Belmont Park Investments Pty Ltd v BNY Corporate Trustee Services Ltd

The Dante Programme and the issue of priority 12 The documentation for the Dante Program consists of a complex web of interconnected Trust Deeds and agreements. These documents provide for the issue of a series of synthetic portfolio notes secured by a charge over government bonds and other highly rated investments purchased with the funds subscribed by the Noteholders. 13 The parties to the Dante Programme include the issuer of the Notes, namely a special purpose vehicle provided by the Lehman Group, the Trustee for the Noteholders, namely BNY Corporate Trustee Services Ltd ("BNY") as Trustee, and LBSF as "Swap Counterparty". LBSF assumed that role under a credit default swap agreement which formed part of the Dante Programme. 14 The securities for the Notes were described as the "Collateral" in the relevant documentation. The Collateral was vested in BNY under cl 5 of the Supplemental Trust Deed. Under that clause, the issuer of the Notes charged the Collateral in favour of the Trustee which held it as trustee for itself, the Noteholders and LBSF as Swap Counterparty. 15 The critical clause is cl 5.5 which is known colloquially as the "flip clause". It provided for Swap Counterparty priority unless an Event of Default occurred under the Swap Agreement. In that event, Noteholder priority was to apply. 16 An Event of Default occurred under the Swap Agreement when the parent company of the Lehman Group, Lehman Brothers Holdings Inc, filed for protection under Ch 11 of the US Bankruptcy Code in September 2008 or, alternatively, when LBSF filed for Ch 11 protection on 3 October 2008. 17 The question which then arose was whether the priority granted to LBSF as Swap Counterparty was reversed by the flip clause so as to give effected to the Noteholder priority as provided for in cl 5.5. 18 Clause 13 of the Supplemental Trust Deed provides that the Deed is to be governed and construed in accordance with English law.

The decisions of the English Courts 19 The validity and effect of the flip clause has been determined in England at first instance and on appeal in proceedings brought by Perpetual Trustee Co Limited on behalf of the Noteholders of a number of series of Notes in the Dante Programme. The series of Notes which were the subject of that proceeding included the series of Notes held by LBA: see Perpetual Trustee Co Ltd v BNY Corporate Services Ltd [2009] 2 BCLC 400 ("Perpetual No 1"). 20 BNY was the first Defendant in Perpetual No 1 and LBSF was the second Defendant. 21 In Perpetual No 1, the Chancellor, Sir Andrew Morritt, held that the provisions for Noteholder priority under the flip clause did not offend against English public policy or against the principle of anti-deprivation in insolvency law. He therefore held that cl 5.5 was effective to confer Noteholder priority and that the Collateral held by BNY was to be realised and distributed for the benefit of the Noteholders. 22 The Chancellor's decision in Perpetual No 1 was affirmed on appeal by the Court of Appeal: Belmont Park Investments Pty Ltd v BNY Corporate Trustee Services Ltd [2010] Ch 347. 23 An appeal from the Court of Appeal's decision in Perpetual No 1 was dismissed by the Supreme Court of the United Kingdom: Belmont Park Investments Pty Ltd v BNY Corporate Trustee Services Ltd [2011] 3 WLR 521.

The United States Proceedings 24 In proceedings brought by LBSF against BNY in the US Bankruptcy Court for the Southern District of New York, Judge Peck delivered a Memorandum of Decision on 25 January 2010 in which he took a different view of the effect of the flip clause from that which had been taken in England: see Lehman Brothers Special Financing Inc v BNY Corporate Trustee Services Limited (United States Bankruptcy Court, Southern District of New York, Case No 08-13555, Adversary Proceeding No 09-01242, 25 January 2010) (the "US Perpetual Notes Proceeding"). 25 Judge Peck came to the view in the US Perpetual Notes Proceeding that the flip clause was contrary to the "ipso facto" and "automatic stay" provisions of the US Bankruptcy Code. He considered that the terms of cl 5.5 which purport to modify LBSF's right to Counterparty priority constituted an unenforceable ipso facto clause. He also considered that any attempt to enforce Noteholder priority would violate the automatic stay triggered by the filing of a petition under Ch 11 because it would deprive LBSF and its creditors of a valuable property interest. 26 In his Memorandum in the US Perpetual Notes Proceeding, Judge Peck said: The issues presented in this litigation are, as far as the Court can tell, unique to the Lehman bankruptcy cases and unprecedented. The Court is not aware of any other case that has construed the ipso facto provisions of the Bankruptcy Code under circumstances comparable to those presented here. No case has ever declared that the operative bankruptcy filing is not limited to the commencement of a bankruptcy case by the debtor-counterparty itself but may be a case filed by a related entity - in this instance the counterparty's parent corporation as credit support provider. Because this is the first such interpretation of the ipso facto language, the Court anticipates that the current ruling may be a controversial one, especially due to the resulting conflict with the decisions of the English Courts. 27 As is apparent from the above, Judge Peck was well aware of the contrary decisions of the English Courts. His Honour's Memorandum was delivered after the decision of the Court of Appeal in Perpetual No 1, but before it was affirmed by the Supreme Court of the United Kingdom. Judge Peck referred to the decisions of Sir Andrew Morritt and the Court of Appeal and gave his reasons as to why he came to a different view. 28 In coming to that view, Judge Peck was well aware of an issue which is very much at the heart of the application which has been made to me, namely that BNY is concerned about its position as the meat in the sandwich between the conflicting decisions of the English and American courts. He said at 14: Indeed, BNY has been concerned from the very outset of this litigation about the prospect of being caught in the middle between conflicting decisions as to the rights of Perpetual and LBSF to the Collateral. From BNY's perspective, consistent guidance from courts of competent jurisdiction on both sides of the Atlantic would be highly desirable and would avoid the unwanted result of conflicting judgments as to which party is entitled to the Collateral. 29 The United States District Court for the Southern District of New York granted a motion brought by BNY for leave to appeal against the decision in the US Perpetual Notes Proceeding. However, the appeal did not proceed because a settlement was reached between BNY and LBSF in respect of the Notes held by Perpetual which were the subject of that proceeding. 30 However, there is another proceeding on foot between BNY and LBSF in the US Bankruptcy Court. In that proceeding, which is Adversary Proceeding No 10-03545, LBSF seeks declaratory relief against BNY in terms which reflect Judge Peck's decision on the issue of the validity and enforceability of the flip clause under United States law. This proceeding (the "US LBA Notes Proceeding") is concerned with the right of LBSF to the Collateral held by BNY for other series of Notes issued under the Dante Programme. 31 The Notes which are the subject of the US LBA Notes proceeding include the notes held by LBA. 32 On 20 October 2010, Judge Peck granted LBSF's motion for a stay of the US LBA Notes proceeding, and other proceedings relating to Notes issued under the Dante Programme, for 9 months. 33 On 25 January 2011, LBA filed a motion to intervene in the US LBA Notes proceeding. However, LBSF opposed LBA's motion and, on 18 February 2011, Judge Peck denied LBA's motion to intervene, without prejudice to LBA's right to refile the motion after the expiration of the stay granted to LBSF. 34 On 16 June 2011, Judge Peck extended the stay of the US LBA Notes Proceeding until 20 January 2012. In doing so, he denied LBA's objection to the extension of the stay on the ground that LBA had no standing to raise its objection. 35 The Liquidators of LBA appealed from the decision of Judge Peck to the United States District Court for the Southern District of New York. On 21 June 2011 Judge McMahon dismissed the appeal. However, her Honour's remarks, as recorded in her Memorandum and Order, are pertinent to the application made to me by the Liquidators of LBA. 36 Judge McMahon observed at page 6 that if LBA (and certain other appellants) were not allowed to intervene in the US LBA Note Proceeding, they will be unable to seek appellate review of Judge Peck's decision of 25 January 2010 in the US Perpetual Notes Proceeding. 37 Judge McMahon went on to say that Judge Peck's decision in the US Perpetual Notes Proceeding was "unprecedented" and that it represents a new development in US bankruptcy law. Her Honour said it is not settled law since it has never been tested in a higher court. 38 Nevertheless, Judge McMahon refused to allow the appeal because her Honour said the Bankruptcy Court did not deny LBA's right to intervene on the merits, but had concluded, instead, that the motion was premature. Her Honour observed that LBA may renew its motion after the stay is lifted.

Perpetual No 2 39 Henderson J's decision in Perpetual No 2 was handed down before Judge Peck's decision was delivered in the US Perpetual Notes Proceeding. It is important to bear that context in mind when addressing the issues in the present application. 40 In Perpetual No 2, the application was made by Perpetual because, as was pointed out at [21] Perpetual feared that in the US Bankruptcy Court: LBSF is trying in some way to steal a march and pre-empt the orderly resolution of the conflict issues which may arise if Judge Peck decides the underlying question of US bankruptcy law in favour of LBSF. 41 The request made to Henderson J by Perpetual was opposed by LBSF. It was also opposed by BNY, in the form sought by Perpetual, although BNY did not oppose the sending of a shorter and simpler form of letter. 42 Henderson J set out the background to the application which arose out of the proceedings between the same parties in Perpetual No 1. The application was made, as I have said, after the Court of Appeal decision but before the determination of the appeal by the Supreme Court. 43 The application was made to Henderson J as a matter of some urgency because LBSF had brought a motion for summary judgment in the US Perpetual Notes Proceeding which was due to be heard later that week. 44 Henderson J pointed out that both the English Court and the US Bankruptcy Court were fully aware of the desirability of avoiding a conflict between the two jurisdictions with respect to the underlying question of priority over the Collateral. He also pointed out that steps had already been taken to establish a protocol for communication between the Chancellor and Judge Peck. Indeed, there had already been communication between the Chancellor and Judge Peck when the application was made to Henderson J. 45 The draft letter proposed by Perpetual set out a detailed allocation of functions between the English and American courts. Henderson J observed at [22] that the letter appeared to leave the last word on the critical question of how the collateral should be distributed with the English courts. 46 Counsel for LBSF opposed the application on a number of grounds. He submitted, inter alia, that the proposed letter went beyond the principle of comity and would be seen as an unwarranted interference in the proceeding in the US Bankruptcy Court. 47 Henderson J considered that there was force in the criticism made by LBSF that the letter may look like a pre-emptive attempt to establish primacy for the orders which may be made by the English Court directing BNY as to how the collateral or its proceeds should be distributed. 48 Henderson J then said at [43]-[45]: More generally, I think that to send a letter in these terms at this stage, before Judge Peck has given any ruling on the issues of US law, would be judicial bad manners rather than an example of judicial comity in action, and might even be counter-productive. Accordingly, the real question, to my mind, is whether to send a letter at all at this stage, or whether to send a much more limited letter designed to reduce the risk of conflicting rulings being made as a result of the hearing on Thursday. There is undoubtedly much to be said for doing nothing, and Mr Snowden has advanced a persuasive case in support of that conclusion. The existing exchange of judicial letters shows that Judge Peck is very alive to the problems and that he intends to communicate further with the English court once he has given his rulings on the issues of US law. 49 Ultimately, Henderson J found the question of whether or not to send a letter to be finely balanced but he concluded that the arguments in favour of sending a request outweighed the arguments against it. However, the letter which he agreed to send was less prescriptive than that which Perpetual had sought. In particular, he said the letter should invite Judge Peck not to make any order which would require BNY to act in a particular way or deal in any particular way with the collateral or its proceeds until further communication had taken place between the English and American courts as envisaged by the protocol established between Judge Peck and the Chancellor.

Consideration 50 I accept the view that inter-court communication can have a vital role to play in major cross-border insolvencies. Also, so far as possible, I would try to endorse the efforts of the Liquidators of LBA to seek to minimise the possibilities of conflicting orders: see Re T & N Ltd [2005] BCC 982 at [27] ("Re T & N"). 51 However, I cannot accede to the request in its present form. There are a number of reasons for this. 52 First, the effect of the draft letter is to request Judge Peck to lift the stay of the US LBA Notes proceeding, or at least, not to extend it when the stay expires on 20 January 2012. 53 It seems to me that a request in those terms may pre-empt the consideration of the matter by Judge Peck when the US LBA Notes Proceeding comes before him. It would therefore impinge upon the principle of comity which is based on common courtesy and mutual respect. Indeed, it may be seen by Judge Peck as an unwarranted interference by me in the US LBA Notes Proceeding. 54 As Richards J said in Re T & N at [26], I do not consider it appropriate for this court to enter into substantive discussions with the United States court on matters of controversy between the parties which may come before the court for decision. 55 Second, unlike the application in Perpetual No 2, the present application is made ex parte. By contrast, in Perpetual No 2, the parties to the English proceeding and the parties to the proceeding before Judge Peck were joined as defendants in the application. 56 Thus, Henderson J had before him, as opponents to the application, LBSF and BNY who are parties that are directly affected by the outcome of the English and American proceedings. 57 It is true that in the present application the Liquidators of LBA seek my assistance in communicating with Judge Peck because they are concerned about the invidious position of BNY which is subject to conflicting authorities. 58 But whether or not BNY may support the application, it is plain that I have not heard from LBSF as to its position. 59 Third, cooperation between this Court and any foreign court will generally occur within a framework or protocol that has previously been approved by the Court, and is known to the parties in the particular proceeding: see Federal Court of Australia, Practice Note Corp 2 - Cross-Border Insolvency: Cooperation with Foreign Courts or Foreign Representatives at [5]. 60 Reference should also be made to the Guidelines Applicable to Court-to-Court Communication in Cross-Border Cases published by the American Law Institute and the International Insolvency Association. 61 No protocol has been established in the present case. I note that a form of protocol appears to have been established between the Chancellor and Judge Peck in relation to the issues arising out of Perpetual No 1 and the US Perpetual Notes Proceeding. 62 It seems to me that any protocol would need to provide for notice of the proposed communication to be given to the parties directly affected, in particular BNY and LBSF. 63 Fourth, it is clear from the history of the proceedings in England and in the United States that Judge Peck is acutely aware of the conflict between the authorities on either side of the Atlantic. 64 The protocol that was established between the Chancellor and Judge Peck seems now to have been overtaken by the delivery of the decision of the Supreme Court and Judge Peck's decision in the US Perpetual Notes Proceeding. 65 However, I would need to consider the terms of that protocol, and of any further steps taken under it, before I could consider the utility of any direct communication with Judge Peck in the terms sought by LBA. 66 Fifth, the application in Perpetual No 2 was made within the framework of proceedings that were on foot in England and the United States with respect to the issue of the validity and effect of the flip clause. There is no such proceeding before me. 67 An issue does arise in relation to the effect of the flip clause in proceedings brought by approximately 225 Australian Noteholders who have made claims for damages against LBA. The damages claimed are calculated by reference, inter alia, to losses suffered by Australian Noteholders who purchased Notes in various series of the Dante Programme. 68 Those proceedings were heard by Rares J earlier this year. His Honour has reserved his judgment. The proceedings are entitled Wingecarribee Shire Council v Lehman Brothers Australia Ltd, matter No NSD 2492 of 2007. 69 There may be a question as to whether notice of an application under Article 25 ought to be given to the parties to that proceeding.

Conclusion 70 For the reasons set out above, I do not propose to send a letter to Judge Peck in or to the effect of the terms of the draft submitted by LBA. 71 Nevertheless, the authorities to which I have referred indicate that inter-court communications in cross-border insolvencies should be encouraged so long as this can be done without going beyond the principle of comity. 72 It seems to me that, in light of what I have said about the reasons for refusing the application, the most that I can do is to communicate with Judge Peck to inform him of the present application. I do not think it would be discourteous to Judge Peck to ask him whether he would be prepared to establish a protocol for future communications so long as the necessary parties are consulted about the terms of any communication with him. 73 I will set out as an appendix to my judgment a draft letter which I propose to send. I will permit the Liquidators of LBA to comment upon the draft by close of business on Friday 16 December 2011. Otherwise I will send the letter in the form appended to this judgment. 74 Finally, I would point out that it may be unnecessary in the present case to establish any protocol. This is because I assume the necessary parties, namely the Liquidators of LBA, BNY and LBSF will appear before Judge Peck in early January 2012 to argue the question of the stay, and whether LBA has any right to be heard on it. 75 I would expect that counsel for those parties would be more than adequately prepared to argue the issues which arise including, in particular, the question of whether leave should be granted to LBA to intervene so as to be able to take the matter on appeal. I certify that the preceding seventy-five (75) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Jacobson.