The U.K. Court of Appeal (the “Court of Appeal”) on Aug. 2, 2010, handed down a long-awaited decision regarding an appeal related to the scope of, and eligibility to receive distributions from, the Lehman Brothers Europe (International) (“LBIE”) pool of client money. Lehman Bros. Int. (Europe) (In Administration) v CRC Credit Fund Ltd. & Ors, [2010] EWCA Civ 917 (appeal taken from the Chancery Division) (U.K.).

The immediate impact of the Court of Appeal’s decision is to expand the scope of the client money pool itself and the universe of claimants entitled to seek distributions from that pool. LBIE’s joint Administrators are currently considering the effect of the decision on “the timing and level of any distribution of client money to LBIE’s clients.”1

The Court of Appeal considered the High Court’s decision in relation to an application for directions from the joint Administrators concerning LBIE’s responsibilities in the handling of client money received prior to the time of administration. Under the U.K.’s Financial Services Authority’s rules (the “FSA Rules”), LBIE was required to segregate client money received from its clients (FSA Rules, CASS7), such money being subject to a statutory trust created in favor of such clients. Accordingly, the treatment of a client’s entitlement depended on (i) whether LBIE had, at the time of administration, segregated client money in its client money accounts and (ii) whether it is possible to identify from its books and records that client money entitlement. Such segregated money would be included in the client money pool created pursuant to FSA Rules (CASS7) following LBIE’s failure (“Client Money Pool”), for distribution to clients. Money not so segregated, the lower Court held, would be subject to other tracing remedies under U.K. law.

Partially overturning the earlier decision by the High Court (Chancery Division), the Court of Appeal held that:

  • The statutory trust is created at the time an investment firm, such as LBIE, receives client money and not at the time the client money is actually segregated.
  • In addition to any client money LBIE had properly segregated prior to the commencement of its administration, money that LBIE had not segregated and is identifiable in the firm’s house accounts as client money may also form part of the Client Money Pool.
  • Therefore, clients with an entitlement to client money may recover from the assets in the Client Money Pool, regardless of whether LBIE actually segregated their client money. In accordance with U.K. law, the joint Administrators will distribute the Client Money Pool pro rata to all clients who have claims against the Client Money Pool.
  • Amounts an investment firm merely owes to a client based on a debtor-creditor relationship (e.g., monies due as “manufactured dividend” under a stock loan transaction) do not constitute client money and do not form part of the Client Money Pool.

As of this writing, no party to the case has sought permission to appeal the Court of Appeal’s decision to the U.K.’s Supreme Court, though interested parties have 28 days from the date the Court of Appeal enters an order implementing the decision to seek such permission. LBIE’s joint Administrators do not expect the Court of Appeal to enter such an order until late September or early October 2010.

A copy of the Court of Appeal decision can be accessed here.