Former mortgage company wins $45M in breach-of-contract action

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The trustee for failed mortgage lender Thornburg Mortgage Inc. has been awarded more than $45 million in damages in a lawsuit alleging an investment bank improperly liquidated mortgage-backed securities more than eight years ago.

Thornburg, now known as TMST Inc., was a publicly-traded real estate investment trust investing in residential, mortgage-backed securities that filed for Chapter 11 bankruptcy in 2009. Two years earlier, when the mortgage-backed securities market began experiencing a panic, the Royal Bank of Canada’s RBC Capital Markets served  Thornburg two margin calls on Aug. 13 and Aug. 14, 2007, according to the opinion issued last week by U.S. District Judge George L. Russell III.

Thornburg satisfied the Aug. 13 margin call but defaulted on the Aug. 14 margin call. The master repurchase agreement signed by the parties specified two options for RBC in the event of a default, according to the opinion: RBC could either immediately sell part or all of the collateral mortgage-backed securities or keep them and give Thornburg credit.

The credit was supposed to be the price of the securities on the day of default obtained from a generally recognized source, according to the opinion, but RBC credited Thornburg for a bid received from Goldman Sachs Group Inc. three days later. The difference cost Thornburg $26 million.

Thornburg’s court-appointed trustee, Joel I. Sher of Shapiro, Sher, Guinot & Sandler in Baltimore, filed suit RBC for breach of contract in 2011.

Russell, in his ruling last week, denied a motion for summary judgment filed by RBC and granted the cross-motion filed by Thornburg, finding that the plain language of the agreement required the non-defaulting party to calculate credit using a price obtained from a generally recognized source as of the default date.

The judge further declared the internal marks made by RBC on Aug. 14, 2007, satisfied the requirement of being from a generally recognized source and, being the only available source to value the securities on the day in question, were the appropriate measure of damages.

Russell awarded Thornburg $26.3 million, plus prejudgment interest at a rate of 9 percent from Aug. 14, 2007 to the date of judgment last week.

The case is Joel I. Sher v. RBC Capital Markets LLC, 1:11-cv-01998-GLR.