Judge narrows Lehman's $8.6 billion lawsuit vs. JPMorgan

NEW YORK (Reuters)—A federal judge has narrowed Lehman Brothers Holdings Inc.'s $8.6 billion lawsuit against JPMorgan Chase & Co., potentially reducing how much creditors of what was once the fourth-largest U.S. investment bank may ultimately recover.

Peck cited "safe harbor" rules designed to protect healthier banks such as JPMorgan in their dealings with weaker banks.

"These are systemically significant transactions between sophisticated financial players at a time of financial distress in the markets—in other words, the precise setting for which the safe harbors were intended," Judge Peck wrote on Thursday in a 92-page decision.

Judge Peck let stand other Lehman claims, saying safe harbors do not let "systemically important" banks such as JPMorgan, the largest U.S. bank, act in a "commercially unreasonable" manner. He said Lehman may pursue claims involving intentional misconduct, which are not otherwise covered by safe harbors.

Lehman filed for Chapter 11 protection on Sept. 15, 2008, in what was a primary driver of the global financial crisis and remains by far the largest U.S. bankruptcy.

"JPMorgan grabbed assets for itself at a critical time in its banking relationship with Lehman," Judge Peck wrote. "The issues presented are especially difficult ones that one day may help to define what constitutes acceptable conduct by major financial institutions during times of crisis."

Kimberly MacLeod, a Lehman spokeswoman, declined to comment. JPMorgan spokeswoman Jennifer Zuccarelli was not immediately available for comment. Both companies are based in New York.

Lehman accused JPMorgan of taking advantage of inside details it had learned as a clearing bank to extract desperately needed assets in the last few days prior to, and thus hastening, the bankruptcy.

JPMorgan countersued, saying it feared it might never be repaid after lending Lehman's brokerage more than $70 billion around the time of the bankruptcy, and getting stuck with collateral that Lehman's own employees called "toxic waste."

In September 2011, JPMorgan sought to move the Lehman case to federal district court, saying it involved issues that Judge Peck lacks jurisdiction to handle. U.S. District Judge Richard Sullivan in Manhattan has yet to rule on JPMorgan's request.

Lehman emerged from Chapter 11 last month. On April 11, it said it planned to make an initial $22.5 billion distribution to creditors this week.

The case is Lehman Brothers Holdings Inc. et al. v. JPMorgan Chase Bank N.A., U.S. Bankruptcy Court, Southern District of New York, No. 10-ap-03266.