United States Bankruptcy Court Rules in Favor of Ashby & Geddes’ Clients Lehman Brothers Inc. and Lehman Brothers Commercial Paper Inc. Under "Safe Harbor" Provisions of Bankruptcy Code Sections 555 and 559

Pursuant to the terms of the MRA, Lehman had certain contractual rights under an ipso facto clause – a provision which allows non-debtor counterparties to liquidate, terminate, or accelerate an agreement following the bankruptcy of a debtor counterparty.  While enforcement of such ipso facto clauses is generally prohibited by the Bankruptcy Code, certain “safe harbor” exceptions are permitted for certain types of agreements, such as repurchase agreements and securities contracts.  As noted by the Court in the memorandum opinion:

[T[he market for repurchase agreements is a critical component of, not only the U.S. financial market, but global financial markets as well.  To protect the liquidity of repurchase agreements, the Bankruptcy Code provides special protections to non-debtor counterparties.  Without these ... safe harbors, the bankruptcy of a counterparty to a repurchase agreement would impair the liquidity of the repurchase agreement and possibly lead to the bankruptcy of non-debtor counterparties.

Debtors alleged, among other theories, that Lehman’s exercise of its rights under the MRA’s ipso facto clause following the Debtors’ default – including margin calls, termination of the MRA, and Lehman’s ultimate foreclosure on the subordinated notes – constituted a violation of the automatic stay, and Debtors sought a declaratory judgment with respect to same.  In denying the Debtors such relief, the Court undertook a detailed examination of the requirements for application of the “safe harbor” protections afforded by the Bankruptcy Code under sections 555 and 559 and determined that the MRA was both a repurchase agreement under section 559 and a securities contract under section 555 of the Bankruptcy Code.  The Court’s memorandum opinion will be highly instructive for repurchase participants as such disputes become increasingly common in the mortgage loan industry.  A team of Ashby & Geddes attorneys from the Bankruptcy and Insolvency Practice, including William P. Bowden and Benjamin W. Keenan, served as co-counsel to Lehman Brothers Inc. and Lehman Brothers Commercial Paper Inc.  The case is American Home Mortgage Investment Corp. v. Lehman Brothers Inc. and Lehman Brothers Commercial Paper Inc., Case No. 07-51739 (CSS) (Bankr.D.Del. May 23, 2008).