SDNY Rules on Scope of Section 560 Safe Harbor in Lehman Bankruptcy

On March 14, 2018, Judge Schofield of the U.S. District Court for the Southern District of New York affirmed a 2016 decision by Judge Chapman in the bankruptcy of Lehman Brothers Special Financing Inc. concerning the enforceability of market standard provisions setting payment priorities in structured finance transactions.

In the District Court decision, Lehman Brothers Special Financing Inc. v. Bank of America National Association, No. 17-cv-01224, 2018 WL 1322225 (S.D.N.Y. Mar. 14, 2018), Judge Schofield held that the safe harbor provisions of Section 560 of the U.S. Bankruptcy Code protect swap termination payments made pursuant to such market-standard payment priority provisions.  Consistent with the Supreme Court’s approach in its recent decision in Merit Management Group, LP v. FTI Consulting, Inc., Judge Schofield focused heavily on the text of the statute, concluding that under “the most sensible literal reading,” the Section 560 safe harbor applied to the distributions at issue.

The District Court decision, which is currently pending appeal to the Second Circuit, provides clarification regarding the application of the Section 560 safe harbor to protect market standard provisions from invalidation.