U.S. Bankruptcy Judge James Peck, has ordered Bank of America to return $500 million it seized from Lehman Brothers after the investment company filed for Chapter 11 bankruptcy.
Peck ruled that Bank of America's post-bankruptcy seizure of funds that Lehman had posted as collateral before its Chapter 11 filing, was "brazen...unauthorized and impermissible."
In August 2008, Bank of America demanded that Lehman deposit $500 million into a cash collateral account because they feared that they would suffer considerable losses while doing business with the company. But when Lehman filed for Chapter 11 bankruptcy, Bank of America seized the funds without first seeking permission of the bankruptcy court. The bankruptcy court found that Bank of America acted with blatant disregard for the bankruptcy laws and ruled that the company should repay the $500 million plus interest to Lehman.
When a debtor files Chapter 11 bankruptcy, they are protected from creditor asset seizures like the one that Bank of America conducted. But as with personal bankruptcy, some creditors are willing to test the law and seize funds anyway after a bankruptcy has been filed. In these cases the creditor will be forced to repay the money plus interest and could even be fined or sanctioned. It is not clear at this time what type of sanctions, if any, that Bank of America will face due to their blatant disregard to the bankruptcy law in the Lehman case.
As we have discussed previously, many debtors in bankruptcy don't have the resources to fight these post-bankruptcy filing asset seizures especially if they are representing themselves. Many creditors are counting on this fact to take advantage and illegally seize assets after a debtor files bankruptcy.