Zombie Lehman Keeps Chalking Up Victories

(Bloomberg Opinion) -- Bloomberg Opinion marks the 10th anniversary of Lehman’s bankruptcy with a collection of columns from around the world. Read more.

I suppose it’s like being mugged by a corpse. Losing to Lehman Brothers in court, I mean. After all, the firm went under a decade ago. Everybody knows that. On Sept. 15, 2008, Lehman declared bankruptcy. Following its collapse, the company was left to die in the dust, largely unmourned. But somehow its cadaver continues to drift about the financial landscape, still paying big lawyers, still winning cases.

Just last month, a piece of Lehman’s earthly remains won a lawsuit in the U.S. Court of Appeals for the First Circuit, when the judges agreed that an employee’s claim of retaliatory discharge had been properly dismissed. A few days earlier, this time as plaintiff, Lehman successfully avoided dismissal of its own lawsuit against entities from whom it purchased mortgage securities. Yes, you heard that right. Lehman claims it was misled by the sellers. In its lingering existence as a bankrupt estate, the company now proclaims itself the victim.

“Insolvent corporations,” warned a federal bankruptcy referee back in 1914, “usually live forever.” Yes, he was exaggerating a bit. But even after a company seemingly dies, the bankrupt corpse can live on for a very long time. A decade, I’m told, by no means represents an unusually long period for a company’s estate to continue. Early in 2014, for instance, W.R. Grace emerged from bankruptcy after proceedings that lasted almost 13 years. Its stock price exceeded $90 per share — a huge jump from the value of $1.52 when the company filed for bankruptcy in April, 2001.

But Lehman won’t be emerging. Energetic new owners have not arrived on the scene bearing plans for a leaner and nimbler company. The shell that is Lehman Brothers Holdings exists only to pay off creditors. Few assets remain to be distributed, but affiliates will hang around, doling out what they can, until, in the dry words of the company’s court-approved bankruptcy plan, “the liquidation of their assets is complete.”

Nobody one can say how long that process will continue. But the bankruptcy has already generated billions of dollars in fees for Lehman’s lawyers and advisers. (No, I don’t begrudge them the money.) The bankruptcy docket is thick with Lehman litigation, much of it concerning the company’s complex web of financial transactions. For example, a Lehman subsidiary sued Intel, seeking to recover $1 billion in collateral the company had given in connection with a share repurchase agreement. Intel won. In another case, FirstBank Puerto Rico tried to reacquire certain shares that had been pledged to another Lehman subsidiary. Lehman won.

But the most interesting case is the one about Lehman’s mortgage securities, the Aug. 13 decision by Judge Shelly C. Chapman rejecting a motion to dismiss a Lehman lawsuit.

Here’s what happened: A few years ago, Lehman paid some $3 billion to settle charges that it had sold faulty mortgages to Fannie Mae and Freddie Mac. Since that time, the estate has been busily going after those who sold the mortgages to Lehman in the first place. The company has identified some 3,000 counterparties against which it might have claims for indemnification in light of the settlement. And has brought suit — technically, “adversary proceedings” before the bankruptcy court — against over 150 mortgage originators, seeking in excess of $1 billion in damages.

The bankruptcy court has split the litigation into over 100 separate proceedings. And those scores of defendants have argued that the complaints should be tossed from bankruptcy court, with all its special rules and protections. They’ve been hoping to force Lehman to prove its case before a federal district judge. The legal arguments are technical, related to the closeness of the “nexus” between the claims and Lehman’s plan for paying off creditors. Suffice it to say that Judge Chapman ruled for Lehman. “The Plan Administrator’s authority to liquidate assets,” she wrote, “includes prosecuting Litigation Claims to maximize distributions to creditors.”

So the cases are staying where they are. And they’ll be litigated on and on and on and on. (Well, no, they’ll eventually be settled, but you get the point.) More will doubtless be filed. (And also settled.) This is a big chunk of what corporate bankruptcy litigators do: battle earnestly over the remains of companies the rest of the world thought long dead.

There’s something tragic about watching the court battles involving what Lehman has been reduced to. Among scholars, it’s become an article of faith that at the height of the 2008 financial crisis, Lehman was at least as strong as Bear Stearns and probably stronger. But the government rescued Bear and let Lehman collapse, citing the risk of moral hazard. And the risk was certainly real. Still, one can’t escape the suspicion that Lehman’s biggest mistake was being the second investment bank to fail rather than the first.

Don’t get me wrong. I’m not excusing the missteps — in particular, the high leverage and the refusal, as late as the end of 2007, to reduce its mortgage exposure — that led to Lehman’s collapse. But to watch the company’s fading remnant struggle valiantly in bankruptcy court is to wonder what would have been different had Lehman Brothers never fallen.

To contact the editor responsible for this story: Jonathan Landman at jlandman4@bloomberg.net

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Stephen L. Carter is a Bloomberg Opinion columnist. He is a professor of law at Yale University and was a clerk to U.S. Supreme Court Justice Thurgood Marshall. His novels include “The Emperor of Ocean Park,” and his nonfiction includes “Civility.”

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