Lehman Bros. Holdings Inc. v. Jpmorgan Chase Bank, N.A. (In re Lehman Bros. Holdings Inc.)

• Decision Date: 30 September 2015
• Docket Number: Adversary Proceeding No. 10–3266 JMP,Case No. 08–13555 JMP,No. 11–cv–6760 RJS,11–cv–6760 RJS
• Citation: 541 B.R. 551
• Parties: In re Lehman Brothers Holdings Inc., et al., Debtors. Lehman Brothers Holdings Inc. and the Official Committee of Unsecured Creditors of Lehman Brothers Holdings Inc., Plaintiff and Plaintiff Intervenor, v. JPMorgan Chase Bank, N.A., Defendant.
• Court: U.S. District Court — Southern District of New York

541 B.R. 551

In re Lehman Brothers Holdings Inc., et al., Debtors.

Lehman Brothers Holdings Inc. and the Official Committee of Unsecured Creditors of Lehman Brothers Holdings Inc., Plaintiff and Plaintiff Intervenor,

v.JPMorgan Chase Bank, N.A., Defendant.

Case No. 08–13555 JMP

Adversary Proceeding No. 10–3266 JMP

No. 11–cv–6760 RJS

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

Signed September 30, 2015

Plaintiff Lehman Brothers Holdings Inc. is represented by Joseph D. Pizzurro, L.P. Harrison III, Michael J. Moscato, and Peter J. Behmkeof Curtis, Mallet–Prevost, Colt & Mosle LLP, 101 Park Avenue, New York, New York 10178.

Plaintiff Intervenor, the Official Committee of Unsecured Creditors of Lehman Brothers Holdings Inc. is represented by Andrew J. Rossman, James C. Tecce, Erica P. Taggart, and Christopher Kercherof Quinn Emanuel Urquhart & Sullivan, LLP, 51 Madison Avenue, 22nd Floor, New York, New York 10010.

Defendant is represented by Paul Vizcarrondo, Jr., Harold S. Novikoff, Marc Wolinsky, Amy R. Wolf, Douglas K. Mayer, Ian Boczko, and Emil A. Kleinhausof Wachtell, Lipton, Rosen & Katz, 51 West 52nd Street, New York, New York 10019.

MEMORANDUM AND ORDER

RICHARD J. SULLIVAN, District Judge:

Plaintiff Lehman Brothers Holdings Inc. (“LBHI,” collectively with all of LBHI's subsidiaries, “Lehman”) and Plaintiff Intervenor Official Committee of Unsecured Creditors of Lehman Brothers Holdings Inc. (the “Committee,” collectively with LBHI, “Plaintiffs”) bring this adversary proceeding, under Rule 7001 of the Federal Rules of Bankruptcy Procedure, seeking, inter alia,damages and the recovery of $8.6 billion from Defendant JPMorgan Chase Bank, N.A. (“JPMC”) for the benefit of Lehman's creditors.

Now before the Court is Plaintiffs' motion for partial summary judgment (Doc. No. 55), and Defendant's motion for summary judgment as to all Plaintiffs' claims (Doc. No. 49). For the reasons set forth below, Plaintiffs' motion is denied, and Defendant's motion is granted in part and denied in part.

I. Background

A. Facts¹

Plaintiffs allege that JPMC took unfair advantage of Lehman at a time when Lehman relied upon JPMC as its main source of credit to sustain critical trading operations. They claim that actions taken by JPMC to mitigate its risk exposure to Lehman during the early days of the financial crisis included “take it or leave it” demands and a coordinated “cash grab” designed to ensure that JPMC would be repaid ahead of other creditors in the event of Lehman's insolvency. As it turned out, JPMC's concerns regarding Lehman's financial stability came to fruition, and the Court must now decide, long after the fact, whether JPMC's actions were authorized by the parties' agreements and governing law.

A summary of the facts alleged in Plaintiffs' First Amended Complaint appears in the Court's prior opinion and order denying Defendant's motion to withdraw the reference to the bankruptcy court in this matter. (Doc. No. 40.) Accordingly, the Court sets forth below only those undisputed facts pertinent to the instant motion.

1. The Clearance Agreement

Prior to its bankruptcy, “Lehman was the fourth largest investment bank in the United States,” offering “an array of financial services in equity and fixed income sales, trading and research, investment banking, asset management, private investment management, and private equity.” (Doc. No. 3, Ex. A (“First Amended Complaint”) ¶ 15.) As is most relevant here, Lehman “provided prime broker services to professional investors and hedge funds, allowing them to borrow securities and cash [in order] to be able to invest on a leveraged basis using borrowed funds, or debt, to increase the returns on equity.” (Id.) These service offerings required Lehman to buy and sell billions of dollars in securities each day on behalf of itself and its clients.

At all times relevant to this action, JPMC served as the primary bank and credit provider for broker/dealer Lehman Brothers Inc. (“LBI”), a wholly-owned subsidiary of LBHI. (Def. MSJ 56.1 Stmt. ¶ 2.) Among its roles, JPMC functioned as the agent for LBI's “triparty repurchase agreements,” also known as “triparty repos.” (Def. MSJ 56.1 Stmt. ¶ 6; Pl. PSMJ 56.1 Stmt. ¶ 1.) In a repurchasing agreement, one party sells an asset to another party with a promise to repurchase that asset at a pre-specified future date. In the triparty repo market, a third party known as a clearing bank acts as an intermediary between two groups of parties engaging in a repurchase transaction—broker/dealers like LBI on the one hand, and outside investors on the other. In a tri-party repo transaction, at the end of the day, the clearing bank settles the repos, which involves simultaneously transferring securities from the broker/dealer's account to the outside investors' accounts and the cash from the outside investors' accounts to the broker/dealer's accounts. (Def. MSJ 56.1 Stmt. ¶ 4.) The outside investors hold the securities overnight and, in the morning of the next trading day, the clearing bank “unwinds” the repo, returning the securities to the broker/dealer and transferring cash (at the repurchase price plus interest) to the outside investors. (Id.¶ 5.)

During the relevant period, only two clearing banks—JPMC and Bank of New York Mellon—provided triparty repo clearing services to broker/dealers like LBI. (Pl. MSJ 56.1 Stmt. ¶ 6; id.Cntrstmt. ¶¶ 2, 28.) These clearing banks provided the nearly $2.5 trillion of daily intraday credit and liquidity that broker/dealer banks like LBI required to “maintain their inventory of securities, to support their trading activity, and to settle new issues of securities.” (Pl. MSJ 56.1 Cntrstmt. ¶ 3 (internal quotation marks omitted).) At its peak in March of 2008, LBI alone borrowed as much as $242 billion of intraday credit from JPMC to unwind its triparty repo transactions. (Def. MSJ 56.1 Stmt. ¶ 76.)

JPMC's triparty repo obligations were defined in a Clearance Agreement executed on June 15, 2000 between LBI and JPMC's predecessor-in-interest, the Chase Manhattan Bank (“Chase”). (Id.¶¶ 3, 14.) Under the terms of the Clearance Agreement, JPMC agreed to “act as [LBI's] non-exclusive clearance agent for securities transactions” and as the “custodian with respect to [LBI's] tri-party custody transactions.” (Id.¶ 6.) Specifically, Section 3 provided that JPMC may “permit transfer from the Clearing Account [to other JPMC accounts] to the extent that after such transfer [JPMorgan] remain [s] fully collateralized.” (Id. ¶ 71 (quoting Doc. No. 3, Ex. C (“Clearance Agreement”)).) The lending provision appearing in Section 5 of the agreement also preserved JPMC's right, via Chase, to decline a request by LBI for an extension of credit and provided that “[a]ll loans, whether of money or securities, shall be payable on demand.” (Id. ¶ 58.) The provision further provided that Chase, and thereby JPMC, “may, solely at [its] discretion, permit [LBI] to use funds credited to the Account prior to final payment” and “may at any time decline to extend ... credit at [JPMC's] discretion, with notice....” (Id.) The contract's countervailing lien provisions in Section 11 granted JPMC, via Chase, a lien over certain assets held in LBI's accounts at JPMC as security for its exposure on advances made by JPMC to LBI. (Id.¶ 59.) The lien provisions further provided that LBI “may upon three days['] written notice to [JPMC] transfer any security.” (Id.¶ 88.)

Although the “initial term” of the Clearance Agreement commenced on June 15, 2000 and ended on October 7, 2002, the parties continued to engage in transactions under the terms of the agreement from June 2000 until they executed a formal amendment continuing their agreement in May 2008. (SeeDef. MSJ 56.1 Stmt. ¶ 3; Clearance Agreement.)

2. The August Agreements

In early 2008, the Federal Reserve urged JPMC to review its exposure in the clearance market and increase the margins it required from broker/dealers like LBI to cover clearing-related functions. (Def. MSJ 56.1 Stmt. ¶ 8; Pl. MSJ 56.1 Stmt. ¶ 8.) JPMC began that process and, in June, following negotiations, LBHI pledged collateral in the form of securities priced at approximately $5 billion to secure JPMC's advances of intraday credit (the “June Collateral”). (Def. MSJ 56.1 Stmt. ¶ 9; Pl. MSJ 56.1 Stmt. ¶ 9.)

A few months later, in August 2008, JPMC raised concerns to Lehman regarding (1) the valuation of the June Collateral, and the enforceability of its lien on those funds. (Def. MSJ 56.1 Stmt. ¶¶ 10–11; Pl. MSJ 56.1 Stmt. ¶ 10.) In response to these concerns, LBHI agreed to transfer the June Collateral to a securities account maintained at JPMC, and the parties entered into a series of new agreements further defining their triparty repo and security obligations (collectively the “August Agreements”). (Def. MSJ 56.1 Stmt. ¶ 12.) The August Agreements, executed on or about August 29, 2008, included an amendment to the Clearance Agreement (the “August Amendment”), a guaranty of LBHI's obligations (the “August Guaranty”), and a security agreement which provided JPMC with a lien over LBHI accounts (the “August Security Agreement”). (Id.¶¶ 12–15; Pl. PMSJ 56.1. Stmt. ¶¶ 8, 11.) In the August Agreements, LBHI agreed to post collateral to guarantee the intraday trading obligations of LBHI and Lehman subsidiaries, as defined in the amended Clearance Agreement. (Pl. MSJ 56.1 Cntrstmt. ¶ 21; Doc. No. 56, Ex. R at 1.)

3. The September Agreements

On September 9, 2008, Lehman's stock dropped to $7.79, a 45% decline from the prior day's value. (Def. MSJ 56.1 Stmt. ¶ 19.) That same day, JPMC approached Lehman to obtain a “broad-based collateral agreement to secure all the risk that JPMorgan had to Lehman Brothers” and request additional collateral from Lehman. (Id. ¶¶ 20–21; see alsoPl. MSJ 56.1 Stmt. ¶¶ 20–21.) In the discussion, JPMC allegedly told LBHI executives that, if they did not execute the proposed agreements before LBHI's earnings call the next day, “it would be...