Lehman Bankruptcy Court Holds Provisions in Lehman CDOs Setting Payment Priority Are Enforceable and Protected by Safe Harbor

On July 6, 2016, the firm published an alert titled “Lehman Bankruptcy Court Holds Provisions in Lehman CDOs Setting Payment Priority Are Enforceable and Protected by Safe Harbor.”

Last week, the U.S. Bankruptcy Court for the Southern District of New York held in Lehman Brothers Special Financing Inc. v. Bank of America National Association, Ch. 11 Case No. 08-13555, Adv. No. 10-03547 (Bankr. S.D.N.Y. June 28, 2016), that market-standard provisions in structured finance transactions that set the priority of payment for swap termination payments to swap counterparties in the event of a swap counterparty default are enforceable when the default is due to the filing of a bankruptcy – in this case, the bankruptcy of the counterparty Lehman Brothers Special Financing Inc.’s  ultimate holding company Lehman Brothers Holding Inc.  This decision substantially protects such market-standard provisions from invalidation and provides greater certainty after earlier rulings in Lehman Brothers Special Financing Inc. v. BNY Corporate Trustee Services Ltd. (In re Lehman Bros. Holdings Inc.), 422 B.R. 407 (Bankr. S.D.N.Y. 2010), invalidated CDO provisions that subordinated swap termination payments.