By Dow Jones Business News, October 23, 2013, 01:54:00 PM EDT
By Joseph Checkler
NEW YORK--A judge on Wednesday handed Citigroup Inc. ( C ) a small victory in its legal battle with Lehman Brothers
Holdings Inc., essentially allowing Citi to continue collecting millions of dollars in interest on $2 billion Lehman
deposited before its 2008 bankruptcy.
Judge James Peck of U.S. Bankruptcy Court in Manhattan rejected Lehman's bid to "provisionally" allow a $2 billion
claim as the two sides prepare for trial in their legal fight over billions of dollars in derivatives claims. If he had
approved the move, Citi would have been forced to pay itself the $2 billion and thus no longer collect the interest.
"It would be an inappropriate exercise of this court's discretion in the present context to provisionally allow a
claim with all rights reserved if the economic impact of so doing would be to cut off ... interest," Judge Peck said.
He said such a move would have been unprecedented, and while "novel," there was no legal authority for approving
Lehman's request. The $2 billion, in effect, "secures" Citi's claims against Lehman, even though the money itself has
nothing to do with what they're fighting about in the derivatives battle.
Lehman had argued that Citi is playing "interest rate arbitrage" by paying only 0.02% interest on the disputed $2
billion in Lehman's account, while the bank is demanding a much higher rate on its bankruptcy claims against Lehman. In
court Wednesday, a Citi lawyer said that rate was more than 5%. The interest-rate spread, Lehman said, gives Citigroup's
bank unit an unfair leverage in the dispute.
"We'll take the credit risk that Citi is good for the money," said Susheel Kirpalani of Quinn Emanuel Urquhart &
Sullivan LLP, a lawyer arguing Lehman's side.
Citi's lawyers said there's nothing wrong with using the higher interest rate as leverage, and that an approval of
Lehman's request would have "tipped the scales" in the failed investment bank's favor.
"All of these matters should wait another day," said Paul, Weiss, Rifkind, Wharton & Garrison LLP's Stephen J.
Shimshak, a Citi lawyer, who said Citi has put the money to work since April 2009.
Judge Peck ultimately agreed, saying that the interest fight could be decided later when the two sides settle or if
one wins at trial.
The bulk of Citi's claims against Lehman are tied to the termination of derivatives trades between Lehman and Citi at
the time of Lehman's 2008 bankruptcy filing. The bank said it is entitled to the interest payments under bankruptcy law
and that Lehman could claw back the $2 billion payment if it wins the legal battle.
In May of 2011, Lehman proposed a wide-ranging settlement of its outstanding derivatives trades with more than a dozen
of its largest counterparties--including some of Wall Street's biggest banks.
A number of these so-called "big bank counterparties," among them Bank of America ( BAC ) and Merrill Lynch, settled
with Lehman, resulting in the erasure of billions of dollars in derivatives claims that the big banks filed against
Lehman and its affiliates. Citigroup, however, rejected the settlement framework.
Lehman sued both Citigroup and J.P. Morgan Chase & Co. ( JPM ), alleging the banks' demand for more collateral triggered
a liquidity squeeze that contributed to Lehman's failure. Both banks have denied the allegations and filed counterclaims
J.P. Morgan, however, agreed to the provisional allowance of its claims, while Citigroup balked.
Lehman, once the nation's fourth-largest investment bank, collapsed in the largest bankruptcy in history on the
morning of Sept. 15, 2008.
While Lehman officially exited from bankruptcy protection in March, its liquidation continues as the estate looks to
drastically reduce the tens of billions in claims filed by creditors.
At the top of the creditor list is J.P. Morgan, which in addition to trading with Lehman served as Lehman's clearing
bank. Citi cleared Lehman's foreign-exchange trades. The legal sparring among Lehman and its creditors could last years.
Since emerging from bankruptcy with a $80 billion creditor-payment plan, Lehman's wind-down team has paid out more
than $62 billion to creditors in four distributions, with the most recent one taking place earlier this month.
(Dow Jones Daily Bankruptcy Review covers news about distressed companies and those under bankruptcy protection. Go to
Write to Joseph Checkler at email@example.com
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