Bankruptcy Court Rejects Triangular Setoff Rights in ISDA Agreement


On October 4, 2011, in the case of In re Lehman Brothers Inc., the Bankruptcy Court in the Southern District of New York (the "Court") held that a cross-affiliate setoff provision contained in a swap agreement was not enforceable under the provisions of the U.S. Bankruptcy Code (the "Code").

On July 13, 2004, UBS AG ("UBS") and Lehman Brothers, Inc.("LBI") entered into a 1992 ISDA Master Agreement, including a Schedule and Credit Support Annex forming a part thereof(collectively, the "ISDA Agreement"), for purposes of entering into foreign exchange transactions. Pursuant to the margining provisions of the Credit Support Annex, the parties exchanged collateral to secure payment obligations under the various transactions. Following the occurrence of certain events of default by LBI under the ISDA Agreement, UBS sent LBI a termination notice ("Termination Notice") designating September 16, 2008, as the ISDA Agreement's early termination date. After the date UBS sent its Termination Notice, the Court entered an order (i) authorizing LBI'strustee under the Securities Investor Protection Act ("SIPA Trustee") to take possession of LBI property, and (ii) notifying creditors that the automatic stay applied to all acts to obtain property from LBI's estate, and stayed all entities from directly or indirectly retaining or setting off any of LBI's assets (the "LBI Liquidation Order").

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