Judge Gives Green Light to BofA Mortgage Settlement
In a long-awaited decision issued on Friday, New York Supreme Court Justice Barbara Kapnick largely approved a $8.5 billion settlement between Bank of America Corp and mortgage-backed securities investors, resolving in one fell swoop much of the bank's liability for its acquisition of Countrywide Financial Corp. The decision is a victory for Bank of New York Mellon, the trustee for Countrywide MBS trusts, which threw its weight behind the settlement. It's also a victory for Kathy Patrick of the boutique law firm Gibbs & Bruns, who negotiated the deal on behalf of 22 institutional investors and defended it during a contentious court proceeding.
The settlement resolves past and future claims that BofA, which acquired Countrywide in 2008, should repurchase home loans underlying more than $400 billion in MBS sold by Countrywide before the financial crisis. Some large MBS investors, including American International Group, argued that the settlement did not adequately compensate them for signing away their claims.
Kapnick mostly brushed aside those concerns in Friday's ruling. She wrote that it was reasonable for BNYMellon to lock in a lump payment rather than pursue lengthy and difficult litigation. "It's also clear that the trustee placed considerable weight on the fact that the settlement was supported by 22 institutional investors, including arms of the federal government, prominent investment managers acting as fiduciaries for their clients, and institutions managing their own money," she wrote.
There was one large exception to Kapnick's ruling, however. She allowed MBS investors to proceed with their suit to recover $31 billion in loan modifications, ruling that BNYMellon settled those claims "without investigating their potential worth or strength." AIG said in a statement that it's "pleased that the Court refused to approve the proposed settlement in its entirety and found that the trustee acted unreasonably in agreeing to compromise billions of dollars of investor claims." Mark Zauderer, a partner at Flemming Zulack Williamson Zauderer who represented AIG, told our affiliate the New York Commercial Litigation Insider that the case will "continue for years to come."
In 2006 and 2007, Countrywide sold MBS to investors through 530 trusts. BNYMellon contracted with BofA to serve as trustee, a relatively hands-off role that mostly meant watching over funds coming into and leaving the trusts.
As securities lawyer Isaac Gradman explained in a guest column on the case, the intricacies of MBS servicing agreements meant that a sufficiently large group of investors could unite and force BNYMellon to pursue repurchase claims against Countrywide. In 2010, Patrick and her colleagues at Gibbs & Bruns cobbled together such. Group. The 22 institutional investors, included Belackrock Inc., Pacific Investment Management Company (PIMCO), and the Federal Home Loan Mortgage Corporation (Freddie Mac).
In June 2011, the group announced the $8.5 billion settlement with BofA. Gibbs & Bruns are seeking $85 million in attorneys fees as part of the settlement. AIG voiced its objections during a lengthy bench trial before Kapnick in the summer of 2013.
Patrick didn't return a request for comment on Friday.