"A federal judge ruled that the court-appointed trustee overseeing the liquidation of Thornburg Mortgage Inc. can move forward with a lawsuit against Barclays Capital Inc. over allegations that the bank made improper margin calls that helped drive the mortgage lender into bankruptcy.
Judge Ellen Lipton Hollander of the U.S. District Court in Baltimore said the trustee can sue BarCap, the investment-banking division of British bank Barclays PLC, for at least $94 million over the margin calls and subsequent seizure and sale of the mortgage-backed securities that Thornburg financed through BarCap. She dismissed, however, the trustee's claim that the bank acted in bad faith.
Joel I. Sher, the bankruptcy trustee overseeing Thornburg's liquidation, contends that Barclays wrongfully shored up its own financial condition in August 2007 as the subprime mortgage sector began to crumble by improperly seizing $2.7 billion in mortgage-backed securities with Barclays under the terms of various reverse repurchase agreements. BarCap then sold most of the securities at fire-sale prices.
Mr. Sher claims BarCap breached the provisions of their repo deal by improperly valuing Thornburg's collateral in order to create deficits that justified its margin calls. He also says BarCap refused to allow Bear Stearns—itself soon to fall victim to the mortgage market collapse—to take over the British bank's positions. BarCap denied acting improperly and had sought a dismissal of the lawsuit.
"As to the breach of contract claim, it may be that, ultimately, the arguments advanced by Barclays prove to be meritorious," Judge Hollander wrote. "But. I am persuaded that the complaint does not fail to state a claim, and a factual record must be developed before addressing the issues raised in the motion."
BarCap spokeswoman Kerrie-Ann Cohen declined to comment on the ruling.
The decision is a victory of sorts for Mr. Sher, who is also suing Goldman Sachs Group Inc. in a similar suit. In that case, Mr. Sher is seeking $71 million from Goldman for what he says was the improper seizure of mortgage-backed securities that Thornburg had pledged to Goldman as collateral.
The trustee is also suing some of the biggest players in Wall Street's mortgage-finance assembly line for nearly $2 billion, claiming a number of banks—including J.P. Morgan Chase & Co., Citigroup Inc. and Credit Suisse Group—engaged in series of "collusive" and "predatory" schemes that resulted in Thornburg's demise. The banks, in court papers, have denied wrongdoing.
The suits allege that Thornburg, once the nation's second-largest independent mortgage company, was undone by a series of unlawful acts taken by investment banks during the mortgage crisis in 2007 and 2008.
Bankruptcy law allows a trustee to unwind certain transfers as fraudulent transactions if they rendered the company insolvent and provided no benefit to the estate.
Mr. Sher was named the Chapter 11 trustee of Thornburg, now named TMST Inc., in 2009 after it was discovered that former managers had used the lender's employees and assets to launch a new company.
Thornburg, based in Santa Fe, N.M., filed for Chapter 11 protection in May 2009, listing assets of $24.4 billion and debts of $24.7 billion. The bulk of those assets—some $19.7 billion— were held in securitization trusts. Mr. Sher is winding down the company and selling off its assets for the benefit of creditors."
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