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FEDERAL COURT OF AUSTRALIA
Parbery; in the matter of Lehman Brothers Australia Limited (in liq) [2011] FCA 1449
Citation: / Parbery; in the matter of Lehman Brothers Australia Limited (in liq) [2011] FCA 1449Parties: / STEPHEN JAMES PARBERY and MARCUS WILLIAM AYRES IN THEIR CAPACITY AS LIQUIDATORS FOR LEHMAN BROTHERS AUSTRALIA LIMITED (IN LIQUIDATION) ACN 066 797 760
File number(s): / NSD 2102 of 2011
Judge: / JACOBSON J
Date of judgment: / 15 December 2011
Catchwords: / PRACTICE AND PROCEDURE – Co-operation between courts in different jurisdictions – Application made under Articles 25 & 27 of the Cross-Border Insolvency Act 2008 (Cth) for letter of request to be sent to United States court to act in aid of proceedings in Australia – issue of judicial comity – discussion of factors relevant to whether a letter of request should be sent – appropriate form and content of such a letter of request discussed
Legislation: / Cross Border Insolvency Act 2008 (Cth), ss 6 and 8
United States Bankruptcy Code 11 USC §1525 (2011)
Federal Court of Australia, Practice Note CORP 2 – Cross-Border Insolvency: Cooperation with Foreign Courts or Foreign Representatives, 1 August 2011
Model Law on Cross-Border Insolvency of the United Nations Commission on International Trade Law, GA Res 52/158, 52nd sess, 72nd plen mtg, Agenda Item 148, UN Doc A/52/649 (30 January 1998, adopted 15 December 1997), Arts 25 and 27
Guidelines Applicable to Court-to-Court Communication in Cross-Border Cases (The American Law Institute, 2000)
Cases cited: / Belmont Park Investments Pty Ltd v BNY Corporate Trustee Services Ltd [2011] 3 WLR 521
Lehman Brothers Special Financing Inc v BNY Corporate Trustee Services Ltd (United States Bankruptcy Court, Southern District of New York, Case No 08-13555, Adversary Proceeding No 09-01242, 25 January 2010)
Perpetual Trustee Co Ltd v BNY Corporate Services Ltd [2009] 2 BCLC 400
Perpetual Trustee Co Ltd v BNY Corporate Trustee Services Ltd [2010] 2 BCLC 237
Belmont Park Investments Pty Ltd v BNY Corporate Trustee Services Ltd [2010] Ch 347
T & N Ltd; Re [2005] BCC 982
Date of hearing: / 5 December 2011
Place: / Sydney
Division: / GENERAL DIVISION
Category: / Catchwords
Number of paragraphs: / 75
Counsel for the Applicant: / BA Coles QC with P Kulevski
Solicitor for the Applicant: / Clayton Utz
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IN THE FEDERAL COURT OF AUSTRALIANEW SOUTH WALES DISTRICT REGISTRY
GENERAL DIVISION / NSD 2102 of 2011
IN THE MATTER OF LEHMAN BROTHERS AUSTRALIA LIMITED (IN LIQUIDATION) ACN 066 797 760
STEPHEN JAMES PARBERY AND MARCUS WILLIAM AYRES IN THEIR CAPACITY AS LIQUIDATORS FOR LEHMAN BROTHERS AUSTRALIA LIMITED (IN LIQUIDATION) ACN 066 797 760Applicants
JUDGE: / JACOBSON J
DATE OF ORDER: / 15 DECEMBER 2011
WHERE MADE: / SYDNEY
THE COURT ORDERS THAT:
1. Otherwise than as stated in the reasons for judgment delivered on 15 December 2011, the application be dismissed.
Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.
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IN THE FEDERAL COURT OF AUSTRALIANEW SOUTH WALES DISTRICT REGISTRY
GENERAL DIVISION / NSD 2102 of 2011
IN THE MATTER OF LEHMAN BROTHERS AUSTRALIA LIMITED (IN LIQUIDATION) ACN 066 797 760
BETWEEN: / STEPHEN JAMES PARBERY and MARCUS WILLIAM AYRES IN THEIR CAPACITY AS LIQUIDATORS FOR LEHMAN BROTHERS AUSTRALIA LIMITED (IN LIQUIDATION) ACN 066 797 760Applicants
JUDGE: / JACOBSON J
DATE: / 15 DECEMBER 2011
PLACE: / SYDNEY
REASONS FOR JUDGMENT
Introduction
1 Last week, Stephen Parbery and Marcus Ayres, the liquidators of Lehman Brothers Australia Limited (in liquidation) (“LBA”) (together “the Liquidators”) applied to me ex parte to exercise my powers under the Cross Border Insolvency Act 2008 (Cth) (the “Cross Border Insolvency Act”) to communicate directly with the Honourable Judge James M Peck of the United States Bankruptcy Court for the Southern District of New York.
2 Judge Peck is the designated bankruptcy judge with overall responsibility for administering the insolvencies of the Lehman Brothers Group of Companies (the “Lehman Group”) in the United States. His Honour is also the docket judge for a proceeding in the United States, the outcome of which has a bearing on the ability of the Liquidators of LBA to carry out their statutory responsibilities to collect and realise the assets of LBA for the benefit of creditors.
3 The assets in question are securities for certain obligations arising under various series of note issues made pursuant to a programme for the issue of a form of collateralised debt obligations. The programme is known as the Dante Programme. LBA holds notes issued in five different series of note issues made pursuant to the Dante Programme. The notes held by LBA in the Dante Program have a face value of nearly $A9 million.
4 I am the docket judge of the Federal Court of Australia for the liquidation of LBA. The matter was placed in my docket recently, it having previously been in the docket of Rares J who ordered the winding up of LBA on 2 October 2009.
5 The application which has been made to me is thought by the Liquidators of LBA to be one which may assist in resolving conflicting orders of Courts in England and the United States as to the competing priorities between the holders of notes issued in the Dante Program (the “Noteholders”) and an American company, Lehman Brothers Special Financing Inc (“LBSF”) on the question of who has priority to the securities.
6 The Liquidators of LBA rely on Articles 25 and 27 of the Model Law on Cross-Border Insolvency of the United Nations Commission on International Trade Law (the “Model Law”) which is given the force of law in Australia under ss 6 and 8 of the Cross Border Insolvency Act.
7 Article 25 of the Model Law empowers this Court to communicate directly with or request information and assistance from a foreign court. Article 25 has been implemented in the Unites States in §1525 of the United States Bankruptcy Code 11 USC (2011) (the “US Bankruptcy Code”).
8 Whether or not Article 25 of the Model Law is wide enough to permit me to seek the assistance of Judge Peck in the manner sought by the Liquidators, I do not consider that I should do so at the present time. The reasons why I have come to this view emerge largely from the decision of Henderson J in Perpetual Trustee Co Ltd v BNY Corporate Trustee Services Ltd [2010] 2 BCLC 237 (“Perpetual No 2”).
9 Perpetual No 2 addressed a similar question to the one which is raised before me. The issue before Henderson J was whether he should send a letter of request to Judge Peck proposing an allocation of functions between the English Court and the American Court in relation to the question of priorities between the Noteholders and LBSF.
10 In Perpetual No 2, Henderson J agreed to send a letter of request to Judge Peck but he did so in much narrower terms than were sought by the claimant. The importance of the decision for present purposes is that it points against the utility of the request which the Liquidators of LBA have asked me to make to Judge Peck.
11 There are a number of other reasons why I consider it inappropriate to accede to the request. Some of them are of a procedural nature but a question of comity also arises because it seems to me that the extent of the assistance which is sought may impinge upon the sovereignty of the United States.
The Dante Programme and the issue of priority
12 The documentation for the Dante Program consists of a complex web of interconnected Trust Deeds and agreements. These documents provide for the issue of a series of synthetic portfolio notes secured by a charge over government bonds and other highly rated investments purchased with the funds subscribed by the Noteholders.
13 The parties to the Dante Programme include the issuer of the Notes, namely a special purpose vehicle provided by the Lehman Group, the Trustee for the Noteholders, namely BNY Corporate Trustee Services Ltd (“BNY”) as Trustee, and LBSF as “Swap Counterparty”. LBSF assumed that role under a credit default swap agreement which formed part of the Dante Programme.
14 The securities for the Notes were described as the “Collateral” in the relevant documentation. The Collateral was vested in BNY under cl 5 of the Supplemental Trust Deed. Under that clause, the issuer of the Notes charged the Collateral in favour of the Trustee which held it as trustee for itself, the Noteholders and LBSF as Swap Counterparty.
15 The critical clause is cl 5.5 which is known colloquially as the “flip clause”. It provided for Swap Counterparty priority unless an Event of Default occurred under the Swap Agreement. In that event, Noteholder priority was to apply.
16 An Event of Default occurred under the Swap Agreement when the parent company of the Lehman Group, Lehman Brothers Holdings Inc, filed for protection under Ch 11 of the US Bankruptcy Code in September 2008 or, alternatively, when LBSF filed for Ch 11 protection on 3 October 2008.
17 The question which then arose was whether the priority granted to LBSF as Swap Counterparty was reversed by the flip clause so as to give effected to the Noteholder priority as provided for in cl 5.5.
18 Clause 13 of the Supplemental Trust Deed provides that the Deed is to be governed and construed in accordance with English law.
The decisions of the English Courts
19 The validity and effect of the flip clause has been determined in England at first instance and on appeal in proceedings brought by Perpetual Trustee Co Limited on behalf of the Noteholders of a number of series of Notes in the Dante Programme. The series of Notes which were the subject of that proceeding included the series of Notes held by LBA: see Perpetual Trustee Co Ltd v BNY Corporate Services Ltd [2009] 2 BCLC 400 (“Perpetual No 1”).
20 BNY was the first Defendant in Perpetual No 1 and LBSF was the second Defendant.
21 In Perpetual No 1, the Chancellor, Sir Andrew Morritt, held that the provisions for Noteholder priority under the flip clause did not offend against English public policy or against the principle of anti-deprivation in insolvency law. He therefore held that cl 5.5 was effective to confer Noteholder priority and that the Collateral held by BNY was to be realised and distributed for the benefit of the Noteholders.
22 The Chancellor’s decision in Perpetual No 1 was affirmed on appeal by the Court of Appeal: Belmont Park Investments Pty Ltd v BNY Corporate Trustee Services Ltd [2010] Ch 347.
23 An appeal from the Court of Appeal’s decision in Perpetual No 1 was dismissed by the Supreme Court of the United Kingdom: Belmont Park Investments Pty Ltd v BNY Corporate Trustee Services Ltd [2011] 3 WLR 521.
The United States Proceedings
24 In proceedings brought by LBSF against BNY in the US Bankruptcy Court for the Southern District of New York, Judge Peck delivered a Memorandum of Decision on 25 January 2010 in which he took a different view of the effect of the flip clause from that which had been taken in England: see Lehman Brothers Special Financing Inc v BNY Corporate Trustee Services Limited (United States Bankruptcy Court, Southern District of New York, Case No 08-13555, Adversary Proceeding No 09-01242, 25 January 2010) (the “US Perpetual Notes Proceeding”).
25 Judge Peck came to the view in the US Perpetual Notes Proceeding that the flip clause was contrary to the “ipso facto” and “automatic stay” provisions of the US Bankruptcy Code. He considered that the terms of cl 5.5 which purport to modify LBSF’s right to Counterparty priority constituted an unenforceable ipso facto clause. He also considered that any attempt to enforce Noteholder priority would violate the automatic stay triggered by the filing of a petition under Ch 11 because it would deprive LBSF and its creditors of a valuable property interest.
26 In his Memorandum in the US Perpetual Notes Proceeding, Judge Peck said:
The issues presented in this litigation are, as far as the Court can tell, unique to the Lehman bankruptcy cases and unprecedented. The Court is not aware of any other case that has construed the ipso facto provisions of the Bankruptcy Code under circumstances comparable to those presented here. No case has ever declared that the operative bankruptcy filing is not limited to the commencement of a bankruptcy case by the debtor-counterparty itself but may be a case filed by a related entity – in this instance the counterparty’s parent corporation as credit support provider. Because this is the first such interpretation of the ipso facto language, the Court anticipates that the current ruling may be a controversial one, especially due to the resulting conflict with the decisions of the English Courts.
27 As is apparent from the above, Judge Peck was well aware of the contrary decisions of the English Courts. His Honour’s Memorandum was delivered after the decision of the Court of Appeal in Perpetual No 1, but before it was affirmed by the Supreme Court of the United Kingdom. Judge Peck referred to the decisions of Sir Andrew Morritt and the Court of Appeal and gave his reasons as to why he came to a different view.