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Lehman Moves for Bankruptcy Court Approval of Metavante Settlement


26 March 2010

Litigation is currently on appeal before the United States District Court for the Southern District of New York.  

As a follow-up to our September 17, 2009 article summarizing US Bankruptcy Judge James Peck's decision in the Metavante litigation in the United States Bankruptcy Court for the Southern District of New York, we note that on March 24, 2010, the Lehman debtors filed a motion seeking approval of a settlement agreement with Metavante Corporation.

The Metavante litigation is currently on appeal before the United States District Court for the Southern District of New York (the District Court). On March 16, 2010, the District Court entered an order remanding the appeal to the United States Bankruptcy Court for the Southern District of New York (the Bankruptcy Court), solely to allow the Bankruptcy Court to consider the proposed settlement. The motion (the Motion ), if granted by Judge Peck at a hearing on April 14, 2010, would likely forestall the issuance of a binding precedential judgment by either court.

According to the Motion, the proposed settlement provides for continued performance by the parties to the contested interest rate swap, Metavante Corporation (Metavante) and Lehman Brothers Special Financing Inc. (LBSF ). Net payments from the date of the bankruptcy filing until February 1, 2012 (the maturity date of the swap) will continue to accrue, but only a single lump-sum net payment will be due on the maturity date, with no payments made by either party in the interim.

In addition to its continued performance, Metavante would agree to withdraw all litigation, waive all defenses to payment (including assertion of rights under Section 2(a)(iii) of the ISDA Master Agreement) and forego any additional claims relating to replacement hedging costs or claims against Lehman Brothers Holding Inc. as guarantor. LBSF, on the other hand, would grant Metavante an early termination right, which, if exercised, will result in an early termination payment calculated by reference to an agreed-upon formula.

Interestingly, while Judge Peck had indicated in his earlier ruling that Metavante would be required to pay LBSF interest on its withheld payments (presumably at the Default Rate under the ISDA Master Agreement), the terms of the settlement agreement specifically indicate that no interest will accrue or be payable by either party in respect of any time prior to the maturity date of the swap. The Lehman debtors (the Debtors ) indicate in the Motion that their willingness to enter into the settlement agreement (and presumably forego interest despite the payment deferral) is based in part on Metavante's strong credit and the short maturity of the swap. The Debtors also expressly state that their desire to reach a quick settlement is motivated in part by the fact that counterparties similarly situated to Metavante have indicated that they would await the outcome of Metavante's appeal prior to commencing settlement negotiations.

The proposed settlement, if approved, would not constitute binding precedent for purposes of the Lehman bankruptcy, but nevertheless provides guidance for similarly situated parties who are negotiating with the Lehman estates. Please feel free to contact any of the individuals listed above, or your usual Allen & Overy contacts, should you wish to discuss.


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