Is this timing merely a coincidence? On Friday, JPMorgan Chase and the Houston law firm Gibbs & Bruns announced that they had reached a $4.5 billion settlement to resolve allegations that the bank breached representations and warranties to private investors in 330 JPMorgan and Bear Stearns mortgage-backed securities trusts. Gibbs & Bruns negotiated the JPMorgan settlement on behalf of 21 major institutional investors, including BlackRock, Pimco, Goldman Sachs and MetLife. Two days after the JPMorgan announcement, Kathy Patrick of Gibbs appeared in New York State Supreme Court to make her closing argument in support of her clients’ previous deal, an $8.5 billion settlement with Bank of America that has been held up for 2-1/2 years by a small group of Countrywide MBS investors who object to the deal. Will Patrick be back in court in 2016 to defend the JPMorgan settlement?
She could well be, but there are important differences between the JPMorgan and BofA put-back settlements, some structural and some a matter of circumstance, that should reduce the friction for JPMorgan. Gibbs & Bruns, which is slated to receive $85 million , or 1 percent, in fees if the BofA settlement is approved, is in line for $66 million, or 1.47 percent, in fees from the JPMorgan deal, according to the JPMorgan settlement agreement. That extra share will be worth it to JPMorgan if Gibbs & Bruns used its bruising experience with Countrywide MBS objectors to improve the new deal.
Let’s look first at tweaks to the settlement structure. Bank of America’s settlement was actually filed by Bank of New York Mellon, the lone MBS trustee for all of the 430 Countrywide trusts whose breach-of-contract claims would be resolved in the proposed $8.5 billion deal. BNY Mellon asked for a judicial determination, through a special New York state-court trust proceeding known as Article 77, that it was acting within its discretion when it accepted BofA’s global settlement offer. BofA, BNY Mellon and the Gibbs & Bruns group believed that to obtain approval of the settlement under the broad latitude trustees enjoy under New York law, BNY Mellon would simply have to show that it did not abuse its power or act in conflict with the trusts’ interests. Objectors, led by AIG, have since howled that (among other things) BNY Mellon made no distinction between Countrywide MBS trusts when it agreed to a global settlement. As the lone trustee, it accepted BofA’s offer on behalf of all of the 430 Countrywide trusts in the deal. BofA, BNY Mellon and the investor group, meanwhile, have stood by the one-for-all nature of the global settlement. If the court finds that BNY Mellon did not properly execute its trustee duties, they contend, the entire $8.5 billion settlement collapses.
The JPMorgan settlement, by contrast, involves seven different MBS trustees and seems to anticipate that not all of the trustees will participate in the settlement on behalf of all the JPMorgan and Bear trusts they oversee. The agreement between the bank and the Gibbs & Bruns group, remember, is meaningless unless the MBS trustees enter the deal, since only the trustees have the power to settle the trusts’ claim. The investors in the Gibbs group have a large enough stake to direct the decisions of the trustees in many of the trusts (though the settlement agreement does not specify how many). Trustees overseeing trusts that aren’t controlled by Gibbs investors will have to make their own determination about whether to enter the settlement. Trustees will also have to decide whether to ask courts to approve their settlement decisions. The agreement between Gibbs & Bruns and JPMorgan does not refer explicitly to trustees obtaining court approval through New York’s Article 77 or any other trust proceeding, and trustees could theoretically enter the settlement without approval from certificate holders or a court. Chances are, though, that if the trustees agree to settle, they will ask a judge to bless that decision in order to insulate themselves from potential liability to MBS certificate holders in the trusts they oversee.
But unlike BofA, JPMorgan seems to be willing to proceed with the settlement even if some of the 330 trusts reject the deal. The agreement with Gibbs & Bruns includes a provision on “non-settling trusts” that envisions a few such scenarios: A trustee may decline to enter the settlement for any or all of the trusts it’s in charge of, or a court may refuse to approve a trustee’s decision to settle. In any of those events, the non-settling trust’s share of the $4.5 billion would revert to JPMorgan.