Mark Palmer of BTIG weighs in on the Bank of America Corp (NYSE:BAC) $8.5 billion settlement. Below is his latest report on the topic.
When the Article 77 hearing to determine whether Bank of America’s $8.5bn settlement with investors in 530 mortgage trusts that concluded on November 21 after its 35th session at the New York State Supreme Court, we stated that a ruling on the case might not occur until well into 2014.
Many value investors have given up on their strategy over the last 15 years amid concerns that value investing no longer worked. However, some made small adjustments to their strategy but remained value investors to the core. Now all of the value investors who held fast to their investment philosophy are being rewarded as value Read More
That assessment was based on the fact that Judge Barbara Kapnick, who presided over the hearing, took almost nine months – from June 7, 2012 until March 4, 2013 – before ruling in the Article 78 proceeding challenging the New York Insurance Department’s decision to allow MBIA to split itself. As we noted during that case, Judge Kapnick has an extremely busy docket, with over 300 cases at some stage of adjudication at any given time.
However, the timetable for a ruling was accelerated on Friday when Judge Kapnick was promoted to the New York State Appellate Division by Governor Andrew Cuomo. The judge will assume her new role on February 3, and Reuters reported that a staff member in her chambers stated that “the judge is going to be issuing that decision before she leaves.”
Reuters also cited David Bookstaver, a spokesman for the New York state court system, who said that New York law appeared to allow promoted judges to decide cases they were already handling and which were ready for rulings.
As a reminder, the defendants in the case are American International Group Inc (NYSE:AIG) and others who object to the settlement. This group had actually requested mediation during the hiatus that had occurred between Day 20 of the hearing on July 29 and Day 21 of the hearing on September 10, with the support of Judge Kapnick. However, that request was rebuffed by the attorneys for the plaintiff in the case, The Bank of New York Mellon Corporation (NYSE:BK), the trustee for the 530 mortgage trusts.
One of the conditions of the settlement was that The Bank of New York Mellon Corporation (NYSE:BK) would seek an Article 77 hearing so that the court could sign off on the deal.
At the heart of the case is the process that BNYM had used to negotiate the deal and to determine whether the $8.5bn had constituted a fair settlement amount. One of the overarching questions of the hearing is whether Judge Kapnick will base her ruling on what BNYM knew at the time or what was subsequently learned.
In other words, did BNYM fulfill its obligation as a trustee by seeking out and hiring experts to inform its decision on whether to sign off on the settlement? Or did it matter that some of the views expressed by some of the experts it hired, such as mortgage-backed securities (MBS) expert Brian Lin of RRMS Advisors and Stanford Law Professor Robert Daines, were ultimately proven to be inaccurate?
For example, Lin had based his valuation analysis of the settlement on a mortgage-putback success rate that was premised on an MBS damage causation theory that was no longer good law in New York after Judge Jed Rakoff’s opinion in Assured Guaranty Municipal Corp. v. Flagstar Bancorp Inc (NYSE:FBC).
And Daines had opined that a judge likely would determine that Delaware rather than New York law would be applicable in determining Bank of America Corp (NYSE:BAC)’s successor liability for Countrywide and would hold that the bank had paid fair value for Countrywide’s assets. However, New York State Supreme Court Justice Eileen Bransten ruled in MBIA Inc. (NYSE:MBI) v. Countrywide PLC (LON:CWD) that New York law would be applicable to determine successor liability and that Countrywide had not received fair value from Bank of America Corp (NYSE:BAC) for its assets.
Given the lack of a firm standard in Article 77 cases, we believe it is very difficult to predict the standpoint from which Judge Kapnick will issue her ruling.
As we noted in a blog post on July 16, we believe one of the strongest arguments made by the settlement objectors was outlined during the cross examination of Jason Kravitt of Mayer Brown LLP, attorney for BNYM, by David Wollmuth of Wollmuth Maher & Deutsch LLP, attorney for settlement objector Cranberry Park.
Wollmuth asked Kravitt what his understanding was of Section 316 of the Trust and Indenture Act (TIA), and specifically the third provision within that section:
such indenture shall automatically be deemed (unless it is expressly provided therein that any such provision is excluded) to contain provisions protecting the indenture trustee with respect to any action taken or omitted to be taken by it in good faith in accordance with the direction of the holders of not less than a majority in principal amount of the indenture securities at the time outstanding (determined as provided in subsection (a) of section 316) relating to the time, method, and place of conducting any proceeding for any remedy available to such trustee, or exercising any trust or power conferred upon such trustee, under such indenture.
In a nutshell, what Wollmuth was trying to establish was that the consent of a majority of certificate holders would be needed to change the Pooling and Servicing Agreements (PSAs) of the 530 Countrywide mortgage trusts at the core of the case. And Wollmuth tried to show that since investors in only 115 of the 530 trusts had effectively agreed to the PSA changes by supporting the settlement, the deal was in violation of the TIA.
Wollmuth established that the PSAs do not specifically waive protection under the TIA, and noted that U.S. District Court Judge William Pauley had ruled in Retirement Board of the Policemen’s Annuity and Benefit Fund of the City of Chicago et al. v. Bank of New York Mellon that the TIA applies to RMBS securities. While that ruling was handed down in April 2012, almost 10 months after the settlement was achieved, Wollmuth confirmed with Kravitt that BNYM had not taken any action after the fact to adjust for the ruling.
Asked by Wollmuth whether The Bank of New York Mellon Corporation (NYSE:BK) had sought a release for failure to comply with the TIA, Kravitt pointed out that a lot of the releases associated with the settlement were broad.
Kravitt pointed out that most PSAs have exceptions to the TIA’s “majority rule.” Wollmuth then pulled up those exceptions, and knocked them down one after another via questions posed to the Mayer Brown attorney.