United States: The United States Bankruptcy Court For The Southern District Of New York Deals Loss To Lehman In Interpreting Loss Under ISDA Master Agreement

In a blow to the Lehman Chapter 11 estates, the United States Bankruptcy Court for the Southern District of New York held on September 16, 2015 that Intel Corporation's Loss calculation resulting from a failed transaction under an ISDA Master Agreement was appropriate.1 The decision is significant both because of the dearth of judicial interpretation of the ISDA mechanics regarding the calculation of early termination amounts, and because it affirms the general market understanding that a non-defaulting party has broad discretion in calculating "Loss," so long as its calculation is reasonable and made in good faith. It also suggests that, in considering Lehman's valuation disputes with non-settling counterparties that elected the Loss calculation mechanism, the focus of the bankruptcy court's inquiry will be on whether the counterparty's calculation was reasonable, not whether Lehman can prove that it has a superior calculation.


Plaintiff Lehman Brothers OTC Derivatives Inc. ("LOTC") and defendant Intel Corporation  ("Intel") entered into a 1992 ISDA Master Agreement, as modified by a schedule (together,  the "ISDA Master"), governing the over-the-counter derivatives relationship between the  parties. Under the terms of the schedule, Lehman Brothers Holdings Inc. ("LBHI," and  together with LOTC, "Lehman") acted as a guarantor for LOTC's obligations under the ISDA  Master. On or about August 1, 2008, LOTC and Intel entered into a trade confirmation (the "Confirmation") for a share repurchase transaction whereby LOTC would purchase Intel  shares and deliver them to Intel during a "quiet period" in which Intel was prohibited by securities regulations from transacting in its own shares. In accordance with the Confirmation, Intel remitted $1 billion to LOTC on August 29, 2008, and on September 29, 2008, LOTC was obligated to deliver to Intel a number of shares of Intel common stock determined by dividing $1 billion by the value-weighted average price of Intel shares between September 2, 2008 and September 26, 2008, less a forward price adjustment. The parties further agreed that to secure its obligations, LOTC would post $1 billion of collateral to be held by Intel. In the Confirmation, the parties selected "Loss" as the termination payment measure for the transaction agreed to in the Confirmation.2

LBHI (the credit provider under the Confirmation) commenced its Chapter 11 case on September 15, 2008, followed by LOTC on October 3, 2008. After LOTC failed to deliver the shares of Intel stock on September 29, 2008, as contemplated by the Confirmation, Intel declared an "Early Termination Date" of September 29, 2008. Using Loss, Intel calculated an Early Termination Payment of $1,001,966,256, consisting of the $1 billion it delivered to LOTC on August 29, 2008 plus interest, and on September 30, 2008, Intel set off and applied the collateral it was holding. Lehman subsequently commenced an adversary proceeding against Intel disputing Intel's Early Termination Payment calculation. Lehman contended that the only reasonable calculation of Intel's Early Termination Payment was an amount equal to the fair market value of the undelivered Intel shares as of the close of trading on September 29, 2008, or $873 million. Lehman also argued that Intel breached the Confirmation when it seized the portion of the LOTC collateral in excess of the $873 million fair market value. Both parties moved for summary judgment.

The Bankruptcy Court's Analysis

Intel, as the non-defaulting party, was responsible for calculating the Early Termination Payment. Lehman argued that the fair market value of the shares at the close of the markets on the Early Termination Date was the only reasonable calculation of "Loss" as that term is interpreted by the ISDA User's Guide to the 1992 ISDA Master Agreements (the "ISDA User's Guide"). The bankruptcy court disagreed, finding that nothing in the definition of Loss mandates the use of any particular calculation method. Moreover, the court found that the ISDA User's Guide makes clear that Loss is intended to provide parties flexibility in selecting a method to calculate Early Termination Payments and thereby functions as an express alternative to the more rigid methodology and procedure of Market Quotation.3 As a result, the court concluded that strong textual support exists for the proposition that non-defaulting parties generally may select any methodology for calculating Loss, so long as the methodology is reasonable and in good faith.

Lehman also argued that where a terminated transaction does not call for deliveries beyond the close-out date, the definition of Loss requires limiting the non-defaulting party's loss incurred on the undelivered property as of the close-out date. According to Lehman, because such "Unpaid Amounts" are defined in the ISDA Master as the fair market value of the undelivered property, Intel was required to calculate its Loss as the fair market value of the shares Intel would have received had the transaction settled. The bankruptcy court again disagreed. Noting that the term "Unpaid Amounts" does not appear in the definition of Loss (but instead was a provision relevant only to the Market Quotation method), nor is it referenced in the ISDA Master provisions governing the calculation of an Early Termination Payment using Loss, the court was not persuaded by Lehman's argument that the Loss calculation must be so limited.4

Lehman argued that further support for its position could be found in the fact that its calculation of Loss led to the same result as applying either the Market Quotation method of calculating an Early Termination Payment under the ISDA or New York law on damages. The court was not persuaded. With respect to the Market Quotation method, the Court found that the text and drafting history of the ISDA Master Agreement and the ISDA User's Guide support the conclusion that Market Quotation and Loss can and should produce different results in certain circumstances. With respect to New York law, which provides that loss in connection with undelivered securities is limited to the fair market value of those securities on the date they were to be delivered, the Court noted that the parties did not document the transaction at issue as a simple contract for the purchase of shares governed by New York law; instead, they documented the transaction under the Confirmation and the incorporated ISDA Master. Accordingly, the Court held that Lehman could not, in hindsight, look to New York law to receive a more favorable outcome.

The court emphasized that there is no single correct methodology for calculating Loss. Rather, non-defaulting parties are afforded broad discretion in choosing a method to calculate Loss, so long as the calculation is performed reasonably and in good faith. As Lehman did not challenge Intel's good faith in its calculation of Loss, the court went on to consider whether there was a disputed issue of material fact as to the reasonableness of Intel's calculation of its Loss. After considering various methodologies advanced by Intel, including that its upfront costs were $1 billion, the court concluded that there was no such issue, and that Intel's Loss calculation was reasonable.


The bankruptcy court's conclusion that Loss generally permits non-defaulting parties such as Intel to select any calculation methodology, so long as that methodology is reasonable and in good faith, is, in the court's own words "rather unremarkable," given the broad definition of Loss in ISDA master agreements. Nonetheless, the decision is significant given the scarcity of judicial guidance on ISDA close-outs, as evidenced by the fact that the only other cases on close-out calculations discussed by the court in the decision were two factually distinguishable cases decided by courts in England. Furthermore, an opposite determination by the court would have been contrary to the general market understanding and could have led to market uncertainty. Concern in that respect had prompted ISDA to file an amicus brief in support of Intel's motion for summary judgment.

With regard to the impact of the decision on the numerous valuation disputes that Lehman has outstanding with non-settling derivatives counterparties, it suggests that the focus of the court's inquiry, at least for those counterparties that elected Loss and Second Method, will be on the reasonableness of the counterparty's calculation, and that the court will not be receptive to efforts by Lehman to argue for a calculation approach that would have been preferable from its perspective with the benefit of hindsight. That said, the decision does not speak directly to many of the specific lines of attack that Lehman has advanced with respect to "big bank" early termination amount calculations such as: (i) emphasis on discrepancies between net mark-to-market values on September 12, 2008 (which was the last trading day prior to Lehman's filing) and close-out values on September 15, 2008; (ii) the so-called "phantom loss" argument that if no replacement trades were entered into, there is no loss; (iii) allegations regarding the failure to apply portfolio aggregation to determine the economic equivalent of material terms of transactions as a group (vs. closing out trades in isolation, which would have the effect of amplifying the number of loss charges); and (iv) alleged inconsistent pricing across desks in closing out identical or similar trades. Accordingly, the decision leaves many key issues unresolved. It is noteworthy, however, that although the decision did not directly address one of the other issues involved in the "big bank" disputes—namely whether the calculation of close-out values for trades after the close-out date is appropriate—the bankruptcy court's quotation of Professor Jeffrey Bruce Golden, one of the principal drafters of the ISDA Master Agreement, as stating that "[s]etting specific fixing times or prices was not the game," could be viewed as potentially undermining Lehman's position on that issue.


1 Lehman Brothers Holdings Inc. and Lehman Brothers OTC Derivatives Inc. v. Intel Corporation (In re Lehman Brothers Holdings Inc., et al.), Bk. No. 08-13555, Adv. No. 13-01340 (Bankr. S.D.N.Y. Sept. 16, 2015).

2 The 1992 ISDA allows the parties to choose between two termination payment mechanisms: Market Quotation and Loss. "Loss" is defined in relevant part as "[T]he Termination Currency Equivalent of an amount that party reasonably determines in good faith to be its total losses and costs...in connection with this [ISDA]... [l]oss includes losses and costs...in respect of any payment or delivery required to have been made...on or before the relevant Early Termination Date and not made..." ISDA § 14.

3 Market Quotation generally is the arithmetic mean of four or more price quotes offered by "Reference Market-makers" to replicate the defaulting party in a transaction that would preserve the economic equivalent of the terminated transaction.

4 The term "Unpaid Amounts" only is used as part of the ISDA Master calculation of an Early Termination Payment using Market Quotation, which was a payment measure the parties could have chosen – but did not choose – as an alternative to Loss.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

In association with
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.