- From LexisNexis® Mealey’s™ Daily Legal News.
Citibank N.A., Citigroup Inc. and several of their affiliates (collectively, Citibank) have reached a $ 435 million agreement with the liquidation trustee for Lehman Brothers Holdings Inc. (LBHI) subsidiary Lehman Brothers Inc. (LBI) regarding more than $ 1 billion in collateral posted by LBI before its bankruptcy, according to a document filed Nov. 16 in a New York federal bankruptcy court (Securities Investor Protection Corp. v. Lehman Brothers Inc., No. 08-1420, [In re Lehman Brothers Inc. (Lehman Brothers Inc. v. Citibank, N.A., et al.), No. 11-1681], S.D. N.Y. Bkcy.)
James W. Giddens, the Securities Investor Protection Act (SIPA)-mandated trustee liquidating LBI, moved to approve the settlement in the U.S. Bankruptcy Court for the Southern District of New York.
According to the agreement, Citibank will pay $ 360 million to Giddens and relinquish a $ 75 million administrative claim against a payment made to LBI’s estate at the start of bankruptcy proceedings.
The settlement is subject to the approval of Bankruptcy Judge James M. Peck. A hearing is scheduled for Dec. 12.
Trustee’s Adversary Complaint
Giddens filed the adversary proceeding in the Bankruptcy Court on March 18, 2011. He alleged that the defendants failed to return more than $ 1 billion from a deposit LBHI’s broker-dealer until LBI made with Citibank before ceasing operations in September 2008, in violation of the bankruptcy proceedings’ automatic stay, as well as Sections 502(d), 506(d), 510(c), 542, 544, 547, 548, 549,550, 553(a)(3) and 553(b) of the Bankruptcy Code and New York state law. An additional claim for breach of contract was made.
Giddens contended that after LBHI filed for Chapter 11 protection, LBI remained in business through the week of Sept. 15, 2008, to “ensure an orderly wind-down of the business in order to facilitate a seamless transfer of customer accounts and thereby to protect its customers.”
“After LBHI’s filing, Citibank conditioned continuation of certain foreign exchange settlement services to LBI on LBI’s depositing $ 1 billion in an LBI account at Citibank,” Giddens said in the complaint. “Also during the week of September 15, Citibank obtained a $ 700 million pledge from Barclays Bank PLC as security for carrying on the same foreign exchange settlement services. On September 19, after the SIPC [Securities Investor Protection Corp.] filing and after LBI requested the return of the $ 1 billon deposit, Citibank advised LBI that it had set the deposit off against ‘obligations owed to Citibank.’ In addition, Citibank and its various affiliates around the world froze over $ 300 million in additional LBI deposits and asserted a right to setoff against the alleged remaining balance of the shortfall. In November 2008, Citibank returned the $ 700 million pledge to Barclays without notification to the Court or to the Trustee.
“The Trustee seeks to recover the $ 1 billion deposit, post-petition deposits in LBI’s various accounts at Citibank which total approximately $ 190 million as of May 31, 2010, approximately $ 62 million in pre-petition deposits in LBI’s accounts at Citibank, and approximately $ 90 million in deposits and net payables to LBI from Citibank and certain of its affiliates. The Trustee’s right to recover these funds derives from simple and straightforward principles of applicable bankruptcy law and SIPA – e.g., the requirement of mutuality with respect to setoffs – together with the clear limitations on the scope of safe harbor insulation. These legal principles are reinforced by the purposes underlying SIPA and a balance of the equities that weighs heavily against Citibank and its affiliates and in favor of the Trustee and those he is charged to protect.”