UK supreme court throws out Lehman CDO appeal

The UK supreme court today rejected an appeal by Lehman Brothers’ bankruptcy estate against the English courts’ earlier decisions in favour of synthetic CDO noteholders. An earlier court judgment, confirmed by the court of appeal, had found that the noteholders - mostly Australian investors – were entitled to get back funds used as collateral for the credit default swaps.

The ruling leaves the UK and US courts split on this hugely contentious matter. The US bankruptcy court has ruled that the “flip” clauses – which give noteholders priority over the collateral in the event of Lehman’s bankrupty – are not eligible under US law.

Lehman argued that the flip clause also contravenes the English law principle of anti-deprivation (putting assets out of the way of creditors). But the top UK judges unanimously rejected this argument. “It is desirable that, so far as possible, the courts give effect to contractual terms which parties have agreed,” wrote Lawrence Collins, one of the supreme court judges. “This was a complex commercial transaction entered into in good faith,” he added.

See  full ruling at 2011-07-28 Lehman (PDF, 248.2 kb).

The trustee for some of the Australian investors, Perpetual Trustees, has already settled with the Lehman estate, for a sum which has not yet been disclosed to the noteholders.

See also

CDO investors express anger over Lehman settlement
No need for investors to know CDO settlement terms, says court
US ruling brings set-back for Lehman CDO investors