Lehman Brothers Holdings Inc.

UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK
In re: LEHMAN BROTHERS HOLDINGS
INC.
MAVERICK 	LONG 	ENHANCED 	FUND,
LTD., MAVERICK NEUTRAL LEVERED
FUND, 	LTD., 	MAVERICK 	NEUTRAL
FUND, 	LTD., 	MAVERICK 	FUND 	USA,
LTD., MAVERICK FUND II, LTD., AND
MAVERICK FUND, L.D.C.,
Appellants,
V.
LEHMAN BROTHERS HOLDINGS INC.,
Appellee.
RONNIE ABRAMS, United States District Judge:
USDC-SDNY
DOCUMENT
ELECTRONICALLY FILED
DOC#:
DATE FILED<:;Fp 3 Q 2018
Chapter 11 Case No. 08-13555 (SCC)
No. 17-CV-4203 (RA)
OPINION AND ORDER
Appellants, a collection of Maverick funds (collectively, "Maverick"), appeal from an
order of the United States Bankruptcy Court for the Southern District of New York (Chapman, J.)
disallowing and expunging Maverick's claims against Lehman Brothers Holding Inc. ("LBHI"), a
Chapter 11 debtor. For the reasons set forth below, the order of the bankruptcy court is reversed
and this matter is remanded for further proceedings.
BACKGROUND
In 2005, each of the Appellant Maverick entities separately entered into a prime brokerage
agreement ("Prime Brokerage Agreements") with Lehman Brothers Inc., which signed on behalf
of itself and certain affiliates, one of which was Lehman Brothers International (Europe) ("LBIE,"
collectively with LBHI, "Lehman"). 	See App. 584. 	Pursuant to these agreements, LBIE was
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required, among other things, to maintain custody of Maverick's cash and securities, execute
trades, and return Maverick's property, held as collateral, upon request. App. 574-80. The Prime
Brokerage Agreements also contained provisions granting LBIE certain contractual rights in the
event of a Maverick default. App. 575-76. At the same time, the Maverick entities were parties
to a separate set of contracts with LBIE relating to the borrowing of securities to facilitate "short"
trades and the provision of margin loans. 	Under the terms of these agreements, Maverick
periodically owed LBIE various amounts.
Meanwhile, Maverick entered into a guarantee with LBHI (the "Guarantee") regarding all
of the Maverick property custodied with LBIE. App. 646--49. 	Governed by New York law, the
Guarantee was "absolute and unconditional." 	App. 647. 	The Guarantee also was for payment
rather than collection, meaning that Maverick was under no obligation to pursue collection efforts
against LBIE in the event of a default and could proceed directly against LBHI. 	App. 647. 	The
purpose of the Guarantee was to protect Maverick if its property became trapped by virtue of an
LBIE bankruptcy.
On September 15, 2008, LBIE commenced administration proceedings pursuant to the
English Insolvency Act 1986. 	The same day, LBHI commenced Chapter 11 bankruptcy
proceedings in the United States. App. 39. On September 22, 2009, Maverick timely filed claims
against LBHI seeking to enforce the Guarantee in that entity's chapter 11 proceedings. App. 535.
The bankruptcy court confirmed the Modified Third Amended Joint Chapter 11 Plan ofLBHI and
its affiliated debtors. App. 35-95. The Plan provides for partial payments to be made to holders
of guarantee claims such as Maverick's, provided that the bankruptcy court allows them.
During this period, Maverick and LBIE engaged in negotiations concerning the resolution
of their respective 	claims against one 	another in connection with LBIE's 	administration
2
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proceedings. 	On March 30, 2012, LBIE and Maverick entered into a Deed of Settlement
("Settlement Agreement"), which provided for a netting of certain amounts owed to Maverick on
the basis of its property custodied by LBIE against amounts owed by Maverick on account of its
margin loans and short positions. 	App. 249-281. 	The Settlement Agreement provided for
Maverick to pay a net amount of $30 million to LBIE. App. 252.
On the basis of United Kingdom bankruptcy laws invoked by LBIE, the Settlement
Agreement credited Maverick with the market value of its property at the time the agreement
became effective, which was $101.9 million. This stands in contrast to the $118.l million market
value when both Lehman entities entered bankruptcy proceedings, the default date for assessing
damages under Chapter 11. 	Therefore, Maverick contends, it has a claim against LBHI, the
guarantor, for the difference between the amount with which it was credited under the Settlement
Agreement and the market value of its securities on the day bankruptcy proceedings began.
PROCEDURAL HISTORY
On June 22, 2016, LBHI filed its objection to Maverick's claims. 	ECF No. 282. 	The
bankruptcy court heard argument on March 24, 2017, at which point it issued an oral ruling,
followed by a supplemental written order, disallowing and expunging Maverick's claims. 	ECF
No. 1. Maverick timely filed its notice of appeal with this Court. ECF No. 1. After briefing was
complete, the Court held oral argument. ECF No. 15.
LEGAL STANDARD
District courts have appellate jurisdiction over "final judgments, orders, and decrees" of
bankruptcy courts under 28 U.S.C. § 158(a)(l). 	"A district court reviews a bankruptcy court's
findings of fact for clear error and reviews its legal conclusions de nova." Davidson v. AMR Corp.
(In re AMR Corp.), 566 B.R. 657,663 (S.D.N.Y. 2017) (citation omitted). "A finding of fact is
3
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clearly erroneous when 'the reviewing court on the entire evidence is left with the definite and
firm conviction that a mistake has been committed."' Adler v. Lehman Bros. Holdings Inc. (In re
Lehman Bros. Holdings Inc.), 855 F.3d 459, 469 (2d Cir. 2017) (quoting Anderson v. City of
Bessemer, 470 U.S. 564, 573 (1985)). 	By contrast, "[h]armless error, meaning an error not
inconsistent with substantial justice or that does not affect the parties' substantial rights, is not
grounds for reversal." 	McNerney v. ResCap Borrower Claims Trust (In re Residential Capital,
LLC), 563 B.R. 477, 485 (S.D.N.Y. 2016). 	"A district court may affirm, modify, or reverse a
bankruptcy 	judge's judgment, 	order, 	or 	decree 	or 	remand 	with 	instructions 	for 	further
proceedings." Margulies v. Hough (In re Margulies), 566 B.R. 318,328 (S.D.N.Y. 2017) (citation
omitted).
DISCUSSION
The bankruptcy court relied on two independent bases for concluding that Maverick's
claims against LBHI should be disallowed and expunged: (1) Section 562 of the Bankruptcy Code
applies to any damages sustained by Maverick thereby extinguishing, directly or indirectly, the
claims asserted against LBHI and (2) even if Section 562 does not apply, Maverick's claims fail
because Lehman avoided liability by virtue of two exculpation clauses contained in the Prime
Brokerage Agreements. The bankruptcy court further denied Maverick leave to amend in order to
assert claims for lost profits. 1 The Court addresses each of these issues in tum.
I. 	Section 562
Enacted in 2005 as part of the Bankruptcy Abuse Prevention and Consumer Act, Section
562 is related to a number of preceding provisions, colloquially termed safe harbors because they
exempt certain actions from aspects of the Bankruptcy Code, primarily the automatic stay and the
1 The bankruptcy court also denied leave to amend with respect to two other types of damages, which
Maverick does not contest on appeal.
4
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ban on ipso facto clauses. 	See 11 U.S.C. §§ 555-56, 559-61. 	The rationale underpinning these
provisions is that parties may be irreparably harmed if certain contractual rights, such as
termination, 	cannot 	be 	exercised 	because 	one 	of the 	signatories 	has 	entered 	bankruptcy
proceedings. 	Indeed, contractual rights of this sort are often meant to be exercised precisely
because a counterparty has defaulted. 	Section 562(a) specifies the relevant date for purposes of
assessing damages:
If the trustee rejects a swap agreement, securities contract (as defined in section
741), forward contract, commodity contract (as defined in section 761), repurchase
agreement, or master netting agreement pursuant to section 365(a), or if a forward
contract merchant, stockbroker, financial institution, securities clearing agency,
repo participant, financial participant, master netting agreement participant, or
swap participant liquidates, terminates, or accelerates such contract or agreement,
damages shall be measured as of the earlier of-
(!) the date of such rejection; or
(2) the date or dates of such liquidation, termination, or acceleration.
11 U.S.C. § 562(a) (emphasis added).
Relying on this language, Lehman argues that damages should be measured as of the date
the Settlement Agreement became effective, which operated, it contends, to terminate all of the
relevant agreements, including the Guarantee. This argument runs contrary to a well-established
principle of bankruptcy law-Section 562 being a codified exception-that damages should be
measured as of the date on which bankruptcy proceedings began. 	See 11 U.S.C. § 502(b). The
answer is of great import because, as previously noted, from the commencement of Chapter 11
proceedings to the date the Settlement Agreement became effective, Maverick's property declined
in value by approximately $ I 6.2 million.
Lehman asserts, in essence, two theories under which Section 562 applies: (I) any liability
of LBHI was directly extinguished because the Guarantee was terminated by the Settlement
5
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Agreement and (2) any liability was indirectly extinguished because Section 562 similarly applies
to the termination of the Prime Brokerage Agreements, which had the practical effect of negating
any claims against LBHI on the basis that a guarantor has no liability once all claims against a
primary obligor have been satisfied. The Court will assess these theories in tandem because, as it
will explain, they suffer from the same flaw. 2
As an initial matter, Lehman rightly notes that in issuing its ruling the bankruptcy court did
not have the benefit of considering certain arguments now advanced by Maverick on appeal. The
Court will consider these arguments, however, because waiver is a prudential, rather than
jurisdictional, doctrine and they "present[] a question of law [with] no need for additional fact-
finding." 	Bogle-Assegai v. Connecticut, 470 F.3d 498, 504 (2d Cir. 2006) (citation omitted);
accord Cortlandt St. Recovery Corp. v. He/las Telecomms., 790 F.3d 411, 421-22 (2d Cir. 2015).
Indeed, the application of Section 562 was the primary issue before the bankruptcy court. 	The
parties' focus, however, was whether the agreements at issue are of the type enumerated in the
statute. 	The bankruptcy court concluded that the relevant agreements, including the Guarantee,
are "securities contracts" and "netting agreements" and were terminated, as set forth in the
Settlement Agreement. 3 It was on this basis that the bankruptcy court rested its holding, apparently
concluding that Section 562 applies whenever one of the listed agreement types is terminated, no
matter the context. The Court is persuaded, however, that Section 562 is more narrowly drawn.
Distilled to its core, the fundamental problem with applying Section 562 to the present
facts-due to the termination of either the Prime Brokerage Agreements or the Guarantee-is that
2 Maverick also asserts arguments that pertain only to LBIE, namely that Section 562 does not apply
extraterritorially or in situations in which neither party is a Chapter 11 debtor. Whatever merit these arguments may
have, resolving the instant appeal does not require the Court to address them.
3 With respect to these findings, Maverick continues to dispute only whether the Guarantee failed to survive
the Settlement Agreement.
6
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Maverick's purported damages fall outside the reach of the statute because the termination that
occurred was not of the sort contemplated. Section 562 calculates damages resulting from one of
the actions enumerated therein. But the termination here, under either of Lehman's theories, did
not cause harm. Any damages instead flowed from the purported breaches of the Prime Brokerage
Agreements and Guarantee. Indeed, the Settlement Agreement represented a consensus between
LBIE and Maverick to settle the claims against one another then pending in UK administration
proceedings. 	Admittedly, and as Lehman is apt to remind the Court, Section 562 does not
explicitly compel this conclusion, nor does any other controlling authority. 	This lack of clarity
stems, in part, from the Bankruptcy Code's failure to set forth a definition of termination, in
contrast to the other terms used in the statute. But drawing upon a variety of sources, the Court is
nonetheless convinced that a good faith, common sense reading of Section 562 in context leads to
this result.
The Court begins its inquiry with the text of Section 562. See King v. Time Warner Cable
Inc., 894 F.3d 473, 477 (2d Cir. 2018). The statute provides that "if a ... financial participant ...
terminates" a "securities contract" or "master netting agreement" "damages shall be measured as
of' "the date ... of such ... termination." The most natural interpretation of this plain language
is that the statute calculates damages resulting from termination as opposed to a situation such as
the one here, where the termination represents an amicable settlement of damages pertaining to an
earlier breach. 	This reasoning is bolstered by the statute's apparent failure to contemplate a
termination that comes about by mutual agreement. The language is clear that the statute applies
when one of the specified participants elects to take one of the enumerated actions in a unilateral
fashion. This focus is further consistent with action that causes, rather than resolves, damages.
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The Court's interpretation finds additional support when Section 562 is construed in
context. See id. ("The words to be interpreted are not considered in isolation; rather, we look to
the statutory scheme as a whole and place the particular provision within the context of the statute."
(citation and alteration omitted)). 	As previously noted, Section 562 is the last provision in
Subchapter III of Chapter 5, following the safe harbor provisions meant to exempt certain actions
from various aspects of the Bankruptcy Code. 	Unsurprisingly, those sections concern precisely
the types of agreements and actions that are referenced in Section 562. 	Section 555, entitled
"contractual right to liquidate, terminate, or accelerate a securities contract," for instance, specifies
the following:
The exercise of a contractual right of a stockbroker, financial institution, financial
participant, or securities clearing agency to cause the liquidation, termination, or
acceleration of a securities contract, as defined in Section 7 41 ofthis title, because
of a condition of the kind specified in section 365(e)(1) of this title shall not be
stayed, avoided or otherwise limited by operation of any provision of this title or
by order of court or administrative agency in any proceeding under this title unless
such order is authorized under the provisions of the Securities Investor Protection
Act 	of 1970 	or 	any 	statute 	administered 	by 	the 	Securities 	and 	Exchange
Commission.
11 U.S.C. § 555 (emphasis added).
The other safe harbors preceding Section 562 provide similar protection for the other types
of contracts enumerated in that provision, such as master netting agreements. 	See 11 U.S.C.
§§ 555-56, 559-61. 	As Section 555 makes explicit, termination in this context refers to a very
specific act: the exercise of a contractual right belonging to one of the signatories, often bestowed
by the contract being terminated in the event that the counterparty defaults. And if the language
of the safe harbors was not clear enough, one of their primary effects is to exempt the specified
actions from the bar on ipso facto clauses codified at Section 365(e)(! ), which provides:
Notwithstanding a provision in an executory contract or unexpired lease, or in
applicable law, an executory contract or unexpired lease of the debtor may not be
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terminated or modified, and any right or obligation under such contract or lease
may not be terminated or modified, at any time after the commencement of the case
solely because of a provision in such contract or lease that is conditioned on--
(A) the insolvency or financial condition of the debtor at any time before the closing
of the case;
(B) the commencement of a case under this title; or
(C) the appointment of or taking possession by a trustee in a case under this title or
a custodian before such commencement.
11 U.S.C. § 365(e)(l) (emphasis added).
It is thus abundantly clear what termination means when used in Subchapter III of Chapter
5 of the Bankruptcy Code. Construing Section 5 62 in context compels the conclusion that when
that statute specifies the method for calculating damages in the event of contract termination, it is
not a reference to a mutual agreement settling purported breaches but instead to a right of one of
the contract signatories to terminate it under certain conditions. 	Any other conclusion would
render Section 562 inconsistent with the provisions with which it was codified and fail to effect
the policy scheme apparently contemplated by Congress. 4
Indeed, policy considerations counsel strongly against applying Section 562 in the present
instance. The rationale underpinning the safe harbors and the accompanying method of calculating
damages is that large scale harm could befall financial markets should a major institution file for
bankruptcy and such clauses in contracts to which it was a party be effectively rendered void. The
report authored by the Judiciary Committee of the House of Representatives that accompanied the
4 The entire thrust of Lehman's policy argument rests on a discussion from In re American Home Mortgage
Holdings, Inc. relating to the purported moral hazard that would exist absent Section 562. 411 B.R. 181 (Banla. D.
Del. 2009), ajf'd but criticized on other grounds, 637 F.3d 246 (3d Cir. 2011). Whatever merit this analysis has in
that context, it does not apply here. In American Home Mortgage, the non-defaulting party accelerated a re-purchase
agreement, requiring the defaulting party to purchase certain property. 411 B .R. at 191. The parties disputed whether,
pursuant to Section 562(b), damages were to be assessed as of a date after the acceleration because on that day there
was no "commercially reasonable determinant[] of value." Id. at 185-86. The moral hazard was that if damages were
measured on a future date, the non-defaulting party "could hold the asset at little or no risk" because it would capture
any resulting increase in value up to the full amount owed under the agreement, while a decrease would result in
heightened deficiency damages. Id. at 191. Here, by contrast, the alternative is not that the damages be calculated as
of a date subsequent to termination but rather on the day Lehman entered banlauptcy in 2008, in accordance with
Section 502(b).
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Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, which, as previously noted,
enacted Section 562, explicitly identified this concern in amending certain of the safe harbors:
These provisions are intended to reduce "systemic risk" in the banking system and
financial marketplace. 	To minimize the risk of disruption when parties to these
transactions become bankrupt or insolvent, the bill amends provisions of the
banking and investment laws, as well as the Bankruptcy Code, to allow the
expeditious termination or netting of certain types of financial transactions. Many
of these provisions are derived from recommendations issued by the President's
Working Group on Financial Markets and revisions espoused by the financial
industry.
H.R. Rep. No. 109-31, at 20 (2005), reprinted in 2005 U.S.C.C.A.N. 88, 105-06 (footnotes
omitted). 	The President's Working Group on Financial Markets further expounded upon the
attendant risks when a large institution becomes insolvent, emphasizing the need to provide
certainty to the non-defaulting party as expeditiously as possible, including with respect to the
value of any contract being terminated:
Closeout, or termination, refers to the right under a master agreement to terminate
one or more contracts immediately upon certain specified events and to compute a
termination amount due to, or due from, the defaulting party. 	The termination
amount is generally based on the value of the contract at the time of closeout. The
ability to terminate most financial market contracts upon an event of default is
central to the effective management of market risk by financial market participants
like the trading counterparties of [an insolvent corporation]. 	Without these rights,
parties are left with uncertainty as to whether the contracts will be performed,
resulting in uncontrollable market risk. By providing for termination of a contract
upon the default of a counterparty, a participant can remove uncertainty as to
whether a contract will be performed, fix the value of the contract at that point, and
attempt to re-hedge itself against its market risk.
The President's Working Group on Financial Markets, Hedge Funds, Leverage, and the Lessons
of Long-Term Capital Management, at 19-20 (April 1999).5
5 These justifications for the relevant provisions of the Bankruptcy Code are echoed by commentators and
experts on bankruptcy law. See Talcott J. Franklin & Thomas F. Nealon Ill, Mortgage and Asset Backed Securities
Litigation Handbook, 7:59 (ed. Jill L. Nicholson Nov. 2017) ("One of bankruptcy's fundamental tenets is that a party
cannot terminate a contractual arrangement, declare a default, or exercise remedies because of a debtor's bankruptcy.
Consequently, ipso facto clauses-which purport to automatically terminate a contract upon a bankruptcy filing or a
change in the debtor's financial condition-are generally not enforceable. However, the Bankruptcy Code creates
certain exceptions to this general prohibition to ensure that the financial markets operate smoothly following a major
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Bearing these considerations in mind, the exception codified at Section 562 makes a great
deal of sense. As previously noted, it is a foundational principle of bankruptcy law that damages
are typically assessed as of the date on which proceedings are commenced. 	But in an effort to
limit the systemic impact of the collapse of a major institution, the Bankruptcy Code permits
counterparties to contracts with insolvent firms to exercise any termination rights contained
therein, mandating that damages be assessed as they stand at the precise moment of termination.
This immediate certainty, of which Section 562 is an integral component, is designed to prevent
catastrophic ripple effects throughout financial markets.
The rationale underlying these aspects of the Bankruptcy Code further illustrates why
Section 562 does not apply here. Maverick did not have the ability to exercise termination rights
under any of the relevant agreements. 	Instead, on March 30, 2012-nearly four years after
Lehman's September 2008 bankruptcy-the parties reached an amicable settlement in the context
of UK administration proceedings. The termination thus in no way achieved the sort of immediate
certainty for Maverick that is intended by Section 562, especially when a major institution such as
Lehman Brothers goes bankrupt. Applying this codified exception to the usual marmer in which
damages are calculated under the Bankruptcy Code, therefore, is inconsistent with the policy
rationale underpinning Section 562 and its accompanying safe harbors. 6
Finally, although the Court has not identified any controlling authority that definitively
resolves this question, its interpretation is in harmony with the universe of relevant cases. Indeed,
institution's bankruptcy filing. The safe harbors found in 11 U.S.C.A. §§ 555 and 559 for securities contracts andrepos
play a prominent role in mortgage lender bankruptcies."); see also Honorable William L. Norton Jr., I Norton
Bankruptcy Law and Practice 3d Section 3: 11 (July 2018); Ji Hun Kim, Countering Systemic Risk: An Analysis of the
Bankruptcy Code's Safe Harbor Provisions, at 5 n.48, in Norton Annual Survey of Bankruptcy Law, Part I (Sept.
2010). 6 In its bench ruling, the bankruptcy court rested its conclusion, in part, on policy concerns related to a '1
tiered"
system of recovery that would result if it held that Section 562 did not apply with respect to the Guarantee. See Tr.
74: 1-11, ECF No. 1-1. This argument assumes, however, that Section 562 did apply to the termination of the Prime
Brokerage Agreements, which, in this Court's view, is not the case.
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while this issue has not been addressed by the Second Circuit, one other court of appeal, as well
as two courts in this district, have applied Section 562 in a manner consistent with the Court's
interpretation. 	See Conway Hosp., Inc. v. Lehman Bros. Holdings Inc., 531 B.R. 339, 341, 343
(S.D.N.Y. 2015) (applying Section 562 where "LBSF's bankruptcy qualified as an 'Event of
Default' pursuant to Section 6.l(e) of the 1998 Agreement. As a result, Conway could terminate
the contract and recover damages from LBSF."); Sec. Investor Prat. Corp. v. Lehman Bros. Inc.,
433 B.R. 127, 134 (Ban1a. S.D.N.Y. 2010) (declining to apply Section 562 where creditor lacked
authority, prior to settlement agreement, to unilaterally close out positions); In re Am. Home
Mortg. Holdings, Inc., 637 F.3d 246,256 (3d Cir. 2011) ("On the other hand,§ 562 which covers,
inter alia, 	repurchase agreements, 	applies when the 	contract is liquidated, terminated, 	or
accelerated, and results in damages rather than excess proceeds." (emphasis added)); In re
HomeBanc Mortg. Corp., No. 17-797 (RGA), 2018 WL 3869889, at *4 (D. Del. Aug. 14, 2018)
("Section 562 applies only in the event that a repo default results in a claim for deficiency
damages." (emphasis added)). The Court, however, has been unable to identify, nor has Lehman
provided, a single case in which Section 562 was interpreted in the manner advanced by Lehman
or applied to facts analogous to the present situation.
One need only look to the Prime Brokerage Agreements themselves for an example of
precisely the sort of contractual rights that are the subject of Section 562. These documents granted
Lehman the right to accelerate or terminate in the event of a Maverick default, without providing
Maverick reciprocal rights. See App. 576. They even seem to set the stage for the invocation of
precisely the statutory provisions at issue here by specifying that the agreements shall be deemed
securities contracts within the meaning of Sections 555 and 741(7) of the Bankruptcy Code. App
578. 	Indeed, there is little question that had Maverick defaulted and Lehman terminated the
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contract while invoking Section 555 in the course of Chapter 11 proceedings, Section 562 would
apply. 	But, as the Court has gone to great lengths to make clear, that is not what happened.
Accordingly, Section 562 does not apply to the termination of any of the relevant agreements and
thus is not a valid basis on which to disallow and expunge Maverick's claims.
II. 	Exculpation Clauses
The bankruptcy court also 	concluded that Maverick's 	claims fail 	because of two
exculpation clauses contained in the Prime Brokerage Agreements, which explicitly cover Lehman
Brothers and therefore apply to both LBIE and LBHI. 	App. 582. 	The first specified that no
Lehman entity would be liable for losses caused by extraordinary events:
28. EXTRAORDINARY EVENTS. You agree that Lehman Brothers will not be
liable for any loss caused, directly or indirectly, by government restrictions,
exchange or market rulings, suspension of trading, war (whether declared or
undec I ared), terrorist acts, insurrection, riots, fires, flooding, strikes, failure of
utility services, accidents, adverse weather or other events of nature, including but
not limited to earthquakes, hurricanes and tornadoes, or other conditions beyond
Lehman Brothers' control.
App. 582. 	The second provided a shield from liability for losses related to Lehman's trading
activities, so long as the firm's conduct did not amount to gross recklessness or willful misconduct:
29. LIMITATION OF LIABILITY. Lehman Brothers shall not be liable in
connection with the 	execution, clearing, 	handling, 	purchasing or selling 	of
securities, commodities or other property, or other action, 	except for gross
negligence or willful misconduct on Lehman Brothers' part .... In no event will
Lehman Brothers be liable for any special, indirect, incidental or consequential
damages arising out of this Agreement.
App. 582.
Looking to these provisions, and relying on In re MF Global Inc., 515 B.R. 434 (Bankr.
S.D.N.Y. 2014), the bankruptcy court reasoned as follows:
In addition, for reasons that I will elaborate further in a more complete written
opinion, I do believe that Judge Glenn was correct in MF Global, I do believe that
under the principles that he articulated and the terms of the documents here that the
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exculpation provisions would themselves preclude the allowance of, in essence,
what is the diminution claim being asserted by the Maverick entities.
Tr. 75:9-16. 	The Court respectfully disagrees. 	It does so, principally, for two reasons: (1) the
bankruptcy proceedings here are not covered by the extraordinary events paragraph and (2) any
damages sustained by Maverick were not caused by activity on the part of Lehman that is within
the reach of the limitation of liability clause.
First, the Court fails to discern how the extraordinary events provision applies to the present
facts. 	It is of course true that the provision references "government regulation" and "suspension
of trading" and that such a suspension here was in fact mandated by government regulation. But
when read in context, it is evident that this language does not apply to the events at hand. Indeed,
the plain language of the clause makes it abundantly clear that it is only triggered when there is an
"extraordinary event" "beyond Lehman Brothers' control," such as natural disasters or terrorist
attacks. 	Bankruptcy proceedings are not mentioned. 	Looking just to the plain language of the
provision, therefore, the Court fails to see how voluntary entry into proceedings, either Chapter 11
or UK administration, can constitute an "extraordinary event" "beyond Lehman Brothers' control,"
thereby operating to extinguish liability. 8
Contrary to Lehman's position, MF Global does not support its position. In that case, once
the SIP A proceeding commenced, the broker's trading was suspended and it could not return the
claimants' securities, during which time they declined in value. 	515 B.R. at 440. 	Under SIPA,
the claimants were not entitled to damages for any decline in value from the filing date to
liquidation. 	Id. 	The Court held that contractual exculpation clauses absolved the broker of any
liability for the diminution in value. Id. at 441. Those clauses provided that the broker could not
8 Persuasive, though non-binding, authorities are consistent with this interpretation of suspension of trading.
See Black's Law Dictionary (10th ed. 2014) (defining "suspension of trading" as "the temporary cessation of all
trading of a particular stock on a stock exchange because of some abnormal market condition").
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be liable "for any loss, damage, liability, cost, charge, expense, penalty, fine or tax caused directly
or indirectly by, inter alia, (1) any Applicable Law, or any order of any court; (2) suspension or
termination of trading, and (3) any other causes beyond MFGI's control." Id. at 440-41 (alterations
and internal quotations omitted).
Unlike in MF Global, however, Maverick is not seeking damages beyond that to which it
is entitled under the law, but rather in accordance with a well-established bankruptcy principle.
Furthermore, the exculpation provisions in MF Global were much broader than those here,
absolving the broker of liability for any loss resulting from "any applicable law, or any order of a
court." Id. at 441. This is of particular consequence because the suspension of trading in that case
ensued as a result of a court order issued upon the filing of a complaint by, and application of, the
Securities Investor Protection Corporation-not the insolvent broker dealer. 	See ll-CV-7750,
ECFNo. 3 (S.D.N.Y. Oct. 31, 2011). Indeed, the court explicitly noted that the cause was "beyond
[the broker's] control." Id. at 441. Here, by contrast, the Lehman entities voluntarily commenced
the proceedings that resulted in the suspension of trading.
With respect to the limitation of liability paragraph, Maverick does not seek damages
resulting from any of the conduct specified therein. Maverick instead complains of a very specific
and different harm: the failure to return its property or provide it with the market value equivalent.
This harm was caused by the suspension of trading that resulted from the bankruptcy proceedings.
It was not, however, in "connection with the execution, clearing, handling, purchasing or selling
of securities, commodities or other property, or other action." 	Indeed, the damages here were in
no way caused by Lehman's trading of securities or commodities, or any other conduct related to
such activity. 	As Lehman has acknowledged, both at argument and in its papers, the property at
issue was not the subject of trading activity by LBIE but was instead being held merely as collateral
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to 	ensure 	Maverick's 	performance 	pursuant 	to 	the 	vanous 	agreements. 	No 	reasonable
interpretation of this provision, therefore, could absolve Lehman ofliability in the present instance.
The lack of any reference to bankruptcy proceedings is all the more glaring when the
exculpation clauses are construed in context. 	As Maverick rightly notes, the Prime Brokerage
Agreements explicitly reference the United States Bankruptcy Code in other sections but not this
one, cutting against the notion that such proceedings, in the United States or elsewhere, would
permit Lehman to properly invoke either of these clauses. 	Moreover, if such proceedings were
intended to fall within their reach, the parties could have said so, particularly in light of the
specificity with which the triggering conditions were enumerated. It is a well-settled principle that
the absence in one context of particular language used elsewhere by the same parties is intentional.
See, e.g., Cent. Bank of Denver. v. First Interstate Bank of Denver, 511 U.S. 164, 176-77 (1994)
(statute did not provide for aiding and abetting liability because Congress elsewhere used the
words "aid" and "abet" to accomplish that result).
Finally, this construction of the exculpation clauses comports with the Guarantee, which is
further probative of the parties' intent, particularly given its nexus to the Prime Brokerage
Agreements. 	The Guarantee was intended as one form of protection in the event of an LBIE
default, which is precisely what transpired. The Guarantee even explicitly identifies the invocation
of provisions of "the Federal Bankruptcy Code, or any similar applicable state or foreign law" as
circumstances in which it would be fully enforceable. 	App. 647. 	It would thus betray common
sense for the initiation of bankruptcy proceedings by either LBIE, the primary obligor, or LBHI to
shield Lehman from liability under these circumstances.
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III. 	Leave to Amend
The final issue is whether the bankruptcy court abused its discretion in denying Maverick
leave to amend. 	At argument, however, Maverick withdrew its appeal on this point. Tr. 16:21-
22, Sept. 14, 2018. Accordingly, this issue is now moot.
CONCLUSION
For the foregoing reasons, the bankruptcy court's decision is reversed and this matter is
remanded for further proceedings. 	On appeal, Lehman has continued to assert a variety of
arguments related to its liability in the event that Section 562 does not apply. 	The bankruptcy
court did not rule on these issues, nor has this Court expressed any opinion as to their merit. These
matters are most appropriately considered in the first instance by the bankruptcy court.
The Clerk of Court is respectfully directed to close this case.
SO ORDERED.
Dated: 	September 30, 2018
New York, New York
l
I
R 	s
U 	ted States District Judge
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