Ipso facto clause: Difference between revisions

Ipso facto clause (view source)

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-{{g}}A provision allowing one party to terminate or accelerate a payment if the other party goes bankrupt. Generally invalid under the [[Bankruptcy Code]] because a trustee is not bound by any provision that is conditioned on the debtor's insolvency.
+{{g}}
+===USA===
+In america, an ipso factor clause is one that purports to let one party terminate a contract, accelerate payments under it, or somehow get an unconscionable jump on the other party if that poor unfortunate party goes [[bankrupt]]. These are generally invalid under the [[Bankruptcy Code]] because a trustee is not bound by any provision that is conditioned on the debtor's insolvency.
 USC §365(e)(i) states:
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 ::(B) the commencement of a case under this title; or
 ::(C) the appointment of or taking possession by a trustee in a case under this title or a custodian before such commencement.
+Relevant in an {{isdama}} because while the standard {{isdaprov|Bankruptcy}} {{isdaprov|Event of Default}} itself doesn’t offend the rule,  arguably Section {{isdaprov|2(a)(iii)}}, which allows you and {{isdaprov|Event of Default}} to ''not'' [[close out]] the other guy, and instead just cease paying what you owe him on the ISDA until he magically becomes ''un''bankrupt, whereupon you would have to start paying again.
+====Example: the flip clause in a [[synthetic CDO]]===
+In {{casenote|Lehman Brothers Financing|BNY Corporate Trustee Services Limited}} the US Bankruptcy Court held a “flip” clause in one of [[Lehman]]’s [[synthetic CDO]]s was an unenforceable [[ipso facto clause]]. Here the [[flip clause]] that inverted the priority of creditors — ordinarily, a swap counterparty ranks ahead of noteholders  in a credit linked note, which figures, since the economic point of the deal is for the noteholder to sell [[credit protection]] to the swap counterparty — so that [[CDO]] noteholders would rank [[ahead]] of the Lehman swap counterparty if Lehman defaulted under its swap with the CDO issuer.
+===[[Anti-deprivation]]===
+In the United Kingdom there is no statutory equivalent of the ipso facto rule, those clever fellows of the common law invented<ref> i mean, “uncovered an until-then-disregarded but nonetheless foundational [[Doctrine of precedent|principle of the common law]] that extends, unspoken, back to the dawn of civilisation”.</ref> the [[anti‑deprivation rule]]: that, in the honeyed words of Sir William Page Wood V.C., in {{citer|Whitmore|Mason|1861| 2J&H|204}} “no person possessed of property can reserve that property to himself until he shall become [[bankrupt]], and then provide that, [[in the event of]] his becoming bankrupt, it shall pass to another and not his creditors”. This required some wilfulness and not just inadvertence or lucky hap, but if you ''intend'' to defeat the standing bankruptcy laws you will not get away with it.