Good News for Lehman:
NY court nixes option to cease payments in swap dispute
Wed Sep 23, 2009 10:47am EDT
NEW YORK, Sept 23 (Reuters) - A decision by a New York bankruptcy court in a dispute involving Lehman Brothers (LEHMQ.PK) is likely to make it harder for companies that have derivatives trades with the firm to keep the contracts open yet avoid making payments due to the bank's failure.
The court found last week that Metavante Technologies (MV.N), which had an interest rate swap with Lehman, must continue to make payments on the contract, after the company chose not to exercise an option to terminate the swap upon Lehman's failure.
Metavante, a provider of banking and payment technology, had argued that it should not be required to make payments on the contract because Lehman's default left it without an effective counterparty.
The firm also argued that as the non-defaulting party it had the option to wait to terminate the trade until market conditions favored the company.
"The court is saying that while you don't have to designate an early termination you then have to perform, and if you do elect to terminate under the safe harbor you have to do so within a reasonable amount of time after the bankruptcy occurs," said Richard Schetman, partner at law firm Cadwalader, Wickersham & Taft in New York in a comment on the decision.
Derivatives, contracts that are based on the value of an underlying asset, benefit from a safe harbor provision that allows trade counterparties to terminate the contracts in the event of a default.
The contracts, however, don't typically specify a deadline for announcing an intention to terminate the trade.
"This case provides some clarity on the application of the swap safe harbor, though my sense is that the large majority of counterparties have previously terminated their Lehman trades," said Schetman.
Lehman has sued counterparties including American International Group (AIG.N) for using its bankruptcy as a means to avoid making payments on derivatives, which it says violates U.S. bankruptcy code. For details, see [ID:nN12164349]
The case was heard in the U.S. Bankruptcy Court for the Southern District of New York. (Reporting by Karen Brettell; Editing by Theodore d'Afflisio
