“New ‘Intel’-igence on ISDA “Loss” Definition”
The September 15, 2008 Chapter 11 filing of Lehman Brothers Holdings Inc. (“LBHI”) was an Event of Default under hundreds, if not thousands, of 1992 ISDA Master Agreements (Multicurrency — Cross Border) (“1992 ISDAs”) between LBHI and its affiliates and counterparties across the world. Many of these defaults ripened into valuation disputes, which became the subject of mediations and litigations. These proceedings often revolved around the calculation by the Non-defaulting Party of its “Loss” under a 1992 ISDA, and the meaning of the terms of the “Loss” provision. While counterparties had previously litigated some aspects of the “Loss” provision, the Lehman mediations and litigations revealed important lacunae in New York case law—one of the two potential governing laws under the 1992 ISDA.
The decision by the United States Bankruptcy Court for the Southern District of New York (the “Bankruptcy Court”) in Lehman Brothers Holdings Inc. v. Intel Corp. (In re Lehman Brothers Holdings Inc.) helped to fill in two of these gaps:
- what discretion, if any, the Non-defaulting Party has in calculating its Loss; and
- whether and to what extent the so-called “cross-check principle” developed under the law of England and Wales (“English law”), which essentially provides that a calculation of Loss might be unreasonable if it deviates greatly from a Market Quotation calculation, or vice versa, is applicable under New York law.
In this Stroock Special Bulletin we first review the key parts of the Loss provisions of the 1992 ISDA. Next, we analyze the relevant facts of the Intel case and how the Bankruptcy Court reached its decision. We conclude with some practice pointers for counterparties who find themselves having to terminate a 1992 ISDA, where the Loss provision is the governing payment measure.