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Metavante v Lehman Brothers (2009) – USA turns precedent from Down Under upside down

In re Lehman Brothers Holdings Inc, Case no 08-013555 (JMP) (Bankr. 17 SDNY Sept 2009)


Re Lehman Brothers outlines the USA’s approach to the interpretation of Section 2(a)(iii) ISDA Master Agreement (MA) 1992. The Southern District of New York Bankruptcy Court assessed its compliance with the US Bankruptcy Code, determining whether a defaulting party could lawfully suspend payments to a non-defaulting party, potentially indefinitely.

This case is part of a series of key judgments on Section 2(a)(iii), following on the initial Australian case of Enron v TXU (2003), and immediately followed by Marine Trade v Pioneer (2009) in England. Later re-evaluations have subsequently been made in Lomas and Lehman v Firth Rixon.

The judgement can be found here.


In December 2007, Metavante, a prominent US technology corporation, and Lehman Brothers, a global financial services firm and investment bank, engaged in a swap agreement. In this arrangement, Metavante took the fixed position and Lehman assumed the floating rate position, with payments to be made on a quarterly basis. Upon Lehman Brothers’ filing for bankruptcy in September 2008, Metavante sought to utilise Section 2(a)(iii) of the 1992 ISDA Master Agreement. Commonly referred to as the ‘flawed asset’ provision, this clause outlines a condition precedent for both parties. It requires the absence of an ongoing or potential event of default as well as no designation of an early termination date. This provision was previously discussed in the Australian decision of Enron v TXU, where it facilitated the lawful suspension of payments to a defaulting party.

Lehman’s act of filing for bankruptcy was sufficient to warrant an event of default under Section 5(a)(vii) ISDA MA 1992. Consequently, this granted Metavante the right to trigger the suspension of performance whilst the event of default persisted and designate an early termination date. Metavante triggered Section 2 (a)(iii) and halted their payments to Lehman Brothers who subsequently claimed they possessed sufficient resources to fulfil their obligations. In light of this, Lehman contested Metavante’s alleged right to suspend payments through their belief they were able to uphold their side of the agreement.

By May 2009, Metavante had amassed a debt of approximately $6.64 million to Lehman because of their decision to withhold performance. As a result, if Metavante decided an early termination date, they would have owed substantial compensation to Lehman, the defaulting party. Thus the argument was centred not on the amount, but rather the obligation to make such payments at all. 

Legal Issues

The adherence to section 2(a)(iii) was not necessarily disputed; rather, whether it could be used effectively to relieve Metavante from their contractual responsibilities. Lehman simply claimed that the executory nature of the swap agreement meant Metavante could not rely on such a clause to outright disregard payment, arguing that would amount to an unjust alteration of the terms of the contract. Metavante’s stance was grounded in the assertion their legal obligation to make payments was negated by Lehman’s event of default, rendering them an ‘ineffective counterparty’ resting their defence on the mere existence of the clause within the ISDA MA which explicitly permitted such actions. 

A pivotal concern revolved around whether Section 2(a)(iii) could be categorised as an ‘ipso facto clause’. Defined by Section 365(e) of the US bankruptcy code, it is a provision in an agreement which permits its termination due to the bankruptcy, insolvency or financial condition of a party. If this classification held true, it could violate the code which is designed to safeguard against unfair treatment of bankrupt parties, prompting the question of which provision would take precedence. 


The central ruling in this case emphasised that while Metavante did possess the ability to suspend their payments, they could not do so indefinitely. The SDNY Court firmly established that the non-defaulting party held the responsibility to determine the contracts fate. This could entail maintaining the swaps agreement or specifying an early termination date. In agreement with Lehman, the court justified their decision, asserting that an unterminated swap agreement should be treated as any other executory contract. Thus, an indefinite suspension of performance equates to an unauthorised alteration of contractual rights.

As Metavante had chosen to withhold payments for 11 months, the court concluded they had exceeded a ‘reasonable time’ within which to designate an early termination date. As a result, Metavante was compelled to fulfil their debt obligations arising from the missed swap payments, accompanied by the default interest rate, to be continued for the remainder of the agreement. Subsequently, the court’s ruling was clear: the provision in question did represent an ‘ipso facto clause’ as defined by the code. This misalignment between the two regulations led to the court favouring the national provision which they deemed to take precedence.

Application and Significance

Essentially, this ruling offers a stark contrast to the Australian perspective established in Enron that not only could payments be suspended, it could be indefinite. In the US, the stance taken was that the non-defaulting party faced two scenarios where they were obliged to make a payment. Therefore, this position contradicts Enron where no payment was necessary so long as the event was continuing and arguably favours the defaulting party, aligning with the intent of the US Bankruptcy Code.

The US approach clearly limits the significance of Section 2 (a)(iii) due to its conflict with the ‘ipso facto clauses of the Bankruptcy Code’. Thus, it can be argued that the importance of this section is curtailed as it holds far less weighting in the US and consequently likely any jurisdiction with similar provisions. Another significant principle established by the US is the right to designate an early termination date should be treated as a benefit not a detriment. Consequently, this right must be executed promptly – in ‘reasonable time’ or it will be forfeited.

Ultimately, this decision evidently reduces the status of Section 2 (a)(iii). The limitation emerges from the supremacy of local Bankruptcy regulation and the requirement of payment in some capacity. This presents a marked contrast from the stance taken in Enron, but future cases in England would continue the debate.

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