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Keywords

contractplaintiffmotionbankruptcymotion to dismiss
motionbankruptcy

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In re Lehman Bros. Holdings Inc., 469 B.R. 415, 67 Collier Bankr.Cas.2d 1077, 56 Bankr.Ct.Dec. 94

Facts

Lehman Brothers Holdings Inc. (LBHI) and its Official Committee of Unsecured Creditors filed an adversary proceeding against JPMorgan Chase, claiming that JPMorgan, as the principal clearing bank, coerced LBHI into granting additional collateral in the weeks leading up to its bankruptcy. The plaintiffs alleged that JPMorgan abused its position to extract billions in collateral while claiming that its actions were justified to protect its interests during a time of financial distress. The court examined the nature of the transactions and the legal implications of the 'safe harbor' provisions of the Bankruptcy Code.

JPMC served as the principal clearing bank for Lehman Brothers Inc. (“LBI”) as well as the agent for LBI's tri-party repurchase agreements.

Issue

The main legal issues included whether the prepetition clearance agreement constituted a 'securities contract' under the safe harbor provision and whether the plaintiffs could recover transfers made in connection with that agreement.

The allegations and defenses present important questions as to what a lender can do in managing its exposure to potential losses and protect its interests at a time of intensifying concerns about systemic risk.

Rule

The court applied the statutory 'safe harbor' provisions of the Bankruptcy Code, which protect certain transfers made in connection with securities contracts from avoidance, and clarified that these protections apply only to transfers made by the debtor, not to obligations incurred.

The safe harbors specifically address certain stated bankruptcy-related risks and remedies but do not offer protection against exposure that exists under these alternative theories of recovery.

Analysis

The court analyzed the relationship between the safe harbor provisions and the claims made by the plaintiffs. It determined that the prepetition clearance agreement qualified as a securities contract, thus protecting certain transfers from avoidance. However, the court also recognized that while obligations incurred might not be protected, the related transfers were still shielded from challenge under the safe harbor provisions. This led to a nuanced understanding of the claims, allowing some to proceed while dismissing others that fell within the safe harbor's protections.

The court agrees with JPMC that the safe harbors apply here, and it is appropriate for these provisions to be enforced as written and applied literally in the interest of market stability.

Conclusion

The court granted JPMorgan's motion to dismiss in part, specifically regarding claims that were barred by the safe harbor provisions, while allowing other claims not subject to these protections to proceed.

The Motion is being granted as to those counts seeking avoidance of the transfers made to JPMC as preferences or constructively fraudulent transfers during the months of August and September 2008.

Who won?

JPMorgan Chase prevailed in part by successfully arguing that certain claims were barred by the safe harbor provisions of the Bankruptcy Code, which protect transfers made in connection with securities contracts.

JPMC has moved to dismiss all counts of the Amended Complaint, arguing that it acted reasonably and was justified in requiring a pledge of more assets from Lehman as a condition to providing ongoing clearance services and credit at a time of obviously greater financial risk.

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