Bankruptcy Law

How a Lehman Bankruptcy May Unfold With Weil Gotshal’s Help

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Lehman Brothers has filed for bankruptcy after round-the-clock negotiations failed over the weekend and the last potential buyer, Barclays PLC, withdrew its bid.

Lehman has hired Weil, Gotshal & Manges as its bankruptcy counsel, the same law firm that represented Drexel Burnham Lambert in its February 1990 bankruptcy, the New York Times Deal Book blog reports. Drexel was the last major investment bank to seek bankruptcy protection, and only a few of its pieces emerged from the process as going concerns, the blog says. Well-known bankruptcy lawyer Harvey Miller, who chairs Weil Gotshal’s restructuring group, handled Drexel’s case.

Lehman will not be able to reorganize and survive, absent a broader rescue plan, because the bankruptcy laws provide for harsher treatment of financial services firms, the New York Times reports.

Lehman’s announcement capped an unprecedented weekend in which another troubled investment bank, Merrill Lynch, agreed to be sold to Bank of America in a stock transaction worth $50 billion and insurer American International Group sought $40 billion from the Federal Reserve. Attempts to sell Lehman faltered after the government refused to provide financial backing to potential buyers.

Lehman’s holding company has filed for Chapter 11 bankruptcy protection in Manhattan federal court, report the Wall Street Journal and Bloomberg News. None of the bank’s broker dealers or other subsidiaries will be included in the bankruptcy filing. The broker dealers will continue to operate while Lehman explores their sale, the Wall Street Journal story says.

Customer accounts at Lehman are protected by the Securities Investor Protection Corp.

Registered broker-dealers are not permitted to file for Chapter 11 protection. Instead, if they were to file for bankruptcy they would have to file for liquidation under Chapter 7, according to the Deal Book blog. Drexel, led by junk bond king Michael Milken, also sought Chapter 11 protection for its parent company, but the bank “essentially wound down during that process,” the Deal Book says. The SIPC would handle the liquidation process for the brokerage units if it appeared they were insolvent.

One new issue facing Lehman is that the bankruptcy code does not place an automatic stay on the seizing of collateral used in complex financial instruments like credit default swaps, the blog says. In the Drexel bankruptcy, creditors owed money for loans or bonds were barred from immediately seizing collateral.

Several London law firms will be advising other entities on U.K. aspects of the restructuring, Legal Week reports. They include Freshfields Bruckhaus Deringer, Linklaters, Clifford Chance (CC) and Lovells, the story says.

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