Case of the week: Banking & Finance

Commentary
Rob Hickmott

Two themes emerge from this complex Lehman-related case that dealt with the ownership of the ’Rascals’ securities. First, when contractual relationships between group companies are tested on an insolvency, the courts will look at not only to what the contracts say, but also to what the parties did. Here, the contract said one thing but the inter-company processes and accounting treatment were
on a different footing.

The court decided that in circumstances where the conditions for an estoppel by convention had been satisfied that involved LBIE taking title to the Rascalled securities and being treated as having paid the price for the on-leg of a repo or stock loan, Lehman Brothers Finance was estopped from seeking to rely on the contract to say that LBIE had not acquired title to the relevant securities because it had not paid for the on-leg.

The court was inclined to the reality of the situation rather than a contractual fiction.

The second relates to trust law, and specifically the question of whether a trust over fungible assets fails because the subject-matter (intermediated securities) cannot be sufficiently identified as they had been pooled in non-segregated accounts and used, among other things, to satisfy short positions.

The court rejected this argument, focusing on there being no identification of the subject-matter of the trust and putting to one side difficulties in identifying the trust assets to a later date. Once again, it drew on ancient principles of trust law and applied them to the modern facts of a failed investment banking business.

Rob Hickmott, partner, Quinn Emanuel Urquhart & Sullivan