Deutsche Bank poised for big win as last Lehman legal fight ends

(Aug 11): One of the last issues in the bankruptcy of Lehman Brothers has been resolved, handing a potentially huge win to a clutch of distressed investors led by Deutsche Bank AG.

The UK Supreme Court refused Lehman’s US holding company permission to appeal a ruling that said holders of subordinated notes issued by the defunct investment bank should be paid before other claims. The decision effectively brings to an end years of wrangling over what’s left to pay to creditors some 14 years after its collapse.

It could lead to huge payouts for holders of little-known Enhanced Capital Advantaged Preferred Securities issued by Lehman’s UK arm prior to its collapse, which were once considered worthless.

The ECAPS issue was one of the very last matters that remained open in Lehman’s long running bankruptcy, in essence deciding in what order some of the final creditors will be paid.

Picking clean Lehman’s corpse has kept a legion of accountants, lawyers and hedge funds busy for well over a decade. There are a few other matters outstanding, but the vast majority of issues in the thorny bankruptcy have been decided.

The appeal was rejected because the application didn’t “raise a point of law of general public importance on the ranking issue,” according to a decision dated Aug 8 and made public in a linked US lawsuit.

The fight is between holders of different forms of Lehman Brothers’s UK-issued subordinated debts. In one corner you have Lehman’s holding company in New York and hedge funds including King Street Capital Management, who hold interest in loans made by the US parent to European entities. On the other side you have the ECAPS owners, the largest of which is Deutsche Bank, which hold the other subordinated debts of the group, issued to external investors in the lead up to Lehman’s collapse.

The ultimate payout for note holders like Deutsche Bank will depend on a number of factors, including the outcome of a case in New York on credit-default swaps contracts that are more than a decade old.

It’s possible that ECAPS holders could receive a windfall of 500 million pounds. The notes were changing hands for next to nothing just a few years ago.

Spokespeople for Deutsche Bank and Lehman Brothers’s US parent company declined to comment.

Far more money than initially expected has been recovered by administrators at PwC, tasked with winding up the bank’s European subsidiaries. In fact, creditors ahead of ECAPS holders in the queue will be paid out in full with interest and there will probably be hundreds of millions of pounds left over for the subordinated lenders.

“The ruling provides certainty as to the ranking of certain subordinated debts,” Ed Macnamara, an administrator and partner, said in a statement.