Have Four Pension Funds Blown Up the $8.5 Billion Bank of America Settlement?

A ruling in the Retirement Board of the Policemen’s Annuity and Benefit Fund of the City of Chicago et al v. Bank of New York Mellon is a game-changer in mortgage investor litigation.

Readers may recall that we’ve moaned about the failure of investors to sue originators, servicers, and trustees for their grotesque violations of contractual and other duties. Generally, the reluctance to take action is the consequence of terrible incentives. The “investors” are often fee whores agents, meaning fund managers who are hired by the parties that actually have money, such as pension funds. The fund managers don’t want to devote time and money to suing, even though they have a fiduciary duty to their investors, nor do they want to jeopardize their relationships with bank that they think they need for market intelligence and trade execution.

But the fund managers had an excuse. For them to sue under the pooling & servicing agreement, they needed to have 25% of the investors in a particular trust. It was difficult to find the other investors, and even then, hard to get them to act.

But I never really bought the 25% excuse. There were other legal theories that didn’t require having 25% because you wouldn’t be suing on the basis of a violation of the PSA. For instance, it looks to be blindingly obvious that the trustees in these deals made multiple false certifications, which are SEC filings. That sort of action would not be subject to a procedural hurdle.

But a ruling on Tuesday by Judge William Pauley against Bank of New York on 26 Countrywide securitizations may have opened the floodgates to trustee litigation. Heretofore, trustees have effectively told investors to pound sand when they’ve petitioned them to take action against servicers, relying on their belief that it would be unlikely that they’d be able to get a day in court, thanks to the barriers built into the PSA.

But four pension funds which are investors in $30 billion of Countrywide trusts, sued under the Trust Indenture Act of 1939. I haven’t seen the actual original filing or Pauley’s ruling, but here is the background, per Alison Frankel:

…the pension funds accused Bank of New York Mellon of negligence and breach of fiduciary duty for doing nothing to remedy Countrywide’s inadequate servicing of home loans contained in the trusts.

The bondholders said Bank of New York Mellon failed to take possession of loan files, including the original mortgage notes, or require Countrywide to fix or buy back defective loans.

Such failures “created considerable uncertainty” and should make the bank responsible for bondholder losses, regardless of the fairness of the $8.5 billion settlement, the complaint said.

Pauley said the bondholders could pursue claims that Bank of New York Mellon did not properly notify them that Countrywide had defaulted on some obligations, whether as a servicer or as a mortgage lender.

The judge nonetheless said the bondholders could sue only on the basis of the 26 trusts in which they invested, not all 530 trusts covered by the $8.5 billion settlement.

This is extremely significant. This lawsuit provides a road map for any investor unhappy with the Bank of America settlement to take action against Bank of New York and Countrywide. As we noted in earlier posts, the 22 investors that Kathy Patrick of Gibbs & Bruns rounded up to act as a Trojan horse for the deal don’t have 25% of the 530 trusts involved in the settlement. Not even close. There are many trusts in which they own no bonds at all.

So now any investors who are unhappy with the settlement don’t have to go through the effort of trying to intervene in the settlement in New York court, where the deck is very much stacked against them. I am told the judge is very much out of her league on the settlement, and her inclination is to rubber stamp what the banks put before her (which she can pretend isn’t unreasonable if she follows the bank line that an Article 77 hearing is appropriate, since the bar for refusing a trustee’s request in that procedure is very high).

And of course, this decision opens up an entirely new front for other relatively small investors (pension funds, endowments, foundations) to take action. If other parties follow the lead of these four pension funds against Countrywide trusts, you could see enough holes shot in the settlement deal so as to render it useless to Bank of America (indeed, worse than useless: the deal provides for expanded indemnification for Bank of New York Mellon, so if angry investors saddle up to sue BoNY and BofA, it might find itself worse off, depending on the nature and level of damages awarded against BoNY).

Moreover, this action also threatens the Federal/state mortgage settlement. As we have discussed at some length, the Administration has repeatedly trotted out the canard that it has investor consent for principal modifications of securitized mortgages. We’ve explained that’s bogus: most deals have a cap on mods (all Countrywide deals appear to) and to exceed the cap, “consent” doesn’t cut it. You need an amendment to the PSA. That takes a minimum of 51% of the investors (in some deals, of each tranche, in some, as much as 2/3 of each tranche).

But the Administration appears to be trying to pull the wool over the eyes of the public and investors. It has repeatedly told journalists (as well as the Association for Mortgage Investors) that the investor mods will be coming mainly out of Countrywide deals, and that it has consent for that via the Bank of America settlement. Nothing in that deal provides consent of any sort, plus it seems awfully reckless even if that were true to pin one part of a major initiative on a pact that has not yet been sealed. But having the BofA deal fall apart, and that might be the eventual consequence of this action, would also remove the the smokescreen the Administration relied on to legitimate its actions in the Federal/state settlement.

So let’s hope that this important ruling emboldens other investors. They’ve been complacent for much too long.

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  1. Some Bloke

    Hey Rocky, watch me pull a rabbit out of my hat.
    Againnnn! That trick never works.
    This time for sure!

    All these false dawns – nothing ever comes of them…

    1. Richard Kline

      We’ll get change in this country when those with some money turn on those with a lot. I say that as a sincere radical. We conscientious agitators are the thin end of the wedge. The main weight to the hammer comes from those with a bit of a stake worried of losing that too to the rapacity and crimes of the very few. Middle money is never radical, but those who have it now see the threat.

      And regarding dawns in succession, they seem to find an unchanging day until the day they don’t. Say, Some Bloke, you wouldn’t be taking the coin of the 1% to spread hopelessness in blog threads would you?

      1. Jack

        I can feel the Alinsky flowing through you. I can only hope we see such radicalization happen hard and fast among the middle class.

      2. Jill

        Richard Kline,

        I agree with you about this. Although it may not be the only hope, it is a good one. A city in Russia ran out of turnip (the lower orders’) money, even after breaking all the turnips’ knee caps. Authorities then turned to kidnapping wealthy people’s children for ransom. All of a sudden these wealthy people decided something was very wrong with the system.

        Right now, the less wealthy of the US think because they are doing fine there is no problem in our nation. However, US authorities are running out of middle, working class and poor people’s money to pay for their various depravities. They must now turn to the less, but still wealthy for money to ply their trade at warcraft and nation wreaking. As this happens, the less wealthy will become aware that something is very wrong after all. This will be a very good awakening!

        1. R Foreman

          They super-wealthy have to feed on whatever cash they can, Fed fictional dollars, or wealth of the faux-rich, or whatever, because once a deflationary spiral begins, I have heard it is a bitch to stop before everything gets wiped out.

          Rapid Deflation would be bad for just about everyone, but it would prove to the world that interest-bearing debt-based money is unstable and prone to boom/busts.

          Private banker scrip is not a nation’s currency, and it should never be bailed out by the public treasure.

  2. jake chase

    The Trust Indenture Act! That brings back memories of my days at the SEC in 1968. There was one old guy in Corporate Finance who supervised every single trust indenture involved in registered securities deals. He had been with the Commission since 1935. Everyone thought he was nuts, because the Act made no apparent sense, the trust indentures were one hundred fifty pages of interminable boredom, and nobody could imagine how anything in there could ever make any difference. But Spiros (I think that was his name) knew different, and at every opportunity he would explain things. Going down to his office was a trip to Pergatory. We dreaded it. Guess I should have paid more attention. I don’t believe there had been a case decided under that law since 1945, but I won’t swear to it.

    1. Skippy

      Good on you jake…

      Skippy… the emperor is naked… but not in shame… he has a huge chub… and wants to use it… no longer fearful… of others thoughts… resplendent in its offerings… which shower us all…

      1. jake chase

        I forgot to mention this guy Spiros invariably found little ‘mistakes’ in the indentures, where the bank lawyers were attempting end runs around the Act. These made him positively gleeful. He would hold up deals until they were corrected. The bank lawyers hated him, and you’re talking about the whitest of white shoe firms. I could name names but one or two would probably sue me.

        1. just me

          Spiros! Thinking of It’s a Wonderful Life — how you take one decent guy away and the world falls apart

      2. different clue

        “chub”? I assume you mean “club”. I will further assume that you put that in there just to see if we are paying attention.

  3. Pat

    This ruling shows how useful negligence and breach of fiduciary duties and implied warranties are as causes of action — they are like universal can-openers that let you crack open anybody. They get you out of the straitjacket of straight breach of contract theories.
    I have to wonder why all those hurt by the banksters don’t just go with negligence.

  4. Jim A

    I don’t understand. Why does it matter how many trusts they don’t have bonds in if they can put together a coalition of bondholders that reaches 25% in any of the trusts. Those would be the trusts for which they’d sue. Of course once the roadmap is laid, we should see lawfirms that would try to put together 25% collections of bondholders on a contengency basis.

    1. LucyLulu

      My question is related, to Yves or anyone else who might know. Do these four pension funds then have 25% of the shares of the 26 trusts that they are being allowed to proceed to bring suit against? Or are you saying that the 25% rule has been dispensed with for their particular case, and other cases like it? And for the PSA’s I have read, the percentage of certificate holders has actually been higher than 25%, it’s been awhile, but I seem to recall seeing 33% and 51%. My understanding was that getting the required number of shareholders was the primary obstacle to bringing suits, at least in the general case though maybe not in the BAC/Countrywide/BNYMellon deal, because of difficulties locating each other. The other question pertains to the statute of limitations problem for general suits. Does this pertain to certifications after the trusts closed thus would be a workaround for the SOL’s having expired?

      I’ve never been able to believe either that the trustees could get away with such gross neglect of their duties to protect the assets in the trust. I’ve read the PSA’s though and the language does provide the trustees with pretty much blanket immunity. Still, terms in contracts have been voided before when they were deemed to be grossly unfair or unreasonable, or didn’t comply with standard practices. Haven’t they? How could the trustees, who by definition have a fiduciary duty, and by virtue of neglecting the duties they are being paid to fulfill, cause continuing massive losses and the beneficiaries have no recourse. (As I recall from a piece that Abigail Field wrote, in this case, or at least in the trust certification cited, it’s further complicated by documentation management having been subcontracted out by the trustee, and BNYMellon claiming in the certifications that they knew of no problems and were not required to take further steps.)

      1. Nathanael

        Yves is saying that it appears that lawsuits under the Trust Indenture Act do not require the 25% rule. Any investor is eligible for relief under it, as far as we can tell now.

  5. SubjectivObject

    I am not [yet] an agreived party here, but Eve thank you so much for your selfless and generous work.

  6. kris

    I strongly think that anybody involved in that so called deal was fully aware that it would never make it through the labyrinth of US law. However, everybody from the AG of the smallest state to the US President went ahead in order to use it at an election tool.
    Case in point: Rumor is Kamala Harris (CA AG) will be running for senate to replace Feinstein.
    No chance, absolutely no chance the deal will make it through lawsuits, and THEY KNEW IT.

  7. SoCal 7

    Jake Chase, I wish we had three dozen more (at least) Spiroses. We need them desperately at SEC, FDIC, et al. I’ve always been anti-Hamilton, anti-Federalist (*central planning, force and regulation*), but the facts are, my other Libertarian and Conservative friends, that the Federally chartered banks, with access to taxpayer indentured funds, almost without limit, are tearing apart the rule, spirit and essences of the law and are wasting and perverting our “true wealth”.

    This has to be fought with the tenacity and force of the Marines landing on Tarawa (legally)….yet we get and have an administration that is giving aid and comfort to the enemy.

    Go figure.


  8. Fíréan

    The fac that the plaintiff is, this time, the Retirement Board of the Policemen’s Annuity and Benefit Fund of the City of Chicago et al ( v. Bank of New York Mellon) may cast some light upon the minds and perspective of those persons who so far have done the foot work maintaining distance between the demonstrating and disconetent public and the banking institutions.

  9. Ex-Csfb

    There a still a ton of bozos climbing around Credit Suisse and UBS who participated in smelly unregistered deals that were marketed well before closing and filled with toxic waste. Why isn’t anyone talking to them? If the SEC/regulators don’t get to them first it will inevitably be plaintiffs’ counsel. They’re counting on pension funds/rich guys who invested in them going away, but don’t count out foreign banks/funds getting the last word. And if civil suits don’t work, consider what happened to Madoff’s son.

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