This is a potentially stunning loss for those suing $BAC for the sins of $CFC. Should the court follow this ruling (it is precedent now) then $BAC ‘s legal liability for Countrywide just plummeted to pennies. This ruling makes a Chapter 11 for $CFC doable with minimal damage to $BAC itself (should they go that way) and further gives $BAC untold leverage in settlement talks in any suit that involves potential $CFCliability.
This is a VERY big win and we’ll start to see the ramification filter down. Expect $BAC to be far less amenable to settlements (post the big one coming up) in the future OR expect the end value of those settlements to begin to fall precipitously.
Now of course this is the courts, so we never know for sure what will happen down the road but dismissing the claim “with prejudice” is a very big deal. While there will of course be no immediate effect, a very large legal pendulum just swung the other way…..
Allison Frankel Reports: Emphasis mine
None of the firms battling Countrywide and Bank of America on behalf of mortgage-backed securities investors has dedicated more resources to the fight than Quinn Emanuel Urquhart & Sullivan. Quinn represents some of the biggest MBS claimants in suits against Countrywide, including AIG and the Federal Housing Finance Agency. The firm also represents MBIA in the bond insurer’s long-running New York State case against Countrywide. If anyone on the plaintiffs’ side has the goods on Countrywide and Bank of America, in other words, it’s Quinn Emanuel.
That’s why a ruling Thursday by U.S. District Judge Mariana Pfaelzer of Los Angeles federal court is such a blow to Countrywide MBS investors. Pfaelzer, who’s overseeing the consolidated federal-court MBS litigation against Countrywide, dismissed Allstate’s successor-liability and fraudulent-conveyance claims against Bank of America, with prejudice. Quinn represents Allstate, and offered detailed allegations that Bank of America’s 2008 acquisition of Countrywide was structured to deliver Countrywide’s revenue-producing businesses to BofA while simultaneously walling off the mortgage company’s looming liability for subprime mortgages and mortgage-backed securities.
Pfaelzer said, however, that Quinn Emanuel hadn’t come up with sufficient facts to back its assertions. She rejected two different theories: first, that Bank of America and Countrywide engaged in a fraudulent conveyance or transfer; and second, that BofA’s acquisition of Countrywide was a de facto merger. The judge has previously found for Bank of America in two other rulings on the de facto merger question (here’s Pfaelzer’s April 2011 opinion in an MBS class action against Countrywide), but this is the first time she’s delivered a definitive ruling on fraudulent-conveyance allegations.
“Once (Allstate’s) legal conclusions are stripped away, the court is left with the rather bare description of (acquisition) transactions contained in the (amended complaint),” Pfaelzer wrote. “Those paragraphs describe the asserts that Countrywide sold and their prices. They do not contain any indication that any other market for these assets existed, or what the assets’ ‘true’ market value was, or what the accounting value of the assets was, or why the court should disregard the very concrete intangible benefit that proceeds from the asset sales were used to pay off debt, increase capital, and otherwise allow Countrywide to remain in business.”
The judge also said Quinn Emanuel hadn’t shown enough evidence that BofA and Countrywide were aware of the mortgage-backed securities claims that awaited Countrywide at the time of the 2008 acquisition. Interestingly, Quinn pointed to a 2007 MBS class action against Countrywide to show that BofA knew about Countrywide’s MBS exposure and structured its acquisition to protect the bank. Pfaelzer relied on the same 2007 class-action filing this summer when she set a time limit on MBS claims against Countrywide. But in Thursday’s ruling, she reasoned that even though the 2007 class action suit put plaintiffs on notice, it didn’t portend insolvency for Countrywide.
Bank of America’s liability for Countrywide MBS failings is a huge issue for investors who want to recover their losses. In the bank’s proposed $8.5 billion breach-of-contract settlement with Countrywide investors, MBS trustee Bank of New York Mellon obtained an expert opinion that Countrywide has less than $5 billion in assets. That’s obviously a lot less money than MBS investors want to wring from BofA (and, for that matter, a lot less than the $15 billion the bank has taken in reserves for MBS liability). But Pfaelzer’s continued resistance to successor liability for BofA, especially given the considerable effort Quinn Emanuel put into the Allstate amended complaint, doesn’t bode well for investors. You can bet that lawyers for Countrywide and Bank of America will use the successor-liability issue as leverage in settlement talks.