Defendants in a case concerning the order of payments in a Lehman Brothers International (Europe) collateralized debt obligation have sought and been granted permission to appeal a U.K. High Court ruling. The court decided last week that the flip clause in the Dante CDO, which gives noteholders rights to repayments before the defaulted counterparty, should stand. In handing down the decision, the chancellor of the High Court affirmed the right of the defendants to apply U.S. bankruptcy law in future.
The defendants, BNY Corporate Trustee Services and Lehman Brothers Special Financing, had 21 days from receiving permission to file the appeal, according to DW Online sister title Total Securitization and Credit Investment. If the Court of Appeal chooses to hear the case, it will take the lower court’s decision into consideration while also hearing arguments from Lehman counsel. If the appeals court chooses to overturn the lower court’s decision then the case will close. But either the Supreme Court or the Court of Appeal can give permission for the defendants to appeal again. If permission for a second appeal is granted, the Supreme Court’s decision is final.
The High Court’s decision could put it at odds with a similar ruling expected from the U.S. Bankruptcy Court for the Southern District of New York this month. One lawyer said he expects the U.S. will likely uphold the automatic stay clause of the country’s bankruptcy laws, which prevent proceedings being brought against Lehman in the event of insolvency. The stay, if applied, would disregard the Dante flip clause in Lehman’s favor. The expert warned that if the U.S. ruled against noteholders it would prove an “absolute nightmare” for the SPV’s trustee, BNY Mellon, and would cast a shadow over all Lehman CDOs that include a flip clause. Any ruling of a U.S. court at odds with the English court’s decision could also trigger ratings actions.
Australian asset manager Perpetual Investments asked the U.K court to uphold the flip clause in the Dante CDO earlier in the year (DW Online, 7/22). Weil, Gotshal & Manges, Lehman’s counsel, responded that the case should be moved to the U.S. so as not to violate the U.S. bankruptcy code. The notes, however, were issued outside of the U.S, with all parties agreeing to English jurisdiction when the deal originally closed.
Messages left for officials at Perpetual, Weil, Gotshal and BNY were not returned by press time.
