The key sentence in New York State Supreme Court Justice Barbara Kapnick’s 17-page decision dismissing Walnut Place’s $1 billion put-back suit against Countrywide is buried in the middle of the penultimate paragraph. But for Bank of America, it’s pure gold. The Manhattan judge said that contrary to Walnut’s assertion, Countrywide’s mortgage-backed securities trustee, Bank of New York Mellon, acted on Walnut’s complaints about deficiencies in underlying Countrywide loans by reaching the proposed $8.5 billion settlement announced last June. That language should shield BofA and BNY Mellon from reps and warranties claims by any Countrywide MBS investor — and may offer a hint of the fate of the proposed global deal, which is also now before Kapnick after a detour in federal court.
Walnut (a nom de litigation for the hedge fund Baupost) is the leading objector to the proposed $8.5 billion deal, mostly because at the time the settlement was filed as an Article 77 trust proceeding in New York state court last June, Walnut had already sued Countrywide and BNY Mellon for breaching representations and warranties about the mortgage pool underlying trusts it had bought into. Walnut’s lawyers at Grais & Ellsworth asserted in a complaint filed back in February 2011 that the investor had jumped through the requisite procedural hoops in the MBS pooling and servicing agreements. Walnut Place, the complaint said, controlled 25 percent of the voting rights in the trusts on whose behalf it was making claims; and it had demanded action from BNY Mellon before filing suit. The trustee, according to Walnut, failed to take appropriate action on its demands.
BofA’s counsel at Wachtell, Lipton, Rosen & Katz countered in a dismissal brief last July that in fact BNY Mellon had taken action on put-back demands: It had entered the negotiations that resulted in the proposed $8.5 billion settlement. “Far from ‘declining to act at all,’ the trustee has acted decisively by settling, among other things, the precise claims brought by Walnut Place here,” the bank’s brief said. “That it has done so underscores Walnut Place’s complete failure — indeed, inability — to plead refusal of its demand.”
Kapnick’s ruling Thursday didn’t offer much elaboration, but she said first that BNY Mellon’s responses to Walnut — that it needed more time to investigate its claims — “belied” Walnut’s “conclusory allegations that the trustee refused to sue.” Even more importantly, she continued: “Moreover, the trustee did, in fact, act upon [Walnut's] complaints, as demonstrated by the settlement agreement reached with the defendants and submitted to this court…. That settlement includes the claims at issue here.”
Given that the pooling and servicing agreements governing the 503 Countrywide MBS trusts in the proposed settlement are similar to those at issue in the Walnut case, it’s hard to see how any investor could get past Kapnick’s reasoning on the trustee’s action. That means all Countrywide reps and warranties claims against BofA and BNY Mellon are at stake in the proposed global deal.