(Updates with Bank of America accord in 11th paragraph.)
Oct. 19 (Bloomberg) -- Deutsche Bank AG lost a bid to reclassify $2.4 billion in claims on Lehman Brothers Holdings Inc. as a judge denied a request to force the defunct firm to upgrade their value.
Deutsche Bank, which said about $100 million is at stake in the classification, can revive the issue later, U.S. Bankruptcy Judge James Peck said today in Manhattan.
Germany’s largest lender bought the claims from a Lehman affiliate, Lehman Brothers Bankhaus AG, in July 2010. Consisting of a $1.4 billion IOU from the Lehman parent and a $1 billion IOU from Lehman’s commercial-paper unit, they were classified at the time as general unsecured claims. Lehman ranked them in August as affiliate claims, which were worth less, in the third version of its $65 billion liquidation plan, Deutsche Bank said.
A sophisticated buyer, “Deutsche Bank took a business risk” by buying the Bankhaus claims before Lehman settled on a final plan, Lehman lawyer Harvey Miller said. The bank failed to first consult Lehman about their possible value in a revised plan, he said.
“My understanding is that Deutsche Bank bought the claims under an acquisition agreement,” Peck told lawyers from the Frankfurt-based bank. “You acquired affiliate claims and you can’t improve your position simply because Deutsche Bank isn’t an affiliate of Lehman.”
The bank is “still discussing internally” whether it would continue to support Lehman’s plan if the claims aren’t revised, Alan Kolod, a lawyer for Deutsche Bank, told Peck.
Lehman had a right to reclassify the claims under a deal struck with bankrupt Bankhaus last year on settling intercompany obligations, Miller said.
“Nothing limited Lehman’s ability to make different classifications,” Miller said. “Nothing says Bankhaus will get the highest recovery of all unsecured claims.”
A sophisticated buyer, “Deutsche Bank took a business risk” by buying the Bankhaus claims before Lehman settled on a final plan, Miller said. The bank failed to first consult Lehman about their possible value in a revised plan, he said.
The German bank, which signed an agreement to back Lehman’s $65 billion liquidation plan, had an “obligation” to continue its support, Miller said.
Bank of America
Separately, Peck approved a settlement Lehman and Bank of America Corp. reached last month that resolved a $500 million lawsuit and reduced the bank’s derivatives claims against Lehman by $4.5 billion. The Charlotte, North Carolina-based bank agreed to support Lehman’s liquidation plan, return to Lehman $356 million in deposits taken in 2008 during the financial crisis, and drop its appeal of Peck’s order that it pay $500 million, plus interest.
Lehman, after three years in bankruptcy, is sorting out its IOUs before a November deadline for votes on its plan. Creditors holding more than $140 billion in claims support the latest plan, up from $100 billion in July, Lehman said in September. Among the backers are Deutsche Bank, Goldman Sachs Group Inc. and Paulson & Co., Lehman has said.
Centerbridge Capital Partners LLC and four other investment firms had joined with Deutsche Bank in faulting Lehman for mislabeling the Bankhaus claims. Lehman said they are “mere participants” in Deutsche Bank’s ownership of the claims, and have no “standing” to object.
Deutsche Bank suffered from “buyer’s remorse” and was trying to “gain a higher recovery than proposed” in the latest Chapter 11 plan, Lehman said in court filings.
Lehman has said it intends to confirm its plan by year-end and start making payments to creditors in the first quarter. The firm and affiliates held cash and investments of $25.5 billion on Aug. 31, with $2.8 billion unavailable for use. Lehman has spent more than $1.4 billion on bankruptcy managers and advisers.
Chief Executive Officer Bryan Marsal aims to raise a total of $65 billion from the firm’s assets, including the cash already in hand, he has said. He has estimated final claims at about $320 billion.
Lehman filed for bankruptcy in 2008 with assets of $639 billion. It failed because of too much debt, which it tried to hide from investors, and risky investments, according to a bankruptcy examiner.
The case is In re Lehman Brothers Holdings Inc., 08-13555, U.S. Bankruptcy Court, Southern District of New York (Manhattan).
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