Perpetual Trustee Company Ltd v BNY Corporate Trustee Services Ltd & Anor

The issue that I have to decide on this application is whether a letter of request should be sent to the Honourable Judge James M. Peck before the hearings which are due to take place before him in New York on Thursday of this week.

The matter comes before me by an application notice issued by the claimant, Perpetual Trustee Company Limited, on 6^th November asking that a letter should be sent by the Chancellor in the form appended to the application notice.

The application is opposed by the second defendant, Lehman Brothers Special Financing Inc (“LBSF”). The application is also opposed in its current form by the first defendant, BNY Corporate Trustee Services Limited (“BNY”), although BNY would support, or at any rate not oppose, the sending of a much shorter and simpler form of letter.

It became clear early on that the Chancellor would not himself be able to deal with this application due to his other commitments, and directions were given for the application to be heard by myself. Agreed directions were given last week for the filing of evidence and skeleton arguments, and I heard the application yesterday afternoon.

Mr. Gabriel Moss QC, leading Mr. William Willson, appears for the claimant, Perpetual; Mr. Richard Snowden QC, leading Miss Mary Stokes, appears for LBSF; and Mr. Stephen Midwinter appears for BNY.

The background to this case is well known to all the parties and I will not repeat it in this judgment. It is clearly set out in the judgment which was handed down by the Chancellor on 28^th July of this year, and in the judgments of the Court of Appeal, following the hearing of an expedited appeal, which were handed down on 6^th November. It is enough to say that the Court of Appeal has now unanimously upheld the decision by the Chancellor that the collateral held by BNY falls to be realised and distributed, as a matter of English law, in accordance with so-called Noteholder Priority rather than in accordance with Swap Counterparty Priority.

There are two separate reasons which have led the courts to reach that conclusion, either of which would alone be sufficient. Firstly, the provisions in the complex web of contractual documentation which provide for the switch from Swap Counterparty Priority to Noteholder Priority do not offend against the English principle of anti-deprivation, the reason in short being that the interests conferred on LBSF in the collateral were from the outset limited in extent in such a way that they would terminate on the happening of an event of default. LBSF never had any larger interest which was purportedly cut down on its insolvency.

The second reason, even if the first one is wrong, and the English anti-deprivation rule would, in principle, apply on LBSF’s insolvency, is that it is not engaged on the facts of the present case, because the switch to Noteholder Priority was brought about by the filing for Chapter 11 protection of LBSF’s parent company, LBHI, on 15^th September 2008, and not by the subsequent filing under Chapter 11 of LBSF itself on 3^rd October. In other words, the relevant event of default was not the insolvency of LBSF, but the insolvency some 18 days earlier of LBHI.

That is the position as it has now been held to be under English law, subject only to an outstanding application for permission to appeal to the Supreme Court, permission to appeal having been refused by the Court of Appeal.

In support of its case Perpetual also relies on the fact that all of the relevant contractual documentation is expressed to be governed by English law, and the facts that the Trustee, BNY, is an English registered company, the trust under which the collateral is held is governed by English law and the trust assets are all in England. However, LBSF, the Swap Counterparty, is a United States corporation registered in Delaware, with its principal office in New York, and its Chapter 11 insolvency is subject to the control and supervision of the New York court, more precisely the US Bankruptcy Court for the Southern District of New York. The judge with conduct of the matter is the Honourable Judge Peck, who is also the designated bankruptcy judge with overall responsibility for the Lehman insolvencies in that jurisdiction.

LBSF, for its part, has started parallel proceedings in the New York court against BNY, as Trustee, seeking to establish that the switch to Noteholder Priority is void because it breaches the so-called ipso facto principle which is enshrined in the United States Bankruptcy Code.

LBSF has a motion for summary judgment in those proceedings which is due to be heard on Thursday of this week in New York. On the same occasion there will be heard a cross-application for summary judgment by BNY, which, as I understand it, will argue in broad terms, firstly, that the ipso facto rule is not engaged because LBSF had no priority property interest in the collateral when it filed for Chapter 11 protection. As I understand it, the arguments relied on in support of that contention are very similar to those which the English courts have upheld in this jurisdiction. Secondly, if the ipso facto principle is engaged, the circumstances fall within one of the so-called “safe harbour” exceptions for the enforcement of swap agreements. Thirdly, it will be argued that the matter is, in any event, res judicata because of the English judgments which are binding on LBSF as a party to the English proceedings.

Against this background which I have sketched in there is clearly a risk that BNY will find itself faced with conflicting decisions in New York and England. In that event, a conflict of laws question will arise as to which of those decisions should prevail. There is, of course, also the possibility that that further question will be answered differently in the two jurisdictions.

I should say at once that both courts are fully aware of this risk and of the general desirability of avoiding a conflict if that is at all possible. In this context, I would refer to the transcript of a hearing which took place before Judge Peck on 11^th August, when he had before him a dismissal motion filed by BNY asking for the US proceedings to be dismissed on the ground that Perpetual was a necessary party to them but had not been joined. That motion was dismissed by the learned judge, but the transcript shows that he was fully aware of the risk of possibly conflicting decisions, and he was anxious to adopt an approach which would minimise the risk of that happening. He appreciated that BNY wished to avoid being caught in the middle of a conflict. He pointed out, in a comment which I would respectfully endorse, that there appeared to be “some measure of game theory on both sides of the Atlantic”, each side seeking, no doubt, a tactical advantage in proceeding in the way that it has.

He said that he was sensitive to the issues of comity and co-operation had been discussed throughout the argument before him, and he said he also recognised that the only rational outcome that makes good sense in a cross-border setting is for the United States bankruptcy court to be the principal, if not exclusive, decider of issues relating to US bankruptcy law; and similarly for the High Court in London to be the principal, if not exclusive, decider of issues of English law. He commented, and again I would agree, that it would be very difficult for any rational or fair minded person to disagree with that proposition.

He also went on to say that co-ordination appeared to him to be most appropriate answer to the problem, although he was not entirely clear that both sides were agreed as to the precise nature of the co-ordination that would be appropriate.

Shortly after that hearing a letter was sent by Judge Peck to the Chancellor of the High Court, and again I should refer to the terms of that letter, which was dated 20^th August. He set out the general background to the matter, he recorded that he had denied BNY’s motion on 11^th August, and he gave formal notice of his intention to communicate with the High Court. He also referred to the timetable leading up to the hearing which is now due to take place this week, and he concluded in a paragraph which I should quote:

“In this context, and in accordance with the provisions of Article 25 of the UNCITRAL Model Law (as given effect in England by the Cross-Border Insolvency Regulations 2006), I would invite your Lordship to consider this Court’s schedule and not to make any final disposition of the High Court Proceedings, with the exception of the indemnification issues, until I am able to consider and rule on the United States bankruptcy law issues raised in the summary judgment briefing. Once I have considered and ruled on the issues in the Adversary Proceeding ...”

The Chancellor then replied to that letter on 9^th September, pointing out that there was a pending appeal in this jurisdiction and saying that he doubted that he would be called upon to adjudicate on any other issues apart from indemnification issues until the Court of Appeal judgment had been delivered. He said he did not expect that to happen before the week of 16^th November, although in the event, as I have mentioned, the Court of Appeal handed down its judgment on 6^th November.

The Chancellor said that he would, in any event, but subject to any submissions made to him by any of the parties, have regard to Judge Peck’s request, and he continued:

“I look forward to receiving your rulings in due course and any further requests you decide to make.”

Despite the terms of that correspondence, however, Perpetual still has certain concerns. In the first place, it says that the relief sought by LBSF in the United States proceedings apparently goes beyond the mere making of declarations as to the position under United States law. The relief sought is a final determination of the issues of New York law in favour of LBSF together with declarations, among others, that BNY would be in breach of the mandatory stay under the US legislation if it took any steps to enforce the provisions in a way contrary to the ruling on US law which LBSF is asking the court to make. In those circumstances, Perpetual fears that BNY would be at risk of proceedings for contempt of court if it failed to comply with such an order.

The relief sought has been set out in substantially the same terms at all times by LBSF: firstly, in its original application; secondly, in the draft order appended to it; and most recently in a reply memorandum which was lodged on 9^th November. In those circumstances Perpetual fears that LBSF is trying in some way to steal a march and to pre-empt the orderly resolution of the conflict issues which may arise if Judge Peck decides the underlying question of US bankruptcy law in favour of LBSF. It is said that this goes well beyond the position which was represented to the Chancellor and was reflected in paras.61 to 63 of his judgment. Perpetual also relies on the refusal by LBSF to offer an undertaking that it would not enforce any United States judgment against BNY. Such an undertaking was requested, both during the hearing before the Chancellor and in more recent correspondence, but on each occasion the response was that any such undertaking would be a matter that required the authority of the US bankruptcy court and was not one that LBSF could give of its own volition. That may be so, says Perpetual, but there is no evidence of any attempt to obtain such authority from the United States court.

I would refer now to the terms of the draft letter that Perpetual asks to be sent. In summary, it proposes a detailed allocation of functions between the two courts in the manner set out in a schedule. I would draw attention to the last issue which is said to be for the English court, namely whether the collateral should, in the light of decisions on the previous issues, be paid in priority to Perpetual on behalf of the retail Noteholders or in priority to LBSF. That appears to leave the last word on the critical ultimate question of how the collateral should be distributed with the English court.

In addition, in the main body of the letter, there is an express request to the US bankruptcy court, pursuant to the allocation of issues as set out in the schedule, or otherwise pursuant to the principle of comity:

“... not to make any order which would require the Trustee ...”

In his oral submissions to me yesterday, Mr. Moss enlarged on the points which I have summarised, and also made some additional points. He began by observing that LBSF is now bound by the decision of the Court of Appeal as a party to the English proceedings, having chosen to submit to the jurisdiction in this country and to be joined as a party.

He then submitted that the relief sought by LBSF in the United States can be analysed as having substantially three limbs. Perpetual has no objection to the US court deciding the first of those three limbs, which is in essence the question whether the ipso facto doctrine applies in such a way as to invalidate the relevant contractual provisions.

However, Mr. Moss argues that the second and third limbs are different because, although framed in terms of declaratory relief, they include declarations that LBSF is entitled to payment under Swap Counterparty Priority, and also, as I have already mentioned, that any action to enforce the provisions in the documents in the contrary sense would violate the automatic stay under the US legislation.

Mr. Moss submits that no distinction can be drawn for this purpose between declarations and positive orders, and he says that Mr. Snowden confirmed as much during the hearing which took place before the Chancellor, the point being that both would be binding and enforceable and they would each serve the purposes of LBSF equally well. In those circumstances, says Mr. Moss, no comfort can be drawn from the assertion that LBSF is “only” seeking declaratory relief in the New York court.

He goes on to say that there is no reason why a letter of request should not be sent in the terms of the draft. The whole object of the exercise is to prevent any conflict from arising, rather than dealing with it after the event. He says that the request will carry more weight if it comes from the court than if it is left to BNY to raise these points in the course of their submissions on Thursday.

He also submits that there is nothing either premature or exorbitant about the terms of the draft, but rather it reflects a sensible division of responsibilities, as in the earlier Cenargo case, to which reference is made in the draft, and also reflects the fact that any distribution of the collateral or its proceeds will inevitably have to be made under an order of the English court, because that is where both the assets and the Trustee are to be found.

Finally, Mr. Moss submitted that if the court was not prepared to send a letter in those terms his fall-back position would be that a more limited letter should be sent along the lines suggested by BNY, but with the wording clarified in such a way as to make it explicitly clear that the US court is invited not to make orders or declarations in the terms of the second and third limbs of the relief sought.

The counter-argument advanced by Mr. Snowden on behalf of LBSF is that it would be both unnecessary and counter-productive to send a letter in those terms at this stage. In particular, he argues that the application is based on a mischaracterisation of the relief which is sought in the US. That relief is expressly confined to declaratory relief, as the terms of the draft order make clear, and it is confirmed in the witness statement of Mr. Shankland on behalf of LBSF that no order will be sought requiring BNY to act in any particular way at this stage.

Mr. Snowden points out that no realisation of the security has yet taken place, let alone any proposal for its distribution, and there is therefore no immediate risk of BNY being placed in a position of conflict.

In any event, Judge Peck has already said that he will communicate further after ruling on the issues of US law, and in the light of that assurance the proposed letter would be contrary to the scheme of communication and co-operation which has already been established between Judge Peck and the Chancellor. In fact, says Mr. Snowden, the draft letter would in substance amount to an attempt to prevent the US court from ruling on the US issues at all, because what it really seeks to do is to establish priority for future UK rulings on how the collateral is to be distributed. The implication is that the US court would be wasting its time in determining the questions of United States law, because the last word would be in this jurisdiction.

Mr. Snowden submits that this goes far beyond the principle of comity, which is based on common courtesy and mutual respect, and might be regarded by Judge Peck as embarrassing, or possibly even as offensive. In any event, it would be an unwarranted interference, and an extraordinary one coming as it does at the instigation of Perpetual which is not a party to the US proceedings. BNY, on the other hand, is an active party to the US proceedings and Judge Peck expressly recognised in August that BNY was well able to represent the interests of Perpetual in those proceedings.

The exchange of letters between Judge Peck and the Chancellor shows that Judge Peck is fully aware of the possibility of conflict, and on any fair reading his letter evinces a clear intention to proceed in the same cautious and co-operative manner as the English court has done to date.

In summary, submits Mr. Snowden, it should be left to Judge Peck to decide what orders he should make in his own court.

Mr. Snowden buttressed his submissions by reference to the principles on which an English court will grant an anti-suit injunction. As the authorities show, that is a jurisdiction to be very sparingly exercised, and in the absence of an exclusive jurisdiction clause in favour of England, it will only be exercised in truly exceptional cases where the conduct of the respondent has been vexatious or oppressive. Mr. Snowden suggested that the present case was a fortiori because no question of an anti-suit injunction has arisen, nor has one ever been threatened.

On behalf of BNY, Mr. Midwinter pointed out that it found itself as pig in the middle and it wishes to avoid the risk of inconsistent judgments. Although neutral in the English proceedings, as befits its role as Trustee, and because Perpetual is, of course, a party, it is not neutral in the US proceedings where it will argue the case for Noteholder Priority, and will seek to establish its cross-motion for summary judgment.

In his skeleton argument, Mr. Midwinter said that BNY would oppose the sending of a letter in the terms proposed by Perpetual because it might be seen as presumptuous and also as inconsistent with the letter already sent by the Chancellor. However, he went on to say that BNY would be content to support the sending of a more limited letter to Judge Peck, which would simply note that LBSF has submitted to this court that it is only asking for declaratory judgment at the hearing on 19^th November, and not for any relief requiring BNY to deal in any particular way with the collateral or its proceeds; and secondly, asking that Judge Peck not make any order for relief requiring BNY to deal in any particular way with the collateral or its proceeds until there has been further correspondence between the courts.

In his oral submissions Mr. Midwinter confirmed that the wording in his skeleton argument was deliberately imprecise, on the footing that it should be left to Judge Peck to decide precisely what or what not to do and how to interpret the relief sought in the proceedings before him.

With the assistance of the full and very helpful submissions which I have summarised I must now state my conclusions. As I indicated in the course of the hearing, I would not be happy to send a letter in the terms of the draft prepared by Perpetual. Apart from some infelicities of wording, which could no doubt be ironed out, it seems to me altogether too schematic and elaborate for this early stage in the judicial dialogue and to go well beyond the understanding already reached between Judge Peck and the Chancellor.

I also see considerable force in the criticism that it may look like a pre-emptive attempt to establish primacy for the orders either now made or to be made in the future by the English court directing the Trustee how the collateral or its proceeds are to be distributed; and thus may be seen as objectionable for much the same reasons that Perpetual says the relief sought by LBSF in the United States proceedings is objectionable.

More generally, I think that to send a letter in these terms at this stage, before Judge Peck has given any ruling on the issues of US law, would be judicial bad manners rather than an example of judicial comity in action, and might even be counter-productive.

Accordingly, the real question, to my mind, is whether to send no letter at all at this stage, or whether to send a much more limited letter designed to reduce the risk of conflicting rulings being made as a result of the hearing on Thursday.

There is undoubtedly much to be said for doing nothing, and Mr. Snowden has advanced a persuasive case in support of that conclusion. The existing exchange of judicial letters shows that Judge Peck is very alive to the problems and that he intends to communicate further with the English court once he has given his rulings on the issues of US law. What more, it may well be asked, could he reasonably be asked to do at this stage? On the other hand, it may be said that there is nothing to lose, and may be something to gain, in sending a letter which points out that the English court has deliberately refrained from making orders or declarations that might have the effect of pre-empting an application by LBSF, or a request by the US court, in this jurisdiction, and which invites the US court to exercise similar restraint until the two courts have communicated with each other on the way forward.

I am satisfied that there are some real concerns about the second and third limbs of the relief which LBSF has throughout sought to claim in the US proceedings, and in my judgment those concerns are not necessarily allayed by saying that the relief sought is purely declaratory in nature. The problem is, or may be, about the potentially pre-emptive content of the declarations sought rather than about the contrast between declarations and positive orders of the court, that being, in the present context, a distinction without a difference, as Mr. Snowden himself confirmed or accepted in the course of the hearing before the Chancellor.

I am also left wondering why LBSF is so anxious to maintain all three facets of its claim to declaratory relief if, in substance, the second and third facets add nothing to the first.

I should also say that I see no substance in the objection that the present application is made by Perpetual, which is not a party to the US proceedings. The sending of a letter of request is a matter for the English court, and Perpetual is a party to the English proceedings. However, the ultimate decision is one for the court alone, and I cannot see any objection on the basis that Perpetual is the party which has invited the court to consider the question.

I find the question of whether or not to send a letter to be finely balanced, but in the end I have concluded that the arguments in favour of sending a letter of request before Thursday’s hearing in New York outweigh the arguments against. What I envisage is that a letter should be sent along the general lines suggested by BNY, but slightly amplified and clarified.

In a little more detail, it seems to me that the letter should cover the following points:

I hope, in the light of the indications which I have given, that the parties may be able to agree in the course of today a draft letter for the court to send, and then consideration will also need to be given to the mechanics of how that should most expeditiously and efficiently be achieved.