Wingecarribee Shire Council v Lehman Brothers Australia Ltd (in Liq) (No 6)
[2011] FCA 350
•24 March 2011
FEDERAL COURT OF AUSTRALIA
Wingecarribee Shire Council v Lehman Brothers Australia Ltd (in Liq) (No 6)
[2011] FCA 350
Citation: Wingecarribee Shire Council v Lehman Brothers Australia Ltd (in Liq) (No 6) [2011] FCA 350 Parties: WINGECARRIBEE SHIRE COUNCIL, CITY OF SWAN and PARKES SHIRE COUNCIL v LEHMAN BROTHERS AUSTRALIA LIMITED (IN LIQUIDATION) (ACN 066 797 760) File number: NSD 2492 of 2007 Judge: RARES J Date of judgment: 24 March 2011 Catchwords: PROCEDURE AND PRACTICE – subpoena for production – relevance of documents – settlement agreement entered into by third parties in respect of the value of securities similar to securities to be valued
EVIDENCE – whether settlement agreement is a communication or document made “without prejudice” – s 131 of the Evidence Act 1995 (Cth)
Held: subpoena set aside – settlement agreement insufficiently relevant – settlement agreement was not protected by “without prejudice” privilege under s 131 of the Evidence Act 1995 (Cth)
Legislation: Evidence Act 1995 (Cth) s 131 Cases cited: HTW Valuers (Central Queensland) Pty Limited v Astonland Pty Limited (2004) 217 CLR 640 referred to
Lehman Brothers Special Financing Inc v BNY Corporate Trustee Services Limited (2010) 422 BR 407 referred to
Perpetual Trustee Company Limited v BNY Corporate Services Limited [2009] EWHC 1912 (Ch) referred to
Perpetual Trustee Company Limited v BNY Corporate Trustee Services Limited [2010] Ch 347 referred to
State Rail Authority of New South Wales v Smith (1998) 45 NSWLR 382 followed
Tallerman & Co Pty Limited v Nathan’s Merchandise (Victoria) Pty Limited (1957) 98 CLR 93 followed
Western Australia v Southern Equities Corporation Limited (in Liq) (1996) 142 ALR 597 followedDate of hearing: 24 March 2011 Place: Sydney Division: GENERAL DIVISION Category: Catchwords Number of paragraphs: 31 Counsel for Perpetual Trustee Company Limited: AW Street SC Solicitor for Perpetual Trustee Company Limited: Henry Davis York Counsel for Lehman Brothers Special Financing: TGR Parker SC Solicitor for Lehman Brothers Special Financing: Jones Day Counsel for the Respondent: J Sheahan SC and J Hutton Solicitor for the Respondent: Blake Dawson
IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY
GENERAL DIVISION
NSD 2492 of 2007
BETWEEN: WINGECARRIBEE SHIRE COUNCIL
First ApplicantCITY OF SWAN
Second ApplicantPARKES SHIRE COUNCIL
Third ApplicantAND: LEHMAN BROTHERS AUSTRALIA LIMITED (IN LIQUIDATION) (ACN 066 797 760)
Respondent
JUDGE:
RARES J
DATE OF ORDER:
24 MARCH 2011
WHERE MADE:
SYDNEY
THE COURT ORDERS THAT:
1.The subpoena issued to Perpetual Trustee Company Limited be set aside.
2.The respondent pay the costs of the motions of Lehman Brothers Special Financing Inc filed on 11 March 2011 and Perpetual Trustee Company Limited filed on 9 March 2011, such costs to be borne by the respondent in any event and are not to form part of its costs of the proceedings.
Note:Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.
The text of entered orders can be located using Federal Law Search on the Court’s website.
IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY
GENERAL DIVISION
NSD 2492 of 2007
BETWEEN: WINGECARRIBEE SHIRE COUNCIL
First ApplicantCITY OF SWAN
Second ApplicantPARKES SHIRE COUNCIL
Third ApplicantAND: LEHMAN BROTHERS AUSTRALIA LIMITED (IN LIQUIDATION) (ACN 066 797 760)
Respondent
JUDGE:
RARES J
DATE:
24 MARCH 2011
PLACE:
SYDNEY
REASONS FOR JUDGMENT
(REVISED FROM THE TRANSCRIPT)
These proceedings are part heard. The evidence of all lay witnesses has been completed, and the parties are about to commence adducing evidence of experts, including valuers. One issue in the proceedings is the value of a number of synthetic collateralised debt obligations, known as SCDOs, in which the credit default swap counterparty was Lehman Brothers Special Financing Inc (Special Financing). It was a related company of the respondent, Lehman Brothers Australia Limited (Lehman Australia), and each of them was either a subsidiary of, or closely related company to, Lehman Brothers Inc., the American parent that went into Ch 11 administration under the United States Bankruptcy Code on 15 September 2008.
THE CIRCUMSTANCES IN WHICH THE SUBPOENA WAS CHALLENGED
On 22 February 2011, Lehman Australia issued a subpoena to Perpetual Trustee Company Limited to produce the settlement payment deed between it and Special Financing in relation to a different series of synthetic credit-linked notes or SCDOs that were documented substantially identically to the relevant SCDOs in issue in these proceedings. The latter have been called by the parties the “Dante Claim SCDOs”, being the ones held by one or more of the applicants in these proceedings and in which Special Financing is the credit default swap counterparty. The settlement occurred after the Supreme Court of the United Kingdom had granted leave to appeal from a decision of the Court of Appeal of England and Wales (Perpetual Trustee Company Limited v BNY Corporate Trustee Services Limited [2010] Ch 347) in two cases, one involving Perpetual, and the other, persons who made a similar claim, being the administrators of WW Realisation 8 Limited (formerly Woolworths Media plc) and Woolworths Group plc. Those cases related to the proper construction of particular provisions in SCDOs similar to the Dante Claim SCDOs.
On 24 November 2010, after the Court of Appeal’s decision, Perpetual and Special Financing entered into their settlement deed. A redacted version of that deed has been provided to Lehman Australia. However, that version omits the critical provisions dealing with the amount of the settlement to be paid by Special Financing or received by Perpetual. Both Perpetual and Special Financing seek to set aside the subpoena for production of an unredacted version of the deed.
THE “FLIP” CLAUSE
One issue in the valuation of the Dante Claim SCDOs is the application of what is known as a “flip” clause. It is not presently necessary to identify with precision the details of how the “flip” clause operates. Essentially, the arrangements between the parties to the SCDOs and the credit default swap agreements contained a provision granting priority to the swap counterparty (in this case Special Financing) to enforce the security supporting the swap in the event that a default occurred under the SCDO. The security consisted largely of money paid to a trustee that had as its source payments provided by the holders of the SCDOs as consideration for their acquisition. However, under the “flip” clause, the note holders were given priority to the security they originally sourced, if the swap counterparty, itself, became insolvent.
The “flip” clause was contained in cl 5.5 of the supplemental trust deed and draw down agreement applicable to the swap counterparty arrangements. It provided that the trustee would apply all moneys received by it under that deed in connection the realisation or enforcement of the mortgaged property to give the swap counterparty with the priority that had been agreed. However, if an event of default occurred under the swap agreement, and the swap counterparty was the defaulting party, then the note holder would be entitled to priority to that collateral instead of the swap counterparty. English law is the proper law of the relevant contracts but Special Financing as the swap counterparty is located in the United States and is in Ch 11 administration.
In Perpetual [2010] Ch 347 the Court of Appeal found that the “flip” clause was valid under English law and did not have the effect of avoiding the ordinary instances of a debtor’s insolvency. The precise reasoning which led to that decision is not necessary to be detailed in these reasons.
Across the Atlantic, in the United States Bankruptcy Court for the Southern District of New York, Judge Peck held in Lehman Brothers Special Financing Inc v BNY Corporate Trustee Services Limited (2010) 422 BR 407 that the “flip” clause was void, as being contrary to provisions in Ch 11 of the United States Code, namely, 11 USC ss 365(e)(1) and 541(c)(i)(B) and (ii). Judge Peck found that the effect of the swap agreement modified Special Financing’s payment priority upon an event of default, because it was an unenforceable “ipso facto” clause and so violated the above sections of the Bankruptcy Code. His Honor said that the issues presented in the litigation were, so far as he could tell (422 BR at 422):
“… unique to the Lehman bankruptcy cases and unprecedented. The court is not aware of any other case that has construed the ipso facto provisions of the Bankruptcy Code under circumstances comparable to those presented here. No case has ever declared that the operative bankruptcy filing is not limited to the commencement of a bankruptcy case by the counterparty itself, but may be a case filed by a related entity - in this instance, the counterparty’s parent corporation as credit support provider. Because this is the first such interpretation of the ipso facto language, the court anticipates the current ruling may be a controversial one, especially due to the resulting conflict with the decisions of the English courts.”
His Honor’s decision was given on 25 January 2010, after the Chancellor, Sir Andrew Morritt had given the first instance decision on 28 July 2009 in Perpetual Trustee Company Limited v BNY Corporate Services Limited [2009] EWHC 1912 (Ch). The District Court for the Southern District of New York has granted leave to appeal from Judge Peck’s ruling, but no decision has yet been given. There is an interesting note of the issues raised by the litigation to this point written by Professor Sir Roy Goode QC: Perpetual Trustee and Flip Clauses in Swap Transactions (2011) 127 LQR 1.
Accordingly, there is a degree of uncertainty as to what rights, ultimately, will be able to be enforced against the collateral to support credit default swap arrangements that are relevantly identical to the Dante Claim SCDOs. That collateral was sourced by payments the note holders provided to acquire the SCDOs and that was then used by the arranger of the SCDOs to obtain the swap.
THE PARTIES’ SUBMISSIONS
Lehman Australia contends that its expert valuer, Peter Arberg, would be better enabled to form an opinion about the fair value of the Dante Claim SCDOs if he had access to the unredacted material in the settlement deed that is sought in the subpoena. Dr Arberg is to give evidence as to value in the next few days. He said that the disclosure of the settlement amount would enable him to form an opinion about the fair value of the Dante Claim SCDOs. First, he said that he would work out the value of the collateral or security for each of the synthetic credit linked notes in the proceedings involving Perpetual. He said that that information is available to him. Secondly, Dr Arberg asserted that he would be able to work out from that, and other, information a percentage represented by the value of the settlement sum that Perpetual agreed to receive. He would then use all this information in order to make an assessment of the fair value of the Dante Claim SCDOs. Lehman Australia relied, in support of Dr Arberg’s desire for access to the redacted material, on the reasoning of Gleeson CJ and McHugh, Gummow, Kirby and Haydon JJ in HTW Valuers (Central Queensland) Pty Limited v Astonland Pty Limited (2004) 217 CLR 640 at 657-659 [36]-[39]. They identified a distinction that can occur between market and true value.
The valuation expert for the applicant councils, James Finkel, has proceeded on a valuation approach that used market bids in order to arrive at his determination of value. Dr Arberg adopted, as his preferred valuation approach, a model-based method that did not purport to represent market bid levels. Dr Arberg considered that his approach was appropriate, since it was consistent with the method which dealers and investors regularly used to mark their positions for financing instruments of a similar kind to the SCDOs in issue in the proceedings (including Dante Claim SDOs), where there was no ready market for those instruments. Both experts agreed that markets were a good starting point for an indication of the value of a security, such as those in issue here, where they could be sold in a market. Mr Finkel accepted that Dr Arberg’s model-based approach was an appropriate one to use as a fallback method of valuation.
As is apparent, neither expert has actually valued the Dante Claim SCDOs in these proceedings on the basis of the settlement arrived at between Perpetual and Special Financing, because neither has that information.
Perpetual and Special Financing argued that the subpoena ought to be set aside on the following bases. First they contended that the subpoena sought information that Special Financing, as a person with no presence in Australia, could not have been required to produce to the Court. They argued that a subpoena would not have been issued to it because it was not subject to the jurisdiction of the Court. That argument can be immediately dismissed. The subpoena is addressed to Perpetual, and it is amenable to the jurisdiction of the Court. The subpoena is an appropriate use of the Court’s processes to obtain evidence, to the extent that the subject matter it seeks to be produced would otherwise be properly made the subject of a subpoena.
Secondly, Perpetual and Special Financing argued that the quantum or value of their settlement was not relevant to any issue in the proceedings. They contended that it was an off-market transaction, the terms of which had been kept confidential, no doubt, because of the imminence of other proceedings by note holders and those interested in obtaining the collateral provided to support Dante Claim SCDOs and similar transactions in respect of which Special Financing may have rights.
Thirdly, they argued that the settlement documents were protected by the privilege against disclosure of “without prejudice” communications conferred by s 131 of the Evidence Act 1995 (Cth). And, last, they argued that there had not been full and frank disclosure, when applying for the issue of the subpoena, of some unspecified purpose that Lehman Australia was asserted to have in seeking the documents. That argument can also be dismissed as without substance. No such purpose was identified or proved.
THE APPLICATION OF WITHOUT PREJUDICE PRIVILEGE TO A CONCLUDED SETTLEMENT
In my opinion, s 131 of the Evidence Act does not operate to prevent Lehman Australia seeking production of the settlement deed under the subpoena. Section 131(1) provides as follows:
“(1) Evidence is not to be adduced of:
(a)a communication that is made between persons in dispute, or between one or more persons in dispute and a third party, in connection with an attempt to negotiate a settlement of the dispute; or
(b)a document (whether delivered or not) that has been prepared in connection with an attempt to negotiate a settlement of a dispute.”
The settlement deed is not a communication made between persons in dispute or in connection with an attempt to negotiate a settlement of the dispute within the meaning of s 131(1)(a). Nor is it a document prepared in connection with an attempt to negotiate a settlement of the dispute.
A settlement deed or agreement signed by the parties to it, or recording the terms of their agreement is a document or a communication made by parties who are no longer in dispute, but who have, in fact, arrived at an agreement. Because these reasons had to be given urgently, this is not a case in which it is possible to review extensively the authorities or principles. However, at common law the position was stated by Dixon CJ and Fullagar J in Tallerman & Co Pty Limited v Nathan’s Merchandise (Victoria) Pty Limited (1957) 98 CLR 93 at 110, namely:
“It is, of course, clear that if during a dispute an offer of compromise is made “without prejudice” and is accepted simpliciter, the fact that the offer was made without prejudice ceases to have any significance. The commonsense view and the view of the law is that the offeror is saying: ‘I will make you this offer in the hope of avoiding legal proceedings between us. If you accept it, we shall both be bound. But I make no admissions, and if you do not accept it, our legal position remains unaffected.’”
In State Rail Authority of New South Wales v Smith (1998) 45 NSWLR 382 at 385D-E Beazley JA, with whom Priestley and Handley JJA agreed, said that s 131 was directed solely at communications between parties in an attempt to settle. Her Honour said:
“It is not concerned with the settlement document itself. Counsel for the respondent properly conceded this was the case.”
There, the Court of Appeal proceeded on the basis that that concession had been made, but did so because it was a proper concession. In my opinion, the concession reflects the proper construction of s 131. A similar view was taken in Western Australia v Southern Equities Corporation Limited (in Liq) (1996) 142 ALR 597 at 601 by French J, who said that the privilege attaching to without prejudice negotiations does not disappear merely because a concluded agreement is reached. But, his Honour observed, those public policy reasons for according privilege to negotiations did not apply to the agreement itself.
I agree. There is obvious commonsense in such a view. The policy of the law is to encourage settlement of disputes and to allow parties, in the course of negotiating for their resolution, to expose to one another considerations that they may not wish to have used against them in the open forensic context. It is a commonplace in settlement negotiations for one party to agree that certain disputed facts might be the position in order to attempt to arrive at an agreed outcome. Hence, the public policy reflected in s 131 of the Evidence Act to prevent one party later taking inappropriate advantage of its opponent disclosing information in the candour of negotiating leading up or as part of the search for resolution. Material that is disclosed in an attempt to achieve resolution of a dispute that proves unsuccessful must not be used later in proceedings unless one of the exceptions in s 131(2) applies. It is not necessary for me to deal with Perpetual’s and Special Financing’s arguments as to the applicability of those exceptions in these proceedings. That is because I am of opinion that the settlement deed is not a communication or document that falls within the exclusion in s 131(1) on its proper construction.
RELEVANCE OF THE SETTLEMENT TO THE VALUATION OF THE DANTE CLAIM SCDOS
That leaves for consideration the substantial question of the essential relevance or proper forensic purpose of the subpoena. The settlement deed contains provisions relating to a payment of a sum for Perpetual’s costs that is identified in a particular way. Lehman Australia argued that the substantive settlement sums, or the revelation of what was to be paid, or what assets were to be made available, would assist in a possible determination by Dr Arberg of the true value of the Dante Claim SCDOs because he could prepare a new valuation with this new information. Dr Arberg’s present evidence of value postulates that the Dante Claim SCDOs have one of two values, namely, the lower value they would have had, if Peck J’s view of the operation of the “flip” clause was correct, or the higher value they would have had if the England and Wales Court of Appeal’s view of that clause were correct.
The Supreme Court of the United Kingdom reserved judgment on the related appeal on 1 March 2011. I think it likely that their Lordships will have delivered a decision by the time that I am in a position to give judgment and, no doubt, the parties will address me on the impact, if any, that that decision has. It may be also that the District Court for the Southern District of New York and the Second Circuit Court of Appeals may have been able to deal with these issues as well by that stage.
In Astonland 217 CLR at 657-659 [36]-[39] The Court distinguished between the true value, or the real value, and market value. They said that market values were prices actually obtainable in market sales. However, their Honours pointed out that the market could be mistaken on a basis other than manipulation such as, for example, where shares were said to be under, or over, valued by the market, or where the market was operating under some material mistakes: see also at 217 CLR at 661[45]-[46].
Here, of course, the settlement reached by Perpetual and Special Financing must reflect, among others, each party’s appetite for the risk posed by the continuation of the two sets of proceedings, one in the United Kingdom in the Supreme Court and the other in the United States. A party seeking to assert rights in litigation often will be influenced by a variety of considerations to accept an offer of compromise or resolution that may or may not reflect entirely the true or market value of the asset to it were the proceedings fought out to their ultimate conclusion. It is possible that there may be elements of a settlement of litigation that may be comparable to an arms-length transaction between fully informed, willing, but not anxious, parties. However, the parties to litigation are not necessarily in the position of the hypothetical parties in an ordinary market situation, namely, a willing but not anxious vendor and a willing but not anxious purchaser, each fully informed, whose views would be the subject of the hypothetical market-based valuation exercise.
In addition, in this case, there is the complicating factor that a related piece of litigation has proceeded to the Supreme Court of the United Kingdom, so that whatever may have been the commercial or other factors lying behind the settlement Perpetual and Special Financing arrived at, may not have been sufficient to sway the parties to the related proceedings to resolve their dispute in which the same, or substantially the same, issue was in suit.
This tends to suggest that the evidence of the settlement amount would require a deal of further explanation and exploration in order to appreciate its true significance. It is not as if that settlement amount can affect the present market price, since the market is operating in ignorance of it, albeit it is a market that is informed that a settlement has been reached but that its terms, so far as price is concerned, are confidential.
What Dr Arberg seeks to do is, in effect, a simple mathematical exercise so as to devine from the amount of the settlement, a price that Special Financing may be prepared to pay to the applicants for their Dante Claim SCDOs, if all other things remain the same at the time at which I value them based on the evidence. The uncertainty that currently exists between the competing valuation methods of Mr Finkel and Dr Arberg is not one to which the evidence sought in the subpoena relates. That is because Dr Arberg is proposing a different method of valuation, albeit one that has prima facie a fairly simple application of mathematical calculation based on the knowledge of what the amount is.
I do not think that such evidence is relevant to providing a reflex of the true value of the asset. In my opinion, all it can do is provide an insight into a compromise reached by parties to contested litigation in which there was a degree of uncertainty. True it is that a similar degree of uncertainty currently exists, and will no doubt continue to exist, while the laws of the United Kingdom and the United States as to the application of the “flip” clause remains as diametrically opposed as they appear to be at the moment. But, the position of the parties is one in which they are exposed to that very uncertainty. That uncertainty bears on the value to be given to these instruments in the situation where I, as a judicial valuer, may have to determine which of the two foreign laws will govern the ultimate rights, if any, of the applicant councils to receive a payment or value from the Dante Claim SCDOs that they hold.
I am not satisfied that the private negotiated settlement between Perpetual and Special Financing provides a sufficiently relevant measure of value to be ascribed to these instruments as to require the production of the settlement deed at this stage of the litigation. I have had regard to the various uncertainties as to the basis on which the negotiations proceeded, the circumstances in which those parties compromised their rights, and the fact that during the foreseeable future further decisions including, at least, by the Supreme Court of the United Kingdom can be expected to be given that will add legal certainty as to some of the rights of the parties and give a better reflex of value than the settlement deed amount.
I am of opinion that the private, and currently confidential, nature of the settlement between Perpetual and Special Financing suggests that the amount agreed between those parties, for the purposes of resolving their dispute, albeit on instruments that are materially similar to those in issue here, will not assist in the determination of the value of the Dante Claim SCDOs in these proceedings. I, therefore, set aside the subpoena to Perpetual.
I certify that the preceding thirty-one (31) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Rares. Associate:
Dated: 11 April 2011
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