About a year after Deutsche Bank filed a lawsuit against Finepoint Capital regarding Lehman Brothers’ bankruptcy estate, the case has been closed.

Earlier this week, Judge John P Cronan of the New York Southern District Court signed an order dismissing the case.

The defendants had provided Deutsche Bank with documentation concerning the citizenships of their members. Deutsche’s Complaint fails to adequately allege the citizenships of Finepoint Capital LP, Warbler Run I, LLC, Warbler Run II, LLC. For each of these entities, Deutsche Bank merely alleged its state of formation and the location of its principal place of business.

But the citizenship of an unincorporated entity depends on the citizenships of its members, not on its state of formation or the location of its principal place of business.

The Complaint, therefore, did not adequately allege complete diversity of citizenship between the parties.

Accordingly, the Court dismissed the action without prejudice for lack of subject matter jurisdiction.

This was a lawsuit for breach of contract and breach of the implied covenant of good faith and fair dealing. The parties in this action entered into a trade nearly seven years ago in which the defendants agreed to acquire from Deutsche Bank claims against the bankruptcy estate of Lehman Brothers Holdings, Inc., with a face amount of $906 million, in return for a purchase price of approximately $14.6 million.

Deutsche Bank argued that, for more than five years, the defendants have frustrated the parties’ ability to settle the Trade by unreasonably refusing to execute an assignment of claim unless it includes either:

• literally impossible representations and warranties, which would be breached the moment the assignment was signed, which is obviously not something Deutsche Bank agreed to when it entered into the Trade; or
• idiosyncratic indemnification language that goes well beyond what the parties agreed to when they agreed to the Trade.

On September 15, 2008, Lehman Brothers Holdings, Inc. which at the time was the fourth-largest investment bank in the United States, filed a petition for bankruptcy under Chapter 11 of the United States Bankruptcy Code.

The Lehman bankruptcy filing remains the largest bankruptcy filing in the history of the United States. On the day it filed its petition, Lehman held approximately $639 billion in assets and owed approximately $619 billion in liabilities.

After Lehman commenced its bankruptcy proceeding, a secondary marketplace emerged for the sale and purchase of claims against Lehman’s estate.

This case involves a Trade in which Deutsche Bank and Defendants reached an agreement for the sale of claims against Lehman’s estate, memorialized in the form of two written trade confirmations. Deutsche Bank alleges that the defendants breached their obligations to Deutsche Bank by (i) unreasonably refusing to execute assignments of claim with Deutsche Bank on the terms agreed to by the parties and (ii) otherwise refusing to cooperate in good faith with Deutsche Bank to settle the Trade.

Defendant Finepoint is an investment manager based in Boston, Massachusetts, with approximately $4 billion in assets under management. Defendants Warbler Run I and Warbler Run II are two limited liability companies that, upon information and belief, were created and controlled by Finepoint for the purpose of holding assets.

On a phone call on November 7, 2018, Deutsche Bank and Finepoint discussed the terms of the Trade, whereby Defendants would pay Deutsche Bank $14,677,200 in return for claims with a face amount of $906 million, divided up as follows: a. $7,516,251.35 for an assignment of claims against Lehman’s estate with a face amount of $463,966,133.00 to Warbler Run I LLC (the “Warbler Run I Transaction”); and b. $7,160,948.65 for an assignment of claims against Lehman’s estate with a face amount of $442,033,867.00 to Warbler Run II LLC (the “Warbler Run II Transaction,” and collectively with the Warbler Run I Transaction the “Trade”).

The purchase price for the Trade represented 1.62% of the face amount of the claims to be assigned.

Immediately after the discussions with Finepoint on November 7, 2018, Deutsche Bank became aware that it had not disclosed to Defendants the existence of certain communications that took place between Lehman and Deutsche Bank earlier that year and that concerned a claim that would be assigned in part to Defendants pursuant to the Trade.

On July 23, 2018, Deutsche Bank had received a letter from Lehman, as the plan administrator for its own bankruptcy estate, regarding Claim No. 58233, for which Deutsche Bank was the record holder (the “Lehman Letter”).

In the Lehman Letter, Lehman claimed that this claim represented a “guaranty claim,” that there was a corresponding “primary claim” against its estate, and that Lehman had supposedly overpaid on Claim No. 58233 by failing to credit itself for payments already made on that “primary claim.” Lehman then requested repayment from Deutsche Bank of the supposedly overpaid amount.

At the time the Lehman Letter was sent, Deutsche Bank and Lehman were engaged in an unrelated but high stakes dispute concerning hundreds of millions of dollars of Enhanced Capital Advantaged Preferred Securities (“ECAPS”) issued by Lehman’s London affiliate. Deutsche Bank immediately recognized the Lehman Letter for what it was: a transparent, weak, and ultimately unsuccessful attempt to create leverage for use in the ECAPS dispute.

Deutsche Bank promptly set up a phone call with Lehman—along with Deutsche Bank’s and Lehman’s outside counsel—to discuss the Lehman Letter. That phone call took place on August 22, 2018.

During the phone call, Deutsche Bank disputed Lehman’s suggestion that the Claim No. 58233 was a “guaranty claim” capable of being reduced or limited by payments made on a related claim, but also repeatedly asked Lehman to clarify what “primary claim” it had supposedly uncovered that related to Claim No. 58233. In response to this questioning, Lehman admitted it could not identify any such claim.

Also during the phone call, Deutsche Bank revealed to Lehman that Deutsche Bank had sold participations in virtually the entirety of Claim No. 58233 (i.e., a legal right to share in any distributions) to other investors, such that, if Lehman pursued this request for repayment and somehow prevailed, other creditors, rather than Deutsche Bank, would be the ones obligated to make the repayment.

Lehman’s evident disappointment upon hearing this news during the call, and Lehman’s unwillingness to press the matter further after the call, confirmed Deutsche Bank’s conclusion that the Lehman Letter was only sent to manufacture leverage for the ECAPS dispute, and that Lehman did not believe the request for repayment had merit.

Following the August 22, 2018, phone call, Lehman never attempted to pursue the request for repayment, never sent any follow-up communications regarding this request, and never withheld any distributions on the supposedly already overpaid Claim No. 58233 based on the allegations made in the Lehman Letter. In the nearly six years since the August 22, 2018, phone call, Lehman never again communicated with Deutsche Bank about this issue.

Nevertheless, out of an abundance of caution, Deutsche Bank decided to make a full, frank, and immediate disclosure to the defendants of both the Lehman Letter and the August 22, 2018, phone call, and to do so before the parties executed written confirmations for the Trade. Therefore, within minutes of the November 7, 2018, agreement being reached, Deutsche Bank placed another phone call to Finepoint to: (i) bring the Lehman Letter to its attention, and (ii) schedule a conference call the next day between Deutsche Bank, Finepoint, and Deutsche Bank’s outside counsel who had participated on the August 22, 2018, phone call with Lehman, to discuss these issues and answer any questions Finepoint might have.

During the November 8, 2018, conference call between Finepoint, Deutsche Bank, and Deutsche Bank’s outside counsel, Finepoint did not express a belief that the Lehman Letter had any material relevance to the Trade and did not suggest that the disclosure of the Lehman Letter required the parties to revisit or renegotiate any terms discussed on November 7, 2018.

In short, it was readily apparent that none of the parties considered the existence of the Lehman Letter to be material to their Trade.

However, following the execution of the Trade Confirmations, when the time came to draft and execute the assignments of claim, Finepoint began exploiting the existence of the Lehman Letter to try and turn this transaction into an all-upside scenario for Defendants, with Deutsche Bank bearing all the risk.

Specifically, Finepoint seized upon the fact that the Trade Confirmations: (i) included a statement that the “assignment of claim would contain [] customary representations, warranties, covenants, and indemnities, including, for the avoidance of doubt and without limitation, those previously provided by Seller in similar transactions,” and also (ii) attached one such example of a “similar transaction[]” (which actually reflected a “Participation of Claim,” not an assignment of claim), which included a representation, plainly inapposite to this transaction, that the “seller has not received any notice that the Participated Interest is void or voidable or subject to any disallowance, reduction, impairment or objection of any kind. . . .”

Deutsche Bank says it has been damaged by the defendants’ refusal to settle the Trade. Deutsche Bank expended millions of dollars to acquire the claims at issue for the sole purpose of selling those claims to the defendants. Defendants’ breach of the Trade Confirmations left Deutsche Bank holding complex, long-term assets on its books that it had not expected to hold for more than a brief period. As a result, Deutsche Bank has suffered damages including but not limited to outof- pocket costs, administrative costs, lost opportunity costs, interest, and investment losses.

Deutsche Bank argued that these costs and losses, in an amount to be proven at trial, are the direct and proximate result of Defendants’ breaches and are in the millions of dollars. Deutsche Bank claimed it is entitled to be made whole for these losses.

After the dismissal, Deutsche Bank anticipates re-filing its claims in state court. Certain states have “savings statutes” that do not apply if an action is “voluntarily discontinued” by the plaintiff.