(Updates with maximum loss in sixth paragraph.)

June 7 (Bloomberg) -- Barclays Plc, which bought Lehman Brothers Holdings Inc.’s North American business, must return $2 billion in margin assets to the trustee liquidating the remains of Lehman’s brokerage and pay about $270 million in interest, a bankruptcy judge ruled.

U.S. Bankruptcy Judge James Peck in New York yesterday said Barclays must pay the trustee 5 percent interest on the assets from September 2008 until he signs his final order on the case. Barclays will appeal, the bank said in an e-mailed statement.

The amount Barclays must return will be offset by $1.1 billion in assets that the two parties previously agreed should go to the U.K. bank, which bought Lehman’s businesses in the 2008 credit crisis. That cuts its cost to about $1.2 billion, including interest. However, Barclays lost its bid for $1.9 billion in margin to offset liabilities it took on with some of the brokerage’s trading positions.

Peck’s “ruling brings finality to this issue by confirming that the $4 billion in Lehman cash and other margin assets belongs to the Trustee,” William Maguire, a lawyer for brokerage trustee James Giddens, said in an e-mail. The judge said he would publish his ruling later.

Barclays fell 1.45 pence, or 0.6 percent, to 262.55 pence in London trading today. The shares earlier dropped as much as 1.3 percent. They are little changed this year.

Maximum Loss

Barclays’s “maximum possible loss” on the litigation is 2.6 billion pounds ($4.3 billion), according to the bank’s 2010 annual report. The number represents Lehman assets acquired and not received, it said. Against that, Barclays made a loss provision of about 600 million pounds, saying it was satisfied with the provision as the maximum loss is “not considered probable.”

The company’s balance sheet reflects 2 billion pounds of the 2.6 billion pounds in undelivered assets, it said.

Peck in court yesterday affirmed a February ruling, saying its meaning had been clear. The continuing dispute between Barclays and the brokerage over $4 billion in so-called margin assets used to back trades arose partly from Barclays’s effort to change its argument by claiming it was entitled to noncash margin, he said.

2010 Trial

The dispute, arising from Barclays’s September 2008 purchase of bankrupt Lehman’s businesses and subsequent profit on them, led to a bankruptcy court trial in 2010 with more than 30 days of testimony. The trial pitted the third-biggest U.K. bank against two defunct parts of what was once the fourth- largest U.S. investment bank.

Barclays, based in London, and the Lehman brokerage continued their quarrel after Peck’s February ruling didn’t specify how they must divide some components of the assets, held to back trades taken over by Barclays with the purchase.

Negotiations reached “the end of the road” May 9, Peck was told by David Boies, Barclays’s lawyer, and Maguire.

As part of his demands, Giddens wanted Barclays to return about $2 billion in assets held to back trades and pay interest at 9 percent. The claim for return of assets was “consistent” with Peck’s February ruling that Barclays must pay or return any cash it had taken in the deal, the judge said at a May 9 hearing.

Liquidation Threat

Conversely, Barclays claimed about $1.9 billion in margin assets to offset Lehman liabilities and losses it took on at Options Clearing Corp. The derivatives-clearing organization threatened to liquidate Lehman’s trading positions in the 2008 financial crisis, Barclays said in court.

Barclays assumed $1.1 billion in liabilities at the Clearing Corp. and lost $730 million on options in the brokerage’s proprietary accounts, Barclays lawyer Jonathan Schiller told Peck in a letter filed in court on June 3.

After Peck’s February ruling, Barclays argued that it was entitled to noncash margin that it needed to support trading operations it acquired from Lehman.

The trustee was holding about $1 billion in noncash margin, consisting of government securities with maturities of three months to more than 15 years, Schiller wrote to Peck.

About one-fourth of another pool of $879 million in margin assets wasn’t cash, he said. That pool of margin was in the hands of third-party brokers or Lehman affiliates, he said.

“Why didn’t this come up at trial?” Peck asked Boies on May 9. “It was never presented to me that some of the margin was invested in long-term government securities.”

‘Basic Argument’

Boies said the bank believed “the basic argument” at the trial was over whether Barclays should return only cash and cash equivalents, not longer-term government securities.

Maguire said the trustee, who fought for all the margin during the trial, still maintained that Barclays wasn’t entitled to any government securities, whether they matured in months “or in 90 years.”

Demands were higher at the trial, when the New York-based Lehman parent company and the brokerage tried to recoup profit Barclays had made on the purchase, and Barclays said it was still owed $3 billion on the deal. The brokerage trustee demanded about $7 billion from Barclays, and the Lehman parent sought an alleged $11 billion “windfall” it said Barclays made on the purchase.

Claim Denied

Peck denied the Lehman parent’s claim and reduced the trustee’s right to assets. The February ruling left Barclays and the brokerage wrangling over the $4 billion in margin assets.

“We are pleased with the court’s February ruling that upheld the sale of Lehman Brothers’ North American business,” said Barclays spokesman Michael O’Looney, in an e-mail. “We are also pleased that the trustee has agreed to transfer $1.1 billion in trading assets to Barclays. However, there are aspects of the ruling with which we disagree and which we will appeal.”

Giddens said, “We were obligated to take this matter to court to protect LBI’s public customers. Our efforts have been vindicated and customers will benefit.” LBI is Lehman Brothers Inc., the remnants of the brokerage.

Lehman wrote to Peck on April 29, saying it was still claiming $500 million from Barclays for allegedly failing to pay all of the bonuses the U.K. bank agreed to when it bought the defunct investment firm’s business. Barclays has said it paid all the promised bonuses and other compensation.

The main case is In re Lehman Brothers Holdings Inc., 08- 13555, U.S. Bankruptcy Court, Southern District of New York (Manhattan).

--With assistance from Howard Mustoe in London. Editors: John Pickering, Charles Carter

To contact the reporter on this story: Linda Sandler in New York at [email protected]

To contact the editor responsible for this story: John Pickering at [email protected]