Bankruptcy

Lehman 2007 Bonuses?

By Adam Levitin

Lehman paid out around $5.7 billion in bonuses in 2007. Are those bonuses safe? Maybe not.

The bonuses might be recoverable as fraudulent transfers---transfers made while insolvent without receiving reasonably equivalent value. (UFTA 5(a)).

Thus, the key question is whether Lehman was solvent when it paid out the bonuses? (The statute of limitations goes back past 2007, fwiw.) On an equity basis, almost assuredly yes, but on a balance sheet basis, that might be a closer call, depending on how things like MBS and CDOs are valued.

If Lehman was not solvent when it paid the bonuses, then I think there's a fraudulent transfer. It's hard to see how a bonus could ever be paid in exchange for reasonably equivalent value, when an employee has already been paid a salary for their efforts. There are various defenses to FTs, but none would seem to apply here at first blush.

Of course, it takes a challenge by a creditor whose claim arose before the bonuses were paid, but per the rule of Moore v. Bay (which I am teaching tomorrow), it only takes one of them, owed a single cent, in order to challenge all the bonuses. The lack of a creditor might protect the bonuses, but as creditors look to carve up what's left of Lehman, the thought of recovering a decent chunk of $5.7 billion is going to look very appealing.

Full post as published by Credit Slips on September 15, 2008 (boomark / email).