Bloomberg News

Bank of America Says $500 Million Lehman Order Was ‘Error’

July 01, 2011

(Updates with derivatives in second paragraph.)

July 1 (Bloomberg) -- Bank of America Corp., ordered by a judge to return $500 million in deposits to bankrupt Lehman Brothers Holdings Inc. and pay interest, said “the judgment was error” and should have been in the bank’s favor.

U.S. Bankruptcy Judge James Peck signed the judgment in May after a November finding that the biggest U.S. bank took Lehman’s deposits in the 2008 financial crisis to offset unrelated derivative obligations, and must return them. He set interest at 9 percent from November 2008 to December 2010. The judge ignored a “controlling New York statute” when he disregarded covenants in the loan agreement that allowed Bank of America to take the deposits, the bank said in a filing today in U.S. District Court in Manhattan.

“The bank exercised its lawful right,” said Bank of America, based in Charlotte, North Carolina, as it asked a district judge to rule in its favor. “The bankruptcy court imposed an unlawful waiver of rights.”

Banks that previously did business with Lehman, the fourth- largest investment bank before its 2008 failure, are fighting the defunct firm’s efforts to claw back money to pay other creditors. Lehman lost an $11 billion lawsuit against Barclays Plc. JPMorgan Chase & Co. is trying to get an $8.6 billion Lehman suit dismissed.

Lenders ‘Uneasy’

Lehman’s lenders, including Bank of America, became “increasingly uneasy” about the investment bank’s financial health in the summer of 2008, Peck wrote in November. Later that year, Bank of America took collateral posted by Lehman to cover overdrafts, using it to offset amounts owed on unrelated derivatives deals, according to the ruling.

The bank didn’t first ask Peck for relief from the bankruptcy law provision that prevents such seizures, called the automatic stay, Peck said.

Under laws governing derivative transactions, “the setoff was permitted without relief from the automatic stay,” Bank of America wrote in its filing.

Separately, Lehman said today that creditors holding claims of more than $100 billion signed their agreement to its latest liquidation plan, almost three years after it failed.

The appeal is Bank of America NA v. Lehman Brothers Holdings Inc., 11-cv-03958, U.S. District Court, Southern District of New York (Manhattan).

--With assistance from Bob Van Voris in New York. Editors: Charles Carter, Glenn Holdcraft

To contact the reporter on this story: Linda Sandler in New York at lsandler@bloomberg.net

To contact the editor responsible for this story: John Pickering at jpickering@bloomberg.net


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