Mediation Ordered In Lehman Derivatives Feud

By Erin Marie Daly

Law360, New York (August 26, 2009) -- Lehman Brothers Holdings Inc. is reportedly set to head to the mediation table with creditors in a legal wrangle over the value of derivatives contracts entered into with the failed investment bank.

Judge James Peck of the U.S. Bankruptcy Court for the Southern District of New York agreed with Lehman Wednesday that compulsory mediation would reduce the number of disputes over the contracts, Reuters reported.

But the judge also ruled that the procedures of the dispute resolution process should be refined in light of the number of objections raised by numerous parties, Reuters said.

The official committee of unsecured creditors threw its support behind Lehman’s motion for authorization to implement alternative dispute resolution procedures on Monday, saying most of the objections had been resolved.

The remaining objections included a bid to exclude the committee from participating in the mediation.

According to the committee’s filing, the proposed ADR procedures were “carefully tailored to avoid unnecessary litigation, reduce the burden on the court and preserve the debtors’ assets.”

Given the complex nature of the transactions and the significant sums involved, the parties could be mired in “expensive, burdensome and time-consuming” litigation concerning the issues raised by the contracts.

“The derivatives ADR procedures will minimize the expense of resolving these disputes through a structured process designed to foster consensual resolution,” the committee said.

The deadline for claims against Lehman to be filed is Oct. 22.

The bankrupt financial services giant, once the world's fourth-biggest investment bank, listed assets of $639 billion and debts of $613 billion when it filed for Chapter 11. That event is pegged as one of the prime catalysts for the financial meltdown in fall 2008.

With massive numbers of creditors and clients vying to be repaid for their losses stemming from the bankruptcy filing, Lehman has struggled to find ways to unwind its obligations.

On Friday, the U.K. High Court said that it could not rule on a proposed scheme of arrangement, which accounting firm PricewaterhouseCoopers had designed to expedite the distribution of around $9 billion in client assets.

The judge found that a plan should only apply to creditors and not individual clients, according to a statement from PricewaterhouseCoopers, the appointed administrator for Lehman Brothers International Europe.

LBIE held approximately $30 billion in client assets at the time of the bankruptcy, according to the accounting firm. Of that total, approximately $13 billion has been returned to investors and $7 billion is held by affiliates, PwC said.

The scheme of arrangement, the firm said, was negotiated over a period of several months in an attempt to quickly distribute the remaining assets in a way that protected individual investors.

PwC said it had received support for the plan from a number of hedge funds and other institutional investors.

But the main industry group for investment banks in the U.K., the London Investment Banking Association, had opposed the plan in court, saying that it would have “potentially wide-ranging” effects on the protections that U.K. law gives to assets held in trust, including assets held under safe custody arrangements.

Lehman Brothers is represented in its bankruptcy by Weil Gotshal & Manges LLP.

The creditors committee is represented by Milbank Tweed Hadley & McCloy LLP.

The case is In re: Lehman Brothers Holdings Inc., case number 1:08-bk-13555, in the U.S. Bankruptcy Court for the Southern District of New York.

--Additional reporting by Evan Weinberger