COLUMN-On a dark day, BofA's dim ray of hope: Alison Frankel
-- Alison Frankel writes the On the Case blog for Thomson Reuters News & Insight (newsandinsight.com). The views expressed are her own. --
By Alison Frankel
NEW YORK Aug 9 (Reuters) - Monday was (another) dreadful day for Bank of America (BAC.N). The bank's shares closed at a two-year low, thanks in part to AIG's (AIG.N) double whammy: a $10 billion fraud suit against BofA and the insurer's simultaneous motion to intervene in opposition to BofA's proposed $8.5 billion settlement with Countrywide mortgage-backed securities noteholders. Bank of America and Countrywide's securitization trustee, Bank of New York Mellon, thought the $8.5 billion deal would put their MBS woes behind them. Instead the proposed settlement seems to have made the two banks into bigger targets than they were before reaching an agreement with 22 big MBS investors.
There's plenty of reason for BofA to worry about the AIG fraud suit. First off, the New York state court complaint was filed by Quinn Emanuel Urquhart & Sullivan, a familiar opponent for Bank of America. Quinn is counsel to the bond insurer MBIA in its MBS litigation against Countrywide, in which Judge Eileen Bransten has consistently sided with MBIA and Quinn Emanuel. (Among other crucial rulings, Bransten rejected Bank of America's preliminary argument that it's not liable for Countrywide's missteps.) Quinn also represents Fannie Mae and Freddie Mac, which forced Bank of America into a $2.8 billion dollar settlement of MBS claims in January, and Allstate, which filed a $700 million MBS case against Countrywide in December. Different Quinn Emanuel lawyers are involved in the various BofA and Countrywide cases, but the firm isn't starting from scratch.
The AIG fraud complaint is also a canny document. The suit lumps together allegations against Countrywide, Merrill Lynch, and BofA, painting all of them with the same tarry brush even though Countrywide and Merrill Lynch committed a good chunk of the alleged wrongdoing before they became part of BofA. Quinn includes public record information about their manifestly deficient underwriting practices, but has brought the case as a fraud suit-not a contract case accusing BofA, Countrywide, and Merrill of breaching the representations and warranties on the mortgage loans underlying the securitizations AIG invested in. That way, AIG doesn't have to show that it controls 25 percent of the voting rights, the threshold for standing in a securitization contract case. But under the causes of action the complaint asserts -- state-law claims and federal claims under the Securities Act of 1933 -- Quinn Emanuel doesn't have to show that BofA, Countrywide, and Merrill acted with fraudulent intent.
Quinn partners Michael Carlinsky and Philippe Selendy, who signed the AIG complaint, also undoubtedly know that even if Bank of America's $8.5 billion settlement is approved by Manhattan state supreme court judge Barbara Kapnick, their fraud case won't be wiped out. BofA's deal with the 22 MBS noteholders who negotiated the proposed settlement is expressly limited to investors' breach-of-warranty claims. It doesn't resolve securities fraud claims; in fact, three of the investors backing the proposed settlement have since sued Countrywide for fraud.
That's why it's so interesting that AIG filed its motion to intervene in the proposed settlement on the same day that it filed the fraud suit. The intervention petition, filed not by Quinn Emanuel but by Reilly Pozner, raises the now-familiar assertions that investors aren't getting a big enough cash payout and that Bank of New York Mellon had a conflict in negotiating the deal because BofA agreed to indemnify BNY Mellon in a side-letter. But AIG is the first objector also to take aim at Gibbs & Bruns, the law firm that's counsel to the 22 institutional investors that negotiated the proposed settlement.
"The genesis of the proposed settlement agreement appears to be an exclusive group of investors and their outside counsel, who without the participation of the other beneficiaries and with the blessing and cooperation of [BNY Mellon] as trustee, engaged in clandestine settlement negotiations with [BofA]," the petition said. "These discussions culminated in a settlement proposal that, if approved, would result in thousands of affected beneficiaries receiving a small fraction of their losses, while the inside institutional investors' outside counsel would be paid $85 million -- not from her clients but from [BofA]." That fee arrangement, AIG argues, means Gibbs & Bruns had an $85 million conflict in reaching a deal with Bank of America. (Gibbs partner Kathy Patrick told me the fee deal is "very typical in bondholder cases." She said her clients, all experienced litigants, insisted that Bank of America pay Gibbs & Bruns fees rather than take money out of the settlement pool to pay the lawyers. "It's in the best interests of investors," Patrick said.)
So where, you may be wondering, is that ray of hope I mentioned in the headline? It's in a two-page order Kapnick entered in the MBS settlement docket Monday, after presiding over a mobbed hearing Friday. The judge agreed that her original order calling for investors to register objections by Aug. 30 had to be modified because noteholders may not know by then whether they like the proposed deal. She ruled that any investor who wants a say in the case need only file a written notice of intervention, not a formal objection. But she rejected all of the intervenors' demands for expedited discovery and left in place the August 30 deadline for investors to file intervention notices. Settlement proponents claimed that as a win.
"The court acted swiftly to address an issue that needed to be addressed," said Patrick of Gibbs & Bruns. "We're pleased that she indicated the case is going to move rapidly and that she left the existing deadline in place."
Patrick said that deal supporters were encouraged by Friday's hearing, at which Judge Kapnick seemed to be well-versed in the filings and eager to move things along. A transcript suggests that Gibbs & Bruns; BofA counsel from Wachtell, Lipton, Rosen & Katz; and BNY Mellon lawyers from Mayer Brown took a smart course when they filed the case as an Article 77 trust proceeding, under which the court is supposed to pay deference to the trustee unless objectors can show the trustee acted unreasonably or breached its duty.
"That's the proceeding they brought," Kapnick said, after noting that she had to look up the obscure Article 77 in the New York code. "It's not, it's not a class action. There aren't provisions in there to opt out that you are talking about. That's not what this is. If you started it, maybe that's what you would have done, but they started it and that's what they did. I have to work, at least now, within the confines of the proceeding that is before me." (A lawyer from the New York Attorney General's office was at the hearing, according to the transcript, but didn't remind Judge Kapnick that the case now has additional fraud and Martin Act implications, thanks to the AG's counterclaims against BNY Mellon.)
Patrick told me she believes the judge will look hard at AIG's objection, given that it was filed on the same day as the insurers' fraud suit against BofA. "There's a serious question about whether AIG is acting to serve other litigation goals," Patrick said.
And on a day when all else is bleak in BofA land, one judge offering a bit of scrutiny to allegations that harm the bank looks like sunshine.
This blog post first appeared here: link.reuters.com/keg23s
(Reporting by Alison Frankel; Editing by Eileen Daspin)
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