Michigan State Housing Development Authority v. Lehman Brothers Derivatives Products Inc.
United States Bankruptcy Court for the Southern District of New York
502 B.R. 383 (2013)
- Written by Brett Stavin, JD
Facts
Lehman Brothers Derivatives Products Inc. (Lehman) (defendant) was a large organization heavily involved in the derivatives markets, including the markets for swap agreements. Lehman Brothers Special Financing Inc. (LBSF), a Lehman subsidiary, was party to swap agreements with Michigan State Housing Development Authority (MSHDA) (plaintiff). The swaps included an ipso facto clause that would be triggered if either of the parties declared bankruptcy. The clause provided that any subsequent valuation of the swap for liquidation purposes would be governed by quotes from swap dealers regarding how much they would pay for the swap. This methodology relied on the bid spread, as opposed to the more commonly used midmarket-valuation methodology. The valuation for the LBSF was less favorable under the swap’s ipso facto provision. LBSF challenged the provision as an ineffective ipso facto clause that should not be protected by the Bankruptcy Code’s safe harbor for swap agreements. MSHDA argued that the clause was not an isolated right and that it provided necessary guidance for liquidation of the swap after bankruptcy.
Rule of Law
Issue
Holding and Reasoning (Peck, J.)
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