Source: The Canadian Press
CIBC will “vigorously” defend itself against a lawsuit filed by insolvent U.S. investment banker Lehman Brothers and its creditors against dozens of financial companies in an attempt to recover billions in lost payments.
Lehman Brothers Special Financing, the plaintiff, contends it was deprived of more than US$3 billion from collateralized debt obligation deals, or CDOs, because it was switched to junior from senior payment priority after Lehman declared bankruptcy two years ago.
The largest of the CDO deals involved Toronto-based CIBC, from which Lehman is seeking a “significant portion” of a US$1.3-billion claim.
CDOs are securities backed by instruments such as pools of bonds or loans. They played a large role in the credit crisis several years ago when CDOs backed by mortgages were exposed to the collapse of the subprime mortgage market.
In a statement responding to the suit, CIBC noted that the timing of the court filings “coincides with the expiration of a possible statute of limitations.”
“CIBC intends to defend itself vigorously in this matter,” the big Canadian bank said, adding that the matter was not new and had been discussed in CIBC’s quarterly financial disclosure dating to the fourth quarter of 2009.
In that report, the bank recognized a gain of US$841 million resulting from the reduction to zero of its unfunded commitment on a variable funding note issued by a collateralized debt obligation.
“This reduction followed certain actions of the indenture trustee for the CDO following the Sept. 15, 2008, bankruptcy filing of Lehman Brothers Holdings, Inc. (Lehman), the guarantor of a related credit default swap agreement with the CDO.”
“We continue to believe that the CDO indenture trustee’s actions were fully supported by the terms of the governing contracts and the relevant legal standards,” the bank said.
But New York-based Lehman, whose bankruptcy in September 2008 was the biggest in U.S. history, claimed the switch that moved noteholders such as CIBC ahead in line was improper.
Lehman has asked the court for a declaratory judgment that “the purported termination of the note purchase agreement was null and void and CIBC’s obligations to pay amounts due to LBSF . . . remain in full force and effect,” according to court documents.
“At the time the Pyxis swap agreement was purportedly terminated, LBSF was massively `in the money’ and entitled to payment of over $1.3 billion, a significant portion of which CIBC would have been required to pay pursuant to its obligations, . . .” it said in documents filed with the court.
If Lehman is successful in its legal action, the claimed payments could help creditors in the company’s bankruptcy case recover significantly more money.
Lehman’s bankruptcy triggered a panic in financial markets. The U.S. government declined to rescue the company and instead, injected tens of billions of dollars into other financial firms.
Besides CIBC, the suit names Bank of America National Association, Bank of New York Mellon National Association, BNY Corporate Trustee Services Ltd., Citibank N.A., Deutsche Bank Trust Company Americas, U.S. Bank National Association and dozens of companies that issued notes — 76 in all.
With files from The Associated Press
CIBC sued by Lehman in CDO dispute
Bank confident its position ‘fully supported’
- By: B.H. McKenna
- September 15, 2010 September 15, 2010
- 17:20