Thornburg Trustee Can Proceed With Suit Against RBC Capital (3/28/12)
--Judge says trustee can sue RBC Capital for improperly seizing assets
--Judge dismisses trustee's claim that bank's margin calls were improper or that it acted in bad faith.
By Patrick Fitzgerald Of DOW JONES DAILY BANKRUPTCY REVIEW A federal judge ruled the court-appointed trustee overseeing the liquidation of Thornburg Mortgage Inc. (THMRQ) can move forward with a lawsuit against RBC Capital Markets LLC alleging the bank shortchanged the mortgage lender when it seized and subsequently sold some of its assets.
Judge Benson Everett Legg of the U.S. District Court in Baltimore said the trustee can sue RBC Capital, the investment-banking arm of Royal Bank of Canada (RY, RY.T), for improperly seizing the assets backing repurchase agreements the mortgage lender had used to fund its business. The judge dismissed, however, the trustee's claim that the bank's margin calls were improper or that it acted in bad faith.
Joel I. Sher, the bankruptcy trustee overseeing Thornburg's liquidation, sued RBC Capital Markets in a breach-of-contract lawsuit over what he alleges were improper margin calls and the subsequent seizure and sale of $573 million in mortgage-backed securities Thornburg financed through RBC.
"RBC ultimately settled on a number that was significantly lower than the value it had assigned to the MBS when it issued its August 14th margin call," Legg wrote in a ruling Friday. "Whether this process was proper under the terms of the [repurchase agreement] is a valid subject for discovery."
Sher said in court filings the securities firm credited Thornburg "with an amount, at minimum, $35 million less than the actual value" of the 27 mortgage-backed securities at issue.
Sher and a spokesman for RBC Capital couldn't be reached for comment.
Prior to its collapse, Thornburg 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.
Sher claimed RBC breached the provisions of their repo deal by improperly valuing Thornburg's collateral to create deficits that justified its inflated margin calls.
The trustee has filed similar lawsuits against Barclays Capital Inc. and Goldman Sachs Group Inc. (GS), alleging the firms made improper margin calls that helped drive the mortgage lender into bankruptcy.
Last year, another federal judge dismissed part of the suit against BarCap, the investment-banking division of British bank Barclays PLC (BCS, BARC.LN), alleging the bank acted in bad faith but said Sher could sue over margin calls and subsequent sales. Barclays and Goldman have denied wrongdoing.
Sher also is 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. (JPM), Citigroup Inc. (C) and Credit Suisse Group (CS, CSGN.VX)--engaged in a series of "collusive" and "predatory" schemes that resulted in Thornburg's demise. The banks, in court papers, have denied wrongdoing and have moved to have the suit dismissed.
The suits allege 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.
Sher was named the Chapter 11 trustee of Thornburg, now named TMST Inc., in 2009 after it was discovered former managers had used the lender's employees and assets to launch a new company.
Earlier this month, the Securities & Exchange Commission charged three former Thornburg executives--ex-CEO Larry Goldstone, ex-CFO Clarence Simmons, onetime accounting chief Jane Starrett--with civil accounting fraud. Faced with $300 million in margin calls in early 2008, the SEC said the three overstated Thornburg's quarterly income by more than $420 million.
A lawyer for Goldstone and Simmons said the SEC action "is wholly without merit." A lawyer for Starrett couldn't be reached for comment.
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. Sher is winding down the company and selling its assets for the benefit of creditors.
(Dow Jones Daily Bankruptcy Review covers news about distressed companies and those under bankruptcy protection.)
-By Patrick Fitzgerald, Dow Jones Daily Bankruptcy Review; 202-862-3544; patrick.fitzgerald@dowjones.com
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