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Was it just by chance? Could this be Kismet?

posted by Stephen Lubben

Somehow you always knew these two would get together.  AIG and Lehman are in a dispute about credit default swaps. A whole bunch of credit default swaps to be precise.

It seems AIG and Lehman sold 125 CDS contracts to each other under a single master agreement, with Lehman as buyer on 97 of the transactions, and durations out until 2014. As things stand now, AIG owes Lehman $12.5 million for "credit events" associated with General Motors, Washington Mutual, etc.

Lehman has filed a motion with the bankruptcy court to compel AIG to pay up. AIG's answer states that they would be happy to pay, but first they want Lehman to pay (or allow them to net) the $3.7 million in premiums that Lehman "forgot" to pay during its chapter 11 case. AIG also wants adequate assurance of Lehman's ability to perform on the swaps it sold to AIG.

That last bit may be jumping the gun a bit -- Lehman is not currently looking to assume or assign the swaps, so I don't know that they have a right to adequate assurance. Wouldn't most counterparties, on all types of contracts, like to get that? But AIG is certainly right that Lehman has an obligation to perform, at least to the extent of the actual value of the contract to the estate, if it wants to receive the benefits of the swaps during the pendency of the case -- I seem to recall a case from my days in law school . . . AIG seems to remember it too.

UPDATE:  A reader points out that Lehman has conceded its obligation to AIG, partially.  The real problem seems to be that Lehman has continued to not pay (even after filing its motion), thus raising AIG's cross claims to about $4.1 million (vs. the $3.7 million I show above).  Obviously AIG wants to drive home its Bildisco argument (debtor has to perform while making up its mind) before forking over the net $8.4 million to Lehman.

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Comments

Bildisco is a little tangential to the main issue.

In re Teligent, Inc., 268 B.R. 723, 728 (Bankr. S.D.N.Y. 2001) states:

"Section 365 deals with the assumption and assignment of executory contracts and unexpired leases. The trustee must assume or reject the entire contract, but the parties disagree over whether the Merger Agreement and the Non-Compete/Non-Disclosure Agreements comprise one contract or separate contracts. Under general contract law, the parties' intentions determine whether two separately executed agreements are in reality one. See Huyler's v. Ritz-Carlton Restaurant & Hotel Co., 1 F.2d 491, 493 (D. Del. 1924)(applying Delaware law); Rudman v. Cowles Communications, Inc., 30 N.Y.2d 1, 280 N.E.2d 867, 873, 330 N.Y.S.2d 33 (N.Y. 1972) (applying New York law). The same rule applies to assumption and rejection issues under § 365. See Stewart Title Guaranty Co. v. Old Republic Nat'l Title Ins. Co., 83 F.3d 735, 739-41 (5th Cir. 1996) (if parties intend a severable contract, the debtor may reject one agreement and not the other) (applying Texas law)."

The issue is: is the "master agreement" a single contract. I find it hard to believe it is not. Accordingly, the Master Agreement will have to be assumed or rejected in its entirety. Not piecemeal.

From another case, In re Ritchey, 84 B.R. 474, 476:

It is well established that a Debtor cannot retain the beneficial aspects of a contract while rejecting the contract's burdens. In re Tirenational Corp., 47 B.R. 647, 650 (Bankr. N.D. Ohio 1985); In re Texstone Venture, Ltd., 54 B.R. 54, 56 (Bankr. S.D. Tex. 1985); In re LHD Realty Corp., 20 B.R. 717, 719 (Bankr. S.D. Ind. 1982). As was stated in In re Holland Enterprises, Inc., 25 B.R. 301, 303 (E.D.N.C. 1982): "An executory contract or unexpired lease must be rejected in toto. To hold otherwise, would construe the bankruptcy law as providing a debtor in bankruptcy with greater rights and powers under a contract than the debtor had outside of bankruptcy." Consequently, if this Court finds that the agreement between Mr. Parks and the Ritcheys is one contract, the Debtors must assume or reject the entire agreement. However, the question presented here is whether there is in fact "one contract", or several "separate contracts". If the contracts are separate agreements, the Debtors may assume or reject each separate contract under §365.

In deciding whether a contract is divisible or indivisible, the Bankruptcy Court should look to state law. See In re Gardinier, 831 F.2d 974, (11th Cir. 1987); Budge v. Post, 544 F. Supp. 370, 381-382 (N.D. Tex. 1982); In re Chemtoy Corp., 19 B.R. 475, 481 (Bankr. N.D. Ill. 1982)(All cite to law of forum state in determining the divisibility of contracts).

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