Lehman debtor resolves dispute with derivatives transaction parties

By Jim Witters

Wilmington, Del., Dec. 21 - Lehman Brothers Financial Products Inc. resolved its dispute with two derivatives transaction counterparties and lawsuit defendants, with the counterparties agreeing to participate in mediation, an attorney told the U.S. Bankruptcy Court for the Southern District of New York on Wednesday.

In a redacted stipulation to be filed Dec. 22, the counterparties and Lehman agreed to "good faith" mediation, obviating the need for the sanctions Lehman had sought.

The counterparties are issuers of notes held by third parties and were Lehman's direct contractual counterparties in four now-terminated derivatives transactions.

The counterparties have not been named in court documents or other public proceedings.

Need for mediation

In its lawsuit filed against the counterparties, Lehman said it is asking the court to rule that a contractual "flip clause" that modifies the Lehman debtor's payment rights is not enforceable because of its bankruptcy filing.

The company is seeking senior payment priority under the lawsuit.

Debtors' attorney Richard Levine told the court Dec. 21 that special purpose vehicles issuers cannot avoid mediation.

In a document filed Dec. 19, Levine accused the counterparties of engaging in a "shell game" to stall the alternative dispute resolution process.

He said Lehman attempted to mediate with the trustee, but "the trustee disclaimed authority to settle."

That development led Lehman to convert that pending mediation into one under the court's SPV ADR order, naming just the counterparty," Levine said.

The counterparties are authorized to settle under the terms of the master agreements, the indentures and the court's SPV and ADR order, Levine said.

Agreement to mediate

During the Dec. 21 hearing, Levine said that after the counterparties saw the Dec. 19 filing, they realized "we were not as far apart as they thought."

The counterparties agreed to mediation, with the condition that any settlement must include a period in which noteholders may object. That language was included in the stipulation agreement.

"[Lehman] has never demanded that the counterparty participate in the ADR process with the authority to bind noteholders," according to court documents.

The counterparties are the only parties "owing [Lehman] the payment due upon counterparty's early termination of the swap transactions," court documents said.

Levine said the amount owed is due from the counterparties, not the noteholders, as a result of the counterparties' early termination of the transaction.

New York-based Lehman Brothers Holdings was the fourth-largest investment bank in the United States. The company filed for bankruptcy on Sept. 15, 2008 under Chapter 11 case number 08-13555.

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