The Joint Administrators continue to provide regular information updates on this website regarding the US litigation between Lehman Brothers International (Europe) (in Administration) (“LBIE”), Plaintiff v. AG Financial Products, Inc. (“AGFP”), Defendant. The Joint Administrators brought proceedings in the NY State Court in November 2011 asking the court to interpret the termination and valuation provisions of the ISDA Master Agreement. A five week trial was held, commencing 18 October 2021 and ending on 19 November 2021, to determine which valuation (if either) of the Plaintiff or Defendant for a series of terminated credit default swaps (“CDS”) was correct.
Between 2005 and 2008, LBIE and AGFP entered into the 28 CDS at issue in this litigation, documented pursuant an ISDA Master Agreement. LBIE, as protection buyer, agreed to make fixed payments to AGFP, which as protection seller would make payments to LBIE in connection with the occurrence of payment defaults in the securities underlying the 28 CDS. Under the ISDA Master Agreement, LBIE’s entrance into administration in September 2008 provided AGFP with the right to terminate the CDS, which it did in July 2009. Termination under the ISDA Master Agreement was not treated as a breach of contract; the value of the terminated contract was to be paid on a no-fault basis to whichever of the parties it was more valuable at the point of termination.
The ISDA Master Agreement required AGFP, as the terminating party, to calculate a termination payment based on its “Loss,” defined to be the amount that a party reasonably determines in good faith to be its total losses or gains arising from the termination of transactions subject to the agreement. In October 2009, notwithstanding that the collapse in credit markets should have made the CDS “in the money” for LBIE, AGFP calculated that LBIE should make a termination payment to it of $20.6 million. AGFP’s novel methodology ignored standard market practice to calculate Loss on a market basis, which would have demonstrated that AGFP owed LBIE hundreds of million dollars, as the cost of obtaining credit protection provided by the terminated CDS would have been significantly more expensive in 2009 than it was when the CDS were entered into years earlier.
In November 2011, asserting that AGFP breached its contractual obligations by improperly calculating Loss without reference to market information and in a commercially unreasonable manner, LBIE filed the original complaint, setting out three causes of action [Item1]:
AGFP filed an answer to LBIE’s pleadings and made a counterclaim for the payment of the “Loss” amount it had determined and certified in respect of the transactions it terminated [Item 2].
In February 2012 AGFP filed a motion seeking to have LBIE’s first and third causes of action dismissed. [Item 3.] LBIE responded in March [Item 4.] and AGFP filed a reply in April 2012 [Item 5.]
On 12 March 2013, the Court delivered its decision on AGFP’s motion to dismiss [Item 6.], granting AGFP’s request in respect of the first cause of action relating to the transactions terminated on the basis of the additional event of default in December 2008.
After several years of extensive fact and expert discovery, in February 2016, AGFP filed a motion asking the Court to grant it summary judgment against the remaining second and third causes of action arguing that as the non-defaulting party, its determination of Loss is subject to deference and must be judged based on a subjective standard, not an objective standard [Item 7].
In 2016, LBIE filed a brief opposing AGFP’s motion for summary judgment [Item 8]
AGFP replied to LBIE’s opposing brief in May, 2016 [Item 9].
In July 2018 the Trial Court delivered its Summary Judgment Decision dismissing LBIE’s third cause of action, but refusing to dismiss the second cause of action for breach of contract resulting from AGFP’s Loss calculation. [Item 10]
In October 2018 AGFP appealed the Summary Judgment Decision of the Trial Court [Item 11].
LBIE responded with its brief in opposition [Item 12].
And in November 2018, AGFP replied to LBIE’s brief in opposition [Item 13].
The First Department upheld the Trial Court judgment requiring a trial to determine the reasonableness of AGFP’s Loss calculation [Item 14].
Trial was set by Justice Friedman for March 2020, but due to the developing pandemic, trial was postponed until procedures for hearings in the NY courts could be implemented. During the interim period, before hearings were able to be scheduled, Justice Friedman retired and the case needed to be reassigned. For a considerable time, no replacement judge was assigned, and LBIE sought to remove the case to the US Bankruptcy Court requesting the judge that had handled the Lehman bankruptcy cases to accept the case for trial. Ultimately, the US Bankruptcy Court declined to accept the removal of the case from the NY State courts. A replacement judge, Melissa Crane, was assigned the case on 29 March 2021, and on 20 April 2021 she set a target trial date of September 2021. Eventually, trial was held during October and November 2021. Before trial, LBIE and AGFP exchanged pre-trial briefs setting out their arguments in support of their valuation calculations. [Items 15 and 16].
After the trial the parties exchanged sets of post-trial briefs addressing the evidence and arguments presented at trial [Items 17, 18, 19, 20] as set out below:
Justice Crane delivered her decision after trial on 8 March 2023 [Item 21] finding in favour of AGFP.
LBIE gave timely notice of appeal. Briefs have been exchanged in support of the parties’ arguments in favour of and in opposition to the appeal [Items 22, 23, 24], and oral arguments will be heard on 21 February 2024.
Following the oral hearing on 21 February 2024, the New York Supreme Court, Appellate Division, First Judicial Department entered their decision and order on 14 March 2024 [item 25], affirming Justice Crane’s decision in full.
On 15 April 2024, LBIE filed with the New York Supreme Court, Appellate Division, First Judicial Department its motion for leave to reargue, or in the alternative, leave to appeal to the New York State Court of Appeals from the Decision and Order of the Court dated 14 March 2024, Dkt.31 [Item 26].
On 29 April 2024, AGFP filed with the New York Supreme Court, Appellate Division, First Judicial Department its brief in opposition to LBIE's motion for leave to reargue or leave to appeal to the New York State Court of Appeals, Dkt.32 [Item 27].