For over eight years, In re Lehman Bros., No. 08-13555-scc (Bankr. S.D.N.Y.), has been one of the most active, complex bankruptcy dockets in the country. A large portion of the remaining contested matters in that case are claims by trustees for residential mortgage backed securities (RMBS), who continue to pursue claims against the Lehman estate for losses caused by toxic mortgages. Recent developments show that Lehman is trying to wrap up many, if not most, of those RMBS claims by the end of this year.

Most practitioners are aware of the events surrounding Lehman’s bankruptcy filing in 2008, but fewer have followed the long road that the RMBS claims in the case have traveled. Prior to the bar date in 2009, the RMBS Trustees filed proofs of claim for hundreds of trusts, covering hundreds of thousands of mortgage loans. Lehman eventually agreed to reserve $5 billion for payment of those RMBS claims.

In December 2014, the Bankruptcy Court ruled against the RMBS Trustees: rejecting the Trustees’ request to increase that reserve amount, Judge Chapman agreed with Lehman that the Trustees could not use sampling for purposes of estimating Lehman’s liability on claims. While Judge Chapman recognized that sampling had been used in connection with RMBS claims in other bankruptcies (such as the ResCap case), and that sampling was regularly used in RMBS litigation brought by monoline insurers, she declined to authorize it in the Lehman bankruptcy.

Instead, Judge Chapman implemented an RMBS Claim Protocol that called for individual review of over 200,000 loan files and instructed the RMBS Trustees to submit claims for alleged breaches and misrepresentations on a loan-by-loan basis to Lehman. The Protocol established a time table for review and submission of claims to the Lehman estate, and contemplated that the Trustees would complete their review of loan files by early 2016.

The RMBS Trustees worked to meet the benchmarks for review of loan files, but disputes over resolution of the claim files persisted. By September 2016, only a small percentage of claims had been resolved.

Spurred by the deadlock, earlier this year Lehman announced that negotiations with a group of institutional investors (including Blackrock and Goldman Sachs’s asset management wings) had yielded a potential agreement to resolve the RMBS claims. In March 2017, those institutional investors presented the proposed settlement agreement to the RMBS Trustees for consideration and solicitation of certificateholder input. On June 1, the RMBS Trustees announced that they had accepted the settlement agreement on behalf of over 240 trusts.

Lehman filed a 9019 motion for approval of the settlement agreement. At a hearing on July 6, Judge Chapman approved the settlement agreement as fair and reasonable under the extraordinarily complex circumstances. The Southern District of New York recently affirmed that determination, clearing the way for the procedures set forth in the settlement agreement.

Under the settlement agreement procedures, Lehman and the trustees will forgo the Claim Protocol and proceed to an estimation hearing, pursuant to section 502(c), on almost all of the RMBS claims. (A handful of trusts either opted out of settlement or have liquidated; those trusts are not included in the estimation hearing procedures.)

According to the settlement agreement, at the estimation proceeding Lehman will ask the Court to estimate the RMBS claims in an amount no less than $2.416 billion. The RMBS Trustees have the ability to seek estimation at a higher amount and likely will argue that the claims are worth more than $2.416 billion. Both Lehman and the RMBS Trustees are expected to present expert testimony during the estimation hearing and call additional witnesses to testify.

The parties have requested that the Bankruptcy Court schedule the estimation proceeding as early as October 2017. The parties anticipate the estimation proceeding will last 14 days, with time equally allocated between sides.

The estimation hearing will be a major showdown between the Lehman estate and the RMBS Trustees who have litigated these claims for years. We are continuing to monitor this case closely and will provide updates as events unfold.