CORRECTED - BofA's seizure of $500 mln Lehman deposits unauthorized

Wed Nov 17, 2010 11:06am EST

(Corrects first paragraph to show that deposits were seized after, rather than before, Lehman bankruptcy filing)

Nov 17 (Reuters) - Bank of America Corp (BAC.N) was ordered by a U.S. judge to return $500 million of deposits it seized from Lehman Brothers Holdings Inc LEHMQ.PK shortly after Lehman's record bankruptcy in September 2008.

According to court papers, Lehman had deposited the money in August 2008 as collateral so Bank of America could continue to honour Lehman's checks at times when no funds were on deposit, effectively extending an unsecured line of credit to Lehman pending the clearance of deposits.

In November 2008, after Lehman went bankrupt, Bank of America seized the money as a set-off against claims it held against Lehman on an unrelated derivative transaction, and then sued to validate the seizure.

"It is difficult to understand how BofA could have thought that taking the money was the right thing to do without first seeking permission from the court," Judge James Peck said.

"The court believes that the actions taken were surprising and, quite frankly, disappointing for a leading financial institution that should care a great deal about its reputation," he said.

A Bank of America spokesman did not immediately return a call seeking comment.

Lehman filed for Chapter 11 two years ago, in the largest-ever U.S. bankruptcy.

British bank Barclays Plc (BARC.L) bought Lehman's main U.S. brokerage business after the bankruptcy filing, and Lehman's other assets are being managed and unwound while operating under bankruptcy protection.

The case is Bank of America NA v. Lehman Brothers Holdings Inc et al, U.S. Bankruptcy Court, Southern District of New York, No. 08-01753. The main bankruptcy case is In re: Lehman Brothers Holdings Inc in the same court, 08-13555. (Reporting by Santosh Nadgir in Bangalore; Editing by Don Sebastian, Dave Zimmerman)

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