502 B.R. 383
Bankr. S.D.N.Y.2013Background
- MSHDA and Lehman affiliate LBDP entered an ISDA Master Agreement and Schedule for interest-rate swaps; Schedule treated LBHI’s bankruptcy as a "Trigger Event" changing the valuation method on termination.
- The parties selected Market Quotation and Second Method under the Master Agreement; the Schedule prescribed Mid‑Market valuation for Trigger Event terminations.
- LBDP assigned its rights to LBSF by an Assignment Agreement that included a Liquidation Paragraph: Mid‑Market applies generally, but if termination is due to LBSF’s bankruptcy or nonpayment, Market Quotation applies.
- After LBSF filed chapter 11, MSHDA terminated the swaps, calculated and paid a Settlement Amount using the Market Quotation method and later was sued by LBSF for an alleged shortfall (LBSF preferred Mid‑Market valuation).
- MSHDA moved for partial summary judgment asserting the Liquidation Paragraph — though ipso facto — is protected by the Section 560 safe harbor for swap liquidation methodology; LBSF cross‑moved arguing the Paragraph is an unenforceable ipso facto clause outside Section 560.
- The Court framed the core legal question as whether the contractual methodology for calculating liquidation amounts is integral to the "right to liquidate" and therefore exempt from the ipso facto rule under Section 560.
Issues
| Issue | Plaintiff's Argument (MSHDA) | Defendant's Argument (LBSF) | Held |
|---|---|---|---|
| Whether a bankruptcy‑triggered contractual liquidation methodology is protected by 11 U.S.C. § 560 | The contractual right to "cause liquidation" necessarily includes the contractually specified method to calculate the Settlement Amount; Section 560 protects that methodology | Section 560 protects only the acts of termination/liquidation/acceleration, not ancillary provisions (valuation procedures); the Liquidation Paragraph is an unenforceable ipso facto clause | The liquidation methodology is integral to the right to liquidate and is protected by § 560; MSHDA’s valuation method stands |
| Whether the Liquidation Paragraph is analogous to prohibited "flip‑clauses" that alter distribution priorities | The Paragraph governs valuation method, not priority; differing economic results do not remove it from the safe harbor | The Paragraph functions like an ipso facto flip that disadvantages the debtor and should be invalidated | Distinguished from flip‑clauses; altering valuation method is not equivalent to changing payment priority and falls within § 560 |
| Whether prior decisions (BNY Trustee, Ballyrock, Calpine) require invalidation of the Paragraph | These cases are distinguishable because they involved priority shifts or truly ancillary provisions, not valuation methods integral to liquidation | Relies on those precedents to argue non‑enumerated rights are ancillary and not sheltered | Court distinguished those cases and held they do not compel a different result |
| Whether enforcing the contractual valuation promotes the purposes of the safe harbor (market stability, finality) | Enforcing agreed valuation methods furthers market certainty and systemic risk mitigation | Economic result for debtor shouldn't dictate scope of safe harbor; but still argued against protection | Court agreed enforcement advances statutory purposes and supports reading § 560 to include methodology |
Key Cases Cited
- Thrifty Oil Co. v. Bank of Am. Nat’l Trust & Sav. Ass’n, 322 F.3d 1039 (9th Cir. 2003) (defines swaps and context for safe harbor)
- Life Receivables Tr. v. Syndicate 102 at Lloyd’s of London, 549 F.3d 210 (2d Cir. 2008) (statutory interpretation principles)
- Lamie v. U.S. Trustee, 540 U.S. 526 (U.S. 2004) (plain‑meaning rule for statutory text)
- Conn. Nat’l Bank v. Germain, 503 U.S. 249 (U.S. 1992) (presumption that statute means what it says)
- Williams v. Taylor, 529 U.S. 362 (U.S. 2000) (requirement to give effect to every clause of a statute)
- Lehman Bros. Special Fin., Inc. v. BNY Corporate Tr. Servs. Ltd. (In re Lehman Bros. Holdings Inc.), 422 B.R. 407 (Bankr. S.D.N.Y. 2010) (held a flip‑clause altering payment priority not protected by § 560)
- Lehman Bros. Special Fin., Inc. v. Ballyrock ABS CDO 2007‑1 Ltd. (In re Lehman Bros. Holdings Inc.), 452 B.R. 31 (Bankr. S.D.N.Y. 2011) (reaffirmed limits of § 560 re: priority changes)