Opinion

Alison Frankel

Can BofA and SocGen undo MBIA’s restructuring?

Alison Frankel
May 11, 2012 22:19 UTC

Of the 18 banks that challenged MBIA’s restructuring in 2009, only two – Bank of America and Société Générale – remain. On Monday, unless there’s a last-minute settlement this weekend, they will finally go to trial in New York State Supreme Court to argue that New York state insurance regulators should not have approved MBIA’s split, which stripped $5 billion in capital from MBIA’s crippled structured-finance insurance business.

But exactly what shape the trial will take – and what relief BofA and SocGen can ultimately obtain – remains unclear. Bank lawyers from Sullivan & Cromwell, MBIA counsel from Kasowitz Benson Torres & Friedman, and state lawyers from the office of New York Attorney General Eric Schneiderman are all preparing for a proceeding whose parameters have not been set. The banks call it a trial and continue to insist they are entitled to call expert witnesses such as former state insurance officials, who would opine on the adequacy of former Insurance Superintendent Eric Dinallo’s vetting of MBIA’s restructuring. MBIA and the state say the proceeding, brought under an expedited process known as Article 78, should be limited to a few witnesses with direct knowledge of the regulatory investigation. Justice Barbara Kapnick, who is overseeing the case, has called the trial “a glorified oral argument, with some testimony, the crucial testimony, to support it.”

Kapnick agreed at a hearing on Apr. 20 to permit witness testimony at the trial, but she didn’t specify who could be called as a witness. Nor did she set firm rules when she held a conference call this week with all of the parties. So the first order of business Monday will almost certainly be argument on motions to define the trial, though it’s just as likely that the lawyers will end up fighting over the witnesses one by one, as they are proposed. Kapnick has set aside 16 trial days over four weeks for the proceeding.

MBIA has spent more than $1 billion to settle with the 16 other banks that were part of the original coalition challenging its restructuring, including, most recently, Natixis, UBS, Morgan Stanley and Royal Bank of Scotland. According to MBIA’s quarterly filing with the Securities and Exchange Commission on May 10, the insurer has shed tens of billions of dollars of exposure through those deals. In just the first five months of 2012, MBIA commuted $11.5 billion of exposure.

But the insurer’s structured-finance arm, MBIA Insurance, has had to borrow from its better-capitalized municipal bond division, MBIA National, to fund those settlements. Last fall MBIA Insurance took out a $1.1 billion secured loan from MBIA National, at the time it announced a settlement with Morgan Stanley. According to its May 10 filing, MBIA Insurance has borrowed an additional $443 million from MBIA National in the last two months.

In securities suits, is D&O coverage pot of gold – or brick wall?

Alison Frankel
May 9, 2012 05:21 UTC

In an ideal world, the value of a shareholder securities claim rests entirely on its merits. And now that you’ve stopped snickering, let’s talk about the real world, where two disputed settlements test the de facto assumption that securities claims are worth what a company’s directors and officers insurance carriers are willing to pay to resolve them.

In Bank of America’s proposed $20 million settlement in Manhattan federal court of a derivative suit based on its 2008 acquisition of Merrill Lynch, a group of plaintiffs’ firms with a parallel case in Delaware Chancery Court argue that the settlement is insufficient because $20 million is only a tiny fraction of BofA’s $500 million in D&O coverage. Last week Delaware Chancellor Leo Strine refused to enjoin the New York deal, leaving it up to U.S. District Judge P. Kevin Castel to decide whether the derivative shareholders are getting enough money. That’s a sensible result: Castel, after all, is overseeing consolidated Merrill-related securities litigation against BofA, so he’ll evaluate the proposed derivative settlement with the understanding that there are lots of other claimants waiting in line for a chunk of that $500 million in D&O insurance, even as it’s whittled down by defense fees.

Meanwhile, Castel’s Manhattan federal court colleague, U.S. District Judge Lewis Kaplan, last week expressed reservations about a $90 million settlement of securities class action claims against Lehman’s former officers and directors, including former CEO Richard Fuld. Kaplan said in a May 3 order that he understood $90 million was all that remained of Lehman’s $250 million D&O policy, but wanted to satisfy himself that shareholders wouldn’t be better off if their counsel at Bernstein Litowitz Berger & Grossmann pressed on and obtained judgments against individual defendants. To that end, he ordered five former Lehman officers to turn over to him the financial records they’d already produced to a settlement magistrate, retired U.S. District Judge John Martin.

Can Strine and Castel resolve forum fight in BofA derivative deal?

Alison Frankel
Apr 30, 2012 14:48 UTC

According to Bank of America’s board, if three Delaware plaintiffs’ firms wanted to settle their shareholder derivative suit accusing the board of breaching its duty when it acquired Merrill Lynch, they should have asked. Instead, the Delaware firms bickered amongst themselves and refused to participate meaningfully in settlement talks, board members’ counsel at Davis Polk & Wardwell and Richards, Layton & Finger wrote in a brief filed in Delaware Chancery Court on Wednesday.

The BofA brief, which offers a rare behind-the-scenes account of the shuttle diplomacy the bank’s lawyers engaged in as they tried to get rid of parallel derivative suits in Delaware and New York, said that the board would have been perfectly willing to reach a deal with either set of plaintiffs’ firms, and actually reached out first to Delaware counsel from Chimicles & Tikellis; Horwitz, Horwitz & Paradis; and Wolf Haldenstein Adler Freeman & Herz. BofA said it was “rebuffed” by those firms, so when shareholders’ counsel in the New York federal court case, Kahn Swick & Foti and Saxena White, approached the board with a settlement offer, the bank began the talks that resulted in a $20 million proposed settlement earlier this month.

Even in the midst of those negotiations, the bank brief said, Davis Polk partner Lawrence Portnoy took a call from a Wolf Haldenstein partner who said the Delaware firms were finally ready to talk about a deal within the limits of BofA’s directors and officers insurance coverage. But before Portnoy could bring his clients into the loop, the other two Delaware shareholder firms informed him that Wolf Haldenstein had spoken out of turn and Delaware wouldn’t settle within the D&O policy limits. (That figure hasn’t been publicly disclosed in either derivative case, but my Reuters colleague Jon Stempel calculated it to be $500 million, based on Delaware plaintiffs’ filings.)

Bank of America and the standard of review: A tale of two cases

Alison Frankel
Apr 26, 2012 13:48 UTC

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.

For MBIA and BofA, it’s just about high noon

Alison Frankel
Apr 13, 2012 13:47 UTC

Litigation is frequently likened to poker, but there’s actually a big difference. Poker ends with a winner and a loser. In litigation, there’s a third option: settlement. In the overwhelming majority of cases, lawyers and their clients eventually conclude that it’s more sensible to compromise than to test your hand with winner-take-all stakes.

Not Bank of America in its three-pronged litigation with the bond insurer MBIA.

MBIA has said publicly and repeatedly that it’s eager to make deals to resolve accusations that its 2009 restructuring, which split the bond insurer’s healthy muni-bond business from its ailing structured-finance division, was a $5 billion fraud. On Wednesday, the hedge fund Aurelius Capital became the latest plaintiff to reach a deal with MBIA. (Kudos to my colleague Karen Friefeld, who broke news of the settlement.) Aurelius had filed a purported class action in Manhattan federal court on behalf of MBIA policy holders, and its lawyers at Simpson Thacher & Bartlett were litigating that case alongside a group of banks that filed similar fraud claims — as well as a separate regulatory challenge to the restructuring — in New York State Supreme Court. Aurelius’s departure from the litigation means that the bank group, which began with 18 members but has dwindled to Bank of America and two French banks, loses a powerful, well-capitalized ally. (In fact, Aurelius was scheduled to depose MBIA CEO Jay Brown this week; now the banks will depose him next week.)

Meanwhile, in MBIA’s insurance fraud and mortgage-backed securities put-back case against Countrywide and BofA, New York State Supreme Court Justice Eileen Bransten on Wednesday denied the bank’s motion to bar MBIA from deposing BofA CEO Brian Moynihan. As I’ve explained, MBIA’s lawyers at Quinn Emanuel Urquhart & Sullivan want to question Moynihan to help establish Bank of America’s successor liability for Countrywide’s MBS failings. MBIA argued that Moynihan’s public statements about BofA assuming responsibility for Countrywide’s wrongdoing are key to the question of successor liability; Bank of America’s counsel at O’Melveny & Myers countered that MBIA was trying to harass Moynihan, who has no unique knowledge of BofA’s corporate structure or decision-making on Countrywide. Bransten said Moynihan’s public statements are “undoubtedly relevant,” and only the CEO can explain what he meant when he made them. Billions of dollars hang on how Bransten — the leading N.Y. judge on bond insurers’ claims against MBS issuers — decides the question of BofA’s successor liability.

Deposing CEOs: BofA, MBIA, and a tale of two hearings

Alison Frankel
Mar 15, 2012 15:49 UTC

Bank of America really, really does not want CEO Brian Moynihan to sit for a deposition in bond insurer MBIA’s breach-of-contract case against Countrywide and BofA.

According to the transcript of a hearing on the issue last Friday morning before Manhattan State Supreme Court Justice Eileen Bransten, the bank’s lawyers at O’Melveny & Myers said that under the so-called Apex rule — which essentially says that high-ranking executives shouldn’t have to waste their time responding to deposition questions that lesser-ranking officials can answer just as well — Moynihan should be shielded from testifying because he doesn’t have unique personal knowledge of the disputed facts in the case. He’s also a very busy man, said Jonathan Rosenberg of O’Melveny. Rosenberg displayed a slide that showed all of BofA’s “enormous operations,” which he said demanded “24/7 work from senior executives, especially the CEO.” MBIA’s insistence on taking testimony from Moynihan, when BofA has already offered up for deposition several senior bank executives with the same knowledge as the CEO, amounts to harassment, according to BofA.

“There’s no basis to say they have to have Brian Moynihan when they have access to all these other people,” including former BofA CEO Ken Lewis, Rosenberg said. “This effort to depose Brian Moynihan is for harassment purposes.” If Bransten allowed the deposition in MBIA’s case, other bond insurers suing Countrywide would “seek their own shot,” the O’Melveny lawyer said, which “would clearly be disruptive to the business of Bank of America to lose their CEO to substantial time in prepping for and taking depositions.”

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.”

Pauley’s BofA MBS ruling is boon to New York, Delaware AGs

Alison Frankel
Oct 25, 2011 21:31 UTC

In 1998, 400 investors in a trust that distributed revenue from a communications satellite got word that their securitization trustee had settled a $41 million suit against the satellite’s fuel supplier. The trustee, IBJ Schroeder, filed a New York State Article 77 proceeding to obtain a judge’s endorsement of the $8.5 million settlement. Some of the investors protested the deal, arguing that the trustee didn’t have the power to settle the case without consulting them. In 2000, a New York appeals court ruled that, in fact, IBJ Schroeder did have that power, under both New York law and the contract governing the satellite revenue trust. The lower court ultimately ruled in the Article 77 case that even if investors considered the settlement amount too low, Schroeder hadn’t acted unreasonably or imprudently in striking the deal.

If you’re wondering why I’m telling you about an 11-year old ruling involving a defunct communications satellite, it’s because the IBJ Schroeder opinion is sure to be invoked by Bank of New York Mellon, the trustee of those Countrywide mortgage-backed securities, as well as the 22 Countrywide MBS investors represented by Gibbs & Bruns as they appeal last week’s decision by U.S. District Judge William Pauley III of Manhattan federal court. In holding that the federal courts have jurisdiction over Bank of America’s proposed $8.5 billion settlement, Pauley took issue with BNY Mellon’s use of an Article 77 proceeding to get the deal approved. The judge wrote that Article 77 is usually employed to resolve garden-variety trust administration issues; BNY Mellon and Gibbs & Bruns will use the IBJ Schroeder ruling to argue at the U.S. Court of Appeals for the Second Circuit that, contrary to Pauley’s assertion, there’s precedent for using Article 77 exactly as they did in the BofA MBS case.

But even as the Second Circuit decides whether to take up the issue of the rights and responsibilities of securitization trustees, state attorneys general are likely to pounce upon some of the language in Pauley’s 21-page ruling. I warned that there might be unintended consequences for indentured trustees when the judge asked for briefing on the BNY Mellon’s duties. After Pauley’s ruling, that warning is now a red alert. New York attorney general Eric Schneiderman and his faithful follower, Joseph Biden III of Delaware, have both announced that they’re investigating MBS securitization trustees. Schneiderman showed he’s serious by filing state-law fraud claims against BNY Mellon along with his petition to intervene in the BofA Article 77 proceeding. In his complaint against BNY, Schneiderman argued that once an investment goes south, as many of the MBS trusts have, the indentured trustee has a fiduciary duty to trust beneficiaries under New York common law.

Whither BofA MBS deal: Can banks walk if case stays with Pauley?

Alison Frankel
Oct 21, 2011 21:50 UTC

It’s way too early to assume that Manhattan federal judge William Pauley III will end up deciding the fate of Bank of America’s proposed $8.5 billion settlement with investors in Countrywide mortgage-backed securities. But that doesn’t mean it’s too early to start wondering what will happen to the proposed deal if he does.

First, a caveat: Bank of New York Mellon, the Countrywide securitization trustee that filed the case in New York state Supreme Court , has the right to request appellate review of Pauley’s ruling that the case belongs instead in federal court under the Class Action Fairness Act. And when BNY Mellon asks the U.S. Court of Appeals for the Second Circuit to hear the appeal, the bank will surely remind the appellate court of its own language in a previous Countrywide MBS case, in which the Second Circuit decided the suit should go back to state court. In his ruling Wednesday, Pauley cited the “paramount federal interests” at stake in the BofA MBS settlement. But the previous Second Circuit MBS ruling expressly rejected that rationale. “If Congress meant the consideration of a class action’s importance to the nation as a whole to trump these limiting provisions [under CAFA], it would have indicated that intent,” the Second Circuit panel wrote in Greenwich Financial v. Countrywide. “Congress wisely chose not to leave it to the federal courts to assert jurisdiction over whatever class actions seemed to judges to be ‘of national importance’ — a standard much too amorphous to admit of consistent judicial application — but instead to define concrete criteria for federal jurisdiction under CAFA.”

That language doesn’t seem to bode well for the Countrywide MBS investors who want Pauley to evaluate the proposed settlement. But this is a weird, unpredictable case. I wouldn’t bet anything more valuable than an ice cream sundae on whether the Second Circuit will take the appeal and overturn Pauley.

Why Judge Pauley kept $8.5bn BofA MBS case in federal court

Alison Frankel
Oct 20, 2011 18:59 UTC

The key paragraph in Manhattan federal judge William Pauley III‘s 21-page ruling Wednesday in Bank of America’s proposed $8.5 billion settlement with Countrywide mortgage-backed-securities investors is the last one.

“The settlement agreement at issue here implicates core federal interests in the integrity of nationally chartered banks and the vitality of the national securities markets,” Pauley wrote. “A controversy touching on these paramount federal interests should proceed in federal court.”

That sentiment infuses the judge’s analysis of where BofA’s proposed deal should be evaluated: Before Justice Barbara Kapnick in Manhattan state Supreme Court, where Countrywide MBS trustee Bank of New York Mellon filed the case as a special proceeding under an obscure state law; or before Pauley in federal court, where there’s no analogous procedure for binding thousands of investors in 530 trustees to a settlement only 22 of them had a hand in negotiating. Pauley’s decision to keep the case in federal court throws the settlement off the carefully-designed track the bank, the trustee, and the investor group that supports the deal hoped to keep it on.

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