NEW YORK, Aug 11 (Reuters) - A New York bankruptcy court on Tuesday rejected a motion by the Bank of New York Mellon Corp to dismiss a complaint brought against it by bankrupt Lehman Brothers Holdings Inc, in a widely watched case expected to set a precedent for the derivatives market.
At issue is whether Lehman, which is counterparty to a credit default swap in a collateralized debt obligation, has the first claim on assets in the deal in which Lehman claims it is owed $70 million.
The Bank of New York Mellon is trustee to the assets in the deal.
A collateralized debt obligation, or CDO, is a structured finance product with layered risk. A credit default swap, or CDS, is an insurance-type contract used to protect against default risk or bet on the credit quality of an issuer.
The Mellon-Lehman case is being widely watched as it is expected to set a precedent for the priority of claims for CDO assets in bankruptcy. Lawyers have estimated an additional $12 billion in claims could be made based on the outcome.
'It is potentially a landmark decision on the treatment of derivative contracts in bankruptcy, and to what extent you can look at things such as protecting investors' original expectations with respect to the transaction,' Robert Claassen, partner at law firm Paul Hastings, said in an interview before the verdict.
'I think it's going to have a lot of effect on how things are done in the future,' he said.
Lehman brought the claim against the Bank of New York Mellon in New York with the hope of reaching an alternative conclusion to a ruling by the English High Court last month. Parties to the case have argued over which country should have jurisdiction.
The English High Court ruled that investors in the deal, represented by Australian investment service company Perpetual Trustee Co, had a senior claim to Lehman. The court said terms in the deal allowed the investors to jump ahead of Lehman's claim because its collapse in September 2008 constituted a default.
Investors in the CDO, called Dante, argued that the case should be held in the UK because the swap documentation was governed by British law.
Lehman argued the United States should have jurisdiction because terms of the deal were contrary to the 'anti-deprivation' provision in U.S. Bankruptcy Code.
The Bank of New York Mellon claimed on Tuesday that the case against it should be dismissed because Perpetual was not present.
The court rejected this argument, however, for reasons including that the Bank of New York will be representing noteholders in an alternative case against Lehman Brothers that will deal with the same issues.
That case involves insurer Aflac
(Reporting by Karen Brettell; Editing by Leslie Adler) Keywords: LEHMAN CDO/COURT (karen.brettell@thomsonreuters.com; +1 646 223 6274; Reuters Messaging: karen.brettell.reuters.com@reuters.net ) COPYRIGHT Copyright Thomson Reuters 2009. All rights reserved. The copying, republication or redistribution of Reuters News Content, including by framing or similar means, is expressly prohibited without the prior written consent of Thomson Reuters.
At issue is whether Lehman, which is counterparty to a credit default swap in a collateralized debt obligation, has the first claim on assets in the deal in which Lehman claims it is owed $70 million.
The Bank of New York Mellon is trustee to the assets in the deal.
A collateralized debt obligation, or CDO, is a structured finance product with layered risk. A credit default swap, or CDS, is an insurance-type contract used to protect against default risk or bet on the credit quality of an issuer.
The Mellon-Lehman case is being widely watched as it is expected to set a precedent for the priority of claims for CDO assets in bankruptcy. Lawyers have estimated an additional $12 billion in claims could be made based on the outcome.
'It is potentially a landmark decision on the treatment of derivative contracts in bankruptcy, and to what extent you can look at things such as protecting investors' original expectations with respect to the transaction,' Robert Claassen, partner at law firm Paul Hastings, said in an interview before the verdict.
'I think it's going to have a lot of effect on how things are done in the future,' he said.
Lehman brought the claim against the Bank of New York Mellon in New York with the hope of reaching an alternative conclusion to a ruling by the English High Court last month. Parties to the case have argued over which country should have jurisdiction.
The English High Court ruled that investors in the deal, represented by Australian investment service company Perpetual Trustee Co, had a senior claim to Lehman. The court said terms in the deal allowed the investors to jump ahead of Lehman's claim because its collapse in September 2008 constituted a default.
Investors in the CDO, called Dante, argued that the case should be held in the UK because the swap documentation was governed by British law.
Lehman argued the United States should have jurisdiction because terms of the deal were contrary to the 'anti-deprivation' provision in U.S. Bankruptcy Code.
The Bank of New York Mellon claimed on Tuesday that the case against it should be dismissed because Perpetual was not present.
The court rejected this argument, however, for reasons including that the Bank of New York will be representing noteholders in an alternative case against Lehman Brothers that will deal with the same issues.
That case involves insurer Aflac
(Reporting by Karen Brettell; Editing by Leslie Adler) Keywords: LEHMAN CDO/COURT (karen.brettell@thomsonreuters.com; +1 646 223 6274; Reuters Messaging: karen.brettell.reuters.com@reuters.net ) COPYRIGHT Copyright Thomson Reuters 2009. All rights reserved. The copying, republication or redistribution of Reuters News Content, including by framing or similar means, is expressly prohibited without the prior written consent of Thomson Reuters.
© 2009 AFX News
