Pearson & Ors v Lehman Brothers Finance S.A.

Beneficial ownership may pass under a repo or stock loan where the parties intend a proprietary transfer and the agreement makes title conditional on payment. Book entries described as offsets do not themselves constitute payment, but an estoppel by convention may prevent a party from denying the shared basis on which transactions were operated. In a continuing sequence of repos, title remains with the purchaser until the next transaction provides the payment required for the preceding off-leg. A trust of an identified quantity of fungible securities can take effect without segregation, even where the holder may use and mix the securities, provided the subject matter and the beneficiary's share are sufficiently certain.

This was an appeal by Lehman Brothers Finance S.A. against the judgment of Briggs J in the Companies Court, reported at [2010] EWHC 2914 (Ch). The dispute concerned securities acquired by Lehman Brothers International (Europe) for LBF's account under the group's Rascals arrangements. The arrangements used repos for automatic processing and stock loans for manual processing.

The parties disputed whether beneficial title ever passed to LBF, whether title passed back to LBIE under the first repo, whether successive repos maintained continuous title in LBIE, and what effect the final transactions had after LBIE entered administration. The appeal also raised the effect of the Inter-Company Funding Agreement and an estoppel by convention. The central issue was which company held the beneficial title to securities remaining in LBIE's depots when the Lehman group collapsed.

1. Disposition. Lord Justice Lloyd, with whom Patten and Tomlinson LJJ agreed, dismissed the appeal and the Respondent's Notice, subject to a qualification for securities subject to Manual Rascals where the stock loan was first entered into after 31 July 2008. For those securities, beneficial title belonged to LBF unless LBIE could show that it had paid the collateral by another method, or that the securities were first acquired after that date.
2. LBIE initially held the securities on trust for LBF. The parties' objective intention was that beneficial ownership should pass to LBF on acquisition. The unusual ability of LBIE to mix and use the securities did not make the trust void for uncertainty of subject matter. The principle in Hunter v Moss was applicable to a specified quantity of fungible securities.
3. The Inter-Company Funding Agreement would, if applied in practice, have made LBHI rather than LBF the debtor for post-June 2000 acquisitions. In practice, however, the common accounting records treated LBF as indebted to LBIE and recorded the Rascals transactions as giving LBIE secured creditor status. LBF was estopped by convention from denying that position retrospectively.
4. The recorded offsets in the ITS system were not, without more, payment of the repo on-leg price. Nor was the court prepared to decide the newly advanced argument that a true set-off occurred in the DBS general ledger. Nevertheless, the estoppel by convention prevented LBF from denying that LBIE had paid the first on-leg price.
5. In the automatic process, payment of an off-leg was not effective merely because the records showed it as settled. Payment occurred when the next repo opened and supplied the corresponding on-leg obligation. Title therefore passed to LBIE under the first on-leg and remained vested in LBIE through the successive repos until resale to the street. The final recorded off-leg did not return title to LBF because LBF had not paid the required price.
6. The 16 September 2008 notice withdrew LBF's authority for future transactions, so the last authorised automatic repo was treated as the one closing on that date. This did not alter the result because the final off-leg remained unpaid. No issue of lien was determined.

• Court of Appeal (Civil Division): appeal and Respondent's Notice dismissed, subject to the qualification concerning Manual Rascals securities.
• High Court of Justice, Chancery Division, Companies Court: Briggs J decided the Rascals beneficial-ownership issue in favour of LBIE in [2010] EWHC 2914 (Ch).