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Manhattan federal bankruptcy court judge James Peck really took the gloves off in a ruling Tuesday against Bank of America in the Lehman bankruptcy. In a blistering 46-page opinion, Judge Peck ordered BofA to repay $500 million it seized from a collateral account after Lehman filed for Chapter 11 protection in September 2008, calling BofA’s actions “surprising, and, quite frankly, disappointing for a leading financial institution that should care a great deal about its reputation.” The ruling holds BofA liable for interest on the $500 million and notes that further hearings will be held to determine sanctions for the bank’s “calculated violation” of the bankruptcy code. Ironically, Judge Peck’s ruling comes in an adversary proceeding initiated by BofA and its lawyers at Shearman & Sterling. According to the opinion, the bank became alarmed at Lehman’s deteriorating financial situation in August 2008 and set aside $500 million of Lehman’s money in a special cash collateral account to cover BofA’s risks as a clearing bank for Lehman. In November, three weeks after Lehman entered Chapter 11, BofA seized the funds. Sixteen days later, the bank’s lawyers filed an adversary proceeding against Lehman and its unsecured creditors in bankruptcy court, seeking a declaratory judgment that BofA’s seizure of the money was not in violation of an automatic Chapter 11 stay on all of Lehman’s accounts. The bank’s tactics backfired badly with Judge Peck. “This deliberately aggressive and calculated strategy seems to be a current example of the old aphorism that possession is nine-tenths of the law,” the judge wrote in his opinion. “But BOA’s combative approach has done nothing to alter the legal analysis as to the underlying issue.” The ruling, which follows a three-day evidentiary hearing conducted in January and February, concludes that BofA violated the automatic stay and grants summary judgment to Lehman. The ruling is a huge victory for Lehman’s holding company, represented by Weil, Gotshal & Manges, and its unsecured creditors committee, represented by Quinn Emanuel Urquhart & Sullivan. It could also bode well for the bankrupt brokerage firm in its suit against JPMorgan Chase over billions of dollars in collateral the bank took from Lehman before its collapse. (The Lehman estate is represented by Curtis, Mallet-Prevost, Cole & Mosle in that case; its response to JPMorgan’s motion to dismiss is due Dec. 15.) We left messages with Richard Rothman and Peter Isakoff at Weil and with Quinn Emanuel’s James Tecce, but didn’t hear back. In an e-mail statement, Lehman Brothers Holdings co-general counsel Martha Solinger said Lehman is “gratified by the court’s decision, with which we are in full agreement.” BofA lawyers William Roll III and Fredric Sosnick of Shearman & Sterling didn’t respond to our requests for comment on Judge Peck’s decision. Bank of America issued this statement through a spokesperson: “We are disappointed with the court’s decision, and we continue to believe that our actions were fully supported by well established New York law and the unambiguous language of the bankruptcy code.”

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