In re Lehman Bros. Holdings Inc.

• Decision Date: 22 February 2011
• Docket Number: 08–01420 (JMP) SIPA.,Nos. 08–13555 (JMP),s. 08–13555 (JMP)
• Citation: 445 B.R. 143
• Parties: In re LEHMAN BROTHERS HOLDINGS INC., et al., Debtors.In re Lehman Brothers Inc., Debtor.
• Court: U.S. Bankruptcy Court — Southern District of New York

445 B.R. 143

In re LEHMAN BROTHERS HOLDINGS INC., et al., Debtors.In re Lehman Brothers Inc., Debtor.

Nos. 08–13555 (JMP)

08–01420 (JMP) SIPA.

United States Bankruptcy Court, S.D. New York.

Feb. 22, 2011.

Jones Day, Robert W. Gaffey, Esq., Jayant W. Tambe, Esq., William J. Hine, Esq., Tracy V. Schaffer, Esq., New York, NY, Attorneys for Lehman Brothers Holdings Inc., et al.Quinn Emanuel Urquhart & Sullivan LLP, Susheel Kirpalani, Esq., James C. Tecce, Esq., Eric M. Kay, Esq., Robert K. Dakis, Esq., New York, NY, Special Counsel to the Official Committee of Unsecured Creditors of Lehman Brothers Holdings Inc., et al.Hughes Hubbard & Reed LLP, William R. Maguire, Esq., Seth D. Rothman, Esq., Neil J. Oxford, Esq., New York, NY, John F. Wood, Esq., Washington, DC, Attorneys for James W. Giddens, as Trustee for the SIPA Liquidation of Lehman Brothers Inc.Boies, Schiller & Flexner LLP, Jonathan D. Schiller, Esq., Jack G. Stern, Esq., New York, NY, Hamish P.M. Hume, Esq., Washington, DC, David Boies, Esq., Armonk, NY, Attorneys for Barclays Capital Inc.U.S. Securities and Exchange Commission, Jacob H. Stillman, Solicitor, Katharine B. Gresham, Assistant General Counsel, Mark Pennington, Assistant General Counsel, Dimple Gupta, Attorney, Washington, D.C., Alistaire Bambach, Esq., Patricia Schrage, Esq., New York, NY, Attorneys for the U.S. Securities and Exchange Commission.Securities Investor Protection Corporation, Josephine Wang, General Counsel, Kenneth J. Caputo, Senior Associate General Counsel, Washington, D.C., Attorneys for the Securities Investor Protection Corporation.

OPINION ON MOTIONS SEEKING MODIFICATION OF THE SALE ORDER PURSUANT TO RULE 60(B), THE TRUSTEE'S MOTION FOR RELIEF UNDER THE SIPA SALE ORDER, BARCLAYS' CROSS–MOTION TO ENFORCE THE SALE ORDERS AND ADJUDICATION OF RELATED ADVERSARY PROCEEDINGS

JAMES M. PECK, Bankruptcy Judge.I. IntroductionA. Overview of Opinion

These matters arise out of the hurried, at times harried and now challenged sale of assets to Barclays Capital Inc. (“Barclays”) under Section 363 of chapter 11 of title 11 of the United States Code (the “Bankruptcy Code”). Before the Court are motions for relief under Federal Rule of Civil Procedure 60(b) (the “60(b) Motions”) from the order approving the sale to Barclays entered on September 20, 2008 (the “Sale Order”), a related motion by Barclays to secure delivery of certain undelivered assets (the “Disputed Assets”) and three separate adversary proceedings brought against Barclays by each of the moving parties (the “Movants ¹”) that filed the 60(b) Motions. The proceedings have illuminated the factual background of the largest, most expedited and probably the most dramatic asset sale that has ever occurred in bankruptcy history—the sale to Barclays by Lehman Brothers Holdings Inc. (“LBHI”), Lehman Brothers Inc. (“LBI”) and certain of their affiliates (together, “Lehman”) of assets collectively comprising the bulk of Lehman's North American investment banking and capital markets business (the “Broker–Dealer Business”).

The lengthy trial provided an opportunity to review in slow motion and from multiple vantage points the circumstances of an acquisition that had to proceed so very quickly due to the need for speed to salvage the Broker–Dealer Business after LBHI's unplanned bankruptcy filing on September 15, 2008. The evidentiary hearings relating to the 60(b) Motions took place over a thirty-four day period from April through October 2010. Following the close of the record, the parties submitted post-trial briefs and proposed findings of fact and conclusions of law in late November. These submissions are encyclopedic in their scope and attention to detail, and they offer insights as to the motivations and behavior of many of the key actors during the most momentous week of the greatest financial crisis of our lives. The trial itself was a showcase of outstanding advocacy uniformly conducted at the highest professional level.

Approximately thirteen billion dollars is at issue, but the amount in dispute is only one of the reasons that this litigation has attracted so much attention. Foundational principles of bankruptcy jurisprudence are also being tested. The 60(b) Motions constitute a most unusual after the fact challenge to the fairness of a transaction of global significance, a transformative business combination in the financial services industry that was accomplished at a time of fear and major dislocation in the markets. The resulting litigation is highly visible due to interest in the Lehman bankruptcy, the large sums involved and the extraordinary nature of the relief being sought. Because the 60(b) Motions seek to overcome the finality and binding effect of the Sale Order that was entered at the height of the financial crisis and that has also been affirmed on appeal, these motions are unprecedented in challenging the very same order that the Movants themselves (other than the Committee) defended throughout the appellate process.

The circumstances of these proceedings may be exceptional, but the core legal principles are familiar ones that are generally applicable in other chapter 11 cases. The issues governing the right to relief under Federal Rule of Civil Procedure 60(b) (“Rule 60(b)”) are the same ones that might arise in any challenge to a final order authorizing a sale of assets under Section 363 of the Bankruptcy Code. These issues are grounded in the tension between the right of aggrieved parties to obtain relief from final orders for cause shown and the right of purchasers of assets from a chapter 11 debtor to rely with confidence on the integrity and enforceability of final sale orders that have been entered by the bankruptcy courts, especially those that have been affirmed following appellate review.

This tension relating to finality naturally exists to some extent in every motion under Rule 60(b), but the Court views final sale orders as falling within a select category of court order that may be worthy of greater protection from being upset by later motion practice. Sale orders ordinarily should not be disturbed or subjected to challenges under Rule 60(b) unless there are truly special circumstances that warrant judicial intervention and the granting of relief from the binding effect of such orders. The Court is well aware, however, that the language of Rule 60(b) setting forth grounds for relief from a final order has general application to all orders including sale orders and that no order is exempt from this type of relief for cause shown.

This broadly framed right to relief under Rule 60(b) in the case of sale orders must be balanced against the well-recognized bankruptcy policy that encourages third parties to buy assets from debtors for the ultimate benefit of creditors and that protects third parties that have purchased assets from a debtor in good faith reliance on an order of the bankruptcy court. A basic question addressed in this Opinion is whether the Movants have shown sufficient special circumstances to authorize the granting of relief from the Sale Order that was entered here in the face of a profound emergency, that thereafter was affirmed by the United States District Court for the Southern District of New York (the “District Court”) and that Movants did not challenge until one year later after the financial crisis of 2008 had subsided and markets had stabilized. Because the Sale Order was the essential means to the end of completing this crucial acquisition, the Court believes that something greater than ordinary mistake or inadvertence must be proven to overcome the finality and binding effect of that order.

As explained in this opening narrative and in the following sections of this Opinion, Movants have proven that some very significant information was left out of the record of the hearing on Lehman's motion to approve the sale of the Broker–Dealer Business to Barclays held on September 19, 2008 (the “Sale Hearing”)—facts that in a more perfect hearing the Court would have known. Despite what in retrospect appears to be a glaring problem of flawed disclosure, Movants have not carried their burden in establishing a right to relief from the Sale Order under Rule 60(b) because this new information would not have changed the outcome of the Sale Hearing or altered the form and content of the Sale Order in any material respect. Importantly, the failure to disclose material information in this case does not involve fraud, misrepresentation or misconduct. If the evidence had demonstrated such improprieties and abuses, relief under Rule 60(b) in all likelihood would have been granted.

A number of the issues in dispute also depend upon the enforceability and interpretation of a document dated September 20, 2008 and finalized on September 22, 2008. The parties identify the document as the clarification letter (the “Clarification Letter”). The Clarification Letter is identified in the text of the Sale Order and was in the early stages of being drafted when that order was entered. The document went through a number of revisions during the weekend immediately following the Sale Hearing, but the final form of the Clarification Letter was never presented for bankruptcy court approval. Instead, the parties decided among themselves that approval was not required and then caused the executed Clarification Letter to be filed on the docket on September 22, 2008. Thereafter, the parties to this letter agreement relied upon the document as if it had been approved under the original Sale Order and for all purposes treated the Clarification Letter as a binding agreement. The Clarification Letter stands out as a critically important transaction document that purports to change and “clarify” some fundamental terms of that certain Asset Purchase Agreement dated as of September 16, 2008 among LBHI, LBI, LB 745 LLC and Barclays (together with the First Amendment To Asset Purchase Agreement, da...