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Lehman Bros. Awarded $500 Million from Bank of America

A US bankruptcy court on Tuesday ordered Bank of America to repay $500 million plus interest to Lehman Brothers, money the bank seized from the Securities firm two months after its historic bankruptcy filing in September, 2008.

Judge James Peck called BoA's seaiure of the funds "an unauthorized and impermissible setoff in violation of the automatic stay in the Lehman bankruptcy case."  Judge Peck has yet to decide if he will award further monetary damages to Lehman in the form of punitive damages.

The case, economists believe, will be a benchmark case that will dictate how large financial institutions are expected to behave in the midst of financial strife, and will be studied for years to come.  Large banks and securities firms tend to enjoy friendly relationships during normal economic times, but can easily shift into kill-or-be-killed modes when times get tough.

According to Judge Peck's ruling, BoA served a role as a major clearing bank for Lehman, and was used to seeing occasional overdrafts in the firm's accounts.  BoA overlooked the negative balances because they knew Lehman's track record and the balances were usually back to positive the next day.  An overdraft of $650 million in July 2008, however, caught the attention of BoA executives, who would move to protect itself in August of that year by subjecting Lehman Bros. to tough new collateral requirements and other limitations.

On November 10th, two months after Lehman's bankruptcy filing, BoA seized the money in the firm's account to apply it "against amounts allegedly owed" by Lehman, "arising out of certain entirely unrelated derivative transactions," the judge wrote. 

BoA is only one of the large financial institutions battling court cases with Lehman Bros. And its creditors.  JPMorgan Chase, Barclays PLC, Metlife, and several others all have pending cases involving the Lehman bankruptcy.