Lehman’s do-over quest runs against facts

Barclays Plc was something of a hero two years ago, having stepped forward to buy much of Lehman Brothers Holdings Inc. when no one else would touch the bankrupt brokerage.

It was a risky play, and if the market hadn’t recovered, the weight of Lehman’s failures might have dragged Britain’s third-biggest bank under with it.

So when Barclays not only held on but bounced back to reap enormous profits last year, seller’s remorse settled in over at Lehman. As its trustee divvyed up its assets for creditors while trying to find more, it seemed that the deal had turned out better for Barclays than it should have.

The former headquarters of Lehman Brothers Holdings Inc., now owned by Barclays Plc, center, stands in this aerial photograph taken over New York in July. Bloomberg News photo by Daniel Acker

Lehman sued, claiming Barclays had reaped an undeserved “windfall” of $11 billion in the way it accounted for some of the assets, underpaid for others and took assets it wasn’t supposed to get. It did so, in part, by changing the terms of the deal after the fact, according to Lehman.

Barclays denies this and counters that Lehman owes it $3 billion.

The two have been fighting over this in court for the past five months, sporadically because of court recesses. They are at it still.

But Lehman’s got two big problems with its case. First, as Bloomberg’s Linda Sandler wrote Tuesday, the judge at trial in U.S. bankruptcy court in Manhattan is James Peck, the same one who approved the deal. Because of time pressures, the complexity and volatility of the matter and the dire economic consequences of delay, he granted rare leeway to Barclays and Lehman to modify terms after he approved them.

Unprecedented request

Now, Lehman wants Peck to revoke the sale, a request so radical that bankruptcy experts can think of no time when it has ever happened in this type of case. How could Peck do that without acknowledging he blundered in the biggest bankruptcy filing ever?

Second, Lehman’s own $990-an-hour bankruptcy lawyer, Harvey Miller of Weil, Gotshal & Manges in New York, disagrees with key aspects of Lehman’s arguments. He isn’t handling the litigation, but was called to testify by the lawyers who are.

To support his bankruptcy client’s position in the litigation, Miller would have to say that Barclays pulled a fast one on him. And he’d have to say he was wrong in 2008 when he went along with modifications to the original agreement without alerting Peck.

So if Lehman is right in its case against Barclays, then its top-of-the-line bankruptcy lawyer goofed in a rather big way.

He conceded nothing of the sort in his testimony in April.

“I am very proud of what happened,” Miller said, citing the jobs saved and the calming effect the sale had on roiling financial markets.

Beyond needing a reversal of judgment from the trial judge and admission of bad counsel from the lead bankruptcy lawyer, Lehman faces a more essential problem as it tries to squeeze another $11 billion out of Barclays: Just because the deal turned out better for Barclays than expected doesn’t mean Lehman deserves a do-over.

Lehman says its position is more complicated than that, of course. It claims that Barclays took an unwarranted discount on Lehman’s assets, negotiated by Lehman personnel seeking jobs at Barclays, and kept it secret from the judge.

As for an accounting gain, Miller testified that it was already publicly known and didn’t alter the meat of the deal, anyway. It didn’t need to be specifically reported to the judge.

Likewise, both sides agreed, and so did the creditors, that the post-deal deal as reflected in a Letter of Clarification wasn’t a significant enough change to take back to Peck for review.

‘Melting ice cube’

Peck had been on the bench for less than three years when the biggest bankruptcy in U.S. history hit his docket, valued at $639 billion at the time.

It had to be handled at lightning speed because the health of the already shaky U.S. economy hung in the balance, federal authorities were saying, hands wringing.

And the more time that passed, the more the value of Lehman’s assets sank. “A melting ice cube” is how Miller described them at trial.

So on Saturday, Sept. 20, 2008, five days after Lehman’s collapse, Peck approved the brokerage’s sale to Barclays.

He said in that order that Lehman and Barclays could amend or supplement any of the sale documents without court approval, if the changes would have no “material adverse effect” on Lehman’s estate, and as long as creditors, Lehman and Barclays all agreed.

Two days later, on Monday, Sept. 22, the parties filed the Letter of Clarification that changed the terms in ways Lehman says were significant. No one sought Peck’s approval, or even made sure he knew about it.

Lehman says the eventual deal was so different from the one Peck saw that he should have been called into it.

Among those who disagree is Lehman’s lead bankruptcy lawyer.

There’s always a chance that the domestic team will have home court advantage over the Brits at trial.

But if Lehman agreed to terms it now regrets, too bad. It’s fortunate that Barclays showed up at all.

Ann Woolner is a Bloomberg News columnist.