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Lehman in Jakarta -- Venue, Choice of Law, and International Bankruptcy

posted by Stephen Lubben

Tuesday I noted an interesting dispute in the Lehman case regarding a "range accural trade," and wondered about Lehman's willingness to do the trade without collateral. Going without upfront (or "independent amounts") collateral seems inconsistent with the way Lehman normally operated with regard to several established hedge funds, so why take on greater risk in a jurisdiction with lesser legal institutions?

But lurking here are several thorny choice of law, and, more importantly, choice of venue questions.

Recall that Lehman's counterparty has filed suit in Indonesia to void the swap. Lehman had sought to use the bankruptcy court imposed ADR process to resolve the issue, although there does not appear to be much to resolve. Lehman terminated the swap, and appears to have followed the proper ISDA procedures in this regard.

That the counterparty's actions in Indonesia violate the automatic stay seems fairly clear. The real question is whether the bankruptcy court has jurisdiction against the counterparty, so that the stay can be enforced. And there is a subsidiary issue of whether the bankruptcy court can easily interpret a contract that appears to have been entered into in Indonesia. Here the underlying documents provide some bite, because the trade confirmation includes a New York choice of law clause, and the background master agreement (admittedly, never executed -- but arguably incorporated into the confirmation that was signed) provides for both application of New York law and submission to jurisdiction therein. 

So, as a legal matter, the bankruptcy court has jurisdiction to enforce the automatic stay against the counterparty. The practical question is whether the counterparty has any assets in the United States, or desire to do business in the United States, such that the court's jurisdiction will have actual consequence.

Then there is the suit in Indonesia. Up until now, I've referred to it as a suit to annul the swap. Actually, it's a bit more complicated than that. The compliant asserts several tort causes of action, based on Lehman's efforts to collect on a swap the counterparty says was never valid. Not only do they assert they would have been "in the money" on the swap if it had been property executed, but also that they have suffered at least $11 million in reputational damages due to Lehman's claims that the Indonesian company defaulted.

In short, there is some risk that an affirmative judgment will be entered against Lehman. Presumably they are moving any portable assets out of the country as you read this.

Comments

This will be my final comment, as this will likely be the last time I read Credit Slips. Its corporate bankruptcy posts are generally confused and lead in the wrong direction.

In the order you raise them:

1) The Cadwalder memo does not support your statement that doing unsecured trades was “inconsistent with the way Lehman normally operated with regard to several established hedge funds.” The memo makes one passing reference to Lehman saying “[The risk of loss of IA] became all too clear during Lehman’s insolvency where a large number of Lehman clients (both in Europe and in the US) were unable to obtain immediate recovery of their excess collateral and were left with unsecured claims.”

That statement says nothing about the way Lehman normally practiced with hedge funds. Moreover, the statement itself doesn’t make any sense, at least not according to US bankruptcy law. Collateral is posted to secure a payment under the swap. If there is excess collateral (i.e., the payment is less than the collateral), the counterparty wouldn’t be left with an unsecured claim against Lehman. The Court has not held as much either.

2) As to whether “there does not appear to be much to resolve” by the ADR procedures, your analysis is off. The ADR procedures are intended to and are in fact being used to resolve disputes regarding termination amounts, not whether a counterparty properly terminated. There is no standard way to determine Loss and the ADR procedures facilitate a consensual resolution of the dispute. The issue of whether or not proper termination procedures were followed is not germane to the ADR process. Your statement makes clear that you have not seen an ADR notice in the Lehman case, except for the form on the back of the ADR order.

3) “The real question is whether the bankruptcy court has jurisdiction against the counterparty, so that the stay can be enforced. And there is a subsidiary issue of whether the bankruptcy court can easily interpret a contract that appears to have been entered into in Indonesia.” Neither of the issues you identified are very important. The Court has jurisdiction over Lehman’s estate and because it does not appear that Mobile-8 filed a proof of claim, it does not have jurisdiction over Mobile-8 personally. This answers your question, but again it’s not really important. Lehman wants the payments due to it under the swap. The one thing you correctly note is that the question is whether Mobile-8 has any assets in the US. If not, good luck collecting on any judgment. Maybe Indonesia recognizes the validity of U.S. judgments.

4) Why do you mention the fact that an ISDA form wasn’t signed? The confirm expressly provides that in the absence of an executed ISDA agreement, the parties are still subject to the Form ISDA.

5) What are you talking about the agreement was executed in Indonesia? What legal consequence could that have? Parties execute contracts in counterparts across the world everyday. You think those agreements are any less enforceable?

6) “In short, there is some risk that an affirmative judgment will be entered against Lehman. Presumably they are moving any portable assets out of the country as you read this.” What? This bankruptcy law 101. A judgment entered in violation of the automatic stay is void ab initio. The automatic stay protects all property of the debtor no matter where it’s located, New York or Indonesia the same.

Please think through the issues before you post.

Finally, I'll note that despite the title of your post, venue and choice of law are not and will not be important issues in the case if Mobile-8 answers.

The comments to this entry are closed.

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