Lehman Bankruptcy Court Holds That CDO Provision Subordinating Swap Termination Payments to Lehman Is Unenforceable

On January 26, 2010, the New York Office released an Alert Memo entitled “Lehman Bankruptcy Court Holds That CDO Provision Subordinating Swap Termination Payments to Lehman Is Unenforceable.” The Alert Memo reviews the January 25th decision by Judge Peck of the Bankruptcy Court for the Southern District of New York in Lehman Brothers Special Financing Inc. v. BNY Corporate Trustee Services Ltd., holding that market-standard provisions in structured finance transactions that subordinate swap termination payments upon a swap counterparty default are not enforceable when the default is the bankruptcy of the counterparty or, as in this case, the ultimate holding company of the counterparty.