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BofA's $8.5 Billion Settlement Could Fall Apart After Request Made To Move Mortgage Case From State To Federal Court
As most know by now, the ridiculously low $8.5 billion putback settlement, which was supposed to have been closed by now, and which was the key driver in preventing Bank of America from trading far, far lower (and requiring much more capital), is the wildcard that would allow the bank to package tens if not hundreds of billions of claims against the bank in a "tidy (and very small) little package." The key factor allowing this settlement to be structured in its existing form, was that the lawsuit was filed in New York State Court, which allows for a little something known as Article 77, or a provision permitting "special proceeding related to express trust." The details are provided below, but in essence boil down to the following: the settlement in its current form can only be enacted if the lawsuit is conducted under New York State law. Well, minutes ago, David Grais, attorney for Walnut Place, which as we have repeatedly observed represents those interests who claim the $8.5 billion settlement is massively insufficient and are engaged in litigation seeking far greater recoveries, filed a request to transfer the lawsuit from State Court to Federal Court where everything basically begins a new. More than anything, this latest development may explain why Bank of America has been scrambling to raise tens of billions in the open market as an adverse court decision, one granting Grais' request, means the bank is suddenly open to unlimited downside capital risk. In the meantime, add major litigation headline risk to everything else that BAC has going for it...
Manal Mehta explains why this could be a gamechanger:
If this happens, basically renders the Article 77 irrelevant. Article 77 is a New York Statute. Bank of America wanted to use Article 77 to make the settlement binding upon all 530 trusts including those who objected to the settlement. Class action in Federal Court allows parties to opt out of the settlement.
And here is Reuters' Allison Frenkel explaining the nuances of Article 77:
There was a lot of chest thumping Wednesday by noteholders who don't like the proposed $8.5 billion settlement between Bank of America and investors in securities backed by Countrywide mortgages. Bill Frey of Greenwich Financial, a firm that structures asset-backed securities, told Tom Hals of Reuters that he had been "bombarded" with e-mails from angry Countrywide noteholders. He's urging them to rise up in opposition to the settlement proposal. "If investors were to open their mouths," Frey told Hals, "they can push for a better and fairer settlement, or they can get two cents on the dollar like they are getting."
Good luck with that.
The lawyers who structured the BofA settlement saw such protests coming from a mile away and armored the deal against them. Their most powerful defense? The New York state law they chose as a vehicle for judicial approval of the settlement: Article 77, which provides for a "special proceeding related to express trust."
It's a creative use of the law, to say the least. Article 77, which allows a trustee to seek a judicial endorsement of trust-related decisions, is usually invoked in garden-variety trust disputes, not $8.5 billion deals affecting hundreds of trust beneficiaries. But the Countrywide securitizations that the BofA settlement addresses were offered via 530 different trusts, making trust law a legitimate prism through which to assess the proposal. Moreover, there is precedent for using Article 77 to win court approval of decisions by trustees in commercial cases, according to a brief filed in conjunction with the BofA agreement, which cites a 1998 case called In re Application of IBJ Schroder Bank & Trust Co.
The lawyers who put together the BofA deal-- principally Kathy Patrick and Robert Madden of Gibbs & Bruns (for a large investor group); Ted Mirvis of Wachtell, Lipton, Rosen & Katz (for Bank of America); and Jason Kravitt and Matthew Ingber of Mayer Brown (for Bank of New York Mellon, the trustee in the securitizations)-weighed all kinds of options for obtaining judicial approval of the settlement. They considered state and federal courts in various jurisdictions, but ultimately came to a consensus that an Article 77 proceeding made the most sense, even though the law had never been applied to any trust matter of this scope and size "You could think of this as 530 trusts all being heard," said Madden of Gibbs & Bruns. "It's very pragmatic."
It's also weighted in favor of deal supporters. Here's the beauty of the Article 77 vehicle for BofA and BoNY: Under trust law, the bar for blocking a decision by the trustee is incredibly high. Anyone with an interest in the trust has a right to challenge the trustee's decision. But unless objectors can show that the trustee, in this case BoNY, 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.
That's a tough standard to meet for anyone who doesn't like the proposed BofA deal. The trust contracts signed by investors in the Countrywide securitizations clearly state that the trustee, BoNY, has the power to enforce the terms of the trust. The contracts don't expressly give BoNY the power to settle claims-which may be an avenue of attack on the deal for challengers-but New York case law provides considerable precedent. So assuming the court agrees that the trustee has the power to settle on behalf of noteholders, the judge's only inquiry is whether the trustee acted unreasonably.
In their petition requesting approval of the deal, BoNY's lawyers from Mayer Brown lay out all of the precautionary measures the trustee took to assure a reasonable settlement. Among other steps, BoNY brought in five expert consultants to opine on the legal and practical considerations any trust-by-trust litigation against Bank of America would entail. The expert opinions led the trustee to a determination that the most noteholders could get by litigating against the bank was $8.8 to $11 billion--and that's without discounting for any of the defenses BofA could raise. "A settlement payout of $8.5 billion is viewed by the trustee as falling within a small variance of that pre-discounted settlement range," the petition says. Weighed against the uncertainty of years-long litigation, it's going to be very difficult to show that an $8.5 billion settlement-in which investors retain their notes, as well as potential securities law claims-is an unreasonable abuse of the trustee's discretion.
And the just released court filing.
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This bankster bad dream just will not end. It's gonna take a national security order to kill this bedroom boardroom monster.
Were walking down a lonely road
Clear to us now but was never told
Trouble with dreams is you never know
When to hold on and when to let go
This is the life that we must lead now
Crossing fingers and wiping brow
Trouble with dreams is you can't pretend
Something with no beginning has an end
One thought I had was that maybe WB has also sorts of escape clauses and his seemingly generous donation was far less secure than presented in the press.
My guess is that he's taking one for the team today in order to generate goodwill tomorrow towards a tumultus future for WF.
Uncle Warren has not balance sheet account called goodwill. I will bet portions of agreeement not made public yet put him first in line should things go south. Maybe a couple of key assets will be concidered paid in full as security should BoA default.
"Bad Dream" may end a little differently than you may think.
I posted yesterday that IRENE would end up being much bigger than many thought. AND the Media is now doing their part along with the Bamster!
I am about to throw something out that will seem wild to the majority of people that are unaware of the control of these banks.
We have a pres. That needs to restore faith in the people. He needs to be re-elected. He is saving many people by issuing a state of emergency. He will be prepared to handle this emergency.(he will look better than George Bush and Katrina)
We have a huge name in business that wants to help OB, and the nation get back on it's feet, as well he stands to make quite a bit on this purchase of BAC.
Absurd!
Not so fast.
We are being warned about flooding in NY. The subways will be shut down. I would not doubt that many buildings will be flooded as well. I am certain of the flooding, but not certain about any other possible problems related to "extreme flooding" and extreme wind. Potential exists for something to happen that would be unexpected.
The question keeps circling my head........where are the important documents for the banks kept? Which documents when lost forever would destroy the case against the banks? Are those documents archived all in one spot? Would it be possible for those documents to be destroyed during what will be the worst storm to hit the east coast and NY in (X) years?
Think about it. A major problem for the banks is the continual pressure from foreclosure and proving ownership through title. It is all laced with fraud. The rope is there for the banks hanging.
This little storm will provide the means to eliminate the rope.
OB
Will be "Juanita on the spot"! He will have to do something to help rebuild NY. He will need stimulus money because this is NY, and we all need to pitch in as Americans and help. This will outshine 9-11. This will create/spend money as is the plan.
Uncle Warren
As stated above will make money.
Am I crazy? Maybe. But this thought has been been buggin me.
Does anyone know IF there is the possibility of documents located in the NY area that may be significant?
* I know the possibility of a storm created by Govt. Is wacko.
But I also know that cloud seeding is done by multiple countries around the world. And building on the intensity of a storm would not be out of the question IMO.
Never waste a crisis!
BofA gets away with this crap we might as well scrap the entire judicial system and just acknowledge the banks now rule our country.
Wait, we should just NOW acknowledge this? I put 2 and (insert irrational number) together and got = "holy $%^& the banks run this joint" after Hank "Tanks in the Streets" Paulson rammed TARP through congress against the wishes of somewhere on the order of 90% of Americans. Anyone arriving at this conclusion now must have had the banker teet so far down their throat it was denying oxygen to the brain.
Yup. We passed that mile marker quite some time ago.
It isn't the judicial system. That is the one place we still have real people that follow the law. It doesn't always happen that way and there are bad ones, but the good outnumber the bad. And, It is the last hope we have because the supremes, congress and the executive are bought and paid for. This is going to have massive political interference from the corrupt. But even they can't stop an honest judge.
Only an independent judiciary can give us any hope. Ain't it sad we are down to hope?
Yes, it's very sad we're down to hope. It's horrifying.
I think the Ms. Kelo might take offense at that statement.
pods
Pandoras Box has been opened, it can never be closed .........no matter what they try to do, it will not work out for them.......the ramifications of this will be talked about 100 years from now
Moral Hazard , now that is a real Bitch !
That anyone believes Bank of New York Mellon could possibly act in good faith stretches the bounds of rationality. But that's exactly why it'll pass.
Just say it again Countrywide bondholders "2 cents on the dollar". "2 cents on the dollar." "2 cents on the dollar."
Once again, ZH leads the "journalist" pack by about a hundred miles.. Ahem, did I say "journalist" when referring to CNBC, etc? I apologize.
Thx, TD. You guys rule.
The so called 'journalist' pack cannot be considered reporters. They are for the most part repeaters.
No matter what is stuffed in their mouths, they have no problem spitting it back out. This way they never become pregnant with new ideas. Or (God forbid) contaminated with the truth.
I love it. One of the cnbc guys just said that after the initial drop this morning, stocked "decided to man up."
Classic.
What's next?
Probably a -300 point plunge.
In the American economy, the only thing that's really lacking right now is confidence," said David Kelly, chief market strategist at JPMorgan funds. Kelly said the Fed has few remaining options to help the economy, but action by the central bank might not be necessary. ha ha ha ha
Kelly lives at the end of the Skittles rainbow. He always sounds like a Stepford Strategist.
Chapter 11 would solve everything.
as i've been posting, i smell a fix somewhere. not in federal court? with a new 'start'?
oh, yes, we at Paulie Walnut Place for greedy lawyers, think we should take this into "newness" for you poor bastards who will never get paid. trust us! we're lawyers! and we're here to help!
Moynihan to Buffett – “Psych, who’s got who trapped by the balls now sucka? Welcome to my world.”
Banks in deep shit, economy screwed, 1% GDP at best....hey I know lets stage a +200 DOW rally!
What kind of precedent is there for a putback of anywhere near 100 cents on the dollar for the RMBS in question here?
Let's say there is a ~100% putback....who owns the mortgages at that point? Does that further F-up foreclosures? Given how deeply this thing reaches into problem areas of the larger economy I think there will be lots of outside pressure for MBS holders to take their lumps and go home. Justice or no that just seems like the most likely scenario.....not a "settlement" that results in massive putbacks and sinks BAC.
Besides, if the government is willing to bulldoze Chrysler bondholders for "the greater good" they aren't going to let the fucking Bank of America (or the Bank For Fucking America) go down in flames this way. Clearly who owes what to whom and under what conditions in the area of residential real estate has been a very malleable formulation (as far as the government is concerned) for a very long time at this point anyway.
To determine the holder in the event of a putback, just start going backwards in the chain of assignment... hopefully, you get a scenario where the caboose contends it's the engine car's fault... then you get to pit sharks against sharks... practically speaking though, the deepest pockets will get left with this turd.
Chain goes A, B, C, D, E, F. F says to E you sold me bullshit and I want my money back. E says you signed on the dotted line dumbass, but in case you didn't, we'll go ahead and name D because they sold it to us...
Every one of these is going to be different... I suspect there will be common choke points where these things were most all processed in similar ways... but each one must be taken on its own I think. This is largely because culpability and the degree of negligence, etc., are going to be different for everyone on the chain... for example, if you're suing me under strict liability (practically) and I failed to properly assign X mortgage into Y trust, then I'm unclefucked... but, if I did what I was supposed to correctly, it's just that the mortgage should have never been made or was fraudulently sold down the line or has chain of assignment issues, then maybe I don't have culpability... there are too many variables for each case... I strongly suspect there are commonalities, but each will be different.
In the end, given the dollar size of these... I suspect the deepest pockets will end up eating the most turds. And I don't think it's something that the GSEs nor the FED can sit there and let ride out when case after case of fraud/failure to follow securities law gets determined... at some point, someone's fiduciary duty kicks in and they have to file suit... given the nature of claims, some of the issues may be time barred, but it seems many may benefit from a tolling of the statute of limitations via fraudulent concealment. (even if you assign liability to the originator, the deepest pockets are still probably going to be on the line given the prospect of joint liability... considering the originators can't possibly have enough scratch to pony up for these losses...).
We will ultimately be posed with another opportunity to kick the zombies to the curb... I sincerely doubt we take it.
More like "Gumby-able" from where i'm sittin.
"a very malleable formulation---" yes. it just needs a little more hammering around the edges. I think that's what Too Big To Fail; means; basically. It would be amazing if something like contract law were allowed to interfere. Surely, it's a case of "national security".
Forgive my ignorance, but it initially appears that this is a good thing, no? BOA's exposure would be increased by this issue going to federal court, including media exposure/coverage. I know, wishful thinking maybe. But hey, a guy can still fucking dream.
I also want to give a huge, monstrous thank you to ZH and all its commenters for the invaluable information and insight that is provided on this website on a daily basis. Honestly, I am WAY late to the game here and trying to understand all of the stuff you guys talk about is very overwhelming at times. It's scary to wake up from the nice fluffy dream I've been in during my 34 years of life on this planet, however, I wouldn't have it any other way, because I wouldn't be learning jack shit if I was getting my so-called "news" from the same sources I did even a few years ago.
Anyway, give yourselves a big fucking pat on the back.
Sincerely,
A (very) Newbie!
Daily reader/poster here for the past going on two years now. ZH condensed: go long physical gold and popcorn, while we watch TD and guests peel away the layers of the shockingly bullshit onion. Well worth the 30 min o' free time a day.
Yeah, I've been a reader for several months now but never have time to post much since I'm at work. I can't afford gold yet, but I've been buying silver like crazy. Everyone around me thinks I'm crazy! Bought a ton of silver about 5 years ago too when it around $13 an ounce. Back then it was just a feeling I had...
Somebody put that dog out of its misery
Now we know what the quid pro quo with Uncle Warren will be. Once this makes its way into the federal courts, the pressure will be on to settle this into a nice small little package afer all.
I just would have assumed federal court woulda been better for BAC. Well, there you go... That's why I come here.
Just because the case is moved to Federal court does not mean that New York law won't be applied. Federal courts have to apply state law all of the time because there aren't Federal statutes that cover everything that might come up in a Federal case (i.e., general property, contract and tort law are generally all state-law matters).
In this instance the Federal court should be guided by the choice of law provisions in the relevant agreements between the parties, which, because these are NY trusts, is almost certainly NY law.
However this does not mean that Walnut Place's next move will not be to try to somehow get this matter out of the Article 77 proceeding and into a more typical class action, but there is more to it than simply removing the case to Federal court.
I'm sure "Walnut Place" legal reps. are going to continue billing at their hourly rate; I'm not so sure they can do anything useful for them; Sounds like desperation to me.
"Fair and Balanced."
All this litigation and posturing does only one thing.............limit the liabilities of BofA. No matter what, all the investor entities that were defrauded and lost money will be the losers. The courts are at work for the business, in this case BofA, with the deepest pockets to litigate into oblivion. US Courts are a joke. Even when it's settled who says anyone will get payment. Ask Mel Belli (law partners & his estate) who have huge unpaid awards against Exxon. The corruption in this country is everywhere. Start cleaning it up where you live and work your way up to the federal government. Unravel government bureaucracy by defunding budgets and closing ineffective government agencies.
what irony.The banks cultivated the use of a parasitic legal system to help legitimize their fraudulent lending and securitization practicies. Now there are so many parasitic lawyers and courts and admin staff and consultants that the parasite has now been forced to change its strategy from working symbiotically with its host to bleed the american public, toward bleeding the host dry and helping kill it , all in the name of justice of course. that, and the legal system is a group of people that needs to generate litigation to feed themselves.
this all reminds me of the asbestos litigation epidemic that stretched over 3 decades. and still isn't over.
I find myself replacing the word Federal with Feral lately, and find that it works quite well.
...from Latin fera, "a wild beast", the word has a second unrelated meaning, from Latin feralis, "belonging to the dead", "funeral".
any guesses as to when BAC settlement issue gets resolved and where BAC stock will be?
Why did BAC borrow from Buffet at 6% when they have access to Fed Funds at 0-.25%?
Thanks,...