Lehman Brothers

Second Circuit Affirms Enforceability of Flip Provisions in Swap Agreements Under Bankruptcy Code Safe Harbor

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For over a decade, Lehman Brothers Special Financing (“LBSF”) has been litigating the enforceability of so-called “flip clauses” in connection with the post-bankruptcy liquidation of swap agreements. These clauses, which are common in structured financing transactions, specify the priority of payments when a swap provider (like LBSF) is in default. In particular, these clauses purport to subordinate the swap provider’s payment priority below that of noteholders when termination payments are owed due to the provider’s default.

When LBSF’s holding company (Lehman Brothers Holdings Inc.) filed a chapter 11 petition in September 2008, that filing placed LBSF in default under various swap agreements to which LBSF was a party. In a 2010 complaint involving 44 synthetic collateralized debt obligations (“CDOs”) that LBSF created, LBSF sought to claw back over $1 billion that had been distributed to noteholders in connection with the early termination of swap transactions, arguing that the flip clauses in those transactions were ipso facto provisions and therefore unenforceable. (Ipso facto clauses are contractual provisions that modify a debtor’s contractual rights solely because it petitioned for bankruptcy; the Bankruptcy Code generally treats such provisions as unenforceable.) The noteholders defended the distributions on various grounds, including by invoking the safe harbor codified in section 560 of the Bankruptcy Code, which exempts “swap agreements” from the Bankruptcy Code’s prohibition of ipso facto clauses.[1] Read our key takeaways here.

EMIR: “Too Big To Fail”, Again?

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“…just to give you an idea of the actual impact of Lehman Brothers, we can consider the figures published by one of the Lehman’s counterparties: Merrill Lynch, which in the third quarter of 2008 disclosed a US$2 billion pre-tax trading loss, which was mainly due to the unwinding of trades for which Lehman Brothers was a counterparty. Merrill Lynch was only one of the hundreds of counterparties of Lehman, so the aggregate impact on counterparties’ losses of Lehman’s default was much bigger than the one generally used.[1]”

This telling quote is from a speech given by Steven Maijoor on March 27, 2013, the then chair of the European Securities and Markets Authority (“ESMA”), in which he is describing the violent aftermath of the Lehman collapse whose financial tremors nearly brought down the West’s financial system.

This alert focuses on the European Market Infrastructure Regulation (or “EMIR” as it is better known[2]) which was introduced as the equivalent of the Dodd-Frank Act of 2010, to address a wide range of issues, many of which were said to be linked to the problems identified in the over the counter (“OTC”) derivatives market[3] following the collapse of Lehman. However, as we set out below, there are serious questions which arise as to the effectiveness of EMIR and the implications of the seismic changes in the OTC market.

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A Special Report on the Nigerian Banking System: The Ripple Effects of Lehman – A Tale of Sin and Redemption?

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​This article focuses on the banking sector crisis which engulfed the Nigerian financial sector from 2008 to 2011, and the steps taken by the Central Bank of Nigeria (CBN) in restoring financial stability. We discuss the impact and the opportunities for international and domestic investors resulting from the crisis.  Read More.

The Legacy of Lehman Series: The EU Bank Recovery and Resolution Directive – Bringing Stability Back to the European Banking Sector

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The collapse of Lehman Brothers was a pivotal moment which had catastrophic effects on the European financial sector which are still reverberating. Inadequacies in banking regulation were highlighted as most jurisdictions had few (if any) specific laws which covered the peculiarities of the banking sector. Documentation and legislation was tested and often found wanting by the courts. The stresses have acted as a catalyst for change in practices, regulation and documentation.

In order to fill the lacuna in statutory tools available to European governments and central banks to deal with failing financial institutions, many European jurisdictions have enacted new legislation. The legislation adopted differs between various jurisdictions within Europe and in some cases the tools at the disposal of the appropriate governing bodies of such jurisdictions are relatively limited.

Six years on after the collapse of Lehman Brothers, the European banking sector is back in the spotlight after a certain amount of turmoil over the first half of 2014. The European banking sector still has its vulnerabilities. The introduction of a comprehensive set of tools which enable relevant authorities to take early and decisive action in relation to failing financial institutions is therefore imperative.

This common framework across the European Union will be provided by the European Bank Recovery and Resolution Directive (“BRRD”) which was adopted by the European Parliament on 15 April 2014. This client alert in the Legacy of Lehman series considers the key terms of the BRRD and the impact it may have in relation to the financial industry.  Read More.

The Legacy of Lehman Series

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Faced with huge losses in the subprime mortgage market, Lehman Brothers Holdings Inc. (the ultimate parent of the Lehman group) filed for Chapter 11 bankruptcy protection on 15 September 2008, a momentous event which shortly preceded the collapse and break-up of that group, including the filing for administration of Lehman Brothers International (Europe), the main operating subsidiary for the UK and Europe.

Looking back from the perspective of the sixth anniversary of the collapse, its consequences still occupy the English courts with numerous decided, settled, on-going and forthcoming cases. This client update is the first in a series describing and analysing the legal legacy of the Lehman collapse by looking at subsequent changes to financial industry regulation in the UK and across Europe to address the shortcomings highlighted by Lehman’s collapse and also considers certain key pieces of Lehman-related litigation in the English courts and the principles which resulted from those cases.  Read More.