In a remaining vestige of the financial crisis, the U.S. Bankruptcy Court for the District of Delaware (“Court”) recently issued an opinion upholding a repo counterparty’s sale of collateral following the insolvency of the counterparty to the repo. The Chapter 7 Trustee for the insolvent counterparty had challenged the sale on the basis that the sale, conducted through an auction, was not conducted in good faith or in a commercially reasonable manner and therefore violated the repurchase agreement. At auction, an affiliated trading desk of the non-defaulting party submitted the winning bid (there were 2 bids submitted) and took possession of the securities upon payment of the auction price. The issue was distilled and examined on the basis of the following three components:
- was the decision to determine the Net Asset Value of the securities held as collateral rationale or in good faith;
- was the auction process in accordance with industry standards;
- was the non-defaulting counterparty’s acceptance of the value obtained in the auction rationale or in good faith.