Does anyone know what docket 7920 means to the holders of the C/T preferred notHearing Date and Time: April 20, 2010 at 10:00 a.m. (Prevailing Eastern Time)
Objection Date and Time: April 13, 2010 at 4:00 p.m. (Prevailing Eastern Time)
C:\NRPORTBL\US_ACTIVE\ARORAA\43337911_16.DOC
WEIL, GOTSHAL & MANGES LLP
767 Fifth Avenue
New York, New York 10153
Telephone: (212) 310-8000
Facsimile: (212) 310-8007
Lori R. Fife
Richard L. Levine
Robert J. Lemons
Attorneys for Debtors
and Debtors in Possession
UNITED STATES BANKRUPTCY COURT
SOUTHERN DISTRICT OF NEW YORK
-------------------------------------------------------------------x
In re : Chapter 11 Case No.
:
LEHMAN BROTHERS HOLDINGS INC., et al., : 08-13555 (JMP)
:
Debtors. : (Jointly Administered)
-------------------------------------------------------------------x
NOTICE OF THE DEBTORS’ MOTION PURSUANT TO SECTIONS 105(A)
AND 363 OF THE BANKRUPTCY CODE FOR AUTHORIZATION TO PURCHASE
AND SELL NOTES ISSUED BY CERTAIN SPECIAL PURPOSE VEHICLES
THAT ARE PARTY TO TRANSACTIONS WITH CERTAIN DEBTORS
PLEASE TAKE NOTICE that a hearing on the annexed Motion of Lehman
Brothers Holdings Inc. and its affiliated debtors in the above-referenced chapter 11 cases
(together, the “Debtors”) for authorization to purchase and sell notes issued by certain special
purpose vehicles that are party to certain transactions with certain of the Debtors, all as more
fully set forth in the Motion, will be held before the Honorable James M. Peck, United States
Bankruptcy Judge, at the United States Bankruptcy Court, Alexander Hamilton Customs House,
Courtroom 601, One Bowling Green, New York, New York 10004 (the “Bankruptcy Court”), on
April 20, 2010 at 10:00 a.m. (Prevailing Eastern Time) (the “Hearing”).
PLEASE TAKE FURTHER NOTICE that objections, if any, to the Motion shall
be in writing, shall conform to the Federal Rules of Bankruptcy Procedure (the “Bankruptcy
Rules”) and the Local Rules of the Bankruptcy Court for the Southern District of New York,
shall set forth the name of the objecting party, the basis for the objection and the specific grounds
thereof, shall be filed with the Bankruptcy Court electronically in accordance with General Order
M-242 (which can be found at www.nysb.uscourts.gov) by registered users of the Bankruptcy
Court’s case filing system and by all other parties in interest, on a 3.5 inch disk, preferably in
Portable Document Format (PDF), WordPerfect, or any other Windows-based word processing
format (with two hard copies delivered directly to Chambers), and shall be served upon: (i) the
chambers of the Honorable James M. Peck, One Bowling Green, New York, New York 10004,
Courtroom 601; (ii) Weil Gotshal & Manges LLP, 767 Fifth Avenue, New York, New York
C:\NRPORTBL\US_ACTIVE\ARORAA\43337911_16.DOC 2
10153, Attn: Lori R. Fife, Esq., Richard L. Levine, Esq. and Robert J. Lemons, Esq., attorneys
for the Debtors; (iii) the Office of the United States Trustee for the Southern District of New
York (the “U.S. Trustee”), 33 Whitehall Street, 21st Floor, New York, New York 10004 Attn:
Andy Velez-Rivera, Esq., Paul Schwartzberg, Esq., Brian Masumoto, Esq., Linda Riffkin, Esq.,
and Tracy Hope Davis, Esq.; and (iv) Milbank, Tweed, Hadley & McCloy LLP, 1 Chase
Manhattan Plaza, New York, New York 10005, Attn: Dennis F. Dunne, Esq., Evan Fleck, Esq.,
and Dennis O’Donnell, Esq., attorneys for the Official Committee of Unsecured Creditors
appointed in these cases, so as to be so filed and received by no later than April 13, 2010 at 4:00
p.m. (Prevailing Eastern Time) (the “Objection Deadline”).
PLEASE TAKE FURTHER NOTICE that if an objection to the Motion is not
received by the Objection Deadline, the relief requested shall be deemed unopposed, and the
Bankruptcy Court may enter an order granting the relief sought without a hearing.
PLEASE TAKE FURTHER NOTICE that objecting parties are required to attend
the Hearing, and failure to appear may result in relief being granted or denied upon default.
Dated: March 30, 2010
New York, New York
/s/ Robert J. Lemons
Lori R. Fife
Richard L. Levine
Robert J. Lemons
WEIL, GOTSHAL & MANGES LLP
767 Fifth Avenue
New York, New York 10153
Telephone: (212) 310-8000
Facsimile: (212) 310-8007
Attorneys for Debtors
and Debtors in Possession
Hearing Date and Time: April 20, 2010 at 10:00 a.m. (Prevailing Eastern Time)
Objection Date and Time: April 13, 2010 at 4:00 p.m. (Prevailing Eastern Time)
C:\NRPORTBL\US_ACTIVE\ARORAA\43337911_16.DOC
WEIL, GOTSHAL & MANGES LLP
767 Fifth Avenue
New York, New York 10153
Telephone: (212) 310-8000
Facsimile: (212) 310-8007
Lori R. Fife
Richard L. Levine
Robert J. Lemons
Attorneys for Debtors
and Debtors in Possession
UNITED STATES BANKRUPTCY COURT
SOUTHERN DISTRICT OF NEW YORK
-------------------------------------------------------------------x
In re : Chapter 11 Case No.
:
LEHMAN BROTHERS HOLDINGS INC., et al., : 08-13555 (JMP)
:
Debtors. : (Jointly Administered)
-------------------------------------------------------------------x
DEBTORS’ MOTION PURSUANT TO SECTIONS 105(A) AND 363
OF THE BANKRUPTCY CODE FOR AUTHORIZATION TO PURCHASE
AND SELL NOTES ISSUED BY CERTAIN SPECIAL PURPOSE VEHICLES
THAT ARE PARTY TO TRANSACTIONS WITH CERTAIN DEBTORS
TO THE HONORABLE JAMES M. PECK
UNITED STATES BANKRUPTCY JUDGE:
Lehman Brothers Holdings Inc (“LBHI”) and its affiliated debtors in the abovereferenced
chapter 11 cases, as debtors and debtors in possession (together, the “Debtors” and,
collectively with their non-debtor affiliates, “Lehman”), file this Motion and respectfully
represent:
Preliminary Statement1
1. Prior to the Commencement Date, the Debtors (in such capacity, the
“Lehman Counterparties”) entered into swap or other derivative agreements (the “Derivative
1 Capitalized terms used but not defined in the Preliminary Statement shall have the meaning ascribed to
them in subsequent sections of this Motion.
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Agreements”) and/or loan agreements (the “Loan Agreements” and, collectively with the
Derivative Agreements, the “Transaction Agreements”) with various special purpose vehicles
(the “SPVs”). The SPVs then issued notes or securities to third parties (the “Notes”) in a variety
of scenarios. Certain Notes are secured by the applicable SPV’s interest in Derivative
Agreements and other Collateral. The SPVs’ obligations to perform on the Transaction
Agreements are also secured by the Collateral. Other SPVs entered into Loan Agreements with
the Debtors in order to provide a levered return to the holders of Notes. Finally, certain of the
SPVs with which the Debtors entered into Transaction Agreements issued equity or other
interests to a separate SPV, which issued the relevant Notes to third parties.
2. Certain of the SPVs, Indenture Trustees and/or holders of Notes
(“Noteholders”) have asserted that, as a result of a purported event of default under the
Derivative Agreements based on the Debtors’ chapter 11 cases, the Debtors’ rights to payment
pursuant to the Derivative Agreements are subordinated to rights of Noteholders to payment. As
more fully described below, one of the Debtors, Lehman Brothers Special Financing Inc.
(“LBSF”), in response to such assertions, has been embroiled in litigation and other dispute
resolution efforts with SPVs, their directors and officers (“Directors and Officers”), Indenture
Trustees and, in limited cases, Noteholders (collectively, “Transaction Parties”) to enforce its
rights and realize a full recovery on certain Derivative Agreements. These efforts have been
successful in some respects. For example, in Lehman Brothers Special Financing Inc. v. BNY
Corporate Trustee Services Limited, 422 B.R. 407, 420 (Bankr. S.D.N.Y. 2010) (the “BNY
Decision”), the Court granted summary judgment to LBSF on the grounds that such
subordination violated the ipso facto principles in the Bankruptcy Code. However, continuing
solely on a litigation path with respect to disputes with Transaction Parties, particularly due to
C:\NRPORTBL\US_ACTIVE\ARORAA\43337911_16.DOC 3
differing contract terms and factual settings and the potential for inconsistent rulings between
this Court and courts in foreign jurisdictions, results in a substantial amount of cost and risk for
the Debtors’ estates.
3. The Debtors also have been involved in various dispute resolution efforts
and litigation, including in foreign jurisdictions, with Transaction Parties over the Debtors’
inability to recover the amounts due to them under the relevant Transaction Agreements resulting
from the Transaction Parties’ inability and/or unwillingness to liquidate the Collateral and assets
owned by the SPVs. As a result of inaction on the part of these Transaction Parties, the SPVs
have become highly illiquid and the Debtors have been unable to monetize the value of and
recover on their Transaction Agreements. Continued inaction by the Transaction Parties may
result in a deterioration in value of the assets owned by the SPVs.
4. Accordingly, the Debtors now seek approval to employ alternative
methods to try to resolve their disputes with Transaction Parties and/or otherwise maximize
recovery on their Transaction Agreements while minimizing the time, effort, cost and risk
associated with litigation. Specifically, the Debtors seek entry of an Order that would allow
them, without further order of the Court, to purchase Notes (and/or participations in Notes)2
issued by SPVs with which one or more of the Debtors is a Lehman Counterparty or which
wholly own separate SPVs with which one or more of the Debtors is a Lehman Counterparty
(“Purchased Notes”). The Order would also permit the Debtors, after purchasing Notes, to
exercise all rights and remedies as a holder of the Purchased Notes and, where the Debtors deem
it in the best interest of their estates, to sell Purchased Notes to maximize their recoveries. Such
purchases (and sales) of Notes would serve as an alternative mechanism for the Debtors to seek
2 The term Notes, as used in this Motion, shall hereinafter include participations in such Notes.
C:\NRPORTBL\US_ACTIVE\ARORAA\43337911_16.DOC 4
to resolve their disputes with Transaction Parties, hedge litigation risk, and maximize the value
of their Transaction Agreements and their returns from the SPVs.
5. The Debtors seek the authority to purchase Notes for a number of reasons,
one or more of which may be applicable to any particular SPV Note Transaction. First, the
Debtors believe that, as a consequence of the results of litigation among the Debtors and certain
Transaction Parties regarding the Debtors’ rights to priority payment under their Derivative
Agreements, and the possibility of the Debtors obtaining similar results in litigation with other
Transaction Parties, the current market price of Notes issued by certain SPVs is less than the
value of the Collateral securing the repayment of the Notes. By purchasing the requisite amount
of certain Notes issued by such SPVs at a discount and becoming the controlling Noteholder
with respect to the issuing SPVs, the Debtors may be able to direct the liquidation of the
applicable Collateral, redeem the Notes at the value of the applicable Collateral, and avoid the
risk, time and expense of litigation, thus realizing a net gain on their investment in the Notes and
maximizing recovery from such SPVs.
6. Second, if the Debtors purchase the requisite amount of certain Notes
issued by certain SPVs, the Debtors may be able to direct the Indenture Trustee to settle
litigation with the Debtors related to the relevant SPV. This result would avoid the time, expense
and risk of continued litigation and allow the Debtors to recover on their Derivative Agreements.
(Even if the Debtors are not able to direct settlement as controlling Noteholders, their ability to
recover on Purchased Notes should facilitate a settlement between the Debtors and Transaction
Parties, as the Debtors could take into account their recovery on the Purchased Notes above the
Purchase Price in negotiating their return under the Derivative Agreements.)
C:\NRPORTBL\US_ACTIVE\ARORAA\43337911_16.DOC 5
7. Third, with respect to SPVs in which the Debtors are or may become
involved in litigation with respect to their Derivative Agreements, acquisition of the Notes issued
by such SPVs may serve as a hedge against the Debtors’ litigation risk. This reason is also based
on the Debtors’ belief that certain Notes are trading at a discount as a result of the Noteholders’
litigation risk associated with redemption of the Notes. In some cases, the price that the Debtors
would pay to purchase such Notes could be less than the value of the Collateral securing the
Notes due to such litigation risk, which would yield a net recovery for the Debtors on the Notes
if a sufficient amount of Notes was purchased, even if litigation was not pursued by the Debtors.
But even if the Debtors do not acquire a sufficient amount of Notes to justify abandoning or
avoiding litigation with respect to the relevant Derivative Agreements, the purchase of Notes
could still provide the Debtors an effective hedge to minimize any losses they may incur on such
Derivative Agreements if they do not prevail in litigation.
8. Fourth, with respect to certain SPVs with which the Debtors have entered
into Transaction Agreements on which the Debtors are unable to recover due to inaction by
current Noteholders to redeem their Notes, the purchase and redemption by the Debtors of the
requisite amount of Notes issued by a particular SPV may enable the Debtors to direct the
liquidation of Collateral and underlying assets of a particular SPV and any subsidiaries. Such a
liquidation could potentially create sufficient liquidity to satisfy amounts owed to the Debtors
pursuant to the Purchased Notes and the Transaction Agreements with the SPV in a manner that
may both preserve the value of such underlying assets and expedite the time and manner of
repayment to the Debtors. Furthermore, since the Debtors may be able to purchase such Notes at
a discount due to the inability of current Noteholders to redeem the Notes and recover value from
the issuing SPV, the Debtors may achieve a profit on Purchased Notes.
C:\NRPORTBL\US_ACTIVE\ARORAA\43337911_16.DOC 6
9. To further protect the interests of the Debtors and their estates, the Debtors
seek the ability to sell Purchased Notes to hedge against the risk that they are not able to
purchase the requisite amount of Notes to direct a liquidation of Collateral securing such Notes
or settlement of litigation, or where they are not otherwise able to negotiate a settlement. In
these situations, the ability to sell the Notes will give the Debtors the flexibility to maximize
their recovery. In addition, the Debtors may find themselves in a situation where they would be
able to realize a significant return through an immediate sale of particular Purchased Notes and
should be provided the flexibility to dispose of such Notes if they determine, in their business
judgment, that an immediate sale would maximize value for the Debtors and their estates.
10. While the Debtors will continue their SPV litigation and other dispute
resolution efforts where necessary, allowing the Debtors to avoid potential litigation or settle
existing litigation by purchasing and/or selling Notes in accordance with procedures described
herein should maximize the net recovery to the Debtors from Transaction Agreements and the
SPVs. Allowing the Debtors to purchase and sell such Notes without having to seek an order of
the Court authorizing each transaction will minimize the expense of filing separate motions for
each such transaction and allow the Debtors to take advantage of market opportunities. The
Debtors believe, in their sound business judgment, that in some situations the risk associated
with the purchase or sale of the Notes will be considerably less than the risk and cost of engaging
Transaction Parties in one-off litigations in this Court and/or foreign jurisdictions, and in some
situations the purchase of Notes may be the only feasible method of forcing a liquidation of a
highly illiquid and significant position in an SPV. The Debtors seek authorization to use their
business judgment for the benefit of their estates in such situations. Thus, the relief requested by
this Motion is appropriate and necessary to facilitate the realization of value of the Debtors’
C:\NRPORTBL\US_ACTIVE\ARORAA\43337911_16.DOC 7
interest in the Transaction Agreements and the SPVs for the benefit of the Debtors’ estates and
creditors.
Background
11. Commencing on September 15, 2008 and periodically thereafter (as
applicable, the “Commencement Date”), the Debtors commenced with this Court voluntary cases
under chapter 11 of title 11 of the United States Code (the “Bankruptcy Code”). The Debtors’
chapter 11 cases have been consolidated for procedural purposes only and are being jointly
administered pursuant to Rule 1015(b) of the Federal Rules of Bankruptcy Procedure (the
“Bankruptcy Rules”). The Debtors are authorized to operate their businesses and manage their
properties as debtors in possession pursuant to sections 1107(a) and 1108 of the Bankruptcy
Code.
12. On September 17, 2008, the United States Trustee for the Southern
District of New York (the “U.S. Trustee”) appointed the statutory committee of unsecured
creditors pursuant to section 1102 of the Bankruptcy Code (the “Creditors’ Committee”).
13. On September 19, 2008, a proceeding was commenced under the
Securities Investor Protection Act of 1970 (“SIPA”) with respect to Lehman Brothers Inc.
(“LBI”). A trustee appointed under SIPA is administering LBI’s estate.
14. On January 19, 2009, the U.S. Trustee appointed Anton R. Valukas as
examiner in the above-captioned chapter 11 cases (the “Examiner”) and by order, dated January
20, 2009 [Docket No. 2583], the Court approved the U.S. Trustee’s appointment of the
Examiner.
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Jurisdiction
15. This Court has subject matter jurisdiction to consider and determine this
matter pursuant to 28 U.S.C. § 1334. This is a core proceeding pursuant to 28 U.S.C. § 157(b).
Relief Requested3
16. By this Motion, the Debtors seek authorization pursuant to sections 105(a)
and 363(b)(1) of the Bankruptcy Code to establish the procedures described below by which they
may (i) purchase, either in the open market or through private negotiations with current
Noteholders, Notes issued by SPVs with which the Debtors are party to Transaction Agreements
or by SPVs that are the holder of equity or other interests in separate SPVs with which the
Debtors are party to Transaction Agreements; (ii) exercise all rights and remedies afforded them
as holders of Purchased Notes; and (iii) sell Purchased Notes to third parties (collectively, the
“SPV Note Transactions”).
The Debtors’ Interest in the Transaction Agreements,
Related Litigation, and the Contemplated SPV Note Transactions
17. Prior to the commencement of their chapter 11 cases, the Debtors entered
into Transaction Agreements with various SPVs created to issue Notes in one or more series or
classes, the performance of which Notes was linked to the value and performance of underlying
assets or transactions, including the Transaction Agreements. The Notes typically were issued
pursuant to an indenture, trust agreement, loan agreement or similar document (the “Issuance
Document” and, together with the Transaction Agreements and any and all other documents
related to the Notes, the “Governing Documents”). The Notes as well as the Debtors’ rights
under the Transaction Agreements are secured by collateral (the “Collateral”) including, inter
3 Capitalized terms used in the Relief Requested section but not yet defined shall have the meaning ascribed to them
in subsequent sections of this Motion.
C:\NRPORTBL\US_ACTIVE\ARORAA\43337911_16.DOC 9
alia, the applicable SPV’s interest in the Transaction Agreements between the Debtors and the
SPV and, in some cases, loans, bonds or other assets acquired by the issuing SPV. The
Collateral for the Notes is held on behalf of Noteholders and the Debtors, as secured parties in
respect of their Transaction Agreements, typically by a trustee (the “Indenture Trustee”), or as
otherwise set forth in the applicable Governing Documents.
18. Pursuant to the terms of certain of the Governing Documents, the Debtors’
rights in the Collateral take priority over those of the Noteholders, and the Debtors are entitled to
receive all amounts due and payable on the related Derivative Agreements on each payment date
before any distributions are made to Noteholders. However, under the terms of the Governing
Documents, if an “Event of Default” occurs on the part of Debtors under the Derivative
Agreements, there is a modification to the priorities of payment by the SPV such that the
Noteholders’ rights to receive payments from the SPV are superior to those of the Debtors. The
filing of a bankruptcy petition by the Debtors is such an “Event of Default.” Accordingly,
following the commencement of the Debtors’ chapter 11 cases, many of the SPVs declared an
Event of Default and terminated their respective Derivative Agreements with the Debtors.
Furthermore, in certain cases, at the direction of the requisite Noteholders, Indenture Trustees
liquidated the Collateral and distributed the proceeds to the Noteholders before making any
payments to the Debtors, purportedly pursuant to the modified priority of payments set forth in
the Governing Documents based on the Debtors’ chapter 11 cases. In those instances, the
Debtors typically did not receive any payments, as the amounts due to the Noteholders exceeded
the available funds; if the Debtors did receive a payment, it was substantially less than what they
would have received had their superior rights in the Collateral been honored. To preserve their
C:\NRPORTBL\US_ACTIVE\ARORAA\43337911_16.DOC 10
interests in such Derivative Agreements, the Debtors have commenced or participated in a
number of litigations or other dispute resolution efforts.
19. One of the Debtors, LBSF, has litigated successfully in this Court its
position that the provisions of a Governing Document purportedly modifying LBSF’s priority of
payment under the respective Derivative Agreements solely because of the commencement of a
bankruptcy case is an unenforceable ipso facto clauses which violates the automatic stay
imposed by section 362(a) of the Bankruptcy Code. See, e.g., Lehman Brothers Special
Financing Inc. v. BNY Corporate Trustee Services Limited, 422 B.R. 407, 420 (Bankr. S.D.N.Y.
2010) (the provisions of an agreement “purporting to modify LBSF’s right to a priority
distribution solely as a result of a chapter 11 filing constitute unenforceable ipso facto clauses”
and that “any attempt to enforce such provisions would violate the automatic stay”).
20. While the Debtors intend, for the benefit of their estates and creditors, to
continue to enforce their rights to, and priority of, payment under Governing Documents,
including pursuing litigation against parties who threaten to violate or have already violated the
automatic stay and ipso facto principles by purportedly modifying the Debtors’ right to priority
payment under their Derivative Agreements, these efforts are not without significant cost and
risk to the Debtors’ estates. The sheer number of these transactions, the complex nature of the
applicable Governing Documents, the magnitude of the Debtors’ interest in the Derivative
Agreements, the potential precedential value of any legal determinations, and potential
jurisdictional issues make this type of litigation particularly expensive, time consuming, and
risky. The proposed SPV Note Transactions provide the Debtors with a means of preserving the
value of the Derivative Agreements and extracting value from the SPVs without incurring all the
C:\NRPORTBL\US_ACTIVE\ARORAA\43337911_16.DOC 11
time commitment, cost and risk of litigation, by purchasing and/or selling Notes and exercising
their right and remedies as holders of Purchased Notes, as more fully explained below.
21. To be clear, in this Motion, the Debtors are not asking the Court to find
the provisions of any Governing Documents that purport to modify the Debtors’ payment
priority to be unenforceable ipso facto clauses or to find that there has been a violation of the
automatic stay, nor are the Debtors asking this Court to permit them to purchase Notes when
such purchase would be impermissible under the terms of the Transaction Documents or to make
any determinations regarding what rights the Debtors may have vis-à-vis Indenture Trustees,
Directors and Officers, or any other party under the Governing Documents upon becoming a
Noteholder; rather, the Debtors are seeking relief that would provide them with an alternative
means to seek to maximize their recovery on the Transaction Agreements for the benefit of their
estates and creditors by purchasing and selling Notes and exercising whatever rights they may
have under the Governing Documents.4
22. Prior to the Commencement Date, the Debtors in the ordinary course of
business actively traded, and exercised their rights as holders of, notes similar to the Notes the
Debtors seek authority to acquire and sell in this Motion. The Debtors seek authority by this
Motion to continue to enter into such transactions, subject to the procedures set forth in this
Motion, without the need for obtaining Court approval for each such transaction. While the
Debtors believe that the contemplated SPV Note Transactions constitute transactions in the
ordinary course of business not requiring notice or a hearing under section 363(c) of the
Bankruptcy Code, it is out of an abundance of caution and for the purpose of providing full
disclosure to their creditors that the Debtors filed this motion.
4 The Debtors reserve all rights including, without limitation, the right to challenge any purported
modification of the Debtors’ rights to priority payment under the Governing Documents.
C:\NRPORTBL\US_ACTIVE\ARORAA\43337911_16.DOC 12
23. Absent the relief requested in this Motion, the Debtors may be required to
seek specific Court approval prior to each proposed SPV Note Transaction. Filing individual
pleadings with respect to each SPV Note Transaction, sending notice of each proposed SPV Note
Transaction to every party entitled to receive notice in these cases, and holding individual
hearings to approve same would be expensive, time-consuming, cumbersome, and highly
inefficient and may cause the Debtors to miss attractive market opportunities.
24. Accordingly, this Motion sets forth various guidelines and procedures the
Debtors propose to implement with respect to their entry into SPV Note Transactions. These
procedures have been developed in consultation with the advisors to the Creditors’ Committee.
The Debtors believe that it will be efficient and cost effective for their estates and creditors if
they are authorized to undertake SPV Note Transactions under the terms and conditions outlined
in this Motion as opposed to being required to file individual motion.
The SPV Note Transaction Procedures
25. The Debtors hope to settle their disputes regarding Transaction
Agreements consensually and maximize their recovery as quickly and economically as possible.
Nevertheless, the Debtors will, as appropriate, continue to pursue through litigation and other
dispute resolution efforts their rights to payment and their claims against Transaction Parties that
have violated (or may violate) the automatic stay by purporting to subordinate the Debtors’ rights
to payment priority under their Derivative Agreements on the basis of the unenforceable ipso
facto provisions in the Governing Documents, as well as litigate against other claims brought
against the Debtors by Transaction Parties challenging the Debtors’ right to payment under their
Transaction Agreements. To minimize the need to litigate such disputes with Transaction Parties
and spare their estates the attendant costs and risks, however, the Debtors seek authority to enter
C:\NRPORTBL\US_ACTIVE\ARORAA\43337911_16.DOC 13
into SPV Note Transactions pursuant to the following procedures (the “SPV Note Transaction
Procedures”):
a. All proposed SPV Note Transactions will be reviewed by an approval
committee (the “SPV Note Transactions Committee”) established by the Debtors.
The financial advisors to the Creditors’ Committee (the “Advisors”) will receive
notice of, and may attend, all meetings of the SPV Note Transactions Committee
(each a “SPV Note Transactions Meeting”)5 and will have access to the personnel
of the Debtors involved in evaluating the proposed SPV Note Transactions.
b. With respect to all proposed SPV Note Transactions, the Debtors will
provide (i) e-mail notification to the Advisors of any SPV Note Transactions
Meeting regarding the approval of an SPV Note Transaction not later than one (1)
Business Day prior to such meeting (or at such later time as may be agreed by the
Advisors), which email must contain the material terms of the proposed SPV Note
Transaction and (ii) an information package (the “Information Package”) as soon
as practicable but not less than five (5) Business Days prior to the SPV Note
Transactions Meeting (or at such later time as may be agreed by the Advisors)
that will consist of (a) the Governing Documents pursuant to which the relevant
Notes were issued, and (b) market data, valuation inputs, models and assumptions
used by the Debtors to prepare their analysis for the SPV Note Transactions
Committee that relate to and were used to determine the value of the relevant
Notes and adjustments thereto.
c. Informal discussions among the Debtors and the Advisors relative to
prospective SPV Note Transactions will commence no later than five (5) Business
Days (or at such later time as may be agreed by the Advisors) prior to the relevant
SPV Note Transaction Meeting.
d. If the amount proposed to be paid by the Debtors to a Noteholder for the
purchase of Notes (the “Purchase Price”) in an SPV Note Transaction is greater
than $25,000,000, the Debtors may enter into such SPV Note Transaction only if
(i) the Creditors’ Committee, a subcommittee, or other designee thereof consents
in writing before the SPV Note Transaction is executed or (ii) upon Court
approval.
e. The Debtors may enter into an SPV Note Transaction involving a
Purchase Price less than or equal to $25,000,000 only (i) if (a) at least one (1)
representative of the Advisors attends the portion of the SPV Note Transactions
5 The SPV Note Transactions Committee and SPV Note Transactions Meetings may, respectively, consist
of the same members and the same meetings regarding the assumption, assignment, and termination of
derivative contracts pursuant to the order dated December 16, 2008 [Docket No. 2257], authorizing the
Debtors to establish procedures for the settlement or the assumption and assignment of prepetition
derivative contracts.
C:\NRPORTBL\US_ACTIVE\ARORAA\43337911_16.DOC 14
Meeting during which the proposed SPV Note Transaction was discussed and
approved, and (b) the Advisors do not object within six (6) business hours, herein
defined as the hours between 9:00 a.m. and 5:00 p.m. (Prevailing Eastern Time)
on Business Days, after receipt of e-mail notification of the SPV Note
Transactions Committee’s approval of such SPV Note Transaction, (ii) with the
written consent of the Creditors’ Committee, a subcommittee, or other designee
thereof, or (iii) upon Court approval.
f. The Debtors may enter into an SPV Note Transaction involving the sale of
a Purchased Note only if (i) the Creditors’ Committee, a subcommittee, or other
designee thereof consents in writing before the SPV Note Transaction is
scheduled to be executed or (ii) upon Court approval.
g. The Debtors will provide updates to the Creditors’ Committee regarding
(i) the number of SPV Note Transactions that have been consummated and (ii) the
Purchase Price and sale price of Purchased Notes received by the Debtors, as
applicable, on a transaction-by-transaction basis in connection with such SPV
Note Transactions promptly following the request by the Creditors’ Committee or
its Advisors.
h. The Debtors and the Creditors’ Committee reserve all rights and remedies
with respect to the SPV Note Purchase Procedures and may seek to amend such
upon Court approval.
i. The Debtors’ ability to carry out the actions set forth in the foregoing
procedures shall not override any applicable notice, consent or other rights that
any third parties may have pursuant to agreements with the Debtors.
j. Nothing in the foregoing procedures will prevent the Debtors, in their sole
discretion, from (i) seeking, upon notice and hearing, the Court’s approval of any
proposed SPV Note Transaction, including on an expedited basis, (ii) pursuing
any and all claims and rights of action, through litigation or otherwise, that the
Debtors may have against any Transaction Party or (iii) exercising any and all
rights and remedies as holders of any Notes (including Purchased Notes).
26. The Debtors respectfully submit that the proposed SPV Note Transaction
Procedures represent the exercise of sound business judgment and are fair and appropriate.
Sound Business Reasons Support
the Debtors’ Decision to Enter into SPV Note Transactions
27. The Debtors request authorization pursuant to sections 105(a) and
363(b)(1) of the Bankruptcy Code to enter into SPV Note Transactions in consultation with the
Creditors’ Committee and without further order of this Court in accordance with the SPV Note
C:\NRPORTBL\US_ACTIVE\ARORAA\43337911_16.DOC 15
Transaction Procedures. Section 105(a) of the Bankruptcy Code provides that “[t]he court may
issue any order that is necessary or appropriate to carry out the provisions of this title.” 11
U.S.C. § 105(a). Section 363(b)(1) of the Bankruptcy Code provides, in relevant part, “the
trustee, after notice and a hearing, may use, sell, or lease, other than in the ordinary course of
business, property of the estate.” 11 U.S.C. § 363(b)(1). When considering a transaction outside
the ordinary course of business, courts in the Second Circuit, and others, require that such
transaction be based upon the sound business judgment of the debtor. Comm. of Equity Sec.
Holders v. Lionel Corp. (In re Lionel Corp.), 722 F.2d 1063, 1070 (2d Cir. 1983); accord In re
Chateaugay Corp., 973 F.2d 141, 143 (2d Cir. 1992); In re Martin, 91 F.3d 389, 395 (3d Cir.
1996) (citing Fulton State Bank v. Schipper (In Re Schipper), 933 F.2d 513, 515 (7th Cir. 1991));
Institutional Creditors of Cont’l Airlines, Inc. v. Cont’l Airlines, Inc. (In re Cont’l Airlines, Inc.),
780 F.2d 1223, 1226 (5th Cir. 1986).
28. It is generally understood that “[w]here the debtor articulates a reasonable
basis for its business decisions (as distinct from a decision made arbitrarily or capriciously),
courts will generally not entertain objections to the debtor’s conduct.” In re Johns-Manville
Corp., 60 B.R. 612, 616 (Bankr. S.D.N.Y. 1986). If a valid business justification exists, there is
a strong presumption that “the directors of a corporation acted on an informed basis, in good
faith and in the honest belief that the action taken was in the best interests of the company.” In
re Integrated Res., Inc., 147 B.R. 650, 656 (S.D.N.Y. 1992) (quoting Smith v. Van Gorkom, 488
A.2d 858, 872 (Del. 1985)), appeal dismissed, 3 F.3d 49 (2d Cir. 1993). The burden of rebutting
this presumption falls to parties opposing the proposed exercise of a debtor’s business judgment.
Id. (citing Aronson v. Lewis, 473 A.2d 805, 812 (Del. 1984)).
C:\NRPORTBL\US_ACTIVE\ARORAA\43337911_16.DOC 16
29. The Debtors believe that SPV Note Transactions are actions in the
ordinary course of business under section 363(c) of the Bankruptcy Code, not requiring notice or
a hearing. Even to the extent that such transactions are deemed to be outside of the ordinary
course of business, the Debtors have nevertheless determined, in the exercise of their sound
business judgment, that entering into such SPV Note Transactions, in given circumstances, will
represent the most effective and efficient method of protecting, preserving and maximizing
recovery on the Debtors’ interests in the Transaction Agreements and the SPVs.
30. As reflected in the Declaration of Daniel Ehrmann, dated March 30, 2010,
in support of the Motion, annexed hereto as Exhibit A (the “Ehrmann Declaration”), ample
business justifications support the Motion. By entering into SPV Note Transactions, the Debtors
will seek to avoid some of the cost, time, risk and uncertainty associated with protracted
litigation with certain Transaction Parties regarding the purported reversal of the Debtors’
priority as a result of the commencement of their chapter 11 cases. While this Court recently
held favorably for LBSF in the BNY Decision, it acknowledged the “complexity of the
underlying financial structures,” and the “unique” issues that were the subject of the litigation.
Id. at 422. The outcome of almost any litigation, let alone one dealing with controversial issues,
“unsettled subject matter,” and defendants seeking relief against the Debtors in foreign
jurisdictions, is replete with uncertainty and risk. See id. Additionally, the Debtors are currently
facing litigation in foreign jurisdictions and are engaged in other dispute resolution efforts with
Transaction Parties who are unable to effect a liquidation of Collateral and assets of issuing
SPVs and who are challenging the Debtors’ rights to amounts owed under the related
Transaction Agreements. The SPV Note Transactions are intended to provide the Debtors a
method of efficiently and economically resolving disputes with Transaction Parties and
C:\NRPORTBL\US_ACTIVE\ARORAA\43337911_16.DOC 17
minimizing the significant cost and risk associated with litigation of these disputes in this Court
and in foreign jurisdictions.
31. Prior to entering into any particular SPV Note Transaction, the Debtors
will exercise their business judgment to evaluate the benefits and risks of the proposed purchase
or sale of Notes on a case by case basis to determine the amount and value of Notes, if any, they
should purchase or sell with respect to a particular SPV, in light of the purpose for which they
intend to purchase or sell the Notes.
32. The Debtors believe that resolution of the disputes with Transaction
Parties through some SPV Note Transactions may yield a recovery at least equal to, if not greater
than, the recovery the Debtors would expect to receive through successful litigation in their
capacity as Lehman Counterparties. For instance, with respect to certain SPVs with which the
Debtors are party to Derivative Agreements, the Debtors believe that they will be able to
purchase Notes from Noteholders at a discounted price that reflects the appropriate risk and
exposure to the Noteholders from a ruling by the Court on the Debtors’ right to priority payment
under its Derivative Agreements in the Debtors’ favor if the dispute were to be litigated. Since
the current holders’ litigation risk will be built into the Purchase Price of such Notes, the Debtors
expect to purchase the Notes at a discount, which the Debtors expect will produce a net gain for
the Debtors upon redemption, as the liquidation value of the Notes would not be subject to
discount associated with litigation risk. If the Debtors believe that they will be able to purchase
a controlling Noteholder position with respect to such SPVs and will then have the discretion to
direct liquidation of the Collateral underlying the Notes, and the redemption thereof, the Debtors
may determine in their business judgment, that they will be able to produce an expected net
C:\NRPORTBL\US_ACTIVE\ARORAA\43337911_16.DOC 18
recovery on the SPV Note Transaction that is at least equal to, if not greater than, the Debtors’
expected net recovery on their Derivative Agreement.
33. SPV Note Transactions may, in some situations, also give the Debtors
the ability to direct settlement by Indenture Trustees of litigation between the Debtors and
Transaction Parties where the Debtors are able to acquire a requisite Noteholder position and,
where such direction is not feasible, increased leverage to negotiate a favorable and expeditious
settlement of disputes with Transaction Parties, since the Debtors could consider any return on
their Notes in conjunction with any return on their Derivative Agreements.
34. If the Debtors are able to acquire requisite Noteholder positions with
respect to certain issuing SPVs, they would determine, in their business judgment, whether they
would receive a greater return by (i) directing the Indenture Trustee to liquidate the Collateral
securing the Notes, the proceeds of which the Debtors would expect will be above the discounted
value at which they were able to purchase the Notes, or (ii) directing the Indenture Trustee to
settle the litigation with the Transaction Parties, providing a return to the Debtors on the
Derivative Agreement.
35. Furthermore, the acquisition of Notes may serve as a hedge to the risk that
the Debtors will not prevail in litigation with certain Transaction Parties. Since the Debtors
would receive a return on Purchased Notes if Transaction Parties prevail in litigation because
Noteholders receive payment prior to the Debtors under their Derivative Agreements, holding
and recovering on those Purchased Notes would mitigate any losses that would be incurred by
the Debtors on the Derivative Agreements. The SPV Note Transactions provide the Debtors an
avenue of recovery as Noteholders where they may not otherwise be able to recover as Lehman
Counterparties.
C:\NRPORTBL\US_ACTIVE\ARORAA\43337911_16.DOC 19
36. The SPV Note Transactions also may enable the Debtors, in some cases,
to maximize the value of Transaction Agreements on which the Debtors are currently unable to
recover as a result of inaction by Noteholders to redeem their Notes to effect a liquidation of the
Collateral and assets of issuing SPVs. If the Debtors believe that they will be able to acquire a
sufficient amount of Notes to direct the liquidation of the Collateral and assets of an issuing
SPV, the Debtors may determine in their business judgment that such liquidation may result in
sufficient liquidity to allow the Debtors to monetize and fully realize the value of their otherwise
illiquid positions in the SPV and maximize the value of their Transaction Agreements and their
return from the SPV. Given that the Debtors may be able to purchase these Notes at a discount
due to the inability of current Noteholders to redeem their Notes, the Debtors may be able to
realize a positive recovery on their redemption of Purchased Notes as well, yielding additional
value for the Debtors, their estates and their creditors.
37. Once the Debtors purchase Notes through an SPV Note Transaction, the
SPV Note Transaction Procedures provide the Debtors the flexibility to sell Purchased Notes
where such sale, in the Debtors’ business judgment, would be advantageous to the Debtors and
their estates. After purchasing Notes, the Debtors may determine that they can realize immediate
and significant recovery on the Purchased Notes through the sale of the Notes to a third party.
The Debtors’ ability to sell Purchased Notes will help the Debtors to manage their interests in the
SPVs more effectively by giving them the flexibility to purchase Notes in situations in which
they believe (but do not know for certain) that such purchase will enable them to reach
settlements with existing Noteholders, hedge against the risk that they are unable to direct a
liquidation or settlement of litigation, or otherwise negotiate a settlement with recalcitrant
C:\NRPORTBL\US_ACTIVE\ARORAA\43337911_16.DOC 20
Transaction Parties. The ability to sell Purchased Notes provides the Debtors with the needed
flexibility to maximize recoveries.
38. Prior to effecting an SPV Note Transaction, the Debtors will evaluate at
least the following risks: (i) the Debtors may not be able to obtain, or determine the amount
and/or value of Notes needed to obtain, a sufficient amount or value of Notes to direct the
liquidation of the underlying Collateral and/or assets of the issuing SPV and its subsidiaries, if
any, due to either unwillingness of current Noteholders to sell their Notes to the Debtors or the
Debtors’ inability to identify Noteholders; (ii) the Debtors may not be able to obtain, or
determine the amount and/or value of Notes needed to obtain, a sufficient amount or value of
Notes to direct an Indenture Trustee to settle litigation; (iii) the relevant Transactions Parties may
not comply with the Debtors’ direction to liquidate Collateral and/or assets, or settle existing
litigation; (iv) some SPV Note Transactions may implicate limitations imposed by applicable
securities laws; (v) the value obtained from liquidation of Collateral and/or assets of an issuing
SPV may be insufficient to repay the Debtors’ Purchased Notes an amount in excess of the price
at which the Debtors purchased the Notes; (vi) there may be a downturn in the value of the Notes
subsequent to the Debtors’ acquisition thereof; and (vii) remaining Noteholders may continue to
litigate with the Debtors regarding their rights to payment under the Transaction Agreements
after the Debtors’ acquisition of Notes.
39. By evaluating the benefits and risks of proposed SPV Note Transactions
on a case by case basis, the Debtors will be able to use their business judgment to determine the
best method to maximize the value of their Transaction Agreements and recovery from the
various SPVs to which the Debtors are Lehman Counterparties.
C:\NRPORTBL\US_ACTIVE\ARORAA\43337911_16.DOC 21
40. For the foregoing reasons, the Debtors’ ability to enter into SPV Note
Transactions in accordance with the SPV Note Transaction Procedures is in the best interest of
their estates and creditors and represents a reasonable exercise of their business judgment.
Accordingly, the relief requested in the Motion should be granted.
Notice
41. No trustee has been appointed in these chapter 11 cases. The Debtors
have served notice of this Motion in accordance with the procedures set forth in the amended
order entered on February 13, 2009 governing case management and administrative procedures
for these cases [Docket No. 2837] on (i) the U.S. Trustee; (ii) the attorneys for the Creditors’
Committee; (iii) the Securities and Exchange Commission; (iv) the Internal Revenue Service;
(v) the United States Attorney for the Southern District of New York; and (vi) all parties who
have requested notice in these chapter 11 cases. The Debtors submit that no other or further
notice need be provided.
42. No previous request for the relief sought herein has been made by the
Debtors to this or any other court.
C:\NRPORTBL\US_ACTIVE\ARORAA\43337911_16.DOC 22
WHEREFORE the Debtors respectfully request that the Court grant the relief
requested herein and such other and further relief as it deems just and proper.
Dated: March 30, 2010
New York, New York
/s/ Robert J. Lemons
Lori R. Fife
Richard L. Levine
Robert J. Lemons
WEIL, GOTSHAL & MANGES LLP
767 Fifth Avenue
New York, New York 10153
Telephone: (212) 310-8000
Facsimile: (212) 310-8007
Attorneys for Debtors
and Debtors in Possession
C:\NRPORTBL\US_ACTIVE\ARORAA\43337911_16.DOC
Exhibit A
Ehrmann Declaration
C:\NRPORTBL\US_ACTIVE\ARORAA\43337911_16.DOC
WEIL, GOTSHAL & MANGES LLP
767 Fifth Avenue
New York, New York 10153
Telephone: (212) 310-8000
Facsimile: (212) 310-8007
Lori R. Fife
Richard L. Levine
Robert J. Lemons
Attorneys for Debtors
and Debtors in Possession
UNITED STATES BANKRUPTCY COURT
SOUTHERN DISTRICT OF NEW YORK
------------------------------------------------------------------x
:
In re : Chapter 11 Case No.
:
LEHMAN BROTHERS HOLDINGS INC., et al. : 08-13555 (JMP)
:
Debtors. : (Jointly Administered)
:
:
------------------------------------------------------------------x
DECLARATION OF DANIEL EHRMANN IN SUPPORT OF
DEBTORS’ MOTION PURSUANT TO SECTIONS 105(A) AND 363
OF THE BANKRUPTCY CODE FOR AUTHORIZATION TO PURCHASE
AND SELL NOTES ISSUED BY CERTAIN SPECIAL PURPOSE VEHICLES
THAT ARE PARTY TO TRANSACTIONS WITH CERTAIN DEBTORS
Pursuant to 28 U.S.C. § 1746, I, Daniel Ehrmann, declare:
1. I am over the age of 18 years and make these statements based on my
own personal knowledge, my review of the business records of Lehman Brothers Holdings
Inc. (“LBHI”) and its affiliated debtors in the above-referenced chapter 11 cases (collectively
with LBHI, the “Debtors”) and/or my consultation with employees of the Debtors. If called to
testify, I could testify to the truth of the matters set forth herein.
2. I submit this declaration in support of the Debtors’ Motion Pursuant to
Sections 105(a) and 363 of the Bankruptcy Code for Authorization to Purchase and Sell Notes
C:\NRPORTBL\US_ACTIVE\ARORAA\43337911_16.DOC 2
Issued by Certain Special Purpose Vehicles that Are Party to Certain Transactions with
Certain Debtors (the “Motion”) filed concurrently herewith.1
3. I am a Managing Director with Alvarez & Marsal North America, LLC,
the Chief Restructuring Officer to the Debtors pursuant to an Order of this Court dated
December 17, 2008. I was assigned to the Lehman matter in September 2008. I serve as cohead
of the derivatives group for the Debtors; in that capacity, I am responsible for all
derivatives-related matters.
4. I am familiar with the various types of agreements entered into by the
Debtors with SPVs and the various Governing Documents governing the issuance of Notes by
the SPVs and the transactions among the Debtors, SPVs and other Transaction Parties. I am
also familiar with the various litigations and other dispute resolution efforts previously taken,
and currently being taken or considered, by the Debtors against Transaction Parties to enforce
the Debtors’ rights and preserve their interests. Many of these disputes pertain to efforts by
Transaction Parties to subordinate the Debtors’ rights to priority payment under their
Derivative Agreements to payments to Noteholders as a result of an alleged event of default
based on the commencement of the Debtors’ chapter 11 cases. Others of the disputes pertain
to the Debtors’ efforts to recover amounts due to them under various Transaction Agreements
resulting from certain Transaction Parties’ inability and/or unwillingness to liquidate the
respective Collateral and assets of certain SPVs. The investigation, negotiation, and dispute
resolution efforts relating to these disputes have resulted in a substantial amount of cost, time
and risk for the Debtors’ estates. I have reviewed the Motion, and after consultation with
various employees of the Debtors and counsel and other advisors, I believe the Debtors’
1 Capitalized terms used but not defined herein shall have the meaning ascribed to such terms in the Motion.
C:\NRPORTBL\US_ACTIVE\ARORAA\43337911_16.DOC 3
decision to try to maximize the range of tools available to the Debtors to try to resolve their
disputes with Transaction Parties and maximize recoveries pursuant to the procedures
described in the Motion is supported by sound business reasons and is in the best interests of
the Debtors, their estates and creditors.
The Transaction Agreements and Disputes with Transaction Parties
5. Prior to the commencement of the Debtors’ chapter 11 cases, the
Debtors entered into Transaction Agreements with various SPVs, which then issued Notes to
third parties. Other SPVs entered into Loan Agreements, pursuant to which the Debtors
loaned funds to provide a levered return to the holders of Notes. Finally, certain SPVs with
which the Debtors entered into Transaction Agreements issued equity or other interests to a
separate SPV, which then issued the relevant Notes to third parties. Such Notes and the
SPVs’ obligations to the Debtors under the Transaction Agreements are secured by Collateral,
which (in the case of Notes) may include the applicable SPV’s interest in the Transaction
Agreements and which is held on behalf of Noteholders and the Debtors typically by an
Indenture Trustee, or as otherwise set forth in the applicable Governing Documents.
6. Pursuant to the terms of certain Governing Documents, the Debtors’
rights in the respective Collateral take priority over those of the Noteholders, and the Debtors
are entitled to receive all amounts due and payable on the Derivative Agreements on each
payment date before any distributions are made to Noteholders. However, if there is an
“Event of Default,” including the filing of a bankruptcy petition by the Debtors, the terms of
certain of the Governing Documents provide for a modification to the priorities of payment by
the SPV such that the Noteholders’ rights to receive payments from the SPV are superior to
those of the Debtors.
C:\NRPORTBL\US_ACTIVE\ARORAA\43337911_16.DOC 4
7. Accordingly, following the commencement of the Debtors’ chapter 11
cases, many SPVs declared an Event of Default based on the filing of the Debtors’ chapter 11
cases and terminated their respective Derivative Agreements with the Debtors. Furthermore,
in certain cases, at the direction of the requisite Noteholders, Indenture Trustees liquidated the
Collateral and distributed the proceeds to the Noteholders before making any payments to the
Debtors, purportedly pursuant to the modified priority of payments set forth in the Governing
Documents based on the Debtors’ chapter 11 cases. In those instances, the Debtors typically
did not receive any payments, as the amounts due to the Noteholders exceeded the available
funds; if the Debtors did receive a payment, it typically was substantially less than what they
would have received had their superior rights in the Collateral been honored. As a result, the
Debtors have commenced or participated in a number of litigations or other dispute resolution
efforts with Transaction Parties. These efforts, given, among other things, the sheer number
of transactions, the complex nature of the applicable Governing Documents, and the
magnitude of the Debtors’ interest in the Derivative Agreements, have been particularly
expensive and time consuming.
8. The Debtors have been involved in separate dispute resolution efforts
and litigations, including in foreign jurisdictions, with other Transaction Parties over the
Debtors’ failure to receive the amounts due to them under the relevant Transaction
Agreements resulting from the Transaction Parties’ inability to liquidate the Collateral and
assets underlying the SPVs.
SPV Note Transactions
9. Authorization to enter into SPV Note Transactions will enable the
Debtors pursue strategies designed to minimize the time, effort, cost and risk associated with
C:\NRPORTBL\US_ACTIVE\ARORAA\43337911_16.DOC 5
litigation of disputes with Transaction Parties, maximize the Debtors’ recovery on their
Transaction Agreements, and hedge litigation risk in some cases. In some situations, the risk
associated with the purchase or sale of the Notes will be considerably less than the risk and
cost of engaging Transaction Parties in one-off litigations, and in some situations the purchase
of Notes may be the only feasible method of liquidating a highly illiquid and significant
position in an SPV. Prior to entering into any particular SPV Note Transaction, the Debtors
will evaluate the benefits and risks of the proposed purchase or sale on a case by case basis to
determine the amount/value of Notes, if any, they should purchase or sell with respect to a
particular SPV, in light of the purpose for which they intend to purchase or sell the Notes.
10. The Debtors believe that, as a consequence of the results of litigation to
date among the Debtors and certain Transaction Parties regarding the Debtors’ rights to
priority payment under their Derivative Agreements, and the possibility of the Debtors
obtaining similar results in litigation with other Transaction Parties, the current market price
of Notes issued by certain SPVs is less than the value of the Collateral securing the repayment
of the Notes. If the Debtors are able to purchase the requisite amount of certain Notes issued
by such SPVs, the Debtors may be able to direct the liquidation of the Collateral underlying
the Notes, redeem the Notes at the value of the Collateral securing the Notes, avoid the risk,
time and expense of litigation, and realize a net gain on their investment in the Notes and
maximize recovery from such SPVs.
11. In other cases, if the Debtors are able to purchase the requisite amount
of certain Notes issued by certain SPVs, the Debtors may be able to direct the Indenture
Trustee to settle litigation with the Debtors related to the relevant SPV. This result would
avoid the time, expense and risk of continued litigation and allow the Debtors to recover on
C:\NRPORTBL\US_ACTIVE\ARORAA\43337911_16.DOC 6
their Derivative Agreements. Even if the Debtors are not able to direct settlement as
controlling Noteholders, their ability to recover on Purchased Notes should facilitate more
favorable settlements between the Debtors and Transaction Parties, as the Debtors could take
into account their recovery on the Notes above the Purchase Price in negotiating their return
under the Derivative Agreements.
12. With respect to SPVs in which the Debtors are or may become
involved in litigation with respect to their Derivative Agreements, acquisition of the Notes
issued by such SPVs may serve as a hedge to the Debtors’ litigation risk. In some cases, the
price that the Debtors would pay to purchase such Notes could be less than the value of the
Collateral securing repayment of the Notes due to the litigation risk to Noteholders, which
would yield a net recovery for the Debtors on the Notes if a sufficient amount of Notes was
purchased, even if litigation is not pursued by the Debtors. But even if the Debtors do not
acquire a sufficient amount of Notes to justify abandoning or avoiding litigation with respect
to the relevant Derivative Agreements, the purchase of Notes could still provide the Debtors
an effective hedge to minimize any losses they may incur on such Derivative Agreements if
they do not prevail in litigation by allowing the Debtors to realize some recovery on their
Purchased Notes.
13. With respect to certain SPVs with which the Debtors have entered into
Transaction Agreements on which the Debtors are unable to recover due to inaction by
current Noteholders to redeem their Notes, if the Debtors are able to purchase and redeem the
requisite amount of Notes issued by a particular SPV, the Debtors may be able to direct the
liquidation of Collateral and underlying assets of the SPV and any subsidiaries. This would
potentially create sufficient liquidity to satisfy amounts owed to the Debtors in a manner that
C:\NRPORTBL\US_ACTIVE\ARORAA\43337911_16.DOC 7
may both preserve the value of such underlying assets and expedite the time and manner of
repayment to the Debtors. Furthermore, since the Debtors may be able to purchase such
Notes at a discount due to the inability of current Noteholders to redeem the Notes and
recover value from the issuing SPV, the Debtors may receive a positive distribution on
Purchased Notes, yielding additional value for the Debtors, their estates and their creditors.
14. The ability to sell Purchased Notes will further protect the Debtors’
interests in the Transaction Agreements by allowing them to hedge against the risk that they
are not able to purchase the requisite amount of Notes to direct a liquidation or settlement of
litigation, or where they are not otherwise able to negotiate a settlement. In these situations,
the ability to sell the Notes will give the Debtors the flexibility to maximize their recovery. In
addition, the Debtors may find themselves in a situation where they would be able to realize a
significant return through an immediate sale of particular Purchased Notes that would
maximize value for the Debtors and their estates.
15. It is therefore my belief that it is in the best interests of the Debtors,
their estates, and their creditors for the Debtors to have the authority to enter into SPV Note
Transactions in accordance with the procedures set forth in the Motion, as the Debtors would
C:\NRPORTBL\US_ACTIVE\ARORAA\43337911_16.DOC 8
be able, in certain situations, to avoid potential litigation, settle existing litigation, and/or
maximize recovery from their Transaction Agreements and the SPVs.
I declare under penalty of perjury under the laws of the United States of America that the
foregoing is true and correct.
Executed on this 30th day of March 2010.
/s/ Daniel Ehrmann
Daniel Ehrmann
C:\NRPORTBL\US_ACTIVE\ARORAA\43337911_16.DOC
UNITED STATES BANKRUPTCY COURT
SOUTHERN DISTRICT OF NEW YORK
-------------------------------------------------------------------x
In re : Chapter 11 Case No.
:
LEHMAN BROTHERS HOLDINGS INC., et al., : 08-13555 (JMP)
:
Debtors. : (Jointly Administered)
-------------------------------------------------------------------x
ORDER GRANTING DEBTORS’ MOTION PURSUANT TO SECTIONS 105(A)
AND 363 OF THE BANKRUPTCY CODE FOR AUTHORIZATION TO PURCHASE
AND SELL NOTES ISSUED BY CERTAIN SPECIAL PURPOSE VEHICLES
THAT ARE PARTY TO TRANSACTIONS WITH CERTAIN DEBTORS
Upon the motion, dated March 30, 2010 (the “Motion”),1 of Lehman Brothers
Holdings Inc. (“LBHI”) and its affiliated debtors in the above-referenced chapter 11 cases, as
debtors and debtors-in-possession (collectively, the “Debtors”), pursuant to sections 105(a) and
363(b)(1) of title 11 of the United States Code (the “Bankruptcy Code”) for authorization to
purchase and sell notes issued by certain special purpose vehicles that are party to certain
transactions with certain Debtors, all as more fully described in the Motion; and upon the
declaration of Daniel Ehrmann, dated March 30, 2010, in support of the Motion; and the Court
having jurisdiction to consider the Motion and the relief requested therein in accordance with 28
U.S.C. §§ 157 and 1334 and the Standing Order M-61 Referring to Bankruptcy Judges for the
Southern District of New York Any and All Proceedings Under Title 11, dated July 10, 1984
(Ward, Acting C.J.); and consideration of the Motion and the relief requested therein being a
core proceeding pursuant to 28 U.S.C. § 157(b); and venue being proper before this Court
pursuant to 28 U.S.C. §§ 1408 and 1409; and due and proper notice of the Motion having been
provided in accordance with the procedures set forth in the amended order entered February 13,
1 Capitalized terms used but not defined herein shall have the meaning ascribed to such terms in the
Motion.
C:\NRPORTBL\US_ACTIVE\ARORAA\43337911_16.DOC 2
2009 governing case management and administrative procedures [Docket No. 2837] to (i) the
United States Trustee for the Southern District of New York; (ii) the attorneys for the Creditors’
Committee; (iii) the Securities and Exchange Commission; (iv) the Internal Revenue Service; (v)
the United States Attorney for the Southern District of New York; and (vi) all parties who have
requested notice in these chapter 11 cases, and it appearing that no other or further notice need be
provided; and a hearing having been held to consider the relief requested in the Motion; and the
Court having found and determined that the relief sought in the Motion is in the best interests of
the Debtors, their estates and creditors, and all parties in interest and that the legal and factual
bases set forth in the Motion establish just cause for the relief granted herein; and after due
deliberation and sufficient cause appearing therefor, it is
ORDERED that the Motion is GRANTED; and it is further
ORDERED that, pursuant to sections 105(a) and 363(b)(1) of the Bankruptcy
Code, the Debtors are authorized to enter into and consummate SPV Note Transactions in
accordance with the following SPV Note Transaction Procedures:
a. All proposed SPV Note Transactions will be reviewed by an approval committee
(the “SPV Note Transactions Committee”) established by the Debtors. The
financial advisors to the Creditors’ Committee (the “Advisors”) will receive
notice of, and may attend, all meetings of the SPV Note Transactions Committee
(each a “SPV Note Transactions Meeting”)2 and will have access to the
personnel of the Debtors involved in evaluating the proposed SPV Note
Transactions.
b. With respect to all proposed SPV Note Transactions, the Debtors will provide (i)
e-mail notification to the Advisors of any SPV Note Transactions Meeting
regarding the approval of an SPV Note Transaction not later than one (1)
Business Day prior to such meeting (or at such later time as may be agreed by
2 The SPV Note Transactions Committee and SPV Note Transactions Meetings may, respectively, consist
of the same members and the same meetings regarding the assumption, assignment, and termination of
derivative contracts pursuant to the order dated December 16, 2008 [Docket No. 2257], authorizing the
Debtors to establish procedures for the settlement or the assumption and assignment of prepetition
derivative contracts.
C:\NRPORTBL\US_ACTIVE\ARORAA\43337911_16.DOC 3
the Advisors), which email must contain the material terms of the proposed SPV
Note Transaction and (ii) an information package (the “Information Package”) as
soon as practicable but not less than five (5) Business Days prior to the SPV
Note Transactions Meeting (or at such later time as may be agreed by the
Advisors) that will consist of (a) the Governing Documents pursuant to which
the relevant Notes were issued, and (b) market data, valuation inputs, models
and assumptions used by the Debtors to prepare their analysis for the SPV Note
Transactions Committee that relate to and were used to determine the value of
the relevant Notes and adjustments thereto.
c. Informal discussions among the Debtors and the Advisors relative to prospective
SPV Note Transactions will commence no later than five (5) Business Days (or
at such later time as may be agreed by the Advisors) prior to the relevant SPV
Note Transaction Meeting.
d. If the amount proposed to be paid by the Debtors to a Noteholder for the
purchase of Notes (the “Purchase Price”) in an SPV Note Transaction is greater
than $25,000,000, the Debtors may enter into such SPV Note Transaction only if
(i) the Creditors’ Committee, a subcommittee, or other designee thereof consents
in writing before the SPV Note Transaction is executed or (ii) upon Court
approval.
e. The Debtors may enter into an SPV Note Transaction involving a Purchase Price
less than or equal to $25,000,000 only (i) if (a) at least one (1) representative of
the Advisors attends the portion of the SPV Note Transactions Meeting during
which the proposed SPV Note Transaction was discussed and approved, and
(b) the Advisors do not object within six (6) business hours, herein defined as
the hours between 9:00 a.m. and 5:00 p.m. (Prevailing Eastern Time) on
Business Days, after receipt of e-mail notification of the SPV Note Transactions
Committee’s approval of such SPV Note Transaction, (ii) with the written
consent of the Creditors’ Committee, a subcommittee, or other designee thereof,
or (iii) upon Court approval.
f. The Debtors may enter into an SPV Note Transaction involving the sale of a
Purchased Note only if (i) the Creditors’ Committee, a subcommittee, or other
designee thereof consents in writing before the SPV Note Transaction is
scheduled to be executed or (ii) upon Court approval.
g. The Debtors will provide updates to the Creditors’ Committee regarding (i) the
number of SPV Note Transactions that have been consummated and (ii) the
Purchase Price and sale price of Purchased Notes received by the Debtors, as
applicable, on a transaction-by-transaction basis in connection with such SPV
Note Transactions promptly following the request by the Creditors’ Committee
or its Advisors.
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h. The Debtors and the Creditors’ Committee reserve all rights and remedies with
respect to the SPV Note Purchase Procedures and may seek to amend such upon
Court approval.
i. The Debtors’ ability to carry out the actions set forth in the foregoing procedures
shall not override any applicable notice, consent or other rights that any third
parties may have pursuant to agreements with the Debtors.
j. Nothing in the foregoing procedures will prevent the Debtors, in their sole
discretion, from (i) seeking, upon notice and hearing, the Court’s approval of
any proposed SPV Note Transaction, including on an expedited basis, (ii)
pursuing any and all claims and rights of action, through litigation or otherwise,
that the Debtors may have against any Transaction Party or (iii) exercising any
and all rights and remedies as holders of any Notes (including Purchased Notes).
and it is further
ORDERED that the Debtors are authorized to execute such documents or other
instruments and carry out all other actions as may be necessary to effectuate any SPV Note
Transaction in accordance with this Order; and it is further
ORDERED that this Order shall not obligate or require the Debtors to enter into
any SPV Note Transaction, nor shall this Order preclude the Debtors from commencing litigation
in connection with the Transaction Agreements and SPVs and/or settling or compromising any
claim upon further application to the Court; and it is further
ORDERED that this Order shall not modify or limit any orders previously entered
by this Court, including, without limitation, any orders relating to Derivative Agreements; and it
is further
ORDERED that notice of the Motion as provided therein shall be deemed good
and sufficient notice of such Motion; and it is further
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ORDERED that this Court shall retain jurisdiction to hear and determine all
matters arising from or related to the implementation, interpretation, and/or enforcement of this
Order.
Dated: April __, 2010
New York, New York
UNITED STATES BANKRUPTCY JUDGEes/shares?
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