Lehman Financing looks to recover $55 million in swap penalty suit

By Caroline Salls

Pittsburgh, May 21 - Lehman Brothers Special Financing, Inc. filed a lawsuit on Wednesday against Harrier Finance Ltd. in an attempt to recover more than $55 million of value in connection with an alleged credit swap agreement penalty, according to a filing with the U.S. Bankruptcy Court for the Southern District of New York.

According to the complaint, a credit default swap entered into in 2005 by Lehman Brothers Special Financing and Restructured Asset Certificates with Enhanced Returns, Series 2005-13-C (Racers Trust) improperly penalizes Lehman by eliminating all $55 million of the value in the contract.

Lehman said the improper penalty resulted from an alleged default stemming from Lehman Brothers Holdings, Inc's bankruptcy filing "that could not have had any effect on the economics of the deal."

Lehman Brothers Special Financing said it fully prepaid all $4.5 million of its financial obligations on the effective date of the agreement.

Although Lehman Brothers Holdings acted as a credit support provider under the swap agreement, Lehman Brothers Special Financing said it did not need the credit support from the holding company, and Lehman's bankruptcy filing should have been considered a non-event under the contract.

However, Lehman Brothers Special Financing said: "Racers Trust seized on the bankruptcy of LBHI to ostensibly justify the termination of the contract and eliminate LBSF's entire position under the contract."

As a result, Lehman Brothers Special Finance said that Harrier, as sole beneficial interest owner of the Racers Trust, "reaped a windfall of approximately $55 million from the elimination of LBSF's position, wholly at the expense of LBSF and its creditors."

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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