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Citigroup Inc. (C - Analyst Report) has agreed to shell out $360 million to the estate of Lehman Brothers brokerage unit, in order to settle a collateral disagreement, according to a Reuters report. Moreover, Citi would forgo its claim on $75 million that was paid to the estate contingently at the onset of the liquidation.

This comes as part of the agreement, which was reached between Citi and the trustee liquidating Lehman Brothers' U.S. brokerage arm. It finally brings an end to the long drawn battle between the two over the $1 billion in collateral that Lehman put in the bank around the time it filed for bankruptcy protection.

The settlement was filed in U.S. Bankruptcy Court in Manhattan late last week and is subject to court approval. The dispute began as the trustee argued that the $1 billion amount was acquired under coercion. According to the trustee, this amount needs to be considered a part of the common asset pool that would be disbursed between the creditors as per the bankruptcy law.

On the other hand, Citi challenged this claim by stating that as per the Bankruptcy Code's "safe harbor" provisions, it is permitted to retain this $1 billion as certain financial transactions are protected from being included in the common asset pool. As a matter of fact, Citi claimed the deposited amount in order to mitigate the losses it supposedly incurred while clearing Lehman's foreign-exchange trades post the latter’s failure.

Notably, Lehman emerged out of bankruptcy in March and is settling its issues as well as paying back to the creditors. Therefore, for Lehman, resolving the dispute is in the best interest of the customers and other creditors.

A long dispute and the related costs are not healthy for the Lehman estate. The brokerage unit of Lehman is currently being wind down. However, a significant number of Lehman customers with hefty assets have been transitioned to Barclays Plc. (BCS - Analyst Report).

For Citi, the settlement lessens its legal hassles and the company remains committed to directing its resources towards growth and efficiency.

Citi currently retains a Zacks #3 Rank, which translates into a short-term Hold rating. Considering the fundamentals, we also maintain a long-term Neutral recommendation on the stock.

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