Secured creditors of Lehman Brothers Holdings’ London-based subsidiary expected to be voting this fall on a hard-fought plan for getting around $16.7 billion of their assets back. Instead, the U.K. administrator overseeing the bankruptcy, PricewaterhouseCoopers, will be trying to salvage the plan from a damaging court ruling handed down in late August.
To expedite the return of client cash and collateral, the administrator had asked the court to bless the use of a legal process in the U.K., a “scheme of arrangement,” that would enable creditor claims to be dealt with collectively. In this case, the agreement would have created three classes of secured creditors and treated those within each class equally, regardless of the terms of their individual agreements with Lehman Brothers International (Europe), or LBI(E).
But U.K. High Court Justice William Blackburne put the kibosh on PwC’s plan, ruling that the court did not have jurisdiction to sanction a plan that effectively upends the property rights of creditors.
“I do not underestimate the difficulties that the administrators face if they are unable to promote the current scheme,” the justice acknowledged in his opinion. “But I question whether they are insuperable.”
The court decision is the latest setback in a process that has been rocky from the start. In the aftermath of Lehman’s bankruptcy, PricewaterhouseCoopers could not get access to key computer systems. Almost none of LBI(E)’s employees turned up for work. And LBI(E) did not possess any of its creditors’ cash or collateral, which was held by other entities and in some cases lent out; much of PwC’s early effort was focused simply on getting those funds back. In addition, almost every LBI(E) client had a different contract, creating a logistical nightmare for the administrator.
Hedge funds, which make up the bulk of the secured creditors, were confused and angry about the bankruptcy, but ultimately they were loath to help sort out the mess. One notable exception: New York–based Ramius, whose executives spent hundreds of hours working with the administrator to come up with the plan.
PwC is likely to pursue a two-track approach, appealing Blackburne’s decision while simultaneously working out a new plan that stands a better chance of passing judicial muster. “It might not be as elegant and far-reaching as the solution in the current scheme, or provide quite the same level of certainty for all involved,” says Steven Pearson, one of four administrators at PwC overseeing the process, “but I am confident we will find another structure.”
