Lehman debtor files suit to protect derivatives deal payment priority

By Caroline Salls

Pittsburgh, Oct. 19 - Lehman Brothers Special Financing Inc. filed a lawsuit Tuesday against BNY Corporate Trustee Services Ltd. and series 2005-2 notes issuer Topaz Finance Ltd. in an effort to protect its contractual right to senior payment priority in a derivatives transaction, according to a filing with the U.S. Bankruptcy Court for the Southern District of New York.

Topaz issued series 2005-2 Tulip Lane III CDO of CDO variable-rate credit-linked synthetic portfolio notes due 2015 in an initial principal amount of €25 million. BNY Corporate serves as the trustee.

Lehman said it was a party to a related swap agreement with the trustee.

According to the lawsuit, Lehman's bankruptcy filing constituted an event of default under the agreement.

However, Lehman is asking the court to rule that resulting provisions, which transfer payment priority to noteholders in light of the default, are unenforceable. The company said the priority "flip" essentially eliminates its right to payment.

In addition, Lehman said the priority exchange violates the automatic stay imposed by the bankruptcy filing because it involves an improper exercise of control over property of its estate.

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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