Lehman takes middle road on plan for creditors

RELATED NEWS Lehman Brothers` whistle blower was ousted Lehman plans to end bankruptcy, create new company Lehman report may point way for criminal charges Lehman balance sheet massaging may not be unusual Lehman insolvent weeks before bankruptcy

Lehman Brothers Holdings Inc, which filed for bankruptcy in September 2008, wants to take a "middle of the road" approach to repaying creditors, hoping for a consensual outcome that avoids litigation.

The move may please some creditors and frustrate others, but Lehman says its main goal is to achieve a settlement as soon as possible.

"What we're trying to do is 1) maximize value for all creditors and 2) expedite the return of assets to creditors as quickly as possible," Lehman's president and chief operating officer John Suckow said in an interview with Reuters on Tuesday.

In Lehman's initial reorganization plan filed on Monday, the company unveiled a plan to repay secured and unsecured creditors and said it would seek to resolve its bankruptcy case by creating a new unit, LAMCO, to manage what is left of the bank's commercial real estate, mortgages, principal investments, private equity, corporate debt and derivatives assets.

But almost as important as what Lehman has proposed, is what it has not proposed. It could have taken the tack that creditors claims against various Lehman entities should all be pooled using a "substantive consolidation" process that would not distinguish as much between creditors with strong and weak claims to its assets. Or it could have set up a process where each claim would be litigated individually.

"Between those two extremes, we're trying to put forward an economic settlement plan that avoids the litigation involved with a substantive consolidation approach and avoids litigation that would come from a case by case resolution," Suckow said.

One aspect of the plan is that it tries to resolve Lehman's issues with so-called "guarantee claims," where the bank's third-party creditors and affiliates have said they are owed money based on guarantees provided by the parent company. These guarantees are important to Lehman's various counterparties, such as hedge funds, that traded derivatives and other assets with Lehman.

In some cases, several parties -- such as a hedge fund and a Lehman subsidiary could file claims against the parent stemming from the same dispute -- essentially leaving Lehman with double claims.

Lehman chief executive Bryan Marsal said in a statement on Monday that one of the "core" aspects of Lehman's plan was that guarantee claims "should not exceed the actual liabilities to Lehman's third parties on a worldwide basis."

In the company's proposed reorganization plan, it said creditors with third-party guarantee claims could could recover up to USD 94.1 billion, while affiliate creditors with guarantee claims could recover up to USD 21.2 billion.

"A fundamental goal of the plan is to first deal with third party creditor claims of all estates and then deal with claims filed by affiliates," Suckow said.

"We're hoping to rally people around this concept. If this does not work, then we have not ruled out substantive consolidation."

Lehman is currently negotiating with creditors and plans to ask the bankruptcy court for approval to file a disclosure statement in mid-April that would provide further details on its reorganization plans and the state of the business, according to court papers it filed on Tuesday.

Dennis Dunne, an attorney for Lehman's official committee of unsecured creditors, did not return a call seeking comment on Tuesday.

The case is In re: Lehman Brothers Holdings Inc, US Bankruptcy Court, Southern District of New York, No. 08-13555.