Judge slaps BofA for Lehman cash grab

November 17, 2010, 11:49 PM UTC

Troubled homeowners aren’t the only ones having their issues with Bank of America.

A federal bankruptcy judge ruled Tuesday that BofA must return $500 million in collateral it seized without cause from Lehman Brothers two years ago, just after the investment bank collapsed in the biggest-ever U.S. bankruptcy.

A fistful of someone else's dollars

Bank of America’s actions were “brazen…unauthorized and impermissible,” U.S. bankruptcy judge James Peck wrote in a ruling Tuesday, the Wall Street Journal reports.

BofA forced Lehman to post the collateral in August 2008 as questions started to mount about the investment bank’s health. There’s nothing unusual there, as rivals such as Citi and JPMorgan Chase did the same.

The problem lies with what BofA did in November 2008, when it took the cash from the collateral account to offset debts it was owed by Lehman. The bank did so without the court’s permission, the Journal reports.

Peck ruled this week that BofA’s moves violated rules protecting companies from having their assets seized, and made clear he wasn’t overjoyed with the bank.

In his order, Judge Peck said it was “astonishing that [Bank of America] would make the premeditated tactical decision to deliberately seize the collateral” without first seeking court permission.

The judge said Bank of America acted with “apparent disregard for the consequences” and ordered the bank to repay Lehman’s bankruptcy estate the $500 million plus interest.

 Tuesday’s ruling came on the same day a top executive at BofA’s home loans divisions said the bank regrets its missteps in the foreclosure fiasco. But the bank has no regrets in this case, a spokeswoman indicates.

We are disappointed with the court’s decision, and we continue to believe that our actions were fully supported by well-established New York law and the unambiguous language of the Bankruptcy Code.  We are considering our appellate options.