Monday, October 29, 2012

A Mediator's Perspective on the MBIA v Bank of America Litigation---Part 2

I have discussed previously how from a mediator's perspective the litigation between Bank of America (together with its affiliates, BAC) and MBIA (MBI) is highly susceptible of settlement.  Both pieces of litigation, the Article 78 action brought by BAC against MBI and the New York State Department of Financial Services, and the fraud and breach of representation and warranty actions (R/W) brought by MBI against BAC, have been at issue with third parties in the same or identical litigation, and have been settled by MBI and BAC, respectively, to their satisfaction with those third parties.

So given this background, a mediator would go into a caucus with BAC and prepare a spreadsheet with BAC listing all of the R/W actions that it has settled as defendant with third parties, take an average, adjust that average for characteristics relevant to the MBI action (for example, since the MBI R/W action is closer to trial than other R/W actions BAC has previously settled, the average payment should be adjusted upward by a certain amount), and then obtain BAC's agreement to present that adjusted average of prior settlements as a reasonable offer to MBI.  If such a reasonable BAC offer can be constructed in this fashion that takes into account settlements that third parties standing in MBI's shoes found acceptable, the offer may be presented in a fashion that puts the onus on MBI to show why it is reasonable for MBI to insist on more.

Likewise, a mediator would go into a separate caucus with MBI and prepare a spreadsheet with MBI listing all of the plaintiffs in the same Article 78 action that BAC brought that MBI has settled with, and the various amounts MBI paid to commute its insurance of the plaintiffs' commercial mortgage backed securities (cmbs).  Again, this average would be adjusted for any characteristics relevant in any commutation of BAC's insured cmbs, and the mediator would obtain MBI's agreement to present that adjusted average of prior commutation amounts as a reasonable offer to BAC.  If such a reasonable MBI offer can be constructed in this fashion that takes into account commutations that third parties standing in BAC's shoes found acceptable, the offer may be presented in a fashion that puts the onus on BAC to show why it is reasonable for BAC to insist on more.

Of course, BAC and MBI each would likely insist on more, as is the prerogative of every negotiator engaged in a settlement negotiation.  The obligation of the mediator at this point is to devise one or more "bridging the gap" strategies or arguments that will convince the parties to "settle in the middle" once the reasonable offers discussed above can be constructed.

I have found as a mediator that there are two bridging the gap opportunities that are particularly useful:  (i) having the payor pay with "fifty cent dollars", and (ii) finding "freebie bennies" for the payee.  Interestingly, both bridging the gap opportunities are present in the case of the BAC v MBI litigation, leading me to believe that this litigation is especially amenable to settlement.

Tuesday, October 16, 2012

Can Bank of America Shift the Blame?

In Countrywide's motion for summary judgment (SJ) on primary liability to MBIA (MBI), filed September 18, 2012 but unsealed subject to redactions on October 5, 2012 (SJ), Countrywide (together with its affiliates, BAC) led off by reiterating its single over-arching theory of the case: it's not our fault that there have been many tens of billions of dollars of losses on our securitizations, it is the fault of something else (the housing crisis) or someone else (MBI itself).

BAC's claim that the housing crisis actually caused these mbs losses may actually be true in a historical, non-litigation sense. The prevailing meme at the time of these massive mbs securitizations was that as long as housing prices continued to go up, even blindly-underwritten mortgages would be repaid.  The housing crisis certainly punctured that blind faith balloon.

However, there is the matter of those pesky representations and warranties (R/W) that BAC made to mortgage investors and mortgage insurer MBI in the securitization documents; the same BAC R/Ws that MBI alleges in its SJ that BAC materially breached with respect to over 56% on the mortgages in the securitization pools MBI insured. MBI goes on to assert that BAC cannot contest that it breached its R/Ws with respect to these mortgages.

BAC's initial attempt to shift the blame was based upon its loss causation theory.  BAC argued that it could avoid liability on its R/W breaches in the securitization documents unless the damaged party could show that those R/W breaches, rather than the housing crisis, caused the losses incurred by MBI and mbs investors.

This initial attempt by BAC to shift the blame was denied by Justice Bransten in her summary judgment ruling on 1/3/12 regarding loss causation.  She found that BAC could be held liable to MBI under the transaction documents if BAC's R/W breaches materially increased MBI's risk of loss.  There was no need to show that the R/W breaches themselves caused the losses.  She went further to hold that MBI could obtain recissionary damages (recovery for all its losses incurred in insuring the securitization pool, not just losses for loans that individually breached the R/Ws).

The rejection of this loss causation theory that would have permitted BAC to shift the blame has since been seconded by two influential federal district court judges (Crotty and Rakoff) in similar mbs insurance cases.

Now, BAC seeks to shift the blame once again under another theory, by alleging that it can't be held liable to MBI for losses if MBI was aware (or should have been aware) of BAC's many breaches of R/Ws.  BAC argues that MBI was put on notice of BAC's R/W breaches by virtue of the results of third party due diligence reports (conducted by firms retained by underwriters in connection with the offering of the mbs securities).  BAC adds that it provided MBI digital records of the mortgage loans (mortgage tapes), and their contents should have put MBI on notice of BAC's R/W breaches.

Moreover, even though BAC cannot argue that its R/W breaches did not cause MBI's losses, it can still try to show at trial that its R/W breaches did not materially increase MBI's risk of loss.

The question now presented to Justice Bransten is whether BAC will prevail in its second attempt to shift the blame.  Interestingly, Judge Rakoff's recent evidentiary holding in the now current trial of Assured Guaranty v Flagstar may provide ample insight into how this might play out before Justice Bransten.

Monday, October 15, 2012

A Mediator's Perspective on the MBIA v Bank of America Litigation

Many commentators have questioned why the MBIA (MBI) v Bank of American (BAC) mortgaged-backed securities (MBS) litigation has not been settled by now.  This litigation consists of MBI's fraud and breach of representation and warranty (R/W) suit against BAC in connection with MBI's issuance of insurance guarantying timely payment of the mbs interest and principal, and BAC's suit against MBI and the New York State Department of Financial Services challenging the transformation of MBI, creating separate securitization and municipal finance guaranty subsidiaries.

Absent any examples of what the parties agreed to in nearly identical situations, as discussed below, one would anticipate that settlement negotiations of the fraud suit would likely involve offers and counteroffers in the range of approximately $1-5 billion, and settlement negotiations of the transformation suit and commutation of insurance wrapping BAC's commercial mbs would likely involve offers and counteroffers of approximately $.5-$2.5 billion.  Big dollar amounts and big ranges. At first blush, difficult to settle.

Yet, BAC seems to be worsening its legal position, and hence its negotiating position, as the litigation continues.  BAC has lost important rulings regarding whether, among other things, MBI must prove that BAC's R/W breaches caused the loans MBI insured to go into default, or whether these breaches merely adversely affected MBI's interest in insuring the mortgage pools, and whether MBI must identify each loan that breached BAC's R/Ws, or whether MBI can prove BAC's breaches and MBI's damages by resorting to a statistically significant sampling of all loans.  On the horizon stands an important argument regarding parent BAC's successor liability for Countrywide's primary liability, another issue that BAC surely does not want to lose.

Moreover, as this litigation now stands in the shadow of an anticipated New York Attorney General (NYAG) template suit against BAC for all investor losses and for the integrity of the securities marketplace, all litigation losses BAC incurs are magnified by the ability of the NYAG to bring its much larger suit and use these BAC losses as proof of the NYAG's allegations and theories of the case by means of offensive collateral estoppel.

Given that there are such significant benefits for BAC to settle with MBI, isn't the absence of a settlement to date simply an example of the difficulty of settling such a large-scale, big money litigation?  Aren't the barriers to reaching a negotiated settlement of this complex situation so high as to make litigation the only practical conflict resolution medium?

The answer is absolutely no!  Indeed, these two interrelated actions between MBI and BAC share a huge advantage with respect to the likelihood of achieving settlement, as compared to the typical settlement negotiation that, from a mediator's perspective, make the BAC and MBI actions not only not difficult to settle, but particularly susceptible of settlement! To understand why, continue reading following the jump.

Friday, October 12, 2012

Did Bank of America Asset-Strip Countrywide? Were CEO Moynihan's Statements Vague and Informal?

Did Bank of America (BAC) engage in asset stripping of Countrywide after its 2008 acquisition? Did BAC pay fair value for those assets by making a contemporaneous payment to Countrywide of fair value, or is BAC crediting capital contributions it made to Countrywide to fund Countrywide settlements of MBS litigation? Does it even matter whether BAC paid fair value for the transfer of Countrywide's assets? And even if BAC paid fair and contemporaneous value to Countrywide for the transfer to BAC of Countrywide's entire mortgage platform, was Countrywide left with insufficient assets in view of its massive contingent liabilities and, with no operating business remaining, no means to generate funds to pay them?

Did BAC executives engage in "vague and informal" statements regarding BAC's assumption of Countrywide's liabilities, as alleged by BAC, or do the statements by BAC's CEO and CFO regarding payment by BAC of Countrywide's liabilities "when they are due" constitute  BAC's formal and considered assumption of Countrywide's liabilities because of such practical business realities as avoiding severe reputational harm to BAC's franchise itself? And do the various instances when BAC funded Countrywide's litigation settlements provide the best evidence of this practical business reality?

The answers to these simple questions will go a long way in deciding whether BAC will be found to have successor liability for Countrywide's liabilities.

Monday, October 8, 2012

Bank of America's Idiotic Litigation Strategy and Why the New York Attorney General is Licking His Chops

Bank of America's (including its affiliates, BAC) mortgage backed securities (MBS) litigation with MBIA (MBI) has just entered a new and dangerous phase, and BAC appears clueless, confused and exposed.

On October 5, 2012, MBI and BAC filed motions for summary judgement in MBI's fraud and breach of contract action against BAC.  These filings stand in the shadow of the New York Attorney General's filing of a fraud action against Bear Stearns and its parent J.P. Morgan (collectively, JPM) on October 1, 2012. The NYAG stated that its JPM action would serve as a template for additional actions against MBS issuers and originators. In other words, BAC was put on notice that it would be a likely target for a follow-on suit brought by the NYAG, for which its JPM suit would serve as a template. 

Given the NYAG's special statutory powers and reduced evidentiary burden, and the ability of the NYAG to piggyback on any private action by obtaining not only a litigation roadmap for its action but also, importantly, the ability to use collateral estoppel to have findings of fact and legal issues proven in any private action also proven for the NYAG's case, all as discussed below, BAC inexplicably led with its chin in its summary judgment motion, and all but invited the NYAG to launch its case based upon BAC's very own work product.

BAC's litigation strategy has often been criticized for lack of foresight in its failure to settle with MBI.  Now, BAC can fairly be accused of idiocy as its own papers offer the NYAG a crisp first draft for the NYAG's contemplated template action.