Lehman Exit Vindicates Ch. 11 Process, Experts Say
By Lisa Uhlman - Law360, New York
Lehman Brothers Holdings Inc.'s historic emergence Tuesday from what a judge dubbed “the most impossibly challenging international bankruptcy that ever was” vindicates a Chapter 11 filing that many once rued as a failure of the government to step in, experts said.
U.S. Bankruptcy Judge James M. Peck described the case — the largest bankruptcy in U.S. history — in those lofty terms during an emotional Dec. 6 hearing at which he blessed the monumental plan, which will likely come to epitomize success in bankruptcy as much as it did failure in business following the company's catastrophic September 2008 filing.
Free of bankruptcy, Lehman and its affiliates can now begin April 17 to make tens of billions of dollars in distributions to creditors as the former financial Goliath winds down its business, it said Tuesday, the plan's effective date. The exit announcement was somewhat procedural following the plan's approval, but it undoubtedly marks one of the most important events in bankruptcy history — and the culmination of an impressively efficient process given the sheer size of the case, experts said.
“Lehman, without question, was the largest and probably most significant bankruptcy ever filed, in terms of scope and impact,” Peter Shapiro, a partner in Arnstein & Lehr LLP's bankruptcy practice, said.
“Although it was in bankruptcy for 3 1/2 years, which may seem like a long time, in reality I think the case can be considered as being an efficient and not protracted bankruptcy,” he said. “There were dozens of smaller cases that have lasted much longer, so the fact that they've announced that what's left of the company will emerge is historic; there's no question about that.”
The bankruptcy exit is notable not only for the size and complexity of the case itself, but also for the orderly efficiency of the process undertaken by the parties behind it and for Judge Peck's administration of the case, according to Stan Samorajczyk of McNamee Hosea Jernigan Kim Greenan & Lynch PA.
“The emergence of Lehman Brothers and the confirmation of the liquidating plan are the end of a very orderly and I think highly successful process, given where Lehman was as of Sept. 15, 2008,” when the groundbreaking petition was filed, Samorajczyk said. “Financial institutions normally don't survive an orderly bankruptcy — they tend to get liquidated very quickly,” with secured creditors seeing the only recovery.
In contrast, Lehman, which filed for Chapter 11 protection early enough to ensure greater-than-expected recoveries for unsecured creditors, was able to use the bankruptcy process, rather than government intervention, to get the most it could for creditors.
That's a different ballgame, Samorajczyk said, compared with what some had argued should have occurred: a Dodd-Frank Wall Street Reform and Consumer Protection Act-mandated orderly liquidation authority stepping in and taking control of the company's future.
“I think that's a terribly faulted analysis,” he said. “Government agencies historically do not have the ability to conduct orderly liquidations of complex financial companies. The bankruptcy court is really the only forum that can bring order and control to that type of a situation.”
As such, it's an important moment in the history of bankruptcy law, with Lehman joining the ranks of such discourse-changing bankruptcies as the cases of Johns-Manville Corp., which actually resulted in a change to the Bankruptcy Code, and Chrysler LLC and General Motors Co., which used the bankruptcy process to clean up their balance sheets and become profitable companies.
“And now, we look at the biggest bankruptcy in history, a financial institution, which, if they're in bankruptcy, normally they get picked apart very quickly by their major secured creditors,” Samorajczyk said. “This is an example where the bankruptcy process was used in a very orderly fashion and the creditors really got a maximum recovery.”
Lehman is now poised to start distributing $65 billion to creditors — who originally asserted 67,000 claims of about $1.2 trillion — in the final wind-down. Creditors' unprecedented willingness to put aside their differences led those holding $450 billion in claims, or 95 percent of voting creditors, to support the plan.
“Never before have divergent holders of $450 billion in claims recognized the benefits of pragmatic compromise and come together as one in support of a single Chapter 11 plan,” Judge Peck said in confirming the plan.
Once the final liquidation is completed, Lehman is expected to have paid out about $370 billion in claims altogether.
The remaining assets to be liquidated include real estate, private equity investments, corporate loans and derivatives, as well as multibillion-dollar litigation, according to Shapiro. The task of a new board will be to liquidate those assets for the highest value possible.
“The fact that they're emerging — there are still significant issues that remain in terms of assets to be liquidated for the benefit of creditors and litigation left to be resolved, all of which could amount to billions of dollars and many years,” Shapiro said.
The feel-good atmosphere of Tuesday's approval aside, it's important to take what lessons one can from a case that had such catastrophic immediate consequences on the economy, according to experts.
When Lehman and 23 affiliated debtors filed their bankruptcy petitions in September 2008, listing assets of $639 billion and liabilities of $613 billion, the fall helped escalate a brewing financial downturn into a full-blown global economic crisis.
“On the negative side, Lehman's bankruptcy is viewed as the poster child of the financial collapse of 2008,” Shapiro said. “The government, right or wrong, didn't reach out and save the company, and they were left to their own demise. Thousands of people lost their jobs, and clearly it had an impact on Wall Street.”
But in textbook terms of bankruptcy law, according to Samorajczyk, the case should serve as a “shining example” of the Chapter 11 process' ability to hold aggressive creditors at bay and allow the Bankruptcy Code to do more for a company than a government-run wind-down could.
“Given the history of government-created institutions, designed specifically for liquidating companies in an industry — the history is not a very good one, and the government does not do a very good job of liquidating assets,” he said. “Not as good a job as a well-run Chapter 11 case can do.”
Additional reporting by Carolina Bolado and Martin Bricketto. Editing by Andrew Park.