Lehman Bankruptcy Court Addresses Scope of the Bankruptcy Code's Safe Harbor for Liquidation, Termination and Acceleration of Swap Agreements
9 January 2014
Mayer Brown Legal Update
The US Bankruptcy Court for the Southern District of New York has held that a provision in a swap agreement that shifted the methodology for calculating termination amounts upon the debtor counterparty’s bankruptcy was enforceable under the Bankruptcy Code’s safe harbor for liquidating, terminating and accelerating swap agreements. This decision is significant in that it affirms that the safe harbor for swap agreements extends beyond the mere right of a counterparty to cause the liquidation of a swap agreement to include terms that set forth the manner for determining the amounts due under a swap agreement. While, on its face, the Bankruptcy Court’s decision provides swap counterparties with an example of a decision broadly construing the section 560 swap safe harbor to permit enforcement of a contractual provision determining the termination value under a swap that is triggered by a debtor’s bankruptcy, it remains to be seen whether other courts will similarly interpret section 560.