Lehman Bros 7.25% Pref'd Series P (fka LEHPQ)

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DJ Judge OKs Lehman Derivatives Deal With BofA, Fuld Settlement)

By Joseph Checkler

Of DOW JONES DAILY BANKRUPTCY REVIEW


NEW YORK (Dow Jones)--A judge on Wednesday signed off on Lehman Brothers Holdings Inc.'s (LEHMQ) settlement with Bank of America Corp. (BAC) and Merrill Lynch to reduce by more than $4 billion their derivatives claims against the liquidating investment bank.

Judge James Peck of U.S. Bankruptcy Court in Manhattan approved the compromise, which also calls for Bank of America to drop an appeal of a $500 million judgment against it and return $356 million for a claim in that proceeding. Lehman has been settling with its biggest counterparties on derivatives deals as it marches toward an early December confirmation hearing on its most recent creditor-payback plan.

Merrill Lynch is a subsidiary of Bank of America.

Also at Wednesday's hearing, Peck said former Lehman Chief Executive Dick Fuld and other former executives could tap $1.05 million from an insurance policy to settle a securities-fraud lawsuit filed against them by six municipalities that pumped $35 million into the investment bank in the two years leading up to its failure.

The judge also approved a bid by Fuld and other executives to tap $90 million from insurance policies, which can be used to settle a class-action lawsuit brought about by mortgage-backed securities holders. Former executives at Structured Asset Securities Corp., known as Sasco, had objected to the drawdown of insurance funds to pay for the settlement.

Much of Wednesday's hearing centered on Deutsche Bank AG's (DB) argument that $2.4 billion of claims it bought should be treated better than they are under Lehman's plan.

Moses & Singer LLP's Alan Kolod, a lawyer for Deutsche Bank, was asked by Peck why the German bank is raising the issue on the claims now instead of at the confirmation hearing on Lehman's bankruptcy plan.

"I don't need to decide this question today, and I'm not going to," Peck said later, denying Deutsche Bank's motion but leaving the matter open for an objection later in the case.

Peck's sentiment about waiting until later was mentioned earlier by Weil Gotshal & Manges partner Harvey Miller, Lehman's lead lawyer.

Kolod had said Deutsche Bank wanted the matter settled by Nov. 4, which is the date by which creditors have to vote on the proposal.

In trades dating back to June 2010, Deutsche Bank bought intercompany claims from Lehman's German affiliate, Lehman Brothers Bankhaus AG. The claims were part of a $6.6 billion settlement, signed in late 2009, between the German unit's insolvency administrator and Lehman over the disputed ownership of a portfolio of loans.

Deutsche Bank sold stakes in the unsecured claims -- $1.381 billion against Lehman's holding company and a second $1.016 billion claim against Lehman's commercial paper unit -- to a handful of hedge funds specializing in distressed debt.

Deutsche Bank said the claims at issue should be properly characterized as general unsecured claims, which would boost the recoveries to about 56 cents on the dollar for the $1.016 billion claim against Lehman's commercial paper unit and nearly 20 cents on the dollar for the $1.381 billion claim against the holding company.

"It's as visible as a beacon on a dark night," said Kolod, the Deutsche Bank lawyer.

The derivatives deal with Bank of America is the latest for Lehman, which in July announced a settlement with many banks of over $9.6 billion in derivatives claims. Lehman said at the time that it would continue seeking settlements with banks over the derivatives, and it has.

Lehman's newest creditor-payback proposal, filed in late June, could pay creditors up to $65 billion and gives those owed money from Lehman's various subsidiaries larger recoveries than they would have received under its original plan, but defines how much they can claim. The plan has much wider support than a prior one, including from two groups that had filed competing proposals. Peck sent the plan to creditors for a vote last month, and has set a Dec. 6 hearing to consider whether to confirm it.

Since the investment bank's collapse in September 2008, a team of hundreds of bankruptcy professionals under the direction of Alvarez & Marsal Inc. has managed Lehman's assets -- which include real-estate holdings, corporate debt and derivatives -- for the benefit of creditors.

Lehman's most recent estimates say it would likely have $322 billion in allowed claims against the estate, with $272 billion from the parent company and about $50 billion from its various subsidiaries.