This afternoon, Lehman Brothers Holdings Inc. and Lehman Commercial Paper Inc. (together, "Lehman") filed a stipulation with the Bankruptcy Court agreeing to notify parties to all open trades by the close of business on November 7, 2008 of whether it will assume, assume and assign or reject each open trade. Trade counterparties should understand what this means to them and be prepared for whatever action Lehman takes in this regard.
Section 365(a) of the Bankruptcy Code gives Lehman the right to assume or reject an executory contract. An executory contract is generally defined as one in which performance is required from both parties at the time of the debtor’s (Lehman’s) bankruptcy filing. Confirmed trades, that is agreements to buy or sell loans pursuant to executed trade confirmations or enforceable oral agreements, should be considered executory contracts. Under Section 365(f) Lehman may assign any executory contract that it assumes to a third party.
If Lehman assumes your trade you should expect to enter into definitive transfer documentation and consummate your transaction.
If Lehman rejects your trade, instead of acquiring an interest in an underlying loan where Lehman is your seller or disposing of an interest in an underlying loan where Lehman is your buyer, you will have an unsecured claim for Lehman’s breach of the trade and be entitled to damages. Damages for trades where Lehman is your seller should include amounts attributable to increases in market value of the underlying loans (if any) and the expected yield on the underlying loan. Damages for trades where Lehman is your buyer should include losses due to decreases in the market value of the underlying loan and other damages that may result.
If Lehman assumes your trade and assigns it to a third party you will be obligated to perform the contract with a new counterparty not of your choosing. In certain circumstances it may be prudent to object to the assumption and assignment of the trade, including when future performance is required of the assignee and the ability of the assignee to perform is questionable.