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«UNITED STATES BANKRUPTCY COURT FOR THE SOUTHERN DISTRICT OF NEW YORK In re Lehman Brothers Holdings Inc., et al., Chapter Case No. 08-13555 (SCC) ...»

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14-02021-scc Doc 25 Filed 12/11/14 Entered 12/11/14 16:56:14 Main Document

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UNITED STATES BANKRUPTCY COURT

FOR THE SOUTHERN DISTRICT OF NEW YORK

In re Lehman Brothers Holdings Inc., et al.,

Chapter Case No. 08-13555 (SCC)

Debtors.

Moore Macro Fund, LP, et al.,

Adv. Pro. No. 14-02021 (SCC)

Plaintiffs,

v.

Lehman Brothers Holdings Inc., et al., Defendants.

MOTION OF THE INTERNATIONAL SWAPS AND

DERIVATIVES ASSOCIATION, INC. FOR LEAVE TO FILE

AMICUS CURIAE BRIEF IN SUPPORT OF NEITHER PARTY

The International Swaps and Derivatives Association, Inc. (“ISDA”) respectfully moves for leave to file a brief as amicus curiae in the above-captioned case, in support of neither party.

A copy of the proposed amicus filing is attached hereto as Exhibit A.

ISDA submits that consideration of the attached amicus brief will assist the Court in this case. While ISDA does not take a position on how the specific dispute between the parties should be resolved, ISDA seeks to submit this amicus brief to provide the Court with background on the history and purpose of the Bankruptcy Code’s “safe harbor” provisions for swap agreements, and to offer its views on how those provisions should be construed.

However the Court decides this dispute, hearing the perspective of leading industry representatives can only benefit the Court’s decision-making process. The narrow construction of the safe-harbor provisions that the defendants urge the Court to adopt would threaten the protections Congress intended to provide the swaps and derivatives markets. Congress has repeatedly recognized the national interest in ensuring the efficient functioning of the swaps and 14-02021-scc Doc 25 Filed 12/11/14 Entered 12/11/14 16:56:14 Main Document Pg 2 of 37 derivatives markets. It has acted to protect this important and necessary market from the fundamental upheaval that would result if the Bankruptcy Code prevented market participants from enforcing their contractual rights in the event of a counterparty’s bankruptcy. It has thus enacted “safe harbor” provisions to insulate the derivatives markets from bankruptcy-law restrictions, including those invalidating or staying the set-off of amounts owed in connection with the termination of swap agreements at issue here. The unduly narrow construction of those provisions advanced by the defendants, if accepted, would threaten to create the very uncertainty in financial markets that Congress has specifically tried to avoid. Because the Bankruptcy Code’s safe harbor provisions are of vital importance to the financial industry, ISDA seeks leave to file the attached brief as amicus curiae in order to urge the Court to reject the defendants’ erroneous construction of those provisions.

ISDA is the global trade association representing leading participants in the derivatives industry. Since its inception, ISDA has worked to make the global over-the-counter (OTC) derivatives markets safer and more efficient. ISDA was chartered in 1985, and is comprised of more than 800 member institutions from 64 countries. These members include a broad range of OTC derivatives market participants including corporations, investment managers, government and supranational entities, insurance companies, energy and commodities firms, and international and regional banks. In addition to market participants, members also include key components of the derivatives market infrastructure including exchanges, clearinghouses and repositories, as well as law firms, accounting firms and other service providers. ISDA publishes the ISDA Master Agreement, which serves as the contractual foundation for more than 90% of derivatives transactions globally (including the transactions at issue in this dispute), and

–  –  –

distributes market-specific definitional booklets that supplement the Master Agreement.

Information about ISDA and its activities is available on ISDA’s web site: www.isda.org.

Because of its role in the development of derivatives markets, ISDA is uniquely wellpositioned to evaluate and comment on the interpretation of the Bankruptcy Code’s safe harbor provisions for swap agreements. Indeed, ISDA actively participated in the enactment of the 1990 amendments to the Bankruptcy Code that first added the swap safe-harbor provisions.

ISDA frequently appears as amicus curiae in cases raising issues of importance to the derivatives markets, and courts have often relied on its views. See, e.g., Eternity Global Master Fund Ltd. v.

Morgan Guar. Trust Co., 375 F.3d 168, 173-74 (2d. Cir. 2004); Aon Fin. Prods. v. Societe Generale, 476 F.3d 90, 100 n. 9 (2d Cir. 2007) (all citing ISDA amicus briefs); Eternity Global, 375 F.3d at 181-82 & n.24; Brookfield Asset Mgmt. v. AIG Fin. Prods. Corp., No. 09 Civ. 8285, 2010 WL 3910590, at *6 n.3 (S.D.N.Y. Sept. 29, 2010); Merrill Lynch Int’l v. XL Capital Assurance Inc., 564 F.Supp.2d 298, 300 (S.D.N.Y. 2008); Fin. One Pub. Co. v. Lehman Brothers Special Fin., Inc., 215 F. Supp. 2d 395, 400 (S.D.N.Y. 2002), aff’d, 414 F.3d 325 (2d Cir. 2005) (all citing ISDA User’s Guides). ISDA respectfully submits that, in light of this experience, the Court will be aided by ISDA’s views on this matter.





Bankruptcy courts and district courts have permitted the filing of amicus briefs in bankruptcy proceedings and have applied Rule 29 of the Federal Rules of Appellate Procedure by analogy to determine the procedures to be followed by parties filing amicus briefs. See In re Hunt, Adv. No. 06-6235, 2007 WL 7141734, at *1, *7 (Bankr. N.D. Ga. Apr. 3, 2007), amended in part, Adv. No. 06-6234, 2007 WL 714807 (Bankr. N.D. Ga. Apr. 3, 2007), aff’d, 306 F.

App’x 455 (11th Cir. 2008); Triad Int’l Maint. Corp. v. Southern Air Transp., Inc., No. 2:04-CV

–  –  –

1200, 2005 WL 1917512, at *1 (S.D. Ohio Aug. 10, 2005); In re Dow Corning Corp., 255 B.R.

445, 464 (E.D. Mich. 2000), aff’d, 280 F.3d 648 (6th Cir. 2002).

ISDA has sought the consent of Moore Macro Fund LP and Lehman Brothers Holdings Inc. for the filing of an amicus brief in support of neither party. Moore’s counsel indicated that Moore consents. Lehman’s counsel indicated that Lehman does not oppose ISDA’s request to file an amicus brief, provided that the brief is limited (as it is) to addressing the applicability of the bankruptcy safe harbor provisions. ISDA accordingly requests leave to file its proposed amicus brief.

–  –  –

WHEREFORE, ISDA respectfully requests that this Court enter an order in the form attached hereto as Exhibit B granting ISDA leave to file the proposed amicus brief attached hereto as Exhibit A.

–  –  –

TABLE OF AUTHORITIES

PRELIMINARY STATEMENT

STATEMENT OF INTEREST OF AMICUS CURIAE

STATUTORY BACKGROUND

ARGUMENT

I. THE BANKRUPTCY CODE’S SAFE HARBOR PROTECTS THE RIGHT OF

A SWAP PARTICIPANT TO OFFSET A CLAIM TRANSFERRED TO IT

DURING THE PREFERENCE PERIOD

II. THE BANKRUPTCY CODE’S SAFE HARBOR PROTECTS THE RIGHT OF

A SWAP PARTICIPANT TO OFFSET TERMINATION VALUES FREE FROM

THE AUTOMATIC STAY

CONCLUSION

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Aon Fin. Prods. v. Societe Generale, 476 F.3d 90 (2d Cir. 2007)

Brookfield Asset Mgmt. v. AIG Fin. Prods. Corp., No. 09 Civ. 8285, 2010 WL 3910590 (S.D.N.Y. Sept. 29, 2010)

Calpine Energy Servs. v. Reliant Energy Elec. Solutions (In re Calpine Corp.), No. 08-1251 (BRL), 2009 WL 1578282 (Bankr. S.D.N.Y. May 7, 2009)

Duncan v. Walker, 533 U.S. 167 (2001)

Enron Creditors Recovery Corp. v. Alfa, S.A.B. de C.V., 651 F.3d 329 (2d Cir. 2011)

Eternity Global Master Fund Ltd. v. Morgan Guar. Trust Co., 375 F.3d 168 (2d Cir. 2004)

Fin. One Pub. Co. v. Lehman Brothers Special Fin., Inc., 215 F. Supp. 2d 395 (S.D.N.Y. 2002), aff’d, 414 F.3d 325 (2d Cir. 2005)

Grede v. FCStone, LLC, 746 F.3d 244 (7th Cir. 2014)

Hutson v. E.I. du Pont de Nemours & Co. (In re Nat’l Gas Distribs., LLC), 556 F.3d 247 (4th Cir. 2009)

In re Assured Fastener Prods. Corp., 773 F.2d 105 (7th Cir. 1985)

In re Lehman Bros. Holdings Inc., 433 B.R. 101 (Bankr. S.D.N.Y. 2010), aff’d, 445 B.R. 130 (S.D.N.Y.

2011)

In re New Haven Foundry, Inc., 285 B.R. 646 (Bankr. E.D. Mich. 2002)

In re U.S. Aeroteam, Inc., 327 B.R. 852 (Bankr. S.D. Ohio 2005)

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Law v. Siegel, 134 S. Ct. 1188 (2014)

Lines v. Bank of Am. Nat’l Trust & Sav. Ass’n, 743 F. Supp. 176 (S.D.N.Y. 1990)

Merrill Lynch Int’l v. XL Capital Assurance Inc., 564 F.Supp.2d 298 (S.D.N.Y. 2008)

Official Comm. of Unsecured Creditors of Quebecor World (USA) Inc. v. Am.

United Life Ins. Co. (In re Quebecor World (USA) Inc.), 719 F.3d 94 (2d Cir. 2013), cert. denied, 134 S. Ct. 1278 (2014)

Picard v. Ida Fishman Revocable Trust (In re Bernard L. Madoff Investment Securities LLC, No. 12-2557, 2014 WL 6863608 (2d Cir. Dec. 8, 2014)

Thrifty Oil Co. v. Bank of Am. Nat’l Trust & Sav. Ass’n, 322 F.3d 1039 (9th Cir. 2003)

–  –  –

11 U.S.C. § 101

11 U.S.C. § 102(3)

11 U.S.C. § 362

11 U.S.C. § 546

11 U.S.C. § 553

11 U.S.C. § 555

11 U.S.C. § 556

11 U.S.C. § 559

11 U.S.C. § 560

1982 Amendments to Bankruptcy Code, Pub. L. No. 97-222, 96 Stat. 235

1984 Amendments to the Bankruptcy Code, Pub. L. No. 98-353, 98 Stat. 333

1990 Bankruptcy Amendments,Pub. L. No. 101-311, 104 Stat. 267

Bankruptcy Abuse Prevention and Consumer Protection Act of 2005(BAPCPA), Pub. L. No. 109-8, 199 Stat. 23 (2005)

–  –  –

Financial Netting Improvements Act of 2006, Pub. L. No. 109-390, 120 Stat.

2692 (codified at 11 U.S.C. § 362(b)(17))

–  –  –

128 Cong. Rec. S8 (July 13, 1983)

136 Cong. Rec. 13,153 (daily ed. June 6, 1990)

H.R. Rep. 109-31 (2005), reprinted in 2005 U.S.C.C.A.N. 88

H.R. Rep. No. 101-484 (1990), reprinted in 1990 U.S.C.C.A.N. 223

H.R. Rep. No. 109-648 (2006), reprinted in 2006 U.S.C.C.A.N. 1585

H.R. Rep. No. 97-420 (1982), reprinted in 1982 U.S.C.C.A.N. 583

Interest Swap: Hearing on S. 396 Before the Subcomm. on Courts and Administrative Practices of the Senate Comm. on the Judiciary, 101st Cong. 1 (1989)

Interest Swap: Hearing on S. 396 Before the Subcommittee on Courts and Administrative Practices of the Senate Comm. on the Judiciary, 101st Cong. 14 (1989)

S. Rep. No. 101-285 (1990), available at 1990 WL 259288

S. Rep. No. 95-989 (1978), reprinted in 1978 U.S.C.C.A.N. 5787

S. Rep. No. 98-65 (1983)

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The International Swaps and Derivatives Association, Inc. (“ISDA”) respectfully submits this amicus brief to offer its perspective on the dispute now before this Court. ISDA makes this filing not for the purpose of taking sides in the dispute between the parties, but to offer this Court ISDA’s perspective on the history and purpose of the swap “safe harbor” provisions of the Bankruptcy Code. Regardless of how the Court resolves this particular dispute, ISDA strongly urges the Court to reject the unduly narrow reading of those provisions advanced by Lehman, which would threaten the protections Congress intended to provide the swaps and derivatives markets.

Congress has repeatedly recognized the national interest in ensuring the efficient functioning of the swaps and derivatives markets. Congress has acted to protect this important and necessary market from the fundamental upheaval that would result if the Bankruptcy Code prevented market participants from enforcing their contractual rights in the event of a counterparty’s bankruptcy. It has thus enacted “safe harbor” provisions to insulate the derivatives markets from bankruptcy-law restrictions, including those invalidating or staying the set-off of amounts owed in connection with the termination of swap agreements. Specifically, Congress provided, in the broadest possible terms, that the exercise of “any contractual right” to “offset” any “termination values … arising under or in connection with the termination … of one or more swap agreements” “shall not be stayed, avoided, or otherwise limited by operation of any provision” of the Bankruptcy Code. See 11 U.S.C. § 560; see also id. § 362(b)(17) (exempting from the automatic stay the exercise of any contractual right to “offset … any termination value … arising under or in connection with 1 or more such [swap] agreements”).

–  –  –

safe harbor protects the exercise of such set-off rights, notwithstanding section 553’s general invalidation of set-off rights acquired during the preference period. See id. § 553(a)(2)(B)(ii).

Notwithstanding the clear statutory language, Lehman urges the Court to read the safe harbors narrowly to exclude the set-off of termination values under swap agreements where those values arise under more than one swap agreement—notwithstanding the safe harbor’s express protection for set-offs of “one or more swap agreements,” id. §§ 362(b)(17), 560—and where those claims were transferred to the swap participant during section 553(a)(2)(B)’s preference period—notwithstanding the safe harbor’s express exemption of such set-offs from section 553(a)(2)(B)’s limitations. Id. § 553(a)(2)(B)(ii). That reading has no basis in the safe harbor’s text, purpose or history, and accepting it would threaten to create the very uncertainty in financial markets that Congress has specifically tried to avoid.



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