Barclays Capital Inc. v. Giddens (In re Lehman Bros. Inc.)

• Decision Date: 16 July 2012
• Docket Number: Nos. 11 Civ. 6052 (KBF), 11 Civ. 6053 (KBF).,s. 11 Civ. 6052 (KBF), 11 Civ. 6053 (KBF).
• Parties: In re LEHMAN BROTHERS INC., Debtor. Barclays Capital Inc. and Barclays Bank PLC, Appellant and Cross–Appellees, v. James W. Giddens, as Trustee for the SIPA Liquidation of Lehman Brothers, Appellee and Cross–Appellant.
• Court: U.S. District Court — Southern District of New York

478 B.R. 570

In re LEHMAN BROTHERS INC., Debtor.

Barclays Capital Inc. and Barclays Bank PLC, Appellant and Cross–Appellees,

v.James W. Giddens, as Trustee for the SIPA Liquidation of Lehman Brothers, Appellee and Cross–Appellant.

Nos. 11 Civ. 6052 (KBF), 11 Civ. 6053 (KBF).

United States District Court,

S.D. New York.

July 16, 2012.

Jonathan David Schiller, Jonathan M. Shaw, Boies Schiller & Flexner LLP, Washington, DC, for Barclays Capital Inc. and Barclays Bank PLC.

Neil John Oxford, Seth D. Rothman, William R. Maguire, William Robert Stein, Hughes Hubbard & Reed LLP, New York, NY, for James W. Giddens as Trustee for SIPA Liquidation of Lehman Brothers.

John Frederick Wood, Hughes Hubbard & Reed LLP, Washington, DC, for Lehman Brothers Holdings Inc.

AMENDED OPINION & ORDER^*

KATHERINE B. FORREST, District Judge.

The cross-appeals from the February 22, 2011 decision (the “Decision”) of the Honorable James M. Peck, Bankruptcy Judge, arise out of what is commonly referred to as the “fog of Lehman”—the week of September 15 through September 22, 2008, which culminated in Barclays Capital Inc. (“Barclays”) purchasing out of bankruptcy most of the North American business assets (the “Sale”) of Lehman Brothers Inc. (“LBI”). Out of that fog emerged not only a changed economic worldview, but also the disputes that are the subject of the instant cross-appeals.

The cross-appeals center upon the Bankruptcy Court's rulings with respect to which entity owns each of three categories of assets (the “Disputed Assets”). ¹ Barclays appeals the Bankruptcy Court's Decision that (a) Barclays is not entitled to the “property that may be held to secure obligations under” the exchange-traded derivatives transferred to Barclays in the Sale—approximately $4 billion of proprietary margin held at various financial institutions (the “Margin Assets”)—and thus (i) must return those assets to the extent that they have been previously delivered (and must pay $280 million in prejudgment interest) and (ii) is not entitled to receive the undelivered Margin Assets; and (b) Barclays is not entitled to “$769 million of securities, as held by or on behalf of LBI on the date hereof pursuant to Rule 15c3–3 of the Securities Exchange Act of 1934, as amended, or securities of substantially the same nature and value.” (Opening Br. of Appellants Barclays Capital Inc. & Barclays Bank PLC, 11 Civ. 6052 (Dkt. No. 16) (“Barclays Br.”) at 5–6.)

James W. Giddens, as trustee for the Securities Investor Protection Act (“SIPA”) liquidation of LBI (the “Trustee”), cross-appeals, seeking reversal of the Bankruptcy Court's Decision that Barclays is entitled to assets that LBI maintained in its clearance boxes (a type of custodial clearing account) at the Depository Trust & Clearing Corporation (“DTCC”) (the “Clearance Box Assets”). (Br. for Cross–Appellant James W. Giddens, As Trustee for the SIPA Liquidation of Lehman Brothers Inc., 11 Civ. 6053 (Dkt. No. 14) (“Trustee Br.”) at 5–6.)

For the reasons that follow, the Decision of the Bankruptcy Court is AFFIRMED IN PART and REVERSED IN PART.

I. BACKGROUND

The facts relating to Lehman's bankruptcy and subsequent sale to Barclays are dramatic and complex. Events relating to the Sale have become part of what is known as the “fog of Lehman.” To resolve the issues on the instant cross-appeals, this Court's job is to ensure that the Decision (made in the wake of that fog) properly interpreted the agreements memorializing the Sale.

Accordingly, the background recited herein does not examine the events leading up to one of the most memorable financial transactions in modern economic history. Instead, it hews closely to the agreements at issue and delves further only where strictly necessary.

There are three agreements integral to resolution of the instant cross-appeals: the Asset Purchase Agreement (“APA”), an agreement referred to as the “Clarification Letter,” and an agreement referred to as the “DTCC Letter.” The other document critical to resolving the cross-appeals is the Bankruptcy–Court's order approving the Sale (the “Sale Order”). It is important to note that in the relevant agreements, the articulation of the assets purchased in and excluded from the Sale evolves. The Court sets forth that chronological progression below.

A. Facts Relating to the Sale

On September 15, 2008, Lehman Brothers Holdings, Inc. (“LBHI” and with LBI, “Lehman”), LBI's parent, filed for bankruptcy. In re Lehman Bros. Holdings Inc., 445 B.R. 143, 155 (Bankr.S.D.N.Y.2011) (“ In re Lehman” ), That filing precipitated the SIPA liquidation of LBI, Lehman's North American broker-deal, on September 19, 2008. Id. at 172. Immediately after LBHI filed for bankruptcy, representatives from both Lehman and Barclays met to discuss the possibility of the sale of Lehman's North American business to Barclays. Ultimately, Barclays agreed to the purchase, giving rise to “the largest, most expedited and probably the most dramatic asset sale that has ever occurred in bankruptcy history.” ²Id. at 148–49, 155. Barclays and Lehman executed the APA for the Sale on September 16, 2008. [ See R. 1–47.] ³ With, as the Bankruptcy Court called it, “the proverbial ‘ice cube’ ... melting,” the APA “represented the best possible alternative for Lehman's employees.... Indeed, it was the only alternative.” In re Lehman, 445 B.R. at 153.

On September 17, 2008, the parties requested that the Bankruptcy Court approve the Sale. In re Lehman, 445 B.R. at 174. [ See also R. 377.] On September 19, 2008, the Bankruptcy Court held a hearing to do so (the “Sale Hearing”), in which the APA was central. In re Lehman, 445 B.R. at 150. In addition to presenting the APA, however, the parties also informed the Bankruptcy Court that they were preparing a “clarification letter” that had yet to be “finalize [d],” but which reflected “[s]ome other changes” that were made that “affect what are called purchase [ sic ] assets and what are excluded assets” (the “Clarification Letter”). [R. 1591.] LBI's SIPA Trustee and counsel for the Securities Investor Protection Corporation (“SIPC”) attended the Sale Hearing and supported the Sale without reservation. [R. 1595, 1597.]

In approving the Sale that same day (via the Sale Order), the Bankruptcy Court found that the Sale “was the means both to avoid a potentially disastrous piecemeal liquidation and to save thousands of jobs in the troubled financial services industry.” In re Lehman, 445 B.R. at 153. [ See also R. 377–400.] By its terms, the Sale Order approved not only the APA (as amended), but also prospectively approved “that letter agreement clarifying and supplementing the [APA] dated September 20, 2008 (as same may be subsequently modified or amended or clarified, the ‘Purchase Agreement’ ).” [R. 377; see also R. 388.] The Sale Order further “authorized and directed” the parties to “take all other and further actions as may be reasonably necessary to implement the transactions contemplated by the Purchase Agreement.” [R. 388.] It also explicitly recognized Barclays' representation that it would not have agreed to the Sale if it “was not free and clear of all Interests of any kind or nature whatsoever, or if [Barclays] would, or in the future could, be liable for any of the Interests.” [R. 384.] ⁴

During the weekend subsequent to the Sale Hearing (the “pre-closing weekend”), the parties worked to, among other things, finalize the Clarification Letter. The Clarification Letter, as set forth in detail in Part I.B. infra, revised portions of the definitions of Purchased and Excluded Assets set forth in the APA, On September 22, 2008, the parties filed the Clarification Letter on the public docket, “giving broad notice of its terms.” In re Lehman, 445 B.R. at 162.

The “transaction formally closed” on the morning of Monday, September 22, 2008. Id. at 161.

B. Disputed Assets No. 1: Facts Relating to the Margin Assets

The Margin Assets at issue on this appeal consist of approximately $4 billion in assets that had been maintained by LBI at various financial institutions “in connection with LBI's [ETD] business.” In re Lehman, 445 B.R. at 195.⁵ [ See also R. 67185.] The Margin Assets were LBI property, used by LBI to support trading on its own behalf as well as on behalf of its customers. Id. To be clear, the Margin Assets held at the Options Clearing Corporation (the “QCC”) were only LBI proprietarymargin assets, not LBI customer margin. Tr. at 17:3–17:4, 17:7–17:8.⁶

Under the APA, the “Business” being sold included “the U.S. and Canadian investment banking and capital markets businesses of Seller [Lehman] including the fixed income and equities cash trading, brokerage, dealing, trading and advisory businesses, investment banking operations and LBI's business as a futures commission merchant.” [R. 6.] The APA contains definitions of both the assets included in the Sale (the “Purchased Assets”) and those excluded (the “Excluded Assets”). Excluded Assets are defined as, inter alia, “(b) all cash, cash equivalents, bank deposits or similar cash items of LBI and its Subsidiaries (the ‘Retained Cash’ ) other than $1.3 billion in cash, cash equivalents, bank deposits or similar cash items” and “(n) all assets primarily related to the IMD Business and derivatives contracts.” [R. 6, 8.] ⁷

Purchased Assets are defined as, inter alia,

all of the assets of Seller and its Subsidiaries used in connection with the Business (excluding the Excluded Assets), including ... (a) the Retained Cash; (b) all deposits (including customer deposits ... and required capital deposits) and prepaid charges and expenses of Seller and its Subsidiaries associated with the Business ...; ... (d) government securities, commercial paper, corporate debt, corporate equity, exchange traded derivatives and collateralized short term-agreements with a book value as of the date hereof of approximately $70 billion (collectively, ‘Long Positions' )....

[R. 10 (first emphasis added).] ⁸

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