Lehman Brothers Financial SA (LEHNQ)

[robigus]

Is this docket showing that MBSs and CTs should be treated the same and not be subordinated?

45411 07/28/2014
Memorandum Decision Overruling Debtors Objection to CMBS Claims and Denying Request for Subordination Pursuant to Sections 510(a)-(c) of the Bankruptcy Code signed on 7/28/2014. (related document(s)[44779], [36882]) (Chien, Jason)

Case: Lehman Brothers Holdings Inc.

Related: 36882, 44779
http://dm.epiq11.com/LBH/Document/GetDocument/2506360

These sound like our CT Trusts:
"Rather, FHLB argues, non-debtor trusts actually issued the MBS
and were established for the sole purpose of holding title to a pool of underlying residential mortgages backing the MBS; the MBS certificates that FHLB purchased represent rights to certain portions of cash flows generated by the mortgage loans which are the only source of payment on the MBS certificates. Moreover, FHLB asserts, the securities rules and regulations that characterize one or more of the Debtors as an “issuer” for regulatory purposes do not render the MBS securities “of” the Debtors for purposes of section 510 of the Code."

From RESPONSE TO QUESTIONS RECEIVED FROM CREDITORS:
"Response: The Trust Preferred Securities were issued by the non-Debtor entities identified above (the “Trusts”). Based on relevant prospectuses, the sole assets of the Trusts were certain subordinated debt securities (the “Subordinated Securities”) issued by Lehman Brothers Holdings Inc. (“LBHI”).
http://dm.epiq11.com/LBH/Document/GetDocument/2465387

"The originator sells the packaged loans to a trust, which then receives the loans’ cash flow – the monthly payments from the mortgage borrowers. The trust pays the originator by selling bonds, usually called certificates, to investors such as FHLB. The originator that creates and indirectly owns the trust owes no debt to the investors; rather, the trust is the legal owner of the pool of mortgages, known as the “collateral.” Each certificate entitles its holder to an agreed part of the cash flow from the mortgage loans in the collateral pool."

"FLHB responds that its claims should not be subordinated because the MBS should be treated as debt and not equity. FHLB cites to decisions in which courts have observed that mortgage-backed securities are similar in form and structure to bonds under an indenture. Notwithstanding that the MBS can be considered debt securities, FHLB argues, they are neither equity nor debt securities of any of the Debtors, rather “they are more typically characterized as debt securities issued by the Trusts,” and as “products” marketed by the Debtors."

"By purchasing the MBS, investors such as FHLB purchased a securitized product – a pool of mortgage obligations packaged by LBHI, marketed by LBI, and sold by SASCO – but legally owned by the Trusts – non-debtor, non-operating special purpose entities. Payment on the certificates of the cash flow from the collateral was limited to such collateral; payment was not owed by and did not come from the business or assets of any of the Debtors."

"Return on the MBS was not tied to the performance of any Debtor, but rather to the performance of the underlying loans owned by the Trusts."

"For the reasons stated, the Objection is overruled and the request for subordination of the FHLB Claims is denied."