January 11, 2008

In an important recent decision, the Bankruptcy Court for the District of Delaware held that a repurchase agreement involving mortgage loans is subject to the safe harbors of sections 362(b)(7), 555 and 559 of the Bankruptcy Code, and is therefore not subject to the automatic stay. Notably, the Bankruptcy Court held that the nature and scope of the Court's inquiry is limited to whether the agreement in question falls under the definition of repurchase agreement under section 101(47), and should not expand to encompass further analysis of the substance of the agreement or parol evidence.

Calyon v. American Home Mortgage Corp , (In re American Home Mortgage, Inc.), Adv. No. 07-51704, 2008 WL 60292 (Bankr. Del. January 4, 2008) (Sontchi, J.).


The business of American Home Mortgage Corp. and its affiliates (the “Debtors”) primarily involved the origination, servicing and sale of mortgage loans. To fund the origination of mortgage loans, the Debtors had entered into a Repurchase Agreement (the “Contract”) with Calyon, as administrative agent (“Calyon”), which facilitated the transfer of mortgage loans from the Debtors to security issuers and banks (the “Purchasers”). Under the Contract, the Purchasers were obligated to return the mortgage loans to the Debtors within 180 days after the initial transfer, in exchange for cash equal to the original transfer price plus an interest factor. Under the Contract, the Debtors retained the right to service the mortgages or designate the servicer.

Prefiling, Calyon sent to the Debtors notices of default: (1) demanding that the Debtors immediately repurchase all of the mortgage loans in the Purchasers’ possession, (2) designating JPMorgan Chase Bank, N.A. as the new servicer, and (3) demanding that the Debtors transfer the servicing of the mortgage loans to the new servicer. When the Debtors filed their Chapter 11 cases, Calyon sought a declaratory judgment that the Contract was a “repurchase agreement” as defined in Section 101(47) of the Bankruptcy Code and thus, pursuant to Sections 362(b)(7), 555 and 559 of the Bankruptcy Code, that the rights of Calyon under the Contract were not stayed. Calyon also requested specific performance with respect to the transfer of the servicing from the Debtors to the new servicer.

The Bankruptcy Court’s Decision

The Court preliminarily recognized that “as part of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, Congress expanded the definition of ‘repurchase agreement’ to include the transfer of ‘mortgage related securities . . . , mortgage loans, [and] interests in mortgage related securities or mortgage loans.’” Op. at *6.

Nature and scope of the Court’s inquiry

The Debtors argued that the Court should “examine the substance of the Contract to determine whether it is a ‘true’ repurchase agreement or a disguised secured financing” and that, because the Contract lacked the indicia of a ‘true’ repurchase agreement and departed from the industry-approved model form, the Contract was a secured financing. Op. at *6.

The Bankruptcy Court rejected the Debtors’ arguments. It found that “Congress said what it meant and meant what it said in drafting the definition of repurchase agreement, i.e., if the criteria established in the statute are meant [sic] the contract is a repurchase agreement. No further inquiry or consideration of other contractual provisions is required.” Op. at *8. Citing the legislative history of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, the Court opined that “[t]he reference to 'repurchase and reverse repurchase transactions' is intended to eliminate any inquiry under section 555 and related provisions as to whether a repurchase or reverse repurchase transaction is a purchase and sale transaction or a secured financing.” Op. at *8. “Succinctly stated, if the definition of 'repurchase agreement' is met, the section 559 safe harbor provisions apply, period. Similarly, if the definitions of 'securities contract' and 'financial institution' are met, the section 555 safe harbor applies, period.” Op. at *8. Therefore, the Court concluded that it would limit its inquiry to the application of the definition of repurchase agreement set forth in section 101(47) of the Bankruptcy Code to the Contract.

The interpretation of the agreement should be limited to its terms

Having ruled that the terms of the Contract were “the only relevant evidence” before it, the Court found that the Contract satisfied all the elements of the section 101(47) definition of repurchase agreement, Op. at *9, and that the safe harbor provisions contained in sections 362(b)(7), 555 and 559 of the Bankruptcy Code applied. Thus, Caylon's rights under the Contract, including the right to liquidate, terminate or accelerate it, were not stayed, avoided or otherwise limited by the operation of any provision of the Bankruptcy Code.

Safe harbors did not apply to mortgage servicing provisions

The Court, however, denied Calyon's request for specific performance with respect to the transfer of the mortgage servicing business to the new servicer. The Court found that the portion of the Contract that provided for the servicing of mortgage loans was not protected by the safe harbor provisions of sections 555 and 559 of the Bankruptcy Code because, under New York law, that portion of the Contract was (1) severable from the provisions for the repurchase of mortgage loans, (2) should be considered a separate agreement, and (3) was neither a repurchase agreement nor a securities contract. The Court found that the mortgage servicing provisions were separate from the provisions regarding the repurchase of the mortgage loans because (a) mortgage loans are frequently bought and sold on a “servicing retained” basis, (b) the “servicing fee” was distinct and separate from the repo's “price differential” fee, and (c) Calyon had issued two separate notices of default (one of which was directed to one of the Debtors as servicer), thereby acknowledging the distinct nature of the two agreements.


Pre-2005 challenges to the right to close-out repurchase agreements under old section 559 of the Bankruptcy Code prompted Congress to enact, in 2005 and 2006, financial contract legislation that expanded the types of agreements that qualify under the safe harbors from the automatic stay. The American Home Mortgage decision is of significance not only because it is the first case since the 2005 and 2006 amendments that analyzes a repurchase agreement involving mortgage loans, but also because it sets forth the nature and scope of the Court's inquiry - and limits it to verifying whether the terms of the agreement fit the definition of repurchase agreement under section 101(47). Arguments by debtors that courts should examine the substance of agreements to determine whether they are “true” repurchase agreements or disguised secured financings will likely face an uphill battle in the wake of this decision. Indeed, the Court even suggested that a contract that merely provides for a lien on (and not the sale of) mortgage securities might constitute a protected repurchase agreement.

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