Will there be fireworks at Friday’s BofA MBS settlement hearing?
The hearing scheduled to take place tomorrow before Manhattan state supreme court judge Barbara Kapnick could turn out to be a straight-forward affair. The judge could simply hear brief arguments on whether to expedite discovery on Bank of America’s proposed $8.5 billion settlement of Countrywide MBS noteholders’ breach-of-warranty claims, issue a ruling, and call it a day. Given that this will be the first time that the architects of the deal — Mayer Brown for Bank of New York Mellon, the MBS trustee; Gibbs & Bruns for a group of 22 major institutional investors ; and Wachtell, Lipton, Rosen & Katz for BofA — will be gathered in the same room with the small but feisty group of lawyers opposing the settlement, I’m hoping for some heated rhetoric, at the very least. Remember, this hearing is the first chance for these lawyers to register their positions with Judge Kapnick. It’s going to be very interesting to see what each of them make of that opportunity.
The nominal issue before the judge comes from a July 27 order to show cause, filed by Scott + Scott on behalf of a four public pension funds. The show-cause order argues that the schedule suggested by BNY Mellon (and approved by Judge Kapnick) doesn’t offer investors a chance to reach an informed decision about whether to oppose or endorse the proposed deal. Noteholders are supposed to file intervention notices by August 30. Scott + Scott says investors need to conduct expedited discovery before then.
“Document discovery is needed to evaluate the reliability of the expert opinions and the reasonableness of the settlement,” the filing says. “The [self-styled] public pension fund committee also believes that discovery bearing upon the interests and potential conflicts of the negotiating parties, the adequacy of the development of the facts, as well as the basis of the expert reports, is warranted.”
Scott + Scott has already been in consultation with lawyers for other opponents of the proposed settlement, including David Grais of Grais & Ellsworth. Grais has been the most prolific intervenor in the BofA MBS proceeding. Early on he filed an objection on behalf of a group of unidentified investors operating under the name Walnut Place who were already deep in MBS litigation against BofA at the time the global settlement was announced. Since then Grais has moved to intervene on behalf of six Federal Home Loan Banks and three other Countrywide noteholders, including a motion Wednesday on behalf of a new investor group called Cranberry Park. (Walnut Place and Cranberry Park? What’s up with that?)
The intervenors’ side of Kapnick’s courtroom will probably also include two other firms representing Federal Home Loan Banks in MBS litigation: Keller Rohrback and Robins, Kaplan, Miller & Ciresi, both of which signed Grais’s brief on behalf of the FHLBs. There’s also a new intervenor group of six insurance companies, which is represented by Wollmuth Maher & Deutsch.
My prediction is that the intervenors will protest that Bank of New York Mellon is attempting to railroad the settlement through court approval with unnecessary haste. The Scott + Scott filing points to discovery that’s been taken in other MBS litigation against Countrywide, and argues that the intervenors need to know if BNY Mellon and the Gibbs & Bruns group considered that evidence before reaching their agreement with BofA. “The key point here is that the persons being asked to release multi-million dollar or multi-billion dollar claims and to submit written objections to the settlement that would release their claims by August 30, 2011, should be permitted to do so on an informed basis,” the intervenors’ brief says.
Bank of New York Mellon’s Mayer Brown lawyers will lead the defense of the deal, arguing against tampering with the schedule Judge Kapnick has already approved. The bank and the institutional investor group have already said in responses to the intervenors that they’ve disclosed a tremendous amount about how the settlement came together, including all of the expert reports BNY Mellon solicited to evaluate the settlement’s fairness and a detailed narrative of negotiations in BNY’s petition for approval of the settlement. Kathy Patrick and Robert Madden of Gibbs & Bruns will also be in court to back BNY Mellon’s argument. Bank of America isn’t officially a party to the litigation, but you can be sure Wachtell Lipton lawyers will be in attendance, albeit not at counsels’ table, as extremely interested parties.
There are a couple key things to watch. Most importantly, does Judge Kapnick treat this case as she would a class action, in which objectors can have a real impact on the proceedings and can usually opt out of a settlement they don’t like? Or does she give broad deference to BNY Mellon as trustee, as deal supporters say she must?
Remember, BofA, BNY Mellon, and the Gibbs group structured the settlement as an Article 77 proceeding under New York state law. Article 77 proceedings usually take place in garden variety trust disputes, and under New York law, the bar for blocking a decision by the trustee is incredibly high. Under Article 77, anyone with an interest in the trust has a right to challenge the trustee’s decision, which is why the intervenors have standing to challenge the BofA settlement. But unless objectors can show that BNY Mellon, as trustee, abused its discretion, acted unreasonably, or otherwise breached its fiduciary duty to the trusts’ beneficiaries, the court is not supposed to interfere with the trustee’s power.
“The objectors keep saying this is like a class action, and we say, ‘You’re wrong,'” said Madden of Gibbs & Bruns.
It will also be worth paying attention to the reception David Grais receives from deal supporters. The BNY Mellon and BofA side has said that Grais declined an invitation to join settlement talks alongside the Gibbs & Bruns group. Grais maintains in court filings that he was never offered the chance to participate fully in settlement negotiations.
The other big question is whether New York Attorney General Eric Schneiderman will have a say at Friday’s hearing. As Andrew Longstreth has reported for Reuters, the N.Y. AG has been looking hard at the settlement proposal. Both sides have apparently made a pitch to the AG, but so far, he hasn’t committed to supporting or opposing the deal. (The Delaware Attorney General is also said to be considering an intervention motion.) I called Schneiderman’s press office to ask whether the AG’s office will be represented in Judge Kapnick’s courtroom Friday but didn’t hear back.
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