Second Circuit: Lehman Brothers “Flip Clause” Payments Are Protected Settlement Payments and Not Void as Ipso Facto Bankruptcy Provisions

Almost 12 years after the commencement of the Lehman Brothers bankruptcy case, we now know the answer to one of that case’s most interesting questions—namely, whether so-called “flip clauses” are protected settlement payments or void as ipso facto bankruptcy provisions.

On August 11, 2020, the US Court of Appeals for the Second Circuit (Court) issued a decision in the closely followed case of Lehman Brothers Special Financing Inc. v. Bank of America N.A., 18-1079, which raised this question in the context of synthetic collateralized debt obligations (SCDOs).

The Court found (as had the courts below) that, for SCDOs, certain “Priority of Payments” provisions that subordinated the payment priority of Lehman Brothers Special Financing under related swaps in favor of the priority for related noteholders was enforceable pursuant to section 560 of the Bankruptcy Code (Code), which exempts “swap agreements” from the Code’s prohibition of ipso facto clauses.

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