Lehman Sues Real Estate Developer for $83 Million in Swap Case

Even though five years have passed since the bankruptcy of Lehman Brothers, the aftermath continues, as Lehman Brothers Holdings, acting as plan administrator on behalf of Lehman Brothers Special Financing (LBSF), is suing LCOR Alexandria for $83 million dollars for an alleged wrongful valuation from the termination of an interest rate swap.
By Jake Safane(2147484770)
Even though five years have passed since the bankruptcy of Lehman Brothers, the aftermath continues, as Lehman Brothers Holdings, acting as plan administrator on behalf of Lehman Brothers Special Financing (LBSF), is suing LCOR Alexandria for $83 million dollars for an alleged wrongful valuation from the termination of an interest rate swap.

Lehman has filed the case in U.S. Bankruptcy Court for the Southern District of New York, citing that LCOR, a real estate investment and development company, had entered into a swap agreement with Lehman in 2005 with an initial notional amount of $60.2 million and a maturity date in 2032. However, because Lehman filed for bankruptcy in September 2008, LCOR terminated the contract in December 2008, claiming that Lehman owed around $42 million, which Lehman ended up paying.

Lehman says that LCOR’s valuation of the swap violates the International Swaps and Derivatives Association (ISDA) Master Agreement and the U.S. Bankruptcy Code, because LCOR calculated the loss before terminating the contract, and the market moved in Lehman’s favor between that time. The ISDA Master Agreement says that the calculation should be made at the time of the termination or as soon as reasonable after the termination.

Lehman claims in its court filing: “LCOR not only initiated its valuation process prematurely, it also utilized a flawed methodology in performing its loss valuation. LCOR’s calculation of the early termination payment under loss was not commercially reasonable because LCOR failed to take into account the substantial gain it realized based on the present value of the net discounted cash flows to maturity from the terminated swap.”

A major factor in the alleged violation is that LCOR entered into a swap with Barclays that December resulting in a $15 million gain, “but failed to account for this gain when calculating the early termination payment due to LBSF for the swap, even though the Barclays swap had virtually identical economic terms as the LBSF swap and the effective date for the Barclays swap was the same as the early termination date for the swap with LBSF,” the filing states.

Moreover, Lehman claims that LCOR set up a new entity, PTO Holdings, which is also a defendant in the case, and LCOR had Barclays make the $15 million payment to PTO Holdings, “apparently in an effort to make it more difficult for LBSF to recover those funds,” says the court document.

In all, Lehman is suing for the approximately $42 million it paid to LCOR and wants another $41 million in interest for a total of $83 million.

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