Oh, what might have been for opponents of Bank of America's proposed $8.5 billion global settlement with Countrywide mortgage-backed securities investors had the 2nd Circuit Court of Appeals left the case in federal court!
On Tuesday night, a steering committee that represents most of the interveners in the New York State Supreme Court proceeding to evaluate the settlement filed a 49-page brief outlining the reasons why the deal should not be judged under a special New York trust law known as Article 77. An Article 77 proceeding permits a trustee to seek judicial endorsement of its trust-related decisions based on a standard that requires the trustee only to act reasonably, honestly, and within its discretion. That's a low bar for trustees, which is one of the many reasons that settlement opponents contend Article 77 is not an appropriate vehicle for the evaluation of the deal.
Most of steering committee's arguments will be familiar to anyone who has followed the case since Countrywide MBS trustee Bank of New York Mellon first filed for approval of the settlement in state court in Manhattan late last June. It's been a tumultuous nine months. In August, Grais & Ellsworthremoved the case to federal court. In October, U.S. District Judge William Pauley ruled that he should retain jurisdiction, but the 2nd Circuit decided in February to send the case back to Justice Barbara Kapnick in state court. As they've already argued early in the state court case and then before Pauley and the 2nd Circuit, investors who oppose the deal say BNY Mellon is fatally conflicted because of supposedly additional indemnification it received from Bank of America as part of the settlement. Opponents also say BNY Mellon failed to acknowledge that the various trusts are differently situated, and failed to specify how the $8.5 billion settlement would be distributed to the thousands of Countrywide MBS investors whose potential claims would be resolved.
More fundamentally, the steering committee asserted in the new brief (as objectors have before) that Article 77 is intended for garden-variety matters of trust administration, not the all-at-the-same-time settlement of tens of billions of dollars of claims in 530 distinct trusts. Objectors' lawyers from Grais & Ellsworth; Reilly Pozner; Miller & Wrubel; and Keller Rohrback argued that there's simply no precedent for approval of a deal of this magnitude via an Article 77 proceeding. The only case BNY Mellon can cite in support of that proposition, In re IBJ Schroder Bank, doesn't apply, according to the steering committee: "Schroder did not involve 530 trusts with the unprecedented complexity of claims and the unprecedented size of damages that are at issue here."
The steering committee pointed twice to Pauley in arguing that Kapnick should convert the Article 77 proceeding into an ordinary plenary action. The federal court judge was also the source of the only new argument I noticed in Tuesday night's filing. Deal opponents said that the Countrywide MBS trusts are specifically excluded from Article 77, which exempts trusts created for the benefit of creditors. Citing Pauley's ruling Tuesday afternoon, in a pension fund's case against BNY Mellon as Countrywide MBS trustee, the steering committee said that MBS trust certificates are debt securities, which means they're not subject to Article 77. (As I've reported, the bank contests that conclusion.) "Because the certificates are debt securities, the holders of those certificates are, by definition, creditors," the brief said. "And because the 530 trusts in this proceeding were created for the sole purpose of issuing those certificates, the trusts must necessarily be 'for the benefit of creditors' and therefore excluded from the scope of Article 77."
I have no doubt that if the settlement were still before Pauley, the steering committee's arguments against evaluating an enormous global deal under an easy-to-meet discretionary standard would be as welcome as Elijah at the Seder table. But this case isn't before Pauley anymore, as BNY Mellon points out in its 24-page brief on why Article 77 is an appropriate vehicle. Instead, BNY Mellon's lawyers from Mayer Brown and Dechert quote from rulings by the 2nd Circuit and Kapnick herself -- presumably more potent authorities in Kapnick's mind than Pauley's since-reversed ruling on his jurisdiction.
The federal appeals court, according to BNY Mellon, "recognized the propriety of the trustee's decision to proceed under Article 77" when it sent the case back to state court. The 2nd Circuit specifically held that the special trust proceeding can be used to evaluate the bank's discretion to reach a settlement under the MBS pooling and servicing agreements, BNY Mellon argued, and specifically rejected the objectors' "attempt to 'recast the proceeding.'"
To support its contention that BNY Mellon has the right to settle the trusts' breach-of-contract claims, the bank cited Kapnick's March 29 dismissal of an individual investor's suit against Countrywide and BNY Mellon. "This court recently recognized (that ) absent an 'allegation of misconduct of breach by the trustee in the administration of the trusts,' only the trustee may bring suit to enforce representation and warranty claims against (Country wide)," the bank's brief said. "The power to litigate inherently includes the power to settle claims, and the (trusts' pooling and servicing agreements) impose no contractual limits on the trustee's decision-making in that regard."
Kapnick has scheduled a hearing for later this month on the Article 77 issue.
(Reporting by Alison Frankel)
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