Lehman, Libra CDO trade lawsuits amid swap agreement termination dispute

By Caroline Salls

Pittsburgh, May 6 - Lehman Brothers Special Financing, Inc. and Libra CDO Ltd. filed countersuits Friday in the U.S. Bankruptcy Court for the Southern District of New York in connection with what Lehman alleges to be an invalid termination notice on a credit-default swap contract.

According to Lehman's lawsuit, which also names Bank of America, NA, LaSalle Bank, NA and Societe Generale, New York Branch as defendants, Lehman is trying to preserve hundreds of millions of dollars of value.

Libra is a special purpose entity formed solely for the purpose of investing in various securities backed directly or indirectly by mortgages, primarily through the credit-default swap agreement.

Lehman has also requested court approval to assume the contract in question.

Lehman said the express terms of the contract require assumption, which will restore the other contract parties to the economic positions they held at the time of the Lehman bankruptcy filings.

Under the swap agreement, Libra agreed to pay Lehman Brothers Special Financing's losses if they were incurred on mortgage-related securities.

In return, Lehman Brothers Special Financing agreed to pay a periodic premium to Libra. Lehman said it bought contractual protection that could potentially pay it more than a billion dollars if there were losses on the reference obligations, while the investors in Libra stood to profit if there were few or no losses.

Because of the steep decline in the housing market and the ensuing poor performance of residential mortgage-backed securities, Lehman said its investment is now a very significant asset, but the Libra investors should be expected to incur a total or near-total loss on their investment.

Even though the swap agreement is in the money to Lehman Brothers Special Financing, the latter alleged that that defendants wrongfully tried to terminate the contract and distribute all of Libra's remaining assets to its investors.

In its lawsuit, Libra said Lehman has stopped paying the amounts owed under the swap agreement.

In addition, Libra alleged that a non-defaulting party is entitled to terminate the agreement because of the bankruptcy of the other party or its credit support provider.

Bank of America, LaSalle and Societe Generale are also named as plaintiffs in Libra's lawsuit.

A hearing on Lehman's motion to assume the contract is scheduled for May 28.

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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