Bank of New York Mellon, the Countrywide mortgage-backed securitization trustee, had another rough time of it at Wednesday's remand hearing before Manhattan federal judge William Pauley.
Pauley, you'll recall, is presiding over BNY Mellon's attempt to remand the proposed $8.5 billion Countrywide MBS settlement to state court, where the trustee originally filed the case as a special proceeding under Article 77 of New York state law. After a grilling two weeks ago, BNY Mellon's lawyer, Matthew Ingber of Mayer Brown, tried to refocus the judge's attention on the benefits the Article 77 proceeding offers MBS investors, who, according to Ingber, have a right under Article 77 to object to the trustee's decision to settle. What's more, he argued that the state court special proceeding is the only appropriate vehicle in which to evaluate the proposed settlement.
Ingber clearly intended to rebut assertions that BNY Mellon filed the settlement as an Article 77 proceeding to get around the opt-out and objection provisions BofA would have faced if the case had been brought as a class action. He tried to frame his argument-once he got past a preliminary round of hostile questions from Judge Pauley-on the supposedly contorted reading of the federal Class Action Fairness Act under which Grais & Ellsworth removed the case to federal court.
But the judge was much more interested in the rights and duties of BNY Mellon as the securitization trustee. At the end of the two-hour hearing, which attracted a who's who of MBS investors and their lawyers, Judge Pauley deferred a remand ruling. Instead, he called for additional briefing on whether BNY Mellon has duties beyond those spelled out in the pooling and servicing contracts governing the MBS offerings, and, if it does, what the source of those obligations is. He also asked both sides to address whether New York common law imposes duties on securitization trustees that cannot be waived by the pooling and servicing contracts.
The judge's request means he's thinking about the "securities exception" to the Class Action Fairness Act. Grais & Ellsworth, as counsel to an MBS investor group that doesn't like the proposed settlement, removed the case to federal court on the grounds it was a de facto mass action as defined by CAFA. But CAFA carves out an exception for cases involving securities covered by the Securities Act of 1933 or the Exchange Act of 1934. (It's a counterintuitive exception: Class actions involving securities covered by federal law can stay in state court.) As the U.S. Court of Appeals for the Second Circuit has interpreted the securities exception, the key question is the source of BNY Mellon's duties as securitization trustee. If Judge Pauley decides that the trustee's duties are limited to what's spelled out in the PSAs, he's likely to find the securities exception applies and the case should go back to state court. If, on the other hand, BNY Mellon's duties derive from New York state common law, then the securities exception may not apply.
There are reasons beyond the intricacies of the securities exception to look forward to BNY Mellon's brief on its role as securitization trustee. Trustees have recently been under scrutiny by New York and Delaware AGs (among others) for their alleged failure to look out for the interests of MBS investors. At Wednesday's hearing, BNY Mellon counsel Ingber of Mayer Brown told Judge Pauley that the bank does not have a fiduciary duty to MBS investors, but only a duty to act in good faith, as the Countrywide pooling and servicing agreements specify. Judge Pauley pushed Ingber hard on that point. "Doesn't [BNY Mellon] owe a fiduciary duty to each trust individually?" he asked. "What authority does BNY Mellon cite for the assertion that it doesn't owe a duty beyond the PSA?" Because New York attorney general Eric Schneiderman has already filed a state law securities fraud case against BNY Mellon, BNY Mellon has to tread carefully when it answers those questions in the new brief, which is due next Tuesday. (The judge also ordered BNY Mellon and the institutional investors who support the proposed BofA settlement to lay out which Countrywide MBS offerings are not covered by the deal and what the unpaid principal balance of those trusts is.)
It's notable that Judge Pauley is so concerned with the securities exception, given that BNY Mellon offered him two other (arguably easier) reasons to bounce the case back to Judge Barbara Kapnick in New York state supreme court. CAFA defines mass actions as those involving more than 100 plaintiffs and demands for monetary relief. Ingber argued that BNY Mellon's Article 77 proceeding involves only one plaintiff (the trustee) and a request for equitable relief. The judge asked whether Ingber was "exulting form over substance," noting that there are 530 trusts in the case. Ingber eventually responded that there may be 530 trusts, but only the trustee has the right to reach a global settlement with BofA.
Ingber also argued that Grais & Ellsworth's client, Walnut Place, cannot remove the proposed settlement to federal court because only a defendant has that right. Walnut isn't a defendant in the Article 77 proceeding, he said, and, in fact, if the settlement isn't approved, Walnut and BNY Mellon will be aligned in litigation against BofA. Again, Judge Pauley pressed BNY Mellon on whether it was arguing form over substance, since Walnut is clearly "adverse" to the trustee. Ingber noted that Grais & Ellsworth's assertion that Walnut Place is a de facto defendant is irreconcilable with its claim that the case involves money damages, since BNY Mellon isn't asking for damages from Walnut Place.
Judge Pauley, however, appeared to be unpersuaded. At one point, he mused about whether CAFA requires that a claim for monetary relief be asserted against the defendant.
When Owen Cyrulnik of Grais & Ellsworth argued to keep the case in federal court, the judge was much less combative than he was with Ingber. He did interrupt to ask a very intriguing question: How could he "shoehorn" the case into federal court if he decided against remand? Cyrulnik conceded that there's not a federal-law vehicle analogous to Article 77, but said the judge could craft a proceeding, under interpleader or class action rules, to evaluate the fairness of the proposed settlement. Cyrulnik also said that if BNY Mellon had filed the proposed settlement as a state-court class action, Grais & Ellsworth would not have removed it to federal court.
The last lawyer to speak was Robert Madden of Gibbs & Bruns, who's counsel to the 22 institutional investors who support the deal. Madden addressed Judge Pauley's questions about how the proposed settlement came together, in a direct and forceful explanation that seemed to hold the judge's attention. "Repurchase claims were lying fallow. The statute of limitations was running, and no one was doing anything," he said. His clients came together "in an effort to bring BofA to justice.This was not a collusive group that got together with BofA and cut a sweetheart deal," he said. Madden told the judge that his clients have a stake in all 530 trusts, and have 25 percent voting rights in more than 200.
Indeed, Madden noted, his clients actually hold 60 percent of the notes in one of the Walnut Place group's trusts. "My clients don't want to opt out," he told Judge Pauley.
(Reporting by Alison Frankel)
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