On April 25, 2011, as widely expected, a group of Lehman creditors holding claims arising from terminated derivatives transactions filed a competing plan of reorganization and related disclosure statement in the Debtors' chapter 11 cases. As a result of the new filing, there are now three competing plans – (1) the Debtors’ Plan, (2) the Ad Hoc Group’s Plan (filed by a group of bondholder creditors) and (3) the Non-Consolidation Plan (filed by the derivative claimants) - in the Lehman bankruptcy proceedings. Each of the disclosure statements for the three competing plans is now scheduled to be heard on June 28, 2011 to determine if the corresponding plan can be sent to creditors for a vote.  

COMPARISON OF THE PLANS

The three competing plans that have been proposed to date in the Lehman bankruptcy proceedings are:

  1. Debtors’ Plan  

First Amended Joint Chapter 11 Plan of Lehman Brothers Holdings Inc. and Its Affiliated Debtors, dated January 25, 2011. Salient terms of the Debtors’ Plan are:  

  • no substantive consolidation of the Debtors  
  • satisfaction of allowed claims against a Debtor primarily from the assets of that specific Debtor  
  • attempts an “economic resolution” of various issues based on the Debtors’ negotiations with, and the legal positions of, the various creditor constituencies  
  • provides for reduction of certain claims and reallocates recoveries among certain classes of creditors  
  • includes a methodology to determine the allowed amount of certain claims that require market valuation, including claims based on derivative contracts  
  1. Ad Hoc Group’s Plan (Bondholder Constituency)  

Joint Substantively Consolidating Chapter 11 Plan for Lehman Brothers Holdings Inc. and Certain of Its Affiliated Debtors Other Than Merit, LLC, LB Somerset LLC and LB Preferred Somerset LLC Proposed by the Ad Hoc Group of Lehman Brothers Creditors, dated December 15, 2010. In their Verified Statement Pursuant to Bankruptcy Rule 2019, dated April 22, 2011, the Ad Hoc Group state that they collectively hold approximately $19.6 billion in claims against the Debtors and certain material affiliates of the Debtors. Salient terms of the Ad Hoc Group’s Plan are:  

  • premised on substantive consolidation of the Debtors and certain of their foreign affiliates  
  • no distribution on account of intercompany claims among the Debtors  
  • all claims against multiple Debtors are deemed merged and eliminated -- creditors have only one claim against the consolidated Debtors  
  • enhanced treatment is provided for certain accepting classes that could, in theory, receive a greater distribution under a non-consolidating plan  
  1. Non-Consolidation Plan (Derivative Contract Constituency)  

Joint Chapter 11 Plan for Lehman Brothers Holdings, Inc. and Its Affiliated Debtors Other Than Merit, LLC, LB Somerset LLC and LB Preferred Somerset LLC Proposed by Non-Consolidation Plan Proponents, dated April 25, 2011.2 The salient terms of the Non-Consolidation Plan are:  

  • no substantive consolidation of the Debtors  
  • no enhanced treatment to bondholders or other standalone creditors of Lehman Brothers Holdings, Inc. that would benefit from substantive consolidation  
  • appointment of a fiduciary representative on behalf of domestic operating subsidiaries3 and their creditors to represent their interest in the claims administration process and to negotiate the amounts of intercompany claims  
  • market valuation of derivative positions to take place during the normal claims reconciliation process -- no special methodology for determining the allowed amount of claims based on derivative contracts

SCHEDULE TO CONSIDER DISCLOSURE STATEMENTS FOR COMPETING PLANS

The Bankruptcy Court initially issued an order setting the objection deadline, the reply deadline and the hearing date to consider and approve the disclosure statement for the Debtors’ Plan. The Ad Hoc Group then filed a motion requesting that the Bankruptcy Court consider the competing Ad Hoc Group’s Plan and related disclosure statement on the same timeline as the Debtors’ Plan.

On April 21, 2011, the Bankruptcy Court entered an Order Establishing Schedule for Disclosure Statement Hearing and Related Deadlines for Alternative Disclosure Statements and Plans and Approving Form and Manner of Notice of Disclosure Statement Hearing (the “Scheduling Order”). Pursuant to the Scheduling Order, the same schedule relating to the hearing to consider the Debtors’ disclosure statement now also applies to the consideration of the disclosure statements for the Ad Hoc Group’s Plan and the Non-Consolidation Plan. The timeline is:

May 27, 2011 - Deadline for objections and responses to disclosure statements for competing plans

June 21, 2011 - Deadline for replies or omnibus reply to objections and responses

June 28, 2011 - Hearing to approve disclosure

November 17, 2011 - Proposed hearing date to confirm plan

It is possible that the Scheduling Order will be amended and the deadlines and hearing dates extended.

Importantly, the Scheduling Order preserves flexibility as to the sequence of voting on the three plans. Accordingly, the Debtors may continue to argue, as they did in their opposition to the Ad Hoc Group’s motion, that creditors should consider and vote on the Debtors’ Plan first, before voting on any competing plans. This would preserve a strategic advantage for the Debtors because it would preclude creditors from considering the Ad Hoc Group’s Plan and/or the Non-Consolidation Plan unless and until the Debtors’ Plan fails.