Lehman Bros. Holdings v. JPMorgan Chase Bank, N.A. (In re Lehman Bros. Holdings)
541 B.R. 551
S.D.N.Y.2015Background
- Lehman Brothers Holdings Inc. (LBHI) and its Official Committee sued JPMorgan Chase Bank, N.A. (JPMC) seeking recovery of ~$8.6 billion allegedly taken as collateral in September 2008 and various damages arising from JPMC’s treatment of Lehman in the run-up to and immediately after Lehman’s bankruptcy filing.
- JPMC acted as LBI’s (Lehman Brothers Inc.) triparty repo clearing bank under a long‑standing Clearance Agreement (and later August and September amendments), which expressly gave JPMC discretion to make advances and to decline to extend credit “at any time … with notice,” and provided for liens/security interests in Lehman accounts.
- In early September 2008 JPMC demanded additional collateral; LBHI posted roughly $6.9 billion cash and other collateral, some of which JPMC moved into its GL Cash Collateral Account and later applied to claims after Lehman’s bankruptcy filing (Sept. 15, 2008).
- Plaintiffs allege coercion/duress, breach, fraudulent inducement, actual fraudulent conveyance, conversion/unjust enrichment, invalidity of the September agreements, and seek turnover/avoidance and disallowance remedies; JPMC counterclaimed for fraud and related claims against LBHI.
- The district court considered cross‑motions for summary judgment: it rejected Plaintiffs’ core contention that JPMC was contractually required to continue lending and that its collateral demands were unlawful, granted summary judgment to JPMC on many counts, but left several claims for trial (setoff/automatic stay safe‑harbor issues, equitable subordination, and JPMC’s fraud counterclaims).
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether the Clearance Agreement obligated JPMC to continue lending or required commercially reasonable/advance notice before refusing credit | Lehman: Section 5’s “with notice” requires commercially reasonable notice (months/year); JPMC coerced Lehman by threatening to stop lending the next day | JPMC: Section 5 gives sole discretion to lend and permits refusal “at any time … with notice” — no defined temporal notice; loans are payable on demand | Court: Section 5 unambiguous — JPMC had no duty to continue lending and needed only to provide notice (not months of advance notice); Plaintiffs’ coercion/duress claims fail |
| Whether JPMC could demand additional or “over” collateral beyond what was strictly necessary to be “fully collateralized” | Lehman: Section 3 limits JPMC to be only "fully collateralized" and prohibits overcollateralization; JPMC miscalculated and demanded excess collateral | JPMC: Security provisions and subsequent August/September security agreements expressly allow it to require further security to secure liabilities | Court: Contract language left determination of sufficient collateral to JPMC; no breach for seeking additional collateral; claims premised on overcollateralization fail |
| Validity/enforceability of the September Agreements (lack of consideration; lack of authority) | Lehman: September documents were rushed, lacked consideration, and were signed by an unauthorized person | JPMC: Agreements included a clear waiver ("hell or high water") of defenses and were entered by sophisticated parties; Lehman ratified them in bankruptcy proceedings | Court: Waiver clause enforceable; Lehman ratified/accepted benefits before challenging; Counts seeking to invalidate September Agreements denied |
| Whether Lehman’s transfers were actual fraudulent conveyances (intent to hinder/defraud creditors) | Lehman’s transfers were designed to prefer JPMC and should be avoided; badges of fraud (haste, insolvency, secrecy, inadequate consideration) support intent | JPMC: Transfers secured necessary intraday credit; adequate consideration (credit advances); no evidence LBHI intended to defraud creditors; JPMC’s intent not imputable to Lehman | Court: No genuine issue of fact supports LBHI’s actual intent to defraud; badges insufficient; fraud/actual fraudulent conveyance claims dismissed |
| Whether JPMC’s transfer of cash from Lehman’s deposit (Cash Account) to JPMC’s GL Cash Collateral Account released JPMC’s lien | Lehman: Moving funds to JPMC ledger terminated the secured interest and thus JPMC forfeited lien | JPMC: The September Security Agreement covered accounts and “proceeds”; transfer to GL account are proceeds and remain subject to the security interest | Court: Security agreement + UCC treat the GL account funds as proceeds; JPMC did not authorize release; lien continued — Lehman’s lien challenge fails |
| Whether setoff/automatic stay, equitable subordination, and certain remediation claims are resolved on summary judgment | Lehman: JPMC’s conduct engineered setoffs and applied collateral in violation of stay; claims should proceed | JPMC: Safe‑harbor provisions (securities/repurchase/netting) protect its actions | Court: Factual issues remain about particular setoffs and safe‑harbor applicability; summary judgment denied on counts concerning setoff/automatic stay and equitable subordination remains premature |
Key Cases Cited
- Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574 (summary judgment standard inferences and evidentiary burden)
- Anderson v. Liberty Lobby, Inc., 477 U.S. 242 (genuine dispute and summary judgment standard)
- Dalton v. Educ. Testing Serv., 87 N.Y.2d 384 (1995) (implied covenant of good faith limits discretionary contract terms)
- Kham & Nate’s Shoes No. 2, Inc. v. First Bank of Whiting, 908 F.2d 1351 (7th Cir. 1990) (criticizing lender‑liability holdings that override express contract terms)
- Wells Fargo Bank, N.A. v. BrooksAmerica Mortg. Corp., 419 F.3d 107 (2d Cir. 2005) (enforceability of "hell or high water" waiver clauses between sophisticated parties)
- Manufacturers Hanover Trust Co. v. Yanakas, 7 F.3d 310 (2d Cir. 1993) (no implied obligation to continue credit absent representations)