Barclays Capital Inc. v. Giddens (In re Lehman Brothers Holdings, Inc.)

Second Circuit affirmed the District Court's decision, which held that Barclays was entitled to both the Margin Assets (i.e., $4bn in collateral supporting Lehman Brother Inc.'s exchange-traded derivatives business) as well as the CBAs (i.e., $1.9bn in unencumbered securities held in LBI's clearance box accounts at DTCC, which supported open trading positions). As a matter of New York contract law, the Second Circuit followed the unambiguous meaning of the operative documents in connection with its finding that the Margin Assets were intended to be transferred to Barclays. In addition, the proper weighting of extrinsic evidence proffered in connection with the dispute over the CBAs tipped in favor of conveying such assets to Barclays. The issue concerning the Rule 15c-3 Assets was resolved consensually before the Second Circuit ruled on the matter.
Procedural context:
In early 2011, Judge James M. Peck, U.S.B.J. ruled that Barclays was conditionally entitled to the Clearance Box Assets, but had not purchased either the Margin Assets or the Rule 15c-3 Assets. On appeal, Judge Peck was affirmed in part and reversed in part. Judge Forrest held that Barclays was entitled to both the Margin Assets and the CBAs, and was conditionally entitled to the Rule 15c-3 Assets. The SIPA Trustee appealed from the ruling as it relates to the Margin Assets and the CBAs, and Barclays cross-appealed as it relates to the Rule 15c-3 Assets.
This dispute arises out of the emergency sale of Lehman Brothers, Inc. ("LBI"), the North American broker-dealer of Lehman Brother Holdings Inc. ("LBHI"), to Barclays Capital Inc. ("Barclays") in September 2008 within days of chapter 11 filing of LBHI. An Asset Purchase Agreement ("APA") was executed by the parties on September 16, 2008 - one day after LBHI's chapter 11 petition was filed. On September 19 (the day of the Sale Hearing), LBI notified Barclays that it could no longer deliver billions of dollars in assets that had been promised in the APA. As a result, Barclays demanded that LBI identify assets that LBI could still transfer, in order for Barclays to decide whether to close the deal. This so-called "asset scramble" produced two group of assets that are the subject of the appeal: the Margin Assets and the CBAs. At the sale hearing, it was made clear that no "cash" from Lehman would be transferred to Barclays. At the hearing, Barclays' counsel also represented that all material changes had been disclosed. The bankruptcy court advised the parties that any change to the deal in excess of $500 million would be material. In response, the parties advised that court that a "Clarification Letter" would be forthcoming, memorializing any necessary changes. For nearly a year, Barclays and the SIPA Trustee relied on the CL. However, they returned to the bankruptcy court wherein Barclays moved for delivery of certain assets it claimed, and the SIPA Trustee, LBHI and its official creditors' committee brought adversary proceedings and motions seeking relief from the Sale Order. The Margin Assets were LBI property that it pledged to support both its own and customer trading. It is undisputed that Barclays purchased the ETD (exchange traded derivatives) business; however, the dispute was whether the Margin Assets, which supported the ETD business, were transferred along with the ETD business by operation of the documents at issue. The court notes that in the APA, "exchange-traded derivatives" are clearly included in the definition of "Purchased Assets." In addition, the CL specifically defined Purchased Assets to include both exchange-traded derivatives and "any property that may be held to secure obligations under such derivatives." Therefore, the unambiguous meaning of those terms convey the Margin Assets to Barclays. The Second Circuit noted that it would be unusual for a buyer to purchase LBI's ETD business in its entirety but not its collateral that allowed the business to exist. Accordingly, the court was not convinced by the trustee's arguments and declined to create ambiguity and conflict where none existed. The disposition of the CBAs was dependent on the interpretation of two documents - the CL and a DTCC letter. The CL provided that Purchased Assets include "such securities and other assets held in LBI's 'clearance boxes' as of the time of the Closing." The DTCC Letter (executed by the DTCC, SIPA Trustee and Barclays) provides that "all of the accounts of LBI maintained at the Clearing Agencies Subsidiaries ... constitute 'Excluded Assets' within the meaning of the APA." The Second Circuit agreed with the bankruptcy court that the DTCC Letter was ambiguous and thus considered extrinsic evidence. The Second Circuit, like the bankruptcy court, found an alternate possible reading of the DTCC Letter. In addition, the unambiguous text of the CL Letter contains more detail and is more specific with regards to the CBAs than the DTCC Letter. Ultimately, the weight of evidence tipped in Barclays' favor and the Second Circuit held that the parties' post-closing conduct in approving the CL and finalizing the related schedules evinced an intent to transfer the CBA Assets.
Ralph Winter, Peter Hall and Gerald Lynch

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