Assured Guaranty Secures Trial Victory Against Lehman Brothers International (Europe) in Commercial Division of the New York Supreme Court

Cleary Gottlieb achieved a significant victory for its client Assured Guaranty (Assured) by successfully defeating claims brought by Lehman Brothers International (Europe) (LBIE) in the Commercial Division of the New York Supreme Court and prevailing on Assured’s counterclaim for breach of contract.

The case concerned the proper valuation of 28 terminated credit default swaps between Assured and LBIE under the terms of the ISDA Master Agreement. After Lehman’s bankruptcy in 2009, Assured (the protection seller on the swaps) exercised its right to terminate the transactions and calculated a settlement amount of approximate $20 million that Lehman owed Assured. Lehman disputed that amount, and initiated litigation against Assured in 2011, asserting a number of claims and seeking damages of approximately $1.4 billion.

Cleary succeeded twice in narrowing the scope of Lehman’s claims—first, in 2013 after the trial court granted Cleary’s motion to dismiss certain of Lehman’s claims, and again in 2018 after Cleary prevailed in dismissing other of Lehman’s claims on its motion for summary judgment, which order the First Department subsequently affirmed. The issue left for trial was whether Assured’s calculation of the settlement amount upon termination of the swaps was objectively reasonable and made in good faith under the terms of the governing ISDA Master Agreement. Lehman claimed that Assured breached the agreements and that it was owed $485 million plus pre-judgment interest. On its counterclaim, Assured claimed that it was owed over $20 million plus pre-judgment interest.

A five-week bench trial was held from October 18, 2021, through November 19, 2021, before Justice Melissa A. Crane of the New York Commercial Division.

After extensive post-trial briefing, the court ruled on March 8, 2023. The court found that Lehman had not proven its claim, that its “valuation was commercially unreasonable under the circumstances,” decision p. 33, and rejected its request for $485 million in damages; the court also found that Assured had proven its counterclaim by showing that its calculation was commercially reasonable and done in good faith. At trial, Lehman argued that there was a uniform market practice to calculate Loss with reference to market prices, and that Assured had calculated its loss unreasonably by departing from that market practice and calculating its loss using a cash-flow model. Justice Crane rejected Lehman’s contention in full and found in Assured’s favor on every issue. Justice Crane concluded that Lehman “fail[ed] to demonstrate the existence of a uniform market practice to calculate ‘loss’ based on market prices,” or that “market prices were available around the time of the valuation date.” Decision pp. 2-3. Further, the court explained that Lehman’s position ignored the plain language of the contract, explaining that “[Lehman] keeps forgetting that...Assured was entitled to resort to loss methodology that ‘NEED NOT’ utilize market prices.” Decision p. 33. This was particularly important because at the time “markets were so disrupted that accurate market prices were non-existent...the ISDA Master Agreement allowed Assured to value its loss in any reasonable manner.” Decision p. 3. Thus, the court found that by relying on the same loss reserve model that it used in the regular course of business to estimate the losses on these transactions, Assured had “followed the ISDA Master Agreement’s contractual terms and considered all relevant circumstances,” and had “carried its burden to demonstrate that its valuation was commercially reasonable and in good faith.” Decision p. 4.