On July 28, 2011, several institutional investors filed a complaint against Countrywide Financial, Bank of America, several former Countrywide officers, and KPMG in the Federal District Court for the Central District of California. Plaintiffs allege that Defendants made false and misleading statements regarding the quality of loans originated by Countrywide, which allegedly inflated the value of Plaintiffs’ Countrywide securities, in violation of Sections 10(b), 20(a), and 20A of the Exchange Act and Sections 11, 12(a)(2), and 15 of the Securities Act. Plaintiffs opted out of the recently-settled class action against Countrywide to pursue their own claims. Complaint.
Countrywide
Walnut Place Files Derivative Suit Against Bank of New York Mellon and Countrywide in Response to Recent Settlement
On August 2, 2011, several investment entities under the name Walnut Place (“Plaintiffs”) filed a derivative complaint against Countrywide Home Loans on behalf of Bank of New York Mellon (“BNYM”) in New York State Court. Plaintiffs allege that Countrywide breached representations and warranties concerning the mortgage loans underlying Countrywide RMBS that Plaintiffs purchased. According to the Complaint, upon realization of the breach, Plaintiffs demanded in May 2011 that Countrywide repurchase the loans, which Countrywide allegedly refused to do. Plaintiffs are now suing Countrywide on behalf of BNYM, the Trustee to the RMBS that Plaintiffs purchased, to enforce the rights of the Trust on behalf of themselves and other RMBS certificateholders. According to Plaintiffs, because Countrywide and BNYM have since announced a proposed settlement that would extinguish Plaintiffs’ claims against Countrywide, it is futile to expect BNYM to sue Countrywide to enforce its repurchase obligations and Plaintiffs therefore bring their suit in a derivative action. Complaint.
New York Attorney General and Other Parties Move to Intervene in the Bank of America and Bank of New York Mellon Settlement
On August 4, 2011, New York Attorney General Eric T. Schneiderman moved to intervene in the June 29, 2011 settlement between Bank of America and Bank of New York Mellon (“BNYM”), the trustee for 530 trusts created by Countrywide entities. The Attorney General argued that the settlement should not be approved because it was negotiated by BNYM and Bank of America, without input from other beneficiaries who would also be bound by the settlement. According to the Attorney General, he moved to intervene to protect the marketplace, the interests of New York investors, and the Attorney General’s own ability to pursue claims against BNYM, Countrywide, Bank of America, and affiliated entities. NYAG Motion to Intervene.
The Attorney General also attached a proposed pleading to his motion to intervene that described the proposed settlement as “unfair” and included counterclaims against BNYM for breach of fiduciary duty and violations of state anti-fraud statutes, including the Martin Act. These causes of action arise out of BNYM’s alleged failure to properly transfer loans from Countrywide to the trusts and its failure to notify certificateholders of Countrywide’s delivery of incomplete mortgage files. NYAG Proposed Pleading in Intervention.
A few days earlier, on August 2, 2011, Cranberry Park, who allegedly owns securities in 28 of the 530 trusts at issue, also moved to intervene, arguing that BNYM may not adequately represent its interests in the settlement. If the judge grants these motions to intervene, the Attorney General and Cranberry Park will become parties to the settlement proceedings before the New York Supreme Court. Cranberry Park Motion to Intervene.
Investment Company Sues Bank of America Claiming Recently Announced Proposed $8.5 Billion Settlement Proves Fraud
On July 18, 2011, Federated Investment Management Co. and affiliated entities sued Bank of America, Countrywide, affiliated entities, and individual officers and directors in California state court. Plaintiff claims that Bank of America’s recently announced proposed $8.5 billion settlement with various MBS investors and Bank of New York Mellon as Trustee evidences that Countrywide fraudulently concealed the quality of the loans it originated. Specifically, the complaint alleges that Countrywide’s underwriting standards and guidelines failed to meet industry standards and that it misrepresented that fact to investors. While the plaintiffs allege they do not have access to the loan files underlying the securities they purchased, they assert that the disclosure of the proposed settlement and challenges by investors and regulators have uncovered Countrywide’s alleged fraud. Plaintiff brings claims for fraud and negligent misrepresentation, as well as claims under the Securities Act of 1933, the California Corporate Securities Act, and the California Civil Code, and seek both compensatory and/or recessionary damages, as well as punitive damages. Complaint.
Challenges Mount to Bank of America’s Proposed $8.5 Billion Settlement
Numerous investor groups, regulators and politicians have challenged Bank of America’s June 29, 2011 announcement proposing an $8.5 billion settlement of claims based on representations and warranties made by Countrywide in RMBS securitizations. Between July 5 and July 13, four separate groups of investors each moved to intervene in the Article 77 proceeding brought by Bank of New York Mellon, as Trustee or Indenture Trustee of the various securitization trusts, seeking judicial approval of the settlement. Potential objections have been voiced to the size of the settlement, potential conflicts of interest, and a failure to provide sufficient information to evaluate the settlement terms. On July 12, New York Attorney General Eric Schneiderman reportedly sent letters to investors that participated in the settlement negotiations seeking additional information, suggesting that the Attorney General’s office may object to the settlement. Representative Brad Miller, a North Carolina Democrat, raised additional questions about the terms of the settlement in a July 8 letter to the Federal Housing Finance Agency. Walnut Place Motion to Intervene. Pension Fund Motion to Intervene. TM1 Motion to Intervene. FHLB Motion to Intervene. Miller Letter.
New York Court Orders Rating Agencies to Produce Internal Communications Regarding RMBS Ratings in Monoline Insurer Lawsuit
Justice Eileen Brantsen of the Supreme Court of the State of New York ordered non-parties Standard & Poor’s Rating Services and Moody’s Investors Service, Inc. to produce their internal communications concerning their “shadow ratings” of certain RMBS certificates at issue in an action between monoline insurer MBIA and several Countrywide affiliates. MBIA maintains that it received and relied upon the “shadow ratings” in deciding whether to insure the Countrywide RMBS. MBIA argued that the requested documents were directly relevant to Countrywide’s alleged misrepresentations and the reasonableness of MBIA’s reliance on Countrywide’s representations regarding the quality of the loans underlying the RMBS. Order.
New York Appellate Court Preserves MBIA’s Fraud Claim in RMBS Suit Against Countrywide
On June 30, 2011, a New York appellate court affirmed the denial of Countrywide Home Loans, Inc.’s and certain of its affiliates’ (“Countrywide”) motion to dismiss MBIA, Inc’s (“MBIA”) claim that it had been fraudulently induced to insure 15 Countrywide RMBS securitizations. The court held that MBIA’s fraudulent inducement claim was not duplicative of its contract claims and that the fraudulent inducement claim adequately alleged misstatements of fact that could be argued to have caused MBIA’s losses. The court, however, sustained the dismissal of MBIA’s negligent misrepresentation claim, holding that an arm’s length business transaction does not create the special relationship of trust or confidence required to establish such a claim. The court also dismissed MBIA’s claim for breach of the implied duty of good faith and fair dealing, holding that the claim was duplicative of MBIA’s breach of contract claim. Decision.
Bank of America Announces Proposed $8.5 Billion Settlement With Institutional Investors Over Claims Related to Countrywide RMBS
On June 29, 2011, Bank of America and 22 institutional investors jointly announced that they had reached a settlement of repurchase and mortgage servicing claims related to 530 RMBS trusts of primarily first-lien loans issued by Countrywide. The trusts had an original principal balance of $424 billion and current unpaid principal balance of approximately $221 billion, and represent nearly all Countrywide first-lien private label RMBS exposure held by Bank of America.
The terms of the settlement provide that (1) Bank of America pay $8.5 billion to the Trustee of the trusts (BNY Mellon) to be allocated to the trusts on a collateral loss formula; (2) Bank of America will implement several loan servicing improvements designed to improve both borrower and investor outcomes; (3) the Trustee will seek court approval of the settlement; and (4) the institutional investors will intervene in the action and use their best efforts to ensure court approval. As part of the settlement, Bank of America also has agreed to cover future losses to investors when foreclosure on defaulting borrowers is prevented because of faulty or missing documentation. The settlement is expressly limited to repurchase and servicing claims, and any direct claims held by investors based on allegedly misleading disclosures or omissions in connection with the sale of the RMBS issued by the trusts are not released.
The settlement is subject to court approval, which could require changes to the terms of the agreement. Bank of America also retains the right to withdraw from the settlement if trusts holding a certain, confidential percentage of the aggregate principle balance are not part of the settlement. Bank of America Press Release. Investor Press Release. Settlement Agreement. Bank of America Investor Presentation.
Ninth Circuit Overturns Remand to State Court and Orders Lower Court to Consider Arbitration Motion
On June 15, 2011, the Ninth Circuit overturned a district court’s order to remand this declaratory judgment action to state court. The action was brought by Countrywide and BAC Home Loans Servicing LP against Mortgage Guaranty Insurance Co. (“MGIC”) and seeks a declaration concerning the terms of an insurance policy covering borrower defaults. The policy provides for a reduction in the claimed loss amount in cases of “fraud, misrepresentation, or negligence” on the part of Countrywide, and on the basis of this provision, MGIC denied coverage on several Countrywide claims. The insurance agreement also contains an arbitration clause, and MGIC argued that the district court was required to consider its motion to stay the action pending resolution in arbitration under the Federal Arbitration Act (“FAA”) before exercising its discretion to remand under the Declaratory Judgment Act (“DJA”). The Court of Appeals, in a question of first impression in the Ninth Circuit, agreed with MGIC and found that the FAA did require the district court to reach the merits of MGIC’s motion to stay before exercising its discretion to remand under the DJA. Decision.
New York Federal Court Transfers Countrywide RMBS Case to California to Prevent “Judge-Shopping”
On June 14, 2011, District Judge Alvin Hellerstein of the S.D.N.Y. granted defendant Countrywide’s motion to transfer this case to the U.S. District Court for the Central District of California. Allstate’s complaint alleges that Countrywide, several associated entities, and certain high-ranking employees committed fraud in connection with statements regarding underwriting standards in the sale of over $700 million in RMBS. Judge Hellerstein noted that this case is closely related to another case in the Central District of California involving the same parties and the same issues, and that Allstate filed its New York case only after the California judge narrowed the case to exclude some of the securities upon which Allstate bases its claims. Judge Hellerstein further found that the New York suit “gives the appearance of judge-shopping” and granted the motion to “promote the efficient use of judicial resources” and “prevent the possibility of inconsistent results.” Decision.