Several large Wall Street firms that played a key role in financing nonprime lenders this week asked a federal judge to dismiss a nearly $2 billion civil fraud lawsuit filed by the trustee of Thornburg Mortgage, the now defunct Jumbo/super Jumbo lender.
In a new filing in U.S. Bankruptcy Court in Baltimore, the banks – including JPMorgan Chase, Citigroup, and Credit Suisse – are asking Judge Duncan Keir to throw out the lawsuit filed by the trustee.
Other financiers that are party to the filing include Royal Bank of Scotland Group and UBS.
Thornburg trustee Joel Sher sued these Wall Street financiers earlier in the year, claiming they engaged in series of "collusive" and "predatory" schemes taken against Thornburg, once a publicly traded REIT, during the mortgage crisis in late 2007 and 2008 that resulted in the lender's demise.
That alleged scheme involved these “warehouse” lenders demanding more than $700 million of margin calls and interest payments for which, Sher charges, the Thornburg estate received no reasonably equivalent value. Bankruptcy law allows a trustee to unwind certain transfers as fraudulent transactions if they render a company insolvent and provided no benefit to the estate.
Prior to its collapse, Thornburg financed its lending, servicing and MBS investments, using a series of repurchase agreements and swap deals with the banks. The MBS were then pledged as collateral for the repo lines. (Reverse repurchase agreements are considered a type of warehouse facility.)
The trustee's lawsuit charges the Wall Street firms improperly colluded to seize the property backing the deals and drive Thornburg into bankruptcy.
Attorneys working for the lenders argue in their filing that the trustee is simply "looking to 'finger-point,'" and the lawsuit engages in a "self-serving, revisionist story."
The defendants claim the real cause of Thornburg's demise was "the catastrophic decline in the domestic residential mortgage market" to which Thornburg, as one of the market's biggest players, was "inherently and acutely" vulnerable.
The lenders say their actions in connection with their repurchase deals are protected by the bankruptcy code's safe-harbor provisions.