Lehman Brothers Commodity Services Inc. v Crédit Agricole Corporate and Investment Bank (formerly Calyon)
| Jurisdiction | England & Wales |
| Judge | Mr Justice Field |
| Judgment Date | 07 June 2011 |
| Neutral Citation | [2011] EWHC 1390 (Comm) |
| Court | Queen's Bench Division (Commercial Court) |
| Date | 07 June 2011 |
| Docket Number | Case No: 2010 Folio 79 |
[2011] EWHC 1390 (Comm)
IN THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION
COMMERCIAL COURT
Royal Courts of Justice
Strand, London, WC2A 2LL
Mr Justice Field
Case No: 2010 Folio 79
Alain Choo-Choy QC (instructed by Weil Gotshal & Manges) for the Claimant
Robin Dicker QC and Jeremy Goldring (instructed by Clifford Chance LLP) for the Defendant
Hearing dates: 1, 2 & 3 March 2011
Introduction
This is a trial of a number of Preliminary Issues ordered to be determined by Burton J.
The issues arise out of proceedings in which the Claimant ("LBCS") sues on a Letter of Credit issued by the Defendant ("Calyon") in favour of LBCS. The Letter of Credit was provided in connection with a derivatives trading contract contained in an ISDA Master Agreement and the Schedule thereto, including a Credit Support Annex ("the EDF/LBCS Master Agreement"). The contract was made on 23 May 2006; the parties were LBCS and EDF Trading Ltd ("EDF").
The Letter of Credit was issued on 25 September 2007 and when drawn upon on 21 November 2008 was in the sum of €50,000,000. It is governed by English law. As at 25 September 2007, LBCS and Calyon were already in a wholly separate contractual relationship governed by a distinct ISDA Master Agreement and Schedule dated 2 October 2006 ("the Calyon Master Agreement"). This agreement is governed by the law of New York.
Section 6 (f) of the the Calyon Master Agreement 1 provided (in relevant part):
(i) In addition to any rights of set-off a party may have as a matter of law or otherwise, upon the occurrence of an Event of Default, Credit Event Upon Merger, or an Additional Termination Event and the designation of an Early Termination Date pursuant to Section 6 of the Agreement with respect to a party ("X"), the other party ("Y") will have the right (but not be obliged) without prior notice to X or any other person to set-off or apply any obligation of X owed to Y (whether or not matured or contingent and whether or not arising under this Agreement, and regardless of the currency, place of payment or booking office of the obligation) against any obligation of Y owed to X (whether or not matured or contingent and whether or not arising under this Agreement, and regardless of the currency, place of payment or booking office of the obligation.
(ii) …
(iii) If the amount of an obligation is unascertained, Y may in good faith estimate that amount and set-off in respect of the estimate, subject to the relevant party accounting to the other when the amount of the obligation is ascertained.
(iv) Nothing herein shall be effective to create a charge or other security interest. This provision shall be without prejudice and in addition to any right of set-off, combination of accounts, lien or other right to which any party is at any time otherwise entitled (whether by operation of law, contract or otherwise).
Section 9 (a) and (b) of the Calyon Master Agreement read:
(a) Entire Agreement. This Agreement constitutes the entire agreement and understanding of the parties with respect to its subject matter and supersedes all oral communication and prior writings with respect thereto.
(b) Amendments. No amendment, modification or waiver in respect of this Agreement will be effective unless in writing (including a writing evidenced by a facsimile transmission) and executed by each of the parties or confirmed by an exchange of telexes or electronic messages on an electronic messaging system.
Both the Calyon Master Agreement and the EDF/LBCS Master Agreement provided in Section 6 (e) for the calculation of payments due on Early Termination, depending on whether the Early Termination Date results from an Event of Default or a Termination Event and on the chosen method of calculation. The chosen method of calculation under each agreement was Loss and Second Method. Under this method
of calculation, if there is an Early Termination Date and the non-defaulting party is "out of the money", he can end up paying the defaulting party.LBCS' obligations under the the Calyon Master Agreement are guaranteed by Lehman Brothers Holdings, Inc ("LBHI") pursuant to a guarantee dated 12 October 2006. LBHI was also the Credit Support Provider under the Calyon Master Agreement On 15 September 2008, LBHI filed under Chapter 11 of the US Bankruptcy Code ("the Code"), an act that constituted an Event of Default in respect of LBCS under the Calyon Master Agreement. On 15 and 16 September 2008, Calyon served notices on LBCS under Section 6 (a) of the Calyon Master Agreement designating those dates Early Termination Dates on which all outstanding transactions under the Calyon Master Agreement would be terminated; and on 30 December 2008, Calyon served a notice on LBCS stating that the sum due under the Calyon Master Agreement was US$15,030,239.
LBHI's filing under Chapter 11 also constituted an Event of Default under the Calyon Master Agreement and 16 September 2008 was designated an Early Termination Date under this contract. The sum due and owing to LBCS by EDF is said to be €125,538,461.
On 21 November 2008, LBCS sought to draw down on the Letter of Credit. On 28 November 2008, Calyon paid LBCS €38,377,190.69 and, relying on Section 6 (f), set-off the sum of €11,622,809.31 against the US$15,030,239 due under the Calyon Master Agreement.
LBCS does not accept that Calyon were entitled to set-off the sum due from LBCS against Calyon's obligation under the Letter of Credit. In its Reply it pleads that: (i) on its true construction Section 6 (f) did not apply to Calyon's obligation under the Letter of Credit; (ii) there was no legal set-off; and (iii) any entitlement to set-off the Letter of Credit obligation against the debt due from LBCS was automatically stayed pursuant to the provisions of s. 362 (a) of Title 11 of the Code.
The Preliminary Issues
The preliminary issues ordered to be tried are:
1. Is the question of whether the Defendant was entitled to set off, against its obligation under the Letter of Credit, the amount of the Early Termination Payment to be determined solely in accordance with English law or are the laws of New York (including in particular the bankruptcy law applicable in New York) relevant to the determination of that question?
2. Is the English court required or entitled to recognise or take account of the provisions of bankruptcy law applicable in New York in these proceedings or do the Cross-Border Insolvency Regulations 2006 and/or English public policy preclude it from doing so on the facts of this case?
3. On the proper construction of (i) the Calyon Master Agreement dated 2 October 2006 and (ii) the Letter of Credit between the Claimant and Defendant, does Section 6 (f) of the Calyon Master Agreement entitle the Claimant to set off any Early Termination Payment calculated by the Defendant pursuant to Section 6 (d) of the Calyon Master Agreement against the amount payable by the Defendant to the Claimant under the Letter of Credit?
4. If on the proper construction of the relevant agreements the Claimant is entitled to rely on contractual set-off pursuant to Section 6(f) of the Calyon Master Agreement, does the US Bankruptcy Code (insofar as applicable) preclude the Defendant from relying on that provision in any way?
5. Under the laws of the State of New York (insofar as relevant), did any amount properly calculated under Section 6(d) of the Calyon Master Agreement cease to be payable to the Defendant following the Claimant's Chapter 11 filing on 3 October 2008 as a result of the stay imposed by Section 362(a) of the US Bankruptcy Code?
6. As a matter of English law, is the effect of Section 362(a) of the US Bankruptcy code (insofar as relevant) such as to prevent the Defendant from satisfying the requirements under English law for set-off under the Statutes of Set-Off and Civil Procedure Rule 16.6 with regard to the set-off at law of any Early Termination Payment calculated by the Defendant under Section 6(d) of the Calyon Master Agreement against the amount payable by the Defendant to the Claimant under the Letter of Credit?
7. As a matter of English Law and having regard to the proper construction of the Letter of Credit, even apart from Section 362(a) of the US Bankruptcy code, is the defence of legal set-off available in respect of a claim for payment under the Letter of Credit?
8. Was the Early Termination Payment calculated in accordance with Section 6(d) of the Calyon Master Agreement?
The Expert Witnesses
The court has been assisted by three distinguished expert witnesses who were called to give their opinions on questions of New York law and the Code. Professor Jeffrey Bruce Golden gave evidence on behalf of Calyon. He is admitted to practise in the States of New York and New Jersey and before the US Supreme Court. He was in practice for over 30 years in New York and London and is now Visiting Professor in the Law Department at the London School of Economics. He participated in the preparation of ISDA's standard master agreement forms and other documentation for global derivatives and has written extensively on the law of derivatives.
Calyon also called Professor Jay Westbrook who is licensed to practise in the State of Texas and before the US Supreme Court. Professor Westbrook practised in Washington DC for a number of years before becoming a member of the University of Texas Law Faculty. He has written extensively on insolvency and bankruptcy subjects.
The expert called by LCBS was Professor Edward R Morrison, Harvey J Miller Professor of Law and Economics at Columbia Law School. Professor Morrison has published broadly on topics related to bankruptcy law and currently serves as a member of...
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