Opinion

Alison Frankel

Grais fights to keep $8.5 billion BofA case in fed. court

Alison Frankel
Sep 15, 2011 20:57 UTC

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.

Countrywide MBS investors emerge from shadows as deadline looms

Alison Frankel
Aug 30, 2011 21:44 UTC

Last October, when BofA’s proposed $8.5 billion settlement of Countrywide mortgage-backed securities breach of contract claims was just a twinkle in Kathy Patrick’s eye, David Grais of Grais & Ellsworth told me that one of the biggest problems for lawyers representing disgruntled MBS noteholders was the investors’ reluctance to come forward. Noteholders were afraid to provoke the banks that issued mortgage-backed securities, Grais said, so they didn’t want to sue under their own names. That’s why one of Grais & Ellsworth’s early put-back cases was filed on behalf of an ad hoc coalition of anonymous Countrywide MBS investors operating under the name Walnut Place.

It’s also why the Gibbs & Brun investor group that negotiated the BofA deal made such a splash. Kathy Patrick’s big institutional investor clients, including Pimco, BlackRock, and the New York Federal Reserve’s Maiden Lane funds, showed their faces when they offered public support for the proposed $8.5 billion settlement. In fact, after Grais’s Walnut Place investors filed an objection to the proposed deal, supporters of the settlement drew a contrast between the Gibbs group’s public face and Walnut’s anonymity.

But as time runs out for investors to claim a place in the litigation over the proposed settlement, more and more Countrywide MBS noteholders are shrugging off secrecy. On Monday, six new interventions motions appeared in either the original state court docket or in federal court, where Grais & Ellsworth removed the case last week. (A seventh intervention petition, by American Fidelity Assurance, popped up Tuesday morning.) The big news was the placeholder petition Grais filed on behalf of the Federal Deposit Insurance Corporation, which says it is “the receiver of numerous banks and owner of many certificates issued by many of the trusts that would be covered by the proposed settlement.” (Hard to know from that how big a stake the FDIC has in the Countrywide MBS offerings.) Like the six Federal Home Loan Banks that have already intervened in the proposed settlement, the FDIC isn’t yet objecting to the deal, but said it wants more information to evaluate the fairness of the deal.

BofA MBS settlement shocker: Grais removes case to federal court

Alison Frankel
Aug 26, 2011 23:04 UTC

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.)

NY AG’s BofA filing will ripple far beyond $8.5 bn MBS deal

Alison Frankel
Aug 5, 2011 21:18 UTC

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.

Will there be fireworks at Friday’s BofA MBS settlement hearing?

Alison Frankel
Aug 4, 2011 22:42 UTC

The hearing scheduled to take place tomorrow before Manhattan state supreme court judge Barbara Kapnick could turn out to be a straight-forward affair. The judge could simply hear brief arguments on whether to expedite discovery on Bank of America’s proposed $8.5 billion settlement of Countrywide MBS noteholders’ breach-of-warranty claims, issue a ruling, and call it a day. Given that this will be the first time that the architects of the deal — Mayer Brown for Bank of New York Mellon, the MBS trustee; Gibbs & Bruns for a group of 22 major institutional investors ; and Wachtell, Lipton, Rosen & Katz for BofA — will be gathered in the same room with the small but feisty group of lawyers opposing the settlement, I’m hoping for some heated rhetoric, at the very least. Remember, this hearing is the first chance for these lawyers to register their positions with Judge Kapnick. It’s going to be very interesting to see what each of them make of that opportunity.

The nominal issue before the judge comes from a July 27 order to show cause, filed by Scott + Scott on behalf of a four public pension funds. The show-cause order argues that the schedule suggested by BNY Mellon (and approved by Judge Kapnick) doesn’t offer investors a chance to reach an informed decision about whether to oppose or endorse the proposed deal. Noteholders are supposed to file intervention notices by August 30. Scott + Scott says investors need to conduct expedited discovery before then.

“Document discovery is needed to evaluate the reliability of the expert opinions and the reasonableness of the settlement,” the filing says. “The [self-styled] public pension fund committee also believes that discovery bearing upon the interests and potential conflicts of the negotiating parties, the adequacy of the development of the facts, as well as the basis of the expert reports, is warranted.”

Gibbs & Bruns comes to NY to sell investors on $8.5bl BofA deal

Alison Frankel
Jul 16, 2011 03:05 UTC

Kathy Patrick wants to set the world straight.

The Gibbs & Bruns partner, who represented 22 major Countrywide mortgage-backed securities investors in the negotiations that led to the June 29 proposed $8.5 billion Bank of America deal, has come East from her home office in Houston to sell Countrywide MBS noteholders and anyone else who will listen on the settlement she and her partner Scott Humphries negotiated with BofA and Countrywide MBS trustee Bank of New York Mellon.

In the face of questions about the deal from six Federal Home Loan Banks, the New York State Attorney General, and a North Carolina Congressman, Patrick and Humphries spent Thursday in Washington and Friday in New York, meeting with MBS investors and “other interested parties” they declined to identify. The Gibbs lawyers’ message: The proposed BofA settlement represents a far better outcome for noteholders than continued litigation of loan-by-loan breach of contract claims against Countrywide. In that scenario, they insist, there would be no guaranteed outcome, no assurance investors can obtain a judgment against BofA as Countrywide’s successor, and none of the mortgage loan-servicing provisions that are a big part of the proposed deal. (The Gibbs & Bruns lawyers and some of their institutional investor clients argue that the servicing component of the deal, in which Bank of America has agreed to outsource loan servicing to specialists tasked with renegotiating troubled mortgages, could end up being as valuable as the cash part of the settlement.)

Patrick is particularly exercised that one objector to the proposed settlement has asserted that the deal “fails to address” securities claims pending against Countrywide. The settlement agreement specifically states that securities fraud claims are not part of the deal, and even if BNY Mellon, as trustee, wanted to give away investors’ right to sue for securities fraud, it has no power to do so. Patrick said she was so determined to preserve her own clients’ securities law claims that Gibbs & Bruns very nearly walked away from late-stage negotiations when Bank of America’s lawyers from Wachtell, Lipton, Rosen & Katz demanded a release. “We said not only no, but hell no,” Patrick said, adding that she was ready to leave $8.5 billion on the table.

In BofA deal: Did Grais firm refuse to join settlement talks?

Alison Frankel
Jul 13, 2011 20:54 UTC

As Bank of America’s proposed $8.5 billion deal to resolve put-back claims by Countrywide mortgage-backed certificate holders comes under increased scrutiny, including a new inquiry by New York attorney general Eric Schneiderman and two newly-filed objections to the deal by major investor groups, some very intriguing news has emerged about Grais & Ellsworth, the prominent MBS investors’ firm that’s leading the charge against the BofA settlement.

Grais & Ellsworth filed new objections to the deal on behalf of two investor groups with large Countrywide MBS holdings Wednesday. But its first objection to the BofA settlement came on behalf of a coalition of MBS investors under the name Walnut Place, which had sued Bank of America in February. (Walnut Pace asserted put-back claims in two of the 530 trusts that offered Countrywide mortgage-backed certificates.) In a July 5 petition to intervene in the New York state supreme court proceeding to evaluate the proposed $8.5 billion BofA deal, Walnut Place raised some pretty serious questions about Bank of New York Mellon’s strong motivation, as trustee for the Countrywide MBS offerings, to go along with BofA’s proposal. Grais & Ellsworth also criticized the trustee for having “negotiated [the global deal] in secret, without the knowledge or consent of Walnut Place.”

That accusation of secret negotiations designed to cut out Walnut Place seems like powerful evidence of a potentially collusive deal—but according to Bank of New York Mellon, it’s just not true. In a  July 11 response to the Grais & Ellsworth filing, the trustee’s lawyers at Mayer Brown say Grais & Ellsworth was invited to join settlement discussions between Bank of America and the Gibbs & Bruns investor group that ultimately negotiated the proposed deal. But instead of opting to participate in the process, Grais & Ellsworth proceeded to file Walnut Place’s suit against BofA. Mayer Brown asserts.

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