Alison Frankel

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.

If the case stays in federal court, there’s going to be a preliminary fight over what shape it takes. There’s no federal analog for New York state’s Article 77, the vehicle under which BNY Mellon filed this case. Article 77 permits a trustee to obtain a judge’s endorsement of its actions, under a standard that requires only that the trustee behaved reasonably. In his ruling Wednesday, Pauley called on all of the parties to submit a joint proposal for how the case should proceed in federal court. BNY Mellon and the Gibbs & Bruns investor group that supports the proposed settlement are likely to argue that Pauley should hear the case as a declaratory judgment action that would essentially replicate the Article 77 state court proceeding. They’ll argue that Pauley should only decide the question at issue in the case as it was filed: Did BNY Mellon act reasonably as a trustee in reaching the proposed settlement?

But Grais & Ellsworth – the law firm that moved the proposed settlement to federal court — is likely to have a different idea of how Pauley should structure the case. At a Sept. 21 hearing, Owen Cyrulnik of Grais & Ellsworth proposed that the case be treated as a class action, with each of the 530 trusts in the proposed settlement treated as a class member. (Keep in mind that Grais & Ellsworth’s goal is to win the right to litigate outside of the settlement on behalf of investors in three of the Countrywide MBS trusts.) That would presumably permit Pauley much more power over the merits of the settlement. Pauley has already shown considerable skepticism about BofA’s attempt to settle the claims of thousands of noteholders in 530 trusts through a vehicle that doesn’t give investors any right to opt out. Whatever structure he devises if he keeps the case, he’s probably not going to permit BofA, BNY Mellon, and the Gibbs & Bruns group to bind all Countrywide mortgage-backed noteholders to a settlement they had no hand in negotiating.

That brings us to the big question: If the case stays before Pauley, and if he permits opt-outs, can BofA walk away from the $8.5 billion settlement? The short answer is yes, although it may depend on how many opt-outs there are.

There are two relevant portions of the June 29 settlement agreement. One seems to me to be an absolute out for BofA. In a provision called “Withdrawal from Settlement,” the agreement says that if trusts holding a pre-set percentage of the total unpaid principal balance of the Countrywide MBS included in the deal don’t participate in the settlement, then BofA can withdraw. The big question mark there is the percentage. The settlement agreement says it’s “confidential,” but says that it’s already been determined by BofA and BNY Mellon.

If opt-outs don’t hit the specified percentage under the withdrawal clause, I think the banks could also fashion a case for withdrawing under the settlement agreement’s specification that New York state Supreme Court is the “settlement court” under which BNY Mellon agrees to seek approval of the deal under Article 77. The agreement says that the settlement is subject to final court approval from the settlement court — i.e., New York state Supreme. If the parties cannot obtain final approval from the court, the agreement says, the deal is void. So if the banks were desperate to walk away from the settlement in federal court, they could argue that they never agreed to have the case heard there.

Which leads, of course, to the question of why BofA might want to get out of the proposed $8.5 billion settlement. The bank reached the Countrywide MBS deal to end uncertainty about the size of its MBS liability. The settlement was supposed to reassure shareholders and permit the bank to put the MBS issue behind it. Obviously, things haven’t worked out that way. There’s more investor attention than ever on BofA’s liability for mortgage-backed securities, and the bank’s share price hasn’t exactly rebounded. Meanwhile, BofA has already taken the financial hit of setting aside MBS reserves. At some point, the bank could decide that opt-outs from the settlement so compromise the value of certainty that it would rather take its chances in the courts, where crucial questions like BofA’s successor liability for Countrywide’s mistakes are still undecided.

We’re a long, long way from there. But Countrywide MBS investors should be starting to ask themselves whether they’re better off with the settlement BofA agreed to or, in the best-case scenario in which they band together to get standing, with years of litigation.

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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.

The judge opted for a broad interpretation of the federal Class Action Fairness Act, a 2005 law intended to keep big cases involving lots of claimants out of state court. Grais & Ellsworth, which represents a group of Countrywide MBS investors who don’t like the proposed BofA settlement, removed the case to federal court under CAFA’s provisions for mass cases. (I’ve written here and here about Grais & Ellsworth’s rationale for the removal and BNY Mellon’s arguments against removal.) The test for a mass action involves three questions: Does the case involve monetary relief; does it involve 100 or more plaintiffs; and do their claims involve common questions of law or fact? In siding with Grais & Ellsworth on each of those questions, Pauley considered the implications of the proposed settlement, not the technicalities of Article 77, the New York law under which the case was filed.

“BNYM’s argument exalts form over substance,” he wrote with regard to arguments by BNY Mellon’s Mayer Brown lawyer Matthew Ingber that the Article 77 proceeding didn’t involve a claim for monetary relief, since all the trustee sought was a ruling that BNY Mellon had acted reasonably in reaching the settlement. Pauley was similarly scornful of the trustee’s assertion that the Article 77 proceeding involved only one plaintiff, BNY Mellon. “BNY Mellon’s argument is untenable,” he wrote. “BNYM is trustee for 530 separate and unique trusts and seeks approval for its decision to settle the claims of each individual trust.”

In all, Pauley seemed to find the settlement supporters’ Article 77 gambit to have been too clever by half. He noted that his research uncovered only 28 Article 77 decisions in the last 40 years, many of which involved uncontested proceedings and garden-variety trust administration issues. He said, in fact, that he could find no authority to support the idea that a single Article 77 proceeding can be used to evaluate a decision affecting 530 trusts.

BNY Mellon had also argued that Grais & Ellsworth’s client, an investor group called Walnut Place, doesn’t have the right to remove the proposed settlement to federal court because it’s not a defendant in the case. Indeed, as Ingber of Mayer Brown argued at the Sept. 21 hearing before Pauley, Walnut Place will receive money if the proposed settlement is approved, so it can’t be considered a defendant under the traditional definition. Pauley concluded, however, that BNY Mellon was once again looking at form rather than substance, calling its argument “crabbed.” Walnut Place, he wrote, was adverse to BNY Mellon, the Article 77 plaintiff, so it is a defendant for the purposes of removal.

Finally, the judge shredded settlement supporters’ hole card: a ruling by the U.S. Court of Appeals for the Second Circuit that concluded a previous Countrywide MBS case — a Grais & Ellsworth suit — belonged in state court under the “securities exception” to the Class Action Fairness Act. As I’ve explained, the securities exception is counterintuitive. If the only claims at issue in a case involve federal securities laws, the case falls under the exception and goes back to state court. If state law claims are involved, it stays in federal court. (Weird, right?)

Pauley found that even though the previous Second Circuit ruling involved Countrywide mortgage-backed securities, it concerned the rights of MBS investors. The proposed settlement, on the other hand, involves the rights and duties of BNY Mellon as securitization trustee. The bank had argued that those duties derive from the contracts that govern the Countrywide MBS; but even BNY Mellon conceded in a round of briefing earlier this month that it also had common-law trustee duties. “Because a court evaluating BNYM’s conduct as trustee must rely on New York common law, and not simply the bare text of the [trust contracts],” the judge wrote, “the securities exception does not apply here.”

BNY Mellon and the Gibbs & Brun investor group that supports the proposed settlement will surely ask for Second Circuit review of Pauley’s ruling, although it’s not clear to me whether they’ll have to get Pauley’s leave to file an interlocutory appeal. (Remember, Bank of America is technically not a party to the case.) If the Second Circuit upholds the ruling, it’s very bad news for BofA. Given the harsh treatment Pauley has dished out to settlement supporters in two hearings and in Wednesday’s ruling, it’s clear the lawyers who crafted the $8.5 billion dollar deal have a long way to go before they get Pauley to sign off. (There’s also the rather enormous matter of what Pauley called the “procedural difficulty inherent in continuing this action in federal court,” where there’s nothing remotely like an Article 77 proceeding.)

I believe there’s support for the assertion that Judge Pauley interpreted the Class Action Fairness Act too broadly in a pair of recent rulings by two federal circuits considering whether state attorney general parens patriae suits are mass actions. Both the Ninth Circuit and the Fourth Circuit have said that judges must hew closely to the language of CAFA in deciding whether a case is a mass action. Pauley wrote that he was “reluctant to indulge” BNY Mellon’s reliance on CAFA’s legislative history. We’ll have to wait and see if the Second Circuit supports his reluctance.

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The most dramatic moment at the Sept. 21 hearing on Bank of America’s proposed $8.5 billion settlement with Countrywide mortgage-backed securities investors came near the end, when Gibbs & Bruns partner Robert Madden stood up to address Manhattan federal judge William Pauley’s concerns about how the settlement came to be. Tall and clear-spoken, Madden captured the judge’s attention as he explained that his clients, a group of 22 large institutional investors, hadn’t entered a sweetheart deal with BofA, but had banded together to force the bank to pony up billions to investors for claims BofA thought it would never have to deal with.

“The problem was that these repurchase claims were lying fallow,” Madden said, according to the transcript of the hearing. “No one was doing anything. None of (the investors now objecting to the deal) were doing anything. And, I’m sorry to say, the trustee wasn’t doing anything. Limitations were running on those claims, and nothing was happening.”

Or was it?

I’ve learned that in the summer of 2010, as Gibbs & Bruns began to push Countrywide MBS trustee Bank of New York Mellon to act on its assertions that mortgages underlying the Countrywide securities were deficient, another group of Countrywide MBS investors was finalizing its own notice of default to serve on BNY Mellon. Members of the RMBS Clearinghouse, run by former Patton Boggs partner Talcott Franklin, had undertaken an extensive analysis of the underlying Countrywide mortgages, and, according to two sources familiar with the Clearinghouse’s activities, were on the verge of sending BNY Mellon a notice that would trigger put-back litigation.

The asset management firms BlackRock and PIMCO were key members of Franklin’s Clearinghouse. But they were also Gibbs & Bruns clients. On Aug. 4, 2010, Gibbs & Bruns partner Kathy Patrick sent an email to her MBS clients, including BlackRock, PIMCO, the New York Federal Reserve Bank, and MetLife. In that email, Patrick made it clear that Gibbs & Bruns clients should not support the Clearinghouse’s effort.

“Since some of you were previously in the Clearinghouse, it may be that Mr. Franklin believes (mistakenly) that he is authorized to send a notice of default on your behalf,” the email said. “If you have not already done so, it is important that you promptly advise him that he is not authorized to send a notice of default on your behalf … You should also make clear that he should not include your bonds in the count of any bonds he uses to reach the percentages required to tender such a notice.”

After Patrick’s email went out, PIMCO and BlackRock left the Clearinghouse, which never sent its notice of default to BNY Mellon. Gibbs & Bruns’s clients were left as the only investors pushing the trustee to act on their breach-of-contract claims against Countrywide successor BofA.

Patrick told me there was nothing inappropriate about her confidential email to her own clients. Nor did any action by her clients prevent the Clearinghouse from proceeding without them. (More on both points below.) Moreover, she said, Madden’s comments to Judge Pauley were true: Gibbs & Bruns’s clients were the only Countrywide MBS investors who took meaningful action to enforce their claims.

Nevertheless, in a deal that has generated so much controversy — including complaints that the Gibbs & Bruns group shut other investors out of the settlement process — the Kathy Patrick email is going to give opponents of the proposed $8.5 billion agreement new ammunition. At the very least, the new disclosures will mean more complications and delay for supporters of the embattled settlement.

This story begins back in 2009, when Tal Franklin (who did not return my phone calls) had a brilliant idea: because investors have to have significant voting rights to demand action from securitization trustees, Franklin devised a sort of dating service for MBS holders. They could register their bonds with the Clearinghouse, then investors with holdings in particular trusts could team up to obtain the requisite voting rights for asserting put-back claims. The Clearinghouse attracted some of the biggest MBS investors in the country, including Fannie Mae, BlackRock, and PIMCO.

Franklin wasn’t the only lawyer interested in mortgage-backed securities litigation, though. By February 2010, PIMCO had already retained its longtime lawyers at Gibbs & Bruns to represent it in investigating potential MBS claims. That month, Gibbs & Bruns participated in a PIMCO-organized conference for MBS investors. According to Patrick, Franklin also spoke at the conference, making a pitch for investors to join the Clearinghouse. Patrick and Franklin spoke once on the phone later that month, Patrick said. Since then, they haven’t talked.

BlackRock was at the February 2010 conference. By April or May, it had also signed a client agreement with Gibbs & Bruns. (Kathy Patrick goes way back with BlackRock: she represented a predecessor mutual fund in a 1990s case involving for-profit prisons in Texas.)

On June 17, Gibbs & Bruns sent the first letter on behalf of its clients to BNY Mellon. The letter, according to Patrick, asserted that the securitization trustee was obligated to take action on non-performing Countrywide mortgages. Gibbs & Bruns also demanded a meeting with BNY Mellon’s then-lawyers at Pillsbury Winthrop.

Meanwhile, a leading member of Franklin’s Clearinghouse, Bill Frey of Greenwich Financial, was pulling together data on Countrywide MBS defaults, based on first-lien mortgages BofA agreed to modify despite second-lien mortgages on the same property. (Frey subsequently discussed the strategy at an October 2010 MBS investors’ conference organized by David Grais of Grais & Ellsworth.) Frey found, according to his comments at that conference, “defaults in every single (Countrywide MBS) trust.” Fannie Mae, another Clearinghouse member, reviewed and ultimately endorsed Frey’s analysis.

Throughout the early summer of 2010, Clearinghouse leaders held long conference calls to decide how to proceed against Bank of New York Mellon and Countrywide, based on Frey’s evidence of default. By early August, Franklin had prepared a draft notice of default to be sent to BNY Mellon. I’ve been told the draft notice — which I’ve been unable to obtain — included the evidence Frey had assembled of specific breaches in specific trusts.

Then Patrick sent the Aug. 4 email to her clients and the Clearinghouse effort fell apart.

“Several of you have contacted me to indicate that the alternative clearinghouse organized by Tal Franklin may be on the verge of sending a letter to Bank of New York declaring BONY in default of its obligations under the Countrywide (pooling and servicing agreements),” the email said. “That is not in your interests.”

Gibbs & Bruns, the email said, believed it was making progress with BNY Mellon and did not want that progress to be halted by the Clearinghouse notice of default. “We were aggressively pushing BNY Mellon to take action throughout the summer,” Patrick told me. “Our clients were understandably anxious that a lawyer they had not engaged was purporting to act on their behalf.”

Patrick said the email, which was sent only to her clients, didn’t seek to squelch the Clearinghouse, but just to remind her clients to make sure Franklin knew what they wanted to do. “All our clients did was say, ‘You can’t use our holdings (to reach the 25 percent voting rights threshold),’” Patrick told me. “If the Clearinghouse had 25 percent in any deal and had information indicating default, they should have sent the notice. I don’t know why they didn’t.”

They didn’t because without PIMCO and BlackRock, the Clearinghouse couldn’t muster the requisite voting rights. The other Clearinghouse investors were effectively stranded. And that leads to a question that has dogged supporters of the proposed $8.5 billion BofA settlement: why didn’t Gibbs & Bruns invite more Countrywide MBS investors and their lawyers into talks with BNY Mellon and BofA? I’ve previously reported on AIG’s claim that Patrick didn’t return a call from its lawyers at Quinn Emanuel Urquhart & Sullivan (Patrick said the Quinn lawyer who called didn’t identify himself as counsel to AIG) and David Grais’s assertion that he was told he could not participate directly in settlement talks (Patrick has said that Grais’s discussions were with BofA and the trustee, not her). Patrick has always said that she responded to any Countrywide MBS investors who contacted Gibbs & Bruns, but she declined to disclose whether Clearinghouse members who supported the draft notice of default subsequently called Gibbs & Bruns, citing client confidentiality.

After BlackRock and PIMCO made it clear that they would not support the Clearinghouse’s letter to BNY Mellon, Gibbs & Bruns continued to pursue the trustee. Patrick sent the bank a letter on Aug. 20, following an unsuccessful meeting with BNY Mellon’s Pillsbury lawyers. On Sept. 3, the trustee told Gibbs & Bruns that it did not intend to take any action on her letter. Patrick told me she received BNY Mellon’s letter in the middle of the day. By day’s end, she said, she was circulating a draft notice of non-compliance among her clients.

Gibbs & Bruns made the final version of that letter public in October 2010. One source familiar with Franklin’s Clearinghouse draft notice told me the Gibbs notice read like a “watered down” version of Franklin’s draft, “with less evidence.”

Patrick heatedly rejected the suggestion that she borrowed strategy or language from Franklin or the Clearinghouse. She never even saw his draft letter to BNY Mellon, she said, nor did she receive any Clearinghouse materials from her clients. The notice of deficiency Gibbs & Bruns sent to the trustee, she said, “was based on binders of evidence I and my team put together over the course of months of investigation, none of which came from the Clearinghouse.”

Patrick also rejected speculation that BlackRock backed away from the Clearinghouse effort and threw in with Gibbs & Bruns because it didn’t want to take a hard line with Bank of America, which still owned 34 percent of the asset manager in the summer of 2010. (David Grais raised the issue of BlackRock’s alleged conflict of interest in Walnut Place’s petition to intervene.) BlackRock had already signed on with Gibbs & Bruns by the time the Clearinghouse draft default notice was circulating, she said. The asset manager didn’t change course in August 2010, according to Patrick. It had already picked its course.

And as Gibbs partner Bob Madden told Judge Pauley at the Sept. 21 hearing, that course forced Bank of America to the negotiating table for a year of hard-fought talks. “This was no effort to help Bank of America. This was an effort to bring Bank of America to justice,” Madden said. “This was no collusive, self-selected group of people who decided to get in a room with Bank of America and cut a sweetheart deal.”

Will Judge Pauley agree — or will news of the Clearinghouse’s aborted pursuit of BoA and BNY Mellon lead him to authorize discovery on that question? I bet I’m not the only one who can’t wait to find out.

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When New York attorney general Eric Schneiderman sued Bank of New York Mellon in August, the AG asserted that the Countrywide mortgage-backed securitization trustee had breached its duty to MBS investors. “As trustee, BNYM owed and owes a fiduciary duty of undivided loyalty,” said the AG’s suit, which was filed as a counterclaim in BNY Mellon’s case seeking approval of the proposed $8.5 billion Bank of America settlement with MBS investors. “[BNYM] breached that duty to [investors'] detriment and disadvantage, by failing to notify them of issues regarding the quality of loans underlying their securities.”

But according to BNY Mellon, it had no such duty.

The bank’s lawyers at Mayer Brown and Dechert filed a 14-page brief this week outlining its interpretation of the responsibilities of an MBS securitization trustee. The filing came at the direction of Manhattan federal Judge William Pauley, who’s deciding whether the BofA MBS settlement should be heard in state court, where BNY Mellon filed it, or in federal court, where key objectors to the proposed settlement want it to proceed. Pauley was concerned with the “securities exception” to the Class Action Fairness Act, which could end up guiding his decision on the forum question. For BNY Mellon, however, any discussion of its trustee responsibilities is fraught with danger. It’s already facing the New York AG’s claims, and several other state attorneys general have threatened similar actions. MBS investors, meanwhile, are pushing BNY Mellon (and other securitization trustees) to bring put-back claims, with the implied threat that investors will take action against trustees unless they do.

BNY Mellon’s brief pushes back against that pressure, asserting that the trustee’s responsibilities don’t extend much beyond the ministerial duties spelled out in the pooling and servicing agreements governing MBS trusts. New York law, the filing said, imposes only two addition burdens: the trustee must avoid conflicts of interest and must perform its ministerial functions “with due care.” According to BNY Mellon, there’s an important distinction between ordinary trustees and indenture trustees. Indenture trustees, it said, do not have “a traditional duty of due care.” Its duties — beyond those two basic responsibilities implied in New York law — are strictly defined by the pooling and servicing trust contracts.

The New York AG argued that the duties of an indentured trustee change when there’s a default. (He also asserted that BNY Mellon failed even to carry out its “ministerial” duties to MBS holders.) Defaults trigger a heightened duty under New York law, which says that a trustee must behave as a “prudent man” would with regard to his own affairs. State-law precedent, the AG brief said, holds that the “prudent man” standard of care is a fiduciary duty — and BNY Mellon breached it when the bank failed to notify Countrywide MBS investors of defaults in underlying mortgage loans.

BNY Mellon’s brief countered with two arguments, one legal and one factual. Even if default triggers a heightened standard of care for indentured trustees, it argued, those new duties are still governed by the trust agreement. The bank quoted language referring to the extra duties as “a relatively minor change in the legal landscape.” Moreover, according to BNY Mellon, there has been no default, under the precise language of the pooling and servicing agreements. “The Events of Default are strictly defined and none has occurred,” the brief said.

We’ll have to wait for Pauley to say what he thinks of the bank’s description of its duties. In the meantime, there’s a good question for the rest of us to contemplate. BNY Mellon’s brief tells investors in asset-backed securities that they shouldn’t count on indentured trustees to do anything more than their specified administrative duties. That leads to the conclusion that securitization trustees consider all substantive responsibility to police asset-backed deals to lie with investors. Will securitization agreements have to change for that market to be revived? And if investors insist on more accountability for trustees, will anyone agree to take on that duty?

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On Wednesday night, Grais & Ellsworth filed a 29-page brief laying out its arguments for why Bank of America’s proposed $8.5 billion settlement with Countrywide mortgage-backed securities investors belongs in federal court, not in New York state court, where Bank of New York Mellon, as Countrywide MBS trustee, filed it. I’ll talk about Grais’s assertions in a moment, but first I want to explain why the jurisdictional question is so crucial to the ultimate fate of BofA’s proposed deal. Two transcripts tell that tale.

BNY Mellon, you’ll recall, used a highly unusual device when it asked for court approval of the proposed $8.5 billion settlement in late June. The bank filed the case as an Article 77 proceeding in New York state supreme court, taking advantage of a state law that permits trustees to seek a judge’s endorsement of their decisions. Using Article 77 was a deliberate tactic by BNY Mellon, BofA, and the 22 institutional investors who support the settlement. The lawyers who put together the deal considered and rejected other possible vehicles for court approval, but decided that Article 77 was the fastest, cleanest way to resolve claims involving 530 separate trusts. The provision, which is usually invoked in garden-variety trust cases, gives broad discretion to trustees, who are generally assumed to be acting in the best interests of trust beneficiaries.

The Article 77 strategy looked brilliant at the first hearing on the settlement before New York state supreme court judge Barbara Kapnick. According to a transcript of the August 5 hearing, Judge Kapnick shot down objectors to the deal who, in her view, wanted to proceed with discovery as if the case were a class action. “It’s important to remember that this petition was brought as an Article 77 petition,” the judge said. “It’s not a class action. There aren’t provisions in there to opt out that you are talking about. That’s not what this is. If you started it, maybe that’s what you would have done, but they started it and that’s what they did. I have to work, at least now, within the confines of the proceeding that is before me.”

But then David Grais of Grais & Ellsworth, in a move as bold and novel as the banks’ use of Article 77, removed the case to federal court, arguing that the settlement is a mass action under the federal Class Action Fairness Act. And there, BNY Mellon met with quite a different reception. At a Sept. 1 hearing, Manhattan federal judge William Pauley gave BNY Mellon’s counsel, Matthew Ingber of Mayer Brown, pretty rough treatment. “Isn’t it unusual to use an Article 77 proceeding to seek approval for a settlement of this type,” the judge demanded, according to a transcript of the hearing. “Isn’t it odd that the trustee appears to have chosen such a proceeding whose main benefit appears to be to limit the rights of the trust beneficiaries to opt out of the settlement? You don’t think that is in any way at odds with the trustee’s fiduciary duty to the beneficiaries of the trust?” Judge Pauley went on to grill Ingber on the experts BNY Mellon engaged to determine the fairness of the settlement and the controversial side letter to the settlement agreement in which BofA affirms indemnity for BNY Mellon as trustee.

These are the same issues Grais & Ellsworth and other objectors to the settlement have raised and Judge Pauley is clearly listening to their arguments. It’s dangerous to read too much into how judges behave at preliminary hearings, but if I were BofA, BNY Mellon, or any other supporter of the settlement, I’d prefer my chances before Judge Kapnick a lot more than another hearing in front of Judge Pauley.

That’s why BNY Mellon argued strenuously in a Sept. 1 brief in federal court that the case should be sent back to state court. Calling Grais’s attempt to move the proceeding to federal court “frivolous,” the bank made four key arguments. First, BNY’s counsel at Mayer Brown and Dechert argued, the case isn’t a mass action under the Class Action Fairness Act. There’s only one plaintiff in the Article 77 proceeding — BNY Mellon as trustee — not the 100 plaintiffs that define a mass action under the federal law. The Article 77 proceeding doesn’t seek money damages, as CAFA requires, but simply judicial approval of the trustee’s action; and Grais’s client, a coalition of Countrywide MBS investors acting under the name Walnut Place, can’t remove the Article 77 case to federal court because it’s not a defendant in the proceeding.

Finally, the bank’s lawyers pointed to a ruling by the U.S. Court of Appeals for the Second Circuit that holds claims under MBS pooling and servicing agreements fall into an exception to CAFA’s removal provisions. As the bank’s brief noted, Grais & Ellsworth knows the Second Circuit ruling, in a case called Greenwich Financial Services v. Countrywide, quite well: it was counsel to the MBS investors who sought, successfully, to send their case against Countrywide back to state court. To put an exclamation point on its assertion that Grais shouldn’t have removed the case to federal court, the BNY Mellon brief asked Judge Pauley to award attorneys fees for the cost of litigating the removal petition.

In Wednesday’s filing, Grais & Ellsworth addressed all of the bank’s arguments in a brief that essentially asked Judge Pauley to look beyond the technicalities of the Article 77 proceeding and treat the proposed settlement as a de facto class action. Picking up on the judge’s own skepticism at the Sept. 1 hearing, the Grais brief asserted: “BNYM chose to file an Article 77 proceeding because it thought it could use the special proceeding to cherry-pick the aspects of class action settlements that it finds useful (court approval, global releases of the rights of all class members, ‘objections’ rather than interventions as of right, etc.), but to cast aside the aspects that it finds inconvenient (mainly the right to opt out).”

Grais asserted that even though BNY Mellon says it’s the only plaintiff in the Article 77 proceeding and claims that the case doesn’t seek money damages, there are in fact 530 trusts and $8.5 billion at issue. And even though the bank says Walnut Place isn’t a defendant, the Grais brief said, Walnut has intervened in opposition to the proposed settlement, which makes it an adverse party in the state case — a defendant in fact, if not in name. As for BNY Mellon’s demand for attorneys fees, the brief said, “despite BNYM’s repeated and reckless description of this removal as ‘frivolous,” there is no doubt that Walnut Place had an objectively reasonable basis for removing this action to federal court.”

The Grais brief also distinguishes between the Greenwich Financial case that led to the Second Circuit’s holding and the Article 77 proceeding. Greenwich was a case between an MBS investor and Countrywide as the MBS issuer, the brief said. The Second Circuit’s finding related to the rights of an MBS investor. But BNY Mellon isn’t an MBS investor, so the appellate court’s holding does not apply. (The brief includes a complicated, only-a-lawyer-could-love-it discussion of the source of rights under securitization pooling and servicing agreements; I called Grais and his partner Owen Cyrulnik for a layman’s explanation but didn’t hear back.)

Bank of New York Mellon has until tomorrow to respond to the Grais & Ellsworth brief. Judge Pauley has scheduled a hearing on the remand motion for next Wednesday. If he’s as outspoken as he was at the first hearing, we should get a pretty good idea of whose going to be overseeing this case — and whether the Article 77 gambit backfires on the banks.

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There is never a dull moment in Bank of America’s attempt to resolve its Countrywide mortgage-backed securities liability. In a stunning move Friday, the law firm leading the fight against BofA’s proposed $8.5 billion settlement with Countrywide MBS noteholders removed the case from New York state supreme court to federal court. “The purpose of removal is to make sure that this proceeding is adjudicated in the proper forum,” Grais & Ellsworth wrote in a letter to lawyers for Bank of New York Mellon (the Countrywide MBS trustee) and for the big institutional investors who crafted the proposed settlement. “We believe in good faith that this proceeding is subject to federal jurisdiction as a mass action under the Class Action Fairness Act.” (Here’s the Grais & Ellsworth letter with the removal petition attached.)

The removal to federal court plunges the proposed settlement, at least temporarily, into more uncertainty than ever. Judge Barbara Kapnick, who is presiding over the unusual state court proceeding to evaluate the proposed deal, had imposed an August 30 deadline for Countrywide MBS investors to intervene in the case. She had also established a preliminary schedule for the discovery Grais & Ellsworth and other objectors’ counsel have demanded from BNY Mellon, BofA, and the institutional investors and their Gibbs & Bruns counsel. The removal to federal court means that Judge Kapnick isn’t in charge of the case, so it’s not clear whether lawyers are required to abide by her schedule.

The Grais & Ellsworth filing was a surprise tactic. The firm has been in the state court litigation since early July, filing its initial petition to intervene only days after Bank of New York Mellon, as Countrywide trustee, filed a suit asking for court approval of the settlement of investors’ claims. David Grais even appeared before Judge Kapnick at an August 5 hearing on objectors’ requests for expedited discovery. Grais & Ellsworth apparently waited to remove the case to federal court until Judge Kapnick granted the firm’s motion to intervene in the state court case on Monday. (Grais, who was not in the office Friday, didn’t respond to my e-mail; his partner Owen Cyrulnik, who signed the letter to opposing counsel, didn’t respond to an e-mail and phone message.)

You can bet that BNY Mellon and the institutional investors will move quickly to try to get the case back to Judge Kapnick, whose first substantive ruling, albeit on a minor procedural matter, went their way. Lawyers from Mayer Brown and Dechert (for BNY Mellon) and Gibbs & Bruns (for the investors backing the settlement) will be filing remand motions next week, possibly as soon as Monday or Tuesday. Whoever hears the remand fight — Grais & Ellsworth’s petition said the case is related to a Countrywide MBS investor suit before Manhattan federal judge William Pauley -- will have to deal with all kinds of novel questions. Among them: Grais & Ellsworth’s own previous precedent on put-back claims in federal court.

Grais’s argument for sending the $8.5 billion proposed settlement to federal court comes under the Class Action Fairness Act, the 2005 law that requires big-money class actions to be litigated under the oversight of a federal judge. CAFA also mandates that mass actions, in which at least 100 plaintiffs have filed parallel suits seeking money damages against the same defendant, be transferred to federal court. Grais & Ellsworth is asserting that because the proposed Countrywide MBS settlement will resolve the claims of investors in 530 trusts, it’s a mass action under CAFA.

But here’s the thing: there’s actually only one plaintiff in the proceeding before Judge Kapnick. As I’ve explained, the banks and the Gibbs & Bruns investor group that negotiated the proposed settlement are seeking court approval for the $8.5 billion deal under Article 77, a provision of the New York rules of civil procedure that’s typically invoked in small-time family trust matters. The lawyers behind the settlement opted for an Article 77 proceeding — instead of a class action — specifically because New York trust laws give broad leeway to trustees, who are presumed to be acting in the interests of trust beneficiaries unless someone can show they acted unreasonably. It may turn out that the banks’ Article 77 strategy also undermines Grais & Ellsworth’s attempt to move the case to federal court because technically the case is not a mass action.

There’s also the little matter of a previous ruling by the U.S. Court of Appeals for the Second Circuit, upholding a Manhattan federal court’s remand of a Countrywide MBS put-back case to state court. It’s worth taking a moment to consider that case, in which a plaintiff called Greenwich Financial Services asserted in New York state supreme court that Countrywide had breached representations and warranties about the mortgage loans underlying notes Greenwich bought. Those are the exact sort of investor claims, remember, that are at issue in the proposed $8.5 billion settlement.

Countrywide removed the case to federal court under the Class Action Fairness Act. (Sound familiar?) Greenwich successfully remanded the case to state court, arguing that CAFA didn’t apply to its put-back suit because of an exception in the class action law for cases related to rights and duties, including fiduciary duties, over securities. It was a smart argument by Greenwich’s lawyers, who badly wanted to keep the case in state court. Put-back suits argue that the MBS sponsor is required to buy back underlying mortgages that breach the representations the sponsor made about them. They’re based on the issuer’s contractual duty, not on fraud allegations.

Countrywide appealed, but the Second Circuit found that “as long as a plaintiff’s claim seeks enforcement of a right that arises from an appropriate instrument, its falls within the [CAFA] exception.” (Technically, the appellate court found that it didn’t have jurisdiction to hear Countrywide’s appeal.)

The Article 77 proceeding that Grais & Ellsworth has now removed to federal court is distinct from the Greenwich case because it was filed by the Countrywide MBS trustee, not by an investor. Nevertheless, the Second Circuit seemed pretty clear that put-back claims, which the Article 77 proceeding addresses, are an exception to the Class Action Fairness Act.

Grais & Ellsworth, as it happens, knows the Greenwich precedent very well: Grais represented the plaintiff who fought so hard — and effectively — to remand the put-back case to state court. And guess who oversaw the Greenwich case when it returned to state court? Judge Kapnick! Last October, she dismissed Grais’s case on procedural grounds, finding that Greenwich didn’t own the requisite 25 percent voting rights that would have permitted it to demand put-backs.

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As expected, the Delaware attorney general’s office moved Tuesday night to intervene in Bank of America’s proposed $8.5 billion settlement with Countrywide mortgage-backed noteholders. The Delaware petition to intervene and supporting brief are notable for their moderate tone, in contrast to last week’s fiery objection and counterclaims by the New York attorney general. Tuesday’s filings, signed by Delaware deputy AG Jeremy Eicher, said that Delaware is concerned about BofA’s indemnification of the MBS trustee, Bank of New York Mellon — the same conflict-of-interest allegation raised by just about every intervenor who so far has surfaced in the case. Delaware, which noted that two of the Countrywide MBS trusts are Delaware vehicles, argued that it needs more information about the proposed settlement in order to protect investors.

The real story, though, is that both the New York and Delaware AGs believe BofA and BNY Mellon can’t resolve their liability to MBS investors without including regulators in the deal. After all, the proposed $8.5 billion settlement encroaches on turf already claimed by New York AG Eric Schneiderman and Delaware AG Joseph Biden III; in June, the New York Times broke the news that the New York and Delaware AG offices were investigating the banks involved in the mortgage-backed securitization process — including sponsors and underwriters such as Countrywide and BofA and trustees such as BNY Mellon.

The Delaware and New York securitization probes, which are running parallel to the 50-state AG investigation of banks’ mortgage foreclosure practices, gave Schneiderman and Biden a platform to argue that MBS investors, as well as homeowners, are affected by slipshod mortgage underwriting practices and widespread foreclosures. In the wider foreclosure-resolution negotiations between mortgage lenders and state AGs, New York and Delaware have taken a lead in calling for banks to also address MBS liability.

“We have a close working relationship with New York,” Delaware deputy AG Ian McConnel told me Wednesday. McConnel said the states have been investigating the entire securitization process, from the documentation of mortgage loans backing securities offerings to communications with investors after underlying loans began to go into default. (The New York AG’s counterclaims in the BofA settlement, for instance, asserted that BNY Mellon breached its duties as trustee in the Countrywide MBS offerings because the bank didn’t demand documentation from Countrywide when the notes were offered, and didn’t notify investors when underlying mortgages defaulted.)

The proposed BofA deal would wipe out Bank of America and Bank of New York Mellon’s liability to investors for much of the same alleged wrongdoing that the New York and Delaware AGs are investigating. It would also enact changes in how BofA services mortgage loans, which is what the larger AG group is negotiating with mortgage lenders. The settlement between BofA, BNY Mellon, and Countrywide investors, in other words, attempts to do privately what 50 attorneys general are trying to accomplish in the regulatory arena.

And that’s why the deal has run afoul of the New York and Delaware AGs. With their intervention motions, New York and Delaware are telling the banks that they can’t evade regulators. Try it and you’ll get the stunning fraud counterclaims New York asserted last week.

“Is is possible to reach a settlement with investors? Yes, it is,” said Delaware deputy AG McConnel. “You do that by including more than the trustee, the underwriter, and 22 investors in talks. A settlement has to be done in a holistic way.”

That’s a pretty clear invitation to BofA and BNY Mellon. Now we’ll have to see if the banks accept.

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Before Thursday night, opposition to Bank of America’s proposed $8.5 billion settlement with Countrywide mortgage-backed securities investors consisted of a handful of investor groups represented by a handful of law firms. Even if you counted the six Federal Home Loan Banks that have moved to intervene but haven’t yet gone on record opposing the deal, intervenors represented less than 7 percent of all Countrywide MBS noteholders. The 22 gargantuan institutional investors that negotiated the settlement were a much more potent force.

That all changed when New York attorney general Eric Schneiderman -- in a move that stunned deal proponents — filed an explosive motion to intervene in the $8.5 billion settlement. Schneiderman didn’t just register his opposition to the proposed settlement, which he said had been reached “without ever giving beneficiaries or their representatives an opportunity to test [whether] the proposed settlement is reasonable.” He went far, far beyond mere opposition: Schneiderman accused the Countrywide MBS trustee, Bank of New York Mellon, of breaching its fiduciary duty and said that Bank of America may have aided and abetted the breach. And to show that he was serious about those assertions, Schneiderman actually filed counterclaims against BNY Mellon along with his intervention motion.

The countersuit — a truly revolutionary filing — alleges three causes of action against BNY Mellon, in what is thought to be the first time the AG has accused an MBS trustee of fraud. Schneiderman claimed the bank breached its duty to investors because the settlement includes indemnification for the trustee — a “direct financial benefit” for BNY Mellon, according to the AG’s filing. Schneiderman also asserted that BNYM let down Countrywide MBS investors long before proposing the $8.5 billion settlement, by failing to notify certificate holders that underlying Countrywide mortgages were in default. Finally, the New York AG accused Bank of New York Mellon of securities fraud under New York’s Martin Act.

Schneiderman didn’t claim that New York pension funds actually have a stake in the Countrywide MBS trusts. Instead, he claimed standing under the parens patriae doctrine, asserting that he intervened “to protect the interests of the public and absent investors.” And that raises a question that Bank of New York Mellon — once it recovers from the shock of the AG’s filing — is sure to argue to Judge Barbara Kapnick as she weighs whether to approve the proposed settlement. Are investors — and the public at large — better off if the New York AG kills the proposed BofA settlement?

There are a lot of ways to look at the question. In the narrowest interpretation, will investors be able to recover more money for breach of warranty claims against Countrywide than they would under the settlement? Maybe. There have only been a few investor put-back cases filed against Countrywide, mostly by David Grais of Grais & Ellsworth, and they’re not far enough along to lay odds on their success. Mayer Brown, which represents BNY Mellon in the BofA proposed settlement, argues that a lot of obstacles stand between Countrywide noteholders and a windfall recovery from Bank of America. Those range from the loan-by-loan evaluation investors will have to make of individual underlying mortgages to Bank of America’s claim that it’s not liable for Countrywide’s failings.

Grais may be able to surmount those obstacles, which is why his goal in opposing the proposed BofA deal seems to be to force the bank to permit opt-outs for investors who want to take their chances in litigation. If the settlement blows up, however, every Countrywide MBS investor is going to have to slug it out in court, and they’re certainly not all represented by lawyers who are prepared for a long, expensive battle with BofA that may end with them getting nothing.

The AG’s filing, moreover, has implications beyond the BofA case. Bank of America and Bank of New York Mellon certainly bear a heavy load of responsibility for the MBS fiasco. The New York AG has been engaged in an investigation of their (and other banks’) various failures as a trustee, MBS issuer, and mortgage servicer. But this settlement was at least an attempt to mitigate the damage BofA and BNY Mellon have caused investors — and for some reason, Schneiderman waited until now to claim that BNY Mellon committed fraud and that BofA may have abetted it. That timing gives little incentive to any of the other banks facing billions of dollars in MBS breach-of-warranty liability to reach global deals with investors. Why spend months negotiating a settlement if the New York AG, under the broad aegis of protecting the public, attacks you after you reach a deal?

The AG’s filing gives MBS trustees even less incentive to push for investor settlements. Trustees have been incredibly slow to take action against MBS issuers, which is why regulators like Schneiderman are scrutinizing them. Bank of New York Mellon took a bold step when it hired Jason Kravitt and Matthew Ingber of Mayer Brown to talk to the Gibbs & Bruns group of 22 investors, instead of continuing to resist investors’ calls for action against MBS issuers. Its reward for reaching a deal with the Gibbs & Bruns investors? A Martin Act suit. Given that Schneiderman hasn’t brought Martin Act claims against MBS trustees that haven’t proposed global settlements, why would any trustee try to engineer a deal? For the banks that issued mortgage-backed securities and the banks that acted as trustees on MBS offerings, the Schneiderman filings are a very good reason to keep their profiles low by quietly defending cases by those investors with the fortitude to sue.

Then there’s the issue of the mortgage servicing provisions in the BofA settlement proposal. BofA and the Gibbs & Bruns group have touted the servicing provisions, which call for Bank of America to outsource loan service to companies tasked with renegotiating troubled loans, rather than pushing homeowners into default. Bank of America, in fact, regarded the loan modification provisions of the MBS settlement as template for solving the foreclosure crisis.

The AG’s filing, on the other hand, blasted the settlement’s servicing provisions as “too vague and ill-defined to provide any concrete value to investors.” Schneiderman complained that Bank of America’s poor track record in modifying troubled loans underscored the inadequacy of the servicing aspects of the settlement. The AG is in the midst of talks to reach nationwide mortgage modification deals with a host of banks, so I’m sure he’s speaking knowledgeably. But as a matter of tactics, he doesn’t seem to be sending a message of cooperation to BofA — or other banks.

Finally, there’s the message the AG sent to New York businesses. BNY Mellon’s response to the AG was as remarkable, in its way, as the AG’s filing. “The allegations by the New York attorney general are outrageous, baseless, unsupported by fact and law and we will fight them if necessary in court,” the bank said in a rare display of adjectives by a financial institution. “We are confident that we have fulfilled in all respects our responsibilities as trustee. The AG’s action is misguided and fails to comprehend the role of the trustee and the benefit the settlement would provide to investors.”

A BNY Mellon spokesman told me the bank didn’t want to comment on the broader implications of the AG’s filing, but directed me to Kathryn Wylde, CEO of the Partnership for New York City, a business development non-profit. She said that the AG’s “careless action” hurts New York’s standing as a financial center.

“It’s disappointing from the standpoint of the business community that the AG would make a fraud accusation against a major financial institution — in the press,” she told me. “And to not have any consultation with the institution? The bank was blindsided by what appears to be an outrageous charge.” (The AG’s press office declined comment.)

Thursday’s filing unquestionably changes the tenor of the BofA MBS settlement. It could end up changing a lot of other things as well.

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Faced with a barrage of investor criticism (see here, here, and here) of its proposed $8.5 billion mortgage-backed securities settlement with Bank of America, Bank of New York Mellon, the MBS trustee, has released the expert reports underlying the agreement. The reports—in particular the valuation report by Brian Lin, the managing director of RRMS Advisors—provide an extraordinary window into how this deal got done. They may not change anyone’s mind about the fairness of the settlement proposal, but they answer a lot of the questions that challengers of the deal have raised.

Let’s start with the numbers that were on the table when Gibbs & Bruns and its group of 22 major Countrywide MBS investors sat down across from Bank of America and its lawyers from Wachtell, Lipton, Rosen & Katz. The outside range of the investor group’s demands was $52.6 billion, according to Lin’s report. At the low end, the investors asked for $27 billion. Bank of America, according to the Lin report, calculated that investors could claim no more than $4 billion.

Lin began his evaluation of the investors’ Countrywide MBS claims by reviewing the presentations that the Gibbs group and BofA made to one another. (His company, RRMS, is a mortgage-backed securities consultant that advises MBS investors, packagers, and issuers. BoNY and its Mayer Brown lawyers selected Lin’s firm to provide an expert opinion after beauty contest interviews with several candidates, which had to have MBS expertise but couldn’t have a significant relationship with Bank of America.) Interestingly, Lin’s report indicates that the valuation methodology employed by both the investors and BofA was almost the same, although the two sides obviously plugged different assumptions into the basic formula.

Here’s how the investors and the bank came to their numbers. As OTC explained earlier this week, the key metric is the value of the investors’ valid claims that Countrywide breached its representations and warranties on the mortgage loans underlying the securities. To determine that number, both the bank and the investor group began with a calculation of how many of the mortgages in the underlying pools would go into default. They next considered what percentage of the value of a defaulted underlying mortgage would be lost to investors—a figure Lin calls the “severity rate.” (If, for instance, a homeowner defaulted on a $100,000 mortgage and the mortgage-holder was later able to sell the mortgaged property for $75,000, the severity rate would be 25 percent.) Two more numbers then come into play: the breach rate, which represents the percentage of mortgages in the pool that breached Countrywide’s assurances to investors; and the success rate, which is the percentage of claims on which investors could successfully demand a bank buyback.

To arrive at its demand of $27 billion to $52.6 billion, the Gibbs & Bruns group asserted that $107.8 billion of the underlying mortgage pool would go into default. The investors applied a severity rate of 66 percent, a breach rate of 60 percent, and a success rate of 50 to 75 percent. (Lin said the latter two rates were too high, based on his “industry knowledge.”) The bank used different figures to reach its $4 billion estimate of investors’ claims, but Lin didn’t spell out BofA’s exact numbers.

In any event, Lin and his team arrived at their own conclusions for default, severity, breach, and success rates, based on the two sides’ presentations and their own expertise. RRMS said 36 percent of the defaulted underlying loans breached Countrywide’s representations and warranties, and investors would prevail on 40 percent of their buy-back claims on those loans. Lin made calculations using two different severity rate models—one estimating that investors would recover only 40 percent of the value of defaulted underlying mortgages; the other estimating a 55 percent recovery. He also offered two different default models.

In the end, Lin arrived at a range of $8.8 billion to $11 billion for investors’ claims. Importantly, he reached those results without knowing that negotiations between BofA, BoNY, and the Gibbs & Bruns group had produced a tentative $8.5 billion settlement agreement. In a second opinion, Lin says the servicing aspects of the proposed settlement “can be viewed as an industry precedent-setting, pro-active approach in regard to establishing a framework to enhance recovery efforts.” (Supporters of the proposed settlement assert that the servicing provisions, which require BofA to hand off responsibility for renegotiating troubled mortgage loans, could be worth as much or more to investors as the cash part of the deal.)

When Mayer Brown submitted BoNY’s petition for court approval of the $8.5 billion settlement proposal, partners Jason Kravitt and Matthew Ingber said that their expert’s valuation didn’t include discounts for BofA’s legal defenses against the investors’ claims. The other three expert reports released Tuesday explain what those legal defenses would have been—and may still be if the proposed settlement isn’t approved.

First off, Mayer Brown obtained an opinion from Capstone that said the trustee could recover no more than $4.8 billion from Countrywide, based on Countrywide’s assets. That’s important because in another expert opinion, Stanford Law School professor Robert Daines said it would be “difficult” for MBS investors to prevail in claims that Bank of America is responsible for Countrywide’s breaches of representations and warranties on the underlying mortgages. (There’s a lot more nuance in Professor Daines’s scholarly 58-page analysis, but the takeaway is that investors can’t be sure they could pierce the corporate veil and hit Bank of America for Countrywide’s failings.)

Finally, New York University School of Law professor Barry Adler opined on the standard for investor breach of contract claims against MBS issuers. Bank of America asserted in negotiations that unless the breaches were material—meaning that Countrywide misrepresented the facts that led to the mortgage’s default—the bank isn’t liable. Investors argued that every breach is material because they wouldn’t have purchased the securities without Countrywide’s representations and warranties about the underlying mortgages. Professor Adler’s 13-page opinion concludes that the law is unsettled but that the bank “appears to [have] a reasonable position.”

Kathy Patrick of Gibbs & Bruns, who represents the investor group that negotiated the deal, told OTC she’s glad the expert reports have come out. “We believe investors will find it very helpful ,” she said. “The trustee’s expert opinions… confirm and support the trustee’s decision to enter into the settlement.”