NEW YORK Barclays Plc (BARC.L) is entitled to about $6 billion of disputed assets as part of its hurried purchase of much of Lehman Brothers Holdings Inc's brokerage unit at the height of the 2008 financial crisis, a federal appeals court ruled.
Tuesday's decision by the 2nd U.S. Circuit Court of Appeals in New York is a setback for the brokerage's creditors, including Lehman affiliates and hedge funds, for whom the trustee James Giddens has been seeking to recoup money.
Lehman had been Wall Street's fourth-largest investment bank. It had $639 billion of assets when it filed for Chapter 11 protection on Sept. 15, 2008, making its bankruptcy by far the most in U.S. history.
Barclays won court approval to buy much of Lehman's brokerage business at a Sept. 19, 2008 hearing overseen by U.S. Bankruptcy Judge James Peck in Manhattan.
A dispute remained, however, over how to dispose of various "cash" assets of the brokerage. These included about $4 billion of margin assets held by third parties to support a Lehman exchange-traded derivatives business, and $1.9 billion of "clearance box" assets used to process securities trades.
In February 2011, Peck said Barclays was entitled to the clearance box assets but not the margin assets. But in July 2012, U.S. District Judge Katherine Forrest in Manhattan partially reversed him, and said Barclays deserved both.
Upholding Forrest's ruling, Circuit Judge Ralph Winter noted for a three-judge appeals court panel that "ambiguities and loose ends were inevitable" given the "urgency under which this deal was executed."
But he said the sale agreement and a later "clarification letter" showed Barclays should prevail, despite the emphasis in documents and court hearings that "no cash" should be involved.
Otherwise, Winter said a buyer such as Barclays might have deemed the purchase commercially unacceptable.
"It would be highly unusual for a buyer to purchase LBI's ETD business in its entirety but not the collateral that allowed that business to exist, particularly in a time of economic crisis when the value of the underlying assets, e.g., options and futures, would be extremely volatile," Winter wrote.
In a statement, Giddens said he is studying the decision and has set aside appropriate reserves.
He also said the decision does not affect the $105 billion already distributed to 111,000 former brokerage customers, or the first planned distribution to general unsecured creditors.
Jonathan Schiller, a lawyer for Barclays, was not immediately available for comment.
The case was argued in May 2013. At the time, Barclays and Giddens each controlled about half of the disputed assets.
The case is Giddens v. Barclays Capital Inc et al, 2nd U.S. Circuit Court of Appeals, No. 12-2322.
(Editing by Grant McCool)