In re American Home Mortg. Holdings, Inc.

Decision Date23 May 2008
Docket NumberBankruptcy No. 07-11047 (CSS).,Adversary No. 07-51739 (CSS).
PartiesIn re AMERICAN HOME MORTGAGE, HOLDINGS, INC., a Delaware Corporation, et al., Debtors. American Home Mortgage Investment Corp., Plaintiff, v. Lehman Brothers Inc., and Lehman Commercial Paper Inc., Defendants.
CourtU.S. Bankruptcy Court — District of Delaware

William P. Bowden, Amanda M. Winfree, Benjamin W. Keenan, Ashby & Geddes, PA., Wilmington, DE, Robert J. Rosenberg, (Argued), Noreen A. Kelly-Najah, George Royle, Michael J. Riela, Latham & Watkins, LLP, New York, NY, for Defendants Lehman Brothers, Inc. and Lehman Commercial Paper Inc.

John T. Dorsey, Erin D. Edwards, Young, Conaway, Stargatt Taylor, LLP, Wilmington, DE, Susheel Kirpalani, James C. Tecce, (Argued), Harrison Denman, Quinn, Emanuel, Urquhart, Oliver & Hedges, LLP, New York, NY, Counsel to American Home Mortgage Investment Corp.

OPINION1

CHRISTOPHER S. SONTCHI, Bankruptcy Judge.

INTRODUCTION

Before the Court is a motion to dismiss the bulk of the complaint filed by American Home Mortgage Investment Corp. against Lehman Brothers Inc. and Lehman Commercial Paper Inc. The complaint contains five counts, including five requests for declaratory judgment contained in the fifth count. The first three requests for declaratory judgment center on whether the "safe harbor" protections of section 559 and 555 of the Bankruptcy Code apply to the transaction in question. The Court finds that the transaction in question is a "repurchase agreement" under the statute and the safe harbor provisions of sections 559 and 555 of the Bankruptcy Code are applicable.

Consequently, the Court further finds that the relevant defendant did not violate the automatic stay imposed by section 362(a) of the Bankruptcy Code when it exercised its rights under an ipso facto clause. Furthermore, the Court finds that the relevant defendant was not constrained by Article 9 of the Uniform Commercial Code when it exercised its rights under the ipso facto clause. Thus, the Court will dismiss four of the five requests for declaratory judgment contained in the fifth count.2

Finally, the Court will dismiss Counts I through IV of the complaint. For the reasons set forth below, each of these counts fails to state a claim upon which relief can be granted.3

JURISDICTION

This Court has jurisdiction over this matter pursuant to 28 U.S.C. § 1334. Venue of this proceeding is proper in this district pursuant to 28 U.S.C. §§ 1408 and 1409. This is a core proceeding pursuant to 28 U.S.C. §§ 157(b)(2)(A), (E), (G) and (O).

STATEMENT OF FACTS
I. Procedural Background

American Home Mortgage Investment Corp. ("AHMIC" or "Plaintiff'), a debtor in possession in the above-captioned chapter 11 cases, commenced this adversary proceeding by filing a complaint ("Complaint") against Lehman Brothers Inc. and Lehman Commercial Paper Inc. (collectively "Lehman" or "Defendants").4 In the Complaint, AHMIC puts forward five counts: breach of contract, turnover of property of the estate, conversion, unjust enrichment, and declaratory judgment.

In response to the Complaint, the Defendants filed a motion to dismiss the bulk of the Complaint and a supporting brief (collectively, "Motion to Dismiss").5 The Defendants request that the Court dismiss the Plaintiffs claims for breach of contract, turnover of property of the estate, conversion, and unjust enrichment. The Defendants also request that the Court dismiss the first four claims for declaratory judgment contained in the fifth count.

The Plaintiff filed an answering brief in opposition to the Motion to Dismiss ("Plaintiffs Answer").6 The Defendants subsequently filed a response ("Defendants' Response").7 The Court heard oral argument on March 13, 2008. This matter is now ripe for decision.

II. Facts8

The facts relevant to this dispute center on a structured finance transaction involving AHMIC, Lehman Brothers Inc. ("Lehman Brothers") and Lehman Commercial Paper Inc.

AHMIC was engaged in the business of originating residential mortgage loans.9 To fund its business of originating loans, AHMIC sold mortgage loans to special-purpose entities ("SPE's").10 The SPE's issued commercial paper and subordinated debt to raise funds to purchase the mortgage loans from AHMIC.11 One such SPE, Broadhollow Funding LLC ("Broadhollow"), issued commercial paper in the form of secured liquidity notes and subordinated notes.12 Both the commercial paper and the subordinated notes were secured by liens on the mortgage loans it purchased from AHMIC.13 Relevant to this dispute are the subordinated notes known as Series 2004-A Notes and Series 2005-A Notes.14 Standard & Poor's rated the Subordinated Notes "BBB," and Moody's rated the Subordinated Notes "Baa2."15

In June, 2005, AHMIC purchased the Series 2005-A Notes from Lehman in the aggregate principal face amount of $53,125,000. In July, 2007, AHMIC purchased the Series 2004-A Notes in the aggregate principal face amount of $31,000,000.16 Lehman agreed to finance both note purchases under the parties' pre-existing master repurchase agreement ("MRA").17

Later, in July, 2007, AHMIC and Lehman entered into a transaction under the MRA (the "Subordinated Notes Transaction"). Under the Subordinated Notes Transaction, AHMIC sold the Series 2004-A Notes and Series 2005-A Notes (collectively "Subordinated Notes" or "Notes") to Lehman pursuant to the MRA.18 Under the terms of the MRA, AHMIC was the "Seller" of the Subordinated Notes and one or more entities comprising or affiliated with Lehman was the "Buyer" of the Notes.19

After the initial sale of the Subordinated Notes, the MRA entitled Lehman to make margin calls when the market value of the Notes, as determined by a "generally recognized source," fell below a certain amount.20 If Lehman made a margin call, AHMIC was required to transfer to Lehman cash or additional securities, so that the value of the cash or additional securities or both combined with the aggregate value of the Subordinated Notes equaled or exceeded the aggregate Buyer's Margin Amount.21

Throughout July 2007, Lehman asserted that the market value of the Notes had dropped to 91 percent of their market value.22 Then on July, 23, 2007, Lehman made a margin call.23 While AHMIC disagreed with Lehman's characterization of the Notes' value, it satisfied this margin call.24

On July 26, 2007, Lehman asserted that the value of the Subordinated Notes had fallen to 80 percent of their face value, and that this drop entitled Lehman to make a second margin call.25 AHMIC did not satisfy this margin call.26

On August 1, 2007, Lehman sent notice ("Pre-Petition Default Notice") to AHMIC stating that its failure to pay the latest margin constituted an event of default and that Lehman reserved all of its rights under the MRA.27 AHMIC and its affiliated debtors and debtors in possession sought protection under chapter 11 on August 6, 2007.28 Subsequently, on August 27, Lehman issued the Post-Petition Foreclosure Notice in which it notified AHMIC that "it had terminated the MRA and that it either had foreclosed' or intended to foreclose on the [Subordinated Notes] in lieu of selling them to a third party."29 In addition, Lehman notified AHMIC that the market value of the Notes was 68.25 percent of face value.30 After these events, "Lehman held itself out to third parties, including the Indenture Trustee with respect to the Subordinated Notes, as the owner of the [Notes.]"31

LEGAL DISCUSSION
I. The Standard for Evaluating a Motion to Dismiss

A motion under Rule 12(b)(6) serves to test the sufficiency of the factual allegations in the plaintiffs complaint.32 "While a complaint attacked by a Rule 12(b)(6) motion to dismiss does not need detailed factual allegations ... [f]actual allegations must be enough to raise a right to relief above the speculative level."33 In deciding a motion to dismiss, the Court must "accept all factual allegations in the complaint as true."34 In addition, the Court will "construe the complaint in the light most favorable to the plaintiff, and determine whether, under, any reasonable reading of the complaint, the plaintiff may be entitled to relief."35 Furthermore, "[t]he issue is not whether a plaintiff will ultimately prevail but whether he or she is entitled to offer evidence to support the claims."36

II. The Master Repurchase Agreement In This Case Is A "Repurchase Agreement" Under The Statute And The "Safe Harbor" Provisions Of Sections 559 And 555 Of The Bankruptcy Code Are Applicable.
a. Background

In Bevill, Bresler & Schulman Asset Mgmt. Corp. v. Spencer. S & L Ass'n, the Third Circuit succinctly described the nature of the agreement before the Court:

A standard repurchase agreement, commonly called a "repo," consists of a two-part transaction. The first part is the transfer of specified securities by one party, the dealer, to another party, the purchaser, in exchange for cash. The second part consists of a contemporaneous agreement by the dealer to repurchase the securities at the, original price, plus an agreed upon additional amount on a specified future date. A "reverse repo" is the identical transaction viewed from the perspective of the dealer who purchases securities with an agreement to resell.37

As this Court recently discussed in Calyon N.Y. Branch v. Am. Home Mortg. Corp., the market for repurchase agreements is a critical component of, not only the U.S. financial market, but global financial markets as well.38 To protect the liquidity of repurchase agreements, the Bankruptcy Code provides special protections to non-debtor counterparties. Without these special protections, or safe harbors as they are known, the bankruptcy of a counterparty to a repurchase agreement would impair the liquidity of the repurchase agreement and possibly lead to the bankruptcy of the non-debtor...

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