Lehman Brothers Special Financing Inc. v. Bank of America N.A., No. 18-1079 (2d Cir. 2020)Annotate this Case
The Second Circuit affirmed the district court's judgment affirming the bankruptcy court's grant of defendants' motion to dismiss in an action arising out of the Chapter 11 bankruptcy of Lehman Brothers Holdings Inc. The bankruptcy court held that, in the context of synthetic collateralized debt obligations, certain "Priority Provisions" that subordinated LBSF's payment priority to claims of the Noteholder defendants are enforceable by virtue of section 560 of the Bankruptcy Code, which exempts "swap agreements" from the Code's prohibition of "ipso facto clauses."
Like the district court, the court held that, even if the Priority Provisions were ipso facto clauses, their enforcement was nevertheless permissible under the section 560 safe harbor. The court explained that the Priority Provisions are incorporated by reference into the swap agreements and thus, for the purposes of section 560, are considered to be part of a swap agreement; the contractual right to liquidate included distributions made pursuant to Noteholder priority; the Trustees exercised a contractual right to effect liquidation when they distributed the proceeds of the sold Collateral; and, in doing so, the Trustees exercised the rights of a swap participant. Because the Priority of Payments clauses are enforceable under the Code, the court held that LBSF's state-law claims also fail. Finally, the district court and bankruptcy court correctly concluded that LBSF is not entitled to declaratory relief.