With the gigantic news Monday that Bank of America has reached a global settlement with the bond insurer MBIA - agreeing to pay MBIA $1.7 billion and acquiring five-year warrants on about 10 million shares of the insurer’s holding company – the bank’s most pressing piece of litigation has become its proposed $8.5 billion settlement with investors in Countrywide mortgage-backed securities. Friday was the deadline for noteholders who have previously intervened in the special proceeding to evaluate the deal to announce where they stand.
There were some encouraging developments for BofA and fellow settlement proponents Bank of New York Mellon (the Countrywide MBS trustee) and the major institutional investor group represented by Gibbs & Bruns. The investment management firm Fir Tree, whose funds hold Countrywide notes with a face value of $550 million, announced support for the proposed settlement, asserting that the “widespread lack of objection” by Countrywide MBS investors “reflects deep and broad support among holder of securities for the proposed settlement.” The Federal Housing Finance Agency, which had filed a wishy-washy “conditional objection” to the deal back in September 2011, dropped its half-hearted resistance. And the New York and Delaware attorneys general, who entered the case with a bang, departed with a whimper, deferring to “capable and sophisticated counsel” for private noteholders with objections to handle things from here.
But a total of 68 noteholders objected to the settlement in filings on Friday. And though 20 of them are affiliated with AIG, they’re otherwise a diverse group that includes four Federal Home Loan Banks, a couple of public pension funds and Cranberry Park, the nom de litigation of an investment fund family with a significant Countrywide MBS stake. As I read competing briefs by objecting noteholders, who want New York State Supreme Court Justice Barbara Kapnick to reject the $8.5 billion settlement, and by BNY Mellon, which brought the special proceeding under state trust law to win court approval of the deal, I was struck by the difference in the way the two sides want Kapnick to look at the settlement. Opponents are asking the judge to examine the settlement through a microscope, scrutinizing details. Proponents want her to take a broad view of the trustee’s discretion and the magnitude of $8.5 billion.
The simpler course for Kapnick would be to approve the settlement. As BNY Mellon noted throughout the brief it submitted Friday, the $8.5 billion deal would be one of the largest payouts in U.S. litigation history. Does any judge want to make that much money disappear, especially when only 68 noteholders, of presumably thousands that own Countrywide MBS, have objected to the agreement? Besides, according to BNY Mellon, the very fact that objectors dispute the value of investors’ breach-of-contract claims justifies its decision to settle. In the trustee’s account, BNY Mellon had a choice of agreeing to an $8.5 billion deal supported by investors holding upward of $30 billion in notes in hundreds of Countrywide trusts or of rejecting the settlement and taking the risk that MBS noteholders would receive nothing unless they succeeded in very difficult and time-consuming litigation. BNY Mellon’s lawyers at Dechert and Mayer Brown argued that Kapnick should accord considerable deference to the trustee and approve any settlement it reached in good faith. But even if the bank is held to a higher standard, the brief said, BNY Mellon’s decision to take the $8.5 billion ultimately offered by Bank of America wasn’t even a close call.
“Certificateholders with billions of dollars in holdings requested that the trustee enter into (the settlement). The settlement amount – $8.5 billion – was $3.7 billion more than Countrywide was able to pay assuming (counterfactually) no other liabilities, and the prospect of recovering from Bank of America under theories of successor liability were dim,” BNY Mellon’s brief said. “And the alternative of years of litigation with no certain outcome was one that the trustee in good faith believed was not in the best interests of certificateholders.”