FEDERAL COURT OF AUSTRALIA

Lehman Bros Australia Ltd (In Liq) v Lehman Bros Special Financing Inc [2015] FCA 779

THE COURT ORDERS THAT:

1.    Pursuant to r 10.43(2) of the Federal Court Rules 2001 (Cth), leave be granted for the applicants to serve the Originating Application dated 16 June 2015 on the respondent in the United States of America, by personal delivery of the Originating Application to the office of Corporation Service Company, the Respondent's registered agent in Delaware, at 2711 Centerville Road Suite 400, Wilmington Delaware 19808, USA.

2.    Pursuant to rule 10.44(1) of the Federal Court Rules 2001 (Cth), leave be granted for the applicants to serve copies of:

(a)    the applicants’ genuine steps statement dated 16 June 2015;

(b)    first affidavit of Marcus William Ayres sworn 16 June 2015, filed in support of the originating application dated 16 June 2015 (first Ayres affidavit);

(c)    exhibit marked “MWA-1” to the first Ayres affidavit;

(d)    interlocutory application dated 16 June 2015;

(e)    second affidavit of Marcus William Ayres sworn 16 June 2015, filed in support of the interlocutory application dated 16 June 2015 (second Ayres affidavit);

(f)     exhibit marked “MWA-2” to the second Ayres affidavit;

(g)    exhibit marked “MWA-3” to the second Ayres affidavit;

(h)    the applicants’ outline of submissions dated 16 June 2015; and

(i)    these orders

on the respondent in the United States of America, by personal delivery of the documents to the office of Corporation Service Company, the Respondent's registered agent in Delaware, at 2711 Centerville Road Suite 400, Wilmington Delaware 19808, USA.

3.    The Applicants are to send, by prepaid post, to the office of Corporation Service Company, the Respondent's registered agent in Delaware, at 2711 Centerville Road Suite 400, Wilmington Delaware 19808, U.S.A.:

(a)    the transcript of the hearing of the interlocutory application held on 18 June 2015; and

(b)    the reasons for judgment issued by this Court in respect of that interlocutory application,

once they become available.

4.    The second and third applicants’ costs of this application are costs properly incurred in the exercise of their duties and powers as liquidators of the first applicant.

5.    The matter be listed for directions on 21 August 2015 at 9.30 am, and that be specified as the return date in the originating application dated 16 June 2015 to be served on the respondent.

Note:    Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

REASONS FOR JUDGMENT

(REVISED FROM THE TRANSCRIPT)

1    The applicants, Lehman Brothers Australia Ltd (In Liq) (Scheme Administrators Appointed) (LBA) and its two current liquidators, have applied for leave to serve the originating application, affidavits in support and some other documents on the registered agent of the respondent, Lehman Brothers Special Financing Inc (LBSF), in Delaware in the United States of America.

2    On 2 October 2009, the Court ordered that LBA be wound up by the Court, and appointed its two then administrators as liquidators: City of Swan v Lehman Brothers Australia Limited (No 2) [2009] FCA 1160. Over the course of the years since then, the identity of the liquidators has changed. The second and third applicants are LBA’s current liquidators. Both LBA and LBSF were companies in the Lehman Brothers group. The principal company in the group was Lehman Brothers Holdings Inc (LBHI).

Background

3    The Lehman Brothers group of companies collapsed spectacularly when, on 15 September 2008, LBHI filed a voluntary petition for re-organisation under Ch 11 of Title 11 of the United States Code (the Bankruptcy Code). That event precipitated what has become known as the Global Financial Crisis. Shortly afterwards, on 3 October 2008, LBSF also filed Ch 11 re-organisation proceedings. Each of those events was an event of default under a large number of financial instruments, some of which were synthetic collateralised debt obligations (SCDOs). Those included a series known as the Federation SCDOs. The transaction documents for SCDOs, including the Federation SCDOs, contained clauses that:

    set out the order of priority for the payment of what, if any, of the investor’s capital remained at the time of final payment. This clause was known as the “flip clause”;

    provided that the proper law of those documents was the law of the United States of America.

4    I discussed, in a general way, how SCDOs operated, including how the flip clause operated, in Wingecarribee Shire Council v Lehman Brothers Australia Limited (2012) 301 ALR 1, inter alia at 220-223 [823]-[837].

5    The Federation SCDOs’ flip clause provided that, if the credit default early swap terminated early, LBSF would be paid all moneys due to it in priority to note holders (i.e. investors). The payment would be made out of the collateral held by the trustee for note holders, Bank of New York Mellon, as it is now known, formerly Bank of New York, (BNY), unless LBSF was the defaulting party causing the early termination of the swap. The transaction documents provided that an event of default included a bankruptcy filing by LBSF or LBHI.

6    On 27 October 2008, BNY issued a notice of designation of early termination date in respect of each series of Federation SCDO notes. The notice referred to the earlier events of default, being the Ch 11 filings of LBHI on 15 September 2008 and LBSF on 3 October 2008, and designated 30 October 2008 as the early termination date for the notes.

7    Relevantly, LBA had gone into administration on 26 September 2008. On 30 October 2008, BNY paid LBA $22,823,890.49. That sum represented the whole of the value of the collateral in respect of the Federation SCDOs notes held by BNY (the collateral payment).

8    The administration of LBA came to an end on 2 October 2009, after the Full Court of this Court held that the deed of company arrangement that LBA had entered into was void, (City of Swan v Lehman Brothers Australia Ltd (2009) 179 FCR 243). As a result, I made the order for LBA to be wound-up.

9    As I described in my reasons (Wingecarribee 301 ALR at 222 [830]ff), on 25 January 2010, Judge James M Peck of the United States Bankruptcy Court for the Southern District of New York held that the flip clause was an “ipso facto” clause under the Bankruptcy Code, and that monies payable under instruments such as the Federation SCDOs could not be paid out to note holders. He held that the Ch 11 filing by LBHI had triggered an automatic stay on the operation of the flip clause: Lehman Brothers Special Financing Inc v BNY Corporate Trustee Services Ltd (2010) 422 BR 407.

10    Subsequently, in different proceedings that involved the same issue, the Supreme Court in the United Kingdom held in Belmont Park Investments Proprietary Limited v BNY Corporate Trustee Services Limited [2012] 1 AC 383 that, under English law, being the proper law of the SCDOs in that litigation, the flip clause was valid and did not deprive the note holders of their entitlement to return of the collateral in priority to the swap counter party in those proceedings. The latter was in materially the same position in those proceedings as LBSF is in these. There, the swap counter party had contended that the flip clause was “ipso facto” rendered ineffective under the Bankruptcy Code and could not deprive it of the right to be paid the collateral held by the trustee before the residue, if any, was available to be paid to the note holders.

The nature of these proceedings

11    The applicants seek relief in this Court in the form of three substantively negative declarations, to the effect that they are not under any liability to LBSF as a result of BNY making the collateral payment to LBA on 30 October 2008.

12    The substance of the three negative declarations that the applicants seek as final relief is that:

    first, the rights and interests of LBA in the debts comprising the balances of numerous bank accounts into which the administrators and, subsequently, liquidators have paid or transferred various parts of the collateral payment after its receipt from BNY on 30 October 2008, are held free from any proprietary interest of LBSF arising from the collateral payment;

    secondly, the applicants are not liable to LBSF in respect of any liability or claim arising from the distribution of the collateral payment by BNY, or LBA’s the receipt of those proceeds on 30 October 2008;

    thirdly, LBSF does not have any debt or claim against LBA in respect of the Federation SCDO notes or the collateral payment that either is admissible to proof against LBA pursuant to s 553(1) of the Corporations Act 2001 (Cth) or should be accorded priority over all other unsecured debts and claims against LBA under s 556(1) of the Corporations Act or otherwise.

13    The applicants seek this relief because the liquidation has now progressed to the point where the liquidators are intending to call for proofs of debt to make an interim distribution. They hope soon to be in a position to finalise the winding-up, subject to three outstanding matters, namely:

    clarification of what, if any rights, LBSF has in respect of the collateral payment;

    an appeal by Gosford City Council, pursuant to s 1321 of the Corporations Act challenging the treatment by the liquidators of its proof of debt, that will be heard by another judge of the Court in July 2015;

    two proofs of debt lodged by McGraw Hill Financial Inc. and its subsidiary, Standard & Poor’s International LLC, claiming contribution from LBA in connection with a representative action that I am to hear in October and November 2015. As the liquidators currently understand it, the treatment of that proof of debt may not need to await the final resolution of those proceedings. I do not need to decide whether that understanding is correct for present purposes.

The evidence

14    On 17 December 2014, Jacobson J ordered, pursuant to s 479(3) of the Corporations Act, that the liquidators were justified in commencing proceedings seeking relief of the present kind.

15    The evidence before me is voluminous and extensive. It addresses what the applicants contend, for the reasons elaborated in their written and oral submissions, establishes their prima facie case for each of the three declarations that they seek.

16    The Lehman Brothers group companies had significant intercompany balances, rights and liabilities that have involved a number of complex intercompany arrangements and orders made by the Bankruptcy Court. The precise nature of those arrangements and orders is not necessary to describe in these reasons, but their substance has been referred to in the detailed written and oral submissions made by the applicants on the present application.

17    One of the liquidators, the third applicant Marcus Ayers, swore two affidavits on 16 June 2015, the first dealing with the substance of the applicants’ claims for final relief and the second proving matters in support of orders for service of LBSF in the United States, under r 10.43.

18    The first two declarations sought involve highly complex issues as to the proper construction of the various Federation SCDO transaction documents, the application of various sections in the Bankruptcy Code, the operation of various orders made by the Bankruptcy Court in relation to the Ch 11 reorganisation of Lehman Brothers group companies in the United States, including LBSF and LBHI, their effect on third parties such as LBA and the operation of the substantive law of the United States, including in relation to the flip clause.

19    LBSF commenced proceedings in the Bankruptcy Court in the form of a class action, but the class has not yet been certified. LBSF’s claims in those proceedings are now into their third amended formulation and, on the evidence before me, are not likely to be resolved by the Bankruptcy Court for some time, at the earliest in 2017. LBA is not named as a party in those proceedings, but is capable of being included within the members of the class that the Bankruptcy Court ultimately will have to certify, if the class action is to proceed.

20    In June 2013, the liquidators called for informal proofs of debt for the purposes of voting on a proposed scheme of arrangement of LBA. In response to that call, on 5 June 2013, LBSF, through its Australian solicitors, Jones Day, filed a proof of debt for $22,400,000. That proof of debt explained that it was based on the collateral payment made by BNY to LBA. The proof of debt stated that the law of the State of New York was the governing law of the transaction documents under which the collateral payment was made, and that that law provided that LBSF had a right to priority, protected by the Bankruptcy Code, to receive that payment before any distribution to note holders, including LBA, despite the provisions of the flip clause. In the event, the proposed scheme did not proceed to a vote, so the liquidators did not have to adjudicate, and LBSF did not have to rely, on that proof of debt.

21    The proof of debt claimed that LBA was obliged to repay, or disgorge in favour of, LBSF, the amounts it had received as the collateral payment. The proof asserted that the bases on which that repayment or disgorgement liability arose were summarised in the then second amended complaint in the Bankruptcy Court proceedings filed on 29 June 2012, which the proof treated as being referred to by incorporation. The proof of debt stated (in [24] of the annexure to it):

Note that LBA is not named as a party to the LBSF US Proceedings, and reference to those Proceedings is by way of convenient summary of the legal bases on which LBSF makes its claim against LBA, which claim should fall to be determined in LBA’s liquidation or under any Scheme of Arrangement in the usual way (including, if necessary, by appeal to the court against any adjudication, or, with any necessary leave, by litigation). (emphasis added)

22    It is apparent from this explanation of LBSF’s then position that, in order to recover any amounts of the collateral payment to which it may be entitled, LBSF will have to prove its entitlement in the liquidation, in the usual way. The previously proposed scheme of arrangement was subsequently abandoned. It is not clear whether or not the third amended complaint in the Bankruptcy Court proceedings substantively altered the way in which LBSF currently asserts its rights against Federation SCDO note holders in the position of LBA, in respect of collateral payments by BNY.

23    The evidence before me contains an extensive analysis of the way in which the third amended complaint is formulated. As I presently understand, the applicants’ purpose in seeking the first two negative declarations is to meet both any proprietary and personal claims by LBSF against Federal SCDO note holders, such as LBA, who received a collateral payment.

24    The third amended complaint does not appear to make any assertions that affect the matters LBSF would need to establish in order to prove in LBA’s liquidation. Nor does that pleading suggest that, whatever rights LBSF claims to have in respect of the collateral payment, LBSF would not be constrained in seeking to enforce those rights in Australia by force of s 471B of the Corporations Act. That section provides:

471B    Stay of proceedings and suspension of enforcement process

While a company is being wound up in insolvency or by the Court, or a provisional liquidator of a company is acting, a person cannot begin or proceed with:

(a)    a proceeding in a court against the company or in relation to property of the company; or

(b)    enforcement process in relation to such property;

except with the leave of the Court and in accordance with such terms (if any) as the Court imposes.

25    Relevantly ss 553(1) and 556(1)(a) and (dd) also provide:

553    Debts or claims that are provable in winding up

(1)    Subject to this Division and Division 8, in every winding up, all debts payable by, and all claims against, the company (present or future, certain or contingent, ascertained or sounding only in damages), being debts or claims the circumstances giving rise to which occurred before the relevant date, are admissible to proof against the company.

556    Priority payments

(1)    Subject to this Division, in the winding up of a company the following debts and claims must be paid in priority to all other unsecured debts and claims:

(a)    first, expenses (except deferred expenses) properly incurred by a relevant authority in preserving, realising or getting in property of the company, or in carrying on the company’s business;

…

(dd)    next, any other expenses (except deferred expenses) properly incurred by a relevant authority;

Consideration – procedural matters

26    An application for service of originating process on a person in a foreign country requires the applicant to satisfy the Court of the matters set out in r 10.43(4), namely that the Court has jurisdiction in the proceeding, the proceeding is of a kind mentioned in r 10.42 and the party has a prima facie case for all or any of the relief claimed in the proceeding. In addition, the applicant must establish what the proposed method of service is and that that method of service is permitted, relevantly, by the law of the United States of America.

27    I am satisfied, on the evidence, that the law of the United States of America permits service of an originating process and court documents by personal delivery on Corporation Service Company, LBSF’s registered agent in its State of incorporation, Delaware, for the purpose of service of process at its address of 2711 Centerville Road, Suite 401, Wilmington, Delaware.

28    The Court has jurisdiction in this matter because the proceedings are of a kind specified in items 6, 14, 15 and 21 of the table in r 10.42. First, item 6 relevantly, requires that the proceedings be in Australia seeking the construction of a contract affecting property in Australia. These proceedings satisfy that requirement because they concern the construction of the transaction documents as that affects property in Australia, being the money representing LBA’s receipt of the collateral payment that is now held in 17 different bank accounts administered by the liquidators for the purposes of the liquidation.

29    Secondly, for the purposes of item 14, these are also proceedings in relation to the construction, effect or enforcement of the Corporations Act, as to how ss 471B, 553 and 556 operate in respect of claims which LBSF may, or wishes to, assert against LBA.

30    Thirdly, these proceedings are within item 15 because they seek relief or a remedy under s 21 of the Federal Court of Australia Act 1976 (Cth), namely declarations of right.

31    Lastly, the proceedings are also within item 21 because their subject matter is property in Australia that concerns LBSF as the party to be served, namely the choses in action in the 17 bank accounts in respect of LBA’s original receipt of the collateral payment.

Consideration – prima facie case

32    Rule 10.43(4)(c) requires that LBA have a prima facie case for all or any of the relief that it claims in the proceedings. That rule is in identical terms to O 8 r 3(2)(c) of the Federal Court Rules 1979 (Cth). In Ho v Akai Pty Limited (In Liquidation) (2006) 24 ACLC 1526 at [10] Finn, Weinberg JJ and myself explained the principles under O 8 r 3(2)(c) for ascertaining whether a party had established such a prima facie case in the following terms:

As has been observed on many occasions, the prima facie case requirement has to be met at the outset, usually on an ex parte basis, and without the advantage of discovery and other procedural aids to the making out of a case: see e.g. Merpro Montassa Ltd v Conoco Specialty Products Inc (1991) 28 FCR 387 at 390. It “should not call for a substantial inquiry”: WSGAL Pty Ltd v Trade Practices Commission (1992) 39 FCR 472 at 476; see also Sydbank Soenderjylland A/S v Bannerton Holdings Pty Ltd (1996) 68 FCR 539 at 549. For present purposes it is sufficient to say that a prima facie case for relief is made out if, on the material before the court, inferences are open which, if translated into findings of fact, would support the relief claimed: Western Australia v Vetter Trittler Pty Ltd (in liq) (1991) 30 FCR 102 at 110. Or, to put the matter more prosaically as Lee J did in Century Insurance (in provisional liquidation) v New Zealand Guardian Trust [1996] FCA 376:

“What the Court must determine is whether the case made out on the material presented shows that a controversy exists between the parties that warrants the use of the Court’s processes to resolve it and whether causing a proposed respondent to be involved in litigation in the Court in Australia is justified.”

33    And, as I said in Beluga Shipping GmbH & Co KS “Beluga Fantastic” v Headway Shipping Ltd (No 2) (2008) 251 ALR 620 at 628 [33]:

… a finding that there was a prima facie case on one aspect of the claim against [the party to be served] has the consequence that he may be proceeded against on other bases as well. That is because it is only necessary that a prima facie case be established for any one of the causes of action relied on for the relief sought: Bray [v F Hoffman-La Roche Ltd (2003) 130 FCR 317] at [47]-[55] per Carr J, [176]-[191] per Branson J; Ho [(2006) 24 ACLC 1526] at [45]-[46].

34    Of course, I cannot make, and am not making in these reasons, findings of fact that are in any way determinative of the ultimate issues in these proceedings. Nor is it the purpose of the rule that that be done. That purpose is, as Lee J identified in Century Insurance Ltd [1996] FCA 376, that the Court be satisfied that a controversy exists between the parties that warrants the use of its processes to resolve that controversy so as to justify the exercise of the long-arm jurisdiction that r 10.43 authorises, in order to expose a foreigner to this country’s jurisdiction.

35    It is neither necessary nor desirable for me to analyse in detail the facts and law relied on by the applicants for the purpose of determining whether to grant this ex parte application in relation to the first two forms of relief sought. That is because such an exercise would require extensive analysis of the law of the United States and consideration of a great deal of factual material of considerable complexity.

36    In contrast, the third declaration which the applicants seek squarely addresses what appears to me to be a controversy of the kind identified in LBSF’s earlier proof of debt, and warrants the use of the Court’s processes to resolve it. That is because, whatever may be the results of the class action in the Bankruptcy Court and assuming that LBA could be included within a certified class, LBA is being wound up by the Court. Thus, any proceeding in this country, other than by a secured creditor against LBA, will require the Court’s leave under s 471B of the Corporations Act. For LBSF to recover judgment against LBA in the class action, it would be necessary for LBSF either to prove in the liquidation or to seek to enforce such a judgment in Australia. Because LBA is in liquidation, any enforcement proceedings, ordinarily, could only be brought if LBSF first obtains leave to do so under s 471B. That is a controversy that warrants use of the Court’s processes.

37    As the applicants assert, there are some apparently formidable obstacles to such a proof of debt by LBSF being admissible in the liquidation. First, the relevant date for the purposes of s 553(1) is 26 September 2008, being when administrators were appointed to LBA: see my reasons in Wingecarribee 301 ALR at 281 [1076]. But, as the applicants argue, the circumstances giving rise to the receipt of the collateral payment by LBA occurred over one month later, on 27 or 30 October 2008.

38    For that reason I am satisfied that on the material before me, an inference is open, if translated to findings of fact at the trial, that the collateral payment made on 30 October 2008 does not fall within the provisions of s 553(1). That is because the collateral payment occurred after the relevant date and it therefore did not give rise to a debt or claim admissible to proof against LBA in the winding up. If that were established, as the evidence in respect of the prima facie case presently suggests it will be, LBSF could not qualify to prove under s 553(1) in respect of any allegedly wrongful act of payment of the collateral to LBA by the trustee, BNY. That is because, as at 26 September 2008, no money had been paid to LBA by BNY. That only occurred on 30 October 2008.

39    On one view of the applicants’ argument, the date of issue of BNY’s notice of designation of early termination, 27 October 2008, may support an even stronger prima facie case that no relevant circumstances could have arisen before 26 September 2008 for the purposes of s 553(1). It is not necessary to resolve that argument.

40    The issue of the notice by BNY on 27 October 2008 was a necessary step that had to occur before it could pay the collateral to anyone. That occurred after 26 September 2008 being the relevant date for claims to be admissible to proof in LBA’s liquidation under s 553(1).

41    For these reasons, I am satisfied that there is a sufficient prima facie case on the material before me, for the purposes of the test in r 10.43(4)(c), that LBSF will not be able to prove in LBA’s liquidation under s 553(1) in respect of LBSF’s allegation that, when BNY made the collateral payment, it did not do so in accordance with what LBSF asserts was the proper application of the flip clause.

42    I am also satisfied that the applicants have established a sufficient prima facie case under s 556(1). That is because on the material before me, there is a sufficiently strong argument that LBSF does not have a debt or claim that it could prove, under the provisions of s 556(1)(a), as an unsecured debt or claim incurred by LBA, its administrators or liquidators in preserving, realising, or getting in property of that company, being the proceeds of the collateral payment. Nor does any debt or claim that LBSF may seek to recover in respect of the collateral payment to LBA appear to be capable of being characterised as some other expense properly incurred by LBA, its administrators or liquidators, within the meaning of s 556(1)(dd).

43    Moreover, LBSF will be able to assert any rights that it may claim to have in respect of LBA’s receipt of the collateral payment in these proceedings, if it so chooses.

44    I am also mindful that any claim LBSF may have in respect of the collateral payment relates to property that is the subject of the winding up of LBA by the liquidators as officers of the Court, and that any such claim is likely to raise a question in the winding up under the Corporations Act that will fall to be decided by the Court in due course.

Conclusion

45    For these reasons, I am satisfied that it is appropriate to make orders providing for service of the originating application on the registered agent of LBSF in the United States, together with copies of the genuine steps statement, the interlocutory application for service out of the jurisdiction and the affidavits and exhibits of Mr Ayres. I will also require that the applicants’ written submissions be served, and that a copy of the transcript of today’s hearing and these reasons also be served in due course.

46    In my opinion, the liquidators’ cost of this interlocutory application are costs properly incurred in the exercise of their duties and powers as liquidators. That is because the liquidators have acted in accordance with the direction in the order made by Jacobson J on 17 December 2014, that they would be justified to bring proceedings of this kind.

47    In addition, for the reasons I have given, the potential for the class action to have an impact on the way in which the liquidation of LBA is to proceed further justifies the liquidators in having brought these proceedings, so as to have that matter addressed by the Court.

Associate:

Dated:    30 July 2015

SCHEDULE

NSD 697 of 2015

IN HIS CAPACITY AS LIQUIDATOR OF LEHMAN BROTHERS AUSTRALIA LIMITED (IN LIQUIDATION) (SCHEME ADMINISTRATORS APPOINTED) STEPHEN JAMES PARBERY

Second Applicant

IN HIS CAPACITY AS LIQUIDATOR OF LEHMAN BROTHERS AUSTRALIA LIMITED (IN LIQUIDATION) (SCHEME ADMINISTRATORS APPOINTED) MARCUS WILLIAM AYRES

Third Applicant