Court dismisses most of American Home's repurchase agreement lawsuit against Lehman

By Caroline Salls

Pittsburgh, May 23 - A federal judge has thrown out a majority of American Home Mortgage Investment Corp.'s lawsuit against Lehman Brothers, Inc. and Lehman Commercial Paper Inc. that was based on allegations that Lehman took advantage of American Home's liquidity problems "in a scheme to foreclose on [valuable notes] for a quick profit."

According to judge Christopher S. Sontchi's opinion filed Thursday with the U.S. Bankruptcy Court for the District of Delaware, the transaction in question constitutes a repurchase agreement that is covered under the safe harbor provisions of the bankruptcy code.

As a result, Sontchi said Lehman did not violate the automatic stay in American Home's bankruptcy case when it exercised its rights under the repurchase agreement.

As previously reported, American Home's complaint alleged that Lehman had "an intimate understanding of the private-label notes" it sold to American Home shortly before the latter filed for Chapter 11 bankruptcy.

In taking advantage of American Home's liquidity problems, the complaint alleged that Lehman hid behind the temporarily dysfunctional market for the notes it bought with Lehman financing, and misrepresented that the market value for the financed notes suffered a steep decline that required American Home to provide millions of dollars in alleged margin deficits to keep Lehman from foreclosing.

American Home also alleged that Lehman knew that the market value of the subordinated notes had not changed since the margin call days before, and Lehman made no effort to obtain bids from a "generally recognized source" to value the notes.

American Home said one of the most significant trades had just occurred when Lehman sold the company the notes at 97% of their face value.

As a result, American Home said liquidity problems prevented it from satisfying Lehman's July 26 margin call.

American Home filed for bankruptcy protection, and Lehman claimed that its unmet margin call constituted an event of default, warranting termination of American Home's financing agreement and Lehman's foreclosure on the notes.

Lawsuit claims

Specifically, American Home was asking the court to rule that:

• Lehman breached the master repurchase agreement by fabricating values for the notes and representing them as market value determinations, asserting the existence of a margin deficit based on false pretenses, claiming the existence of a pre-bankruptcy event of default when none existed and not acting reasonably or in good faith;

• Lehman's termination and liquidation of the subordinated notes financing transaction violated the automatic stay imposed under section 362 of the Bankruptcy Code;

• Lehman has wrongfully taken possession of $84.13 million of subordinated notes provided as collateral under the master repurchase agreement;

• Lehman is not entitled to the securities contract safe harbor of section 555 of the Bankruptcy Code because the Lehman entity that was a counterparty to the purported repurchase transaction with American Home is not a stockbroker, financial institution, financial participant, or securities clearing agency; and

• Lehman must turnover either the subordinated notes or the debt owed by Lehman for damages arising from Lehman's termination of the master repurchase agreement and subsequent foreclosure on or liquidation of the subordinated notes.

However, Lehman asked the court to dismiss the claims for breach of contract, turnover of property of the estate, conversion and unjust enrichment.

In addition to dismissing those claims, Sontchi also granted Lehman's request to dismiss four of five claims for declaratory judgment.

American Home, a Melville, N.Y.-based real estate investment trust focused on residential mortgage loans, filed for bankruptcy on Aug. 6. Its Chapter 11 case number is 07-11047.

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