In January 2010, in a controversial ruling, U.S. Bankruptcy Judge James Peck held that the U.S. Bankruptcy Code protected a debtor from the operation of a clause that changed the waterfall of distributions in a CDO transaction, triggered not by its own bankruptcy filing but by the prior bankruptcy of a related entity.
In a subsequent decision on 28 June 2016, Judge Shelly Chapman (a judge of equal authority on the same bench) rejected the rationale of Judge Peck. Whilst this decision was applauded by many the uncertainty about proper interpretation of waterfall flip provisions and the scope of the safe harbours increased. This article examines this decision and the likely effect of an appeal, which it is hoped will affirm Judge Chapman’s decision and provide an ongoing level of certainty to participants in the financial markets.
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