1) In September 2008, Lehman Brothers filed for Chapter 11 bankruptcy and sold its brokerage business to Barclays Capital for $1.75 billion in just 5 days, the fastest sale of its size and complexity under Section 363. 2) However, Lehman alleges the sale terms were altered without court approval in ways that benefited Barclays, such as terminating a $45 billion repurchase agreement for a $5 billion discount. 3) The case examines the limits of Section 363 sales and whether modifying approved terms risks undermining the finality of such sales going forward during bankruptcy proceedings.

1. USA
US Sale of
the Century:
Five Days in
September
n September 2008 Lehman 11 filing to the closing of the sale. approved by the Bankruptcy
I Brothers Holdings Inc. and
Lehman Brothers Inc.
(collectively, “Lehman”) sold their
While the sale order referenced
“competitive bidding” and other
“qualified bids,” Barclays was the
Court. Lehman’s motion indicates
that the original intent of the sale
was a “wash” whereby Barclays
historically coveted brokerage only realistic buyer. would pay fair value for the assets
business to Barclays Capital Inc. This “sale of the century” has it was acquiring, when in fact the
Many believe the sale was spawned litigation and deal was actually structured to give
necessary to prevent a worldwide commentary around the globe. Barclays an immediate and
economic meltdown given The most significant litigation that enormous windfall of
Lehman’s tentacles throughout the emerged from the sale was approximately $11 billion. This
global economy. In fact, Lehman’s Lehman’s own motion to have the was accomplished because the key
Chapter 11 filing on 15 September terms of the sale modified, which Lehman negotiators were also key
2008 was valued at $639 billion, is currently pending before the employees who were transferring
DAVID H. CONAWAY the largest Chapter 11 in U.S. United States Bankruptcy Court in to Barclays as a result of the sale.
history. It involved 7,000 legal the Southern District of New A controversial component of
Shumaker, Loop & Kendrick,
entities and spawned 75 related York. The business and legal the transaction was the
LLP (USA)
insolvency proceedings throughout communities are closely watching “Clarification Letter” which was
the world. Despite (or perhaps the outcome of this litigation on signed after the sale order was
because of) the enormity of the the efficacy of the Section 363 entered. The “Clarification
Lehman Chapter 11, the sale of sales process and the finality of Letter,” among other things,
Lehman’s brokerage business was Section 363 sale orders. Is Lehman terminated a Repurchase
accomplished in five days, an trying to renegotiate the deal after Agreement between Lehman and
unprecedented accomplishment the fact, or does the Barclays where Barclays
given the size, importance and unprecedented magnitude and transferred $45 billion cash to
complexity of the assets being sold speed of this sale warrant a Lehman in exchange for $50
and the transaction itself. Lehman modification to the sale order to billion of securities, subject to
proceeded under Section 363 of insure the original intent of the Lehman’s repurchase of the
the U.S. Bankruptcy Code transaction? securities at a later date for $45
(regarding sales of assets) to effect According to Lehman’s billion. By terminating this
this transaction. However, the sale motion to modify the Section 363 agreement, Barclays received an
had none of the usual procedures sale order, there were material undisclosed $5 billion discount.
and protections normally components of the transaction that Lehman asserted that under
associated with a Section 363 sale. were not disclosed to the Section 559 of the Bankruptcy
The sale followed an extremely Bankruptcy Court and the sale Code (dealing with Repurchase
truncated process involving only transaction that closed differed Agreements), the excess of market
five days from Lehman’s Chapter materially from the transaction prices over stated repurchase prices
40 Winter 2010/11

2. USA
are property of Lehman’s estate, Lehman’s broker-dealer business, Lehman-Barclays trial due to the
and thus termination of the
Repurchase Agreement violated
the Bankruptcy Code. The terms
where once an agreement was
struck, both sides continued to
negotiate terms as Lehman’s assets
potential impact on the sanctity of
Section 363 sale orders. The
Bankruptcy Court has a delicate
“ immediate gain
The
for Barclays was
of the “Clarification Letter” continued to deteriorate in the balance of preserving the finality
allegedly were not disclosed, and wake of its collapse. Barclays of sale orders and insuring the never disclosed to or
constituted a material alteration to asserted that it received far less process, including adequate approved by the
the transaction approved by the than the $50 billion in securities it disclosure, generates the maximum
Court. was supposed to get in exchange value for creditors. If the Bankruptcy Court
In addition to the $5 billion for $45 billion in cash it advanced Bankruptcy Court modifies the
discount, and due to the fear that
the value of Lehman’s assets were
rapidly deteriorating, Lehman
to Lehman. This short fall created
“massive uncertainty and risk” for
Barclays that was not resolved for
sale order as Lehman requests,
many will use the Court’s
modification to challenge future
”
asserted that there was a scramble months. Because the securities section 363 sale orders. While such
within Lehman to deliver to were actually worth only slightly a ruling would surely create some
Barclays $5 billion of other assets more than $45 billion, the level of uncertainty for future
without consideration or disclosure embedded gain of almost $5 Section 363 sales, perhaps Lehman
to the court. The additional assets billion was a fiction. Barclays’ will be “limited to its facts,” and
included approximately $800 court filings asserted that had the viewed as an extraordinary ruling
million of the so-called “15c3-3 deal turned out differently such regarding an extraordinary
assets,” at least $1.9 billion of that Barclays incurred a loss transaction in an extraordinary
unencumbered assets in so-called because the assets were worth less time in our economic history. In
“clearance boxes,” and than anticipated, Barclays would the Lehman case itself, a
approximately $2.3 billion of not have the right to come back to modification to the sale order is
additional assets. court a year later to change the estimated to create a nearly 16
Lehman further alleged that deal. cents per dollar recovery for
Barclays was to assume $2 billion Lehman’s legal arguments Lehman’s creditors.
in 2008 bonus liabilities to included the following: (1) the sale A fundamental policy of
Lehman employees who failed to maximise the value of the Chapter 11 is to preserve asset
transferred to Barclays, and Lehman bankruptcy estate and the values for the benefit of the
another $1.5 billion for cure return to creditors, (2) under debtors’ estates and their creditors.
payments for assumed executory Section 549 of the Bankruptcy Bankruptcy Courts in the United
contracts. Lehman maintained Code, there were unauthorised States are accustomed to quick
that Barclays actually assumed no post-petition transfers of the Section 363 sales to accomplish
more than about $1.7 billion in debtor’s assets of at least $8.2 this purpose. What made the
liabilities, compared to the $3.5 billion, based on “secret Lehman sale unique is that it was
billion it had agreed to assume. agreements” which are the largest such sale in bankruptcy
Lehman also highlighted that unacceptable in bankruptcy as history, and it occurred in only five
Barclays publicly announced in they deprive sellers of full market days, in an effort to stabilise the
February 2009 that it had enjoyed value, (3) Lehman executives United States’ economy and world
a gain of $4.2 billion “on colluded with Barclays to create a markets. It is impossible for a sale
acquisition” of Lehman assets. sweetheart deal for Barclays, and of this enormity to have all details
This immediate gain was (4) through mistake, resolved prior to sale approval or
attributable to “the excess of the misrepresentation and newly closing. Necessarily, the
fair value of net assets acquired discovered evidence, it is clear that Bankruptcy Court approved a
over consideration paid … on Barclays received an $11 billion transaction with many details left
acquisition.” Lehman maintained discount and failed to assume for further negotiations. The
the “gain on acquisition” was liabilities for borrowers and Bankruptcy Court clearly gave
understated by at least $6 billion executory contract cure payments. Lehman and Barclays virtual carte
because of various post-closing The trial on Lehman’s motion blanche to consummate a deal to
asset and valuation adjustments. to modify the sale order, including save Lehman’s brokerage business
The immediate gain for Barclays Barclay’s defences, concluded in and prevent a feared catastrophe
was never disclosed to or approved October 2010. A ruling by the in the global economic markets.
by the Bankruptcy Court. Bankruptcy Court is expected in While this strategy allowed a truly
In response to Lehman’s the first quarter of 2011. Given the titanic Section 363 sale to be
various assertions, Barclays has $11 billion at stake, there will negotiated, approved and closed in
posited that Lehman is simply undoubtedly be appeals to the warp speed, the sale has
trying to rewrite the deal because it United States District Court, the predictably precipitated an $11
was “too good for Barclays.” United States Second Circuit billion lawsuit challenging the
Moreover, Barclays maintains that Court of Appeals and perhaps the terms of the transaction, and may
Lehman’s assertions are “a gross U.S. Supreme Court. The business alter Section 363 sales in the
distortion” about the complex and legal communities are closely future.
negotiations over the sale of watching the outcome of the
Winter 2010/11 41