Client money & assets update - Scheme of Arrangement - MFA and AIMA Presentation, 5 and 7 August 2009: Q&As
This update concerns the questions submitted by creditors at the presentations made by the Joint Administrators to MFA and AIMA held on 5 and 7 August 2009 (the "Presentations").
The objective of the Presentations was to provide members of the industry bodies who may have an interest in the trust assets held by LBIE with an overview of the proposed Scheme of arrangement (the "Scheme").
For background information on the Presentations, please see the Client money & assets update - Scheme of Arrangement - Presentation to Members of MFA and AIMA - 5 and 7 August 2009
The answers to the creditor questions set out below (which were submitted by creditors, at or following the Presentations, in substantially the form set out) are based on the proposed Scheme as it was contemplated at 14 August 2009.
However, please note that the terms of the Scheme have yet to be finalised and therefore the answers set out below are provisional and illustrative only and should not be relied upon as a definitive description of the position of any potential creditor or the effect of the proposed Scheme. In particular, the terms of the Scheme may be impacted by, or may be required to be amended as a result of:
(i) the judgment of the Court in respect of the jurisdiction issues heard by the Court on 29 and 30 July 2009; and
(ii) the judgment of the Court in respect of the convening hearing which is required to take place in order to launch the Scheme.
The questions and answers (the "Q&As;") set out below are intended to assist an interested person to understand the purpose, operation and effect of certain specific aspects of the Scheme, in respect of which queries where raised at the Presentations. They are intended as general guidance only and should not be regarded as advice in respect of the Scheme. This document is not a legal document and is not intended to create legal relations or to form the basis of any contract or agreement.
The Q&As; are NOT:
(i) a comprehensive description of the Scheme; or
(ii) a substitute for reading the Scheme document. Please note that the full Scheme document and Explanatory Statement are not yet available but Scheme Creditors will be notified in due course once they are finalised for publication.
Please note, the Joint Administrators were asked many questions, from various sources, which were not relevant to the Scheme and, therefore, we have not sought to provide answers for these questions. These issues will be addressed in due course at the appropriate time.
Table of Contents
II. Client Money
III. Converted / Derived Assets
IV. Assets - General
VI. Reserved Assets
VII. Shortfalls
VIII. Financial Contracts (including Derivatives)
IX. Prime Brokerage Agreements
XII. Rehypothecated Securities
XIII. LBI
XIV. LBHI
XV. Affiliates
XVI. Costs
XVII. Timing
XVIII. General
1. If a PB creditor did not instruct a specific security to be placed in a segregated account but the securities were not re-hypothecated, are the securities considered segregated securities for purposes of the Scheme?
Answer - The test for segregated assets is whether such assets were actually held on a segregated basis, rather than on the instructions received. If the assets satisfy the test for being segregated assets then the PB creditor will be a Scheme Creditor in respect of such assets.
2. Please clarify the definition of "segregation" in practical terms - how were assets to be segregated?
Answer - Segregation occurred by book entry at LBIE and, where a custodian operated segregated accounts for client assets, by entry in the client account in the books of the custodian.
II. Client Money
3. In terms of the election to set off a Scheme Creditor's client money claim against their net financial liability as calculated under the Scheme, is it just the client money claim shortfall that can be set off (as opposed to the whole claim) and, if so, what is the reason for the limited right of set-off given that a Scheme Creditor's client money claim must by definition be a financial claim?
Answer - It is the entire admitted pre-administration client money claim that can be set off but clearly this is only possible to the extent that the client money claim has not already been satisfied from distributions.
4. Is there any indication of the shortfall on pre-admin client money claims and is there any indication of when an initial distribution may be made?
Answer - This is not relevant to the Scheme, but will depend upon the outcome of applications to the Court for directions on a number of issues relating to pre-administration monies. It is too early to give any indication as to the ultimate level of recovery or timing.
5. Where assets have matured, has cash been received from the likes of DTC? If so, what claim on this cash does a Scheme Creditor have - is it an unsecured claim or is such cash held separately, such that it is identifiable and linked to the claim on the original asset?
Answer - No cash has been received from DTC. In general, if cash has been received by LBIE upon the maturity of a client asset, then that cash will be held by LBIE on a segregated basis. If that cash, as received by LBIE, is post administration client money (as this term is defined in the FSA's rules) then LBIE will be required to account to the relevant creditor for it. If it was not client money (as this term is defined in the FSA's rules) LBIE is seeking directions from the court as to its treatment so as to confirm whether or not the cash will be held for the benefit of the creditor with the interest in the underlying property.
6. Can you define "client money" which falls outside the Scheme? Is cash sitting in a LBIE account of 9/15/2008 considered "trust property"?
Answer - Client money (as this term is defined in the FSA's rules) that was received by or on behalf of the Company before 7:56 am (London time) on 15 September 2008 will be "client money" which falls outside the Scheme.
7. Re the election to have liabilities to LBIE crystallised and taken out of client money. Does this cover a case where there is no claim to Trust Property, other than client money? (The Scheme is intended to exclude client money).
Answer - If the creditor in question has no claim to Trust Property then the creditor is not a Scheme Creditor at all.
III. Converted / Derived Assets
8. We understand that a Converted Asset is an asset held at the time of administration, which has now become the Derived Asset - i.e. Treasury bills (Converted Asset) mature into cash (Derived Assets) - assuming cash is trust protected.
Answer -A Converted Asset is an asset that was Trust Property but which has been completely replaced by a Derived Asset. There is no claim to the original asset as it does not exist any more, but there is a claim to, or in respect of, its replacement.
Please note that Derived Assets include income (e.g. dividends and coupons) so a Scheme Creditor may have a claim to a Derived Asset without there also necessarily being a Converted Asset.
9. Can you expand on your comment that balance interest and dividends will fall back to creditors? Will this vary by type of contract?
Answer - To the extent that Scheme Creditors have claims for Derived Assets (e.g. interest and dividends on their Trust Property) this will be distributed under the Scheme. The treatment of Derived Assets may vary depending on the type of contract. The Administrators are currently seeking guidance on the status of certain derived assets and the Scheme will deal with such assets consistently with that decision.
IV. Assets - General
10. Are LBIE assets to be dealt with on a pooled or stock line basis?
Answer - The Scheme deals with assets on a stock line by stock line basis except where the custodian itself pools the property. The "pooled" Affected Assets form a stock line to which affected Scheme Creditors have a claim.
11. How are LBIE's client assets reflected on balance sheet, i.e., market value?
Answer - Client assets do not appear on the balance sheet as they do not belong to LBIE.
12. Please indicate rough sizes of custody and non-custody pools. How do non-custody claims arise?
Answer - These will be more fully described in the Scheme Explanatory Statement.
13. Can you please confirm that client assets already returned will not be included in the proposed Scheme? If so, will the credit protection and indemnities remain in place and if so for how long?
Answer -Creditors are not subject to the Scheme if they have had all their assets returned to them (including all Derived Assets), although there will be an option for any such creditor to become party to the Scheme (at LBIE's absolute discretion) for the purposes of the Net Contractual Position determination. The Scheme will give LBIE discretion to grant mutual releases in which case the indemnity and credit support may be released. Many creditors who have had assets returned will be in the Scheme for the balance of assets not returned (and any assets that have already been returned in respect of such Scheme Creditors will be taken into account when determining distributions).
14. How much information will be given to creditors as to their "Trust Property", and when will this be sent out, as this may materially affect voting patterns. Will this also state where Trust Property is held (i.e. whether it is with LBI or other sub-custodians)?
Answer - For Scheme Claim purposes LBIE will give each Scheme Creditor details of the assets held on a segregated basis and the assets rehypothecated. LBIE will not indicate locations or valuations. For voting purposes LBIE will give creditors the LBIE calculation of the value of their asset claims and their net equity, on which their voting rights will be based. A Scheme Creditor's Voting Rights will only be used in calculating the value of votes for the purposes of the Creditors' Scheme Meetings held to approve the Scheme and these Voting Rights are not, and will not be, an indication of any allocation or distribution that a Scheme Creditor may receive under the Scheme itself and / or the amount of any Scheme Creditor's Scheme Claim.
15. Can you confirm the valuation date for Securities? Is it 9/12/2008 or 9/15/2008?
Answer -The trust property returned to Scheme Creditors under the Scheme will be valued as at a date as near as reasonably practicable for LBIE to the date of distribution to that Scheme Creditor.
16. Where a creditor has negotiated a bilateral undertaking covering the return of trust assets, but that creditor's assets have not in their entirety been returned, will the creditor be a Scheme Creditor?
Answer - Yes, although the entitlement to a distribution will be reduced to take account of the assets already returned.
17. Please indicate the rough size of expected Retention Amounts. How do the liens arise, and typically under what contracts?
Answer - These relate to liabilities which Scheme Creditors have to other persons (generally liabilities of Scheme Creditors to Lehman affiliates which are secured on the Scheme Creditor's Trust Property). The liens arise under the Scheme Creditors' agreements with LBIE or with the third party who has the benefit of the lien. The liabilities arise under their arrangements with the affiliate or other creditor. The retention amount for each Scheme Creditor will depend on how much that individual Scheme Creditor owes to a lien creditor.
VI. Reserved Assets
18. When reserved assets are "set-aside", are they set aside on a pro-rata basis or does the event in effect create a first claim on the relevant asset?
Answer - LBIE shall be responsible for making good any increase in any shortfall in a stock line of Trust Property under the Scheme attributable to any assets being designated as "Reserved Assets".
VII. Shortfalls
19. Please explain the rationale for allocating shortfalls on a stock line basis. If there is a shortfall with one sub-custodian, but I can trace my securities to a sub-custodian with no shortfall why should I be prejudiced?
Answer - The Scheme operates on the basis that securities within a stock line are fully fungible apart from Custody Securities held on a clearly identified custody account.
20. Please clarify what constitutes an asset shortfall as opposed to a rehypothecation.
Answer - Rehypothecation is the use by LBIE of an asset. In practice as both rehypothecation and shortfall claims are unsecured and both are valued as at the business day before administration (save where shortfall claims are used in set off) there is likely to be limited practical difference for creditors.
21. You have said that there was no systemic over-rehypothecation by LBIE and that client asset shortfalls were mainly due to intra day settlement issues. Some creditors have found (in bilateral negations for return of Trust Property) that almost 100% of some stock lines are missing and that the reason for this is (i) post-administration settlement of pre-administration sell orders instructed by creditors with respect to the same stock lines as held in the omnibus clearing account; and (ii) the failure of orders to cover those creditors' sales out of the omnibus clearing account. Do you consider such near-100% shortfalls to be "Asset Shortfalls" or 'over-hypothecation'?
Answer - In either case these will give rise to unsecured claims under the Scheme. In general, claims arising from intra-day settlement would be valued on the basis of asset shortfall claims. If the claim cannot be used through set-off the valuation will be the same as for claims for rehypothecated assets.
VIII. Financial Contracts (including Derivatives)
22. Do claims for open OTC contracts under ISDA agreements fall within the "general creditor" class of the proposed Scheme?
Answer - It is anticipated that Scheme Creditors who only have open contracts will form a separate class.
23. If we were a prime brokerage creditor with no client assets at LBIE but with a financial contract claim (termination of ISDA), will we be a Scheme Creditor?
Answer - No, as you have no claim in respect of Segregated Assets, however there will be an option for you to request to be bound by the Scheme for the purpose of calculating a Net Contractual Position.
24. What is the position with respect to options that have expired in the ordinary course since the Time of Administration (e.g. in December 2008) where LBIE was obliged to deliver assets to the counterparty on such expiry? Are those options considered to be "terminated" or "still open" for the purpose of the Scheme and (assuming the Fallback Valuation Methodology applies) as at what date will they be valued (as at the Time of Administration, as at their expiry date, as at the Open Contract Termination Date, or some other time)?
Answer - Options will be treated as terminated on their maturity and to the extent that gives rise to a termination payment, the close-out amount will be calculated in accordance with the Scheme and taken into account in determining a Scheme Creditor's Net Contractual Position. They will not give rise to any proprietary claims to or over assets, but may give rise to an unsecured claim depending on a Scheme Creditor's Net Contractual Position. The amount of any such unsecured claim will be determined as at the termination date of the option (such valuation being, of course, irrelevant for voting purposes as it is not an Asset Claim).
25. For contracts that have already been terminated and are to be valued in accordance with the Fallback Valuation Methodology (including, for example, where creditors have terminated failed trades by accepting LBIE's repudiatory breach), as at what date will the Close-Out Amount for such contracts be calculated (as at the Time of Administration, as at the date of breach (e.g., the expected settlement date for a failed trade), as at the Open Contract Termination Date or as at some other date)? Will the conversion of that Close-Out Amount to USD be made as at the same date?
Answer - Close out values, for claim purposes, will be determined on the Fallback Valuation Date in accordance with the provisions of the Scheme. The Fallback Valuation Date in respect of a terminated contract is the date on which the contract was terminated or as soon as reasonably practicable thereafter. The conversion of any Close Out Amount to USD will be calculated as at the Open Contract Termination Date.
26. If shorts and rehypothecated long positions have already been closed out (e.g. a creditor has terminated their PB agreement), are they still to be valued at close out/termination date or on 12 September 2008?
Answer - They are valued, for claim purposes, as at the business day before administration (12 September 2008) and for voting purposes (to the extent relevant), as at 30 June 2009 (being the Voting Calculation Date).
27. Will creditors with open contracts which are being terminated be entitled to termination or replacement claims?
Answer - Close-out amounts will be calculated under the Scheme in relation to the termination of financial contracts and those close-out amounts will be aggregated to calculate that Scheme creditor's Net Contractual Position.
28. For the creditors who terminated their PB accounts, will their positions be valued as of 9/12/2008, or as of the time of closeout?
Answer - Scheme Creditors who terminated their PB agreements will have their positions valued in the same way as other Scheme Creditors. Their claims will be valued, for claim purposes, as at the termination date (subject to the exceptions for shorts and rehypothecated securities, which will be valued as at the business day before administration). For voting purposes their claims, to the extent they constitute Asset Claims, will be valued as at the Voting Calculation Date (being 30 June 2009).
29. Can creditors cover open short positions to avoid them being valued as at 12 September 2008?
Answer - No. for claims purposes, all short positions are all valued as at 12 September 2008 under the Scheme and for voting purposes, all short positions are valued as at 30 June 2009.
30. When is your current assessment of the percentage of financing claims that have a deficiency and the average deficiency on those claims?
Answer - In the context of the Scheme, the number of shortfall claims and the overall quantum of such claims is likely to be small.
31. How will LBIE address open, non-Scheme derivatives?
Answer - Assets and liabilities of non-Scheme Creditors will be dealt with outside of the Scheme. Financial Contracts (including derivative contracts) entered into by Scheme Creditors will be taken into account when determining a Scheme Creditor's Net Contractual Position under the Scheme.
32. How are contracts purportedly terminated other than in accordance with the terms of the contract to be dealt with? i.e. acceptance of repudiatory breach. Will they be treated as having been terminated?
Answer - This is likely to depend on individual facts and the nature of termination under individual contracts. Under the Scheme it does not matter whether a contract is validly terminated under the expressed contractual provisions or otherwise validly terminated under common law for the determination of what is a "closed" contract.
IX. Prime Brokerage Agreements
33. For creditors with a (charge) prime brokerage agreement that had terminated their agreements, the Scheme proposes to treat them as trust creditors but values their shorts and rehypothecated longs as at the date they terminated, which is different to the valuation date for other prime brokerage customers. Please explain why such customers are being treated differently from other prime brokerage customers.
Answer - Creditors with terminated charge prime brokerage agreements do not have their shorts or rehypothecated longs valued differently from other Scheme Creditors. All creditors get their shorts and rehypothecated positions valued, for claim purposes, as at the business day before the date of Administration (being 12 September 2008) and for voting purposes, as at 30 June 2009.
34. Why are creditors who terminated their PB agreements - and arguably relinquished their trust claims - being included in the Scheme?
Answer - This will be dealt with in the Explanatory Statement.
35. Will a creditor who has a title transfer PB agreement, but who was at all times treated by LBIE as if he had a security interest PB agreement, be a Scheme Creditor?
Answer - No.
36. Why is it that the value of Non-Financial Contract Liabilities (which term includes liabilities incurred other than under a contract) are deducted from the Distribution Assets available to a creditor, but no account is taken of any non-Financial Contract claims of the creditor against LBIE ("Non-Financial Contract Claims")?
Answer - These Non-Financial Contract Claims will rank as unsecured claims and may be available for set off in any eventual distribution to unsecured creditors.
37. Will a creditor that has a claim for trust assets but has a Net Financial Liability in excess of the value of its trust assets and any client money claim (i.e., where it will not be eligible to receive any assets at all back after Appropriations) be a Scheme Creditor?
Answer - Yes they will be treated as a Scheme Creditor and will receive a nominal vote for voting purposes. The intention is that they will be bound by all aspects of the Scheme, including for the calculation of their Net Contractual Position and the Appropriation of their trust assets, so as to eliminate their claim to Trust Property and determine their Net Financial Liability.
38. Please could you explain what types of non-affiliate claims will be considered as 'Excluded'? For example, where a creditor is not a creditor with a PB or custody agreement but passed collateral under a NY CSA which has been kept segregated be an 'Excluded Creditor' or would that be classified as a "Custody Agreement" under the Scheme?
Answer - It is most likely that such assets would be held in a charge account rather than a custody account and it is possible that such a creditor would constitute an Excluded Creditor, although it is not possible to give an exhaustive list of types of person who will constitute Excluded Creditors.
XII. Rehypothecated Securities
39. Please explain how claims in relation to Rehypothecated Securities are "Excluded Claims" but are also taken into account in calculating the Net Financial Position. Also, is it correct that Rehypothecated Securities which are still held in a "house account" will not be part of the Scheme?
Answer - Creditors have no asset claim within the Scheme in respect of Rehypothecated Securities, rather they have a monetary claim within the calculation of their Net Contractual Position (to the extent that they constitute Scheme Creditors).
However, to the extent that any monetary claim in respect of Rehypothecated Securities is not settled pursuant to the Net Contractual Position and Appropriation and Distribution mechanics under the Scheme, then such claims in respect of Rehypothecated Securities are not compromised by the Scheme insofar as the claim sought to be made is a proprietary claim over any Rehypothecated Assets that can be traced into the LBIE "house" accounts (as these assets are not part of the Scheme).
Please note that if all of a customer's assets have been rehypothecated, then that person will not be a Scheme Creditor at all.
40. Do matured Rehypothecated Securities constitute Derived Assets under the Scheme or, if not, are they treated as Client Money?
Answer - Claims in respect of Rehypothecated Securities (whether matured or otherwise) represent financial claims on LBIE and do not constitute either Derived Assets or Client Money.
41. Do Rehypothecated Securities that have been returned post-administration constitute Trust Property?
Answer - To the Administrators' knowledge, no Rehypothecated Securities have been returned.
42. Will Rehypothecated Securities set off margin loans? If yes, what if the value of those assets as of 9/15/2008 exceeds the margin loan? Is it an unsecured claim?
Answer - They will be netted off against each other in the calculation of a Scheme Creditor's Net Contractual Position. If a Scheme Creditor has a net financial claim (i.e. its financial claims against LBIE are greater than its liabilities to LBIE) this will constitute an unsecured claim. The rehypothecated assets will be valued as at the business day before administration. (i.e. 12 September 2008 in most cases).
43. How are dividends accruing to short or rehypothecated long positions, post 12 September being dealt with?
Answer - These are not included in the Scheme as shorts and rehypothecated securities are valued as at the 12 September. Any dividends accruing after that date belong to or are the responsibility of LBIE.
XIII. LBI
44. How will post-administration cash, such as dividends and coupons on assets held through LBI, be treated in the Scheme?
Answer - LBI is subject to the Securities Investor Protection Act ("SIPA") process and LBIE cannot influence how LBI treats post-administration cash. However, to the extent that LBI distributes cash to LBIE, LBIE will return that cash to Scheme Creditors in accordance with its legal obligations.
45. Will a Scheme Creditor have an Asset Shortfall Claim for shortfalls arising in respect of assets held through LBI?
Answer - Scheme Creditors will receive Asset Shortfall Claims in respect of shortfalls in assets held through LBI to the full extent of LBIE's liability under its contracts.
46. Why will securities returned from LBI be liquidated over 6 months rather than just being returned to creditors immediately?
Answer - Where LBI returns identifiable securities in respect of specific identifiable Scheme Creditors then they will be distributed to the same specific identifiable Scheme Creditors with asset claims to that stock line.
Where LBI returns securities which cannot be linked back to a specific stock line and specific Scheme Creditors then they will constitute an Affected Asset Pool and must be shared, pro rata, amongst all Scheme Creditors with claims into that asset pool. This can only effectively be done by distributing money rather than securities and the Scheme provides a six month window for selling securities to avoid LBIE being forced to sell on any particular day. Scheme Creditors will be able to purchase stock from this asset pool at market price independently from the operation of Scheme.
47. If the Derived Assets Application issued by LBIE results in a determination that such assets represent a trust claim, but the LBI SIPA Trustee does not share that view and does not return Derived Assets to LBIE as part of its omnibus claim, will customers of LBIE whose Derived Assets were held by LBI receive a trust distribution from a reduced Affected Asset Pool or receive no distribution as a trust claim at all?
Answer - LBIE's Derived Assets Application to the Court concerns the status of proceeds received by LBIE. LBIE will allocate to Scheme Creditors cash distributed to it by LBI in accordance with LBIE's legal obligations minus any liabilities owed to LBIE by Scheme Creditors. Derived Assets only constitute Trust Property eligible for return under the Scheme to the extent that they are received by LBIE. If they are not received by LBIE, there will be no claim to them as the value of Shortfall Claims are determined by reference to the value of Trust Property immediately before the date of administration, at which time the Derived Assets would not have existed as they comprise assets received in respect of Trust Property after the date of administration.
48. Does LBIE's net equity claim to LBI exceed the amount of segregated assets LBIE believes LBI is holding on behalf of Scheme Creditors?
Answer - This question is not relevant given the SIPA process which the LBI Trustee is following. Creditor claims against LBI are determined based on a creditor's net equity, i.e., the value of a creditor's account and any indebtedness to the broker as of the filing date of the liquidation (in this case, September 19, 2008). Net equity claims then share on a pro rata basis in the fund of "customer property," as defined by SIPA, which includes generally all the customer-related property of the broker-dealer's business. LBI will seek US bankruptcy court approval of an allocation of property between customer property and general estate property. For further details please go to the LBI Trustee website at www.lehmantrustee.com. LBIE currently does not have any information on the amount of customer property actually being held by LBI for Scheme Creditors.
49. Why can't LBI return the securities they hold on behalf of LBIE creditors now? When do they expect to be able to return them?
Answer - LBI is subject to the statutory SIPA process and this process is outside LBIE's control. As such, the timings and returns made by LBI are outside the scope of the Scheme until such time as they are received by LBIE. The Scheme provides the most efficient mechanism for returning assets held by LBIE once LBI has made distributions.
XIV. LBHI
50. Given that LBIE did not agree to the LBHI Protocol, how are you planning to work with other entities? Is this going to affect the ability to collect from other LB entities?
Answer - LBIE is working efficiently with the affiliates on a bilateral basis to maximise returns to its creditors.
51. LBHI provided guarantees for Lehman entities including LBIE. Did this guarantee cover the entire of LBIE's balance sheet or only certain liabilities and how are the Administrators proposing to deal with these guarantees?
Answer -The Administrators are considering their position regarding the guarantee liability which LBHI may have to LBIE in respect of obligations owed to LBIE by affiliates and also the extent of LBHI's guarantee obligations in respect of liabilities of LBIE (if any) and these matters have yet to be finally determined. Creditors must consider for themselves what claims they may have against LBHI. Creditors are reminded of the upcoming bar date in the insolvency of LBHI.
52. Are there any subrogation rights for LBHI?
Answer - The existence of any subrogation rights in favour of LBHI will be dependent on the particular circumstances of each creditor and will be determined by the terms of the relevant guarantee, indemnity or insurance policy provided by LBHI and the extent to which the underlying principal obligation is discharged by LBHI pursuant to the credit support it provided.
XV. Affiliates
53. LBIE has said that there are affiliates who believe that they own "billions" of LBIE inventory. Which affiliates hold this belief and why?
Answer - The arrangements with the affiliates are complex and are subject to determination through the courts. As they relate to claims to house assets or to Reserved Assets they do not affect the operation of the Scheme.
54. With regards to intercompany claims relative to other claims, what is the ranking, are they priority claims or general/secured/unsecured?
Answer - As far as the LBIE administration is concerned, all intercompany claims rank pari passu with other unsecured and unsubordinated claims unless subject to a specific subordination agreement.
55. How are affiliates for whom LBIE held trust assets being treated in relation to the Scheme?
Answer - In the vast majority of cases, LBIE's relationships with its affiliates relate to intercompany unsecured claims. Affiliates who are bound by the Scheme will be treated the same as any other Scheme Creditor. However, many Affiliates with claims to trust assets will be designated "Excluded Creditors" by LBIE. These Affiliates will not participate in the Scheme and their relationship with LBIE will be dealt with outside the Scheme.
56. Will the Scheme affect the entirety of my relationship with LBIE only (i.e., will not affect any relationship with other Lehman entities, e.g., LBHI)?
Answer - Yes but amounts may be retained by LBIE to discharge liabilities to other affiliates (being Retention Amounts).
XVI. Costs
57. How have you calculated your costs? Are these provisional? Have you considered a sliding scale to make it more equitable?
Answer - Costs attributable to Scheme Creditors reflect a contribution to the expenses which LBIE will bear relating to the collection, management and distribution of Trust Property. It is currently estimated that LBIE's actual costs will exceed the contribution levied under the Scheme.
58. Why is it intended to levy all costs against first distribution, rather than pro-rata among them?
Answer - To best protect the unsecured estate. There will be a true up when actual distributions have been finally determined and Scheme Creditors may receive a costs rebate at that point.
59. Given that LBIE unsecured creditors are benefiting from the Scheme, shouldn't they bear all costs? Also, a 1% fee is large; how was this determined?
Answer - Scheme Creditors also benefit from the Scheme by settling their entire positions vis-Ã -vis LBIE and potentially receiving back assets in a more efficient manner than would otherwise be possible. The Administrators are subject to an order of the English High Court which envisages that they will take reasonable steps to recover the costs of distributing trust property from the trust property claimants and provides that, in the event they are not so recovered, the costs will be borne by the general estate. The maximum 1% costs percentage attributable to Scheme Creditors reflects a contribution to the expenses which LBIE will bear relating to the collection, management and distribution of Trust Property. Costs for each Scheme Creditor will also be capped at US$2.5 million under the Scheme. It is currently estimated that LBIE's actual costs will exceed the contribution levied under the Scheme.
60. You said the current process for returning Trust Property is onerous and expensive so, why are you doing it? Who is paying for it and how does one qualify for this treatment?
Answer - the Administrators are keen to return trust property to creditors and are seeking to do so in the most efficient way possible. Until now they have pursued the approach of prioritising returns in light of the hardship being suffered by creditors and subject to certain other criteria, in accordance with the order of the English High Court of 7 October 2008. The costs of this process are agreed by LBIE and the relevant creditor. The Scheme will allow a more efficient and cost effective means of distributing property back to creditors.
XVII. Timing
61. Do the Administrators have any feel for the likely dividend to unsecured creditors, and when a first distribution might be made?
Answer - It is not possible to give any indication of the likely dividend at this stage.
62. Would it not be more sensible to delay the Scheme Meetings until after the determination of the "corporate actions" trust decision?
Answer - This could result in significant delay in the return of Trust Property which many creditors would regard as highly undesirable. Since the Scheme is drafted in such a way as to be consistent with the decision, it is possible for the two processes to progress in parallel
63. What is the timing and the process for judicial determination of disputes where a PB creditor says it has a trust claim, but LBIE denies that a trust claim exists?
Answer - After the Effective Date of the Scheme, if a PB creditor submits a claim, this will be reviewed by LBIE as part of its claims review process and, depending on the circumstances, any dispute in relation to the claim will be resolved either within the framework of the dispute resolution mechanism contained in the Scheme or by the Court outside of the Scheme.
64. How long is it likely to take to distribute amounts in respect of claims outside of the Scheme?
Answer - It is not yet possible to indicate anticipated timing on distributions in respect of unsecured claims. In due course the Administrators will come forward with proposals on this which is likely to follow the approval of this Scheme.
XVIII. General
65. What type of information will be provided in relation the Scheme before the Scheme Meetings?
Answer - Scheme Creditors will receive a letter informing them of the date of the court hearing for approval to convene meetings of the Scheme Creditors. This letter will include a brief summary of the purpose of the Scheme, an outline of how creditors' voting rights are calculated and details of the proposed classes of Scheme Creditors for the purpose of voting on the Scheme. Scheme Creditors will also receive a provisional draft Voting Claim Statement setting out provisional details of their Voting Rights. Prior to the Scheme Meetings, the Scheme itself and an accompanying Explanatory Statement will be sent to Scheme Creditors, together with voting documentation informing them of LBIE's calculation of their voting rights.
66. There seems to be a great deal of emphasis on understanding and satisfying the contractual relationships of LBIE, especially with respect to LBIE's affiliations. Do any regulatory obligations of LBIE at the time of administration carry the same weight as a contractual obligation?
Answer - LBIE is a regulated organisation and continues to be bound by its regulatory obligations. These should not give rise to any conflict with its contractual obligations, although certain contractual provisions may not be enforced by a regulated entity if to do so would contravene the regulatory rules.
67. Are there any complications/issues in the UK for a US based LBIE creditor selling/assigning the claim (right to be paid) to another party?
Answer - the Scheme itself does not restrict or prevent assignments of claims. However, if a Scheme Creditor acquires another creditor's claims after the time of administration, it will not be entitled to set its liabilities off against those claims under the Scheme.
68. It is conceptually possible to implement the Scheme? How can you compromise claims pursuant to a scheme, when the relevant claim is beneficially owned not by LBIE but by third parties?
Answer - This is the subject matter of the court directions being sought on jurisdiction, the hearing for which took place on 29 and 30 July in the High Court. The Administrators believe, on the basis of advice, that the court does have jurisdiction to approve a scheme of this nature. It is expected that the judgment on this issue will be handed down in the we
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