439 B.R. 811
Bankr. S.D.N.Y.2010Background
- BOA provided clearing services to Lehman for years; July 2008 overdraft of $650 million prompted BOA to seek collateral safeguards.
- In August 2008 Lehman pledged $500 million cash as collateral under a security agreement to cover intra-day overdrafts.
- The deposited funds were held in a special Deposit Account (465 account and Cayman Eurodollar deposit) with three‑day withdrawal notice and a hold on access, reflecting a fixed, limited purpose.
- On November 10, 2008 BOA seized $508,808,584.29 from LBHI accounts, including the $500 million collateral, without obtaining relief from the automatic stay.
- LBHI filed this adversary proceeding; the Court held, after an evidentiary hearing, that the security agreement created a special purpose account and did not authorize setoff; the stay was violated and funds must be returned, with possible sanctions to be determined.
- The Committee supported Lehman; the case involved cross‑motions for summary judgment and a subsequent need for further proceedings on damages/sanctions.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether the funds are subject to setoff under NY law | Lehman argues the account is special and not subject to setoff. | BoA contends the boilerplate and the account design permit a broader setoff right. | No setoff rights; funds not subject to setoff under NY law. |
| Whether the Deposit Account was a special purpose account or a general account | Mutual intent was to create a special purpose account for overdrafts. | BoA argues boilerplate could extend rights beyond overdrafts. | Special purpose account; not a general account; limited to overdraft security. |
| Whether BOA violated the automatic stay by seizing collateral | BOA’s offset violated §362(a)(7) and was not exempt. | BOA relied on §362(b)(17) to justify offset. | Yes, stay violation; must return funds; potential sanctions. |
| Whether §362(b)(17) safe harbor applies to this collateral | Not applicable to collateral unrelated to swaps. | Argues mutual rights under §560 and §362(b)(17) extend to collateral. | Not applicable; collateral had no swap connection; safe harbor does not authorize. |
Key Cases Cited
- In re Applied Logic Corp., 576 F.2d 952 (2d Cir.1978) (special purpose funds not subject to setoff)
- Swan Brewery Co. v. United States Trust Co., 832 F. Supp. 714 (S.D.N.Y.1993) (presumption that deposits are general unless mutual intent evidences a special fund)
- Citizens Bank of Md. v. Strumpf, 516 U.S. 16 (1995) (setoff rights preserved prepetition subject to §553(a))
- Merrill Lynch Mortgage Capital, Inc. v. FDIC, 293 F. Supp. 2d 98 (D.D.C.2003) (test for when a deposit is a special account vs. general)
- The Bennett Funding Group, Inc. v. M&T Bank, 212 B.R. 206 (2d Cir. BAP 1997) (presumption not rebutted where agreement shows general funds)
- Westinghouse Credit Corp. v. D'Urso, 278 F.3d 138 (2d Cir.2002) (bank cannot set off funds pledged as collateral)
- Int'l Multifoods Corp. v. Commercial Union Ins. Co., 309 F.3d 76 (2d Cir.2002) (contract interpretation when unambiguous; extrinsic evidence limited)