Third Circuit Decision on Repurchase Transaction


In a decision filed on July 7th, the United States Court of Appeals for the Third Circuit affirmed a district court decision upholding a bankruptcy court order granting summary judgment to American Home Mortgage Investment Corp. (American Home) in connection with a repurchase transaction entered into in 2007 under which American Home sold certain certificates to Bear Stearns International Ltd. (Bear Stearns) for $19,534,000 and agreed to re-purchase the certificates at a later date for $19,636,879.07.  In re American Home Mortgage Holdings, Inc., 2010 WL 2676383 (3d Cir. July 7, 2010).

In July 2009, Bear Stearns terminated the agreement based on American Home’s failure to meet a margin call.  Shortly thereafter, American Home filed for bankruptcy protection.  The trustee for the certificates filed an interpleader action with the bankruptcy court to determine whether it should pay the August certificate income to Bear Stearns or American Home.

The Third Circuit held that Bear Stearns was not entitled to the August certificate income for two reasons.  First, while the repurchase agreement provided that Bear Stearns was purchasing the certificates, the repurchase agreement did not state that Bear Stearns was purchasing the income on the certificates.  Second, Bear Stearns did not cause the certificates to be re-registered in its name on the books of the certificate trustee.

This decision is rather surprising and appears to be contrary to settled market expectations.  Purchasers of securities typically believe that if they buy a security, they are obtaining all rights under that security, regardless of whether individual rights are specifically mentioned in the purchase and sale agreement.  It is also commonplace for securities to be transferred using stock powers or bond powers, and market participants believe that the purchaser has obtained good title, even if the securities are not re-registered on the books of the issuer.  The Third Circuit decision appears to say that both of these market expectations are wrong as a matter of law, at least where securities are purchased in connection with a repurchase transaction.

The Third Circuit opinion is labeled as “not precedential.”  Nevertheless, until the law is clarified, it may be prudent for participants in the repurchase market to first, revise their form documents to provide that the purchaser is purchasing the securities, as well as all rights to income and other proceeds of the securities, all voting rights under the securities, and all other rights included in the securities, and second, ensure that the purchased securities are re-registered into the name of the purchaser at the time of the original purchase under the repurchase agreement.