Replies to post #7572 on Lehman Brothers Holdings Inc. (fka LEHMQ)

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(=DJ Lehman, Metavante Renew Court Battle Over Swap Payments)

By Patrick Fitzgerald

Of DOW JONES DAILY BANKRUPTCY REVIEW


Lehman Brothers Holdings Inc. (LEHMQ) says a bankruptcy judge ruled correctly when he said financial-technology firm Metavante Corp. had to keep making payments on an interest-rate swap after the investment bank tumbled into bankruptcy.

In papers filed Friday in connection with Metavante's appeal of the bankruptcy court ruling, Lehman's lawyers say that U.S. Bankruptcy Court Judge James Peck correctly ruled that Metavante couldn't stop making payments to Lehman because of the investment bank's bankruptcy.

Last September, Peck said counterparties like Metavante that didn't close out their swaps when Lehman defaulted must now hold up their ends while they wait for the estate to decide how to handle them.

At issue is a 2007 swap Metavante entered into with Lehman Brothers Special Financing to hedge its interest-rate risk on a $1.75 billion loan.

The deal called for Metavante to pay Lehman a fixed rate of interest every quarter while the bank paid the company a floating rate. Because interest rates had been below the 3.865% fixed rate Metavante paid Lehman, the investment bank was in the money on the deal.

Bankruptcy law allows Lehman to assume its "in the money" derivative contracts, like its swap with Metavante, for the benefit of the estate and its creditors.

At an earlier hearing in July on the matter, Peck said Metavante had the opportunity to terminate the swap agreement but chose not to. The company instead opted to "ride the market" without paying premiums to Lehman in the hope that the markets would turn and the deal would swing back in its favor.

Peck ordered the Milwaukee company to send to Lehman missed payments of about $7 million. Those payments now total more than $11 million, plus default interest, according to Lehman.

Lawyers for Metavante and Lehman couldn't be reached for comment.

Metavante appealed the ruling to the U.S. District Court in Manhattan, arguing that Peck improperly penalized it for not taking action quickly enough to terminate the deal following Lehman's bankruptcy.

Peck's decision, Metavante argues, violates its rights to minimize losses under the Bankruptcy Code's so-called safe-harbor provisions governing swaps and other derivatives. Financial contracts like swaps have long been afforded a special exemption under bankruptcy law, providing counterparties a safe harbor from the automatic stay.

The provision, a cornerstone of U.S. bankruptcy law, blocks creditors from immediately seizing property for payment of a debt. Those exemptions allow a counterparty to cancel its swap, net out payments and seize collateral if its counterparty fails.

The derivatives represent a significant source of cash for Lehman creditors still waiting to get paid more than a year after the investment bank filed for bankruptcy protection in September 2008.

At the time of its collapse, Lehman was a party to or was guaranteed more than 10,000 derivative contracts representing more than 1.7 million transactions, according to court documents. The team working on unwinding the deals has so far recovered more than $8 billion in cash.

Fewer than 2,000 of the contracts are considered settled, and Lehman expects to have 250 people working exclusively on winding down the derivatives portfolio through at least this year.