492 B.R. 379 (Bkrtcy.S.D.N.Y. 2013), 08-01420 (JMP) (SIPA), In re Lehman Brothers Inc.

• Citation: 492 B.R. 379
• Opinion Judge: JAMES M. PECK, United States Bankruptcy Judge
• Party Name: In re Lehman Brothers Inc., Debtor.
• Attorney: Hughes Hubbard & Reed LLP, Attorneys for James W. Giddens, as Trustee for the SIPA Liquidation of Lehman Brothers Inc., One Battery Park Plaza, New York, New York 10004, Michael E. Salzman, Esq. SNR Denton US LLP, Attorneys for Hudson City Savings Bank, 1221 Avenue of the Americas, New York, New ...
• Case Date: June 25, 2013
• Court: United States Bankruptcy Courts, Second Circuit

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492 B.R. 379 (Bkrtcy.S.D.N.Y. 2013)

In re Lehman Brothers Inc., Debtor.

No. 08-01420 (JMP) (SIPA)

United States Bankruptcy Court, S.D. New York.

June 25, 2013

Hughes Hubbard & Reed LLP, Attorneys for James W. Giddens, as Trustee for

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the SIPA Liquidation of Lehman Brothers Inc., One Battery Park Plaza, New York, New York 10004, Michael E. Salzman, Esq.

SNR Denton US LLP, Attorneys for Hudson City Savings Bank, 1221 Avenue of the Americas, New York, New York 10020, Hugh M. McDonald, Esq. and 2000 McKinney Avenue, Dallas, Texas 75201, Kym Rogers, Esq.

Otterbourg, Steindler, Houston & Rosen, P.C., Attorneys for the FDIC, as receiver of Westernbank Puerto Rico, 230 Park Avenue, New York, New York 10169, Peter Feldman, Esq., John Bougiamas, Esq.

Paul Hastings LLP, Attorneys for CarVal Investors UK Limited, as manager of Assignee of Doral Bank and Doral Financial Corporation, 75 East 55th Street, New York, New York 10022, Luc A. Despins, Esq., Jodi A. Kleinick, Esq., Bryan R. Kaplan, Esq.

Securities Investor Protection Corporation, Attorneys for Securities Investor Protection Corporation, 805 15th Street, N.W., Suite 800, Washington, DC 20005, Josephine Wang, General Counsel, Kenneth J. Caputo, Senior Associate General Counsel.

MEMORANDUM DECISION CONFIRMING THE TRUSTEE'S DETERMINATION OF CLAIMS RELATING TO REPURCHASE AGREEMENTS

JAMES M. PECK, United States Bankruptcy Judge

Introduction

The contested matter before the Court is the latest in a series of similar proceedings brought by James W. Giddens (the " Trustee" ) to advance the process of case administration by seeking judicial approval of his determinations that certain categories of claims do not satisfy the definition of customer claims in this case. The Trustee, in his capacity as trustee for the liquidation of Lehman Brothers Inc. (" LBI" ) under the Securities Investor Protection Act of 1970, as amended (" SIPA" ), has brought a motion (the " Motion" ) to confirm his determination that claims asserted by counterparties in relation to repurchase agreements do not qualify for treatment as customer claims under SIPA. The Securities Investor Protection Corporation (" SIPC" ) has submitted its own arguments in support of the Motion.¹

Following extensive briefing and argument by the Trustee and the Representative Claimants (as defined below), the Court agrees with the Trustee's determination that these claims are not entitled to customer status and approves that determination based upon the requirement that cash or securities must be entrusted with a broker-dealer in order to qualify for customer protection under SIPA. In this instance, the Representative Claimants do not have customer claims against LBI because their delivery-versus-payment accounts at LBI did not hold any securities on September 19, 2008, the date of commencement of this case (the " Commencement Date" ), and they are unable to show that the agreements governing the repurchase transactions in question contemplated the entrustment to LBI of the securities that were transferred under the terms of the applicable agreements.

Three banks ² that are typical of the class of claimants asserting a disputed

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right to customer status (the " Representative Claimants" ) ³ oppose the Motion, relying primarily upon the decision of the United States District Court for the District of New Jersey in Cohen v. Army Moral Support Fund (In re Bevill, Bresler & Schulman Asset Mgmt. Corp.), 67 B.R. 557 (D.N.J.1986). That New Jersey district court decision held that claims made against a broker-dealer in relation to hold-in-custody repurchase agreements were customer claims under SIPA. The Representative Claimants cite to this precedent as persuasive support for their position, but, as explained in the discussion section of this Memorandum Decision, Bevill, Bresler involved securities that actually were being held by the SIPC member firm for the claimants.

That is far different from the current situation. Even if the holding could be applied more broadly to other types of repo agreements, Bevill, Bresler is not binding precedent and does not control the outcome here. Importantly, the repo transactions before the Court, by their very nature and structure, lead directly to the conclusion that the Representative Claimants are entitled to no more than general creditor claims against the estate. They never entrusted any property with LBI as their broker-dealer, and that is fatal to establishing customer status. Their account statements confirm transactions involving repo contracts, but not the retention and holding of any customer securities or cash. Without the existence of identified property in the hands of LBI, no customer claim can be made against the estate to recover such property.

Thus, the Motion is comparable to an earlier contested matter in which the Trustee and SIPC urged the Court to approve the determination that claims relating to so-called TBA contracts are not customer claims against the LBI estate. See ECF No. 4360. The Court agreed with the position advocated by the Trustee and SIPC, finding that " without identified property in the hands of LBI, there can be no claim against the estate for the recovery of such property."

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In re Lehman Brothers Inc., 462 B.R. 53, 57-58 (Bankr.S.D.N.Y.2011) (the " TBA Decision " ).⁴

The analysis in the TBA Decision with respect to customer property applies equally well to the claims made by the Representative Claimants. They try to side step the TBA Decision by stressing the fact that the claimants there never delivered any securities to LBI (and indeed the TBA contracts related to securities that had not yet been issued), but this is a distinction without a difference. The simple and unavoidable truth is that the LBI accounts of the Representative Claimants held no property on the Commencement Date, and that indisputable fact alone is dispositive. The Representative Claimants are not entitled to customer claims under SIPA relating to the repurchase transactions in question.

Factual Background

A repurchase transaction (or " repo" ) is a single transaction consisting of two related parts. The first step of the transaction involves a " Seller" who agrees to transfer securities (the " Purchased Securities" ) to a counterparty, the " Buyer," against the transfer of cash by the Buyer. The second step is the simultaneous agreement by the Buyer to transfer back the securities to the Seller on the " Repurchase Date" (a specified future date), against the transfer of cash by the Seller back to the Buyer on the Repurchase Date. McIsaac Decl. ⁵ ¶ 8.

The market value of the Purchased Securities transferred to the Buyer in the first step of the transaction generally is higher than the value of the funds transferred to the Seller, with the difference in value being referred to as the " haircut." McIsaac Decl. ¶ 9. The funds transferred back to the Buyer in the second step of the transaction include, in addition to the sum originally transferred to the Seller, an amount representing a financing charge computed using an agreed interest rate, also known as a " repo rate." McIsaac Decl. ¶ 10.

Whether a transaction is called a " repo" or a " reverse repo" is a matter of perspective. When viewed from the Seller's perspective, the transaction is called a repo; when viewed from the Buyer's perspective, the same transaction is called a reverse repo. McIsaac Decl. ¶ 13; Legotte Decl.⁶ ¶ 8. The Motion involves transactions that were all reverse repos from LBI's perspective, inasmuch as LBI acted as the " Buyer." Legotte Decl. ¶¶ 8, 15.

The term (i.e., the time period between the date of the initial transfer of securities and the Repurchase Date) of a repo is fixed by the agreement of the parties. McIsaac Decl. ¶ 12. A " term" repo has a fixed repurchase date, which may be anywhere from the next day to several years. An " open" repo has no fixed repurchase date, and either party may terminate the

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transaction on demand. McIsaac Decl. ¶ 12; Legotte Decl. ¶ 9.

There are three types of delivery arrangements for repo transactions: (i) bilateral repos, in which the Seller delivers the Purchased Securities to the Buyer or its agent at the outset of the transactions against the transfer of cash; (ii) safekeeping or hold-in-custody (" HIC" ) repos, in which the Purchased Securities are not delivered to the Buyer, but rather are placed in an internal safekeeping account by the Seller, for the Buyer, throughout the duration of the repo; and (iii) tri-party repos, whereby the Buyer and Seller enter into a contractual arrangement with a third-party agent who acts as an intermediary between the counterparties. McIsaac Decl. ¶ 16. The repos at issue in the Motion are bilateral repos. Legotte Decl. ¶¶ 23-26.

As described in more detail below, each of the repo transactions between LBI and the Representative Claimants was governed by an industry-standard Master Repurchase Agreement (" MRA" ).⁷ The MRA defines the rights of parties to the transaction and contains provisions relating to the maintenance of margin, substitution of securities, default remedies, required disclosures, and other matters. McIsaac Decl. ¶ 19. The details of each particular repo transaction, including the purchase and repurchase prices, margin percentage, term, and repo rate, are set out in separate letter agreements (or " confirmations" ). Id. The MRA states that the transactions between the counterparties constitute a " business and contractual relationship," and each party represents and warrants that " it will engage in such transactions as principal." Foukas Decl.⁸ Ex. A1 ¶¶ 10, 12.

The MRA includes specific margin provisions designed to protect both parties with respect to changes in the value of the Purchased Securities during the term of the repo. McIsaac Decl. ¶ 20. To ensure that a Buyer is always fully...