Lehman may lose US$900m from Cayman SPVs

Lehman Brothers Holdings, the
investment bank in liquidation under bankruptcy, has asked the US Bankruptcy
Court in New York to authorise the payment of fees and expenses in relation to
two special purpose vehicles incorporated in the Cayman Islands.

Alvarez & Marsal, the
liquidators for Lehman Brothers, said in a motion submitted to the court that
failure to pay could hamper the recovery of up to $900 million that Lehman is owed
from numerous swap transactions the firm has entered into with the SPVs.

Under the swap agreements Lehman
was obligated to pay, on behalf of
the Cayman SPVs, all fees owed to administrators and legal counsel with respect
to the transactions.

However, Maples Finance, the
administrator, and Maples and Calder, the legal counsel to the special purpose
vehicles, have not been paid since Lehman Brothers entered bankruptcy
proceedings in September 2008.

Maples Finance,
as the administrator, acts as a registered office for the Cayman SPVs, provides
directors and other local administrative services to the and pays the annual
registration fee to the registrar of companies on behalf of the Cayman SPVs,
court documents show.

Due to the
non-payment of fees and expenses, Maples Finance has not paid the company
registration fees on behalf of the SPVs for well over 12 months and the companies are in danger of being struck off the register should
fees and late penalties not be settled immediately.

Maples Finance is owed a total of $586,920 for the
administration of the SPVs and Maples and Calder has demanded the payment of $103,242
for legal services, according to the motion.

Maples and Calder has given Lehman
until 29 March  to pay the amounts owed.
Otherwise the law firm would not only halt the provision of legal services to
the SPVs but also cause Maples Finance to resign as the administrator.

Lehman Brothers asked the court for
permission to pay the fees in the interest of its creditors, as it aims to
pursue its right in the collateral securing the notes issued by the SPVs.

These rights
in the collateral, held by a trustee, normally take priority over the rights of
note-holders and Lehman is entitled to payment in full under the transaction
before any of the note-holders is paid.

However, this
is not the case in a bankruptcy, following which note-holders are paid first.

After Lehman’s
bankruptcy most Cayman SPVs cancelled the swap agreements with Lehman due to an
event of default, which included the bankruptcy of the counterparty. Subsequently
most trustees liquidated the collateral and paid the note-holders, leaving
little or nothing to pay Lehman Brothers.

Lehman’s liquidators believe that
the US Chapter 11 bankruptcy protection should have prevented a modification of
Lehman’s rights in the collateral.

They seek to enforce the firm’s rights to
payment under the transactions as well as claims against trustees that have, in
the liquidators’ opinion, violated the automatic stay by subordinating Lehman’s
rights to those of the note-holders.

 If the SPVs were struck of the register and dissolved,
Lehman’s ability to recover
payment under the transactions would be impaired, the liquidators argued.

They have
asked the court to permit the payment of current and future fees relating to
the SPVs, which, they said, paled in comparison to the amount that could be
recovered.

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