Lehman Unsuccessful in Recovering Funds From Creditors

, New York Law Journal

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Lehman Brothers Holdings Inc. lost two fights with creditors, with a bankruptcy judge dismissing claims seeking to recover money from Intel Corp. and the public housing authority of Michigan.

Lehman, which is liquidating itself pursuant to a court-approved bankruptcy plan, had sought to recover hundreds of millions of dollars from Intel, which it claimed the computer giant wrongfully held as collateral under a swap agreement. It sought to recover about $23 million from the Michigan State Housing Development Authority, or MSHDA, under a different swap agreement.

Southern District Bankruptcy Judge James Peck (See Profile) ruled against Lehman in both disputes in a pair of opinions handed down Dec. 19.

In Lehman Brothers v. Intel, 13-01340, Peck allowed one of three counts asserted by Lehman to go forward, but found that it was not a core proceeding under the bankruptcy law, meaning that Intel can litigate it in district court instead of bankruptcy court. Peck recommended, however, that Intel agree to go ahead in bankruptcy court anyway.

The dispute hinges on a swap agreement entered into shortly before Lehman's 2008 bankruptcy. The swap agreement was structured to allow Intel to purchase a significant amount of its publicly traded shares indirectly without running afoul of insider trading laws, according to Peck's decision.

According to an adversary complaint Lehman filed against Intel earlier this year, the swap agreement called for a subsidiary of Lehman, Lehman Brothers OTC Derivatives Inc. (LOTC), to purchase about 50.5 million shares of Intel stock and deliver them to Intel on Sept. 29, 2008. Intel transferred $1 billion to Lehman as a prepayment for the shares, and Lehman transferred $1 billion to Intel as collateral.

Just weeks before the swap was supposed to close, on Sept. 15, 2008, Lehman declared bankruptcy, though LOTC did not. Intel, in response, kept the entire $1 billion in collateral posted by Lehman and declared that the agreement was terminated as of Sept. 29. On Sept. 30, LOTC filed for bankruptcy as well.

Lehman alleges that Intel should have made a good faith effort to determine what its actual loss was, rather than keep all of the collateral. Lehman claims that the value of the shares it failed to deliver was actually, at most, $873 million. Depending on how damages are calculated, Lehman alleges, Intel should turn between $127 million and $312 million back over to Lehman.

Lehman's suit against Intel has three counts: one breach of contract claim, and two brought under the bankruptcy code asserting that Intel was wrongly exercising control over property of the Lehman estate.

Intel, on the other hand, argued that the swap agreement gave it the right to keep the entire $1 billion, and moved to dismiss.

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