The drumbeat of calls for Bank of America to put what remains of Countrywide into Chapter 11 has grown so loud and relentless that according to a report last month by Bloomberg, BofA is actually considering what’s been called the “nuclear option.” Resorting to a Countrywide Chapter 11 would be fraught with unknown but surely devastating consequences for a commercial bank, as bankruptcy guru Harvey Miller of Weil, Gotshal & Manges explained in a fascinating Bloomberg video. But more significantly, there’s a good chance it wouldn’t accomplish the intended goal of roping off BofA’s liability for Countrywide’s mortgage-backed securities mess.
If Bank of America can succeed in limiting its MBS litigation losses to Countrywide’s remaining assets, it will have to show that it didn’t assume liability for Countrywide’s conduct when it acquired the mortgage company in 2008. That’s known as successor liability, and it was one of the key questions Bank of New York Mellon considered as it weighed the fairness of BofA’s proposed $8.5 billion settlement with Countrywide MBS investors. BNY Mellon’s expert, Professor Robert Daines of Stanford Law School, produced a 58-page treatise that concluded it would be very difficult for MBS investors to establish BofA’s successor liability.
Professor Daines looked at a variety of theories plaintiffs could pursue to stick BofA with the hot potato of Countrywide MBS liability. Most, he said, are non-starters, but if there’s any route to successor liability it would probably be through an argument, under New York law, that BofA’s acquisition of Countrywide was a de facto merger. There’s a four-prong test for such a determination, according to the professor, but its interpretation depends to a very large extent on the judge hearing the case. “The doctrine is thus unpredictable and there is even a disagreement about how the four-factor test should be applied: several decisions suggest that the courts apply a ‘flexible’ standard: i.e., they consider all of the factors and that any of these factors could trigger a de facto merger,” Professor Daines wrote in the analysis for BNY Mellon.
In other words, if a New York judge decides an acquiring company should be tagged with the liabilities of its target, the judge has a lot of discretion to make it happen. BofA didn’t have to look very far for proof of that. In April 2010, New York supreme court judge Eileen Bransten refused to dismiss allegations that BofA has successor liability for MBIA’s MBS claims against Countrywide. She found that MBIA offered sufficient evidence — the judge noted in particular that BofA had stripped Countrywide of its assets and shut down the Countrywide brand — to assert the deal was a de facto merger. Judge Bransten ruled that BofA must remain a defendant in MBIA’s case under MBIA’s successor liability theory.
It’s significant that when Countrywide and BofA appealed parts of Judge Bransten’s April 2010 ruling to the state’s appellate division, the defendants didn’t ask for review of her finding on successor liability. Typically, when defendants don’t appeal a ruling like that, it’s because they’re worried about setting appellate precedent that will guide future determinations on the same issue. BofA didn’t show a whole lot of confidence in its arguments against MBIA’s de facto merger theory when it let stand Judge Bransten’s preliminary ruling on its successor liability.