United States District Court, S.D. New York
Appeals arising from SIP A Liquidation Proceeding, Case No. 08-1420.
For Claren Road Credit Master Fund Ltd., Appellant: Marshall R. King, Esq., Matthew J. Williams, Esq., Joshua Weisser, Esq., Gibson, Dunn, & Crutcher LLP, New York, NY.
For UBS Financial Services Inc., Appellant: Joshua Dorchak, Esq., Bingham McCutchen LLP, New York, NY.
For ANZ Securities, Inc., BMO Capital Markets Corp., BNY Mellon Capital Markets, LLC, Cabrera Capital Markets, LLC, DNB Markets, Inc., BNP Paribas FS, LLC, nabSecurities, LLC, National Australia Bank Ltd., SunTrust Robinson Humphrey, Inc. and The Williams Capital Group, L.P., Appellants: Mitchell A. Lowenthal, Esq., Luke A. Barefoot, Esq., Cleary Gottlieb Steen & Hamilton LLP, New York, NY.
For James W. Giddens, as Trustee for the SIPA Liquidation of Lehman Brothers, Inc., Appellee: James B. Kobak, Jr., Esq., Michael E. Salzman, Esq., Ramsey Chamie, Esq., Dina R. Hoffer, Esq., Hughes Hubbard & Reed LLP, New York, NY.
OPINION AND ORDER
Shira A. Scheindlin, United States District Judge.
On September 19, 2008, Lehman Brothers Inc. (" LBI" ), a registered broker-dealer and wholly-owned subsidiary of Lehman Brothers Holdings Inc. (" LBHI" ), was placed into liquidation pursuant to the Securities Investor Protection Act of 1970 (" SIPA" ), and James W. Giddens was appointed as SIPA trustee (the " Trustee" ). Before the Court are three related appeals from two orders entered by Bankruptcy Judge James M. Peck in LBI's SIPA proceeding (the " Orders" ). In relevant part, the Orders grant a motion and sustain an objection filed by the Trustee seeking to subordinate certain claims pursuant to section 510(b) of the Bankruptcy Code. The Bankruptcy Court found that subordination of the claims to the claims of general unsecured creditors was mandated under the plain language of section 510(b).
Appellant Claren Road Credit Master Fund Ltd. (" Claren Road" ) argues that its claim for damages against LBI, based on LBI's failure to purchase bonds issued by LBHI from Claren Road pursuant to a prime brokerage account agreement, should not be subordinated because it does not " aris[e] from the purchase or sale" of the LBHI bonds within the meaning of section 510(b). In addition, Claren Road and the remaining appellants, co-underwriters with LBI in the issuance of LBHI securities, argue that section 510(b) is inapplicable because there are no claims or interests " represented by" LBHI securities in LBI's SIPA proceeding. For the reasons set forth below, the Orders are AFFIRMED.
A. Claren Road
1. Claren Road's Claim
In December 2005, Claren Road and LBI entered into a prime brokerage agreement. The PBA deems LBHI and
certain LBHI affiliates as parties and is signed by LBI " as signatory for itself and as agent for the affiliates named herein."  As prime broker, LBI agreed to " 'settl[e] trades executed on [Claren Road's] behalf by [its] executing broker(s).'"  On September 12, 2008, LBI and Claren Road entered into two separate trades in which LBI agreed to purchase LBHI bonds from Claren Road at a discount to par. LBI breached its agreement to purchase the LBHI bonds on September 17, 2008, when it failed to settle the trades. Claren Road filed a claim against LBI in the SIPA liquidation for over $8.5 million, representing the difference between the amount that LBI had agreed to pay for the LBHI bonds and their market price on September 19, 2008.
2. The Trustee's Motion and the Bankruptcy Court's Order
On October 25, 2013, the Trustee filed a motion seeking to confirm the non-customer status of Claren Road's claim under SIPA and to subordinate it to the claims of general unsecured creditors pursuant to section 510(b). Claren Road argued that on a literal reading of section 510(b), its claim does not arise from a purchase or sale of a security because LBI did not complete the purchase of the LBHI bonds. It further argued that under Second Circuit case law, section 510(b) is ambiguous when applied to its claim and that subordination of its claim would not further the policy objectives underlying the statute. The Bankruptcy Court held
that under the plain language of the statute, Claren Road's claim was subject to subordination as a claim arising from the purchase or sale of a security of a debtor affiliate. The Bankruptcy Court also rejected Claren Road's argument that because section 510(b) states that an arising from claim " shall be subordinated to all claims or interests that are senior to or equal the claim or interest represented by such security," claims based on LBHI bonds may not be subordinated in LBI's SIPA proceeding where holders of LBHI bonds have no claims against LBI's estate. The Bankruptcy Court explained that
Claren Road's approach is too narrow and fails to recognize the common meaning of the words used in the statute. A more reasonable interpretation of the statutory language is that the " claim . . . represented by [the LBHI Bonds]" is not directed to a recovery from LBI on account of the LBHI Bonds but extends to the breach of contract claim asserted by Claren Road against LBI with respect to these bonds. Such a claim is a general unsecured claim that is connected to the subject matter of the securities in question. The essence of the claim is the failure to purchase the LBHI Bonds. This reading of the plain language of the statute leads to the conclusion that the Claren Road Claim " shall be subordinated to all claims . . . that are senior to or equal" the general unsecured claims against LBI.
Interpreting the phrase " claim or interest represented by such security " in this fashion is a common sense interpretation of section 510(b) that infuses the words of section 510(b) with meaning. If a claim " represented by such security" were to be restricted to a recovery from the issuer for amounts outstanding under the security, then no claim arising from the purchase or sale of affiliate securities would ever fit within the regime for subordination. Such a result would contradict express provisions of the statute which direct that such claims shall be subordinated.
The Bankruptcy Court entered an order allowing Claren Road's claim as a non-customer claim in its asserted amount, and subordinated that claim to the claims of general unsecured creditors.
B. The Co-underwriters
In the course of its business as a broker-dealer, LBI served as lead underwriter in connection with offerings of registered securities issued by LBHI. LBI and ANZ entered into a Master Agreement Among Underwriters dated December 1, 2005, which governed the relationship among the underwriters. " The agreement required each underwriter to contribute, based on
its agreed percentage participation in an offering, toward losses or liabilities incurred by another underwriter arising from allegations that the offering materials ...