Lehman Brothers Special Financing Inc. v. Bank of America N.A.

Summary

The Second Circuit affirmed that contractual "Priority Provisions" subordinating Lehman Brothers Special Financing Inc.'s payment priority in synthetic CDO transactions upon its default were enforceable under the safe harbor of Bankruptcy Code § 560. The court held that the Priority Provisions were part of a "swap agreement" and that the distribution of collateral proceeds constituted "liquidation" of the swap agreement under § 560, which protects swap participants from the prohibition on *ipso facto* clauses. This decision broadly interprets the § 560 safe harbor to protect the contractual right to unwind swap transactions and distribute proceeds according to agreed priorities triggered by a counterparty's bankruptcy.

Holdings

1. The priority provisions are enforceable under section 560 safe harbor even if they are ipso facto clauses.

Questions Presented

1. Whether the priority provisions are unenforceable ipso facto clauses under the Bankruptcy Code.
2. Whether the priority provisions are nevertheless enforceable under the section 560 safe harbor for swap agreements.

Disposition

affirmed