Client Alert

Delaware Bankruptcy Court Issues Opinion Of First Impression With Respect To Repo Agreement

January 09, 2008

Richard Chesley, Keith Miller and Kimberly Newmarch

In 2005, sections of the Bankruptcy Code concerning repurchase agreements were amended to, among other things, clarify and expand the definition of repurchase agreement to specifically include mortgage related securities, mortgage loans and interests in such mortgage-related securities and loans. As Congress noted, these amendments were intended to make clear that the exercise of a contractual right of a repurchase participant to cause the liquidation of a repurchase agreement were not stayed under chapter 11. With the recent wave of bankruptcy filings by numerous subprime originators, all of whom were parties to significant repurchase agreements, questions have loomed and disputes ensued regarding the reach of sections 555 and 559 of the Bankruptcy Code.

Today the answer to many of the questions regarding the applicability of such sections has judicially been determined. With the issuance on January 4, 2008 of an opinion by the Honorable Judge Christopher Sontchi in the American Home Mortgage bankruptcy case, guidelines for determining the applicability of sections 555 and 559 of the Bankruptcy Code, and the extent of the protection provided by such sections, have been resolved.