Friday, August 26, 2011


BofA's $8.5 Billion Settlement
Could Fall Apart
After Request Made To Move
Mortgage Case
From State To Federal Court

Tyler Durden's picture

As most know by now, the ridiculously low $8.5 billion putback settlement, which was supposed to have been closed by now, and which was the key driver in preventing Bank of America from trading far, far lower (and requiring much more capital), is the wildcard that would allow the bank to package tens if not hundreds of billions of claims against the bank in a "tidy (and very small) little package." The key factor allowing this settlement to be structured in its existing form, was that the lawsuit was filed in New York State Court, which allows for a little something known as Article 77, or a provision permitting "special proceeding related to express trust." The details are provided below, but in essence boil down to the following: the settlement in its current form can only be enacted if the lawsuit is conducted under New York State law. Well, minutes ago, David Grais, attorney for Walnut Place, which as we have repeatedly observed represents those interests who claim the $8.5 billion settlement is massively insufficient and are engaged in litigation seeking far greater recoveries, filed a request to transfer the lawsuit from State Court to Federal Court where everything basically begins a new. More than anything, this latest development may explain why Bank of America has been scrambling to raise tens of billions in the open market as an adverse court decision, one granting Grais' request, means the bank is suddenly open to unlimited downside capital risk. In the meantime, add major litigation headline risk to everything else that BAC has going for it...
Manal Mehta explains why this could be a gamechanger:
If this happens, basically renders the Article 77 irrelevant. Article 77 is a New York Statute.  Bank of America wanted to use Article 77 to make the settlement binding upon all 530 trusts including those who objected to the settlement.  Class action in Federal Court allows parties to opt out of the settlement.
And here is Reuters' Allison Frenkel explaining the nuances of Article 77:
There was a lot of chest thumping Wednesday by noteholders who don't like the proposed $8.5 billion settlement between Bank of America and investors in securities backed by Countrywide mortgages. Bill Frey of Greenwich Financial, a firm that structures asset-backed securities, told Tom Hals of Reuters that he had been "bombarded" with e-mails from angry Countrywide noteholders. He's urging them to rise up in opposition to the settlement proposal. "If investors were to open their mouths," Frey told Hals, "they can push for a better and fairer settlement, or they can get two cents on the dollar like they are getting."

Good luck with that.

The lawyers who structured the BofA settlement saw such protests coming from a mile away and armored the deal against them. Their most powerful defense? The New York state law they chose as a vehicle for judicial approval of the settlement: Article 77, which provides for a "special proceeding related to express trust."

It's a creative use of the law, to say the least. Article 77, which allows a trustee to seek a judicial endorsement of trust-related decisions, is usually invoked in garden-variety trust disputes, not $8.5 billion deals affecting hundreds of trust beneficiaries. But the Countrywide securitizations that the BofA settlement addresses were offered via 530 different trusts, making trust law a legitimate prism through which to assess the proposal. Moreover, there is precedent for using Article 77 to win court approval of decisions by trustees in commercial cases, according to a brief filed in conjunction with the BofA agreement, which cites a 1998 case called In re Application of IBJ Schroder Bank & Trust Co.

The lawyers who put together the BofA deal-- principally Kathy Patrick and Robert Madden of Gibbs & Bruns (for a large investor group); Ted Mirvis of Wachtell, Lipton, Rosen & Katz (for Bank of America); and Jason Kravitt and Matthew Ingber of Mayer Brown (for Bank of New York Mellon, the trustee in the securitizations)-weighed all kinds of options for obtaining judicial approval of the settlement. They considered state and federal courts in various jurisdictions, but ultimately came to a consensus that an Article 77 proceeding made the most sense, even though the law had never been applied to any trust matter of this scope and size "You could think of this as 530 trusts all being heard," said Madden of Gibbs & Bruns. "It's very pragmatic."

It's also weighted in favor of deal supporters. Here's the beauty of the Article 77 vehicle for BofA and BoNY: Under trust law, the bar for blocking a decision by the trustee is incredibly high. Anyone with an interest in the trust has a right to challenge the trustee's decision. But unless objectors can show that the trustee, in this case BoNY, abused its discretion, acted unreasonably, or otherwise breached its fiduciary duty to the trusts' beneficiaries, the court is not supposed to interfere with the trustee's power.

That's a tough standard to meet for anyone who doesn't like the proposed BofA deal. The trust contracts signed by investors in the Countrywide securitizations clearly state that the trustee, BoNY, has the power to enforce the terms of the trust. The contracts don't expressly give BoNY the power to settle claims-which may be an avenue of attack on the deal for challengers-but New York case law provides considerable precedent. So assuming the court agrees that the trustee has the power to settle on behalf of noteholders, the judge's only inquiry is whether the trustee acted unreasonably.

In their petition requesting approval of the deal, BoNY's lawyers from Mayer Brown lay out all of the precautionary measures the trustee took to assure a reasonable settlement. Among other steps, BoNY brought in five expert consultants to opine on the legal and practical considerations any trust-by-trust litigation against Bank of America would entail. The expert opinions led the trustee to a determination that the most noteholders could get by litigating against the bank was $8.8 to $11 billion--and that's without discounting for any of the defenses BofA could raise. "A settlement payout of $8.5 billion is viewed by the trustee as falling within a small variance of that pre-discounted settlement range," the petition says. Weighed against the uncertainty of years-long litigation, it's going to be very difficult to show that an $8.5 billion settlement-in which investors retain their notes, as well as potential securities law claims-is an unreasonable abuse of the trustee's discretion.
And the just released court filing.
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Fri, 08/26/2011 - 12:57 | Link to CommentCognitive Dissonance
Cognitive Dissonance's picture
This bankster bad dream just will not end. It's gonna take a national security order to kill thisbedroom boardroom monster.
Fri, 08/26/2011 - 13:01 | Link to CommentWALLST8MY8BALL
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Were walking down a lonely road
Clear to us now but  was never told
Trouble with dreams is you never know
When to hold on and when to let go
This is the life that we must lead now
Crossing fingers and wiping brow
Trouble with dreams is you can't pretend
Something with no beginning has an end
Fri, 08/26/2011 - 13:28 | Link to CommentThomas
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One thought I had was that maybe WB has also sorts of escape clauses and his seemingly generous donation was far less secure than presented in the press.
Fri, 08/26/2011 - 13:51 | Link to CommentNotApplicable
NotApplicable's picture
My guess is that he's taking one for the team today in order to generate goodwill tomorrow towards a tumultus future for WF.
Fri, 08/26/2011 - 14:03 | Link to Commentspanish inquisition
spanish inquisition's picture
Uncle Warren has not balance sheet account called goodwill. I will bet portions of agreeement not made public yet put him first in line should things go south. Maybe a couple of key assets will be concidered paid in full as security should BoA default.
Fri, 08/26/2011 - 13:00 | Link to Commentunwashedmass
unwashedmass's picture
BofA gets away with this crap we might as well scrap the entire judicial system and just acknowledge the banks now rule our country.
Fri, 08/26/2011 - 13:06 | Link to CommentBring the Gold
Bring the Gold's picture
Wait, we should just NOW acknowledge this? I put 2 and (insert irrational number) together and got = "holy $%^& the banks run this joint" after Hank "Tanks in the Streets" Paulson rammed TARP through congress against the wishes of somewhere on the order of 90% of Americans. Anyone arriving at this conclusion now must have had the banker teet so far down their throat it was denying oxygen to the brain.
Fri, 08/26/2011 - 13:29 | Link to CommentThomas
Thomas's picture
Yup. We passed that mile marker quite some time ago.
Fri, 08/26/2011 - 13:35 | Link to CommentPiranhanoia
Piranhanoia's picture
It isn't the judicial system.  That is the one place we still have real people that follow the law.  It doesn't always happen that way and there are bad ones, but the good outnumber the bad.   And,   It is the last hope we have because the supremes, congress and the executive are bought and paid for.   This is going to have massive political interference from the corrupt.  But even they can't stop an honest judge.
Only an independent judiciary can give us any hope.  Ain't it sad we are down to hope?
Fri, 08/26/2011 - 14:20 | Link to CommentHavana White
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Yes, it's very sad we're down to hope.  It's horrifying.
Fri, 08/26/2011 - 13:01 | Link to CommentSeasmoke
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Pandoras Box has been opened, it can never be closed matter what they try to do, it will not work out for them.......the ramifications of this will be talked about 100 years from now

Moral Hazard , now that is a real Bitch !
Fri, 08/26/2011 - 13:01 | Link to CommentCatullus
Catullus's picture
That anyone believes Bank of New York Mellon could possibly act in good faith stretches the bounds of rationality. But that's exactly why it'll pass.
Just say it again Countrywide bondholders "2 cents on the dollar". "2 cents on the dollar." "2 cents on the dollar."
Fri, 08/26/2011 - 13:05 | Link to CommentQuackking
Quackking's picture
Once again, ZH leads the "journalist" pack by about a hundred miles.. Ahem, did I say "journalist" when referring to CNBC, etc? I apologize.

Thx, TD. You guys rule.
Fri, 08/26/2011 - 13:17 | Link to CommentCognitive Dissonance
Cognitive Dissonance's picture
The so called 'journalist' pack cannot be considered reporters. They are for the most partrepeaters.
No matter what is stuffed in their mouths, they have no problem spitting it back out. This way they never become pregnant with new ideas. Or (God forbid) contaminated with the truth.
Fri, 08/26/2011 - 13:12 | Link to Comment--Freedom--
--Freedom--'s picture
I love it. One of the cnbc guys just said that after the initial drop this morning, stocked "decided to man up."
What's next?
Fri, 08/26/2011 - 13:34 | Link to CommentSheepDog-One
SheepDog-One's picture
Probably a -300 point plunge.
Fri, 08/26/2011 - 13:18 | Link to Commentunionbroker
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In the American economy, the only thing that's really lacking right now is confidence," said David Kelly, chief market strategist at JPMorgan funds. Kelly said the Fed has few remaining options to help the economy, but action by the central bank might not be necessary. ha ha ha ha
Fri, 08/26/2011 - 13:30 | Link to CommentThomas
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Kelly lives at the end of the Skittles rainbow. He always sounds like a Stepford Strategist.
Fri, 08/26/2011 - 13:25 | Link to CommentSurly Bear
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Chapter 11 would solve everything.
Fri, 08/26/2011 - 13:27 | Link to Commentslewie the pi-rat
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as i've been posting, i smell a fix somewhere.  not infederal court? with a new 'start'? 
oh, yes, we at Paulie Walnut Place for greedy lawyers, thinkwe should take this into "newness" for you poor bastards who will never get paid.  trust us!  we're lawyers!  and we're here to help!
Fri, 08/26/2011 - 13:35 | Link to CommentDowntoolong
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Moynihan to Buffett – “Psych, who’s got who trapped by the balls now sucka? Welcome to my world.”
Fri, 08/26/2011 - 13:35 | Link to CommentSheepDog-One
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Banks in deep shit, economy screwed, 1% GDP at best....hey I know lets stage a +200 DOW rally!
Fri, 08/26/2011 - 14:05 | Link to CommentMercury
Mercury's picture
What kind of precedent is there for a putback of anywhere near 100 cents on the dollar for the RMBS in question here?
Let's say there is a ~100% putback....who owns the mortgages at that point?  Does that further F-up foreclosures?  Given how deeply this thing reaches into problem areas of the larger economy I think there will be lots of outside pressure for MBS holders to take their lumps and go home.  Justice or no that just seems like the most likely scenario.....not a "settlement" that results in massive putbacks and sinks BAC.
Besides, if the government is willing to bulldoze Chrysler bondholders for "the greater good" they aren't going to let the fucking  Bank of America (or the Bank For Fucking America) go down in flames this way.  Clearly who owes what to whom and under what conditions in the area of residential real estate has been a very malleable formulation (as far as the government is concerned) for a very long time at this point anyway. 
Fri, 08/26/2011 - 13:47 | Link to CommentColorado14er
Colorado14er's picture
Forgive my ignorance, but it initially appears that this is a good thing, no?  BOA's exposure would be increased by this issue going to federal court, including media exposure/coverage.  I know, wishful thinking maybe. But hey, a guy can still fucking dream.
I also want to give a huge, monstrous thank you to ZH and all its commenters for the invaluable information and insight that is provided on this website on a daily basis.  Honestly, I am WAY late to the game here and trying to understand all of the stuff you guys talk about is very overwhelming at times.  It's scary to wake up from the nice fluffy dream I've been in during my 34 years of life on this planet, however, I wouldn't have it any other way, because I wouldn't be learning jack shit if I was getting my so-called "news" from the same sources I did even a few years ago.
Anyway, give yourselves a big fucking pat on the back. 
A (very) Newbie!
Fri, 08/26/2011 - 14:11 | Link to CommentPanafrican Funk...
Panafrican Funktron Robot's picture
Daily reader/poster here for the past going on two years now.  ZH condensed:  go long physical gold and popcorn, while we watch TD and guests peel away the layers of the shockingly bullshit onion.  Well worth the 30 min o' free time a day.  
Fri, 08/26/2011 - 13:53 | Link to CommentEndTimes
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Somebody put that dog out of its misery

Fri, 08/26/2011 - 13:54 | Link to Commenthungrydweller
hungrydweller's picture
Now we know what the quid pro quo with Uncle Warren will be.  Once this makes its way into the federal courts, the pressure will be on to settle this into a nice small little package afer all.
Fri, 08/26/2011 - 14:01 | Link to Commentgwar5
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I just would have assumed federal court woulda been better for BAC. Well, there you go... That's why I come here.
Fri, 08/26/2011 - 14:06 | Link to CommentMaximumPig
MaximumPig's picture

Just because the case is moved to Federal court does not mean that New York law won't be applied.  Federal courts have to apply state law all of the time because there aren't Federal statutes that cover everything that might come up in a Federal case (i.e., general property, contract and tort law are generally all state-law matters).  
In this instance the Federal court should be guided by the choice of law provisions in the relevant agreements between the parties, which, because these are NY trusts, is almost certainly NY law.  
However this does not mean that Walnut Place's next move will not be to try to somehow get this matter out of the Article 77 proceeding and into a more typical class action, but there is more to it than simply removing the case to Federal court.
Fri, 08/26/2011 - 14:18 | Link to CommentPulauHantu29
PulauHantu29's picture
"Fair and Balanced."
Fri, 08/26/2011 - 14:26 | Link to CommentFreudianSlip
FreudianSlip's picture
All this litigation and posturing does only one thing.............limit the liabilities of BofA.  No matter what, all the investor entities that were defrauded and lost money will be the losers.  The courts at work for the business, in this case BofA, with the deepest pockets to litigate into oblivion.  US Courts are a joke.  Even when it's settled who says anyone will get payment.  Ask Mel Belli (law partners & his estate) who have huge unpaid awards against Exxon.  The corruption in this country is everywhere.  Start cleaning it up where you live and work your way up to the federal government.  Unravel government bureaucracy by defunding budgets and closing ineffective government agencies.  

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