District court dismisses appeal of Lehman dispute procedures order

By Caroline Salls

Pittsburgh, Nov. 2 - Lehman Brothers Holdings Inc.'s motion to dismiss the appeal of a March 2011 order was granted Wednesday by the U.S. District Court for the Southern District of New York. The March 2011 order set alternative dispute resolution procedures for disputes related to derivatives transactions.

The order was appealed by a subset of investors who own, or owned and maintain beneficial interests in, collateralized notes, or "Minibonds," issued by Pacific International Finance Ltd.

According to judge Naomi Reice Buchwald's appeal ruling, Pacific Finance entered into a swap agreement with Lehman Brothers Special Financing Inc. in connection with the Minibonds. Pacific Finance used the proceeds of the sale of the Minibonds to purchase collateral that secured its obligation to pay Lehman Brothers Special Financing and the Minibonds noteholders.

Lehman Brothers Holdings provided the credit necessary to support the Minibonds program and its insolvency in 2008 triggered a default, making the collateral notes redeemable.

The appellants filed a lawsuit in the U.S. Bankruptcy Court for the Southern District of New York in March 2009, alleging that Lehman Brothers Special Financing had prevented the liquidation of the collateral. Lehman has filed a pending motion to dismiss that complaint.

In a separate adversary proceeding filed in January 2010, the bankruptcy court ruled that provisions in swap agreements, which would alter Lehman Brothers Special Financing's payment priority based on the holding company's bankruptcy filing, are barred by the Bankruptcy Code.

The district court order said Lehman Brothers Special Financing requested court approval of the dispute resolution procedures in November 2010.

An omnibus order established procedures for non-binding mediation of disputes involving special purpose vehicles and pertains to a number of adversary proceedings in the Lehman bankruptcy.

According to Wednesday's ruling, Lehman Brothers Special Financing reached a settlement with the special purpose vehicles and trustees, including Pacific Finance, involved with the Minibonds transaction.

Under the settlement, the noteholders will receive a minimum of 70% of their principal.

The district court said Minibonds noteholders voted "overwhelmingly" in favor of the settlement in May.

"Appellants ask us to review a non-final order for the purpose of preventing possible settlements that may be influenced by an issue which is not pending on appeal," Buchwald said in her ruling.

"Clearly, to state the basis of the appeal is to reject it."

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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