Lehman sues AIG for $9 million in CDS payments

NEW YORK (Reuters) - Lehman Brothers Holdings Inc (LEHMQ.PK) is suing American International Group (AIG.N) for $9 million in payments the bank says it is owed from credit default swap protection it bought from the insurer on companies including General Motors and Washington Mutual.

In a suit filed with a New York bankruptcy court last week, Lehman alleges that AIG is using the bank's failure as an excuse not to make payments, and that this violates U.S. bankruptcy law.

AIG had the option to terminate the CDSs, which used to insure against a borrower defaulting on its debt, when Lehman failed in September 2008, Lehman said in the filing.

The company failed to do so in order to avoid paying Lehman the $50 million it would have been owed at the time, Lehman said. The insurer appears to be refusing to meet its obligations until the contracts mature or the value of the contracts swings in AIG's favor, the bank said.

A spokesperson for AIG was not immediately available to comment.

Lehman bought protection from AIG on AbitibiBowater (ABWTQ.PK), Washington Mutual (WAMUQ.PK) and General Motors Corp GM.UL, all of which have filed for bankruptcy. Payments on another contract, Station Casinos STN.UL, were triggered when the casino operator failed to make an interest payment on its debt.

Lehman said it has spent $5 million to purchase debt needed to settle the contracts with AIG and is exposed to the risk that the debt will deteriorate in value.

When a borrower defaults on debt, the seller of protection typically pays the buyer the full value of the CDS, in return for the defaulted bonds backing the contract.

AIG bought protection from Lehman on three firms, Fannie Mae, Freddie Mac and Washington Mutual, Lehman said. The insurer has voided its right to collect on these contracts, however, because it failed to give notice to Lehman to settle the contracts within the 30-day deadline, Lehman said.

Payments on Fannie Mae (FNM.N) and Freddie Mac's (FRE.N) CDSs were triggered when the U.S. government put the companies into conservatorship last year.

The case is scheduled to be heard in the United States Bankruptcy Court for the Southern District of New York on October 14.

(Reporting by Karen Brettell; Editing by Dan Grebler)