$2-Billion Deal Could Settle Drexel Claims : Bankruptcy: The plan, less than the $20 billion sought by creditors, would also allow a smaller-sized firm to resume business.
Creditors of Drexel Burnham Lambert filed an agreement in principle with a federal judge Tuesday under which most of more than $20 billion in claims against the firm will be dropped.
The accord, which faces some hurdles, would end the bankruptcy proceedings that the once-powerful Wall Street firm collapsed into a year ago. The firm is expected to emerge from the Chapter 11 proceedings as a going concern, although on a vastly reduced scale from what it was in the 1980s. Sources said the firm also is planning to change its name.
Details of the accord weren’t released late yesterday. It is expected that creditors will divide up slightly more than $2 billion of Drexel’s $2.8 billion in assets. Much of the remainder would form the assets of the post-bankruptcy company.
The agreement was being reviewed by U.S. District Judge Milton Pollack, who brought about the accord by threatening to order the immediate liquidation of the firm. Bankruptcy lawyers said Tuesday that such a move would have meant that most creditors would have received far less than they would under the settlement.
Lawyers involved in the case cautioned that the agreement merely specifies how much money will be awarded to each of several classes of creditors. Securities and Exchange Commission lawyer Richard Kirby said there still must be intensive negotiations within each class on how its share of the money will be divided.
There are so-called fixed creditors, who are owed specific amounts by Drexel, and creditors whose claims are for civil damages against the firm in lawsuits. The latter category includes the Federal Deposit Insurance Corp., which accused Drexel of contributing to the failure of many savings and loans, and firms and individuals that filed about 13,000 lawsuits against Drexel.
The Internal Revenue Service, which recently filed a $5.6-billion claim against Drexel, isn’t part of the accord. Lawyers said the agreement is based on the assumption that the IRS will settle for a much smaller amount. They said the agreement could be jeopardized if the IRS isn’t willing to go along.
Drexel officials have long been eager to ensure that the firm is allowed to survive in some form after the bankruptcy proceedings. It is extremely unlikely that it will try to resume operations as a licensed broker-dealer of securities. But remaining in business and managing its remaining assets--and eventually perhaps expanding--is considered the best means of assuring that former Drexel employees may someday receive something for their Drexel stock.
