Restructuring

Contributed by Adam Lavine
Despite the modern prevalence of a thriving market for repurchase agreements, few bankruptcy courts have had occasion to analyze what constitutes a “repurchase agreement” for purposes of the Bankruptcy Code.  Accordingly, both bankruptcy practioners and repo participants should take note of Wells Fargo Bank, N.A. v. Homebanc Corp. (In re Homebanc Mortgage Corp.), No. 07-51740, 2013 WL 21180 (Bankr. D. Del. Jan. 18, 2013), a recent decision from the Bankruptcy Court for the District of Delaware.  In this decision, the court held that a party’s contracts for the sale and repurchase of mortgage-backed securities fell within the Bankruptcy Code’s definition of “repurchase agreements,” notwithstanding that the confirmations applicable to such agreements listed the purchase price of the securities as zero.
Repos and the Bankruptcy Code
Before getting into the details of the Homebanc decision, let’s recap some of the general concepts surrounding repurchase agreements and their treatment under the Bankruptcy Code.  Under a standard repurchase agreement, commonly called a “repo,” Party A agrees to sell securities to Party B while simultaneously agreeing to repurchase those securities at a later date for an amount equal to the sale price plus an additional amount, which effectively represents interest.  Often, a “master agreement” will govern the relationship between Parties A and B at the macro level, and the parties will then enter into various repo transactions pursuant to this master agreement.  The individual transactions are confirmed via written “confirmations” that specify the terms of the transactions, such as the purchase date and price and the repurchase date and price.
Pursuant to section 559 of the Bankruptcy Code, parties to an agreement qualifying as a “repurchase agreement” are provided a “safe harbor” from the Bankruptcy Code’s automatic stay, which, ordinarily, prevents a debtor’s creditors from taking actions to collect, recover, or offset prepetition debts without court approval.  Indeed, section 559 expressly permits repo counterparties, under certain circumstances, to liquidate, terminate, or accelerate a repurchase agreement without seeking court approval. 
The issue in Homebanc was whether the contracts at issue qualified as “repurchase agreements” under section 101(47) of the Bankruptcy Code such that certain of the debtor’s repo counterparties were protected by the “safe harbor” of section 559 when they liquidated the securities “on repo.”  
Whether the Homebanc Transactions Qualified as “Repurchase Agreements” under the Bankruptcy Code
Section 101(47) of the Bankruptcy Code defines a “repurchase agreement,” in pertinent part, as

(i) an agreement, including related terms, which provides for the transfer of one or more … securities … against the transfer of funds by the transferee of such … securities …, with a simultaneous agreement by such transferee to transfer to the transferor thereof … securities … against the transfer of funds; or

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(v) any security agreement or arrangement or other credit enhancement related to any agreement or transaction referred to in clause (i)….

In Homebanc, certain Bear Stearns entities had entered into numerous purported repo transactions with the debtor pursuant to two master agreements.  Ten of those transactions were the subject of the dispute in Homebanc.  Each of the disputed transactions involved confirmations that showed a purchase price of zero for the relevant securities. 
In support of its argument that these transactions did not qualify as “repurchase agreements” under the Bankruptcy Code, the chapter 7 trustee argued that, under the Bankruptcy Code, there can be no such thing as a zero purchase price repo because the Bankruptcy Code’s definition of “repurchase agreement” requires that the relevant securities be transferred “against the transfer of funds by the transferee of such securities.”  Further, the trustee argued that the purchase price of zero suggested that the securities at issue were not transferred to Bear Stearns “against the transfer of funds,” but rather that they were transferred with the intent to be held for future lending transactions, such as future repo transactions.
In holding that the transactions at issue qualified as “repurchase agreements” under section 101(47)(A)(i) of the Bankruptcy Code even though the confirmations applicable to such transactions listed a zero purchase price, Judge Carey adopted the so-called “bucket theory” espoused by Bear Stearns.  Under this “bucket theory,” each individual repo transaction governed by the applicable master agreement was deemed consideration for every other transaction under that master agreement.  Accordingly, each transaction with a purchase price greater than zero provided sufficient consideration to satisfy the Bankruptcy Code’s “transfer of funds” requirement with respect to the zero purchase price securities. 
It is important to note that the court adopted this “bucket theory” because the master agreements explicitly stated that “payments, deliveries and other transfers made by either [party] in respect of any Transaction shall be deemed to have been made in consideration of payments, deliveries and other transfers in respect of any other Transactions hereunder.”  Accordingly, the court did not address applicability of the “bucket theory” to master agreements without such language.
Nevertheless, Judge Carey further held that even if the zero purchase price repos did not qualify as “repurchase agreements” under the “bucket theory” and section 101(47)(A)(i), they would still qualify as “repurchase agreements” under section 101(47)(A)(v).  Under this subsection, a “repurchase agreement” includes “any security agreement or arrangement or other credit enhancement related to any agreement or transaction referred to in clause (i)….”  The court viewed the zero purchase price repos, if not outright repos under section 101(47)(A)(i), as arrangements or credit enhancements related to the master agreements under section 101(47)(A)(i).
Because the repo contracts at issue qualified as “repurchase agreements” under the Bankruptcy Code, the court therefore held that Bear Stearns was permitted to liquidate the securities “on repo” in accordance with the “safe harbor” protections of section 559.
Practical Implications
As mentioned above, Homebanc is notable insofar as few bankruptcy court decisions discuss the Bankruptcy Code’s definition of “repurchase agreements.”  Moreover, the court’s adoption of the “bucket theory” should grant some clarity to repo participants concerning the treatment of zero purchase price confirmations in bankruptcy, at least with respect to contracts that expressly provide that each transaction under a master agreement constitutes consideration for every other transaction under the master agreement.