The opinion of the court was delivered by: Katherine B. Forrest, District Judge:
The cross-appeals from the February 22, 2011 decision (the "Decision") of the Honorable James M. Peck, Bankruptcy Judge, arise out of what is commonly referred to as the "fog of Lehman"--the week of September 15 through September 22, 2008, which culminated in Barclays Capital Inc. ("Barclays") purchasing out of bankruptcy most of the North American business assets (the "Sale") of Lehman Brothers Inc. ("LBI"). Out of that fog emerged not only a changed economic worldview, but also the disputes that are the subject of the instant cross-appeals.
The cross-appeals center upon the Bankruptcy Court's rulings with respect to which entity owns each of three categories of assets (the "Disputed Assets").*fn1 Barclays appeals the Bankruptcy Court's Decision that (a) Barclays is not entitled to the "property that may be held to secure obligations under" LBI's exchange-traded derivatives--specifically $2 billion of proprietary margin held at the Options Clearing Corporation (the "Margin Assets"), and thus, must return those assets (and must pay $280 million in prejudgment interest); and (b) Barclays is not entitled to "$769 million of securities, as held by or on behalf of LBI on the date hereof pursuant to Rule 15c3-3 of the Securities Exchange Act of 1934, as amended, or securities of substantially the same nature and value." (Opening Br. of Appellants Barclays Capital Inc. & Barclays Bank PLC, 11 Civ. 6052 (Dkt. No. 16) ("Barclays Br.") at 5-6.)
James W. Giddens, as trustee for the Securities Investor Protection Act ("SIPA") liquidation of LBI (the "Trustee"), cross-appeals, seeking reversal of the Bankruptcy Court's Decision that Barclays is entitled to assets that LBI maintained in its clearance boxes (a type of custodial clearing account) at the Depository Trust & Clearing Corporation ("DTCC") (the "Clearance Box Assets"). (Br. for Cross-Appellant James W.
Giddens, As Trustee for the SIPA Liquidation of Lehman Brothers Inc., 11 Civ. 6053 (Dkt. No. 14) ("Trustee Br.") at 5-6.)
For the reasons that follow, the Decision of the Bankruptcy Court is AFFIRMED IN PART and REVERSED IN PART.
The facts relating to Lehman's bankruptcy and subsequent sale to Barclays are dramatic and complex. Events relating to the Sale have become part of what is known as the "fog of Lehman." To resolve the issues on the instant cross-appeals, this Court's job is to ensure that the Decision (made in the wake of that fog) properly interpreted the agreements memorializing the Sale.
Accordingly, the background recited herein does not examine the events leading up to one of the most memorable financial transactions in modern economic history. Instead, it hews closely to the agreements at issue and delves further only where strictly necessary.
There are three agreements integral to resolution of the instant cross-appeals: the Asset Purchase Agreement ("APA"), an agreement referred to as the "Clarification Letter," and an agreement referred to as the "DTCC Letter." The other document critical to resolving the cross-appeals is the Bankruptcy Court's order approving the Sale (the "Sale Order"). It is important to note that in the relevant agreements, the articulation of the assets purchased in and excluded from the Sale evolves. The Court sets forth that chronological progression below.
A. Facts Relating to the Sale
On September 15, 2008, Lehman Brothers Holdings, Inc. ("LBHI" and with LBI, "Lehman"), LBI's parent, filed for bankruptcy. In re Lehman Bros. Holdings Inc., 445 B.R. 143, 155 (Bankr. S.D.N.Y. 2011) ("In re Lehman"). That filing precipitated the SIPA liquidation of LBI, Lehman's North American broker-deal, on September 19, 2008. Id. at 172. Immediately after LBHI filed for bankruptcy, representatives from both Lehman and Barclays met to discuss the possibility of the sale of Lehman's North American business to Barclays. Ultimately, Barclays agreed to the purchase, giving rise to "the largest, most expedited and probably the most dramatic asset sale that has ever occurred in bankruptcy history."*fn2 Id. at 148-49, 155. Barclays and Lehman executed the APA for the Sale on September 16, 2008. [See R. 1-47.]*fn3 With, as the Bankruptcy Court called it, "the proverbial 'ice cube' . . . melting," the APA "represented the best possible alternative for Lehman's employees. ... Indeed, it was the only alternative." In re Lehman, 445 B.R. at 153.
On September 17, 2008, the parties requested that the Bankruptcy Court approve the Sale. In re Lehman, 445 B.R. at 174. [See also R. 377.] On September 19, 2008, the Bankruptcy Court held a hearing to do so (the "Sale Hearing"), in which the APA was central. In re Lehman, 445 B.R. at 150. In addition to presenting the APA, however, the parties also informed the Bankruptcy Court that they were preparing a "clarification letter" that had yet to be "finalize[d]," but which reflected "[s]ome other changes" that were made that "affect what are called purchase [sic] assets and what are excluded assets" (the "Clarification Letter"). [R. 1591.] LBI's SIPA Trustee and counsel for the Securities Investor Protection Corporation ("SIPC") attended the Sale Hearing and supported the Sale without reservation. [R. 1595, 1597.]
In approving the Sale that same day (via the Sale Order), the Bankruptcy Court found that the Sale "was the means both to avoid a potentially disastrous piecemeal liquidation and to save thousands of jobs in the troubled financial services industry." In re Lehman, 445 B.R. at 153. [See also R. 377-400.] By its terms, the Sale Order approved not only the APA (as amended), but also prospectively approved "that letter agreement clarifying and supplementing the [APA] dated September 20, 2008 (as same may be subsequently modified or amended or clarified, the 'Purchase Agreement')." [R. 377; see also R. 388.] The Sale Order further "authorized and directed" the parties to "take all other and further actions as may be reasonably necessary to implement the transactions contemplated by the Purchase Agreement." [R. 388.] It also explicitly recognized Barclays' representation that it would not have agreed to the Sale if it "was not free and clear of all Interests of any kind or nature whatsoever, or if [Barclays] would, or in the future could, be liable for any of the Interests." [R. 384.]*fn4
During the weekend subsequent to the Sale Hearing (the "pre-closing weekend"), the parties worked to, among other things, finalize the Clarification Letter. The Clarification Letter, as set forth in detail in Part I.B. infra, revised portions of the definitions of Purchased and Excluded Assets set forth in the APA. On September 22, 2008, the parties filed the Clarification Letter on the public docket, "giving broad notice of its terms." In re Lehman, 445 B.R. at 162.
The "transaction formally closed" on the morning of Monday, September 22, 2008. Id. at 161.
B. Disputed Assets No. 1: Facts Relating to the Margin Assets
The Margin Assets at issue on this appeal consist of over $2 billion in assets that had been maintained by LBI at the Options Clearing Corporation ("OCC") "in connection with LBI's options trading business." In re Lehman, 445 B.R. at 195.*fn5 [See also R. 67185.] The Margin Assets were LBI property, used by LBI to support trading on its own behalf as well as on behalf of its customers. Id. To be clear, the Margin Assets held at the OCC were only LBI proprietary margin, not LBI customer margin. Tr. at 17:3-17:4, 17:7-17:8.*fn6
Under the APA, the "Business" being sold included "the U.S. and Canadian investment banking and capital markets businesses of Seller [Lehman] including the fixed income and equities cash trading, brokerage, dealing, trading and advisory businesses, investment banking operations and LBI's business as a futures commission merchant." [R. 6.] The APA contains definitions of both the assets included in the Sale (the "Purchased Assets") and those excluded (the "Excluded Assets"). Excluded Assets are defined as, inter alia, "(b) all cash, cash equivalents, bank deposits or similar cash items of LBI and its Subsidiaries (the 'Retained Cash') other than $1.3 billion in cash, cash equivalents, bank deposits or similar cash items" and "(n) all assets primarily related to the IMD Business and derivatives contracts." [R. 6, 8.]*fn7
Purchased Assets are defined as, inter alia, all of the assets of Seller and its Subsidiaries used in connection with the Business (excluding the Excluded Assets), including . . . (a) the Retained Cash; (b) all deposits (including customer deposits . . . and required capital deposits) and prepaid charges and expenses of Seller and its Subsidiaries associated with the Business . . .; . . . (d) government securities, commercial paper, corporate debt, corporate equity, exchange traded derivatives and collateralized short term-agreements with a book value as of the date hereof of approximately $70 billion (collectively, 'Long Positions') . . . .
[R. 10 (first emphasis added).]*fn8
The APA does not define separately "exchange-traded derivatives" as used in clause (d) of Purchased Assets nor does it define "derivatives contracts," referred to in clause (n) of Excluded Assets.
Section 2.2 of the APA provides, "Nothing herein contained shall be deemed to sell, transfer, assign or convey the Excluded Assets to Purchaser, and Seller (directly and indirectly) shall retain all right, title and interest to, in and under the Excluded Assets." [R. 15.]
The Clarification Letter, executed on September 22, 2008, In re Lehman, 445 B.R. at 198 [see also R. 61-76], revised the definition of Purchased Assets to include explicitly (and in pertinent part) "all of the assets of Seller used primarily in the Business or necessary for the operation of the Business (in each case, excluding the Excluded Assets)." [R. 61.] The Clarification Letter further amended the definitions of Purchased Assets to include "(i) the items set forth in clauses (b), (c) and (f) through (o) and (q) through (s) of the definition of 'Purchased Assets' in the [APA]." [R. 61.] In other words, "Purchased Assets" no longer included, among other things, the "Retained Cash"*fn9 or the "Long Positions" as set forth in the APA. The Clarification Letter also (i) added to that group of "Purchased Assets," inter alia, "(B) such securities and other assets held in LBI's 'clearance boxes' as of the time of the Closing, which at the close of business on September 21, 2008 were as specified on Schedule B previously delivered by Seller and accepted by Purchaser . . . ." [R. 61]; and (ii) in paragraph 1(a)(ii)(C), retained two assets previously defined as part of the Long Positions--"exchange-traded derivatives (and any property that may be held to secure obligations under such derivatives) and collateralized short-term agreements" [R. 62].
The Clarification Letter also amended the definition of Excluded Assets. The items in clauses (b) and (k) of the APA's Excluded Assets were dropped from the revised definition--i.e., "(b) . . . the Retained Cash other than $1.3 billion in cash, cash equivalents, bank deposits or similar cash items" and "(k) 50% of each position in residential real estate mortgage securities" were no longer Excluded Assets. [See R. 62; R. 28765-66.] With respect to the disposition of cash, the Clarification Letter provides in paragraph 1(c), "Except as otherwise specified in the definition of 'Purchased Assets,' 'Excluded Assets' shall include any cash, cash equivalents, bank deposits or similar cash items of Seller and its Subsidiaries."
[R. 62 (emphasis added).] It did not, however, amend the APA's clause (n) of Excluded Assets (referring to the "IMD Business and derivatives contracts"); in paragraph 1(c), however, it added an enumeration of, inter alia, specific types of derivatives that constituted Excluded Assets--i.e., "[a]ll the investments held by [Lehman] in collateralized debt obligations, collateralized loan obligations, over-the-counter derivatives, TBA mortgage notes and similar asset-backed securities and corporate loans . . . ." [R. 62.]
C. Disputed Assets No. 2: Facts Relating to the 15c3-3 Assets
The regulations governing registered or operating broker-dealers under the Securities Exchange Act of 1934 require that "[e]very broker or dealer shall maintain with a bank or banks at all times when deposits are required or hereinafter specified a 'Special Reserve Account for the Exclusive Benefit of Customers' (hereinafter referred to as the 'Reserve Bank Account'), and it shall be separate from any other bank account of the broker or dealer." 17 C.F.R. § 240.15c3-3(e)(1) (hereinafter "Rule 15c3-3"). The regulation also sets forth a requirement for the amount to be kept in the Reserve Bank Account "at all times," and also only allows withdrawals "if and to the extent that at the time of the withdrawal the amount remaining in the reserve bank account is not less than the amount required by" the regulation. 17 C.F.R. § 240.15c3-3(e)(1), 17 C.F.R. § 240.15c3-3(g).
SIPA itself also promulgated a rule regarding the same types of accounts: it requires broker-dealers (particularly liquidating broker-dealers such as LBI) to maintain assets (including securities) sufficient to "satisfy net equity claims of customers . . . ." 15 U.S.C. § 78fff(a)(1)(B).
The 15c3-3 Assets at issue here (to which Barclays claims entitlement and as to which the Trustee maintains its rights) are "(i) $769 million in securities segregated by LBI for its customers in compliance with SIPA and Rule 15c3-3 and (ii) $507 million in assets posted by LBI as margin with the [OCC] and listed as a debit item in LBI's reserve calculation for purposes of Rule 15c3-3." In re Lehman, 445 B.R. at 191.
The Clarification Letter deals with the 15c3-3 Assets as follows:
All customer accounts of LBI (other than customers who are Affiliates of LBI) shall be transferred to Purchaser [i.e., Barclays]. In connection therewith, Purchaser shall receive (i) for the account of the customer, any and all property of any customer, including any held by or on behalf of LBI to secure the obligations of any customer, whose account(s) are being transferred to Purchaser as part of the Business and (ii) to the extent permitted by applicable law, and as soon as practicable after the Closing, $769 million of securities, as held by or on behalf of LBI on the date hereof pursuant to Rule 15c3-3 of the Securities Exchange Act of 1934, as amended, or securities of substantially the same nature and value.
[R. 64 (emphases added).]
D. Disputed Assets No. 3: Facts Relating to the Clearance Box Assets
The Clearance Box Assets--i.e., "approximately $1.9 billion in unencumbered securities held in LBI's 'clearance box' at the [DTCC],"*fn10 which the Bankruptcy Court awarded to Barclays and which the Trustee now seeks to have returned--were an additional source of contention (and negotiations) during the pre-closing weekend. In re Lehman, 445 B.R. at 199. Those negotiations resulted in two separate agreements dealing with the Clearance Box Assets: what is known as the "DTCC Letter," as well as a provision in the Clarification Letter. Id. at 199-200. The Bankruptcy Court found that the two letters contain "seemingly contradictory provisions." Id. at 200.
Under the Clarification Letter, Purchased Assets includes (as noted above) "such securities and other assets held in LBI's 'clearance boxes' as of the time of the Closing, which at the close of business on September 21, 2008 were as specified on Schedule B previously delivered by Seller and accepted by Purchaser." [R. 61.] As the Bankruptcy Court noted, Schedule B showed the assets to be transferred, 98 percent of which were "in LBI's DTC clearance boxes." In re Lehman, 445 B.R. at 200.
The DTCC Letter--executed among the DTCC, the Trustee, and Barclays--provides, however, that "Barclays has indicated, and hereby agrees, that all of the accounts of LBI maintained at the Clearing Agencies Subsidiaries . . . constitute ...