In Re: Lehman Brothers Holdings Inc.
Filing
27
MEMORANDUM AND ORDER. The judgments of the Bankruptcy Court are affirmed. The clerk is directed to enter judgment for appellee and to close the case. (Signed by Judge Naomi Reice Buchwald on 12/18/2014) (rjm)
UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK
----------------------------------X
In re
Chapter 11
Case No. 08-13555 (SCC)
Jointly Administered
LEHMAN BROTHERS HOLDINGS INC.
et al.,
Debtors.
----------------------------------X
In re
SIPA
Case No. 08-01420 (SCC)
LEHMAN BROTHERS INC.,
Debtor.
----------------------------------X
FIRSTBANK PUERTO RICO,
Adv. Proc.
No. 10-04103 (SCC)
Plaintiff-Appellant,
- against MEMORANDUM AND ORDER
BARCLAYS CAPITAL INC.,
14 Civ. 1935 (NRB)
Defendant-Appellee.
----------------------------------X
NAOMI REICE BUCHWALD
UNITED STATES DISTRICT JUDGE
INTRODUCTION
This appeal arises from the insolvency proceedings of Lehman
Brothers
Holdings
Inc.
and
its
subsidiaries
(collectively,
“Lehman”).
Long before Lehman filed for bankruptcy, plaintiff-appellant
FirstBank Puerto Rico (“FirstBank”) gave bonds to a Lehman entity
as collateral for derivative transactions between FirstBank and
Lehman.
FirstBank’s contract gave that counterparty license to
sell those bonds free of FirstBank’s interest.
Once FirstBank’s
counterparty took advantage of that provision and sold all of
FirstBank’s collateral (as it happened, to a different Lehman
entity), FirstBank retained nothing more than a contractual claim
against its counterparty for return of the bonds at a later date.
FirstBank, then, has no right to re-claim the collateral from the
collateral’s
subsequent
purchaser,
Barclays
Capital
Inc.
(“Barclays”), which bought the collateral at a bankruptcy sale.
Therefore, we affirm the judgment of the United States Bankruptcy
Court for the Southern District of New York (the “Bankruptcy
Court”) granting summary judgment to Barclays.
At the time of the bankruptcy sale, the Bankruptcy Court
enjoined suits against Barclays related to assets that Barclays
purchased from Lehman in bankruptcy.
Because the Bankruptcy Court
did not abuse its discretion in holding that FirstBank’s suit
violated this anti-suit injunction, we also affirm the Bankruptcy
Court’s sanctions against FirstBank.
BACKGROUND
I.
FINANCIAL INSTRUMENTS
Because this appeal requires us to discuss sophisticated
transactions among the parties and various Lehman entities, we
offer an overview of the securities, derivatives, and financing
tools involved in this case.
-2-
A.
Swaps
1.
Definition of a Swap
A swap is, generically, an over-the-counter transaction in
which two parties agree to exchange the returns of two cash flows.
Perhaps the most simple example is an interest-rate swap.1
See generally Frank J. Fabozzi et al., Interest-Rate Swaps and
Swaptions, in Handbook of Fixed Income Securities 1445, 1445–46
(Frank J. Fabozzi ed. 2012).
One party agrees to pay a fixed rate
of interest (say, 4%), while the other party pays a floating rate
of interest based on some published rate that varies over time
(say, “U.S.-dollar 3-month LIBOR, plus 1%”), with both interest
payments calculated against the same notional amount of principal.
At set intervals, one of the parties calculates the difference
between the fixed-rate interest and the floating-rate interest, and
the party that owes more interest pays the difference to the party
that owes less interest.
Thus, if interest rates rise during the
term of the swap, then the payer of the floating-rate leg will make
a net payment; if interest rates fall, then the payer of the
floating-rate leg will receive a net payment.
An interest-rate swap allows a party to gain or reduce
exposure to interest rates. See id. at 1445. For example, suppose
1
Other examples include currency swaps, commodity swaps, swaps on stock
or bond indices, and swaps on credit derivatives. See, e.g., Paul C. Harding,
Mastering the ISDA® Master Agreements (1992 and 2002) 4–5 (3d ed., 2010).
-3-
that a bank has loaned money to its customers at fixed interest
rates, but that the bank borrows money at short-term rates that
fluctuate. Then the bank faces a risk that its own borrowing costs
will increase from rising interest rates, while the bank’s income,
from its fixed-rate loans, will remain constant.
In such a
circumstance, the bank can avoid this risk by entering into an
interest rate swap with a swap dealer. The bank will deliver fixed
payments to the dealer, and will receive floating payments in
return.
This effectively allows the bank to convert its fixed
income into an income stream whose fluctuations will match the
bank’s borrowing costs.
2.
Counterparty Risk
Because swaps are traded directly between counterparties
(rather than through an exchange), each party faces the risk that
the other party will be unable to pay its net losses under the swap
agreement.
See id. at 1446–47, 1474–75; Christian J. Johnson,
Derivatives & Rehypothecation Failure: It’s 3:00 P.M., Do You Know
Where Your Collateral Is?, 39 Ariz. L. Rev. 949, 958–59 (Fall
1997).
Turning back to the example of an interest-rate swap,
suppose prevailing interest rates fall, so that the bank (as the
payer of a fixed rate and receiver of a floating rate) will expect
to owe the swap dealer payments throughout the term of the swap.
Until the bank successfully makes each payment, the swap dealer
-4-
faces
the
risk
that
the
bank
will
become
unable
to
pay.
Conversely, if prevailing interest rates rise, then the swap dealer
will expect to owe the bank payments throughout the term of the
swap.
Until the swap dealer successfully makes each payment, the
bank faces the risk that the swap dealer will become unable to pay.
One partial solution to this credit risk is for one party
(called the “pledgor”) to give the other party (the “secured
party”) safe assets to hold as collateral. The pledgor retains the
economic interest in its collateral.
That is, when the pledged
bonds pay interest, the secured party must deliver the interest to
the pledgor, and the pledgor may re-claim and sell the pledged
bonds upon proper notice (although the pledgor must then post other
acceptable collateral in its place). See Jon Gregory, Counterparty
Credit Risk 70–71 (2010).
Frequently, the swap parties will agree that, at certain
intervals, the party with a net unrealized loss will deliver
collateral to cover the unrealized loss.
See id. at 60.
If
collateral is exchanged frequently enough, this exchange will
prevent either side’s counterparty credit exposure from becoming
intolerably great.
The swap parties may also agree that one party (typically the
party with weaker credit) will post some amount of collateral for
each swap, called an “independent amount” or “initial margin,”
-5-
regardless of profit or loss on the swap.
This decreases the
secured party’s risk; if the pledgor defaults before the pledgor
has an opportunity to post collateral against a sudden loss, the
secured party will (it hopes) have enough initial margin to cover
the pledgor’s loss.
See id. at 67.
Conversely, the use of initial
margin increases the pledgor’s counterparty risk; if the secured
party defaults, then the pledgor will not be able to offset the
loss of its initial margin against any payments owed to the secured
party.
3.
A
swap
Documentation and Rehypothecation
dealer
does
not
re-negotiate
the
terms
of
its
relationship with a customer each time the customer executes a
swap.
Instead, a customer negotiates a single master agreement
with a swap dealer, usually based on standard agreements published
by
the
(ISDA).
International
Swaps
and
Derivatives
Association,
Inc.
This master agreement will include terms regarding the
overall credit relationship between the parties——representations
and
warranties,
events
of
default,
termination
procedures,
procedures for offsetting debts between different trades, and so
forth.
Once a master agreement is in place, each trade requires
only a short confirmation to record essential details of the
particular transaction, such as the notional principal, the fixed
rate, the definition of the floating rate, and the term of the
-6-
swap.
See generally Harding, supra, at 9–16; Johnson, supra, at
957–58.
The standard ISDA Agreements do not govern the exchange of
collateral.
Instead, parties who wish to collateralize their swap
agreement will agree to collateralization terms in a separate
document, such as a “Credit Support Annex” or a “Credit Support
Deed.”
In particular, some credit support documents allow the secured
party to use or dispose of the collateral.
rehypothecation.
This is known as
See generally Johnson, supra, passim.
Just as the pledgor retains the economic interest in bonds
that
are
posted
as
collateral,
see
supra
at
5,
the
pledgor
continues to retain that economic interest after the secured party
has rehypothecated the bonds.
This is because the secured party
must still deliver any interest payments to the pledgor as though
the secured party still held the collateral, and the pledgor may
still re-claim and sell the pledged bonds upon proper notice.
See
Paul C. Harding & Christian A. Johnson, Mastering the ISDA®
Collateral Documents 279 (2d ed., 2012).
The main advantage of rehypothecation is to allow the secured
party to finance its own operations; in exchange, the secured party
offers the pledgor cheaper funding, or, at the margin, the secured
party offers a swap line to a customer who would not otherwise
-7-
qualify.
Before 2007, at least some commentators believed that
rehypothecation was “critical to the entire financial system.”
Gregory, supra, at 71 (citing M. Segoviano Basurto & M. Singh,
Counterparty Risk in the Over-the-counter Derivatives Market 1–19,
IMF Working Papers (2008), available at http://ssrn.com/abstract=
1316726).
The main disadvantage (at least to the pledgor) is that, as in
this case, “the secured party could become insolvent and therefore
be unable to return the posted collateral . . . .”
Johnson, supra, at 66.
Harding &
This risk is especially great when the
pledgor has posted collateral whose value exceeds the pledgor’s
unrealized
losses
(for
example,
when
the
pledgor
posts
an
“independent amount”), because then the pledgor cannot set off the
whole value of its collateral against its own unrealized losses.
See id. at 67; ISDA, Independent Amounts 6–7 (release 2.0, Mar. 1,
2010),
available
at
http://www2.isda.org/attachment/MTY3MA==
/Independent-Amount-WhitePaper-Final.pdf. Because of this risk to
the
pledgor,
negotiated.”
“[r]ehypothecation
rights
are
often
heavily
Harding & Johnson, supra, at 279; cf. Credit Support
Annex between FirstBank and Bank of Montreal, Mar. 15, 2004, J.A.
1810–27 at ¶ 13(g)(ii) (forbidding rehypothecation).
-8-
B.
Repurchase Agreements (Repos)
A repurchase agreement (or repo) is, legally, a pair of bond
sales: A seller sells a bond to a buyer, and the parties agree that
the buyer will re-sell the bond back to the seller at a later date
for a slightly higher price.2
Frank J. Fabozzi & Steven V. Mann,
Financing Positions in the Bond Market, in Handbook of Fixed Income
Securities
1355,
1355–56
(Frank
J.
Fabozzi
ed.
2012)
In
a
“bilateral” repo——the kind that pertains to this case——the first
sale transfers legal title to the purchaser-reseller, and the
second sale transfers legal title back to the seller-repurchaser.
See In re Lehman Bros. Inc., 506 B.R. 346, 349 (S.D.N.Y. 2014).
Although a repo is structured as a pair of sales, the economic
substance is that the “seller” borrows money from the “buyer” and
provides the bond as collateral.
See Fabozzi & Mann, Financing
Positions, supra, at 1357. A repo resembles a secured loan in that
the borrower (or seller and repurchaser) retains the economic
interest in the bonds.
When the bonds pay interest, the lender of
cash must deliver the interest to the borrower.
Fabozzi
&
Steven
V.
Mann,
Repurchase
&
See Frank J.
Reverse
Repurchase
Agreements, in Securities Finance: Securities Lending & Repurchase
2
The repurchase date is usually set at the time of the transaction, but
a repo can be indefinite, with the repurchase to occur upon either party’s
demand. See, e.g., Lehman Master Repurchase Agreement, J.A. 1214–21 (“Lehman
MRA”) at ¶ 3(b)(iii), (c).
-9-
Agreements 221, 237 (Frank J. Fabozzi & Steven V. Mann eds. 2005)
(contrasting a repo to a “buy/sell back” transaction, in which the
lender of cash obtains beneficial ownership of the bond).
The most important use of a repo is to secure financing.
Suppose a bullish trader wants to have economic exposure to $300 of
See Fabozzi & Mann, Financing
bonds, but has only $100 of cash.
Positions, supra, at 1356.
The trader can accomplish this by
combining two transactions: (1) an outright purchase of $300 in
bonds from a bond dealer, and (2) a repo in which the trader
borrows
$200
from
a
repo
dealer,
delivers
$200
of
bonds
as
collateral, and commits to repurchase the bonds in the future.
After making these transactions, the trader has $100 of bonds in
hand, plus economic exposure to $200 in bonds that the trader has
committed to repurchase from the repo dealer at a fixed price.
A trader might also wish to lend cash and borrow bonds.
id. at 1357.
See
Suppose a bearish trader wants to have negative or
short exposure to $100 of bonds. The trader can accomplish this by
combining two transactions: (1) an outright sale of $100 in bonds
to a bond dealer, and (2) a repo in which the trader lends $100 to
a repo dealer, takes $100 of bonds, and commits to resell the bonds
in the future.
economic
After these transactions, the trader has negative
exposure
to
the
$100
in
bonds
that
the
trader
committed to resell to the repo dealer at a fixed price.
-10-
has
As
with
swaps,
traders
do
not
re-negotiate
their
legal
relationship for each new repo. Instead, a single master agreement
(usually the Bond Market Association’s Master Repurchase Agreement)
governs the terms of repo trading, and short trade confirmations to
document the details of each trade. See Fabozzi & Mann, Repurchase
and Reverse Repurchase Agreements, supra at 225–26.
II.
TRANSACTIONS BETWEEN FIRSTBANK AND LEHMAN
In 1997, FirstBank and Lehman Brothers Special Financing Inc.3
executed an master agreement for trading interest rate swaps (the
“Swap Agreement”) based on a standard 1992 ISDA Master Agreement.
See J.A. 1014–24 (“Stip. of Facts”) ¶ 2; J.A. 1026–60 (“Swap
Agr.”)4; see also J.A. 1080–84 (June 2008 Amdt.).
time,
FirstBank
and
Lehman
Swaps
executed
a
At the same
credit
support
agreement (the “Credit Support Annex”) to govern the exchange of
collateral.
See Stip. of Facts ¶¶ 2–3; J.A. 1062–78 (“CSA”).
FirstBank
was
required
to
post
significant
amounts
of
collateral to Lehman Swaps before FirstBank ever incurred losses on
its swaps.
The Credit Support Annex defined FirstBank’s “Credit
3
Lehman Brothers Special Financing Inc. (Lehman Swaps or LBSF) was a
subsidiary of Lehman Brothers Inc. (Lehman Brokerage or LBI), a U.S. brokerdealer, which was in turn a subsidiary of Lehman Brothers Holding Inc. (Lehman
Holdings or LBHI).
4
The signed Swap Agreement contains only the first and last page of
ISDA’s standard agreement, with signatures. The parties agree that this was
common industry practice, and indicates that the middle pages of ISDA’s
standard agreement constituted part of the contract. See Stip. of Facts ¶ 2.
We therefore treat the entire ISDA agreement as part of the Swap Agreement.
-11-
Support Amount” (or the amount of collateral that FirstBank was
required to post) to be no less than the sum of all “Independent
Amounts” applicable to FirstBank. See CSA ¶ 13(b)(i)(C)(x). These
“Independent Amounts” were defined as 1% of the notional principal
of each swap transaction, see J.A. 1374–78 (“Statement of Sept. 1,
2008”) at 4–5.5
Additionally, FirstBank was required to post
collateral to cover any unrealized losses on its underlying swaps.
See CSA ¶ 13(b)(1)(C).6
The Credit Support Annex contained a standard rehypothecation
clause, allowing Lehman Swaps to “sell, pledge, rehypothecate,
assign,
invest,
use,
commingle
or
otherwise
dispose
of,
or
otherwise use in its business[,] any Posted Collateral it holds,
free
from
any
claim
or
right
of
any
nature
whatsoever
[FirstBank], including any equity or right of redemption.”
¶ 6(c)(i).
of
CSA
In the event that the underlying swaps terminated as a
result of a default by Lehman Swaps, Lehman Swaps was obligated to
immediately transfer all collateral back to FirstBank, except that
5
It is unclear if these amounts were set at 1% in each trade
confirmation, see CSA ¶ 13(b)(iv)(A), or if these amounts were set at 1%
through a provision allowing Lehman Swaps to increase FirstBank’s “Independent
Amounts” by 1% whenever FirstBank’s long-term credit ratings fell below
certain thresholds, see June 2008 Amdt. ¶ 2c.
6
The Credit Support Annex was nominally drafted as a two-way street.
However, it does not appear that any trade confirmation ever required Lehman
Swaps to post initial margin, and FirstBank had no unrealized profits to
collateralize as of September 2008. See Statement of Sept. 1, 2008 at 2–3.
Therefore, only Lehman Swaps held collateral in September 2008.
-12-
Lehman Swaps was permitted to set off any amounts payable by
FirstBank.
CSA ¶ 8(b)(iii),(iv).
The Swap Agreement itself allowed FirstBank to hold Lehman
Swaps in default upon the occurrence of any of several events,
including a voluntary bankruptcy filing of Lehman Swaps or Lehman
Holdings and a failure to make any required payments.
See Swap
Agr. ¶¶ 5(a)(I), (vii)(4), 6(a); Swap Agr., Sched., pt. 4, ¶ (g)
(listing Lehman Holdings as a “Credit Support Provider,” whose
bankruptcy was to constitute a default event).
Upon proper notice
of early termination following a default, Lehman Swaps was no
longer allowed to rehypothecate FirstBank’s collateral, and was
required to return all collateral immediately to FirstBank.
CSA
¶¶ 6(c),
8(b)(iii).
If
Lehman
Swaps
failed
to
See
return
FirstBank’s collateral, then FirstBank was entitled to set off the
value of the collateral against any losses that FirstBank owed
Lehman Swaps on the underlying swaps.
See CSA ¶ 8(b)(iv).
Over time, FirstBank traded dozens of interest-rate swaps with
Lehman Swaps.
Stip. of Facts ¶ 5.
To support this trading,
FirstBank provided Lehman Swaps with investment-grade bonds issued
by the Federal National Mortgage Association and the Government
National Mortgage Association (the “Posted Bonds” or the “Posted
Collateral”).
See Stip. of Facts ¶ 8.
possession as Lehman Swaps’ agent.
-13-
Lehman Brokerage took
See Stip. of Facts ¶ 10.
Between February and September 2008 (but before the bankruptcy
of any Lehman entity), Lehman Swaps sold some of the Posted Bonds
to Lehman Brokerage in a series of repos (the “Intra-Lehman
Repos”).
See Stip. of Facts ¶ 12.
As the Posted Bonds had
previously been held by Lehman Brokerage as agent for Lehman Swaps,
employees
of
transaction.
Lehman
Brokerage
acted
on
See Stip. of Facts ¶ 13.
both
sides
of
this
Lehman Swaps received
approximately $51.9 million cash in exchange for approximately
$57.8 million of the Posted Bonds (the “Bonds” or “Collateral”).7
III. THE LEHMAN BANKRUPTCY AND SALE TO BARCLAYS
On Monday, September 15, 2008, Lehman Holdings voluntarily
petitioned for bankruptcy.
See Stip. of Facts ¶ 17; Voluntary
Petition, In re Lehman Bros. Holdings Inc., No. 08-13555 (Bankr.
S.D.N.Y. Sept. 15, 2008), ECF No. 1.
At various times from that
Monday through Wednesday, September 17, the Federal Reserve Bank of
New York lent large amounts of money to Lehman Brokerage through
repo transactions, in order to keep Lehman functioning during the
bankruptcy proceedings.
See Stip. of Facts ¶¶ 17–18
The Bonds
were among the many securities that temporarily passed to the Fed
through these repos.
See Stip. of Facts ¶ 18.
7
Barclays calculates the $51.9 million figure from the repo
confirmations at J.A. 1843–2105, and FirstBank does not appear to dispute
Barclays’s calculation. We calculate the $57.8 million figure independently,
based on the list of Repoed Bonds in the Stipulation of Facts (¶ 12) and the
valuations as of August 29, 2008 in the September 1 Statement. See infra,
Table 1.
-14-
The
Federal
Reserve
un-wound
these
repos
on
Thursday,
September 18, in anticipation that Barclays would take the Federal
Reserve’s place supplying emergency liquidity to Lehman. See Stip.
of Facts ¶ 19.
Simultaneously, Lehman Brokerage sold the Bonds to
Barclays as part of a repo (the “Barclays Repo”) to replace the
Federal Reserve’s repo.
See Stip. of Facts ¶ 20.
On Friday, September 19, the Bankruptcy Court held a hearing
(the “Sale Order Hearing”) to review a proposed Asset Purchase
Agreement (J.A. 1475–1523 (“APA”)) and Sale Motion. See Tr., In re
Lehman Bros. Holding Co., No. 08-13555 (Bankr. S.D.N.Y. Sept. 19,
2008), ECF No. 318 (“Sale Order Hr’g Tr.”).
Barclays agreed to
purchase certain “Purchased Assets,” see APA § 2.1, including, with
exceptions, all assets “used in connection with” the “U.S. and
Canadian investment banking and capital markets businesses of [LBHI
and LBI].”
“Long
APA § 1.1.
Positions,”
These assets included Lehman Brokerage’s
meaning
“government
securities
. . .
and
collateralized short-term agreements with a book value as of the
date hereof of approximately $70 billion.”
of “Purchased Assets,” clause (d).
APA § 1.1, definition
Barclays also assumed many of
Lehman Holdings’ and Lehman Brokerage’s liabilities, including
“‘repos’ relating to any securities or interests of the type
included in the definition of ‘Long Positions.’”
-15-
APA § 2.3(i).
Following the Sale Order Hearing, the Bankruptcy Court issued
a Sale Order to approve the purchase.
See Order Authorizing and
Approving (A) the Sale of Purchased Assets Free and Clear of Liens
and Other Interests and (B) Assumption and Assignment of Executory
Contracts and Unexpired Leases, In re Lehman Bros. Holding Inc.,
No. 08-13555 (Bankr. S.D.N.Y. Sept. 19, 2008), ECF No. 258, J.A.
1332–55 (“Sale Order”).
In this order, the approved “Purchase
Agreement” was defined to include both the APA that was before the
Bankruptcy Court at the Sale Order Hearing and a forthcoming letter
to
clarify
and
supplement
“Clarification Letter”).
the
APA
(later
See Sale Order at 1.
known
as
the
Further amendments
were also permitted without court order, so long as any such
amendment did not have a material adverse effect on the Lehman
debtors’ estates.
See Sale Order at 21.
The Sale Order enjoined
all persons from pursuing claims to the Purchased Assets against
Barclays; instead, those with claims to the Purchased Assets could
make their claims against the money that Barclays paid Lehman. See
Sale Order at 14.
The Sale Order also recited a finding that
notice was sufficient under the circumstances to satisfy due
process.
See Sale Order at 2–3.
On Monday, September 22, Lehman and Barclays publicized the
Clarification Letter that the Sale Order had referred to.
See
Notice of Filing of Purchase Agreement, In re Lehman Bros. Holding
-16-
Inc., No. 08-13555 (Bankr. S.D.N.Y. Sept. 22, 2008), ECF No. 280
Ex. C, J.A. 1528–43 (“Clar. Letter”).
The Clarification Letter
stated that “all securities and other assets held by [Barclays]
under the [Barclays Repo] shall be deemed to constitute part of the
Purchased Assets,” that Barclays and Lehman “shall be deemed to
have no further obligations to each other under the [Barclays
Repo],” and that “the [Barclays Repo] shall terminate.”
Letter § 13.
Clar.
The Clarification Letter also explicitly included as
“Purchased Assets” the assets listed on a confidential schedule.
See
Clar.
Letter
§ 1(ii)(A);
Schedule
A.
This
confidential
Schedule A listed each of the Bonds.
IV.
FIRSTBANK AND THE LEHMAN BANKRUPTCY
Lehman Holdings’ bankruptcy petition constituted an “Event of
Default”
under
¶ 5(a)(vii)(4).
FirstBank’s
Swap
Agreement.
See
Swap
Agr.
Additionally, Lehman Swaps failed to make a
required payment on Monday, September 15, constituting another
Event of Default.
See Swap Agr. ¶ 5(a)(i); Stip. of Facts ¶ 32.
FirstBank was not served with notice of the bankruptcy sale
and did not participate in the proceedings leading up to the sale.
See Aff. of Service, Exs. A, B, In re Lehman Bros. Holdings Inc.,
No. 08-13555 (Bankr. S.D.N.Y. Sept. 17, 2008), ECF No. 79 (service
lists
for
Holdings,
Sale
Motion);
No. 08-13555
Notice
(Bankr.
of
Hr’g,
S.D.N.Y.
-17-
In re
Lehman
Sept. 18,
Bros.
2008),
ECF
No. 108 (announcing Sale Order Hearing to all appearing parties
through ECF); Sale Order Hr’g Tr. 3–40 (list of appearances at Sale
Order Hearing); cf. Limited Obj’n, Lehman Bros. Holdings (Nov. 28,
2008) (first appearance of FirstBank).
FirstBank
did,
of
course,
have
notice
that
its
own
counterparty, Lehman Swaps, had failed to make a required payment
on September 15, 2008.
Accordingly, FirstBank issued a valid
Notice of Termination on or about September 24, 2008 (after Lehman
Brokerage’s
bankruptcy
bankruptcy).
sale,
but
before
Lehman
See Stip. of Facts ¶¶ 26, 32, 33.
Swaps
entered
Contrary to the
requirements of the Credit Support Annex, Lehman Swaps did not
return the Collateral to FirstBank after this termination.
was an obvious breach of the Credit Support Annex.
This
See CSA
¶ 8(b)(3).
In response to Lehman Swaps’ failure to return the Collateral,
FirstBank offset a small portion of the unreturned Collateral by
declining
to
pay
approximately
$2.6 million
that
FirstBank
apparently owed Lehman Swaps as of the swaps’ termination date.8
8
FirstBank could have also filed a proof of claim in the Bankruptcy
Court against its own counterparty, Lehman Swaps, or against Lehman Swaps’
guarantor, Lehman Holdings. (At oral argument, Barclays’s counsel represented
that FirstBank would have received approximately 40% of the Collateral’s value
if FirstBank had done so.) Instead, FirstBank filed a SIPA claim against
Lehman Brokerage, on the theory that FirstBank was a “customer” of Lehman
Brokerage because Lehman had held the Collateral in an account of Lehman
Brokerage. See Mot. of FirstBank for Reconsideration and Limited Intervention
at 1, In re Lehman Bros. Inc., No. 08-1420 (Bankr. S.D.N.Y. Aug. 1, 2012), ECF
No. 5197; J.A. 3447–3502 (FirstBank’s customer claim). The SIPA trustee for
Lehman Brokerage denied FirstBank’s claim, and the Bankruptcy Court has not
-18-
See Email of June 25, 2009, J.A. 2289.9
The remaining value of the
unreturned Bonds was, as calculated by a Lehman employee using data
from FirstBank, $61,271,854.39.10
See id.
In 2008 and 2009, representatives of FirstBank attempted
unsuccessfully to learn what had happened to the Bonds. See, e.g.,
Email from Lehman Counsel, Nov. 11, 2008, J.A. 3439 (“It is
possible that the LBI [SIPA] trustee might be able to confirm for
you whether it is holding the collateral.”); Email from Counsel to
LBI SIPA Trustee, Nov. 20, 2008, J.A. 3442 (“We are still working
on it.”); Email from Lehman Employee, July 1, 2009, J.A. 2297
(“[W]e do not have any authority to discuss/negotiate claims that
involve FirstBank’s desire to become senior to the other creditors
with respect to your excess collateral.”); Letter from Barclays
Counsel, Sept. 25, 2009, J.A. 1363–64 (“[W]e . . . do not know
which securities are at issue.”).
Meanwhile, Lehman and Barclays
yet ruled on the merits. See Stip. and Scheduling Order, In re Lehman Bros.
Inc., No. 08-1420 (Bankr. S.D.N.Y. June 18, 2014), ECF No. 9179.
9
We do not decide whether the calculations expressed in this email are
accurate, or whether the email chain is correct in its apparent assumption
that FirstBank owed Lehman Swaps for the windfall that FirstBank received when
FirstBank replaced Lehman’s swaps with cheaper swaps from other dealers.
10
It is unclear from the record why FirstBank allowed Lehman to become
so overcollateralized. See Statement of Sept. 1, 2008 (showing over
$63 million of collateral posted, against a requirement to post approximately
$7 million); CSA ¶ 3(b) (allowing FirstBank to demand the return of
significant excess collateral); see also Johnson, supra, at 996 (“To avoid
becoming overcollateralized, a pledgor should carefully monitor both its
exposure and the fair market value of its posted collateral on a regular
basis.”).
-19-
employees
and
counsel
consistently
referred
“collateral” in their internal discussions.
to
the
Bonds
as
See Emails, J.A.
1366–72.
At some point in the summer of 2009, FirstBank learned from
JPMorgan Chase (the custodian of the account in which Lehman
Brokerage had held the Bonds on behalf of Lehman Swaps) that at
least some of the Bonds had been transferred to Barclays. See Rule
30(b)(6) Dep. of Victor Barreras for FirstBank at 40:23–42:8,
Mar. 27, 2012, J.A. 3290–3365 (“Barreras Dep.”).
Following that
discovery, FirstBank demanded that Barclays reveal whether Barclays
held the Bonds, and that Barclays return the Bonds.
See Letter,
Sept. 17, 2009, J.A. 1359–61.
V.
THE PRESENT ACTION
On December 21, 2009, FirstBank sued Barclays,11 alleging
several
state
jurisdiction.12
law
claims
pursuant
to
this
Court’s
diversity
Barclays moved to dismiss and requested that the
District Court refer the case to the Bankruptcy Court as a case
arising from the Bankruptcy Court’s Sale Order.
11
FirstBank Puerto Rico v. Barclays Capital, Inc. (“FirstBank I”),
No. 09-cv-10317 (GBD) (S.D.N.Y.) (Daniels, J.).
12
It is well-established that a federal court may exercise diversity
jurisdiction over a dispute between a citizen of Puerto Rico (such as
FirstBank) and a citizen of a State (such as Barclays). See 28 U.S.C.
§ 1332(e); Lummus v. C’wealth Oil Refining Co., 195 F. Supp. 47, 49–51
(S.D.N.Y.) (relying on Nat’l Mut. Ins. Co. of D.C. v. Tidewater Transfer Co.,
337 U.S. 582 (1949)), aff’d, 297 F.2d 80, 87 (2d Cir. 1961).
-20-
The
District
Court
granted
in
part
and
denied
in
part
Barclays’s motion to dismiss. Order, FirstBank I, May 3, 2010, ECF
No. 22.
The surviving claims were a claim for conversion, a claim
for unjust enrichment, and a claim to impose a constructive trust
and compel an accounting.
See id.
The District Court then
referred the case to the Bankruptcy Court for further proceedings.
See Order, FirstBank I, Sept. 7, 2010, ECF No. 44.
Judge
Daniels
purported
to
noted
that
transfer
the
the
Clarification
Bonds
to
In so doing,
Letter
Barclays,
at
least
contrary
to
FirstBank’s allegation that the Bonds had never passed to Barclays.
See id. at 2.
After substantial discovery, the Bankruptcy Court13 granted
summary
judgment
“Purchased
definition,
to
Assets”
and
Barclays,
under
that
the
the
holding
that
Clarification
Sale
Order
FirstBank’s claims against Barclays.
the
Bonds
Letter’s
therefore
were
expanded
prohibited
See FirstBank II, 492 B.R.
191 (Bankr. S.D.N.Y. 2013) (the “Summary Judgment Order”).
The
Bankruptcy Court later imposed sanctions against FirstBank for
failing to comply with the Sale Order’s anti-suit injunction.
See
FirstBank II, 2013 WL 6283572 (Bankr. S.D.N.Y. Dec. 3, 2013) (the
“Contempt Order”).
13
FirstBank Puerto Rico v. Barclays Capital, Inc. (“FirstBank II”),
Ch. 11 Case No. 08-bk-13555, Adv. Proc. No. 10-ap-4103 (Bankr. S.D.N.Y.)
(Peck, J.).
-21-
FirstBank timely appealed both the Summary Judgment Order and
the Contempt Order, and we consolidated the appeals.
See Order,
FirstBank Puerto Rico v. Barclays Capital, Inc., No. 13-cv-4732
(NRB) (S.D.N.Y. Mar. 27, 2014), ECF No. 9.
DISCUSSION
I.
THE SUMMARY JUDGMENT ORDER
A.
Standard of Review
We review the Summary Judgment Order de novo, drawing all
factual inferences in favor of the non-moving party, FirstBank.
See Hanover Direct, Inc. v. T.R. Acquisition Corp. (In re T.R.
Acquisition Corp.), 309 B.R. 830, 835 (S.D.N.Y. 2003).
B.
The Intra-Lehman Repos Cut Off FirstBank’s Interest in
the Collateral.
A rehypothecation clause, by its own terms, allows a secured
party in possession of collateral to dispose of the collateral
“free” of the pledgor’s interest.
See CSA ¶ 6(c).
This means
that, once the secured party transfers title over collateral to
some other person, the pledgor has no rights to the collateral as
against the transferee.
Instead, the pledgor has a right in
contract to demand that the secured party return the collateral
under the terms of the parties’ Credit Support Annex.
See CSA
¶ 6(c) (reserving pledgor’s rights under CSA ¶¶ 3(b) and 8(b));
Johnson, supra, at 981; cf. ISDA, User’s Guide to the 1994 ISDA
-22-
Credit Support Annex at 13 (1994) (“Parties should carefully
consider the risks attendant to the rehypothecation or other
disposition of Posted Collateral both to the Secured Party and to
the
Pledgor
and
consult
with
their
legal
advisors
before
documenting a Transaction . . . under the Annex that permits . . .
rehypothecation . . . .”) (full sentence bolded in original).
It follows that, once Lehman Swaps sold the Collateral to
Lehman Brokerage pursuant to FirstBank’s Credit Support Annex,
FirstBank lost all rights to the Collateral as against Lehman
Brokerage (or any subsequent transferee).
Instead, the Collateral
became outright property of Lehman Brokerage and FirstBank retained
only contractual rights against its own counterparties, including
(1) the right to demand that Lehman Swaps return excess Collateral
(CSA ¶ 3(b)); (2) the right to demand the return of all collateral
upon an event of default (CSA ¶ 8(b)); (3) the right to withhold
any swap payments to compensate for Lehman Swaps’ failure to return
collateral (CSA ¶ 8(c)); and (4) the right to sue Lehman Swaps or
Lehman Holdings for breach of contract.14
14
We acknowledge that Barclays Lehman continued to refer to the Bonds
informally as “collateral.” These emails have no legal consequence. Most
likely, those Barclays and Lehman personnel referred to the Collateral as
“collateral” for the same reason that we do: it is simpler to say “FirstBank’s
collateral” than to say “bonds formerly belonging to FirstBank whose title has
since passed to Barclays through collateralization, rehypothecation, and a
bankruptcy sale.”
FirstBank also points out that, according to Barclays’s expert,
FirstBank was entitled to treat the Collateral as FirstBank’s own asset in
FirstBank’s books and records. See Dep. of David Maloy, J.A. 2926–3021
(“Maloy Dep.”) at 97:10–20 (“they pledged their asset and the asset is still
theirs.”). The asset is “theirs” only in the sense that FirstBank retained
-23-
To avoid this straightforward conclusion, FirstBank argues
that legal title to bonds does not pass from borrower to lender in
a repo and that we should assess FirstBank’s rights without
reference to the Intra-Lehman Repos.
FirstBank is simply wrong to say that a repo does not transfer
legal title to a bond.
See In re Lehman Bros. Inc., 506 B.R. at
349 (S.D.N.Y. 2014); Lehman MRA at ¶ 8 (“Title to all Purchased
Securities shall pass to Buyer and, unless otherwise agreed by
Buyer and Seller, nothing in this Agreement shall preclude Buyer
from
engaging
in
repurchase
transactions
with
the
Purchased
Securities or otherwise pledging or hypothecating the Purchased
Securities. . . .”).
FirstBank’s more interesting argument is that FirstBank’s
interest
in
the
Bonds
survived
the
Intra-Lehman
Repos.
As
FirstBank accurately describes, Lehman Brokerage employees acted on
both sides of the Intra-Lehman Repos, Lehman Swaps was a wholly
owned subsidiary of Lehman Brokerage, and Lehman Brokerage already
managed the Bonds in its capacity as Lehman Swaps’ agent.
However, none of this matters.
FirstBank’s Credit Support
Annex is clear that any permitted sale of the Collateral is “free”
its exposure to the Bonds after the Collateral was sold to Lehman Brokerage
(see supra at 7), not in the sense that FirstBank retained legal title. It
may well be the case that, for at least some accounting purposes, both
FirstBank and Lehman treated the Collateral as belonging to FirstBank, but
this accounting treatment simply reflected the economic reality that FirstBank
had “reason to expect that [Lehman Swaps] w[ould] return [the] collateral.”
Maloy Dep. at 97:21–7.
-24-
of FirstBank’s interest.
This includes a sale between two Lehman
entities, and a sale in which a different Lehman entity acts as
Lehman Swaps’ agent. Indeed, the Credit Support Annex contemplated
that Lehman could unilaterally destroy FirstBank’s interest in the
Collateral
without
transaction.
See
selling
CSA
the
¶ 6(c)
Collateral
(providing
in
an
that
arm’s-length
“commingl[ing]”
collateral would free the collateral from the pledgor’s claims).
Nor did Lehman Swaps’ default on September 15, 2008, restore
FirstBank’s property interest in the Bonds.
Cf. Dep. of Christian
Johnson, J.A. 2785–2857 (“Johnson Dep.”) at 78:18–79:21 (conceding
that the Intra-Lehman Repos were permitted uses of the Collateral,
but with the caveat that Lehman Swaps’ permission to use the
Collateral terminated on September 15). The significance of Lehman
Swaps’ September 15 default was that (1) Lehman Swaps was no longer
permitted
to
rehypothecate
collateral
that
had
not
yet
been
rehypothecated, and (2) Lehman Swaps was obligated, as a matter of
contract, to retrieve any rehypothecated collateral and to restore
it to FirstBank.
Nothing in the Credit Support Annex, however,
supports the idea that the default somehow restored FirstBank to
property rights against transferees of the Collateral (such as
Lehman Brokerage).
Because the Intra-Lehman Repos cut off FirstBank’s interest in
the Bonds, the Bonds’ later history is academic. Barclays owns the
-25-
Bonds so long as (1) Lehman Brokerage transferred the Bonds to
Barclays and (2) that transfer was enforceable as between Lehman
Brokerage and Barclays. There is no question that Lehman Brokerage
transferred the Bonds to Barclays through the Clarification Letter,
or that the Clarification Letter is enforceable between Lehman
Brokerage and Barclays.
See In re Lehman Bros. Holding Inc.,
761 F.3d 303, 312–13 (2d Cir. 2014) (enforcing Clarification Letter
to allocate $1.9 billion in “clearance box assets” to Barclays),
petition for cert. filed sub nom. Giddens v. Barclays Capital Inc.,
No. 14-____ (Dec. 15, 2014).
Therefore, we can conclude without
further analysis of the bankruptcy sale that FirstBank, as a
previous holder of assets subject to the bankruptcy sale, has no
basis to sue Barclays.
Nevertheless,
we
will
examine
the
Sale
Order
and
the
Clarification Letter because the meaning of the Sale Order is
relevant to our affirmance of the Contempt Order.
3.
The Sale Order and Clarification Letter Transferred the
Collateral to Barclays.
The text of the Sale Order is undisputed.
The Sale Order
allowed Barclays to buy “Purchased Assets” of Lehman Brokerage,
free and clear of third parties’ interests.
See Sale Order § 3.
The Sale Order even allowed Barclays to buy “Purchased Assets” that
were subject to bona fide disputes between Lehman and third
-26-
parties.
See
Sale
Order
§ 4
(authorizing
sale
pursuant
to
11 U.S.C. § 363(f)); 11 U.S.C. § 363(f)(4) (authorizing sale “free
and clear” of any interest in “bona fide dispute”).
In such a
case, the third party’s claim was converted into a claim against
the money that the Lehman trustee received from Barclays. See Sale
Order § 4.
It is also undisputed that the Clarification Letter purported
to transfer the Collateral.
See Clar. Letter ¶¶ 1(a)(ii), 13.
Furthermore, the Sale Order incorporated the Clarification
Letter. The Sale Order did so by defining the “Purchase Agreement”
to include (1) the original Asset Purchase Agreement (with one
amendment) that was presented to the Bankruptcy Court at the Sale
Order
Hearing;
and
(2) ”that
letter
agreement
clarifying
and
supplementing the Asset Purchase Agreement dated September 20,
2008”. See Sale Order at 1; In re Lehman Bros. Inc., 478 B.R. 570,
577 (S.D.N.Y. 2012), aff’d sub nom. In re Lehman Bros. Holding
Inc., 761 F.3d at 303, supra.
The Sale Order permitted Lehman and
Barclays to make only “non-material modifications” to the “Purchase
Agreement,” § 25, but placed no “materiality” restriction on the
Clarification Letter, which was itself defined to be part of the
“Purchase Agreement.”
See In re Lehman Bros. Inc., 478 B.R. at
584.
-27-
We recognize that the Bankruptcy Court was disturbed that the
Clarification Letter went beyond what the parties had presented to
the Bankruptcy Court at the Sale Order Hearing.
Bros.
Inc.,
445 B.R.
143,
151
(Bankr.
See In re Lehman
S.D.N.Y.
2011)
(“The
Clarification Letter includes any number of clarifications that are
really more than that . . . .
This is a document that should have
been subjected to further judicial oversight . . . .”), aff’d in
part and rev’d in part, 478 B.R. at 570, supra.
Nevertheless, the
Bankruptcy Court was clearly not disturbed enough to modify the
Sale Order at any time, or to deny Barclays’s motions in this case.
Indeed, if the Sale Order approved the entire Clarification Letter
on the basis of mistake, inadvertence, or misrepresentation, then
the proper remedy was for the Bankruptcy Court to amend the Sale
Order to narrow the definition of “Purchase Agreement” or to reduce
the scope of the anti-suit injunction.
See Fed. R. Bankr. P. 9024
(incorporating most of Fed. R. Civ. P. 60); Fed. R. Civ. P.
60(b)(1),(3).
Because no party successfully moved for relief under Rule 60,
we are bound to apply the Sale Order as written——even if the
Bankruptcy Court has reason to regret its pre-approval of the
Clarification Letter, and even if it was improper under section 363
of the Bankruptcy Code for the Sale Order to pre-approve the
Clarification Letter sight unseen.
-28-
See Celotex Corp. v. Edwards,
514 U.S. 300 (1995) (holding that a bankruptcy court’s order may
not be collaterally attacked, when the target of the order had
failed to seek relief or file a direct appeal).
Turning to the Clarification Letter,15 we conclude that the
Bonds constituted “Purchased Assets” transferred to Barclays under
the authorization of the Sale Order.
First, the Clarification
Letter provided that securities subject to the Barclays Repo were
“deemed to constitute part of the Purchased Assets.”
¶ 13.
Clar. Letter
Second, the Clarification Letter listed the Bonds in its
Appendix A as “Purchased Assets.”
¶ 1(a)(ii).
Finally, we consider FirstBank’s argument that due process
does not permit the Sale Order to be enforced against FirstBank
because FirstBank lacked notice of the Sale Order. The fundamental
problem with this argument is that FirstBank did not have a
property
interest
in
the
Bonds
before
the
bankruptcy
sale.
FirstBank had lost its property interest when Lehman Swaps sold the
Collateral to Lehman Brokerage under the authority of the Credit
Support Annex’s Rehypothecation Clause, and so due process did not
require FirstBank to receive any notice of the sale.
This is a narrow holding.
We do not decide the question
whether a person with a cognizable property interest may attack a
15
We pass over Barclays’s alternative argument that the original Asset
Purchase Agreement transferred the Bonds from Lehman Brokerage to Barclays,
because Barclays did not present this argument below.
-29-
final “free and clear” sale order in the absence of notice.16
Nor
do we decide whether lack of notice could be grounds to file a late
claim against the proceeds of the bankruptcy sale, or grounds for
relief from a sale order under Rule 60(b)(6). Nor, moreover, do we
decide whether a sale order’s finding of adequate notice is res
judicata against parties who actually lacked notice, or whether the
Bankruptcy Court’s finding of adequate notice in this particular
case’s Sale Order was correct.
We simply hold that FirstBank, a
person no interest whatsoever in the property at stake, had no
right to be notified.
II.
THE CONTEMPT ORDER
A.
Standard of Review
Although we may set aside the Contempt Order only for abuse of
discretion, our review is “‘more exacting than under the ordinary
abuse-of-discretion
standard
because
a
contempt power is narrowly circumscribed.’”
[bankruptcy]
court’s
In re A.T. Reynolds &
Sons, Inc., 452 B.R. 374, 380 (S.D.N.Y. 2011) (alteration in
original) (quoting Perez v. Danbury Hosp., 347 F.3d 419, 423
(2d Cir. 2003)).
An abuse of discretion occurs when a decision
relies on an erroneous view of the law, when a decision relies on
16
This question is open in our circuit. Compare In re Edwards, 962 F.2d
641, 642, 645 (7th Cir. 1992) (“The bona fide purchaser at a bankruptcy sale
gets good title” even though “[t]o take away a person’s property . . . without
compensation or even notice is pretty shocking . . . .”), with In re Ex-Cel
Concrete Co., 178 B.R. 198, 205 (B.A.P. 9th Cir. 1995) (“lack of any notice
. . . was a jurisdictional defect sufficient to result in a void order”).
-30-
a clearly erroneous assessment of evidence,17 or when a decision
otherwise “cannot be located within the range of permissible
decisions.”
B.
Id.
The Bankruptcy Court Relied on a Correct View of the Law.
1.
FirstBank’s
Contempt.
Actions
Meet
the
Standard
for
Contempt is appropriate when “(1) the order the contemnor
failed to comply with is clear and unambiguous, (2) the proof of
noncompliance is clear and convincing, and (3) the contemnor has
not
diligently
attempted
to
comply
in
a
reasonable
manner.”
Paramedics Electromedicina Comercial, Ltda. v. GE Med. Sys. Info.
Techs., Inc., 369 F.3d 645, 655 (2d Cir. 2004).
the test that the Bankruptcy Court applied.
This is precisely
See Contempt Order,
2013 WL 6283572 at *1.
The Sale Order is clear and unambiguous.
The Sale Order
clearly prohibits suits with respect to “Purchased Assets” as
defined
in
the
“Purchase
Agreement,”
the
Sale
Order
clearly
incorporates the Clarification Letter into its definition of the
17
Here, there has been no suggestion that the Contempt Order relied on
incorrect facts, as the relevant facts surrounding FirstBank’s dealing with
Lehman, Lehman’s bankruptcy sale, and this litigation are largely undisputed.
Therefore, we need only review the other prongs of this test.
-31-
“Purchase Agreement,”18 and the Clarification Letter clearly defines
“Purchased Assets” to include the Collateral.19
Proof of non-compliance is clear and convincing.
There is no
question that FirstBank filed a suit against Barclays relating to
securities that we have held to constitute “Purchased Assets.” The
“diligent attempt to comply” prong is not relevant to this case, as
it was FirstBank’s affirmative act that violated the Sale Order’s
anti-suit injunction.
2.
Subjective Good Faith Did Not Bar the Contempt
Order.
The Bankruptcy Court also correctly held that subjective good
faith is not a bar to contempt.
“The violation need not be
willful, but it must be demonstrated that the contemnor was not
reasonably diligent in attempting to comply.”
City of New York v.
Local 28, Sheet Metal Workers’ Int’l Ass’n, 170 F.3d 279, 283
(2d Cir. 1999) (internal quotation omitted); but cf. Vuitton et
Fils S.A. v. Carousel Handbags, 592 F.2d 126, 130–31 (2d Cir. 1979)
18
Again, we express no view whether it was either permissible or welladvised under the exigent circumstances for the Bankruptcy Court to preapprove a document that was not available to the court. Whether proper or
not, it is clear that that is what the Sale Order in fact did.
19
FirstBank argues that Rule 65 of the Federal Rules of Civil Procedure
requires an injunction to be clear and unambiguous on the face of the order,
without reference to external documents such as the Clarification Letter and
the Clarification Letter’s Appendix A. Rule 65 does not apply to bankruptcy
cases (except for adversary proceedings, see Fed. R. Bankr. P. 7065), and for
good reason. It would be impractical for a typical sale order to include as
much detail about the assets of a bankrupt business as FirstBank suggests
Rule 65 would require.
-32-
(requiring a finding of willfulness before awarding costs of
prosecuting contempt motion); N.Y. State Nat’l Org. for Women v.
Terry, 952 F. Supp. 1033, 1044 (S.D.N.Y. 1997) (same).
Even
so,
FirstBank’s
contempt
was
willful,
and,
“while
willfulness may not necessarily be a prerequisite to an award of
fees and costs, a finding of willfulness strongly supports granting
them.”
Weitzman v. Stein, 98 F.3d 717, 719 (2d Cir. 1996).
Contempt is willful when the contemnor had actual notice of the
order, could have complied, did not seek modification, and did not
make a good-faith effort to comply.
See, e.g., Bear U.S.A., Inc.
v. Kim, 71 F. Supp. 2d 237, 249 (S.D.N.Y. 1999).
According to this test, FirstBank’s contempt was plainly
willful.
By the time that FirstBank brought its summary judgment
motion, FirstBank had actual notice of the entire Sale Order,
including the Clarification Letter and the Clarification Letter’s
Appendix A; FirstBank could have complied with the Sale Order at
that point by dismissing this action with prejudice, but did not;
and FirstBank did not seek modification.20
In the context of the automatic stay, the Second Circuit has
held that a good-faith mistake does not preclude a finding of
20
The Rule 60(c)(1) time bar does not bar a motion for modification of
on order on grounds of lack of notice, so long as the motion is made within a
reasonable time under the circumstances. Without deciding whether a Rule 60
motion should have succeeded, we can at least say that a Rule 60 motion would
not have been so certainly futile as to excuse FirstBank from seeking
modification.
-33-
contempt.
See Weber v. SEFCU (In re Weber), 719 F.3d 72, 82–83
(2d Cir. 2013). Relying on Maritime Asbestosis Legal Clinic v. LTV
Steel Co. (In re Chateaugay Corp.), 920 F.2d 183, 186–87 (2d Cir.
1990), in which the court declined to enter a contempt order
against a legal clinic that had violated the automatic stay with
respect
to
a
bankruptcy
corporation,
FirstBank
argues
that
subjective good faith is a bar to contempt in a case involving nonnatural entities.
FirstBank misapprehends the distinction between individuals
and entities in the context of an automatic stay violation.
The
distinction is that an individual who suffers a willful stay
violation must be awarded at least actual damages, while an entity
that suffers a willful stay violation will be awarded damages in
the discretion of the bankruptcy court.
See 11 U.S.C. § 362(k)
(mandatory damages for individuals); In re Spookyworld, Inc.,
346 F.3d 1, 8 (1st Cir. 2003) (noting that debtor-corporations may
move for contempt under section 105(a)).
However, section 362(k)
itself demonstrates that “good faith” and “willful” violations are
not mutually exclusive concepts.
Subsection 362(k)(1) allows a
court to impose punitive damages for willful violations of the
automatic stay, while subsection 362(k)(2) forbids punitive damages
when the violation of section 362(k)(1) (i.e., a willful violation)
-34-
was made in a good-faith belief that section 362(h) permitted the
contemptuous act.
In short, we believe the better view is that subjective good
faith is merely a factor that a bankruptcy court may consider in
deciding whether to impose sanctions for the willful violation of
an order.
3.
The District Court’s Denial of Barclays’s Motion to
Dismiss Did Not Bar the Contempt Order.
We mention in passing FirstBank’s argument that this Court’s
(per Judge Daniels) partial denial of Barclays’s motion to dismiss
was “law of the case” that barred the Bankruptcy Court from holding
FirstBank in contempt.
The Contempt Order and the motion to
dismiss turned on different issues.
The Contempt Order largely
turned on whether the Bonds were “Purchased Assets.”
If so, then
the Sale Order’s anti-suit injunction applied and contempt was
permissible; if not, then not.
By contrast, the District Court’s
denial of the motion to dismiss assumed as true the assertion that
the Bonds were not “Purchased Assets.”
With a post-discovery
record available, there was no need for the Bankruptcy Court to
make the same artificial assumption.
C.
The Contempt Order Was Within the Range of Permissible
Decisions.
Under the circumstances of this case, it was not an abuse of
discretion for the Bankruptcy Court to order FirstBank to pay
-35-
Barclays’s “reasonable counsel fees and costs incurred in defending
against
this
litigation
that
has
been
FirstBank in violation of the Sale Order.”
pursued
knowingly
by
Contempt Order at *5.
Strong policy reasons exist to protect a purchase of estate
assets from future litigation costs.
An injunction with teeth
encourages more prospective buyers to participate in sales and
auctions under section 363, and to offer higher prices for a
debtor’s assets, ultimately to the benefit of creditors.
This is
particularly important in the present case, in which the global
financial system desperately needed a buyer such as Barclays to
step forward to purchase Lehman’s assets quickly, and in which,
without a robust injunction, Barclays would otherwise have risked
law suits from hundreds of thousands of Lehman creditors whose
complex
financial
transactions
were
disrupted
by
the
Lehman
bankruptcy.
We note that the Bankruptcy Court did not impose sanctions for
FirstBank’s first contemptuous act.21 Instead, the Bankruptcy Court
gave
FirstBank
an
opportunity,
after
extensive
discovery,
to
withdraw its suit after discovery without facing sanctions.
We recognize, along with the Bankruptcy Court, that FirstBank
acted in good faith. Nevertheless, FirstBank’s good faith does not
21
Unlike the Contempt Order before us, an immediate contempt order for
filing suit might have been reversible——not as a matter of law, but simply as
an improvident exercise of discretion.
-36-
prevent sanctions as a matter of law, and we believe that sanctions
were permissible in light of the need for protecting section 363
purchasers and the Bankruptcy Court's prudent handling of
this
case.
CONCLUSION
The judgments of the Bankruptcy Court are affirmed.
The clerk
is directed to enter judgment for appellee and to close the case.
Dated:
New York, New York
December
2014
;;r,
NAOMI REICE BUCHWALD
UNITED STATES DISTRICT JUDGE
-37-
TABLE 1
FirstBank Collateral
(see text at note 7)
All Collateral
Approx. Market
CUSIP
31391JPYO
31391KYD3
31390MKJ2
31371KWF4
31401JVN5
31400CDE1
31401NW39
31402A4J2
31401AG84
31376J7J2
31400CAT1
31402D5A4
31391Y6N2
31402FBD6
31402BDE1
31401HJ45
31401NP29
31402HH61
31366LFL5
36202KAL9
31391Y3S4
31401C3G6
31401H7M8
Total
Source
Quantity
30,950,709
2,000,000
7,000,000
2,073,064
24,000,915
8,000,000
7,800,000
6,193,841
15,181,749
15,000,000
15,000,000
18,190,000
9,591,196
6,711,261
2,000,000
8,302,184
10,838,817
10,201,592
3,868,461
4,500,000
1,000,000
1,000,000
10,205,000
Stip.
~
12
Value (8/29/08)
$5,509,517
$403,158
$1,551,579
$388,146
$7,635,026
$2,227,662
$1,646,913
$2,244,334
$4,861,287
$5,775,107
$3,934,573
$6,732,383
$2,827,724
$2,969,658
$757,947
$2,049,626
$3,726,333
$3,784,894
$20,132
$4,500,000
$323,673
$314,507
$3,382,418
$67,566,597
Sept. 1 Stmt.
-38-
Repoed Collateral
Approx. Market
Quantity
30,950,709
2,000,000
7,000,000
2,073,064
24,000,915
8,000,000
7,800,000
6,193,841
15,181,749
12,100,000
4,630,000
18,090,000
6,543,000
4,500,000
2,000,000
8,302,184
10,838,817
10,201,592
3,868,461
4,500,000
0
0
0
Stip.
~
12
Value (8/29/08)
$5,509,517
$403,158
$1,551,579
$388,146
$7,635,026
$2,227,662
$1,646,913
$2,244,334
$4,861,287
$4,658,586
$1,214,472
$6,695,372
$1,929,040
$1,991,200
$757,947
$2,049,626
$3,726,333
$3,784,894
$20,132
$4,500,000
$0
$0
$0
$57,795,223
Calculated
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