AIG Wins Temporary Delay of $8.5 Billion BofA Deal
A judge's decision last week to approve Bank of America Corp.'s $8.5 billion megasettlement with mortgage-backed securities investors capped a long and bruising fight over the deal. But with so many zeroes at stake, high-profile challengers of the settlement aren't ready to declare game over just yet. On Tuesday American International Group Inc. persuaded a state court judge in New York to temporarily hold off on dismissing the case so that the parties can figure out what claims against BofA are still viable.
The settlement relates to 530 MBS trusts that Countrywide Financial Corp. marketed to investors prior to the financial crisis. Investors allege that Countrywide, which BofA acquired in 2008, misrepresented the quality of the underlying home mortgages and therefore is obliged to repurchase them. A group of 22 institutional investors, including Blackrock Inc. and Metlife Inc., spearheaded the deal, which would be binding on all investors. The trustee for the MBS trusts, Bank of New York Mellon Corp., signed off on the agreement.
BNY's lawyers at Mayer Brown availed themselves of Article 77 of New York's civil code, which allows a trustee to get a court ruling that it acted reasonably. The task of evaluating the deal fell to then–New York Supreme Court Justice Barbara Kapnick, who ascended to the state's appellate division this week. Kapnick held a nine-week evidentiary hearing in the summer of 2013, during which AIG's lawyers at Flemming Zulack Williamson Zauderer called the settlement a sweetheart deal.
On Jan. 31, on her last day as a trial judge, Kapnick approved the deal, as we reported here. There was one major exception to her ruling, however. She ruled that BNYMellon acted unreasonably when it relinquished claims that BofA should repurchase underlying mortgage loans that had been modified. AIG and its lawyers have argued that those claims are worth "tens of billions of dollars."
Kapnick's replacement in the Article 77 case, Saliann Scarpulla, needs to decide whether to issue a final judgment closing the proceeding. In a motion filed on Tuesday, AIG urged the judge to keep the case open indefinitely, arguing that critical features of the settlement were not addressed by Kapnick, like which trusts are covered by the settlement and how much they'll receive. "By entering final judgment, these matters—all of which could be efficiently litigated in the instant action—will instead by addressed through the subsequent filing of multiple, overlapping proceedings," Mark Zauderer of Flemming Zulack wrote for AIG.
Manhattan-based attorney Kenneth Warner, local counsel for the 22 institutional investors who supported the deal, countered AIG's arguments in a letter to the court also filed on Tuesday. Delaying entry of final judgment would be "greatly prejudicial to the thousands of certificateholders who are waiting for the proceeds to be distributed," he wrote. Lead counsel for the investors is Kathy Patrick of Gibbs & Bruns.
According to DealBook, Scarpulla agreed Tuesday to hold off on entering final judgment until at least later this month. She agreed to hold a hearing in the case on Feb. 19.