Lehman debtor requests sanctions to enforce dispute resolution order

By Caroline Salls

Pittsburgh, Dec. 1 - Lehman Brothers Financial Products Inc. is asking the U.S. Bankruptcy Court for the Southern District of New York to impose sanctions on two derivatives transaction counterparties and lawsuit defendants, according to a Thursday court filing.

The counterparties are issuers of notes held by third parties and were Lehman's direct contractual counterparties in four now-terminated derivatives transactions.

In its lawsuit filed against the counterparties, Lehman said it is asking the court to rule that a contractual "flip clause" that modifies the Lehman debtor's payment rights because of its bankruptcy filing is not enforceable.

The company is seeking senior payment priority under the lawsuit.

Lehman said the two counterparties violated the court's alternative dispute resolution (ADR) procedures order related to derivatives transactions with special purpose vehicles.

The company said the requested sanctions would deter other issuers from adopting the counterparties' tactic of refusing to participate in the resolution process.

Lehman said the counterparties in question claim they lack authority to participate in settlement negotiations, although they are the Lehman debtors' contractual counterparties and lawsuit defendants.

According to the motion, this practice could halt the dispute resolution process and potentially cripple Lehman's efforts to resolve the hundreds of outstanding disputes involving derivatives transactions with special purpose vehicles (SPV).

Lehman said the "SPV ADR order may be effectively gutted" if the counterparties are allowed to disregard their court-ordered obligation to participate in the resolution process.

A hearing is scheduled for Dec. 14.

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 under Chapter 11 case number 08-13555.

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