Bass, Berry & Sims attorney Chris Lazarini discussed the case of Lehman Brothers, Inc., In Re: ANZ Securities, Inc. vs. Giddens in which Junior Underwriters of Lehman Notes filed general creditor proofs of claim against Lehman Brothers, Inc., for losses incurred in the defense and settlement of note holder fraud claims following Lehman Holding’s bankruptcy filing. Agreeing with the SIPA trustee, the bankruptcy court and district court held that the claims were subordinated to those of general creditors. On appeal, the Second Circuit ruled that claims arising from securities issued by the debtor’s affiliate should be subordinated to all claims of the same type as the underlying security.
Chris provided the analysis for Securities Litigation Commentator (SLC). The full text of the analysis is below and used with permission from the publication. If you would like to receive additional content from the SLC, please visit the SLC website to sign up for the newsletter.
Lehman Brothers, Inc., In Re: ANZ Securities, Inc. vs. Giddens, No. 14-3686 (2nd Cir., 12/14/15)
Bankruptcy §510(B) subordinates to the claims of general unsecured creditors any claim arising from the rescission of a purchase or sale of a security of the debtor or its affiliate, for damages arising from the purchase or sale of such a security, or for reimbursement or contribution related to such a claim.
In September 2008, Lehman Brothers Holdings, Inc., filed the largest bankruptcy filing in U.S. history, and its wholly-owned broker-dealer subsidiary, Lehman Brothers, Inc. (“LBI”), was placed in SIPA liquidation. Following these events, numerous Junior Underwriters of Lehman notes incurred losses defending and settling note holder fraud claims. The Junior Underwriters filed general creditor proofs of claim against LBI, the lead underwriter of Lehman notes, in the SIPA proceeding asserting contribution rights. The SIPA Trustee objected, arguing that the claims were subordinate to general creditor claims under Bankruptcy Code Section 510(b). The bankruptcy court and district court sided with the SIPA Trustee, but for different reasons, and this appeal followed.
SIPA establishes procedures for liquidating failed broker-dealers, and SIPA cases proceed in bankruptcy court under the bankruptcy rules, with certain exceptions. Section 510(b) ensures that claims corresponding to ownership of securities in the debtor are put in their proper place in the distribution waterfall and automatically subordinates to the claims of general unsecured creditors most claims “arising from rescission of a purchase or sale of a security of the debtor or of an affiliate of the debtor, for damages arising from the purchase or sale of such a security, or for reimbursement or contribution[.]” 11 U.S.C. §510(b). The Junior Underwriters, seeking a higher place in the waterfall, argued that Section 510(b) did not subordinate their claims, because the notes on which their claims were based were issued by Lehman Holdings, not LBI.
The Court disagrees, finding that claims arising from securities of the debtor’s affiliate should be subordinated to all claims of the same type as the underlying security. The Court cites several factors supporting its conclusion. First, the Court notes, ordinary rules of construction – giving plain meaning to a statute’s terms and meaning to the entire provision – lead to the result. Second, the Court explains, available legislative history endorses a broad interpretation of the statute, while the Junior Underwriters’ argument is a limiting one. Third, the Court notes that its holding follows with the policy rationale behind the adoption of Section 510(b), which was to preserve “the risk and return expectations of shareholders and creditors” and “prevent disappointed shareholders from recovering their investment loss by using fraud and other securities claims to bootstrap their way to parity with general unsecured creditors in a bankruptcy proceeding.” Finally, the Court explains that its approach works in broad strokes, providing flexibility for bankruptcy courts charged with placing claims in their proper place in the waterfall of the debtor’s estate.
The Court notes that LBI’s SIPA liquidation has a single class of general unsecured creditors whose claims will likely consume the LBI estate, leaving nothing for the now subordinated claims of the Junior Underwriters. (EIC: We have summarized a number of decisions in this SIPA proceeding (see SLAs 2013-31, 2013-38, 2014-06 and 2015-14).