In Re: Lehman Brothers Holdings Inc.

Background

Joseph Waske, appearing without a lawyer, owned interests in securities issued by Lehman Brothers Holdings Capital Trusts III, IV, V, and VI. The trusts held subordinated debt issued by Lehman Brothers Holdings Inc. (LBHI), and the trusts were to make payments to security holders only if LBHI paid the underlying debt.

LBHI filed for bankruptcy in September 2008. The bankruptcy court set September 22, 2009, as the deadline for filing proofs of claim. The indenture trustees filed timely claims totaling more than one billion dollars on behalf of the trusts and security holders. Those claims were classified under Classes 10A, 10B, and 10C of the bankruptcy plan, which the bankruptcy court confirmed in December 2011. The confirmation order also barred filing or amending proofs of claim without court authority.

Waske argued that language in the trusts’ prospectuses gave the trust securities payment rights equal to certain preferred equity of LBHI affiliates. He contended that the trustees had failed to enforce the relevant guarantees and that the trust securities should be moved from Class 10B to Class 4, which he alleged would give them higher priority.

Bankruptcy-court motions

Waske filed three motions:

The bankruptcy court held one hearing addressing all three motions and denied each motion, as well as relief requested by parties who joined Waske’s requests. Waske appealed each ruling and also challenged how the hearing was conducted.

Motion to Reclassify

The district court held that the bankruptcy court correctly concluded that Waske lacked standing to modify the confirmed plan. Although Waske called his request a motion to reclassify, the district court determined that the requested change would substantively alter established payment rights. The court therefore treated the request under Section 1127(b) of the Bankruptcy Code, which provides the method for modifying a confirmed reorganization plan.

Under that provision, only a plan proponent or the reorganized debtor may seek modification of a confirmed plan, with court approval and when circumstances warrant. Waske had not participated in forming the plan, was not a plan proponent, and identified no evidence giving him authority to seek the proposed modification. The district court also agreed that the proposed change, made nearly ten years after plan confirmation, would upset creditors’ expectations.

The district court separately agreed that the request was untimely. The indenture trustees had filed timely proofs of claim, and the bankruptcy court had already adjudicated those claims. Labeling the request a reclassification rather than a late claim did not avoid the bankruptcy case’s claim deadline because the substance of the requested relief would dramatically change the claim’s status. The district court concluded that the bankruptcy court properly denied the untimely request.

Motion to Reserve

The district court upheld the denial of the motion seeking a $71 million reserve. The plan allowed funds to be set aside for disputed claims that might later become allowed claims. Because the motion to reclassify was denied, there were no disputed claims requiring a reserve under that provision. The district court found no error in denying the motion to reserve.

Motion for Summary Judgment

Waske argued that the bankruptcy court should grant his motions because more than 21 days had passed after service of the motion to reserve. The district court rejected that argument because the bankruptcy case was governed by a case-management order, rather than the ordinary deadlines Waske relied on under the Federal Rules of Civil Procedure.

The case-management order allowed LBHI to file objections seven days before the hearing or by another deadline set by the court. LBHI filed an objection in March 2020 and another by the May 18, 2020 deadline set for the June hearing. The district court held that both objections were timely and that the bankruptcy court properly considered them and denied the motion for summary judgment. The district court added that, even if an objection had been late, the bankruptcy court had discretion to consider it.

Hearing, due process, and bias

Waske argued that he lacked adequate notice because the bankruptcy court heard the Motion to Reclassify even though that motion was not listed in the original hearing notice. He also objected to the court’s refusal to hear additional argument on the “Neuberger Berman” issue and alleged that the bankruptcy judge was biased, including because of supposed communications with the Plan Administrator.

The district court rejected these arguments. It held that bankruptcy courts have broad discretion to manage their dockets and determine how hearings will proceed. The three motions were related and sought essentially the same relief, and Waske had notice that the substantive issues would be discussed. He had also been able to present arguments in written filings and at the hearing, which satisfied due process.

The district court found no evidence of actual improper communications or judicial bias. It concluded that the record showed the bankruptcy court heard the motions together for judicial efficiency, not to assist the Plan Administrator. The district court also held that adverse rulings and disagreement with Waske’s legal position did not establish bias. It denied Waske’s request to reverse the decision and send the matter to a different judge.

Disposition

The district court affirmed the bankruptcy court’s decision and denied Waske’s appeal in its entirety. The Clerk of Court was directed to close the case, and LBHI was directed to serve Waske with a copy of the order and file proof of service.