A win of sorts

Mallesons Stephen Jacques released a note to clients last week, that might provide some comfort to the ex-Lehman Bros clients now pursuing the firm over failed CDO investments, albeit possibly brief.

The law firm observed, "The High Court of England and Wales recently upheld the priority given to investors over the rights of Lehman Brothers as a swap counterparty in a credit-linked note structure. This means that, as a matter of English law, Lehman Brothers' default under the swap will cause it to rank behind the investors on the application of the collateral which secures the amounts owed to the investors and Lehman Brothers."

Mallesons said the decision is significant because the contractual provisions providing for noteholder priority are commonly used in rated and other structured finance transactions.

While the Trust Deed, around which this case revolved, was governed by English Law, Lehman Bros has complained to the US Bankruptcy Court that the decision breaches several provisions of the US Bankruptcy Code to the extent that it is being deprived of an asset because of its bankruptcy. The decision is being appealed by Lehman Bros.