Bank of America can’t win for losing.
Readers may recall the Charlotte bank tried arranging a settlement for a troublingly wide range of liability issues with its securitization trustee, Bank of New York, purportedly on behalf of investors. This deal looked like a victory for BofA, since it covered virtually all of the old Countrywide securitizations.
As we indicated the deal stank to high heaven, in part because Bank of New York itself has liability to investors on these very same trusts and BofA gave Bank of New York an expanded indemnification. That’s called a bribe, folks. And on top of that, Bank of New York is effectively the house RMBS trustee for BofA, so it isn’t surprising that Bank of New York might be a tad responsive to the wishes of a major, ongoing client.
The deal is subject to a so-called Article 77 hearing, and a raft of parties objected, not just quite a few investors, but also the FDIC and the attorneys general of New York and Delaware. The hearing was due to take place before a New York judge (this was treated as a state law matter) who has proven to be very bank friendly in the past.
One of the investor attorneys, David Grais, petitioned to have the case removed to Federal court. The drill is that the case is automatically removed, but the other side can and pretty much always does move to have the case returned to the original court. It is the judge in the new venue who hears the arguments and decides whether to keep the matter in his court or not.
The Federal judge decided to keep the case. Per Reuters (hat tip Buzz Potamkin):
Manhattan federal Judge William Pauley on Wednesday decided to keep a proposed $8.5 billion settlement over Bank of America Corp’s mortgage-backed securities in federal court, potentially lengthening the deal’s consummation….
“The settlement agreement at issue here implicates core federal interests in the integrity of nationally chartered banks and the vitality of national securities markets,” Pauley’s written order said in part.
“Lengthening the deal’s consummation” is an awfully optimistic conclusion. Most experts not only expect any deal to take two to three years to get done, but the odds are high, given the number of objections, that the deal is likely to be reopened, which means at a minimum it will cost BofA more dough. When you renegotiate a deal, there is no assurance it will get done.
Update. Whoa, the press report is even more misleading, in its terse fashion, than I realized. Get a load of the opening paragraph. The judge is not happy with the procedural move the parties to the settlement took. In particular, he stresses that Article 77 hearings (which set a very high bar for making objections) are exotic, and not appropriate for this sort of deal. He clear states that they are typically used only for “mere matters of administration” and pretty much have never been used post the 1960s.
And if you read the filing, he is ALSO not at all pleased with how Bank of New York has operated to pretend it is acting on behalf of investors yet refusing to say who they are. It looks like he will take a hard look at the deal and see signs that the parties to the deal have not operated in good faith. Just look at how he characterizes Bank of New York’s conduct. For instance: “…fearing that the trusts’ claims against Countrywide and Bank of America would lapse as a result of Bank of New York’s torpor…” Wow. This does not look promising for BofA, and Bank of New York may deservedly take it in the chin for its past conduct.
Pauley Ruling on Keeping $8.5bn Settlement in Federal Court – 10-19-2011
47 comments
Comments are closed.
Judge Pauley put some mustard in that order, to be sure. And if anyone thinks BofA will successfully double-talk its way out of this judge’s sites, take a look at this prior hearing transcript from this case. Man alive, what a bulldog.
http://newsandinsight.thomsonreuters.com/uploadedFiles/Reuters_Content/2011/09_-_September/bofaMBS–9.23hearingtranscript.pdf
I’ll bet BofA is longing for the halcyon days of the flechette shellings it got from Judge Rakoff in S.E.C. v. Bank of America.
I got it via e-mail just as I put the post up and started reading it. Holy cow. You seldom see a judge so openly disapproving. Hence the update. The Reuters article is close to a whitewash.
Too seldom, imho. Who doesn’t like it when an Article III federal judge puts the fear of Jesus into Bank of America’s ATTORNEYS, as Judge Rakoff had no compunction doing?
“The S.E.C. also claims it was stymied in determining individual liability because the Bank’s executives said the lawyers made all the decisions but the Bank refused to waive attorney-client privilege. But it appears that the S.E.C. never seriously pursued whether the this constituted a waiver of the privilege, let alone whether it fit within the crime/fraud exception to the privilege. And even on its face, such testimony would seem to invite INVESTIGATING THE LAWYERS.”
http://scholar.google.com/scholar_case?q=rakoff+s.e.c.+bank+america&hl=en&as_sdt=3,24&case=14424144582837922601&scilh=0 (footnote 3).
Speaking of Judges Pauley and Rakoff…
http://dealbook.nytimes.com/2011/10/04/another-federal-judge-takes-the-s-e-c-to-task/
I agree with the sentiment that BofA is being set up as the fall bank for the finance industry.
What I want to know is whether it will stop there or keep moving onto the other TBTF banks? It will be interesting to see what sort of “just a few bad apples” narratives are invented to protect the remaining guilty.
It’s starting to look like that old Russian folk tale. The wedding party is heading home at night by sleigh and a large pack of wolves picks up their scent. To divert the wolves and keep them from crippling the horses and devouring them all, the partiers throw out one person at a time.
I think Wall Street is about to throw that litle North Carolina bank out of the sleigh.
The Democratic National Convention is in Charlotte. BoA will not be DOA until after the DNC and after the election.
I wouldn’t be so sure, curlydan. Wells Fargo can throw a mean party all by themselves.
Well, BofA was stupid enough to buy Countrywide and then not keep its operations segregated for long enough post merger so as to continue to keep it bankruptcy remote from the parent. This mess is a self inflicted wound.
But Wells is next. It wasn’t as bad an originator, but its business is far more heavily skewed towards mortgages as the other banks, is every bit as bad a servicer as the other big banks, and has written down fewer of its seconds than JPM (whose real Achilles’ heel is its derivatives exposures, even though they are presumed to be less bad than those of other banks, their exposures are huge, so minor miscalculations could have really outsized consequences). Why do you think Buffett invested? My assumption is it was at least in part to protect Wells.
Wells wasn’t included in the FHFA Fannie and Freddie suits. Does anybody know why? Is it because of fewer origination problems as Yves mentioned?
Why do you think Buffett invested? My assumption is it was at least in part to protect Wells.
I’m not sure I agree. Buffett’s history suggests that he’d have just sold off Wells if he didn’t like it. Buffett invested in BAC because he got a very sweet deal (6% + a lot of warrants) and believes the TBTF bit. Even if he is wrong on this deal, it’s a “good bet”–ie, if you make enough of these bets over time, you will end up much richer than if you make none of these bets.
What Buffett sees in Wells is beyond me, but then again, I’m not a multibillionaire who managed to get that way purely based upon my investing acumen.
He got into Wells a long time ago, IIRC the early 1990s. If you bought ANY bank then you got a good return. We had two decades of deregulation and financialization. Look at Wells versus a bank index and then tell me how good his deal looks. It may still have outperformed, but by how much? His later rescue deals haven’t produced stellar returns.
Per Lucy, the FHFA lawsuits are putbacks. Wells SPECIFICALLY laid off its rep and warranty risk on its underwriters. I’m astonished they ate it, but Wells dumped that liability on other parties. That does not mean it was any cleaner as a bank, it was just a more clever criminal.
Maybe Reuters redid the article, I have noticed they constantly reprint and do subtle edits on news articles all day. The link given didn’t work, here’ one that is what I assume is the article, maybe the editors saw this post, the time of the putative rewrite is 5:49 pm today. They’ve warmed up a fraction of a degree to the subject I’d say.
http://www.reuters.com/article/2011/10/19/us-bankofamerica-mortgage-idUSTRE79I75Q20111019
Reuters operates like the worn out segment of a thermostat that is somewhat brittle and incapable of really responding accurately to temperature changes, but you can depend on them at least, to always be five degrees on the cold side. Or what ever . . .
this was an interesting bit from the article:
The proposed settlement was filed in state court as a special proceeding known as Article 77 and not as a class action. Article 77 in state court usually covers family trust matters. The agreement covers 530 mortgage pools with $174 billion of unpaid principal balances.
Let’s see, somebody over at Forbes (help me out, I know I saw it here) put her pretty little fist into a drawer of BofA mess and came out with a hundred dirty rats. ie. fraudulent mortgages.
So, out of $174 billion how much is fraudulent stuff?
20%?
Do I have 25%.
I see 30 from the lady in the back and the gentlemen raises her 10, man with cane makes it 50, lady raises him 10
I have 60% of $174 billion going once . . . .
At the hearing, there was a lot of arguing on
fiduciary duties of BNYM towards investors, and
which of the Pooling and Servicing Agreement or
common law, New York State law and precedent
governed the fiduciary duties, if any existed.
My understanding is that the PSAs were governing
(according to the attorney for BNYM) and that
BNYM owed no fiduciary duties to investors.
On the other hand, the attorney for Walnut Place
argued that BNYM had a fiduciary duty to
institutional investors, because BNYM was
a trustee for over 530 trusts, which had a legal
relationship or tie to the trusts.
Normally, the role of trustee automatically implies a fiduciary duty to beneficiaries of trusts, which is further outlined by the Uniform Trust Code, either federal or state. My understanding, however, is that the PSA trumps anything from UTC, which I’m pretty sure is what BNYM is arguing. The PSA’s I’ve read explicitly release the trustee from fiduciary type responsibilities to the investors (which I always thought was a crime in itself). I’m not sure that a judge will allow the PSA to stand on that particular point. Given the rulings I’ve just read from this judge, I’d say the investors lucked out in terms of which judge they got to hear the case. If any judge will strike that part of the PSA, I’d think it would be him, though I could be wrong.
No, Walnut Place did not argue for a fiduciary duty, but it did argue for duties that are imposed on any New York trust by state law and court precedent. BoNY tried to argue its only duties are contractual. BoNY does not have a fiduciary duty, these are thin form corporate trusts. The ruling endorses that argument.
Schneiderman did mention fiduciary duty in his filing on the settlement, but it was a comment in passing, it was not core to any of his arguments.
Yves, as “still chuckling” quotes downthread, Judge Pauley points out that Bank of New York DOES have a fiduciary duty of loyalty to its trustees which even the Bank, a day late and a dollar short, now recognizes.
“As Judge Learned Hand explained nearly sixty years ago, New York courts have refused to give ‘any countenance to the notion that, so far as a corporation sees fit to assume the duties of an indenture trustee, it can shake of the loyalty demanded of every trustee, corporate or individual.’ That BNYM has only just recognized the import of Judge Hand’s insight speaks volumes.” page 17
The idea of a trustee attempting to discharge its fiduciary duty by contract is baffling to me (hell, the Latin word for trust is “fiducia”). That’s like a father attempting to discharge his child support duty in a prenuptial agreement (perhaps by granting him “thin form corporate parenthood” status).
Not only is it legally unenforceable, it makes you look like a hoodrat to any judge who reads the contract.
No, no, you are STILL missing it.
A fiduciary duty is the highest standard of care. BoNY is NOT a fiduciary for these trusts.
But it DOES have obligations beyond that of its contractual duties (as defined in the pooling & servicing agreement) imposed on it as a trustee under New York law.
Trustee does not equal fiduciary. That is the point you are missing. There are different types of trusts. But there is a minimum level of responsibility that any trustee is duty bound to honor, and BoNY is trying to shake that by arguing it has only responsibilities as set forth in the contract.
Yeah that transcript is ten tons of awesome. Let me tell you where things went to hell for the Bank of New York:
THE COURT: Didn’t it owe a fiduciary duty to each
trust independently.
MR. INGBER: The Bank of New York Mellon didn’t owe —
THE COURT: Did or did not?
MR. INGBER: — did not owe a fiduciary duty to each
of the trusts. The Bank of New York Mellon’s duties are
defined by the pooling and servicing agreements, and they don’t include fiduciary duties.
THE COURT: What is a trustee then?
MR. INGBER: A trustee in this case is administering
the trusts…
That’s horrifying. That’s like someone accused of statutory rape defending themselves with “Wait, that’s a crime?”
I can tell you what was going through Judge Pauley’s head while he listened to counsel; Benjamin Cardozo’s famous Meinhard v. Salmon opinion, a New York Court of Appeals case that every law student in America studies as the textbook definition of a trustee’s fiduciary obligations (of which the Bank of New York was blissfully unaware).
Many forms of conduct permissible in a workaday world for those acting at arm’s length, are forbidden to those bound by fiduciary ties. A trustee is held to something stricter than the morals of the market place. Not honesty alone, but the punctilio of an honor the most sensitive, is then the standard of behavior. As to this there has developed a tradition that is unbending and inveterate. Uncompromising rigidity has been the attitude of courts of equity when petitioned to undermine the rule of undivided loyalty by the “disintegrating erosion” of particular exceptions… Only thus has the level of conduct for fiduciaries been kept at a level higher than that trodden by the crowd. It will not consciously be lowered by any judgment of this court.
http://www.courts.state.ny.us/reporter/archives/meinhard_salmon.htm
Thanks, beowulf, for that blast from the past. Cardozo at his best.
One can only wonder at the logic of BofA counsel: “A trustee in this case is administering the trusts…”
Can he really be arguing that the private law arrangement in the PSA, which purportedly strips away those awkward fiduciary duties, trumps the black letter of trusts and administration with all the weight of public policy behind it.
Bad day for BofA, indeed.
Read his ruling. Nowhere does he say BoNY is as fiduciary. He asked the question and then did further homework.
Trust me, BoNY is still in a shitload of trouble without being a fiduciary. There is are minimum duties imposted by NY law on any trustee, and BoNY shirked them. This is not gonna go well for BoNY.
page 13
15 THE COURT: Where is good faith defined in the PSA?
16 MR. INGBER: It is not defined in the PSA. The good
17 faith duty is set forth in the PSA.
18 THE COURT: Where is that duty defined?
19 MR. INGBER: The duty of good faith, your Honor, its
20 set forth in the PSA.
21 THE COURT: Where?
22 MR. INGBER: It can be defined —
23 THE COURT: Just show me where.
24 MR. INGBER: The definition of good faith is not in
25 the PSA.
Wow, while the “good faith and fair dealing” notion is assumed in any contract. This may just be to show BoNY’s argument is silly, but Pauley may also be suggesting he thinks BoNY did not act in good faith. If so, they are going to get the book thrown at them.
I’ve been of the view since this crisis began that if any major entity was going to end up the sacrificial lamb tossed the public in a display of faux “toughness” by this Admin, it would be BoA. It has never been part of the Wall Street/Washington inner nexus. So long as they’re covered in terms of counterparty risk (and there’s no doubt they would be), they’d be delighted to see a major competitor fold even if they were not allowed to feast on the good assets.
Not unlike the difference had the Gulf spill been caused by, say, Chevron rather than BP. Or if Ford had the “runaway” gas pedal crisis that wasn’t a crisis, not Toyota.
So long as they’re covered in terms of counterparty risk (and there’s no doubt they would be), they’d be delighted to see a major competitor fold
If they fold, there will be a complete bank overhaul. It won’t be a rehash of 2009, where the remaining TBTF just increase their market share. The IB’s will also get hurt.
At least that’s my view, and that’s how I will bet should an outright failure.
Lulz…
Bank of America cannot die fast enough.
I am afraid you will find the death of BofA to have the impact of a fart at the Superbowl. There will be less left for the defrauded than all those smokers realized from the bankruptcy of Owens Corning.
$5.00/per by January?
Bank of American should have gone to bankruptcy, that much is obvious, so that an orderly process could have been initiated for the mortgages it does still hold, which is supposed to be about 8.5% according to our friends at reuters. —
http://www.reuters.com/article/2011/10/11/us-bankofamerica-correspondent-idUSTRE79A6YW20111011
–Not really a small number given that
–Inside Mortgage Finance expects lenders to make about $1.2 trillion in loans this year—-they have say $102 billion in mortgages made just this year?
something will have to be done with those 850,000 or so mortgages —
Obama land has not done too well on that front when they said they were trying to–
I know, were they really trying or just putting in appearances – – -at helping – – the banks or homeowners–or no one.
Not a pretty picture
those are just rough numbers for this year–
how much have they accumulated from years past – -will we ever know–I believe when they go down it will be more like a major demolition hitting the land.
“California reportedly subpoenas BofA over toxic securities”
http://www.latimes.com/business/la-fi-bank-america-harris-20111020,0,7184883.story
More highlights:
“As Judge Learned Hand explained nearly sixty years ago, New York courts have refused to give ‘any countenance to the notion that, so far as a corporation sees fit to assume the duties of an indenture trustee, it can shake of the loyalty demanded of every trustee, corporate or individual.’ That BNYM has only just recognized the import of Judge Hand’s insight speaks volumes.” page 17
“The PSAs are not talismans endowed with the power to ward off federal jurisdiction.” page 19
This is playing like the theater of the absurd. Does Andrew Jackson need to climb out of his grave and do a full reset again?
I think that’s going to happen. It’s only a matter of time before the Fed gets thrown to the wolves. Unfortunately, those idiots are going to completely decimate the economy first.
Erm. “Decimate” means “to kill one in ten.” Perhaps you mean “annihilate” instead? Or just “destroy?” Ok, ok, I’m being picky, but otherwise I’d have to cry.
It also means to destroy a great proportion of, in addition to the definition you provide.
http://dictionary.reference.com/browse/decimate
Perhaps the best thing about the American English language is that is is ever evolving.
I can’t recall the source, but:
“What can you say about a language that includes a word that means killing one in every ten people?”
He had me at torpor. Wow!
Maybe I meant $4.00?
“Wells Fargo & Co. (WFC), the biggest U.S. home lender, may earn higher profits in the U.S. mortgage market as rivals flee from angry homeowners, more powerful regulators and billions of dollars in losses.”
Wells Fargo Sees ‘Huge Opportunity’ as BofA Cuts Home Lending
http://www.bloomberg.com/news/2011-10-20/wells-fargo-sees-huge-opportunity-as-bofa-cuts-home-lending.html
What “more powerful regulators?” I’m still waiting for that movie to come out.
I’d also note that WF’s Wachovia acquisition is close enough to BofA’s offices that they could build a giant skimmer and literally skim the cream from BofA’s despondent workforce
Where do I send a message to BOA et al legal team —- do you need ice for that?
Skippy…maybe the 99% can have a wander over by the judge William Pauley’s building and give a few hips and hoorays!
I noticed on p.47 of the transcript the suggestion that the application could be withdrawn and refiled as a class action. The effect would be to remove it from federal jurisdiction.
On deck…be prepared for another hose-down by TBTF.
So you scooped up a foreclosed home because some deadbeat couldn’t pay? Guess what…chances are good you bought yourself a bill of goods. The seller in most cases held no legal right to sell therefore you too got screwed by TBTF. This is like Ibanez II.
Bevilaqua v. Rodriguez
Summary of the decision by Greg Lemelson of Amvona Houston, we’ve got a problem – Bevilacqua
On Oct. 18th, 2011 the Massachusetts Supreme Judicial Court handed down their decision in the FRANCIS J. BEVILACQUA, THIRD vs. PABLO RODRIGUEZ – and in a moment, essentially made foreclosure sales in the commonwealth over the last five years wholly void. However, some of the more polite headlines, undoubtedly in the interest of not causing wide spread panic simply put it “SJC puts foreclosure sales in doubt” or “Buyer Can’t Sue After Bad Foreclosure Sale”
In essence, the ruling upheld that those who had purchased foreclosure properties that had been illegally foreclosed upon (which is virtually all foreclosure sales in the last five years), did not in fact have title to those properties.
Given the fact that more than two-thirds of all real estate transactions in the last five years have also been foreclosed properties, this creates a small problem.
The Massachusetts SJC is one of the most respected high courts in the country, other supreme courts look to these decisions for guidance, and would find it difficult to rule any other way in their own states. It is a precedent. It’s an important precedent.
Here are the key components of the Bevilacqua case:
1. In holding that Bevilacqua could not make “something from nothing” (bring an action or even have standing to bring an action, when he had a title worth nothing) the lower land court applied and upheld long-standing principles of conveyance.
2. A foreclosure conducted by a non-mortgagee (which includes basically all of them over the last five years, including the landmark Ibanez case) is wholly void and passes no title to a subsequent transferee (purchasers of foreclosures will be especially pleased to learn of this)
3. Where (as in Bevilacqua) a non-mortgagee records a post-foreclosure assignment, any subsequent transferee has record notice that the foreclosure is simply void.
4. A wholly void foreclosure deed passes no title even to a supposed “bona fide purchaser”
5. The Grantee of an invalid (wholly void) foreclosure deed does not have record title, nor does any person claiming under a wholly void deed, and the decision of the lower land court properly dismissed Bevilacqua’s petition.
6. The land court correctly reasoned that the remedy available to Bevilacqua was not against the wrongly foreclosed homeowner but rather against the wrongly foreclosing bank and/or perhaps the servicer (depending on who actually conducted the foreclosure)
2. A foreclosure conducted by a non-mortgagee (which includes basically all of them over the last five years, including the landmark Ibanez case) is wholly void and passes no title to a subsequent transferee (purchasers of foreclosures will be especially pleased to learn of this)
3. Where (as in Bevilacqua) a non-mortgagee records a post-foreclosure assignment, any subsequent transferee has record notice that the foreclosure is simply void.
4. A wholly void foreclosure deed passes no title even to a supposed “bona fide purchaser”
5. The Grantee of an invalid (wholly void) foreclosure deed does not have record title, nor does any person claiming under a wholly void deed, and the decision of the lower land court properly dismissed Bevilacqua’s petition.
6. The land court correctly reasoned that the remedy available to Bevilacqua was not against the wrongly foreclosed homeowner but rather against the wrongly foreclosing bank and/or perhaps the servicer (depending on who actually conducted the foreclosure)
Eat your peas…
I need to go east and talk to my brother, who has done a lot of corporate bankruptcy. How do you figure out what BoA’s assets are? It sounds to me as if they will have to go asset by asset and determine its real worth. Mortgages without the right paperwork? All the securities backed by dubious mortgages? Ten thousand lawyers will be very happy.
THE COURT: Can BONY self-deal, since it is not in the
PSA?
MR. INGBER: I would argue that it would fall within
the good faith standard that is outlined in the PSA.
THE COURT: That is a duty that arises out of New York
law, isn’t it?
MR. INGBER: Which duty, your Honor?
THE COURT: The duty of good faith and not to self-
deal.
MR. INGBER: The duty not to self-deal, the duty to
act in good faith, and the duty of loyalty is common law duty
of a trustee. But it is a duty in this case that is defined
specifically in the pooling and servicing agreements, and it is
in accordance with those duties that the trustee —
THE COURT: Where is good faith defined in the PSA?
MR. INGBER: It is not defined in the PSA. The good
faith duty is set forth in the PSA.
THE COURT: Where is that duty defined?
MR. INGBER: The duty of good faith, your Honor, its
set forth in the PSA.
THE COURT: Where?
22MR. INGBER: It can be defined —
THE COURT: Just show me where.
MR. INGBER: The definition of good faith is not in
the PSA.
love these guys
First base!
Good job. It is nice information about mortgage settlement. Thanks for posting this valuable information. free government cell phone