NEW YORK (WSJ) —A U.S. bankruptcy judge on Wednesday approved a settlement between Lehman Brothers Holdings Inc. and two parties over derivatives deals that had divided courts on both sides of the Atlantic.
Judge James Peck of U.S. Bankruptcy Court in Manhattan signed off on Lehman's pact with aBank of New York Mellon Corp. unit and Australia's Perpetual Trustee Co. over the "flip" clauses in credit-derivatives contracts that would have allowed those companies to jump ahead of Lehman and grab the assets backing the derivatives in those deals.
Judge Peck earlier this year ruled that such a flip provision violated U.S. bankruptcy law.
Lehman lawyers said they had satisfied the minor objections to the agreement, which calls for Perpetual to redeem the notes and the collateral backing those notes to be sold. Proceeds from the sale will be distributed based on the wording of a settlement payment deed, and Lehman said that will result in a "substantial payment" to the estate of its Lehman Brothers Special Financing Unit.
Judge Peck's prior decision on flips, which he acknowledged "may be a controversial one," upset expectations in the market for collateralized debt obligations and other structured-finance deals, forcing investors to forgo billions of dollars in collateral. It also conflicted with an English High Court ruling last year that put the investors ahead of Lehman in the order to be repaid.
Recall:
Lehman affiliates Lehman Brothers Special Financing Inc. and Lehman Brothers Financial Products Inc. filed six lawsuits Tuesday in U.S. Bankruptcy Court in Manhattan to recover funds the investment bank said were wrongly transferred to credit-default-swap counterparties after it filed for bankruptcy protection.Lehman said those transfers, which were triggered when the swaps were terminated and the counterparties jumped ahead of Lehman in the payment priority line after its bankruptcy filing, cost its bankruptcy estate and its creditors more than $3 billion.
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