Late last month, without any fanfare, a New York appeals court issued a terse, one-page ruling that upheld the dismissal of Walnut Place’s breach-of-contract suit against Countrywide, Bank of America and Countrywide’s mortgage-backed securitization trustee, Bank of New York Mellon. It was an abrupt end for what was once a promising attempt at vindication for an MBS investor. It was also a huge setback for Walnut, its lawyers at Grais & Ellsworth and all the other Countrywide MBS investors who were counting on litigation against BofA as an alternative to the bank’s proposed $8.5 billion global settlement of breach-of-contract, or put-back, claims.
That one-page appellate ruling reverberated powerfully on Monday, when Walnut – otherwise known as the Boston hedge fund Baupost – filed a request to withdraw from the special New York proceeding to evaluate BofA’s MBS settlement. Framed as a letter to New York State Supreme Court Justice Barbara Kapnick from Grais partner Owen Cyrulnik, the request offered no explanation for Walnut’s withdrawal; Cyrulnik and Baupost spokeswoman Elaine Mann declined to comment.
But Baupost was facing an imminent decision about whether to request leave to appeal the dismissal of its case against BofA to New York’s highest court. Given the unlikely prospect that the Court of Appeals would agree to take the case, the hedge fund appears to have decided not to continue to spend money on litigation with little chance of a return. And given that the dismissal of Walnut’s suit makes it very difficult for the hedge fund – or any other MBS investor – to recover on put-back claims outside of the global settlement, Walnut apparently determined that it wasn’t economically rational to continue its challenge to the $8.5 billion deal. (From what I’ve heard, Bank of America did not pay Walnut anything in exchange for the hedge fund’s withdrawal; a Bank of America spokesman declined to comment to my Reuters colleague Karen Freifeld.)
In fact, according to the International Financing Review, which checked a trading database of securitized debt run by Empirasign Strategies, Walnut Place has teed up several of its Countrywide notes to be sold into the secondary MBS market Tuesday. The fund seems to have decided to cut its losses and move on.
That’s very good news for Bank of America, BNY Mellon and the major institutional investors pushing for approval of the $8.5 billion settlement. Walnut wasn’t the only intervenor challenging the deal, and AIG counsel Daniel Reilly of Reilly Pozner said Monday that the other members of the intervenors’ steering committee – Keller Rohrback on behalf of three Federal Home Loan Banks and Miller & Wrubel for the Triaxx collateralized debt vehicle – intend to continue to pursue discovery on how the deal was put together and whether it’s adequate. Both the New York and Delaware attorneys general have also intervened in the case.