ISDA offers district court advice on Lehman set off payment judgment

By Caroline Salls

Pittsburgh, July 15 - The International Swaps and Derivatives Association, Inc. (ISDA) filed a brief Thursday in the U.S. District Court for the Southern District of New York in connection with a judgment on a Lehman Brothers Holdings Inc. set off payment lawsuit, according to an ISDA news release.

The brief was filed in the case of Swedbank AB v. Lehman in response to the judgment made on May 5 by the U.S. Bankruptcy Court for the Southern District of New York.

The ISDA said the brief does not take a position on whether the district court should affirm or reverse the bankruptcy court ruling on the Lehman/Swedbank dispute, but it does suggest that any affirmation should limit the bankruptcy court's decision to the restriction against setting off post-bankruptcy debts against pre-bankruptcy claims.

In the case of the Lehman/Swedbank dispute, the ISDA said the setoff clause "is silent as to the aspect of mutuality."

The ISDA said the brief also gives its perspective on the history and purpose of the financial contract "safe harbor" provisions of the Bankruptcy Code and urges the district court "to reject the unduly narrow reading of those provisions in the Bankruptcy Court," regardless of how it rules on the dispute.

"The narrow construction of the Bankruptcy Code endorsed by the bankruptcy court threatens to inject significant uncertainty and disruption into the financial markets," ISDA Americas general counsel Katherine Darras said in the release.

"That is precisely the danger Congress sought to avoid when it enacted the safe-harbor provisions."

According to the ISDA, the safe-harbor provisions should be read to mean the exercise of any contractual right to set off payment amounts arising in connection with the termination or liquidation of a swap agreement will not be stayed, avoided or otherwise limited by any Bankruptcy Code provision.

New York-based Lehman Brothers Holdings Inc. was the fourth-largest investment bank in the United States. The company filed for bankruptcy on Sept. 15, 2008 in the U.S. Bankruptcy Court for the Southern District of New York. Its Chapter 11 case number is 08-13555.

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