United States: Court approves procedures for resolution of claims objections in Lehman Brothers chapter 11 cases

Claims Hearing Procedures

1. Upon service of an objection, a Claimant is temporarily enjoined from pursuing other litigation with respect to any claim to which the objection applies, except pursuant to either the Procedures or a confirmed chapter 11 plan. This injunction expires with respect to a claim only (i) when the claim has been resolved by virtue of a settlement between the parties or (ii) upon the entry of a schedule setting forth the discovery, briefing, and litigation schedule applicable to an evidentiary hearing on the merits of the claim (the Litigation Schedule). However, this stay does not apply to the investigation, prosecution, or defense of claims or rights against Lehman Brothers Inc., any affiliate of the Debtors that is the subject of an insolvency proceeding in a foreign jurisdiction, or any entity not affiliated with the Debtors. Similarly, this stay does not preclude any party from seeking adequate assurance of future performance related to an executory contract with any Debtor.

2. A Claimant may file and serve a response following the Debtors' objection to its proof of claim pursuant to the Court's January 14, 2010 Order approving Claim Objection Procedures, which provides that the Debtors shall serve a Claim Objection Notice on any Claimant whose claim is the subject of an objection; the Claim Objection Notice must contain, among other things, information regarding the response deadline and hearing date for such objection. If the Claimant fails to properly file and serve a response, the Court may enter an order sustaining the Debtors' objection. If the Claimant and the Debtors instead resolve the objection, whether through alternative dispute resolution or otherwise, the Court may approve the resolution in accordance with procedures for the settlement of claims against the Debtors approved on March 31, 2010 (the Settlement Procedures).

3. If the Claimant properly files and serves a response, the following procedures will apply:

ADR Procedures

1. Unless otherwise agreed to by the parties, the Debtors and the Claimant will submit to mandatory, non-binding, confidential mediation no later than sixty calendar days following service of a Notice of ADR Procedures. The mediation will be held in New York, New York at a location selected by the Debtors, though it may be held telephonically by mutual consent of the parties. The mediator will be selected by agreement of the parties from a court-approved list.¹ Each side will be required to submit briefs as part of the mediation process.

2. Either the Debtors or the relevant Claimant may request a telephonic negotiation no later than fourteen days prior to the scheduled mediation.

3. Any statements, arguments, or positions made or taken by any party in a settlement offer may not be disclosed, except by the party, witness, attorney, or advisor that made or took the statement, argument, or position, in a subsequent evidentiary hearing on the merits. Similarly, all documents provided to the mediator are confidential and will not be provided to the court unless otherwise admissible, and only then by the party that provided them to the mediator.

4. If the parties provide documents or information to the mediator that are otherwise subject to some privilege or protection from discovery, their doing so does not waive such privilege or protection; however, such documents or information must be designated as privileged. The mediator will not disclose any documents or information so designated without the consent of the party that provided them to the mediator. Further no party is obligated to provide any documents or information.

5. The mediation concludes upon the request of either party and the concurrence of the mediator; however, unless otherwise agreed to by the parties and the mediator, the mediation may not last longer than 120 calendar days. As noted above, if the mediation results in a settlement, the Court may approve the settlement pursuant to the Settlement Procedures. If the mediation instead concludes with all or part of the objection unresolved, the parties may consent to final and binding arbitration or will otherwise, at least forty-five calendar days from the date the mediation concludes, proceed to an evidentiary hearing before the Court on the merits of the claim. This evidentiary hearing is substantively identical to the Merits Hearing, and identical procedures apply for the establishment of the Litigation Schedule.

Objections Filed by Holders of Lehman Programs Securities Issued by LBHI

The Debtors also provided for the application of the above procedures to objections made by certain holders of claims relating to Programs Securities issued by LBHI (LPS). Generally, the procedures consolidate the treatment of such holders that have timely objected to the Scheduled Claim amount for the same ISIN (Related LPS Holders):²

1. All objections filed by Related LPS Holders are to be heard at the same date and time.

2. Upon service of an objection relating to an LPS, the temporary litigation stay described above applies with respect to the Debtors.

3. Identical Notices of ADR Procedures or Notices of Merits Hearing, as the case may be, must be served contemporaneously on all Related LPS Holders.

4. If the Debtors adjourn a hearing as set forth above, notice must be also be sent if applicable to all Related LPS Holders.

5. If the Debtors so choose, they may communicate individually with any Related LPS Holder.

Notable Changes Between the Debtors' Original Proposed Procedures and the Procedures Approved by the Bankruptcy Court

The most substantive changes clarify the treatment of objections made by Related LPS Holders regarding LPS claims, as described above. The majority of other changes, with a few exceptions, largely clarify the operation of the Procedures. The most salient operational changes are set forth below.

1. Merit Hearings will be substantively identical to evidentiary hearings on the merits of claims that follow a failed mediation.

2. There are express procedures for the creation of a Litigation Schedule, and nothing in the Procedures or the Order precludes the Debtors and the Claimant from mutually agreeing on the creation of a Litigation Schedule or precludes the Claimant from requesting that the Court do so. Previously, the Procedures only provided that the rules and procedures would be set forth in a scheduling order issued by the Court.

3. The temporary litigation stay does not apply with respect to the investigation, prosecution, or defense of any claims or rights against Lehman Brothers Inc., any entity affiliated with the Debtors that is the subject of a bankruptcy, insolvency, or similar proceeding in a foreign jurisdiction, or any entity not affiliated with the Debtors. Similarly, the Procedures do not prevent a party from seeking adequate assurance of future performance with respect to an executory contract.

4. All documents, information, and statements submitted or made in a mediation are confidential, any privileges with respect to documents and information submitted to the mediator are preserved, and no party is obligated to provide documents or information to the mediator.

5. Mediation shall conclude upon the request of either party and the concurrence of the mediator. Further, the Procedures now provide that mediation may not last longer than 120 days. Previously, the mediation concluded only at the mediator's discretion.