Alison Frankel

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.

For more of Alison’s posts, please go to Thomson Reuters News & Insight

Follow Alison on Twitter

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.

I was intrigued by a point Squitieri & Fearon made in an intervention petition on behalf of Waterfall Eden Master Fund, which owns certificates in six Countrywide MBS offerings. Waterfall’s lawyers cited the class action bombshell in the recent appellate opinion tossing out a settlement between freelancers and publishers. The BofA MBS settlement isn’t a class action — it was filed as a special proceeding under a New York State law permitting trustees to seek court approval of their actions. But as Waterfall notes, if Grais & Ellsworth manages to keep the case in federal court as a mass action under the Class Action Fairness Act, the Second Circuit’s new requirement that subclasses have their own counsel could turn out to be quite a messy complication for Bank of America.

Perhaps the most intriguing of the latest filings came from Peter N. Tsapatsaris, who’s working with Talcott Franklin of the Investors Clearinghouse. Franklin has worked closely with Grais & Ellsworth in the past, but the request for information he filed Monday isn’t as aggressive as some of David Grais’s intervention papers. It’s not a formal objection to the proposed settlement or even a motion to intervene, but is instead styled as an “objection in the form or a request for more information.”

The filing’s big revelation is the long list of noteholders Franklin represents. The petition names almost three dozen Countrywide MBS noteholders — mostly insurance companies, hedge funds, and small and medium-sized banks — with a stake in almost 250 Countrywide MBS trusts. That’s more noteholders than the Gibbs & Bruns group supporting the settlement, though it’s unlikely that the Franklin group crosses the all-important threshold of 25 percent voting rights in all of the trusts listed in the petition. (When BofA announced the MBS settlement at the end of June, the Gibbs group crossed the 25 percent threshold in 225 of the 530 Countrywide MBS trusts.)

Emerging publicly, of course, means enduring the spotlight. I wrote last week about the irony of the CDO manager Triaxx objecting a deal supported by its biggest noteholder, the New York Fed. There’s a similarly ironic tidbit in the Franklin filing. Among the hedge funds seeking more information about the proposed Countrywide MBS deal is LibreMax Capital, which was cofounded by Greg Lippman, the former Deutsche Bank trader who famously made a pile of money by betting against mortgage-backed securities. Lippman recently turned up in TIAA-CREF’s suit against Deutsche Bank as the author of a bunch of damning e-mail describing Deutsche Bank’s own mortgage-backed offerings as “pigs” and “crap.” Lippman is now making his money by investing in the same instruments he once derided — including, apparently, Countrywide MBS notes.

Talcott Franklin declined comment. A spokesman for LibreMax also declined comment.

I’ll keep checking the BofA MBS dockets all day and post significant new filings on Twitter.

For more of Alison’s posts, please go to Thomson Reuters News & Insight

Follow Alison on Twitter

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.

For more of Alison’s posts, please go to Thomson Reuters News & Insight

Follow Alison on Twitter

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.

For more of Alison’s posts, please go to Thomson Reuters News & Insight

Follow Alison on Twitter

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.”

Scott + Scott has already been in consultation with lawyers for other opponents of the proposed settlement, including David Grais of Grais & Ellsworth. Grais has been the most prolific intervenor in the BofA MBS proceeding. Early on he filed an objection on behalf of a group of unidentified investors operating under the name Walnut Place who were already deep in MBS litigation against BofA at the time the global settlement was announced. Since then Grais has moved to intervene on behalf of six Federal Home Loan Banks and three other Countrywide noteholders, including a motion Wednesday on behalf of a new investor group called Cranberry Park. (Walnut Place and Cranberry Park? What’s up with that?)

The intervenors’ side of Kapnick’s courtroom will probably also include two other firms representing Federal Home Loan Banks in MBS litigation: Keller Rohrback and Robins, Kaplan, Miller & Ciresi, both of which signed Grais’s brief on behalf of the FHLBs. There’s also a new intervenor group of six insurance companies, which is represented by Wollmuth Maher & Deutsch.

My prediction is that the intervenors will protest that Bank of New York Mellon is attempting to railroad the settlement through court approval with unnecessary haste. The Scott + Scott filing points to discovery that’s been taken in other MBS litigation against Countrywide, and argues that the intervenors need to know if BNY Mellon and the Gibbs & Bruns group considered that evidence before reaching their agreement with BofA. “The key point here is that the persons being asked to release multi-million dollar or multi-billion dollar claims and to submit written objections to the settlement that would release their claims by August 30, 2011, should be permitted to do so on an informed basis,” the intervenors’ brief says.

Bank of New York Mellon’s Mayer Brown lawyers will lead the defense of the deal, arguing against tampering with the schedule Judge Kapnick has already approved. The bank and the institutional investor group have already said in responses to the intervenors that they’ve disclosed a tremendous amount about how the settlement came together, including all of the expert reports BNY Mellon solicited to evaluate the settlement’s fairness and a detailed narrative of negotiations in BNY’s petition for approval of the settlement. Kathy Patrick and Robert Madden of Gibbs & Bruns will also be in court to back BNY Mellon’s argument. Bank of America isn’t officially a party to the litigation, but you can be sure Wachtell Lipton lawyers will be in attendance, albeit not at counsels’ table, as extremely interested parties.

There are a couple key things to watch. Most importantly, does Judge Kapnick treat this case as she would a class action, in which objectors can have a real impact on the proceedings and can usually opt out of a settlement they don’t like? Or does she give broad deference to BNY Mellon as trustee, as deal supporters say she must?

Remember, BofA, BNY Mellon, and the Gibbs group structured the settlement as an Article 77 proceeding under New York state law. Article 77 proceedings usually take place in garden variety trust disputes, and under New York law, the bar for blocking a decision by the trustee is incredibly high. Under Article 77, anyone with an interest in the trust has a right to challenge the trustee’s decision, which is why the intervenors have standing to challenge the BofA settlement. But unless objectors can show that BNY Mellon, as trustee, abused its discretion, acted unreasonably, or otherwise breached its fiduciary duty to the trusts’ beneficiaries, the court is not supposed to interfere with the trustee’s power.

“The objectors keep saying this is like a class action, and we say, ‘You’re wrong,’” said Madden of Gibbs & Bruns.

It will also be worth paying attention to the reception David Grais receives from deal supporters. The BNY Mellon and BofA side has said that Grais declined an invitation to join settlement talks alongside the Gibbs & Bruns group. Grais maintains in court filings that he was never offered the chance to participate fully in settlement negotiations.

The other big question is whether New York Attorney General Eric Schneiderman will have a say at Friday’s hearing. As Andrew Longstreth has reported for Reuters, the N.Y. AG has been looking hard at the settlement proposal. Both sides have apparently made a pitch to the AG, but so far, he hasn’t committed to supporting or opposing the deal. (The Delaware Attorney General is also said to be considering an intervention motion.) I called Schneiderman’s press office to ask whether the AG’s office will be represented in Judge Kapnick’s courtroom Friday but didn’t hear back.

For more of Alison’s posts, please go to Thomson Reuters News & Insight

Follow Alison on Twitter

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.

Patrick said that so far, the only announced objectors to the settlement-as opposed to the New York AG, the Federal Home Loan Banks, and others who’ve said they want more information– are clients of Grais & Ellsworth, including a coalition of MBS investors that sued Bank of America after David Grais learned of the Gibbs & Bruns group’s settlement discussions. “There’s a misperception out there that lots of investors are unhappy with the deal,” Patrick said. “Look very carefully: They’re all represented by one lawyer at one law firm,” she said. Moreover, she added, no objector has suggested a viable alternative to the proposed settlement.

“Here’s a fundamental question any of these objectors will have to answer,” Patrick said. “What’s your plan? What is your plan to fix the servicing?…Unless you have a credible plan, unless you’re going to indemnify all of us against losing this bird in the hand, then you have nothing.”

OTC reached out to David Grais and Owen Cyrulnik for a response. Grais declined comment.

(Reporting by Alison Frankel)

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.

“Bank of America and Countrywide told counsel for Walnut Place that they were negotiating a settlement,” the Mayer Brown July 11 filing says. “They offered to report to Walnut Place on a current and ongoing basis about settlement discussions, and to provide confidential information that the parties were evaluating in connection with the settlement. And they invited Walnut Place to provide input on settlement discussions.”

In an accompanying affidavit, Mayer Brown partner Matthew Ingber detailed discussion between BofA and Grais & Ellsworth. According to the affidavit, Bank of America lawyers met with Grais & Ellsworth, after the firm had demanded that Bank of New York, as trustee, commence a breach-of-warranties suit against BofA.  At that meeting, on February 2, Grais & Ellsworth was informed that BoNY and BofA were “actively negotiating a settlement that could resolve the issues raised by [Grais & Ellsworth’s client] Walnut Place,” Ingber says. The law firm was “invited to provide input on settlement discussions,” the affidavit asserts, and was asked “to delay the filing of any lawsuit temporarily so that settlement negotiations could run their course.” Three weeks after the meeting, however, Grais filed the Walnut Place suit against BofA.

Grais & Ellsworth has a different interpretation of the February 2 meeting. “[BoNY] omits several critical facts,” the firm contends in a brief filed Wednesday. “Neither [BoNY] nor Bank of America ever informed Walnut Place or its counsel that [the trustee] was participating directly in any settlement negotiations. Walnut Place did not learn that [the trustee] was directly involved in a proposed settlement until it was announced in the press.”

Moreover, according to Grais & Ellsworth, Bank of America refused to tell Walnut Place anything about the settlement talks unless Grais & Ellsworth agreed to “a set of highly unusual conditions.” Among those conditions: “Walnut Place would be told what was said in settlement discussions, but it would never be permitted actually to participate in those discussions,” the Walnut brief says. When Grais & Ellsworth “respectfully declined this proposal,” Walnut Place never heard again from BofA or BoNY about settlement talks.

Judge Barbara Kapnick should have quite a time sorting this kerfuffle out.

In other BofA MBS news, OTC heard Wednesday from the office of Congressman Brad Miller, whose letter to the Federal Housing Finance Agency was cited in Tuesday’s post, Why BofA is (partly) to blame for criticism of its MBS deals. Miller’s legislative aide, Corey Frayer, took exception to any implication that the congressman has not delved into the complexities of put-back claims. I did not intend to impugn Congressman Miller’s grasp of the BofA settlement proposal; in fact, his letter to the FHFA raises the same questions about the value of the claims the BofA deal would settle that the OTC post raises.

Frayer also said that Miller’s office has talked to Gibbs & Bruns about scheduling a meeting to review the settlement proposal. The Congressman’s goal, he said, is not to reach its own conclusion about the fairness of the BofA settlement, but “to make sure FHFA is doing its due diligence.”