Lehman Brothers' role as lender in bankrupt SunCal projects doesn't justify lift of automatic stay: judge

By Rebecca Melvin

New York, Nov. 20 - Just because Lehman Brothers Holdings Inc. was a lender to now-bankrupt projects of real estate developer SunCal Cos. doesn't mean that lifting the automatic stay in the Lehman bankruptcy cases is justified; and a request for that was denied Thursday by the U.S. Bankruptcy Court for the Southern District of New York.

Lehman advanced $2.3 billion to now-bankrupt real estate development projects of Irvine, Calif.-based SunCal; and under additional agreements, Lehman was supposed to finance essential costs, urgent payables and certain other costs related to the project to preserve their value, SunCal said in court documents.

Since Lehman Brothers filed bankruptcy those funds have not been forthcoming, and they are needed in bankruptcy proceedings now underway in the central district of California, Andrew Gottfried of Morgan, Lewis & Bockius told the New York court.

"We are in extremis; we have no access to any funds whatsoever, and we have real practical problems," Gottfried said.

Court papers filed by SunCal outlined a plethora of problems the entity faces, including public health and safety issues related to unfinished projects.

For example, during demolition activities at the Oak Knoll Project, friable asbestos was discovered, and Lehman has not provided the funds necessary to properly remove it, creating a health danger from windblown asbestos, the filing alleges.

Other urgent issues related to maintenance of vital water levees, brush that needs to be removed to prevent brush fires, and security needed to prevent vandalism were outlined.

Lehman's prior loans are secured by first-priority deeds of trust on the projects, as well as other collateral, counsel pointed out.

At one point in recent weeks, Lehman agreed to pay $270,000 toward the projects, but because that was woefully inadequate, SunCal located an alternative source willing to fund obligations up to $75 million for the expenses. However, that funding is conditioned on a court-approved priming lien in the Chapter 11 cases of SunCal, something that judge James Peck said is to be avoided.

Counsel for Lehman called this funding arrangement, which carries a 90-day maturity, and exorbitant fees and interest, tantamount to blackmail.

Bankruptcy pile-up

"We have no access to cash collateral. We have no luxury of time, we're out of time," Gottfried said.

"What we have here is a true anomaly under the bankruptcy code, one that is not typical, and one that I don't think was contemplated by the bankruptcy code," Gottfried said, referring to the fact that a lender in a bankruptcy case is bankrupt.

Peck said the relief SunCal requested was too broad, and that a blanket lifting of the automatic stay was unacceptable. On the other hand, he let it be known that it wouldn't be right to just "put those cases on ice," until the Lehman cases run their course.

There are already examples in this case of parties who have been successful in resolving problems, he said.

He said either SunCal could move again with a more targeted motion focused on particular relief for cause, or the parties following discussions agree by stipulation for limited relief of the stay, or the parties reach terms and conditions of financing that may be provided by Lehman-related entities.

He recommended against using lending available in California that comes only on a priming basis. "A priming fight in the current environment is to be avoided," he said.

Instead the parties were encouraged to talk to each other for ways to solve the financing.

"If Lehman holds secured claims of $2.3 billion, someone in charge [at SunCal] needs to be speaking with, dealing with, respecting the rights of Lehman, because they are not going to get out of bankruptcy without Lehman," Peck said.

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