Significant ruling in Lehman RMBS case that has far reaching implications

You may have seen that the High Court today passed an extremely significant judgment in a case that involves Eurosail UK 2007-3BL, the issuer in a £650m Residential Mortgage Backed Securitisation transaction that Lehman Brothers originated. It will have far-reaching implications for many UK-based securitisations. A team at BLP, led by structured finance partner Tamara Box and commercial dispute resolution partner Oliver Glynn-Jones, advised Eurosail 3BL in these proceedings.

The news coverage has concentrated on the fact that Eurosail successfully argued that it was not unable to pay its debts under the terms of UK insolvency law.

Just as significant is the fact that the High Court rejected an argument that the notes in this transaction were effectively limited recourse because of the incorporation into the structure of a post enforcement call option (PECO). The PECO is a structure that is often used in UK-based transactions to avoid certain tax consequences of traditional limited recourse. This potentially opens the door to claims from disgruntled noteholders in other UK-based securitisations with such PECO structures.

Tamara Box, a partner at Berwin Leighton Paisner (BLP), said: “While we are delighted at the outcome for our client and for this transaction, we do expect the Chancellor’s judgement to give rise to further disputes. There are a lot of very large transactions out there with PECOs where similar arguments can be made. it is also unclear, given the importance that ratings agencies have placed on the limited recourse effect of the PECO and their close scrutiny of this case, how they will react to transactions with similar liabilities on their balance sheets.”

Oliver Glynn-Jones, a commercial dispute resolution partner at BLP commented: “It is clear that in granting permission for Eurosail, the Class A2 noteholders and Class A3 noteholders to appeal and in making the comments that he did, the Chancellor considers that the PECO structure and its application to transactions of this nature is of such importance that it is right that the Court of Appeal is given an opportunity to consider the issue further.”

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