American Home seeks return of $84.13 million of notes in Lehman foreclosure suit

By Caroline Salls

Pittsburgh, Oct. 25 - American Home Mortgage Investment Corp. filed a complaint Wednesday in the U.S. Bankruptcy Court for the District of Delaware, alleging that Lehman Brothers, Inc. and Lehman Commercial Paper Inc. took advantage of American Home's liquidity problems "in a scheme to foreclose on [valuable notes] for a quick profit."

According to the complaint, Lehman had "an intimate understanding of the private-label notes" it sold to American Home shortly before the latter filed for Chapter 11 bankruptcy.

Taking advantage of American Home's liquidity problems, the complaint alleged that Lehman hid behind the temporarily dysfunctional market for the notes it bought with Lehman financing, and misrepresented that the market value for the financed notes suffered a steep decline that required American Home to provide millions of dollars in alleged margin deficits to keep Lehman from foreclosing.

American Home alleged that Lehman knew that the market value of the subordinated notes had not changed since the margin call days before, and Lehman made no effort to obtain bids from a "generally recognized source" to value the notes.

American Home said one of the most significant trades had just occurred when Lehman sold the company the notes at 97% of their face value.

As a result, American Home said liquidity problems prevented it from satisfying Lehman's July 26 margin call.

American Home filed for bankruptcy protection, and Lehman claimed that its unmet margin call constituted an event of default, warranting termination of American Home's financing agreement and Lehman's foreclosure on the notes.

"In so doing, Lehman did nothing short of stealing property of [American Home]'s bankruptcy estate," the company alleged in the complaint.

Specifically, American Home said it is asking the court to rule that:

• Lehman breached the master repurchase agreement by fabricating values for the notes and representing them as market value determinations, asserting the existence of a margin deficit based on false pretenses, claiming the existence of a pre-bankruptcy event of default when none existed and not acting reasonably or in good faith;

• Lehman's termination and liquidation of the subordinated notes financing transaction violated the automatic stay imposed under section 362 of the Bankruptcy Code;

• Lehman has wrongfully taken possession of $84.13 million of subordinated notes provided as collateral under the master repurchase agreement;

• Lehman is not entitled to the securities contract safe harbor of section 555 of the Bankruptcy Code because the Lehman entity that was a counterparty to the purported repurchase transaction with American Home is not a stockbroker, financial institution, financial participant, or securities clearing agency; and

• Lehman must turnover either the subordinated notes or the debt owed by Lehman for damages arising from Lehman's termination of the master repurchase agreement and subsequent foreclosure on or liquidation of the subordinated notes.

American Home, a Melville, N.Y.-based real estate investment trust focused on residential mortgage loans, filed for bankruptcy on Aug. 6. Its Chapter 11 case number is 07-11047.

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