SDNY Bankruptcy Court Interprets Section 546(e)’s Safe Harbors in Lehman-JPMorgan Dispute

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On April 19, 2012, the U.S. Bankruptcy Court for the Southern District of New York granted in part and denied in part JPMorgan Chase, N.A.’s motion to dismiss an adversary complaint filed by Lehman Brothers Holdings Inc. (“LBHI”) and its Official Committee of Unsecured Creditors. The Complaint seeks to recover approximately $8.6 billion in prepetition transfers made by LBHI to JPMorgan in the days leading up to LBHI’s bankruptcy. JPMorgan filed a motion to dismiss the Complaint, arguing that it acted reasonably in requiring additional collateral at a time of great financial risk, and that the transfers that the Plaintiffs sought to unwind are immunized by the safe harbor protections of section 546(e) of the Bankruptcy Code.

The Court ultimately dismissed twenty-two counts of the Complaint related to claims of preferential and constructively fraudulent transfers, on the grounds that section 546(e) protected the transfers from avoidance by the Debtors. The Court refused to dismiss the remaining twenty-seven counts, which related to, among other things, common law legal doctrines, turnover of estate property, and equitable subordination, finding that the safe harbors do not offer “fail safe protection against every cognizable claim” related to a covered transaction and are not an “impenetrable barrier” to all claims against a market participant.

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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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