JPMorgan Scores Major Victory in Ongoing Lehman Personal bankruptcy
On Sept. 30, an area court resolved a substantial part of outstanding litigation within the personal bankruptcy proceeding of Lehman Siblings Holdings Corporation. and it is subsidiaries. See Lehman Bros. Holdings Corporation. v. JPMorgan Chase Bank, N.A. (In re Lehman Bros. Holdings Corporation.), No. 1:11-cv-06760 (S.D.N.Y. Sept., 30, 2015). This litigation flows in the debtors’ allegations that JPMorgan Chase Bank, N.A. (JPMC) coerced vast amounts of dollars from Lehman around the eve of their personal bankruptcy filings in September 2008. Lehman Siblings Holdings Corporation. (LBHI) initially filed a complaint this year with respect to itself and many Lehman affiliates, including Lehman Siblings Corporation. (LBI). (The Unofficial Committee of Unsecured Creditors is really a complaintant-intervenor within this situation.) The court’s newest ruling granted summary judgment in support of JPMC on multiple counts, denying over $8 billion in potential recoveries for that liquidating Lehman estate. Now, only six from the 49 counts contained in the initial complaint and 7 of JPMC’s counterclaims remain prior to the court.
Relationships Connecting JPMC, LBI and Lehman
The dispute came about from JPMC’s role because the bank and first supply of credit for LBI in the triparty repurchase contracts. Inside a repurchase agreement, a celebration sells a good thing and concurs to repurchase the asset in a specified date, frequently the following day. Inside a triparty repurchase agreement, a 3rd party functions like a custodian to coordinate the purchase and repurchase of the asset. JPMC was the custodian bank for that repurchase contracts that LBI performed with outdoors investors.
Pursuant to a number of clearance contracts, JPMC decided to supply LBI with guaranteed credit, composed of money and securities, to permit LBI to shut out its positions in repurchase contracts. LBI trusted this supply of credit, borrowing around $242 billion in intraday credit from JPMC. Consequently, Lehman trusted LBI because LBI’s broker/dealer activities were important to the brokerage services that Lehman provided to institutional investors.
These clearance contracts so long as JPMC could won’t extend credit to LBI anytime. Additionally, the clearance contracts needed LBI to completely secure its obligations to JPMC whatsoever occasions. Consequently, JPMC could stop LBI from using lent cash and securities if JPMC wasn’t fully collateralized whatsoever occasions.
Transactions Central for this Litigation
Throughout the summer time of 2008, JPMC developed concerns about its contact with the intraday credit market and requested additional security from Lehman. Consequently, JPMC and LBHI negotiated contracts in June, August and September 2008, by which LBHI promised additional collateral and guaranteed LBI’s intraday borrowing activity. The Sept. 30, 2015, ruling centered on the contracts performed on Sept. 9 and 12, 2008, each inside a week of Lehman’s personal bankruptcy filings on Sept. 15, 2008.
At the begining of September 2008, JPMC mentioned it would no more provide credit to LBI without additional collateral from LBHI. Absent JPMC’s credit, LBI could no more be the broker/dealer, further crippling Lehman’s operations.
To induce additional credit, between Sept. 9 and 12, 2008, LBHI provided yet another $8.6 billion in security. Particularly, it promised $1.7 billion in money-market funds and deposited $6.9 billion in cash collateral right into a demand deposit account maintained at JPMC. After that deposit, JPMC transferred the $6.9 billion to some general ledger account, that only JPMC might make transfers, effectively walling Lehman removed from exercising any control of this cash. After Lehman filed its personal bankruptcy petitions on Sept. 15, JPMC ongoing to supply intraday credit to LBI underneath the the August and September contracts.
In October 2008, JPMC applied $1.9 billion in the $6.9 billion in the general ledger account to create off various claims. Ultimately, JPMC filed a $30 billion evidence of claim against LBHI, which $25 billion was for guaranteed claims as a result of the contracts that LBHI and JPMC performed in August and September 2008.
Summary of LBHI’s Claims for Relief
The district court placed LBHI’s 49 counts into four general groups. One category contained 20 counts of alleged liability according to constructively fraudulent conveyances and preferential transfers. All 20 of those counts were ignored through the personal bankruptcy court this year.
The district court categorized the rest of the 29 counts the following: “(1) claims seeking relief under various common law doctrines [including breach of implied covenants of excellent belief and fair dealing, and invalidation from the August and September 2008 contracts according to coercion, insufficient consideration, and insufficient authority] (2) claims trying to avoid and recover actual fraudulent transfers … and (3) claims seeking relief under many other parts of the Personal bankruptcy Code [including voidable setoffs and violations from the automatic stay].” Lehman Bros. Holdings Corporation. v. JPMorgan Chase Bank, N.A. (In re Lehman Bros. Holdings Corporation.), 480 B.R. 179, 186-87 (S.D.N.Y. 2012).
The Court’s Ruling
A legal court rejected Lehman’s arguments and enforced the contracts among JPMC, LBHI and LBI based on the unambiguous the contracts and also the higher level of sophistication one of the parties. Consequently, LBHI’s “various common law doctrines” unsuccessful. A legal court succinctly taken its method of most LBHI’s bases for relief by remarking that “a party doesn’t breach a contract by behaving because the instrument allowed.”
Despite LBHI’s contention that JPMC unfairly threatened to withhold credit absent additional security from LBHI, a legal court noted the clearance contracts didn’t require JPMC to provide credit indefinitely. Rather, these contracts allowed JPMC to withhold credit after notice to Lehman.
LBHI also contended the clearance contracts prohibited JPMC from requesting additional peace of mind in August and September 2008. However, a legal court discovered that the contracts gave JPMC the authority to figure out what constituted sufficient collateral with regards to being “fully collateralized.”
Similarly, a legal court rejected LBHI’s arguments the June, August and September 2008 contracts ought to be invalidated because of insufficient consideration, stress, or insufficient authority. A legal court discovered that a “hell or high water” clause barred LBHI from a lot of individuals claims. Additionally, a legal court held that that LBHI ratified the August and September contracts by performing under them without protest towards the personal bankruptcy court.
LBHI also advanced several theories that JPMC had wrongfully transferred the $6.9 billion it received and released its lien on individuals funds because of that transfer. However, a legal court determined that JPMC acted correctly underneath the express language in clearance contracts and Article 9 from the Uniform Commercial Code, and for that reason had the legal right to transfer the $6.9 billion in cash collateral into its general ledger account and retain its lien.
JPMC also won summary judgment on LBHI’s actual fraudulent transfer claims. A legal court discovered that extensive discovery unsuccessful to discover details that may lead any reasonable juror to locate that LBHI acted using the requisite intent to swindle.
Notwithstanding the broad sweep of their decision on summary judgment, a legal court determined that six of LBHI’s counts should proceed. Particularly, a legal court discovered that an authentic issue of fabric fact continued to be about if the transfers JPMC received in September 2008 ought to be prevented simply because they were created to acquire a setoff. A legal court also declined to allow summary judgment in support of JPMC on LBHI’s claims that JPMC violated the automated stay by leaving $1.9 billion of their claims in October 2008. Finally, LBHI’s equitable subordination claim and JPMC’s counterclaims associated with fraud and indemnification also survived the summary judgment stage.
Last Wednesday’s ruling would be a significant victory for JPMC. By enforcing the express the parties’ contracts, a legal court bumped out a lot of LBHI’s remaining counts against JPMC. Nonetheless, several claims and counterclaims remain, indicating that the ultimate conclusion for this litigation is many several weeks, otherwise years, away.
Possibly most particularly, LBHI’s voidable setoff claims survived summary judgment, potentially offering LBHI a method for unwinding a few of the largest transfers that JPMC received dads and moms preceding Lehman’s personal bankruptcy filings.