Lehman Bondholders Worried About How Tax Bill Will Be Divvied

A group of Lehman Brothers Holdings Inc. (LEHMQ) bondholders led by Paulson & Co. is concerned about how Lehman's tax bill will be divvied up among creditors, in what appears to be a preview to a larger fight over the two sides' competing plans to distribute Lehman's assets.

In a Wednesday filing with the U.S. Bankruptcy Court in Manhattan, the group of bondholders, which holds more than $20 billion in claims against Lehman, said that while it supports a recent settlement between Lehman and New York regulators on Lehman's tax bill, it wants to be able to challenge how the tax money may be allocated.

The bondholders filed their competing plan because they think Lehman's proposal treats creditors of various Lehman subsidiaries much better than creditors of the Lehman parent, like themselves. In their court filings, the bondholders point out that Lehman allots for about $2 billion in what are called priority tax liabilities, with about 75% of those claims being paid by the Lehman parent.

"How such claims are allocated throughout the enterprise can have a significant and material impact on recoveries to impaired creditors," the group says. A Lehman spokeswoman declined comment.

Late last month, Lehman settled a $1.2 billion tax bill with New York authorities for about $144 million, an agreement that Judge James Peck of U.S. Bankruptcy Court in Manhattan will rule on at a hearing next week. The bondholder group said that while it supports the tax settlement, it "presents certain issues that are already a common theme in these cases and that will come under increasing focus and scrutiny as these Chapter 11 cases move through the plan process."

Besides the competing plan from Paulson's group, which includes fellow hedge-fund managers Perry Capital and Fir Tree Partners, and pension funds including the California Public Employees' Retirement System and the County of San Mateo, a group including Goldman Sachs Group Inc. (GS) and distressed-investment firm Silver Point Capital LP has filed a plan that would give greater recovery to Lehman's so-called "operating subsidiaries." Peck in June can decide whether to send any or all of the plans to Lehman creditors for a vote, although Lehman said it might ask the court if creditors can vote on its plan first.

Lehman's collapse in September 2008 marked the largest U.S. bankruptcy case ever filed. Since then, a team of hundreds of bankruptcy professionals under the direction of restructuring firm Alvarez & Marsal has managed Lehman's assets--which include real-estate holdings, corporate debt and derivatives--for the benefit of creditors.

Lehman estimated earlier this year that it will likely have $322 billion in allowed claims against the estate, with $272 billion from the parent company and about $50 billion from its various subsidiaries. The investment bank increased creditors' expected net recovery by $2.6 billion from the $57.5 billion it estimated in a September court presentation.

(Dow Jones Daily Bankruptcy Review covers news about distressed companies and those under bankruptcy protection.)

-By Joseph Checkler, Dow Jones Newswires; 212-416-2152; [e-mail]