Lehman Brothers International (Europe), Re Extended Liens Application V

During the first hearing of LBIE’s Administrators’ application for directions in relation to Extended Liens, Lehman Brothers Holdings Inc. (“LBHII”) and Lehman Brothers Inc. (“LBI”) made similar applications for disclosure by the Administrators, which I now refuse. This judgment sets out my reasons for doing so.

The Extended Lien application arises, in summary, in the following way. When it went into administration, LBIE held securities for other Lehman affiliates (“Ownership Affiliates”) pursuant to standard form agreements providing for LBIE to hold those securities on trust for the Ownership Affiliates. In a number of those standard forms, provision was made for LBIE to be entitled or (which is a matter for argument on the application) obliged to exercise a lien over such securities not merely in respect of monies owed by the Ownership Affiliates to LBIE, but also in respect of monies owed by Ownership Affiliates to any other affiliate within the Lehman group.

The main purpose of the Extended Lien application is to enable the Administrators and others to know the principles applicable under English (and possibly other) law relevant as to the extent and enforceability of the Extended Lien provisions and, if enforceable, to understand the principles governing the priority of interest in those securities as between the Ownership Affiliates, LBIE itself, and other affiliates owed money by Ownership Affiliates. It is perfectly possible for the same affiliate to be, in relation to LBIE, both an Ownership Affiliate and an affiliate claiming to be able to require LBIE to exercise an Extended Lien (a “Security Interest Claimant”).

LBHI is the ultimate holding company of the Lehman group, and the insolvency practitioners presently managing its affairs also manage the affairs of a substantial number of other affiliates. LBI was the main group operating company within the USA.

The immensely complicated affairs of the Lehman group leave those responsible for managing LBHI and LBI uncertain whether the interests of their stakeholders would be best served, in relation to the Extended Lien application, by advancing the interests of Ownership Affiliates, and challenging the effectiveness of the Extended Liens, or by advancing the interests of the Security Interest Claimants, and thereby pursuing a case supportive of the validity of the Extended Liens. In relation to securities held by LBIE for an Ownership Affiliate, its natural inclination might be supposed to be to join the former camp, but it is perfectly possible that the enforcement of Extended Liens in relation to securities held by LBIE for other Ownership Affiliates owing money to it, might swing the balance of advantage the other way.

The disclosure application made by LBHI and LBI seeks to elicit from LBIE information not merely about securities held for each of them as Ownership Affiliates, but information about securities held for other Ownership Affiliates which might owe them money, and also information about claims which may have been communicated to the Administrators of LBIE by Security Interest Claimants in relation to any assets held by LBIE either for LBHI or LBI.

It was common ground at the first hearing that LBIE should make disclosure to LBHI, LBI and other affiliates being or becoming party to this application of any agreements containing Extended Lien type provisions. Nonetheless LBIE resisted the wider disclosure sought by LBHI and LBI.

LBHI and LBI sought disclosure on three distinct grounds. First it was submitted that disclosure of the information sought would assist in the fair determination of the Extended Lien application, in the sense only that it would enable LBHI and LBI to know on which side of the argument to make their submissions. It was not suggested that the information sought (beyond the relevant agreements themselves) would be relevant to the determination of the issues raised by the Administrators.

Secondly, it was submitted that as Ownership Affiliates, and even as Security Interest Claimants, LBHI and LBI were entitled to disclosure as beneficiaries under a trust of the relevant securities. Thirdly, it was submitted that disclosure of the material would be of advantage in the conduct of the insolvency processes affecting LBHI and LBI, so that the court both could and should make an order in favour of their insolvency officers, just as the court would assist English officeholders pursuant to section 236 of the Insolvency Act 1986.

LBIE opposed the applications on the following grounds. First, as fiduciary holders of securities for Ownership Affiliates, LBIE owed duties of confidentiality to them both under the general law, and pursuant to the terms of the relevant agreements. It was submitted that this confidentiality could not be overridden in the absence of a sufficient countervailing public interest in disclosure. Since the material sought was not relevant for the purpose of determining the issues raised, there was no such countervailing public interest.

Secondly, there was no issue as to disclosure by LBIE to Ownership Affiliates of the amount of securities held for them, the main thrust of LBHI and LBI’s application being for disclosure to them as potential Security Interest Claimants rather than Ownership Affiliates. The court was by no means obliged to order disclosure to a person claiming a security interest under a trust where the existence of that claim was challenged.

Thirdly, LBIE objected to the time and expense to which it would be put in providing the information sought. Finally, LBIE drew the court’s attention to advanced negotiations for a process of mutual disclosure around the Lehman group, which it was submitted that a one-sided order for disclosure against LBIE would risk upsetting, in the sense of depriving LBIE’s affiliate counterparties of any incentive to provide voluntary reciprocal disclosure of their own of material which would be of assistance to LBIE’s Administrators.

I concluded at the first hearing that the arguments against an order for disclosure of the type sought by LBHI and LBI were substantially more forceful than those in favour. My reasons follow.

First and foremost, the purpose of the application is to enable the Administrators and others to know the principles applicable under English (and possibly other) law relevant to the extent and enforceability of Extended Lien provisions. It is no part of the purpose of the Extended Lien application to invite the court to identify specific securities held for specific Ownership Affiliates. The court’s requirement, in order to deal effectively with the issues raised, is that there should be identified parties prepared to argue, in summary, for and against Extended Liens. I acknowledge that, by the time this matter comes on for trial, the issues may be more complicated than that, but in principle the court needs, as for example in a complicated will construction, parties ready either in their own interests or on a representative basis to argue each relevant corner.

It is evident that Lehman Brothers Finance (“LBF”) knows enough about the underlying facts to be satisfied that it should, as an Ownership Affiliate, resolutely oppose the effectiveness of the Extended Lien provisions. In order fully to constitute these proceedings it is therefore necessary to identify an affiliate prepared, in its own interests or as a representative, to argue in support of them. It seems to me inevitable that there must be an affiliate within (for example) the stable managed by LBHI’s insolvency practitioners which is not (or not to any significant extent) an Ownership Affiliate in relation to LBIE, but which is owed money by one or more of those who are (and are known to be) LBIE’s Ownership Affiliates. The disclosure sought ought in my view to be unnecessary to enable such an affiliate to be identified.

I should add that counsel for LBHI was unable upon my request immediately to identify such an affiliate, but after taking instructions during the short adjournment, considered that it ought to be possible to find one qualifying for that purpose in a few days.

It follows therefore that the disclosure sought by LBHI and LBI ought not to be necessary to enable this application to be properly constituted for the purpose of achieving an effective determination of the issues. By effective I mean a determination after full adversarial argument, rather than by joining every affiliate which might conceivably be affected by the outcome.

It follows from the lack of any need for the disclosure sought that there is no countervailing public interest sufficient to make it appropriate for the court to override the confidentiality in the information sought as between LBIE and its Ownership Affiliates.

I am not persuaded that the claims of LBHI and LBI to be potential Security Interest Claimants comes anywhere near giving them, beyond argument, the status of beneficiaries under the trusts of the securities held by LBIE. The question whether disclosure of the type sought should be made to them is, I acknowledge, a matter of discretion, but in my view the interests of those trusts would be better served by making no order of that kind, at least pending establishment of the validity of security interest claims, as proprietary claims in relation to the securities held by LBIE.

As for the third alternative basis of claim, under section 236, again the matter is one for the court’s discretion. I do not consider that the cost and expense of providing that information warrants an order at present, in particular because of the real prospect that mutual disclosure within the group will shortly be agreed. If that negotiating process fails, the question whether further disclosure should be made to assist the office holders of LBHI or LBI can be revisited.