In Connection With

The litigation between Chase and Lehman (10-03266 (JMP)) is heating up, with Chase filing its motion to dismiss all of Lehman's claims. While Lehman's claims are many, the ones that are of special interest to me are those fraudulent transfer and preference actions that implicate the "safe harbors" in the Code.

The safe harbors could be key here, because the underlying claims seem to tilt strongly in Lehman's favor.

Essentially these claims involve Lehman the parent company providing additional collateral, entering into guarantees, and expanding the number of Lehman entities subject to certain preexisting arrangements with Chase. In some cases this secured previously unsecured claims (hence the preference actions) and in some cases it simply moved value out of Lehman for the benefit of Lehman's broker-dealer subsidiary, and, ultimately, Chase.

Key to Chase's motion to dismiss is the argument that even if these transactions are otherwise avoidable, they are not actionable because of the safe-harbors. And there seems to be little doubt that from the broker-dealer's perspective, these eve of bankruptcy deals between Chase and the Lehman parent company did allow the broker-deal to continue to engage in repo and other securities transactions as defined in the Code. And the Chase-Lehman deals probably are "extension[s] of credit for the clearance or settlement of securities transactions," to take one relevant provision of the Code.

Thus the key question is whether, from the Lehman parent's perspective, these transactions were "in connection with" a securities, repo, or swap agreement, as provided in section 546 of the Code. From a policy perspective, Chase's broad reading of "in connection with" should probably be rejected, because it allows almost any contract to be "safe harbored," so long as there is some minimal connection with a protected class of securities. And those classes became massively overbroad in 2005, so that would not be too hard to do. In short, Chase's argument lacks any outer limits.

On the other hand, it would be easy enough for the court to cite some of those "plain meaning" cases from the Supreme Court and say Congress' odd policy choices are not the court's problem. 

This one will be interesting to watch as it unfolds.