In re American Home Mortgage Holdings, Inc.

In 2005 American Home Mortgage Holdings, Inc. (American) (plaintiff) and Lehman Brothers, Inc. (Lehman) (defendant) entered into a repurchase agreement. In 2005 and 2007, respectively, American purchased two series of notes from Lehman, which Lehman financed. In 2007 Lehman repurchased the notes from American. The repurchase agreement allowed Lehman, as the initial seller of the notes, to make margin calls if the market value of the notes fell below a specific amount. If Lehman made a margin call, American was required to pledge additional value to make up the difference between the market value and the face value of the notes. The repurchase agreement also contained an ipso facto clause, allowing one party to terminate the agreement and foreclose on the notes if the other party filed for bankruptcy. In 2007, after Lehman repurchased the notes, it made two margin calls. American pledged additional value to satisfy the first margin call but refused to satisfy the second margin call. After Lehman informed American that American had defaulted on the notes, American filed for bankruptcy. In response, Lehman sent American a notice explaining that Lehman would exercise its rights under the repurchase agreement’s ipso facto clause to terminate the agreement and foreclose on the notes. American filed a lawsuit in bankruptcy court against Lehman, arguing that the ipso facto clause in the repurchase agreement could not be enforced, and that Lehman had violated Article 9 of the Uniform Commercial Code by exercising its rights under the ipso facto clause in a commercially unreasonable manner. Lehman moved to dismiss the lawsuit, arguing that the safe-harbor provisions of §§ 555 and 559 of the Bankruptcy Code allowed it to enforce the ipso facto clause. Lehman also argued that, because the repurchase agreement was for the purchase and sale of securities, Article 9 did not apply.