On Sept. 30, a district court resolved a significant portion of outstanding litigation in the bankruptcy proceeding of Lehman Brothers Holdings Inc. and its subsidiaries.See Lehman Bros. Holdings Inc. v. JPMorgan Chase Bank, N.A. (In re Lehman Bros. Holdings Inc.), No. 1:11-cv-06760 (S.D.N.Y. Sept., 30, 2015). This litigation flows from the debtors’ allegations that JPMorgan Chase Bank, N.A. (JPMC) coerced billions of dollars from Lehman on the eve of its bankruptcy filings in September 2008. Lehman Brothers Holdings Inc. (LBHI) originally filed a complaint in 2010 on behalf of itself and several Lehman affiliates, including Lehman Brothers Inc. (LBI). (The Unofficial Committee of Unsecured Creditors is a plaintiff-intervenor in this case.) The court’s most recent ruling granted summary judgment in favor of JPMC on multiple counts, denying over $8 billion in potential recoveries for the liquidating Lehman estate. Now, only six of the 49 counts present in the original complaint and seven of JPMC’s counterclaims remain before the court.

Relationships Connecting JPMC, LBI and Lehman

The dispute arose from JPMC’s role as the bank and primary source of credit for LBI in its triparty repurchase agreements. In a repurchase agreement, a party sells an asset and agrees to repurchase the asset at a specified date, often the next day. In a triparty repurchase agreement, a third party acts as a custodian to coordinate the sale and repurchase of an asset. JPMC was the custodian bank for the repurchase agreements that LBI executed with outside investors.

Pursuant to a series of clearance agreements, JPMC agreed to supply LBI with secured credit, consisting of cash and securities, to allow LBI to close out its positions in repurchase agreements. LBI relied on this source of credit, borrowing as much as $242 billion in intraday credit from JPMC. In turn, Lehman relied on LBI because LBI’s broker/dealer activities were critical to the brokerage services that Lehman offered to institutional investors.

These clearance agreements provided that JPMC could refuse to extend credit to LBI at any time. In addition, the clearance agreements required LBI to fully secure its obligations to JPMC at all times. As a result, JPMC could prohibit LBI from making use of borrowed cash and securities if JPMC was not fully collateralized at all times.

Transactions Central to this Litigation

During the summer of 2008, JPMC developed concerns about its exposure to the intraday credit market and requested additional security from Lehman. As a result, JPMC and LBHI negotiated agreements in June, August and September 2008, in which LBHI pledged additional collateral and guaranteed LBI’s intraday borrowing activity. The Sept. 30, 2015, ruling focused on the agreements executed on Sept. 9 and 12, 2008, each within a week of Lehman’s bankruptcy filings on Sept. 15, 2008.

In early September 2008, JPMC stated that it would no longer provide credit to LBI without additional collateral from LBHI. Absent JPMC’s credit, LBI could no longer function as a broker/dealer, further crippling Lehman’s operations.

To induce additional credit, between Sept. 9 and 12, 2008, LBHI provided an additional $8.6 billion in security. Specifically, it pledged $1.7 billion in money-market funds and deposited $6.9 billion in cash collateral into a demand deposit account maintained at JPMC. Following that deposit, JPMC transferred the $6.9 billion to a general ledger account, from which only JPMC could make transfers, effectively walling Lehman off from exercising any control over this cash. After Lehman filed its bankruptcy petitions on Sept. 15, JPMC continued to provide intraday credit to LBI under the terms of the August and September agreements.

In October 2008, JPMC applied $1.9 billion from the $6.9 billion in its general ledger account to set off various claims. Ultimately, JPMC filed a $30 billion proof of claim against LBHI, of which $25 billion was for secured claims arising from the agreements that LBHI and JPMC executed in August and September 2008.

Overview of LBHI’s Claims for Relief

The district court placed LBHI’s 49 counts into four general categories. One category consisted of 20 counts of alleged liability based on constructively fraudulent conveyances and preferential transfers. All 20 of these counts were dismissed by the bankruptcy court in 2012.

The district court categorized the remaining 29 counts as follows: “(1) claims seeking relief under various common law doctrines [including breach of implied covenants of good faith and fair dealing, and invalidation of the August and September 2008 agreements based on coercion, lack of consideration, and lack of authority]; (2) claims seeking to avoid and recover actual fraudulent transfers ...; and (3) claims seeking relief under various other sections of the Bankruptcy Code [including voidable setoffs and violations of the automatic stay].” Lehman Bros. Holdings Inc. v. JPMorgan Chase Bank, N.A. (In re Lehman Bros. Holdings Inc.), 480 B.R. 179, 186-87 (S.D.N.Y. 2012).

The Court’s Ruling

The court rejected Lehman’s arguments and enforced the agreements among JPMC, LBHI and LBI based upon the unambiguous terms of the agreements and the high level of sophistication among the parties. As a result, LBHI’s “various common law doctrines” failed. The court succinctly captured its approach to the vast majority of LBHI’s bases for relief by remarking that “a party does not breach an agreement by behaving as the instrument permitted.”

Despite LBHI’s contention that JPMC unfairly threatened to withhold credit absent additional security from LBHI, the court noted that the clearance agreements did not require JPMC to supply credit indefinitely. Rather, these agreements permitted JPMC to withhold credit after notice to Lehman.

LBHI also argued that the clearance agreements prohibited JPMC from requesting additional security in August and September 2008. However, the court found that the agreements gave JPMC the right to determine what constituted sufficient collateral for the purpose of being “fully collateralized.”

Similarly, the court rejected LBHI’s arguments that the June, August and September 2008 agreements should be invalidated due to lack of consideration, duress, or lack of authority. The court found that a “hell or high water” clause barred LBHI from many of those claims. In addition, the court held that that LBHI ratified the August and September agreements by performing under them without protest to the bankruptcy court.

LBHI also advanced several theories that JPMC had wrongfully transferred the $6.9 billion it received and released its lien on those funds as a result of that transfer. However, the court determined that JPMC acted properly under the express language in clearance agreements and Article 9 of the Uniform Commercial Code, and therefore had the authority to transfer the $6.9 billion in cash collateral into its general ledger account and retain its lien.

JPMC also won summary judgment on LBHI’s actual fraudulent transfer claims. The court found that extensive discovery failed to uncover facts that could lead any reasonable juror to find that LBHI acted with the requisite intent to defraud.

Notwithstanding the broad sweep of its decision on summary judgment, the court determined that six of LBHI’s counts should proceed. Specifically, the court found that a genuine issue of material fact remained about whether the transfers JPMC received in September 2008 should be avoided because they were made to obtain a setoff. The court also declined to grant summary judgment in favor of JPMC on LBHI’s claims that JPMC violated the automatic stay by setting off $1.9 billion of its claims in October 2008. Finally, LBHI’s equitable subordination claim and JPMC’s counterclaims related to fraud and indemnification also survived the summary judgment stage.

Analysis

Last Wednesday’s ruling was a significant victory for JPMC. By enforcing the express terms of the parties’ agreements, the court knocked out many of LBHI’s remaining counts against JPMC. Nevertheless, several claims and counterclaims remain, indicating that an ultimate conclusion to this litigation is many months, if not years, away.

Perhaps most notably, LBHI’s voidable setoff claims survived summary judgment, potentially offering LBHI an avenue for unwinding some of the largest transfers that JPMC received in the days preceding Lehman’s bankruptcy filings.