In re Lehman Bros.
519 B.R. 434
S.D.N.Y.2014Background
- LBI was placed into SIPA liquidation; James W. Giddens appointed SIPA trustee.
- Trustee sought to subordinate certain claims under 11 U.S.C. §510(b) to general unsecured creditors.
- Claren Road claimed its damages arising from LBI’s failure to purchase LBHI bonds under a prime brokerage agreement, arguing 510(b) did not apply.
- Co-underwriters (ANZ and UBSFS) asserted their contribution claims against LBI based on LBHI-affiliated securities were not “represented by” LBHI securities and thus not subject to subordination.
- Bankruptcy Court held 510(b) plain language supports subordination for affiliate securities claims; SIPA proceedings apply 510(b); underwriters’ claims also subordinated.
- Appeals affirming the bankruptcy court’s Orders regarding subordination of affiliate and underwriter claims are before the district court.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether Claren Road’s claim arises from a purchase or sale under 510(b) | Claren Road argued no arising-from nexus since LBI didn’t settle the LBHI bonds. | Giddens argued the affiliate security governs subordination; plain language supports subordination. | Yes; 510(b) applies to affiliate securities claims. |
| Whether 510(b) applies to claims based on affiliate securities | Claren Road urged ambiguity and legislative history should guide interpretation. | Court should apply plain text; affiliate securities fall within 510(b) subordination. | Yes; affiliate securities claims are subordinated. |
| Whether co-underwriters’ contribution claims are subject to 510(b) | Underwriters argued LBHI securities do not represent a claim in LBI’s SIPA case. | Textual application of 510(b) to affiliate securities supports subordination. | Yes; co-underwriters’ claims subordinated. |
| What is the proper interpretation of 'represented by such security' in 510(b) | Argued for a narrow reading tied to the underlying security’s issuer. | Court may read more broadly to include claims connected to the security’s subject matter. | The court adopts a broad interpretation consistent with subordination goals. |
| What is the appropriate level of subordination for affiliate securities’s claims | Argued for subordinate to different priority based on structure. | Level determined by security type (e.g., unsecured, common stock). | Subordination determined by the type of security represented; affiliate claims subordinated to general unsecured creditors. |
Key Cases Cited
- Med Diversified, Inc. v. Med Diversified, Inc., 461 F.3d 251 (2d Cir. 2006) (broadly supports subordination under §510(b) even without an actual purchase or sale)
- Telegroup, Inc. v. Telegroup, 281 F.3d 133 (3d Cir. 2002) (ambiguous arising-from language; endorses nexus-based readings)
- Enron Corp. (In re Enron Corp.), 341 B.R. 141 (S.D.N.Y. 2006) (broad applicability of §510(b); discusses risk-allocation rationale)
- Geneva Steel Co. v. N/A, 281 F.3d 1173 (10th Cir. 2002) (affirms broad application of §510(b) to affiliate securities)
- Granite Partners, L.P. v. Deutsche Bank, 208 B.R. 332 (Bankr. S.D.N.Y. 1997) (subordination of claims arising from securities-related transactions)