Lehman Brothers suing CIBC for $1.3-billion

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Canadian Imperial Bank of Commerce is being sued for $1.3-billion (U.S.) by the estate of Lehman Brothers, the investment bank whose stunning collapse touched off the most serious phase of the global financial crisis.

The lawsuit stems from a credit default swap CIBC made in 2008 with the New York financial institution prior to Lehman filing for bankruptcy on Sept. 15 of that year.

The estate that is now sorting through Lehman's ruins on behalf of creditors claims it is entitled to $1.3-billion from a collateralized debt obligation (CDO) called the Pyrix Transaction. CIBC's unfunded obligations were written down to zero when Lehman filed for bankruptcy. However, the Lehman estate argues in court documents that Lehman was "massively in the money" and deserved to be compensated.

CIBC issued a statement Wednesday saying that it would vigorously defend the lawsuit, and maintains its obligations were written down properly by a trustee involved in Lehman's bankruptcy proceedings.

The lawsuit comes two years after the demise of Lehman, which was spurred by the collapse in the high-risk mortgage market and a subsequent liquidity crisis for banks. The trustee had until this week to file the suit.

CIBC recorded an $895-million gain in the fourth quarter of 2008 associated with the reduction of its unfunded commitment in the CDO, which it argues was in keeping with the agreement.

A court decision earlier this year has prompted the lawsuit against CIBC and other banks as the Lehman estate seeks to recoup more than $3-billion. In the first quarter of this year, a U.S. bankruptcy court in New York overturned a similar provision in a CDO transaction. That decision is now being appealed.

National Bank analyst Peter Routledge predicted in a research note Wednesday that the two sides could be in for a protracted legal fight.

"Given the legal complexity of the CDO and a lack of case law pertaining to such matters, we expect that this will be a long drawn-out legal affair," Mr. Routledge said.

CIBC paid $2.4-billion to settle a lawsuit stemming from the collapse of Enron in 2005. Faced with that suit, the bank originally took a $300-million (Canadian) provision, Mr. Routledge noted.

He said CIBC may not set aside a provision in this case because the bank is "adamant that the actions of its indenture trustee were contractually and legally appropriate."

Lehman owes creditors more than $600-billion. It has sued other banks, including a case against Barclays PLC in which the bank argues Barclays made $11-billion improperly off of the buyout of its U.S. brokerage. It has also sued JP Morgan Chase & Co. for $8.6-billion over money it argues was improperly extracted prior to the bankruptcy.