Judge James M. Peck of the United States Bank-ruptcy Court for
the Southern District of New York on December 8, 2011 issued an
opinion on a motion of the Lehman Brothers Inc. ("LBI")
trustee ("Trustee") to confirm his determination that
certain claims relating to settled on delivery-versus-payment
"to be announced" ("TBA") contracts do not
qualify as customer claims against the LBI estate and therefore are
not entitled to Securities Investor Protection Act
Several creditors, counterparties to TBA contracts with LBI, had
sought designation of their TBA contract claims as customer claims
seeking to recover the economic benefit of their transactions
(e.g., the difference between the prices of the TBA
contracts on the trade date and the prices of the TBA contracts on
the date LBI filed for bankruptcy which prompted their TBA contract
counterparties to cover the transactions in the market). Having
these claims classified as customer claims would have made
Securities Investor Protection Corpora-tion ("SIPC")
insurance available to meet the claims. Without such a designation,
the TBA contract claims are simply for breach of contract, and the
TBA contract counterparties are simply unsecured creditors of the
LBI estate — at the bottom of the order of recovery
In order to have qualified as a customer claim under SIPA, the
TBA contract claims would have had to be for "securities
received, acquired or held" by LBI or cash on deposit with LBI
"for the purpose of purchasing securities." Because TBA
contracts are settled on delivery-versus-payment, the TBA contract
counterparties did not deliver any assets into LBI's custody to
effect their transac-tions. Judge Peck agreed with the Trustee,
holding that the TBA contracts did not involve an entrust-ment of
property to LBI and therefore a return of customer assets. As Judge
Peck put it: "The claims necessarily are for contract damages
and not for 'securities received, acquired or held' by LBI
or cash on deposit with LBI 'for the purpose of purchasing
securities' under SIPA."
It is noteworthy that Judge Peck held the that the creditors
have convincingly established that TBA contracts are essential for
the Agency MBS market, that the contracts have a number of
similarities to securities, and that they are the main avenue for
investors to gain access to the second largest securities market in
the U.S. Since, however, these contracts do not involve the
delivery or entrustment of property to LBI, the resulting claims do
not qualify as customers' claims under SIPA.
In addition, Judge Peck held that, although TBA contracts have
many characteristics of a security, they do not qualify as such
under SIPA. Parsing through the statutory definition of
"security" under SIPA, Judge Peck found that TBA
contracts do not fit the definition and that even though they are
similar to securities in certain respects, "similarity is not
enough for purposes of statutory construc-tion."
Judge Peck found that as a result, the "net equity of a
customer claim could be calculated for an account that is empty and
does not have securities positions." He analogized the TBA
contract counterparty claims to claims involving
broker-dealers' failure to execute or comply with buy or sell
orders, which were determined to be breach of contract claims
rather than customer claims.
This is the first known decision in the United States to address
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As a recent number of bankruptcy cases have illustrated, contract integration clauses can have profound and unintended effects when, upon the bankruptcy of a counterparty, the contract becomes subject to section 365 of the Bankruptcy Code.