On September 15, 2008, Lehman Brothers Holdings Inc. ("Lehman Holdings") filed for Chapter 11 in the United States Bankruptcy Court for the Southern District of New York (Case No. 08-13555). None of Lehman Holdings’ U.S. subsidiaries have filed for bankruptcy at this point. In addition, while Lehman Holdings has certain subsidiaries that are regulated entities (e.g., banks, insurance companies, etc.), none of those entities has yet been placed into any kind of insolvency proceeding by the applicable regulators. However, immediately following the bankruptcy filing, regulators in the UK placed several of Lehman's European operations into administration (a process similar to involuntary bankruptcy or receivership proceeding). Lehman's main business units consist of its (i) capital markets group, (ii) investment banking and advisory services, and (iii) investment management services. On Saturday, September 20, the Bankruptcy Court approved the sale of substantially all of Lehman's operating businesses (other than its investment management services unit, Neuberger Berman) to Barclays PLC for approximately $250 million, excluding the purchase price for certain Lehman real estate assets.
As described in the bankruptcy affidavit of its CFO, Lehman attributed the bankruptcy filing to "a chain reaction of adverse economic consequences" flowing from Lehman's severe loss of liquidity as certain of its significant asset classes (particularly domestic subprime residential mortgages and structured credit products) declined in value. On September 12, Lehman's management and representatives of the SEC, Treasury Department and Federal Reserve Bank held emergency meetings. Following those meetings, federal officials advised Lehman that emergency federal funding would not be forthcoming to address Lehman's liquidity problems, and the bankruptcy filing was made shortly thereafter.
Lehman Holdings and certain of its subsidiaries have been very active in healthcare finance, serving in various roles such as underwriter in bond financings and remarketing agent for variable rate bonds, as well as counterparty and guarantor in swap transactions. In addition, Lehman Holdings' subsidiaries serve as investment advisors. The bankruptcy filing of Lehman Holdings presents potential risks and challenges to any healthcare entity with an agreement or relationship with Lehman or any of its subsidiaries.
Of note is that in one of Lehman Holdings' initial filings with the bankruptcy court, it asked the court for, and received, a "comfort-order" specifically advising its counterparties, business partners, creditors and other parties of the existence of the automatic stay provisions of section 362 of the Bankruptcy Code. Generally speaking, the automatic stay provisions of the Bankruptcy Code prohibit parties (such as healthcare entities with a relationship with Lehman Holdings) from taking certain actions (such as foreclosure, collection, etc.) against the assets of a debtor's (Lehman Holdings') estate. However, interested parties should be aware that the Bankruptcy Code's automatic stay provisions explicitly carve out and permit certain actions which may be relevant to some parties in this case, including actions related to commodity or securities contracts (11 U.S.C. § 362(b)(6)), swap agreements (§ 362(b)(17)), and master netting agreements (§ 362(b)(27)). Therefore, any stay applicable to the Lehman Holdings case may not apply to ongoing payments under swaps, termination rights (including termination payments that may be owed by Lehman and related set-off rights) or certain other transactions.
The impact of the Lehman Holdings bankruptcy filing on any particular relationship or agreement will be fact specific. The first step is to identify any such relationships or agreements, so that the relevant agreements can be reviewed to see which entities are parties and what rights, obligations and options are available to the healthcare entity in this situation. Health care entities should note that even though Lehman Holdings has filed for bankruptcy, termination of a swap with Lehman Holdings or one of its subsidiaries may result in a termination payment (which could be substantial) from the health care entity to Lehman.