Lehman Brothers Holdings Inc.’s bankruptcy plan is facing its first challenge in what could become a barrage of challenges in the nation’s largest bankruptcy ever. A group of creditors who identify themselves as an ad hoc group of Lehman Brothers creditors are objecting to the bankruptcy plan which aims to create a “pot of assets” from which to pay back creditors saying that it’s seriously flawed and that it does not treat all creditors fairly.
The plan includes a number of intercompany settlements and actually constitutes 23 distinct Chapter 11 plans applying to each of the Lehman units in bankruptcy. Allowed claims against a particular debtor will be paid from the assets of that debtor, with recoveries for unsecured creditors ranging from about 10 cents on the dollar to 44 cents.
That’s a problem, according to the bondholder group, which says creditors of the parent company stand to fare better if the various Lehman units are treated as a single company, or substantively consolidated, for purposes of the Chapter 11 distribution.
Under Lehman’s proposed plan, general unsecured creditors of its holding company can expect recoveries on their claims of 10.4% to 14.7%. Unsecured creditors of other Lehman units will do better. General unsecured creditors of the company’s commercial paper unit can expect to recover between 29 cents and 44 cents on the dollar for their claims.
Unsecured creditors of Lehman’s special finance unit, the heart of much of Lehman’s derivatives business, can expect to recover somewhere between 22 cents to 24 cents on the dollar.
But the bankruptcy plan is already coming under fire. The ad hoc group has already warned the bankruptcy court that while it does not wish to litigate the issue it wants the bankruptcy court to create a system to coordinate competing bankruptcy plan submissions as Lehman’s period of exclusivity expires. With more than 65,000 claims in the Lehman Brothers’ bankruptcy case, even if only a fraction of the creditors decide to submit their own competing bankruptcy plans, it could turn into a logistical nightmare.