2009-11-11 01:34:01 -

Perpetual Trustee Company Limited (“Perpetual”), acting in its capacity as trustee for retail investors in Australia, New Zealand and Papua New Guinea, has prevailed in its defence of an appeal made by Lehman Brothers Special Financing Inc. (“LBSF”) in the English Court of Appeal against the first instance decision of the Chancellor in the English High Court on 28 July

2009.

On 6 November 2009, the Court of Appeal unanimously dismissed LBSF’s appeal and upheld the High Court’s decision that provisions which allow for the subordination of rights or beneficial entitlements of LBSF on its bankruptcy or default are valid and effectual under English law. The efficacy of provisions such as these is widely perceived as an important factor in the assignment of credit ratings to credit linked notes and other instruments.

Perpetual was represented by English lawyers from Sidley Austin* working together with lawyers from the Australian firm of Henry Davis York. The action, which is called Perpetual Trustee Company Limited v (1) BNY Corporate Trustee Services Limited and (2) Lehman Brothers Special Financing Inc. (together with a case that was heard concurrently, Belmont Park Investments Pty Limited and Others v (1) BNY Corporate Trustee Services Limited and (2) Lehman Brothers Special Financing Inc.), has been closely monitored by financial market participants given its potentially far-reaching significance to similar synthetic CDO and other derivative transactions in which parties have deliberately selected English law to govern their dealings.

The proceedings were brought by Perpetual as the holder of certain credit-linked notes (the “Notes”) issued as part of the “Dante” Note Programme sponsored by LBSF and its affiliates. The proceedings were brought against BNY Corporate Trustee Services Limited (“BNY”). LBSF elected to be joined as a party to those proceedings. BNY maintained a neutral stance throughout the proceedings.

The action concerns a variety of issues, including whether BNY should be prevented from applying “Noteholder Priority” in relation to the distribution of the proceeds of the Collateral over which it was directed to enforce security following an acceleration of the Notes held by Perpetual. The documents (which were governed by English law) provided for a reversal of the priority of payments to allow Perpetual (as holder of the Notes) to be paid ahead of LBSF (as Swap Counterparty) if there was an Event of Default in relation to LBSF under the Swap Agreement. An Event of Default under the Swap Agreement had occurred as a result of the Chapter 11 Bankruptcy filings of LBSF and its parent company in the United States and other events.

LBSF maintained at first instance that provisions of the U.S. Bankruptcy Code (the so-called “ipso facto” rule) and, in the alternative, provisions of English law, operated to make the reversal of the priority of payments ineffectual as a matter of law. LBSF appealed the High Court’s decision that the reversal of the priority of payments was not ineffectual under English law under the so-called “anti-deprivation principle.”

The Court of Appeal unanimously upheld the English High Court’s decision at first instance, confirming that provisions in contracts governed by English law that subordinate the rights or beneficial entitlements of the swap counterparty on an insolvency or other default will not generally be prohibited by English law. The Master of the Rolls, Lord Neuberger, commented that LBSF’s prior ranking right to the proceeds of the collateral under the documents was always contingent, and given that LBSF had never unconditionally owned a prior ranking right, it could not be said to have been “deprived” of such a right contrary to the English law anti-deprivation principle.

LBSF has applied for permission to appeal to the newly formed English Supreme Court and the Court of Appeal’s decision on whether to grant such permission is expected shortly.

The validity of provisions such as these as a matter of U.S. law has yet to be determined by the U.S. courts and is presently the subject of litigation initiated by LBSF in the U.S. after LBSF elected to be joined as a party to the English proceedings. Motions seeking summary judgement on the U.S. law issue are scheduled to be heard on 19 November 2009 in New York in the U.S. Bankruptcy Court.

Also at issue in the proceedings is whether the English Court will permit the application of foreign insolvency laws (by virtue of an application under the Cross Border Insolvency Regulations 2006 (“CBIR”)) to invalidate these subordination provisions. That issue was not the subject of the hearing before the Court of Appeal, having been adjourned by the English High Court to permit an appropriate application for recognition and assistance under the CBIR to be made by LBSF.

Sidley is one of the world's largest full-service law firms, with approximately 1700 lawyers practising in 16 U.S. and international cities, including Beijing, Brussels, Frankfurt, Geneva, Hong Kong, London, Shanghai, Singapore, Sydney and Tokyo. Every year since 2003, Sidley has been named to Legal Business’ Global Elite, its designation for the 18 firms “that define the pinnacle of the legal profession.” BTI, a Boston-based consulting and research firm, has named Sidley to their Client Service Hall of Fame as one of only two law firms to rank in the Client Service Top 10 for seven years in a row.

*Sidley Austin LLP, a Delaware limited liability partnership which operates at the firm’s offices other than Chicago, London, Hong Kong, Singapore and Sydney, is affiliated with other partnerships, including Sidley Austin LLP, an Illinois limited liability partnership (Chicago); Sidley Austin LLP, a separate Delaware limited liability partnership (London); Sidley Austin LLP, a separate Delaware limited liability partnership (Singapore); Sidley Austin, a New York general partnership (Hong Kong); Sidley Austin, a Delaware general partnership of registered foreign lawyers restricted to practicing foreign law (Sydney); and Sidley Austin Nishikawa Foreign Law Joint Enterprise (Tokyo). The affiliated partnerships are referred to herein collectively as Sidley Austin, Sidley, or the firm.


For the purposes of the New York State Bar rules, this press release may be considered Attorney Advertising and the headquarters of the firm are Sidley Austin LLP 787 Seventh Avenue, New York, NY 10019, 212.839.5300 and Sidley Austin LLP One South Dearborn, Chicago, IL 60603, 312.853.7000. Prior results described herein do not guarantee a similar outcome.

Sidley Austin LLPJanet Zagorin, 212-839-8797Director of
Practice Development jzagorin@sidley.com : mailto:jzagorin@sidley.com orRobin

Parsons, +44 (0) 20 7360 3651Partner, London rparsons@sidley.com : mailto:rparsons@sidley.com