Citigroup Inc. (C) is firing back at Lehman Brothers Holdings Inc.'s "unprecedented" bid to cut off its right to hundreds of millions of dollars in interest payments tied to Citi's $3 billion bankruptcy claim against the failed investment bank.
Lawyers for Citigroup on Wednesday blasted Lehman's "scorched earth" tactics in its attempt to have a bankruptcy judge "provisionally allow" the remains of the failed investment bank to use $2 billion in cash in a Citi account to satisfy the bank's claims against the failed investment bank.
Lehman wants U.S. Bankruptcy Judge James Peck to end what it calls Citi's "interest rate arbitrage" with respect to rival claims on billions of dollars in assets.
By provisionally paying off the bank, Lehman would stem the flow of interest payments to Citi, which could total hundreds of millions of dollars by the time the two sides face off in court, which isn't expected until 2015.
The bulk of Citi's claims against Lehman are tied to the termination of derivatives trades between Lehman and Citi at the time of Lehman's 2008 bankruptcy filing. The bank said it is entitled to the interest payments under bankruptcy and it doesn't want the "provisional" $2 billion payment from Lehman because Lehman could claw it back if it emerges the winner in their legal fight.
In any event, Citi's lawyers say the protracted litigation--and its impact on the mounting interest payments--is entirely of Lehman's making.
"The fact that five years after its bankruptcy Lehman is still litigating with Citigroup over the allowance of Citibank's secured claims is a problem of Lehman's own making," Citigroup's lawyers said in a filing with U.S. Bankruptcy Court in New York.
The problem, as Lehman sees it, is that Citi is paying only 0.02% interest on the disputed $2 billion in Lehman's account, while the bank is demanding a much higher rate on its bankruptcy claims against Lehman. The interest-rate spread, Lehman says, gives Citigroup's bank unit an unfair leverage in their dispute.
So-called oversecured creditors of a bankrupt company are often eligible to receive a higher postbankruptcy interest rate on their claims. In the case of Citi, the bank is seeking "the highest possible rates (totaling hundreds of millions of dollars)" on its claims, Lehman said.
Lehman says Citigroup can use the $2 billion in whatever way it sees fit, and it will bear the risk involving the litigation over the cash.
Judge Peck has scheduled a hearing on the dispute for Oct. 23.
In May of 2011, Lehman proposed a wide-ranging settlement of its outstanding derivatives trades with more than a dozen of its largest counterparties--including some of Wall Street's biggest banks.
A number of these so-called "big bank counterparties," among them Bank of America and Merrill Lynch, settled with Lehman, resulting in the erasure of billions of dollars in derivatives claims that the big banks filed against Lehman and its affiliates. Citigroup, however, rejected the settlement framework.
Lehman Brothers sued both Citigroup and J.P. Morgan Chase & Co. (>> JPMorgan Chase & Co), alleging the banks' demand for more collateral triggered a liquidity squeeze that contributed to Lehman's failure. Both banks have denied the allegations and filed counterclaims against Lehman.
J.P. Morgan, however, agreed to the provisional allowance of its claims, while Citigroup balked, according to court filings.
Lehman, once the nation's fourth-largest investment bank, collapsed in the largest bankruptcy in history on the morning of Sept. 15, 2008.
While Lehman officially exited from bankruptcy protection in March, its liquidation continues as the estate looks to drastically reduce the tens of billions in claims filed by creditors.
At the top of the creditor list is J.P. Morgan, which in addition to trading with Lehman served as Lehman's clearing bank. Citi cleared Lehman's foreign-exchange trades. The legal sparring among Lehman and its creditors could last years.
Since emerging from bankruptcy with a $80 billion creditor-payment plan, Lehman's wind-down team has paid out more than $47 billion to creditors. A fourth distribution of some $15.6 billion was sent to creditors Thursday.
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Earlier version misstated the day that lawyers for Citigroup Inc. blasted Lehman Brothers Holdings Inc.'s "scorched earth" tactics in the second paragraph. Citigroup's lawyers made the comments Wednesday, not Tuesday.