Opinion

Alison Frankel

Accusations fly on Day 2 of hearing on BofA’s $8.5 bln put-back deal

Alison Frankel
Jun 5, 2013 00:17 UTC

The biggest news to come out of Tuesday’s ongoing hearing to evaluate Bank of America’s proposed $8.5 billion settlement with investors in 530 Countrywide mortgage-backed securities trusts is that the Office of the Comptroller of the Currency gave Bank of America clearance to put Countrywide into bankruptcy if Countrywide’s liabilities threatened BofA’s existence. Or at least that’s what Kathy Patrick of Gibbs & Bruns, who represents 22 institutional investors that negotiated the proposed deal with BofA and Countrywide MBS trustee Bank of New York Mellon, said her clients were told by BofA Chief Risk Officer Terry Laughlin in 2011 as they tried to come to terms on a settlement of investor claims that Countrywide breached representations and warranties about the underlying mortgage loans. To my knowledge, Patrick’s assertion – which was intended to support her argument that MBS investors risked getting much less than $8.5 billion for their put-back claims – is, if true, the first tangible indication that Bank of America ever did more than hypothesize bankruptcy for Countrywide.

Objectors to the proposed settlement, meanwhile, scored points with their argument that BNY Mellon had options aside from acquiescing to what AIG counsel Michael Rollin of Reilly Pozner called “a sweetheart deal for BofA.” Both Rollin and his partner Daniel Reilly, who occupied most of the three hours of opening arguments by objectors (including 22 AIG-related entities, several Federal Home Loan Banks, the investment manager Triaxx and a variety of pension funds and local banks), emphasized that after the Countrywide MBS trustee received a demand letter from Gibbs & Bruns on behalf of major institutional investors, the trustee could simply have begun requesting loan files from BofA as the servicer of Countrywide MBS trusts, evaluating those loan files for material breaches, and demanding that Bank of America repurchase defective loans.

Rollin played a deposition clip from a BofA servicing executive, who said it was the bank’s official policy to repurchase loans that breached representations and warranties. That statement alone, Rollin said, proved the fallacy of arguments that BNY Mellon and the Gibbs & Bruns investor group could not have pierced the corporate veil to tag Bank of America with successor liability for Countrywide’s breaches. The trustee could simply have asserted put-backs to BofA as the servicer, Rollin suggested, without ever getting into the quagmire of successor liability. After all, the Reilly Pozner lawyers argued, the $8.5 billion settlement amounts to the put-back of only 2.5 percent of the 1.6 million mortgages underlying 530 Countrywide MBS trusts covered by the deal. Had BNY Mellon taken the alternative route of demanding the put-back of defective loans, they said, the trustee could have forced BofA to buy back a higher percentage of loans.

“The trustee wants your honor to believe that this settlement was the only way,” Rollin told New York State Supreme Court Justice Barbara Kapnick. “But it wasn’t the only way. There were other ways to achieve more.”

But for a hearing that is supposed to determine whether Bank of New York Mellon made a reasonable and good-faith decision to settle put-back claims on behalf of all 530 Countrywide MBS trusts, there was an awful lot of hostility exchanged Tuesday by lawyers for the two camps of MBS investors in the case, the Gibbs & Bruns group that negotiated the deal and the AIG-led coalition that opposes it.

AIG (mostly) survives Countrywide timeliness defense in MBS case

Alison Frankel
May 25, 2012 02:48 UTC

AIG’s $6 billion in mortgage-backed securities claims against Countrywide survived a near-death experience late Wednesday, when U.S. District Judge Mariana Pfaelzer of Los Angeles issued her ruling on Countrywide’s statute of limitations defense. In a 25-page opinion, Pfaelzer tossed AIG’s federal securities claims, as well as some fraud and negligent misrepresentation claims by AIG subsidiaries. But AIG said in an email statement that the ruling leaves alive “more than 98 percent of the recovery it seeks.” For a plaintiff that feared the worst – as AIG most certainly did, thanks to a silver bullet Pfaelzer handed to Countrywide in February – the judge’s ruling is a stunning reprieve.

Here’s why. Pfaelzer has not been a particularly good friend to investors in Countrywide mortgage-backed securities, particularly when it comes to the statute of limitations on their claims. In a ruling last August, Pfaelzer said that MBS investors were on notice of potential federal securities claims against Countrywide as of Feb. 14, 2008. Given the three-year time limit on those federal claims – and Pfaelzer’s role overseeing all Countrywide MBS litigation in federal court – her ruling meant that any Countrywide investor who hadn’t filed a complaint by Feb. 14, 2011, or who didn’t have a tolling agreement was too late.

Countrywide MBS plaintiffs had an alternative route to recovery, though, through fraud and negligent misrepresentation claims under state laws, some of which have less restrictive time limits. New York, for instance, has particularly generous laws, giving plaintiffs up to six years to file fraud cases. So the New York-based insurer AIG didn’t completely despair when its Countrywide MBS claims were severed from its $10 billion suit against Bank of America and transferred to Pfaelzer in Los Angeles. (AIG doesn’t think any part of its MBS case belongs in federal court, but that’s another story.) The insurer had to expect that in Pfaelzer’s court its federal securities case wouldn’t survive Countrywide’s statute of limitations defense. But it also had reason to be confident that its New York state fraud claims would be fine.

Marc Becker’s sad tale: Casualty of BofA attack on Quinn Emanuel

Alison Frankel
Dec 7, 2011 23:48 UTC

Late Tuesday, U.S. District Judge Barbara Jones of Manhattan federal court denied Bank of America’s motion to disqualify Quinn Emanuel Urquhart & Sullivan from representing AIG in its $10 billion mortgage-backed securities case against BofA, Merrill, and other bank subsidiaries. BofA’s lawyers at Munger, Tolles & Olson had argued that a former Munger partner, Marc Becker, acquired confidential information about Merrill’s MBS litigation strategy before departing to join Quinn Emanuel in 2008, then proceeded to work on AIG’s case against BofA and Merrill. The judge faulted Quinn’s screening process for failing to identify Becker’s potential conflict. But she said Becker had performed only non-substantive editorial work on AIG’s complaint and remand motion, didn’t share any confidences, and took steps to segregate himself from the AIG case as soon as he was reminded of his previous work for Merrill Lynch and its former mortgage unit. “There is no meaningful showing here that the trial process will be tainted,” Jones wrote. “The court finds that it would be unduly prejudicial to disqualify Quinn.”

But what about Marc Becker?

In October, after learning that Munger Tolles had raised the issue of his previous work for Merrill Lynch and First Franklin Financial, Becker resigned from Quinn Emanuel’s London office. In a Nov. 3 declaration, Becker said that he hadn’t remembered working for First Franklin when he spent a total of 5.8 hours reviewing the two AIG documents. “Had I remembered it, I never would have had anything to do with the [BofA] action,” he wrote. “None of what I did during those 5.8 hours on the [BofA] action was in any way focused on, or specific to, First Franklin or Merrill Lynch. I did not use or disclose any confidential information of First Franklin or Merrill Lynch. In fact, I did not at that time, and do not now, recall any confidential information of First Franklin or Merrill Lynch.” Becker asserted that Munger’s account of his work for Merrill — which cast him as a lead partner in Merrill and First Franklin’s MBS defense strategizing — didn’t jibe with his refreshed recollection of a “far more limited” role.

Becker remained at Quinn Emanuel for a month after Munger first alerted the firm of his potential conflict. During that time, according to his declaration, he met with Quinn’s outside counsel, Gregory Joseph, to discuss his work for Merrill, without any Quinn partners present. “Thus, even if I had recalled any confidential information regarding Merrill Lynch or First Franklin, which I did not, Quinn Emanuel would not have been exposed to it,” he wrote. “I understand that defendants have suggested that I was aware of and deliberately ignored the existence of a conflict of interest arising from my work on the First Franklin matter. That is totally untrue.”

On a very dark day, BofA’s dim ray of hope

Alison Frankel
Aug 9, 2011 14:14 UTC

Monday was (another) dreadful day for Bank of America. The bank’s shares closed at a two-year low, thanks in part to AIG’s double whammy: a $10 billion fraud suit against BofA and the insurer’s simultaneous motion to intervene in opposition to BofA’s proposed $8.5 billion settlement with Countrywide mortgage-backed securities noteholders. Bank of America and Countrywide’s securitization trustee, Bank of New York Mellon, thought the $8.5 billion deal would put their MBS woes behind them. Instead the proposed settlement seems to have made the two banks into bigger targets than they were before reaching an agreement with 22 big MBS investors.

There’s plenty of reason for BofA to worry about the AIG fraud suit. First off, the New York state court complaint was filed by Quinn Emanuel Urquhart & Sullivan, a familiar opponent for Bank of America. Quinn is counsel to the bond insurer MBIA in its MBS litigation against Countrywide, in which New York state supreme court judge Eileen Bransten has consistently sided with MBIA and Quinn Emanuel. (Among other crucial rulings, Judge Bransten rejected Bank of America’s preliminary argument that it’s not liable for Countrywide’s missteps.) Quinn also represents Fannie Mae and Freddie Mac, which forced Bank of America into a $2.8 billion settlement of MBS claims in January, and Allstate, which filed a $700 million MBS case against Countrywide in December. Different Quinn Emanuel lawyers are involved in the various BofA and Countrywide cases, but the firm isn’t starting from scratch.

The AIG fraud complaint is also a canny document. The suit lumps together allegations against Countrywide, Merrill Lynch, and BofA, painting all of them with the same tarry brush even though Countrywide and Merrill Lynch committed a good chunk of the alleged wrongdoing before they became part of BofA. Quinn includes public record information about their manifestly-deficient underwriting practices, but has brought the case as a fraud suit — not a contract case accusing BofA, Countrywide, and Merrill of breaching the representations and warranties on the mortgage loans underlying the securitizations AIG invested in. That way, AIG doesn’t have to show that it controls 25 percent of the voting rights, the threshold for standing in a securitization contract case. But under the causes of action the complaint asserts — state-law claims and federal claims under the Securities Act of 1933 — Quinn Emanuel doesn’t have to show that BofA, Countrywide, and Merrill acted with fraudulent intent.

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