Lehman European arm vexed over claim treatment

Wed Aug 3, 2011 2:50pm

* $8.9 bln claim pooled with other unsecured claims

* Says should be higher-priority customer claim

By Nick Brown

NEW YORK, Aug 3 (Reuters) - Lehman Brothers' (LEHMQ.PK) European brokerage arm has asked a court to classify its $8.9 billion claim against the failed investment bank as a customer claim, a higher-priority category that could afford it full recovery.

In bankruptcy court papers, Lehman Brothers Inc Europe objected to the refusal by James Giddens, the trustee liquidating Lehman's U.S. brokerage, to give the claim customer status.

Giddens told LBIE in May that, as a Lehman affiliate, it could not be treated as a customer, and would be combined with other general unsecured creditors such as bondholder groups that are likely to see only partial repayment on claims.

Customer claims in bankruptcies, conversely, are usually paid in full.

LBIE challenged Giddens' interpretation of bankruptcy law, saying its status as an affiliate does not inherently bar it from asserting valid customer claims.

The claim, if allowed, could eat up a significant portion of the U.S. brokerage's resources for paying back its creditors.

According to Giddens' April report, Lehman Brothers Inc, the U.S. brokerage, has only about $23 billion in assets. It has already allowed $10 billion in claims against it and is facing billions more in asserted claims from other parties.

LBIE's claim will likely be reduced somewhat by offsetting claims against it by Lehman Brothers Inc, but the amounts remain unclear, according to court documents.

"We are reviewing LBIE's objection and intend to respond formally on Sept. 30, in accordance with the proposed litigation schedule," Giddens' office told Reuters on Wednesday in an emailed statement.

Attorneys for LBIE declined to comment Wednesday.

LBIE filed its court request on Monday.

The claims relate to securities traded by LBIE and held on its behalf by Lehman Brothers Inc, according to court papers. Lehman's estate transferred much of its customer accounts to Barclays Plc (BARC.L) and other firms when it filed for bankruptcy, but LBIE's accounts remained with the estate, according to the filing.

Lehman is scheduled on Aug. 30 to seek the court's permission to hold a creditor vote on a plan to exit bankruptcy that would provide creditors an average of only 20 percent recovery on claims. If creditors approve, it could exit bankruptcy late this year or early 2012 and begin paying creditors soon after.

Lehman declared the largest bankruptcy in U.S. history in September 2008, listing $639 billion in assets -- six times more than any other bankrupt U.S. firm. The filing is considered to be a key catalyst to the financial crisis.

The case is In re Lehman Brothers Holdings Inc, U.S. Bankruptcy Court, Southern District of New York, No. 08-13555. (Reporting by Nick Brown, editing by Maureen Bavdek)