Bank of America
Corp., a lender to Lehman Brothers
Holdings Inc. in September 2008, must return $500 million of
deposits it seized in violation of bankruptcy law, a judge ruled.
“BOA’s
seizure of the deposited funds was an unauthorized and impermissible setoff in
violation of the automatic stay in LBHI’s bankruptcy case,” U.S. Bankruptcy
Judge James Peck in New
York said yesterday in a written decision.
The
case is one of several involving big banks such as Barclays Plc
and JPMorgan Chase & Co. that Peck is considering as Lehman,
which filed the biggest bankruptcy in U.S. history two years ago, sues to
recover money to pay creditors. The defunct firm has said creditors stand to
get an average of 15.8 cents on the dollar.
“We
are disappointed with the court’s decision, and we continue to believe that our
actions were fully supported by well-established New York law and the unambiguous
language of the Bankruptcy Code,” Shirley Norton, a spokeswoman for Charlotte, North Carolina-based
Bank of America, said in an e- mailed response to questions. “We are considering
our appellate options.”
Lehman’s
lenders, including Bank of America, became “increasingly uneasy” about the
investment bank’s financial health in the summer of 2008, Peck wrote, citing a
report by examiner Anton Valukas into Lehman’s failure. To mitigate its exposure,
Bank of America used its right to set off a secured collateral account posted
by Lehman a few weeks before the firm’s Sept. 15, 2008, bankruptcy filing, Peck
said.
The
account had been created to cover overdrafts. Routine overdrafts by Lehman
“became a major preoccupation” at Bank of America when it discovered a $650
million overnight overdraft in a Lehman account in July 2008, he said.
‘Attention-Grabbing’
“That
unexpected attention-grabbing event, along with deepening apprehension about
the state of the financial markets in general and Lehman in particular, caused
BOA to review its relationship with Lehman and take action,” the judge said.
The result was a newly funded cash collateral account subject to newly negotiated
terms, he said.
On
Nov. 10, 2008, Bank of America took the deposited funds “against amounts allegedly
owed by LBHI” on unrelated derivatives deals, according to the ruling. The bank
didn’t first seek relief from the bankruptcy law provision that prevents such
seizures, called the automatic stay, Peck said.
Peck
ruled that the final security agreement drawn up by Bank of America related
only to intraday overdrafts and shouldn’t have been used to offset derivative
transactions. The bank’s actions in setting off the funds “did not fall within
any applicable exemption to the automatic stay,” he said.
The
bankruptcy case is In re Lehman Brothers Holdings Inc., 08-13555, U.S.
Bankruptcy Court, Southern District of New York (Manhattan). The lawsuit is Bank of America NA
v. Lehman Brothers Holdings Inc., 08-01753, U.S. Bankruptcy Court, Southern
District of New York (Manhattan).
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