Ordinarily, there's not much reason to get excited about a state
intermediate appeals court upholding a procedural ruling by a
trial court judge. But in the litigation between bond insurers
and mortgage-backed securities issuers, decisions are not only
magnified by the tens of billions of dollars at stake, but also
by the paucity of precedent. Almost every ruling is
groundbreaking, which means that decisions have an impact far
beyond a single case.
With that in mind, there are two reasons why a ruling
Thursday by the New York Appellate Division, First Department,
is a setback for Bank of America: timing and authority.
Without much comment, the state appeals court affirmed two rulings by New York State Supreme Court Justice Eileen Bransten,
who last fall denied motions by Bank of America to sever and
consolidate successor liability claims against the bank in four
bond insurer cases against Countrywide. "The court properly
exercised its discretion in denying defendant's motion to sever
plaintiffs' successor liability claims from the primary claims
and to consolidate them, for purposes of discovery, in a single
action," the appellate decision said. "The successor liability
actions are at completely different stages of discovery, and
consolidation would result in undue delay."
Delay was one of BofA's primary objectives in the motion to
consolidate the monolines' claims against it. Successor
liability, as I've explained, means that when Bank of America
acquired Countrywide, it took on legal responsibility for all
the wrongs committed by the onetime mortgage giant. That's a
tougher question than you might think. When Stanford Law School
professor Robert Daines analyzed BofA's successor liability in
connection with the bank's proposed $8.5 billion put-back
settlement with Countrywide MBS investors, it took him 58 pages
to conclude that BofA probably wasn't liable, but might be if a
judge concluded its acquisition of Countrywide was a de facto
merger under New York state law. Even the applicable state law,
however, is a matter of judgment: U.S. District Judge Mariana
Pfaelzer, who's presiding over the consolidated Countrywide MBS
litigation in federal court in Los Angeles, has applied Delaware law in dismissing successor liability claims against BofA.
BofA's liability for Countrywide's failings is a crucial
issue for monolines and MBS investors. The bank claims that
Countrywide's remaining assets are worth less than $4 billion, a
tiny fraction of what MBS plaintiffs believe they're owed for
the deficient securities they bought. If Bank of America were
able to restrict its MBS payouts to Countrywide's assets, it
could conceivably throw the subsidiary into Chapter 11 and let
creditors fight over the remains.
But BofA has enough concerns about its own liability for
Countrywide's alleged wrongs that it kicked in $8.5 billion for
the proposed put-back settlement and has put aside billions more
in reserves for MBS losses. Its motion to sever and consolidate
the monoline successor liability claims pending against it in
New York state court also indicates that BofA is in no hurry for
a definitive ruling that takes into account a full record.
(Pfaelzer's successor liability decisions have all been on
motions to dismiss, when plaintiffs don't have the benefit of
deposition testimony and document discovery to back up their
arguments.) The bank's New York state-court motion would have
slowed down MBIA, which is already deep in discovery on
successor liability, to permit later-to-file bond insurers to
catch up.
Instead, the appellate ruling means that MBIA can press
onward and wrap up discovery. One of the looming issues, you'll
recall, is whether the insurer's lawyers at Quinn Emanuel
Urquhart & Sullivan can depose BofA CEO Brian Moynihan; Bransten
still hasn't ruled on MBIA's motion to compel his testimony. But
as BofA's lawyers at O'Melveny & Myers disclosed in the spat
over Moynihan's deposition, lots of other bank officials --
including former CEO Ken Lewis, former chief risk officer Amy
Brinkley, and CFO Joseph Price -- have been or will be
questioned about whether the Countrywide acquisition was a de
facto merger. Document production is almost complete, expert
reports are underway, and summary judgment motions are due on
Aug. 3. That's not a long way off for Bank of America,
considering that Bransten's ruling will affect parallel
successor liability claims by Ambac, Financial Guaranty
Insurance, and Syncora.
It's also significant that the state appeals court has once
again endorsed a ruling by Bransten, who has established herself
as the leading state-court judge in the monoline MBS litigation.
Bransten has not yet been overturned on a substantive MBS
ruling. That's significant as the First Department considers
appeals and cross appeals of Bransten's loss causation decisions
from earlier this year. It's also important because the New York
justice, unlike Pfaelzer in federal court, is generally
sympathetic toward the bond insurers. If I were Bank of America,
I wouldn't be looking forward to the prospect of a
precedent-setting Bransten ruling on successor liability.
The bank still has a chance to move to stay the MBIA
successor liability issue after discovery is closed, since the
First Department ruling addressed only whether the claims should
be consolidated for discovery. BofA may ask Bransten to hold off
on a summary judgment ruling in MBIA's case until the other
bond insurers have caught up. The judge has previously expressed
concern about giving MBIA the day in court it deserves, however,
so it would be a surprise if she halted MBIA's case at the brink
of a crucial ruling.
(Reporting by Alison Frankel)
Follow us on Twitter: @AlisonFrankel, @ReutersLegal