In the minds of many, Lehman Brothers Holdings Inc.'s collapse and subsequent bankruptcy has served as a turning point in the country's financial landscape.
And while five years have gone by since the epic Chapter 11 filing on Sept. 15, 2008, its influence remains strong. For example, the movement behind the possible creation of a Chapter 14 of the U.S. Bankruptcy Code that would just be for financial institutions is a direct response to Lehman.
Meanwhile, the Lehman petition was clearly the impetus behind at least one piece of legislation, the Dodd-Frank Wall Street Reform and Consumer Protection Act, designed to improve accounting transparency among financial institutions and prevent future taxpayer bailouts of them.
Less clear is how "the skinniest Chapter 11 petition in history," as debtor counsel Harvey Miller of Weil, Gotshal & Manges LLP called it recently, inspired the speed at which bankruptcy sales were done in the cases of General Motors Corp. and Chrysler LLC, which filed within two months of each other in the spring of 2009 and were sold in as lightning-quick a fashion as Lehman's North American investment bank and brokerage assets.
Without question, general market turmoil, an economic freefall and widespread mistrust of the big banks and the regulators tasked with overseeing them followed the brokerage's implosion.
"[It was] the biggest unplanned bankruptcy in the history of bankruptcy law, period," said the person presiding over the Lehman case, Judge James Peck of the U.S. Bankruptcy Court for the Southern District of New York in Manhattan, during a Sept. 12 teleconference commemorating the five-year anniversary of the filing. "Anyone who was in my overcrowded courtroom [the first day] will remember the experience as absolutely one-of-a-kind, extraordinarily dramatic."
The judge, who said he felt an "enormous responsibility" when randomly assigned the case, said the first few days of the case "will go down as the most momentous week in bankruptcy history, full stop."
Right off the bat, Peck approved a $1.29 billion sale of Lehman's North American investment bank and brokerage assets to Barclays Capital Inc. on Sept. 20, 2008, less than a week after the company's filing -- a move Weil's Miller calls "courageous" given the alacrity in which it was done.
Chris Kiplok of Hughes Hubbard & Reed LLP, who represented Securities Investor Protection Act trustee James W. Giddens, stated that the Barclays transaction was one of several early case developments that marked "the end, in my mind, of the triage phase. ... We paused and saw that we had the right professionals on the case in the case ... [we knew] we could drive the case instead of having the case drive us."
Daniel Y. Gielchinsky of Higer Lichter & Givner LLP said that critics of the swift nature of the sale are ignoring other instances of fast Section 363 transactions.
"That does occur fairly routinely," he said. "It was imperfect [in] that not all the issues came to light before ... but the [Lehman] judge did what he had to do under the time constraints in realizing the enormity in failing to act in an expeditious matter."
One lawyer whose firm represented one of the parties that had its services contract acquired by Barclays, Christopher A. Ward at Polsinelli Shughart PC, said that because the deal was approved quickly, it made it "hard to dot all your i's and cross all your t's."
Ward said the debtor, the purchaser and the client were unclear at first on whether the contract would even be involved in the Barclays deal -- a position that many found themselves in for some time after the deal closed.
Ultimately, the client Ward's firm represented was absorbed under the Barclays deal, but not before months of litigation and back-and-forth over the details of the deal.
"It's what needed to be done, but the rules were definitely bent to get there," he said of Peck's approval. "Getting something done in less than five days was definitely unheard of. It was just unheard of and absolutely unprecedented. No one really knew how to handle it."
But he doesn't foresee that the Lehman formula for a rapid sale of a major division of a bankrupt business will serve as a playbook for others.
"I don't think it has [established a blueprint], because it went so far outside the box to get things done at the outset," Ward said.
To be sure, Lehman's bankruptcy may not have set a framework for creative interpretations of the U.S. Bankruptcy Code, but it may trigger changes to the law itself. Peck is co-chair of one of the advisory committees that is exploring adding a Chapter 14 that would include "code reforms that would better match the Bankruptcy Code to the needs of financial institutions," the presiding judge said at the teleconference.
"One of the things that we are clearly taking a hard look at are the safe harbors themselves ... and whether they are too broad," Peck said, declining to elaborate because of the ongoing nature of the matter.
Higer Lichter's Gielchinsky said that at its core, Chapter 14 would address matters that could affect relationships that are specific to the financial services industry.
"When a large financial institution files for bankruptcy, the automatic market reaction is to make a run for it," Gielchinsky said.
When Lehman filed for bankruptcy, many of its customers tried to close out contracts with the brokerage firm, which had a significant impact on the company's value as a going concern. (As a reference point, in the five days between when the Barclays deal was proposed and its approval, the deal value dipped to $1.29 billion from $1.75 billion because of the market's instability.)
Chapter 14, Gielchinsky explained, would establish a subsidiary to continue to do business with consumers when a major financial institution filed for bankruptcy, "and the market would understand that they are doing business with a new nonbankrupt subsidiary that is adequately funded."
While Chapter 14 is still on the drawing board, the Dodd-Frank Wall Street Reform and Consumer Protection Act is a post-Lehman reality because of the financial instability the firm's bankruptcy helped usher in.
"Lehman was clearly the catalyst of the financial meltdown and the recession and people think of it as the start of the domino effect that occurred after that," said Mike Gottfried at Landau Gottfried & Berger LLP. "The whole world basically changed after Lehman in a lot of ways."
Dodd-Frank's purpose, effective as of July 21, 2010, is to "promote the financial stability of the United States by improving accountability and transparency in the financial system, to end 'too big to fail,' to protect the American taxpayer by ending bailouts, to protect consumers from abusive financial services practices, and for other purposes."
Under Title II of Dodd-Frank, the Orderly Liquidation Authority has been created, allowing insured depository institutions and securities companies to be liquidated under existing law by the Federal Deposit Insurance Corp. or Securities Investor Protection Corp. Other insurance companies and nonbank financial companies not covered elsewhere can be liquidated under the act, too.
Bryan Marsal of Alvarez and Marsal Holdings LLC, who served as Lehman's CEO after the company's filing until 2012, questioned whether Dodd-Frank was the right way to deal with issues related to similar filings, adding that we have "miles to go before we sleep" when it comes to the reform act.
"The [bankruptcy process] works well," Marsal said during the teleconference. "It continued to work well, so why we are moving to a regulator process is a mystery."
Marsal maintained that risk management should not simply be the responsibility of the regulators, but has to start with the company.
Gielchinsky also questioned whether Dodd-Frank would cause more confusion moving forward.
"Dodd-Frank raises questions in and of itself. ... Is the proper place within the Bankruptcy Code, or is it within Title II's orderly liquidation?" Gielchinsky asked.
Polsinelli's Ward contended that Dodd-Frank has provided more clarity, but hasn't exactly accomplished the goals of its mission statement.
"It's provided more transparency in the system," Ward said. "It may illuminate some of the issues, but I definitely don't think it has solved the problem."
Though questions around Dodd-Frank remain, there has been a consensus that a collaborative attitude from the parties involved has kept the biggest issues in Lehman's complicated case from dragging out even further than it could have. (Though Peck on Dec. 6, 2011, confirmed a liquidation plan that would allow Lehman to unwind its remaining holdings, including real estate, commercial loans and private equity and principal investment over time, Lehman is still disputing claims in the case.)
Peck pointed to the establishment of a protocol for dealing with Lehman's numerous international affiliates -- 7,000 legal entities located in over 40 countries -- as a key force binding the combatants.
"There was an extraordinary level of international cooperation and consultation," Peck said during the teleconference. "It was a coalition of the willing."
Gielchinsky, who called it the first international protocol of its time, said he has not yet seen an instance where a similar model has been used but expects it'll rear its head again.
"I think that the testament to the collaborative process is the fact that the protocol worked," he said. "Everyone bought into it, the courts largely abided by it and it should become a model for how large bankruptcy cases should be handled in the future."
Miller, while outlining the biggest lessons learned from the case, said, "If parties are rational and if they examine the facts, they will work together to reach a conclusion that benefits everybody."
Peck concurred that the Lehman case shouldn't only be cast in a negative light.
"While Lehman as an event is viewed with a sense of horror, Lehman as a bankruptcy case was actually an effective and efficient way to deal with that failure," Peck said. "I can't say that it can be easily replicated. It happened improvisationally."
Geoffrey F. Aronow joined Sidley Austin LLP as a partner in the global securities and derivatives enforcement and regulatory practice. For other updates launch today's Movers & shakers slideshow.
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