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From Securities Regulation Daily, March 6, 2015

Court approves $8.5 billion Bank of America settlement of mortgage-backed securities claims

By Lene Powell, J.D.

A New York state appellate court upheld a settlement requiring Bank of America to pay $8.5 billion to investors in residential mortgage-backed securities, saying a lower court decision rejecting part of the settlement didn’t show enough deference to the “reasoned and reasonable” decisions of the Bank of New York Mellon in its capacity as trustee (In re The Bank of New York Mellon, March 5, Saxe, D.).

Mortgage-backed securities claims. Between 2004 and 2008, Countrywide Home Loans originated and sold approximately 1.6 million residential mortgage loans, which were bundled together, underwritten, and sold to investor-certificateholders. The loans were held in 530 residential mortgage-securitization trusts, with Bank of New York Mellon (Trustee) serving as trustee. Countrywide serviced the loans until it was acquired by Bank of America in 2008.

In October 2010, following the collapse in the housing market and the decline in the value of mortgage-backed securities, a group of institutional investors who held almost one-quarter of the face value of the certificates issued a notice of non-performance to Countrywide and the Trustee. These institutional investors arrived at a settlement in 2011 in which Countrywide and the Trustee agreed to pay $8.5 billion into the trusts, as well as improve mortgage servicing procedures and indemnify the trusts against certain losses.

When the Trustee requested court approval of the settlement, a group of objecting investors intervened. According to the objectors, the Trustee acted in bad faith and outside its discretion by placing its own interests above the certificateholders, retaining conflicted counsel, estimating a low settlement range, and failing to insist on a loan file review. They also argued that the loan sellers and servicers breached their obligations to repurchase modified loans from the trusts, and that the settlement improperly released those claims.

The lower court approved most of the settlement and rejected the claims about the Trustee’s conduct, but found that the Trustee did not adequately investigate the potential worth of the claims regarding the failure to repurchase modified loans. The court faulted the Trustee’s attorney for not showing that a factual assessment was made as to the value of those claims.

Trustee and its counsel acted reasonably. Upon review, the appellate panel said the issue was not whether it agreed with the Trustee’s judgment, but whether the Trustee exercised its discretionary power reasonably and in good faith. Where, as here, a trustee selected trust counsel prudently and in good faith, a party challenging the decisions of the trustee could prevail only by showing that the reliance on counsel’s assessment was unreasonable and in bad faith.

The argument that the Trustee’s retained law firm, Mayer Brown, was conflicted was properly rejected, as the nature of the conflict was disclosed and waived, and had no impact on the propriety of the legal advice. Moreover, reliance on the advice of lead counsel Jason Kravitt was “eminently reasonable” because Kravitt was an expert in securitization and had thoroughly reviewed the governing documents. Kravitt’s negotiating strategy in not seeking recovery for the failure to repurchase modified loans was reasonable and supported by viable legal reasoning. Finally, Kravitt’s decision not to have an outside expert evaluate the legal merits of the loan modification claims did not undermine his assessment.

Settlement approved. The court concluded that the lower court improperly disregarded the standard of deference due to a trustee’s exercise of discretionary judgment, and that its partial rejection of the settlement was incorrect. The court determined that the Trustee did not abuse its discretion in deciding to release the claims based on the failure to repurchase the modified mortgages, and approved the settlement in its entirety.  

The case is 651786/11 13527.

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