If New York attorney general Eric Schneiderman thought his extremely aggressive petition to intervene in the proposed $8.5 billion settlement between Bank of America, Countrywide mortgage-backed securities investors, and Countrywide MBS trustee Bank of New York Mellon would force the banks to reopen negotiations and include him, he apparently thought wrong.
Late Tuesday BNY Mellon and the institutional investor group represented by Gibbs & Bruns filed responses to the AG's intervention bid. In briefs that match the AG's in aggression, the trustee and the investors who support the settlement argued that Scheiderman shouldn't be allowed to intervene in the deal because he doesn't have standing. "The whole purpose of this proceeding is to afford investors an opportunity to be heard," Mayer Brown and Dechert wrote in the BNY Mellon brief. "The trustee, which brought this special proceeding, has not opposed the intervention of any investor who seeks to object to the Settlement. It objects to the NYAG's involvement only because, unlike the investors, he has no standing to intervene and the intervention would fundamentally alter, expand, and delay the proceeding."
As I noted when Schneiderman first filed his petition, the AG claimed a right to intervene not on behalf of New York pension funds but under the doctrine of parens patriae, "to protect the interests of the public and absent investors." BNY Mellon and Gibbs & Bruns asserted that the BofA MBS settlement is a private deal in which the AG doesn't have an interest. "Any ruling to the contrary would constitute a radical and unprecedented expansion of the NY AG's power to intervene in private litigation," the Mellon brief said.
Nor can the AG bootstrap his way into the Article 77 proceeding to win court approval for the MBS settlement by bringing fraud counterclaims against BNY Mellon, the Mellon and Gibbs brief asserted. The institutional investors who support the deal urged New York state supreme court judge Barbara Kapnick, who's overseeing the proposed settlement, to split the AG's counterclaims from the Article 77 litigation so investors can get a quick decision on the settlement. "If the court permits the NY AG to convert this Article 77 special proceeding into a plenary venue for its affirmative claims against the trustee, the result could be years of contentious litigation," the Gibbs & Bruns brief said. "During this delay, the certificateholders would remain on the sidelines-deprived of the benefits of the settlement, yet unable to obtain relief by any other means, because the covered trusts' claims have been settled and are awaiting approval."
Asking a New York state court judge to deny a voice to New York's top law enforcement official is a tough sale, so the investors' filing offers Judge Kapnick a way out of the dilemma: The judge can permit the AG to be heard as an amicus. "In the event that the NY AG wishes to appear in this proceeding for the sole purpose of stating its views as to the settlement," the brief said, "the institutional investors would not object to the NY AG appearing to do so as amicus curiae." Kathy Patrick of Gibbs & Bruns declined to comment beyond the brief.
BNY Mellon's full-frontal challenge to the AG's standing is a bold and risky tactic. The AG has indicated that he believes any settlement between BofA, BNY, and the MBS noteholders has to include regulators. To fortify that position, he filed the controversial fraud counterclaims against BNY Mellon, most of which involve conduct predating the proposed settlement. But rather than placating Schneiderman and moving toward a global settlement that addresses regulatory issues, the bank has opted for confrontation. BNY Mellon and the Gibbs investor group will also have to confront criticism that despite their avowals of transparency, they're trying to curtail investigation of the AG's counterclaims. (Here's BNY Mellon's official statement on the filing: "The current settlement process allows for all investors--supporters and objectors--to make their case before the court, including those with even the smallest economic interests. BNY Mellon as trustee has never opposed the intervention of any investor seeking to object to the settlement. However, we respectfully believe that there is no need or legal standing for the New York Attorney General to intervene on behalf of private investors.")
The New York AG's spokesman, Danny Kanner, sent me an e-mail statement on the new filings: "Any argument that the New York Attorney General is not obligated to protect the integrity of New York's global financial markets, in addition to the thousands of New Yorkers impacted by this settlement, is unfounded. Given that those who stand to be significantly affected include New York State investors and pensioners, as well as distressed homeowners residing throughout the state and country, the State of New York has a broad and crucial interest in these proceedings."
The AG's comment about distressed homeowners is a reference to the proposed settlement's mortgage servicing provisions, which would affect homeowners with Countrywide mortgages. BNY Mellon and the institutional investors have said that the servicing improvements are part of the deal because investors get back more money when troubled mortgages are renegotiated rather than put into default. They'll argue that the provisions were privately negotiated for the benefit of investors; the AG will respond that homeowners have an interest in what happens.
One thing is for sure: No one is making this easy for Judge Kapnick.
(Reporting by Alison Frankel)
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