Sale Hearing

On September 20, 2008, the Bankruptcy Court approved the sale of certain assets of Lehman Brothers Holdings Inc. ("LBHI") and Lehman Brothers Inc. ("LBI"),1 including those related to its Canadian Capital Markets and Investment Banking businesses, to Barclays Capital, Inc. ("Barclays"). The sale was approved despite the filing of over 80 objections raising a number of procedural and substantive issues. The Purchase and Sale Agreement was subsequently amended, and a clarifying letter filed, to address a number of the questions and concerns raised.

Objections to the sale centered primarily on two issues. First, the sale process was moving forward with such unprecedented speed that it was difficult to determine which assets of LBI or other LBHI subsidiaries were being sold to Barclays. Moreover, there was no definitive understanding as to which liabilities Barclays was assuming as part of the sale. The second category of objections were filed to correct inaccurate cure amounts for those contracts that Lehman intended to assume and assign to Barclays as of the closing.

Immediately after the Sale Order was approved, Bay Harbor Co. and certain of its subsidiaries filed an appeal of the approval order, alleging that the sale procedures violated due process. In addition, the appeal contends that Barclays was not a good faith purchaser, and therefore not entitled to the protection afforded such good faith purchasers under Section 363(m) of the Bankruptcy Code. The protection afforded under that section provides that the reversal or modification on appeal of a sale authorized by the Bankruptcy Court will not affect the validity of the sale to the good faith purchaser. The appeal is moving forward.

Points of Interest

Several private equity and other funds have filed motions for leave to conduct discovery under Bankruptcy Rule 2004, including requests to conduct depositions of LBHI management and for document production concerning the movement of property between and among LBHI and its affiliates, such as Lehman Brothers Special Financing Inc. These discovery motions set forth allegations of improper conduct by Lehman in the days and minutes leading up to -- and just after -- the bankruptcy filing, relating to the transfer of certain assets between affiliates.

The Official Committee of Unsecured Creditors has also filed a motion seeking leave to take Rule 2004 discovery of LBHI and JPMorgan Chase. In its papers, the Committee alleges that JPMorgan Chase, through its inaction, may have contributed to LBHI’s liquidity crisis.

Affiliate Filings

Between October 3, 2008 and October 5, 2008, an additional fourteen affiliates2 of LBHI filed for Chapter 11 bankruptcy protection.

Lehman Brothers Special Financing Inc. ("LBSF") was one of the affiliates to file late on October 3, 2008. LBSF is the counter party to numerous interest rate and other swap agreements and other financial contracts. Sections 559 and 560 of the Bankruptcy Code, known as "safe harbor" provisions, permit the other (non-debtor) parties to a repurchase or swap contracts to terminate those contracts by their terms, notwithstanding the automatic stay that became effective immediately upon the bankruptcy filing. As of this writing, LBSF has filed no request to assume or reject any of the contracts to which it is a party.

Lehman Commercial Paper Inc. ("LCPI"), which engages in administering, syndicating, and trading commercial loans, filed its Chapter 11 petition on October 5, 2008. According to LCPI, after filing for bankruptcy protection and because of the uncertainty in the credit markets regarding its ability to perform various obligations, it began to extricate itself from its position between borrowers and lenders. For a brief period, and to no avail, LCPI sought a buyer to purchase its positions in which it acted as an administrative agent, but concluded that those positions had no economic value to support an independent sale transaction.

On October 6, 2008, the Bankruptcy Court approved, over two objections, LCPI’s motion for authority to continue to utilize its agency bank account, terminate agency relationships, and elevate loan participations. According to LCPI, it intends to remove itself from many of these relationships and filed the motion to further that goal.