Key Creditors Derail a Drexel Settlement

After weeks of intensive negotiations, a key creditors committee in the Drexel Burnham Lambert bankruptcy proceedings Thursday rejected a settlement that would have resolved the bankruptcy case.

Marc Kirschner, the lawyer for creditors of Drexel Burnham Lambert Group, parent company of the collapsed brokerage firm, said the debtors committee objects to the way the firm’s assets would be divided. It also opposes settlement provisions that would preserve the jobs of some Drexel executives and protect them from personal liability for past actions.

In a hearing Thursday, U.S. District Court Judge Milton Pollack noted that there was broad agreement on the settlement plan among other groups of creditors and Drexel itself. He accused the recalcitrant committee of “trading too hard.”

Pollack said he would continue to press for a settlement rather than immediately convert the bankruptcy proceedings to a liquidation, as he had threatened. The judge also said he might force a tentative settlement on all creditors.

Lawyers for Drexel and the main groups of creditors reached a tentative settlement in February designed to end the bankruptcy proceedings and divide up Drexel’s roughly $2.8 billion in assets among thousands of creditors.

Claims against the company, including many lawsuits for alleged securities fraud, total more than $20 billion. The firm, which dominated the junk bond market, filed for Chapter 11 bankruptcy protection in February, 1990, following the prosecution of Drexel and its former junk bond chief, Michael Milken.

Lawyers for Drexel and for creditors of Drexel subsidiaries were shocked that the parent company’s creditors committee rejected the settlement. They said they had been led to believe until minutes before the court hearing that the committee would go along with it.