Lehman noteholders seek recognition, enforcement of U.K. court ruling

By Jim Witters

Wilmington, Del., Feb. 9 - A group of 24 Australian noteholders is seeking U.S. bankruptcy court recognition and enforcement of a court ruling in the United Kingdom granting them first-priority claims over Lehman Brothers Special Financing Inc., according to documents filed Wednesday with the U.S. Bankruptcy Court for the Southern District of New York.

The noteholders also are seeking a declaratory judgment against BNY Mellon Corporate Trustee Services Ltd., as trustee, to cause the distribution of collateral for each series of notes in accordance with the noteholder priority.

The motion filed Feb. 8 states that the plaintiffs' priority was established in a ruling in the High Court of Justice in England and Wales and affirmed by the Court of Appeal of England and Wales and by the Supreme Court of the United Kingdom.

In the ruling, the plaintiffs were granted a priority position against Lehman Brothers Special Financing Inc. and its affiliates. BNY is a British affiliate of Bank of New York Mellon.

The notes in the series have a total face value of A$250.230 million. The notes held by the plaintiffs have a total face value of A$93.45 million.

Background of the case

The case stems from the "Dante Program," a series of synthetic collateralized debt obligations in the form of notes linked to credit default swaps. The program was structured and marketed by Lehman Brothers Special Financing, the motion states.

The issuers used the proceeds of the sale of the notes to buy collateral, which was pledged to BNY Mellon Corporate Trustee Services Ltd., as trustee, to secure the issuer's obligations to noteholders.

Under most conditions, Lehman Brothers Special Financing would have first priority to the proceeds of the collateral, according to the motion.

However, as a result of a bankruptcy filing by either Lehman Brothers Special Financing or Lehman Brothers Holdings Inc., noteholder priority applies, giving the noteholders the first priority position. Both companies filed for Chapter 11 bankruptcy in 2008.

On June 9, 2009, the plaintiffs sought through the U.K. courts to compel BNY to distribute the collateral.

"Nonetheless, BNY has not distributed the collateral in accordance with noteholder priority because it is concerned," in light of a January 2010 decision in a case concerning other series of notes under the Dante Program, "that it might be exposed to liability in the U.S. or other applicable U.S. law if it were to do so," the motion states.

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. Its Chapter 11 case number is 08-13555.

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