THE Lehman bankruptcy estate lost a $250 million legal battle against a group of Australian bondholders. Australian law firm Johnson Winter & Slattery was co-counsel in the case, the result of which has been labelled a "game changer".
Johnson Winter & Slattery has represented Australian investors in 9 Series of Lehman-originated synthetic CDOs in the Supreme Court in London. The victory was achieved when a panel of seven judges in the Supreme Court of England unanimously dismissed an appeal by Lehman Brothers Special Financing Inc, a member of the now bankrupt Lehman Brothers group, on 27 July.
The court ruled that the bondholders, who consist of 29 Australian companies, investors and charities, should be paid first under a so-called "flip" provision that triggers a change in priority. This means noteholders have priority over swap counterparts in the event of a bankruptcy.
Lehman Brothers Special Financing (LBSF) had argued that the contractual provisions creating noteholder priority – which Lehman entities created, drafted and marketed – were in fact invalid under English law due to a rule known as the “anti-deprivation” rule, and that in fact LBSF had prior claim to the collateral.
The collateral in dispute is valuable, Johnson Winter & Slattery said in a statement. It comprises AAA rated securities which are currently under the control of an English subsidiary of the Bank of New York Mellon, acting as trustee, and has a face value equal to the face value of noteholders’ CDOs.
This decision upholds investors’ rights under English law to receive a full distribution of that collateral, or its proceeds, after administrative and other costs which are required to be paid to the trustee and other service providers.
Lawyers say the ruling is important and has serious consequences for financial markets.
Lawyers argue the ruling has resolved considerable market uncertainty, the Financial Times reports, and that it is a "game changer" in terms of global structured finance business. They have said in future, more emphasis will be placed on the jurisdiction under which a counterparty falls.
"As a consequence, securitisation arrangers may prefer to avoid contracts with swap counterparts that are subject to US bankruptcy laws. Issuers may even consider re-structuring existing securities.
a partner at law firm Morrison & Foerster, Elana Hahn, told the Financial Times.
Johnson Winter & Slattery partner Jim Hunwick, who represented the 22 Australian investors who made the claim, which commenced in June 2009, said it is an "emphatic and welcome win".
“Had Lehman’s cynical attempt to invalidate its own documents succeeded, this would have called into question the validity of many widely used contractual provisions," he said.
He said the "fight is not over yet", however.
"We can expect Lehman to try anything it can to stop the trustee and the English courts from giving effect to this win, including attempting to convince the English courts to defer to a decision last year by Judge Peck of the US Bankruptcy Court invalidating noteholder priority on two other Dante Series, even though the superior US District Court has clearly stated that this decision is not settled US law”.
The Johnson Winter & Slattery partner was first approached by investors in Lehman CDOs shortly after the Lehman collapse in September 2008. The investors were seeking advice on how to preserve their rights.
Hunwick was assisted by senior associate Michael Garry, litigation partner Paul Reidy, and insolvency partner David Proudman.
The English litigation team comprised law firm Lawrence Graham, lead by partner Jean-Pierre Douglas-Henry, with associates Natalie Roberts and Verity Barker and counsel Richard Salter QC and Jonathan Davies-Jones of Three Verulam Buildings.