Compass Lexecon President Daniel R. Fischel and Professor Bradford Cornell Testify at Trial
After Lehman Brothers Holdings Inc., (“Lehman”) filed for bankruptcy, Trustees for 244 RMBS Trusts filed claims arising out of alleged breaches of representations and warranties on mortgages conveyed to the Trusts. In 2012, the parties agreed to a $5 billion reserve for the RMBS Trusts’ claims. Lehman and the Trustees agreed to resolve the dispute through a claims estimation proceeding under which the RMBS Trusts’ allowed claim in the bankruptcy proceeding would be set after a trial presided over by Judge Shelley C. Chapman of United States Bankruptcy Court. Lehman agreed to propose that the allowed claim be set at approximately $2.4 billion. The Trustees argued in multiple expert reports and court filings that the allowed claim should be set at a much higher value, approximately $11.6 billion.
Counsel for Lehman retained Compass Lexecon President, Professor Daniel R. Fischel and Professor Bradford Cornell. Both filed expert reports and testified at trial. At the conclusion of the trial, Judge Chapman ruled for Lehman agreeing that the allowed claim should be $2.4 billion and rejecting the Trustees’ proposed allowed claim.
At trial, Professor Fischel identified a set of comparable settlements and opined that, taking into account differences between the comparable settlements and the case here, Lehman’s proposed allowed claim of $2.4 billion was at the higher end of the range of recent settlements of comparable claims, while the Trustees’ proposed allowed claim was far outside that range. Professor Fischel also described the support of large investors in the RMBS Trusts (the “Institutional Investors”) for an earlier settlement offer from Lehman of $2.44 billion and opined that this supported estimating the allowed claim at $2.4 billion.
Professor Cornell worked with Lehman and its counsel to design scenarios that showed how often the Trustees would have to succeed on their loan level claims to achieve an aggregate allowed claim of $2.4 billion. The scenarios analyzed by Professor Cornell made different assumptions about whether the Trustees would prevail on contested issues that affected a large number of loans.
In rejecting the Trustees’ proposed allowed claim, Judge Chapman found that she had not been presented with any methodology which would enable her to estimate the allowed claim on a loan by loan basis and therefore had to look to comparable settlements and the actions of the Institutional Investors to determine the allowed claim. As a result, Judge Chapman relied upon and extensively discussed Professor Fischel’s testimony. She found that Professor Fischel demonstrated that Lehman’s proposed allowed claim of $2.4 billion was well within the range of comparable settlements and the Trustees proposed allowed claim was far outside that range. She also agreed with Professor Fischel that the Institutional Investors’ willingness to settle the RMBS Trusts’ claims for $2.44 billion was entitled to substantial weight due to their large holdings in the Trusts, their sophistication and their experience in other RMBS settlements. Judge Chapman rejected arguments by the Trustees and their experts that the settlements identified by Professor Fischel were not comparable and that the Institutional Investors’ interests were not aligned with other certificateholders in the RMBS Trusts.
Lehman Brothers was successfully represented by Todd G. Cosenza, Paul V. Shalhoub, Joseph G. Davis and Benjamin P. McCallen of Willkie Farr & Gallagher LLP, William Olshan and Matthew Cantor of Lehman Brothers Holdings and Michael A. Rollin and Maritza Dominguez Braswell of Rollin Braswell Fisher LLC. Professors Fischel and Cornell were supported by a team at Compass Lexecon led by Jerry Lumer that included Neal Lenhoff, Elizabeth Wall, Kevin Hartt, Jonathan Williams, Ron Laschever, Donald Hong and Erika Morris in Compass Lexecon’s Chicago office.