By Patrick Fitzgerald
Citigroup Inc. (C) is firing back at Lehman Brothers Holdings
Inc.'s "unprecedented" bid to cut off its right to hundreds of
millions of dollars in interest payments tied to Citi's $3 billion
bankruptcy claim against the failed investment bank.
Lawyers for Citigroup on Tuesday blasted Lehman's "scorched
earth" tactics in its attempt to have a bankruptcy judge
"provisionally allow" the remains of the failed investment bank to
use $2 billion in cash in a Citi account to satisfy the bank's
claims against the failed investment bank.
Lehman wants U.S. Bankruptcy Judge James Peck to end what it
calls Citi's "interest rate arbitrage" with respect to their rival
claims on billions of dollars in assets.
By provisionally paying off the bank, Lehman would stem the flow
of interest payments to Citi, which could total hundreds of
millions of dollars by the time the two sides face off in court,
which isn't expected until 2015.
The bulk of Citi's claims against Lehman are tied to the
termination of derivatives trades between Lehman and Citi at the
time of Lehman's 2008 bankruptcy filing. The bank said it's
entitled to the interest payments under bankruptcy and it doesn't
want the "provisional" $2 billion payment from Lehman because
Lehman could claw it back if it emerges the winner in their legal
fight.
In any event, Citi's lawyers say the protracted litigation--and
its impact on the mounting interest payments--is entirely of
Lehman's making.
"The fact that five years after its bankruptcy Lehman is still
litigating with Citigroup over the allowance of Citibank's secured
claims is a problem of Lehman's own making," Citigroup's lawyers
said in a filing with U.S. Bankruptcy Court in New York.
The problem, as Lehman sees it, is that Citi is paying only .02%
interest on the disputed $2 billion in Lehman's account, while the
bank is demanding a much higher rate on its bankruptcy claims
against Lehman. The interest-rate spread, Lehman says, gives
Citigroup's bank unit an unfair leverage in their dispute.
A Lehman spokeswoman couldn't immediately be reached for
comment.
So-called oversecured creditors of a bankrupt company are often
eligible to receive a higher postbankruptcy interest rate on their
claims. In the case of Citi, the bank is seeking "the highest
possible rates (totaling hundreds of millions of dollars)" on its
claims, Lehman said.
Lehman says Citigroup can use the $2 billion in whatever way it
sees fit, and it will bear the risk involving the litigation over
the cash.
Judge Peck has scheduled a hearing on the dispute for Oct.
23.
Lehman Brothers sued both Citigroup and J.P. Morgan Chase &
Co. (JPM), alleging the banks' demand for more collateral triggered
a liquidity squeeze that contributed to Lehman's failure. Both
banks have denied the allegations and filed counterclaims against
Lehman.
J.P. Morgan, however, agreed to the provisional allowance of its
claims, while Citigroup balked, according to court filings.
Lehman, once the nation's fourth-largest investment bank,
collapsed in the largest bankruptcy in history on the morning of
Sept. 15, 2008.
While Lehman officially exited from bankruptcy protection in
March, its liquidation continues as the estate looks to drastically
reduce the tens of billions in claims filed by creditors.
At the top of the creditor list is J.P. Morgan, which in
addition to trading with Lehman served as Lehman's clearing bank.
Citi cleared Lehman's foreign-exchange trades. The legal sparring
among Lehman and its creditors could last years.
Since emerging from bankruptcy with a $80 billion
creditor-payment plan, Lehman's wind-down team has paid out more
than $47 billion to creditors. A fourth distribution of some $15.6
billion is slated to go out to creditors Thursday.
(Dow Jones Daily Bankruptcy Review covers news about distressed
companies and those under bankruptcy protection. Go to
http://dbr.dowjones.com)
Write to Patrick Fitzgerald at patrick.fitzgerald@wsj.com
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