On April 19, Lehman Brothers Special Financing (“LBSF”), a subsidiary of Lehman Brothers Holdings Inc. (“LBHI”), filed its opposition to a motion to dismiss its breach-of-contract claims related to the Pyxis transaction, one of many credit-default swap (“CDS”) transactions that were terminated as a result of LBHI’s bankruptcy. LBSF argued that the cancellation of its priority payment status under the swap agreements was a breach of contract and violated bankruptcy law.

After LBHI initiated a Chapter 11 bankruptcy proceeding in September 2008, dozens of banks and noteholders terminated a massive series of CDS transactions and enforced contractual “flip clauses,” which allowed investors to move ahead of LBSF to secure assets backing a structured-debt deal in a derivatives contract. LBSF filed suit, seeking more than $3 billion, including $1.3 billion stemming from the Pyxis transaction. In its fourth amended complaint filed in October 2015, LBSF argued that the flip clauses “wiped out [its] substantial ‘in-the-money’ position under the Swap Agreements, resulting in an enormous (and unjustifiable) windfall to the Noteholders at [its] expense.” LBSF reiterated this argument in the opposition, stating that the “reversal of priorities because of LBHI’s bankruptcy resulted from [an] application of impermissible ipso facto provisions.”

LBSF is expected to prevail on its argument that the flip clauses are unenforceable in light of the 2010 decision by U.S. Bankruptcy Judge James Peck, who oversaw Lehman’s Chapter 11 case, that such flip clauses violated U.S. bankruptcy law.

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