Lehman Brothers Inc. (LBI) Trustee Jim Giddens won two significant victories that advance his goal of returning as much money as possible to customers and general creditors.
On June 25, U.S. Bankruptcy Judge James M. Peck ruled that approximately $197 million in claims related to repurchase agreements do not qualify for customer protection under the Securities Investor Protection Act (SIPA). On July 17, Judge Peck approved a settlement between Lehman’s brokerage and its Luxembourg unit that resolves a $13 billion dispute over securities transactions.
“The settlement agreements will resolve the claims submitted by the Luxembourg affiliates at amounts well below asserted amounts, thereby preserving maximum value for the LBI customer and general estates,” Hughes Hubbard & Reed said in court papers.
Under the settlement agreements, Lehman Brothers (Luxembourg) SA will get a $158 million unsecured claim against the brokerage in return for dropping its $13 billion claim brought in 2009. LBI responded with its own $13 billion claim, which is now resolved. Another affiliate, Lehman Brothers (Luxembourg) Equity Finance, will receive a $5 million customer claim against the estate that resolves its two claims totaling $78 million.
In the June 25 ruling, Judge Peck granted Giddens’s motion to confirm his determination that claims by five representative claimants – including Hudson City Savings Bank and CarVal Investors UK Limited – related to repurchase agreements were not entitled to customer status under SIPA and should be reclassified as general creditor claims. The transactions at issue were reverse repos.
Judge Peck held that the failure to show entrustment of property to the broker-dealer was fatal to establishing customer status. Giddens had asserted that the repos at issue were proprietary, contractual transactions wherein LBI did not hold any property on behalf of claimants, and that the claimants’ losses did not meet the SIPA definition of customer property.
Following extensive expert and fact discovery, briefing and oral argument, in which Michael Salzman argued for Giddens, supported by Ken Caputo for the Securities Investor Protection Corporation, Judge Peck rejected the claimants’ arguments that they entrusted property to LBI and agreed that Giddens properly reclassified the repo claims as general unsecured claims.
In rejecting the claimants’ arguments that they entrusted securities to LBI, Judge Peck stated that “[c]ontractual expectations and retained interests are insufficient by themselves to establish the key possessory elements that are needed to establish entrustment.” Judge Peck’s ruling has been designated for publication and cited by U.S. Bankruptcy Court Judge Martin Glenn in the MF Global Inc. bankruptcy.
Hughes Hubbard’s victories garnered coverage in a number of news sources, including The Wall Street Journal, Law360 and Bloomberg.
Giddens is represented by Jim Kobak, Chris Kiplok and a large team within the firm. The repo litigation team consists of Salzman and Seth Schulman-Marcus. Eric Kluger also assisted with preparation for depositions. In the Luxembourg matter, Jeff Greilsheimer and Greg Farrell played key roles.