The most important woman in Bank of America’s life right now may well be New York State Supreme Court Justice Barbara Kapnick. In the last five days, Kapnick has presided over two critical hearings, one to determine whether the BofA-led group challenging MBIA’s $5 billion restructuring can put on live witnesses and the other to determine whether BofA’s proposed $8.5 billion settlement with investors in Countrywide mortgage-backed securities will remain a special proceeding under New York trust law.
Bank of America got good news at the end of both hearings. Kapnick agreed on Apr. 20 to hear live testimony in the MBIA regulatory case and ruled on Apr. 24 that objectors to the proposed MBS settlement can’t convert it to a more standard adversary case. But BofA didn’t get everything it wanted.
Kapnick was very clear about limiting the evidence the banks can put on in the MBIA case, which is being brought under a proceeding known as Article 78. “This case is really, really directed towards the actions of the Insurance Department in approving this transaction,” she told bank counsel from Sullivan & Cromwell, according to this transcript of the hearing. “It’s not a case about all the intentional and terrible things that you alleged.” Under Article 78, she said, her job is simply to decide whether the state insurance department (now the Department of Financial Services) made a reasonable determination to approve the MBIA restructuring, or whether its approval was “arbitrary and capricious.” Based on the transcript, Kapnick considers that a high bar for the banks to clear.
Her deference to the regulators should, in an ironic way, have been good news for Bank of America in the other case, its proposed MBS settlement. As you no doubt remember, Bank of New York Mellon, as Countrywide MBS trustee, filed for approval of the settlement under New York’s Article 77, which permits trustees to seek a judge’s endorsement of trust decisions. BNY Mellon, BofA, and the institutional investors who negotiated the $8.5 billion deal have long argued that the standard of review in Article 77 is whether the trustee acted reasonably – precisely analogous to the standard Kapnick said she intends to apply in the MBIA case under Article 78.
But as it happens, there’s a crucial difference between Article 77 and Article 78. The New York code spells out the standard of review in Article 78 proceedings, but not in Article 77 trust proceedings. So there’s no statutory framework to guide Kapnick’s evaluation of the proposed MBS settlement.