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Lehman in Jakarta -- Venue, Choice of Law, and International Bankruptcy

By Stephen Lubben

Tuesday I noted an interesting dispute in the Lehman case regarding a "range accural trade," and wondered about Lehman's willingness to do the trade without collateral. Going without upfront (or "independent amounts") collateral seems inconsistent with the way Lehman normally operated with regard to several established hedge funds, so why take on greater risk in a jurisdiction with lesser legal institutions?

But lurking here are several thorny choice of law, and, more importantly, choice of venue questions.

Recall that Lehman's counterparty has filed suit in Indonesia to void the swap. Lehman had sought to use the bankruptcy court imposed ADR process to resolve the issue, although there does not appear to be much to resolve. Lehman terminated the swap, and appears to have followed the proper ISDA procedures in this regard.

That the counterparty's actions in Indonesia violate the automatic stay seems fairly clear. The real question is whether the bankruptcy court has jurisdiction against the counterparty, so that the stay can be enforced. And there is a subsidiary issue of whether the bankruptcy court can easily interpret a contract that appears to have been entered into in Indonesia. Here the underlying documents provide some bite, because the trade confirmation includes a New York choice of law clause, and the background master agreement (admittedly, never executed -- but arguably incorporated into the confirmation that was signed) provides for both application of New York law and submission to jurisdiction therein. 

So, as a legal matter, the bankruptcy court has jurisdiction to enforce the automatic stay against the counterparty. The practical question is whether the counterparty has any assets in the United States, or desire to do business in the United States, such that the court's jurisdiction will have actual consequence.

Then there is the suit in Indonesia. Up until now, I've referred to it as a suit to annul the swap. Actually, it's a bit more complicated than that. The compliant asserts several tort causes of action, based on Lehman's efforts to collect on a swap the counterparty says was never valid. Not only do they assert they would have been "in the money" on the swap if it had been property executed, but also that they have suffered at least $11 million in reputational damages due to Lehman's claims that the Indonesian company defaulted.

In short, there is some risk that an affirmative judgment will be entered against Lehman. Presumably they are moving any portable assets out of the country as you read this.

Full post as published by Credit Slips on October 07, 2010 (boomark / email).