Lehman Brothers Holdings Inc. lost two fights with creditors, with a bankruptcy judge dismissing claims seeking to recover money from Intel Corp. and the public housing authority of Michigan.

Lehman, which is liquidating itself pursuant to a court-approved bankruptcy plan, had sought to recover hundreds of millions of dollars from Intel, which it claimed the computer giant wrongfully held as collateral under a swap agreement. It sought to recover about $23 million from the Michigan State Housing Development Authority, or MSHDA, under a different swap agreement.

Southern District Bankruptcy Judge James Peck (See Profile) ruled against Lehman in both disputes in a pair of opinions handed down Dec. 19.

In Lehman Brothers v. Intel, 13-01340, Peck allowed one of three counts asserted by Lehman to go forward, but found that it was not a core proceeding under the bankruptcy law, meaning that Intel can litigate it in district court instead of bankruptcy court. Peck recommended, however, that Intel agree to go ahead in bankruptcy court anyway.

The dispute hinges on a swap agreement entered into shortly before Lehman’s 2008 bankruptcy. The swap agreement was structured to allow Intel to purchase a significant amount of its publicly traded shares indirectly without running afoul of insider trading laws, according to Peck’s decision.

According to an adversary complaint Lehman filed against Intel earlier this year, the swap agreement called for a subsidiary of Lehman, Lehman Brothers OTC Derivatives Inc. (LOTC), to purchase about 50.5 million shares of Intel stock and deliver them to Intel on Sept. 29, 2008. Intel transferred $1 billion to Lehman as a prepayment for the shares, and Lehman transferred $1 billion to Intel as collateral.

Just weeks before the swap was supposed to close, on Sept. 15, 2008, Lehman declared bankruptcy, though LOTC did not. Intel, in response, kept the entire $1 billion in collateral posted by Lehman and declared that the agreement was terminated as of Sept. 29. On Sept. 30, LOTC filed for bankruptcy as well.

Lehman alleges that Intel should have made a good faith effort to determine what its actual loss was, rather than keep all of the collateral. Lehman claims that the value of the shares it failed to deliver was actually, at most, $873 million. Depending on how damages are calculated, Lehman alleges, Intel should turn between $127 million and $312 million back over to Lehman.

Lehman’s suit against Intel has three counts: one breach of contract claim, and two brought under the bankruptcy code asserting that Intel was wrongly exercising control over property of the Lehman estate.

Intel, on the other hand, argued that the swap agreement gave it the right to keep the entire $1 billion, and moved to dismiss.

Peck ruled that the bankruptcy counts must be dismissed, because Intel’s decision to hold onto the collateral took place before LOTC filed for bankruptcy. The remaining breach of contract claim, he ruled, was “non-core” under bankruptcy law, meaning that the bankruptcy court did not have exclusive jurisdiction over it, and Intel could seek to remove the reference from bankruptcy court and proceed in district court.

Peck further urged that Intel agree to an adjudication of the contract claim in bankruptcy court in “the interest of orderly case management.”

“Regardless of whether a particular count is core or non-core, it is most efficient and eminently sensible for all disputes involving swap agreements where Lehman and its affiliates are counterparties to be handled in this Court,” he wrote.

Lehman is represented by Jones Day partner Robert Gaffey and associate Mahesh Parlikad.

Intel is represented by Williams & Connolly partner John Buckley Jr. and by WilmerHale partners Craig Goldblatt and Daniella Spinelli.

The attorneys could not be reached for comment.

Dispute Over Calculation

The second dispute decided on Dec. 19 involved a dispute between Lehman and MSHDA over how to calculate the amount MSHDA owed Lehman when it closed out a longstanding swap agreement after Lehman went bankrupt.

MSHDA and Lehman subsidiary Lehman Brothers Special Financing Inc. (LBSF) entered into an interest rate swap agreement in 2000. In 2008, when LBSF went bankrupt, MSHDA invoked its right to liquidate the agreement under its own terms.

Those terms provided two formulas for liquidating the swap agreement. One, known as the mid-market method, was to be used under most circumstances; the other, known as the market quotation method, was to be used if LBSF defaulted.

MSHDA, using the market quotation method, determined that it owed Lehman $36 million. Under the mid-market method, it would have owed $59 million.

Lehman claimed that the agreement could not be enforced as written because it changed Lehman’s rights as a result of its bankruptcy, in violation of the bankruptcy code. It argued that MSHDA should have used the mid-market method.

Section 560 of the bankruptcy code creates a “safe harbor” preserving swap counterparties’ contractual right to liquidation in the event of bankruptcy. Peck found that the safe harbor extended not only to the right to trigger a liquidation, but to the contractual terms about how to calculate it.

In fact, the judge said, recognizing a right to liquidate without a right to enforce the particular methods in the contract “would strip away the defining characteristics of a contractual right to liquidation that by statute may not be limited in any manner.”

“The nondefaulting party would be artificially relegated to the bare ability to cause a liquidation without reference to the related provisions of the swap agreement that enable counterparties to achieve a predictable, agreed resolution of their respective contractual obligations,” the judge continued.

“The liquidation method, regardless of amounts realized, is fully ‘baked’ into the very concept of what it means to liquidate,” he said.

Lehman is represented by Richard Slack, a partner at Weil Gotshal & Manges, who could not be reached for comment.

MSHDA is represented by WilmerHale partners Craig Goldblatt and Daniella Spinelli, who also represent Intel.

The underlying bankruptcy case is In re: Lehman Brothers Holdings, 08-13555.