NEW YORK (Reuters) - Creditors of Lehman Brothers Holdings Inc LEHMQ.PK will be allowed to vote on the failed bank’s $65 billion payback plan, clearing a major hurdle in the path to ending the biggest bankruptcy in U.S. history.
U.S. Bankruptcy Judge James Peck in Manhattan said he would enter an order approving the outline of Lehman’s plan and send it to creditors for a November 4 vote, overruling a handful of objections from corporate creditors.
The disclosures in the plan outline are “abundant and adequate as to the issues in this too-big-to-fail enterprise,” Peck told a packed courtroom.
Lehman faced a relatively small list of objections after negotiating support from several powerful critics — including distressed investors and former trading partners — prior to the hearing.
The Wall Street firm, crippled by bad mortgage bets, filed for bankruptcy on September 15, 2008, with $639 billion in assets, and its collapse was a catalyst of the financial crisis. Barclays Plc (BARC.L) took over a large part of its investment banking business in a rushed deal following the bankruptcy.
Lehman has been unloading assets and unwinding operations while in bankruptcy, a case that has provided work for an army of lawyers, advisers and accountants. Only after the company formally emerges from bankruptcy can it begin to pay back creditors.
In court on Tuesday, Lehman attorney Harvey Miller invoked Winston Churchill, telling the judge he hoped that the hearing would represent the “beginning of the end” of Lehman’s three-year Chapter 11 odyssey, rather than the “end of the beginning.”
Among supporters of Lehman’s payback plan were two creditor groups that hold a combined $100 billion in claims, more than one-fourth of the roughly $360 billion in claims against Lehman.
Those groups include bondholders led by hedge fund Paulson & Co, and derivatives creditors such as Goldman Sachs Group Inc (GS.N) and Morgan Stanley (MS.N). Asian affiliates holding about $20 billion in claims have also pledged support.
Peck overruled objections from investment fund Mason Capital Management LLC, Centerbridge Credit Advisors LLC and others, praising a “compelling” compromise on payout terms supported by the vast majority of Lehman’s 110,000 creditors.
The swiftness of the hearing surprised even Peck, who had budgeted two days for the matter and told those gathered in his courtroom on Tuesday to prepare for a “long day.”
But Tuesday’s brisk pace may not foreshadow a simple exit from bankruptcy.
If creditors accept Lehman’s plan, the matter would go back to Peck for a final approval hearing that could take between two and three weeks due to the complexities of certain objections the company is likely to face at the confirmation stage, Miller said.
The parties tentatively scheduled that hearing to begin on December 6.
Some of those objections may come from international affiliates, said Stephen Lubben, a bankruptcy law professor at Seton Hall Law School.
“There is still the international component to this case, and it’s getting to the point where everyone may have to face up to that component, which I think they’ve been avoiding,” Lubben said.
In general, he added, the process of managing objections will be difficult in a case as complex as Lehman’s. The company will tweak its plan to the extent that it can resolve objections, he said.
“But if you tweak it too much, you have to resolicit and creditors have to vote again, so there’s a trade-off,” he said.
Even after creditors and the court approve a plan, Lehman must meet certain financing and other conditions, a process that could take additional days, weeks or months, a company spokeswoman said last week. Lehman has said it hopes to begin creditor payouts in the first quarter of 2012.
Lehman had hoped to continue post-bankruptcy through its Legacy Asset Management Co, an asset management company created to manage its real estate and other assets, but shelved the idea earlier this month after creditors opposed it.
Since the Chapter 11 filing, Lehman’s pre-bankruptcy accounting practices have been under particular scrutiny, especially its use of the so-called Repo 105 method in which a company moves assets on and off its balance sheet. The company and its former executives, including ex-Chief Executive Richard Fuld, face investor lawsuits over their conduct ahead of the firm’s collapse.