Implications of Lehman Brothers Decision on Hedge Fund Managers Trading CDOs

On June 28, 2016, Judge Shelley Chapman of the U.S. Bankruptcy Court for the Southern District of New York authored an opinion in the case of Lehman Brothers Special Financing Inc. v. Bank of America National Association. This decision, which holds that certain market-standard provisions in structured finance transactions are enforceable when the swap counterparty’s default is due to the bankruptcy of that counterparty, provides hedge fund managers and others trading collateralized debt obligations (CDOs) and other structured products with greater certainty than prior rulings relating to the collapse of Lehman Brothers. The Hedge Fund Law Report recently interviewed Schulte Roth & Zabel partner Paul Watterson about Judge Chapman’s decision and its ramifications for hedge fund managers. Specifically, Watterson addressed the significance of the decision in light of prior case law, the implications of the decisions for hedge fund managers trading CDOs and the specific provisions managers should include in CDO documentation to take advantage of this holding. For more on the Lehman Brothers collapse, see “Lesson From Lehman Brothers for Hedge Fund Managers: The Effect of a Bankruptcy Filing on the Value of the Debtor’s Derivative Book” (Jul. 12, 2012); and “How Can Hedge Funds Get Their Money Out of Lehman Brothers International Europe?” (Aug. 5, 2009).

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