It's been a busy couple of weeks for the lawyers who filed Bank of America's proposed $8.5 billion settlement with Countrywide mortgage-backed securities investors. On Oct. 19, as you doubtless recall, U.S. District Judge William Pauley III of Manhattan federal court ruled that the proposed settlement should be evaluated in federal court as a mass action under the Class Action Fairness Act, and not in New York State Supreme Court, where the case was filed back in June. Yesterday Bank of New York Mellon (the Countrywide MBS trustee) and the investor group that negotiated the $8.5 billion deal with BofA responded to Pauley's ruling. In appellate briefs by Mayer Brown and Dechert (for BNY Mellon) and by Gibbs & Bruns (for the institutional investor group), the settlement's supporters asked the U.S. Court of Appeals for the Second Circuit to step in and right Pauley's wrongs.
On the same day, BNY Mellon filed a "joint" case management report with Pauley, in response to the judge's instruction in the Oct. 19 ruling. The joint report is actually two divergent proposals for how the case should proceed in federal court. A group of Countrywide MBS investors who don't like the proposed deal, led by the Walnut Place coalition and AIG, are asking Pauley to fashion an ad hoc vehicle to evaluate the settlement and permit investors who don't like it to opt out. BNY Mellon and the Gibbs & Bruns group, as I predicted, want Pauley simply to answer the limited question they posed to New York State Supreme Court Justice Barbara Kapnick when BNY Mellon filed the case as an Article 77 proceeding under state trust law: Did BNY Mellon act unreasonably or unethically when it agreed to the settlement on behalf of MBS trust investors? The objectors, not surprisingly, want Pauley to permit them to start discovery while the appeal of his ruling is pending. BNY Mellon and the Gibbs group want Pauley to stay discovery until the Second Circuit determines whether he should keep the case.
BNY Mellon and Gibbs & Bruns also filed yet another set of briefs Monday night, these in response to an old case-management order the state court judge entered before Walnut Place's lawyers at Grais & Ellsworth removed the settlement to federal court. The briefs, styled as consolidated answers to settlement objectors, are a bit of theater, given that Kapnick no longer controls the case. But they're a forum for BNY Mellon and the big investors who negotiated the deal to fire back at critics who've complained that (among other things) the trustee is conflicted because of a side letter in which BofA indemnified BNY Mellon for costs associated with the settlement; and that Gibbs & Bruns and its clients co-opted settlement talks. Here's BNY Mellon's brief, and here's the investor group's.
The most important of yesterday's filings are the Second Circuit briefs, which I'll get to in a moment. First I want to point out a couple of interesting points from the other papers. Take a look at the signature pages of the joint case-management report -- in particular, note the objectors who agreed to back the proposal put forth by Grais & Ellsworth (for Walnut Place) and Reilly Pozner (for AIG). It's an impressive group: a dozen or so insurance companies, in two coalitions; the Federal Home Loan Banks of San Francisco, Seattle, Chicago, Boston, Pittsburgh, and Indianapolis; and several public pension funds.
But many, many of the dozens of Countrywide MBS investors who moved to intervene in the settlement proceedings have not signed on to the Walnut/AIG proposal. I called David Grais of Grais & Ellsworth and Dan Reilly of Reilly Pozner to ask why, but didn't hear back.
It's also worth noting that Gibbs & Bruns's answer to objectors says that the firm's clients retain 25 percent voting rights in 180 of the 530 trusts covered by the settlement. That's down from the 225 trusts in which the Gibbs group had the requisite voting rights at the time the settlement was announced in June. Gibbs & Bruns partner Kathy Patrick told me the difference is Freddie Mac's Countrywide MBS holdings. Freddie was part of the Gibbs & Bruns coalition that signed the settlement agreement, but its parent, the Federal Housing Finance Agency, is represented by Kasowitz Benson Torres & Friedman in the settlement proceedings. Gibbs & Bruns chose not to count Freddie's investments in tabulating the holdings of its investor coalition.
The really big question, though, is whether the Second Circuit will take up the appeal of Pauley's ruling to keep the case. BNY Mellon and Gibbs & Bruns have an automatic right to ask the appellate court to review Pauley's decision, but the Second Circuit doesn't have to grant their petitions. So Gibbs & Bruns and the bank's lawyers at Mayer Brown and Dechert had to frame their briefs to pique the interest of the appellate judges and give them a compelling reason to accept a case they don't have to hear.
Before Pauley, BNY Mellon and the Gibbs group presented a veritable smorgasbord of arguments for why the Article 77 proceeding doesn't fit the definition of a mass action under the Class Action Fairness Act. (On the offchance you've forgotten any of their points, here's a summary.) At the Second Circuit, the trustee and the Gibbs group have homed in on three key questions: Is Walnut Place a "defendant" with the standing to remove the case to federal court? Does the Article 77 proceeding involve monetary relief, as required under CAFA, since it only seeks a declaration that BNY Mellon behaved reasonably as a trustee? And, in the argument perhaps most likely to warrant the Second Circuit's involvement, does Pauley's reasoning on the securities exception to CAFA contradict a previous ruling by the appellate court -- and compromise Congress's intention of conferring state-court jurisdiction on some securities class actions?
"[Pauley] held that CAFA's securities exception applies only when the claim can be resolved solely by reference to 'the bare text of' the securities instruments at issue," wrote BNY Mellon's lawyers (including Mayer Brown appellate specialist Andrew Frey).
"But because 'any securities claim under state law will necessarily involve' issues that look beyond the bare text of the instrument, the district court's reading of the securities exception leaves it 'essentially meaningless.'... The ruling below thus has wide-reaching implications, opening the federal courts to virtually all class actions involving securities," the brief continues. "Because this issue is important and recurring, and particularly given this court's central role in establishing the nation's law relating to securities, guidance from this court on this important element of the congressional scheme is essential."
I'll let you know when Grais files his response to the appellate briefs.
(Reporting by Alison Frankel)
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