## Facts

- Lehman Brothers Holdings Inc. and affiliated debtors filed Chapter 11 in the U.S. Bankruptcy Court for the Southern District of New York; Lehman Brothers Special Financing Inc. (LBSF) was among the debtor affiliates.
- In November 2007, LBSF and Metavante Corporation entered into an interest-rate swap governed by a 1992 ISDA Master Agreement and related transaction documents.
- Lehman’s bankruptcy filings constituted Events of Default under the ISDA documentation.
- Metavante had a contractual right to designate an Early Termination Date and close out the swap, but it did not do so.
- By May 2009, market movements made the swap substantially “in the money” to LBSF; under the ordinary settlement terms, Metavante owed LBSF more than $6 million.
- Metavante refused to make the periodic payments, relying primarily on ISDA § 2(a)(iii), which conditions a party’s payment obligation on the absence of a continuing Event of Default with respect to the other party.
- Metavante took the position that the Bankruptcy Code’s swap safe-harbor provisions gave it the right, but not the obligation, to terminate, and that it could therefore keep the swap outstanding while withholding payments.
- Metavante did not terminate because termination would have required a termination payment to LBSF under the swap’s close-out mechanics.
- LBSF commenced an adversary proceeding/motion practice seeking an order compelling Metavante to perform and cure the missed postpetition payments.

## Issues

1. Whether a non-debtor swap counterparty may indefinitely withhold postpetition payments under ISDA § 2(a)(iii) based on the debtor’s bankruptcy (a continuing Event of Default) while leaving the swap un-terminated.
2. Whether the Bankruptcy Code’s swap safe harbors (including 11 U.S.C. § 560) protect a counterparty’s continued nonpayment when it has not liquidated, terminated, or accelerated the swap.
3. Whether Metavante’s payment suspension functioned as an impermissible bankruptcy-triggered contract modification/termination barred by 11 U.S.C. § 365(e)(1) and/or violated the automatic stay under 11 U.S.C. § 362.

## Decision

- The court ruled for LBSF and granted relief compelling Metavante to perform under the swap.
- The court concluded Metavante could not keep the swap in place while withholding ordinary-course settlement payments solely because of Lehman’s bankruptcy.
- The court held that § 560 protects the exercise of contractual rights to liquidate, terminate, or accelerate a swap (and related netting/offset rights), but does not protect an open-ended suspension of performance where the counterparty has not actually closed out the transaction.
- The court determined that Metavante’s use of ISDA § 2(a)(iii) in these circumstances was not enforceable as a bankruptcy-triggered basis to avoid paying indefinitely, and the continued nonpayment was inconsistent with the Bankruptcy Code’s restrictions on ipso facto effects and the automatic stay.
- The court ordered Metavante to cure the missed postpetition amounts (over $6 million) and to resume making payments as they came due, with default interest as applicable.

## Legal Principles

- 11 U.S.C. § 560 provides a stay exception and protection for a swap participant’s contractual right to liquidate, terminate, or accelerate a swap agreement because of specified conditions, including bankruptcy, and to apply contractual netting/offset in connection with close-out.
- The swap safe harbors do not provide blanket protection for any act a counterparty characterizes as “related” to close-out; the protection focuses on actual exercise of close-out rights (and related netting), not continued performance suspension while the swap remains outstanding.
- A counterparty that chooses not to exercise its safe-harbor-protected close-out rights within a reasonable time after the bankruptcy filing cannot treat the swap as frozen indefinitely while avoiding payment; leaving the contract open subjects the parties’ ongoing obligations to ordinary bankruptcy limits on self-help.
- Bankruptcy Code § 365(e)(1) bars enforcement of contractual provisions that terminate or modify an executory contract solely because of the debtor’s bankruptcy; using a bankruptcy-triggered Event of Default to suspend payments indefinitely, without close-out, can operate as an impermissible ipso facto effect.
- The automatic stay in § 362 restricts actions that effectively control or impair the estate’s contract rights; continued nonpayment designed to pressure the debtor while keeping the swap alive may violate the stay when not protected by a safe harbor.

## Conclusion

In the Lehman–Metavante swap dispute, the bankruptcy court held that the swap safe harbors protect prompt exercise of contractual close-out rights and related netting, not an indefinite refusal to make ordinary settlement payments under ISDA § 2(a)(iii) while keeping the swap in force. Because Metavante did not terminate and instead suspended payments to avoid a close-out payment owed to LBSF, the court compelled Metavante to cure past-due postpetition amounts (with interest) and to continue performing going forward.


In re Lehman Brothers Holdings, Inc., No. 08-13555 (JMP) (2009)