Metavante v Lehman

In which the Southern District of New York Bankruptcy Court found that poor old Metavante Corporation, a non-defaulting counterparty relying on Section 2(a)(iii) to withhold payments under live derivatives with Lehman Brothers Special Financing, Inc. due to a valid pending but un-triggered Event of Default — all standard operating procedure, so they thought — had to, um, sit or get off the pot. And, by the time they heard the case, thought their honours, it was too late to do either. Ouch ouch ouch.

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In short, the Court held:

that the safe harbors in the US Bankruptcy Code only protect a non-defaulting party’s right to terminate a swap, and enforce net termination values but do not allow it to withhold performance under a swap if the swap is not terminated;
that Metavante must make all past payments due under the ISDA Master Agreement with default interest, and resume future payments, despite Metavante's contractual right under section 2(a)(iii) to withhold them based upon LBSFs’ ongoing bankruptcy; and,
11 months after the bankruptcy filing was too late for Metavante to suddenly go “oh whoopsie” and trigger early termination. It imposed a sunset on a Metavante’s right to early termination following a bankruptcy even though there wasn’t one in the ISDA Master Agreement or the Bankruptcy Code itself.

Media

Lehman, Metavante and the ISDA Master Agreement - FT Alphaville

Section 2(a)(iii) litigation

There is a (generous) handful of important authorities on the effect under English law or New York law of the suspension of obligations under the most litigationey clause in the ISDA Master Agreement, Section 2(a)(iii). They consider whether flawed asset provision amounts to an “ipso facto clause” under the US Bankruptcy Code or violates the “anti-deprivation” principle under English law. Those cases are: