In a turn of events that may be a surprise to none, the administration proceedings for Lehman Brothers International, Europe – or LBIE – have encountered more stumbling blocks to further delay the distribution of assets to LBIE’s prime brokerage customers.

As discussed in our August article ( The Hedge Fund Journal , Issue 49) Wrapping up Lehman: the implications of PwC’s scheme of arrangement, LBIE’s administrators applied to the High Court in London for a ruling regarding the propriety of a scheme of arrangement. This scheme was designed to provide a cohesive, streamlined process for returning so-called trust property held by LBIE to certain of its creditors. The trust property in this case refers to segregated assets, derived assets or recovered assets held in custody that have been trapped at LBIE since 15th September 2008. A public hearing on the scheme was held before Mr Justice Blackburne at the Royal Courts of Justice in London on 29th and 30th July 2009.

On 21st August, Mr Justice Blackburne rendered judgment: the court viewed the primary question before it as whether it has “jurisdiction under Part 26 to sanction a scheme, so that it becomes binding on dissentients, which has as its purpose the distribution of property held by a company on trust”. Mr Justice Blackburne ruled that the court does not, in fact, have jurisdiction to approve a scheme that would bind dissenters whose property was held or controlled by LBIE in trust for its clients. He reasoned that the determination of the contractual terms that govern LBIE’s relationship with its clients, and the net contractual positions and attendant security rights, are all matters between LBIE and its clients directly and thus are matters over which the High Court has no jurisdiction.

“In my judgment, this case provides no support for the proposition that a scheme designed to deal with (and, so far as necessary, alter) the property rights of persons who happen also to be creditors of the scheme company constitutes a compromise or arrangement within the scope of Part 26 … property rights of LBIE’s clients – their asset claims in the terminology of the scheme – are enjoyed quite independently of any claims which those clients have against LBIE arising out of LBIE’s defaults.”

Steven Pearson, one of LBIE’s administrators, immediately reacted with disappointment. “The proposed scheme sought to significantly reduce the period clients have to wait before they get their assets back,” he said. “This judgment is disappointing as it could create further delay for many of LBIE’s clients.” Shortly thereafter, on 25th August, the administrators indicated their plans to move forward by appealing the judgment of the High Court and simultaneously re-working the scheme in a way that might obtain High Court approval while maintaining the administrators’ goal of a fair and expeditious return of client assets.