526 B.R. 481
S.D.N.Y.2014Background
- FirstBank Puerto Rico provided collateral bonds to Lehman Swaps under a Credit Support Annex and ISDA master agreement.
- Lehman Swaps rehypothecated the collateral, transferring title to Lehman Brokerage and leaving FirstBank with contractual rights only.
- Intra-Lehman repos between Lehman entities caused the bonds to pass to Lehman Brokerage, severing FirstBank’s property interest.
- Barclays Capital, Inc. purchased the collateral in Lehman’s bankruptcy sale and the Clarification Letter purported to treat the bonds as Purchased Assets.
- The Bankruptcy Sale Order barred suits against Barclays for Purchased Assets, and FirstBank later faced sanctions for a contemptuous action seeking to sue Barclays.
- The district and bankruptcy courts held that FirstBank had no property interest to protect and affirmed sanctions for violating the anti-suit injunction.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether the Intra-Lehman Repos stripped FirstBank of its interest in the bonds. | FirstBank: bonds remained FirstBank’s collateral despite repos. | Barclays/Lehman: rehypothecation transfers title free of FirstBank’s interest. | Yes; Intra-Lehman Repos cut off FirstBank’s interest. |
| Whether the Sale Order and Clarification Letter transferred the Bonds to Barclays. | FirstBank contends bonds stayed with FirstBank despite the Clarification Letter. | Clarification Letter and Sale Order transferred Purchased Assets to Barclays. | Bonds were Purchased Assets transferred to Barclays under the Sale Order. |
| Whether FirstBank’s suit violated the anti-suit injunction and supports contempt sanctions. | FirstBank did not intend to violate the injunction. | Suit targeted Purchased Assets and violated the injunction. | Yes; contempt upheld and sanctions affirmed. |
| Whether lack of notice to FirstBank invalidates the Sale Order’s enforcement against it. | FirstBank lacked notice of the sale. | FirstBank had no cognizable property interest to protect; notice not required. | No adverse due process issue given no property interest. |
Key Cases Cited
- Celotex Corp. v. Edwards, 514 U.S. 800 (U.S. 1995) (bankruptcy order not subject to collateral attack without relief)
- Weber v. SEFCU (In re Weber), 719 F.3d 72 (2d Cir. 2013) (good faith and willfulness considerations in contempt under automatic stay)
- City of New York v. Local 28, Sheet Metal Workers’ Int’l Ass’n, 170 F.3d 279 (2d Cir. 1999) (contempt standards include whether contemnor was diligent to comply)
- Weitzman v. Stein, 98 F.3d 717 (2d Cir. 1996) (willfulness supports sanctions for contempt)
- In re Lehman Bros. Holding Inc., 761 F.3d 303 (2d Cir. 2014) (enforcement of Clarification Letter allocating assets; ties to bankruptcy sale)