RY Royal Bank of Canada

By Patrick Fitzgerald 

A federal judge has awarded the court-appointed trustee overseeing the liquidation of Thornburg Mortgage Inc. $45 million in his crisis-era lawsuit against RBC Capital Markets LLC, finding the bank shortchanged the mortgage lender when it seized and subsequently sold some of its assets.

Judge George L. Russell III of the U.S. District Court in Baltimore ruled Wednesday that RBC Capital, the investment-banking arm of Royal Bank of Canada, improperly sold the assets backing repurchase agreements the mortgage lender had used to fund its business. RBC seized the mortgage securities after Thornburg defaulted during the turmoil in mortgage market in August 2007.

In granting the Thornburg trustee's motion for summary judgment, the judge said RBC undervalued the seized mortgage-backed securities at issue by $26.3 million. With interest, Thornburg is owed $45 million in damages as result of RBC's actions.

A spokeswoman for RBC Capital couldn't immediately be reached for comment.

Joel I. Sher, the bankruptcy trustee overseeing Thornburg's liquidation, sued RBC Capital Markets in a breach-of-contract lawsuit over what he said were improper margin calls and the subsequent seizure and sale of $573 million in mortgage-backed securities Thornburg financed through RBC.

Before its collapse, Thornburg was a publicly traded real-estate investment trust that invested in residential mortgages and mortgage-backed securities.

The company financed its business, including its purchase of mortgage-backed securities, through a series of repurchase, or repo, agreements and swaps deals with banks and securities firms like RBC. Those mortgage-backed securities were typically then pledged as collateral in the deals.

Mr. Sher claimed RBC breached the provisions of the repo deal by improperly valuing Thornburg's collateral to create deficits that justified its inflated margin calls.

The trustee filed similar lawsuits against other banks, including Barclays Capital Inc. and Goldman Sachs Group Inc., alleging they made improper margin calls that helped drive the mortgage lender into bankruptcy. BarCap, the investment-banking division of British bank Barclays PLC, settled last year for $23 million. The Goldman suit has been dismissed.

Mr. Sher also sued some of the biggest players in Wall Street's mortgage-finance assembly line for nearly $2 billion, claiming a number of banks--including J.P. Morgan Chase Co., Citigroup Inc. and Credit Suisse Group--engaged in series of "collusive" and "predatory" schemes that resulted in Thornburg's demise. The banks, in court papers, have denied wrongdoing.

A judge last year dismissed the bulk of that lawsuit but said Thornburg could still go after the banks for breach of contract and other claims totaling around $1 billion. The suit is pending.

Thornburg, based in Santa Fe, N.M., filed for chapter 11 bankruptcy-court protection in May 2009. Mr. Sher was named the chapter 11 trustee of Thornburg, now named TMST Inc., in 2009 after it was discovered the company's former managers had used the lender's employees and assets to launch a new company.

Write to Patrick Fitzgerald at patrick.fitzgerald@wsj.com

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(END) Dow Jones Newswires

August 28, 2015 13:01 ET (17:01 GMT)

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