Nov. 6 (Bloomberg) -- Lehman Brothers Holdings Inc. lost an appeal of a U.K. court ruling over whether it should be paid before bondholders in two swap agreements, a decision affecting billions of dollars in claims.

An appeals court in London today rejected Lehman’s argument that its claim to collateral takes precedence over noteholders because it’s operating under U.S. bankruptcy protection. The dispute, being considered by U.K. and U.S. courts, affects notes linked to corporate bonds valued at as much as $12.5 billion when Lehman filed for bankruptcy last year.

The case centers on two swap agreements related to the credit-linked notes. At issue was who should get collateral backing the notes, Lehman or noteholders. The transactions, named Dante after the entity that issued the notes, specified that investors have priority in the event of a Lehman default. While a U.K. judge said the contract favors the noteholders, U.S. bankruptcy law typically protects a debtor’s assets.

“We do not anticipate that this English matter will have a large impact on the U.S. bankruptcy case, as it merely reaffirms the original English law decision in July and does not address critical U.S. bankruptcy law issues,” Locke McMurray, managing director and head of derivatives legal at Lehman in New York, said in a statement.

Perpetual, Belmont

Trustees for the noteholders, Perpetual Trustee Co. and Belmont Park Investments Pty Ltd., argued the investors they represent were entitled to collateral securing the notes after Lehman defaulted by filing for bankruptcy. The investors relied on a provision in a swap agreement that placed them ahead of Lehman in claims to the collateral if a default occurred. The contracts were to be governed by English law.

Today’s ruling isn’t a surprise, said Jeremy Jennings- Mares, a partner in the capital markets group at Morrison & Foerster LLP in London.

“It was absolutely crystal clear from documents that’s what the parties agreed to,” he said.

The issue will be considered again in two weeks in U.S. bankruptcy court, McMurray said. Lehman hasn’t decided whether to appeal the U.K. ruling, he said.

Separate Ruling

In a separate ruling today, the appeals court said Lehman’s U.K. administrators can’t go ahead with an expedited plan to distribute as much as $8.9 billion in assets to creditors. PricewaterhouseCoopers, the administrators of Lehman Brothers International Europe, had sought to speed up the process of returning money to some creditors through a so-called scheme of arrangement.

PwC is creating an alternate plan, called the contractual solution, that would ask creditors to sign contracts to agree to a settlement.

When Lehman filed for bankruptcy last year, there were 19 active issuers with about 180 series of notes under Dante with around $12.5 billion outstanding, according to a Lehman court filing in the U.K.

The case is Perpetual Trustee Co. v. BNY Corporate Trustee Services Ltd. and Lehman Brothers Special Financing Ltd., in the Court of Appeal, on appeal from the High Court of Justice, Chancery Division, 09/1794 and 09/1797.

The U.S. case is Lehman Brothers Holdings Inc. v. BNY Corporate Trustee Services Ltd., 09-01242, U.S. Bankruptcy Court, Southern District (Manhattan).

To contact the reporters for this story: Lindsay Fortado in London at lfortado@bloomberg.net; Abigail Moses in London at Amoses5@bloomberg.net

Last Updated: November 6, 2009 10:19 EST