On January 25, Lehman and JPMorgan announced a settlement to resolve several aspects of the contentious and multifaceted Lehman-JPMorgan dispute that has lingered throughout Lehman’s bankruptcy. The bankruptcy court will hear a motion to approve the settlement on February 8.
The settlement has generated significant attention. In broad terms, it provides for the following: (1) an inflow of approximately $1.5 billion into the Lehman estate, (2) resolution of JPMorgan’s disputed derivatives claims, and (3) dismissal of Lehman’s long-running avoidance action against JPMorgan. In October, McGuireWoods published a client alert titled “JPMorgan Scores Major Victory in Ongoing Lehman Bankruptcy,” about a summary judgment ruling in the avoidance action. The settlement motion makes it clear that the summary judgment ruling was a significant impetus for this proposed settlement.
Despite extensive formal and informal negotiations over the course of more than seven years, the parties were unable to arrive at a global settlement. And what is not included in this enormous settlement may prove to be at least as interesting as what it does include. As detailed below, this settlement expressly preserves five “excluded actions” for resolution at a later time. (With the exception of the excluded actions, Lehman and JPMorgan released and waived any outstanding actions not otherwise resolved by the settlement.) The excluded actions can be placed into three general categories.
First, Lehman and JPMorgan did not resolve various disputed claims. This includes the “Tassimo Action” (ECF No. 19604), in which JPMorgan asserts deficiency claims arising from its role as the clearing bank for Lehman’s broker-dealer activities. Lehman and JPMorgan also did not resolve the 492nd omnibus claims objection (ECF No. 47715), which challenges the adequacy of supporting documentation on a variety of JPMorgan claims.
Second, this settlement does not impact JPMorgan’s role in the multi-defendant “flip clause” litigation, Lehman Brothers Special Financing v. Bank of America, N.A. et al. This suit involves a dispute about the priority of cash distributions from various trusts to swap counterparties, including JPMorgan affiliates.
Finally, the settlement does not alter most of Lehman’s and JPMorgan’s respective obligations under the court-approved Collateral Disposition Agreement (CDA), which Lehman and JPMorgan executed in 2010. (The CDA imposed certain true-up obligations on Lehman and JPMorgan related to various derivative transactions. The settlement released or waived these obligations.) In effect, the CDA is a tool to manage approximately $7.38 billion of claims that JPMorgan asserted against various Lehman debtors. As noted in the settlement motion, the CDA does not resolve these claims. Instead, it is a mechanism to halt the accrual of post-petition interest on the claims while preserving any objections that Lehman may have.
The foregoing illustrates how several major and contentious issues remain outstanding between Lehman and JPMorgan. This information may be useful to other parties with active Lehman matters and to the claims trading community because it underscores how, despite substantial settlements like the one announced by Lehman and JPMorgan this week, the final windup of the Lehman estate is hardly imminent.