The bankruptcy court overseeing the Lehman Brothers chapter 11 cases rejected efforts by Lehman Brothers Special Financing Inc. (LBSF) to recover roughly $1 billion in payments made to numerous noteholder defendants from the liquidation of collateral originally pledged to secure both obligations under notes issued by special purpose entities and credit default swap (CDS) obligations to LBSF, holding that the termination of the swap and liquidation and distribution of the collateral were protected by the Bankruptcy Code’s safe harbor. Bankruptcy Judge Chapman’s predecessor in the Lehman cases, Judge Peck, had previously ruled in proceedings involving similar transactions that a provision in the agreements which, upon an LBSF default, “flipped” the payment priority under which obligations to LBSF under in-the-money CDSs were entitled to collateral proceeds (Swap Priority) before the noteholders were entitled to such proceeds (Noteholder Priority) was an unenforceable ipso facto provision.
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