In BofA deal: Did Grais firm refuse to join settlement talks?

By Alison Frankel
July 13, 2011

As Bank of America’s proposed $8.5 billion deal to resolve put-back claims by Countrywide mortgage-backed certificate holders comes under increased scrutiny, including a new inquiry by New York attorney general Eric Schneiderman and two newly-filed objections to the deal by major investor groups, some very intriguing news has emerged about Grais & Ellsworth, the prominent MBS investors’ firm that’s leading the charge against the BofA settlement.

Grais & Ellsworth filed new objections to the deal on behalf of two investor groups with large Countrywide MBS holdings Wednesday. But its first objection to the BofA settlement came on behalf of a coalition of MBS investors under the name Walnut Place, which had sued Bank of America in February. (Walnut Pace asserted put-back claims in two of the 530 trusts that offered Countrywide mortgage-backed certificates.) In a July 5 petition to intervene in the New York state supreme court proceeding to evaluate the proposed $8.5 billion BofA deal, Walnut Place raised some pretty serious questions about Bank of New York Mellon’s strong motivation, as trustee for the Countrywide MBS offerings, to go along with BofA’s proposal. Grais & Ellsworth also criticized the trustee for having “negotiated [the global deal] in secret, without the knowledge or consent of Walnut Place.”

That accusation of secret negotiations designed to cut out Walnut Place seems like powerful evidence of a potentially collusive deal—but according to Bank of New York Mellon, it’s just not true. In a  July 11 response to the Grais & Ellsworth filing, the trustee’s lawyers at Mayer Brown say Grais & Ellsworth was invited to join settlement discussions between Bank of America and the Gibbs & Bruns investor group that ultimately negotiated the proposed deal. But instead of opting to participate in the process, Grais & Ellsworth proceeded to file Walnut Place’s suit against BofA. Mayer Brown asserts.

“Bank of America and Countrywide told counsel for Walnut Place that they were negotiating a settlement,” the Mayer Brown July 11 filing says. “They offered to report to Walnut Place on a current and ongoing basis about settlement discussions, and to provide confidential information that the parties were evaluating in connection with the settlement. And they invited Walnut Place to provide input on settlement discussions.”

In an accompanying affidavit, Mayer Brown partner Matthew Ingber detailed discussion between BofA and Grais & Ellsworth. According to the affidavit, Bank of America lawyers met with Grais & Ellsworth, after the firm had demanded that Bank of New York, as trustee, commence a breach-of-warranties suit against BofA.  At that meeting, on February 2, Grais & Ellsworth was informed that BoNY and BofA were “actively negotiating a settlement that could resolve the issues raised by [Grais & Ellsworth’s client] Walnut Place,” Ingber says. The law firm was “invited to provide input on settlement discussions,” the affidavit asserts, and was asked “to delay the filing of any lawsuit temporarily so that settlement negotiations could run their course.” Three weeks after the meeting, however, Grais filed the Walnut Place suit against BofA.

Grais & Ellsworth has a different interpretation of the February 2 meeting. “[BoNY] omits several critical facts,” the firm contends in a brief filed Wednesday. “Neither [BoNY] nor Bank of America ever informed Walnut Place or its counsel that [the trustee] was participating directly in any settlement negotiations. Walnut Place did not learn that [the trustee] was directly involved in a proposed settlement until it was announced in the press.”

Moreover, according to Grais & Ellsworth, Bank of America refused to tell Walnut Place anything about the settlement talks unless Grais & Ellsworth agreed to “a set of highly unusual conditions.” Among those conditions: “Walnut Place would be told what was said in settlement discussions, but it would never be permitted actually to participate in those discussions,” the Walnut brief says. When Grais & Ellsworth “respectfully declined this proposal,” Walnut Place never heard again from BofA or BoNY about settlement talks.

Judge Barbara Kapnick should have quite a time sorting this kerfuffle out.

In other BofA MBS news, OTC heard Wednesday from the office of Congressman Brad Miller, whose letter to the Federal Housing Finance Agency was cited in Tuesday’s post, Why BofA is (partly) to blame for criticism of its MBS deals. Miller’s legislative aide, Corey Frayer, took exception to any implication that the congressman has not delved into the complexities of put-back claims. I did not intend to impugn Congressman Miller’s grasp of the BofA settlement proposal; in fact, his letter to the FHFA raises the same questions about the value of the claims the BofA deal would settle that the OTC post raises.

Frayer also said that Miller’s office has talked to Gibbs & Bruns about scheduling a meeting to review the settlement proposal. The Congressman’s goal, he said, is not to reach its own conclusion about the fairness of the BofA settlement, but “to make sure FHFA is doing its due diligence.”

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