Lehman Brothers Holdings Inc
As part of the settlement, the banks have pledged support for Lehman's $65 billion bankruptcy exit plan, according to court papers filed late on Wednesday in U.S. Bankruptcy Court in Manhattan.
Bank of America will reduce its derivatives claims against Lehman entities by $4.5 billion, Lehman said. Merrill Lynch, a Bank of America subsidiary since 2008, will lower its claims by an additional $3 billion, court papers show.
Bank of America will also withdraw an appeal of a bankruptcy court's ruling rejecting its $500 million setoff claim against Lehman, and will return about 71 percent of that total -- $356 million -- to the Lehman estate, according to the filing.
The deal still requires bankruptcy court approval, and is set for hearing on October 19.
A Lehman spokeswoman did not provide an immediate comment Wednesday night.
Bank of America lauded the reasonable resolution, saying in a statement that there are compelling reasons the deal should be approved by the court.
The settlement is part of a larger effort by Lehman to resolve complex claims from big banks that were counterparties in various derivatives transactions totaling more than $20 billion.
Lehman in May unveiled a framework for settling those disputes, and so far, eight of 13 banks have agreed to abide by the framework and pledge support for Lehman's plan, court papers show.
PATH TOWARD CONSENSUS
If approved, the pledge of support from Bank of America and Merrill would extend even further the list of creditors that have agreed to get behind Lehman's $65 billion creditor payback plan.
Touted by Lehman as a compromise that would pay creditors about 20 cents on the dollar, the plan was unveiled in June after earlier proposals met with harsh opposition from creditors.
Two creditor groups holding a combined $100 billion in claims went as far as to propose competing plans in efforts to wrest control of the bankruptcy away from Lehman.
But those groups -- bondholders led by hedge fund Paulson & Co, and derivatives creditors which include Goldman Sachs Group Inc
Asian affiliates holding about $20 billion in claims have also pledged support, and Lehman announced earlier in September it was close to a similar deal with its European affiliate, Lehman Brothers Inc Europe.
Creditors are set to vote on Lehman's plan November 4. If approved, it would go before a bankruptcy court for confirmation in December. Lehman could conceivably end its bankruptcy in early 2012.
The company filed the biggest bankruptcy in U.S. history in September of 2008, listing $639 billion in assets.
Separately on Wednesday, Lehman filed court papers calling for its claims against its brokerage, Lehman Brothers Inc, to be reclassified as customer claims.
Lehman said James Giddens, the trustee liquidating the brokerage, wrongly denied the claims customer status, a higher-priority creditor status more likely to receive full recovery.
Lehman said the parties are continuing to work to resolve the dispute consensually.
The court filing did not reveal the amount of the claims, and an attorney for Lehman declined to comment. However, Giddens said in an August report that the brokerage has denied $11.4 billion in customer claims from Lehman.
The trustee is locked in a similar dispute with Lehman Brothers Inc Europe, which has asserted that $8.9 billion in claims were wrongly denied customer status. The disputes are significant because giving such large claims customer status could hamper the trustee's ability to pay back billions of dollars in claims from other customers.
The bankruptcy case is In re Lehman Brothers Holdings Inc, U.S. Bankruptcy Court, Southern District of New York, No. 08-13555.
(Reporting by Nick Brown; Editing by Richard Chang)