In re Lehman Brothers Holdings Inc.

United States Court of Appeals for the Second Circuit · 2009 · Corporations

CorporationsBankruptcy asset saleContract interpretationAPAClarification LetterSection 363 salePurchased AssetsExcluded Assets

Facts

Lehman Brothers Inc. entered an emergency asset sale to Barclays during the 2008 financial crisis under an Asset Purchase Agreement later supplemented by a Clarification Letter. The dispute concerned two asset groups: about $4 billion in cash and cash equivalents pledged as collateral for Lehman's exchange-traded derivatives business, and about $1.9 billion in unencumbered securities in Lehman's DTCC clearance box accounts. The sale documents classified some assets as Purchased Assets and others as Excluded Assets, but the parties later disagreed over whether these two groups had been transferred. The Clarification Letter specifically referred to exchange-traded derivatives and property held to secure them, and also specifically listed clearance box assets on Schedule B, while another DTCC letter generally referred to LBI accounts at DTCC as Excluded Assets.

Issue

Whether the sale documents transferred to Barclays the Margin Assets supporting Lehman's exchange-traded derivatives business and the Clearance Box Assets held at DTCC. More specifically, the court had to decide whether the governing agreements unambiguously included those assets in the sale or, if ambiguous, whether extrinsic evidence showed an intent to transfer them.

Rule

Under New York contract law, the parties' intent controls, and the best evidence of that intent is the contract itself read as a whole. Contract language is ambiguous only if it is capable of more than one meaning when viewed objectively in context; if ambiguity remains, courts may consider extrinsic evidence. In resolving conflicting sale documents, specific provisions identifying particular assets prevail over general language.

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A bankrupt broker-dealer in Chicago sells its commodities desk to North Harbor Securities LLC under an asset purchase agreement governed by New York law. The agreement includes as purchased assets the desk's "exchange-listed futures positions," and a later clarification letter adds "any property held to secure obligations under such positions," but the excluded-assets section generally excludes all seller cash and cash equivalents.

Who is more likely entitled to $600 million in cash collateral posted with clearing firms to support the sold futures positions?

Explanation. Under New York law, the contract read as a whole is the best evidence of intent. Where the documents specifically include exchange-traded positions and property held to secure them, that language unambiguously covers pledged collateral supporting the sold business. A general exclusion for cash does not override the more specific inclusion, especially because encumbered collateral is not simply cash ready for use.