Lehman Unit's £10B Liability ‘A Mistake,’ Court Hears
By Alex Davis
Law360, London (January 16, 2017, 6:23 PM GMT) -- Lawyers representing a U.K.-based services unit of the defunct Lehman Brothers investment banking group called the structure that left it facing a possible £10 billion ($13 billion) in debt liabilities a “mistake” that breached fiduciary care in London’s High Court on Monday.
Directors didn't exercise reasonable care when they decided to transfer a share in Lehman's main European trading arm to Lehman Brothers Ltd., the unit designed to pay the bank's contractors and U.K. employees, said Philip Marshall, the barrister representing LBL. This move during the 1990s left LBL responsible for the arm’s debts, the court heard.
“We contend that the directors did not consider or apply their minds to the consequences of LBL taking a share,” Marshall said. “There was a breach of duty.”
Administrators for LBL are co-defendants fighting a £10 billion claim from the trading arm’s administrators in two trials scheduled for the end of January and in September. The disputes between the various parties scrapping for the bank’s assets continue to wind through the U.K. courts more than eight years after Lehman’s collapse sparked the global financial crisis.
The administrators for the trading arm, Lehman Brothers International (Europe), found in 2014 they had a potential surplus of as much as £8 billion after paying out the unit’s senior unsecured creditors, according to court documents.
LBIE was an unlimited liability company and, because its administrators also found that outstanding claims against it potentially exceeded the surplus, they lodged a claim against its unlimited liability members, which include LBL. LBL has to date only been able to pay out less than 2 pence in every pound sterling owed to many unsecured creditors.
The administrators for LBIE are Anthony Lomas, Steven Pearson, Julian Parr and Russell Downs from PricewaterhouseCoopers LLP, according to court documents. The administrators for LBL are Michael Jervis and Zelf Hussein, also of PwC.
British insolvency law allows for claims in three stages: payment of proven claims that have been converted into pounds sterling, payment of statutory interest, and finally payment of nonprovable claims.
The upcoming trial for the so-called Waterfall III suit comes after two previous cases have progressed through the courts to decide which of Lehman’s creditors were entitled to the failed bank’s assets.
The Waterfall I case is awaiting judgment from the Supreme Court, the U.K.’s highest appellate court, after a four-day hearing in October. In that suit, LBIE creditors including CVI GVF (Lux) Master SARL had won decisions in the lower courts that allowed them to pursue lost interest as a result of currency conversions from the LBIE surplus.
CVI and other creditors had claims that were converted from dollars to pounds as mandated by British law around the time that the pound was at its peak against the U.S. currency — only to be paid out later when the pound had dropped.
In the Waterfall II suit, which is due to be heard at the Court of Appeal in April, creditors are fighting over issues relating to statutory interest that accrued on claims after the administration process began.
LBIE is represented by William Trower QC, Daniel Bayfield QC and Stephen Robins of South Square and Linklaters.
LBL is represented by Philip Marsh QC and Ruth den Besten of Serle Court and Dechert
LBHI2 represented by Peter Arden of Erskine Chambers, Louise Hutton and Rosanna Foskett of Maitland Chambers and Dentons
LBEL is represented by Felicity Toube QC of South Square and Linklaters
LBH is represented by by Stephen Atherton QC and Tony Beswetherick of 20 Essex Street and Hogan Lovells.
The case is the joint administrators of Lehman Brothers International (Europe) versus the joint administrators of Lehman Brothers Ltd, the joint administrators of LB Holdings Intermediate 2 Ltd., the joint administrators of Lehman Brothers Europe Ltd. and the joint administrators of Lehman Brothers Holdings PLC, case number 7942 of 2008, in the Companies Court, Chancery Division of the High Court of Justice of England and Wales.
--Additional reporting by Melissa Lipman. Editing by Ed Harris.
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