Lehman Bankruptcy Hearing Held Surprises, According to Attorney Eyewitness

One of hundreds of lawyers who crammed into courtrooms Friday for a hearing on Lehman Brothers Holdings' effort to sell some of its big assets says the eight-and-a-half-hour session held a series of surprises. According to attorney Darryl S. Laddin, no appraiser testified in court about how much Lehman's assets were worth, nor was any appraisal filed with the court. And even more extraordinary to Laddin, the terms of Lehman's $1.5 billion sale of assets to Barclays kept changing throughout the evening.

Andy Peters

Daily Report

2008-09-24 12:00:00 AM
Given the chaos that preceded it, one would expect that the most important hearing in the largest bankruptcy case in U.S. history would be a doozy.

It was, said Darryl S. Laddin of Arnall Golden Gregory in Atlanta. He was one of hundreds of lawyers Friday who crammed into courtrooms, many of them limited to standing room only, to deal with Lehman Brothers Holdings Inc.'s effort to sell some of its big assets.

It started Friday at about 4 p.m. in Courtroom 601 of the Alexander Hamilton Custom House in lower Manhattan. It wrapped up at about half-past midnight, when U.S. Bankruptcy Court Judge James M. Peck of the Southern District of New York adjourned to a round of applause, Laddin said.

In the eight-and-a-half-hour interim, all manner of unusual events occurred, Laddin said. Fire marshals repeatedly warned attendees to move out of the aisles and doorways because they were creating a fire hazard. No appraiser testified in court about how much Lehman's assets were worth, nor was any appraisal filed with the court. And, perhaps most extraordinary of all to Laddin, the terms of Lehman's $1.5 billion sale of its investment bank, brokerage assets and 32-story, midtown Manhattan office tower to Barclays kept changing throughout the evening.

"The deal was in a constant state of flux," said Laddin, who attended the hearing on behalf of his client, Verizon Communications Inc. "The deal terms were being hashed out inside and outside the courtroom."

When the final version of the asset purchase agreement was agreed upon, the paper copies handed out to lawyers in the courtroom were filled with pen marks crossing out phrases and entire paragraphs, with additional language written in the margins.

There weren't enough copies for all the attorneys, Laddin said, and he wasn't able to nab a copy.

But Laddin was lucky in another respect. He was able to snag a seat in the main courtroom. Hundreds of attorneys and representatives from creditors and objecting parties were forced to either stand for the entire proceedings or cram into one of the two overflow courtrooms with television monitors of the hearing.

One of those who had to stand for the duration in the main courtroom, Laddin said, was former first daughter Chelsea Clinton, who works for the hedge fund Avenue Capital Group.

Squeezed between an in-house counsel with Lehman Brothers Inc. (the primary operating subsidiary of Lehman Brothers Holdings), and a first-year associate at Weil, Gotshal & Manges, Laddin said that most of Lehman's presentation was delivered by Weil Gotshal partners Harvey R. Miller and Lori R. Fife. Laddin said he was told that there were at least 20 associates from Weil Gotshal inside the courtroom.

Over the objections of many, Peck allowed Lehman to proffer evidence from its only two witnesses: Lehman President and Chief Operating Officer Herbert McDade III and Lazard managing partner Barry Ridings. Lehman had hired Lazard to market its assets in the bankruptcy case.

Lehman's team argued three primary points, according to Laddin. One was that a failure to approve its agreement with Barclays would result in a shock to the nation's and the world's financial system. The second was that Barclays was the only entity with the financial wherewithal, and with the U.S. government's approval, to acquire Lehman's assets. And their last point was that the deal would save about 9,000 Lehman jobs.

Several creditors and other parties objected to various elements of the plan, Laddin said. One of their primary objections was that Lehman made virtually no attempt to market its assets to find the best price, and that there was no credible evidence that Barclays was paying fair value.

Ultimately, however, Peck issued his findings, shortly after midnight, in favor of approving the sale to Barclays. Among Peck's statements, Laddin said, was that the deal had to be closed that weekend, and to wait would be "reckless" because the harm to the global economy would be devastating.

The judge also rejected some creditors' complaints that approving the case would set a bad precedent. Peck said that the Lehman case could never be deemed precedent for future cases, except for the highly unlikely situation that there could be similar circumstances.

Laddin declined to comment specifically on Verizon's claims in the case. Several subsidiaries of Verizon had been challenging the status of outstanding telecommunications contracts it held with Lehman, according to court filings.

The case is In re: Lehman Brothers Holdings, No. 08-13555.