By Joseph Checkler
NEW YORK--A judge on Wednesday handed Citigroup Inc. (C) a small
victory in its legal battle with Lehman Brothers Holdings Inc.,
essentially allowing Citi to continue collecting millions of
dollars in interest on $2 billion Lehman deposited before its 2008
bankruptcy.
Judge James Peck of U.S. Bankruptcy Court in Manhattan rejected
Lehman's bid to "provisionally" allow a $2 billion claim as the two
sides prepare for trial in their legal fight over billions of
dollars in derivatives claims. If he had approved the move, Citi
would have been forced to pay itself the $2 billion and thus no
longer collect the interest.
"It would be an inappropriate exercise of this court's
discretion in the present context to provisionally allow a claim
with all rights reserved if the economic impact of so doing would
be to cut off ... interest," Judge Peck said.
He said such a move would have been unprecedented, and while
"novel," there was no legal authority for approving Lehman's
request. The $2 billion, in effect, "secures" Citi's claims against
Lehman, even though the money itself has nothing to do with what
they're fighting about in the derivatives battle.
Lehman had argued that Citi is playing "interest rate arbitrage"
by paying only 0.02% interest on the disputed $2 billion in
Lehman's account, while the bank is demanding a much higher rate on
its bankruptcy claims against Lehman. In court Wednesday, a Citi
lawyer said that rate was more than 5%. The interest-rate spread,
Lehman said, gives Citigroup's bank unit an unfair leverage in the
dispute.
"We'll take the credit risk that Citi is good for the money,"
said Susheel Kirpalani of Quinn Emanuel Urquhart & Sullivan
LLP, a lawyer arguing Lehman's side.
Citi's lawyers said there's nothing wrong with using the higher
interest rate as leverage, and that an approval of Lehman's request
would have "tipped the scales" in the failed investment bank's
favor.
"All of these matters should wait another day," said Paul,
Weiss, Rifkind, Wharton & Garrison LLP's Stephen J. Shimshak, a
Citi lawyer, who said Citi has put the money to work since April
2009.
Judge Peck ultimately agreed, saying that the interest fight
could be decided later when the two sides settle or if one wins at
trial.
The bulk of Citi's claims against Lehman are tied to the
termination of derivatives trades between Lehman and Citi at the
time of Lehman's 2008 bankruptcy filing. The bank said it is
entitled to the interest payments under bankruptcy law and that
Lehman could claw back the $2 billion payment if it wins the legal
battle.
In May of 2011, Lehman proposed a wide-ranging settlement of its
outstanding derivatives trades with more than a dozen of its
largest counterparties--including some of Wall Street's biggest
banks.
A number of these so-called "big bank counterparties," among
them Bank of America (BAC) and Merrill Lynch, settled with Lehman,
resulting in the erasure of billions of dollars in derivatives
claims that the big banks filed against Lehman and its affiliates.
Citigroup, however, rejected the settlement framework.
Lehman sued both Citigroup and J.P. Morgan Chase & Co.
(JPM), alleging the banks' demand for more collateral triggered a
liquidity squeeze that contributed to Lehman's failure. Both banks
have denied the allegations and filed counterclaims against
Lehman.
J.P. Morgan, however, agreed to the provisional allowance of its
claims, while Citigroup balked.
Lehman, once the nation's fourth-largest investment bank,
collapsed in the largest bankruptcy in history on the morning of
Sept. 15, 2008.
While Lehman officially exited from bankruptcy protection in
March, its liquidation continues as the estate looks to drastically
reduce the tens of billions in claims filed by creditors.
At the top of the creditor list is J.P. Morgan, which in
addition to trading with Lehman served as Lehman's clearing bank.
Citi cleared Lehman's foreign-exchange trades. The legal sparring
among Lehman and its creditors could last years.
Since emerging from bankruptcy with a $80 billion
creditor-payment plan, Lehman's wind-down team has paid out more
than $62 billion to creditors in four distributions, with the most
recent one taking place earlier this month.
(Dow Jones Daily Bankruptcy Review covers news about distressed
companies and those under bankruptcy protection. Go to
http://dbr.dowjones.com)
Write to Joseph Checkler at joseph.checkler@wsj.com
Subscribe to WSJ: http://online.wsj.com?mod=djnwires