TMST, Inc., 8% Senior Notes (TMA.GB)

[Enterprising Investor]

Judge Rules for Thornburg Mortgage in Suit Against RBC (8/28/15)

Failed mortgage lender entitled to $45 million after ruling that RBC undervalued seized assets

A federal judge has awarded the court-appointed trustee overseeing the liquidation of Thornburg Mortgage Inc. $45 million in his crisis-era lawsuit against Royal Bank of Canada, finding the bank shortchanged the mortgage lender when it seized and subsequently sold some of its assets.

U.S. District Judge George L. Russell III ruled Wednesday in Baltimore that RBC Capital, the lender’s investment-banking arm, improperly sold the assets backing repurchase agreements the mortgage lender had used to fund its business. RBC seized the mortgage securities after Thornburg defaulted during the turmoil in the mortgage market in August 2007.

In granting the Thornburg trustee’s motion for summary judgment, the judge said RBC undervalued the seized mortgage-backed securities at issue by $26.3 million. With interest, Thornburg is owed $45 million in damages.

A spokeswoman for RBC didn’t respond to requests for comment.

Joel I. Sher, the bankruptcy trustee overseeing Thornburg’s liquidation, sued RBC Capital Markets in a breach-of-contract lawsuit over what he said were improper margin calls and the subsequent seizure and sale of $573 million in mortgage-backed securities Thornburg financed through RBC.

Before its collapse, Thornburg was a publicly traded real-estate investment trust that invested in residential mortgages and mortgage-backed securities.

The company financed its business, including its purchase of mortgage-backed securities, through a series of repurchase, or repo, agreements and swaps deals with banks and securities firms like RBC. Those mortgage-backed securities were typically then pledged as collateral in the deals.

Mr. Sher claimed RBC breached the provisions of the repo deal by improperly valuing Thornburg’s collateral to create deficits that justified its inflated margin calls.

The trustee filed similar lawsuits against other banks, including Barclays PLC and Goldman Sachs Group Inc., alleging they made improper margin calls that helped drive the mortgage lender into bankruptcy. Barclays settled last year for $23 million. The Goldman suit was settled last year for an undisclosed amount.

Mr. Sher also sued some of the biggest players in Wall Street’s mortgage-finance business for nearly $2 billion, claiming a number of banks—including J.P. Morgan Chase Co. , Citigroup Inc. and Credit Suisse Group AG —engaged in series of “collusive” and “predatory” schemes that resulted in Thornburg’s demise. The banks, in court papers, have denied wrongdoing.

A judge last year dismissed the bulk of that lawsuit but said Thornburg could still go after the banks for breach of contract and other claims totaling about $1 billion. The suit is pending.

Thornburg, based in Santa Fe, N.M., filed for chapter 11 bankruptcy-court protection in May 2009. Mr. Sher was named the trustee of Thornburg, now named TMST Inc., in 2009 after it was discovered the company’s former managers had used the lender’s employees and assets to launch a new company.

http://www.wsj.com/articles/judge-rules-for-thornburg-mortgage-in-rbc-capital-suit-1440769477