Claims Under TBA Contracts Do Not Qualify as Customers’ Claims in Broker-Dealers’ Liquidation


Judge James M. Peck of the United States Bankruptcy Court for the Southern District of New York on December 8, 2011 issued an opinion on a motion of the Lehman Brothers Inc. (“LBI”) trustee (“Trustee”) to confirm his determination that certain claims relating to settled on delivery-versus-payment “to be announced” (“TBA”) contracts do not qualify as customer claims against the LBI estate and therefore are not entitled to Securities Investor Protection Act (“SIPA”) coverage.

Several creditors, counterparties to TBA contracts with LBI, had sought designation of their TBA contract claims as customer claims seeking to recover the economic benefit of their transactions (e.g., the difference between the prices of the TBA contracts on the trade date and the prices of the TBA contracts on the date LBI filed for bankruptcy which prompted their TBA contract counterparties to cover the transactions in the market). Having these claims classified as customer claims would have made Securities Investor Protection Corporation (“SIPC”) insurance available to meet the claims. Without such a designation, the TBA contract claims are simply for breach of contract, and the TBA contract counterparties are simply unsecured creditors of the LBI estate — at the bottom of the order of recovery priority.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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