A U.S. bankruptcy judge on Wednesday approved a settlement between Lehman Brothers Holdings Inc. and two parties over derivatives deals that had divided courts on both sides of the Atlantic.

Judge James Peck of U.S. Bankruptcy Court in Manhattan signed off on Lehman's pact with a Bank of New York Mellon Corp. unit and Perpetual Trustee Co. of Australia over the "flip" clauses in credit derivatives contracts that would have allowed those companies to jump ahead of Lehman and grab the assets backing the derivatives in those deals.

Peck earlier this year ruled that such a flip provision violated U.S. bankruptcy law.

Lehman lawyers said they had satisfied the minor objections to the agreement, which calls for Perpetual to redeem the notes and the collateral backing those notes to be sold. Proceeds from the sale will be distributed based on the wording of a settlement payment deed, and Lehman said that will result in a "substantial payment" to the estate of its Lehman Brothers Special Financing Unit.

Peck's previous decision on flips, which he himself acknowledged "may be a controversial one," upset expectations in the market for collateralized debt obligations and other structured-finance deals, forcing investors to forgo billions of dollars in collateral. It also conflicted with an English High Court ruling last year that put the investors ahead of Lehman in the order to be repaid.

In September, U.S. District Court Judge Colleen McMahon, citing the potentially "game-changing effect" of Peck's ruling on securitization deals, said she would hear Bank of New York Mellon's appeal of Peck's decision.

But under the settlement the U.S. and U.K lawsuits involving Lehman, Bank of New York Mellon and Perpetual will be dismissed and the parties will release their claims against each other. Lehman will pay 280,320 pounds ($437,797) to cover Perpetual's costs in the English case.

Lehman's CDO dispute with Bank of New York Mellon and Perpetual wasn't its only one. Late last month, Lehman filed a lawsuit against Bank of America Corp. and a Barclays PLC arm over similar collateralized debt obligations. In that filing, in which Lehman is seeking $150 million, Lehman cites Peck's decision as one of its arguments.

Derivatives represent a significant source of cash for Lehman creditors still waiting to get paid more than two years after the investment bank filed for bankruptcy protection on Sept. 15, 2008. At the time of its collapse, Lehman was a party to or had guaranteed more than 10,000 derivatives contracts representing more than 1.7 million transactions, according to court documents. The team working on unwinding the deals has so far recovered billions in cash for the benefit of creditors.

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