Lehman creditor group files competing plan amid inter-debtor issues

By Caroline Salls

Pittsburgh, Dec. 15 - An informal group of Lehman Brothers Holdings Inc.'s creditors filed a competing plan of reorganization and related disclosure statement for the company's Chapter 11 case Wednesday with the U.S. Bankruptcy Court for the Southern District of New York.

According to the disclosure statement, the creditor plan proponents are comprised of pension funds, municipalities, institutional holders and secondary holders, holding more than $12 billion of claims across the Lehman Brothers capital structure, including $9.4 billion of senior unsecured claims against Lehman Brothers Holdings.

The creditors said they filed a preliminary objection to Lehman's plan in June, arguing that the company's plan did not reflect a fair assessment of the risks and rewards of active litigation of inter-debtor disputes.

Although the company told the court and parties in interest that it was willing to establish a process for transparency and creditor participation in plan negotiations, the creditors do not feel the company has done so.

The creditor plan proponents said they have contacted holders of billions of dollars of other claims against Lehman "who are generally supportive of the plan and increased creditor involvement in the plan process."

If the company's plan is ultimately confirmed, the creditor group said it would leave unresolved asset ownership and other intercompany issues that would result in potentially years of continued litigation.

Under the creditors' plan, no distributions will be made on account of intercompany claims.

The plan also includes settlement features designed to avoid the cost and delay associated with litigation over the appropriateness of substantive consolidation and other related inter-debtor issues.

The creditor group said plan consideration would include available cash and new securities.

Creditor treatment

Treatment of creditors would include:

• Holders of priority non-tax claims will be paid in full in cash;

• Holders of secured claims against the consolidated debtors will either be paid in full in cash, receive the proceeds from the sale of the collateral securing the claim or receive the collateral, at the plan administrator's option;

• Holders of senior unsecured claims against Lehman Brothers Holdings will receive a share of a plan consideration, a share of reallocated subordinated distributions and a share of a reallocated Lehman Brothers Treasury Co. BV (LBT) distribution, if any;

• Holders of general unsecured claims will receive a share of the plan consideration and any reallocated LBT distribution;

• Holders of subordinated unsecured claims against the holding company will receive no distribution unless all senior unsecured claims are paid in full, in which case they would receive a share of the plan consideration and any reallocated LBT distribution;

• Holders of subsidiary unsecured claims against any of the consolidated debtors will receive a share of plan consideration, provided, however, that if they vote to accept the plan their share will be determined using an amount equal to 115% of their allowed claim;

• Holders of third-party guarantee claims for which another consolidated debtor is the primary obligor on the corresponding primary claim are not entitled to a distribution as a consequence of substantive consolidation; provided, however, if they vote to accept the plan, they will be entitled to receive a share of plan consideration using an amount equal to 25% of the allowed claim;

• Holders of third-party guarantee claims against any of the consolidated debtors for which an affiliate of Lehman other than any of the consolidated debtors, LBT or any designated non-debtor affiliate is the primary obligor on the corresponding primary claim will receive a share of plan consideration, although their claims will be disputed;

• Holders of non-consolidated intercompany claims will receive a share of plan consideration;

• Holders of LBT intercompany claims and third-party guarantee claims asserted against the consolidated debtors for which LBT is the primary obligor are not entitled to a distribution as a consequence of substantive consolidation; provided, however, that if they vote to accept the plan, they will be entitled to a share of plan consideration;

• Holders of section 510(b) claims will receive no distribution; and

• Interest holders will receive no distribution unless all other claims are paid in full, in which case they would receive a share of the debtors' remaining assets.

Company plan

As previously reported, Lehman said it planned to make changes to its plan in the fourth quarter.

Under the company's plan filed in March 2010:

• Holders of administrative expense claims, priority tax claims and priority non-tax claims will be paid in full in cash;

• Holders of secured claims will either be paid in full in cash, receive the proceeds from the sale of the collateral securing the claim, receive the collateral or see the claim remain unaltered;

• Holders of senior unsecured claims will receive a share of available cash and a senior unsecured claim share of reallocated distributions;

• Holders of general unsecured claims will receive a share of available cash;

• Holders of subordinated unsecured claims will receive no distribution because any distribution they would receive will be automatically reallocated to holders of senior unsecured claims;

• Holders of intercompany claims will receive a share of available cash;

• Holders of third-party guarantee claims will receive a share of available cash, provided, however that they will not be entitled to a total recovery of more than 100% of their primary claim;

• Holders of affiliate guarantee claims will receive a share of available cash;

• All equity interests in Lehman Brothers Holdings will be cancelled, and one new share of common stock will be issued to the plan administrator for the benefit of the equity interest holders consistent with their former economic entitlements.

However, the administrator cannot exercise any voting rights, and the interest holders will receive no distribution unless all other holding company creditor classes have been paid in full, in which case they would receive a share of any remaining assets; and

• Holders of equity interests in subsidiary debtors will receive no distribution unless all other creditors of that debtor have been paid in full.

New York-based Lehman Brothers Holdings Inc. 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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