Here Is Why The BAC/Bank of NY Settlement Will Happen

Before you listen to anyone opine on the $BAC settlement, please ask them if they have read any of the legal docs. If the answer is not “yes” please ignore whatever comes next.

Now, the settlement with $BK. It is going to happen. We are simply now seeing political posturing by people with higher aspirations than State AG’s ( Mr. Schneiderman? Mr. Biden?) and other parties. What will end up happening is $BAC will agree to pay a token amount more, the AG’s and other parties can thump their chests and claim victory and everyone will walk away. Why?

Below is a detailed description of why $BAC, far from costing it billions more in litigation is likely not only to pay less, but could even win OR even win if they lose. How? Even if they were to lose, since Countywide still operates as an individual entity and piercing the corporate shield here is HIGHLY unlikely, a judgement against them would simply result in an 11 filing for Countrywide as there is no way they can pay claims.

So, why would $BAC settle?

• Litigation would be a very large cloud hanging over the company for at least 2-3 years
• It would effect credit ratings, Basel ratio’s and certainly the stock price
• It would cost millions (hundreds of millions?)
• The outcome is never certain
• They could be exposed to more than $8.5B if the veil is broken. Even while a remote scenario, is still possible

Okay then you ask, why would the Trusts settle?

• It is very likely that the trust would have to review each and every loan (100’s of thousands) in the 530 Trusts and pull out the specific loans that breaches are accused
• They would then have to prove the breaches “specifically” lead to the particular loan losing value and NOT macro factors like a recession and housing collapse
• There may be breaches on loan that in the end would have had no effect on the loan eventually being made, that loan would then be excluded from the tally
• Regarding macro factors. The argument “all these breaches created a housing bubble that destroyed their value” is NOT a valid argument. Whether or not a loan must be bought back is determined by a specific breach on a specific loan and whether that specific breach lead to the loan losing value, not the cumulative effects of many of them. This hurdle IMO is near insurmountable
• See above regarding Countrywide and the veil….to date, EVERY effort to breach this has failed
• Since there is precedence here in several courts (including Federal), breaching it now is incredibly remote at best which means the only $$ the Trusts will see if they litigate is what Countrywide can give them which is????? Probably zero after three years of litigation.
• The settlement does remedy servicing issues and provide ALL distressed homeowners are availed of all possible remedies immediately through third party servicers agreed on by the Trust

Here are the details on the Countrywide/BAC legal side and the hurdles to Trusts would face from court filings by the Trusts (more on the settlement itself and the servicing arrangement’s later). All Bold face is mine

2. Countrywide and BAC HLS May Have Viable Defenses to Any Potential Claims

68. Countrywide and BAC HLS may have a number of viable legal and factual defenses to potential repurchase and servicing claims under the Governing Agreements. One in particular, highlighted below, relates to the element of causation that Countrywide contends is essential to any repurchase claim under Section 2.03 of the Governing Agreements. The existence and viability of this defense is viewed by the Trustee as a compelling reason to discount the financial experts’ settlement range, and provides an additional, equally compelling reason to enter into the Settlement.

69. Section 2.03 of the Governing Agreements requires the Trustee and others, upon discovery of a breach of a representation or warranty “that materially and adversely affects the interests of the Certificateholders in that Mortgage Loan,” to give prompt notice to the other parties, to allow the Seller to cure the breach, and, absent a cure, to enforce the Seller’s obligation to repurchase the Mortgage Loan.

70. Based on this language, Countrywide has taken the position that if the Trustee brought an action to enforce Countrywide’s repurchase obligations under Section 2.03 of the Governing Agreements, the Trustee would need to prove, on a loan-by-loan basis: (i) that Countrywide breached specific representations and warranties in the Governing Agreements, (ii) that the breach was material, and (iii) that the breach adversely affected the interests of the Certificateholders in the loan. With respect to the final requirement, Countrywide has taken the position that the Trustee would have to prove, on a loan-by-loan basis, that the breach caused Certificateholders to suffer a significant loss on the affected loan.

71. The Institutional Investors have taken a different position – namely, that a breach is “material and adverse” to the interests of Certificateholders if it would have affected their 24 investment decision because it adversely affects the credit quality of the Mortgage Loan. They also have taken the position that a loan-by-loan review may not be necessary, and that a properlystructured sampling approach could be accepted by a court.

72. Countrywide’s argument, if accepted by a court, could mean that the Trustee would have to bear the extraordinary burden of reviewing loan files for hundreds of thousands of loans in 530 trusts; determine as to each loan which of the dozens of Countrywide representations and warranties were breached; and then prove that the loss to Certificateholders was caused by the breach of a specific representation and warranty (such as the owneroccupancy representation) and not other factors that arguably bear no relation to the breach (such as macroeconomic factors affecting the housing market).

73. To be sure, a requirement that the Trustee establish, for each loan or even for a significant sample of loans, both a breach of representation and warranty and a causal link between the breach and the loss would not preclude the Trustee from enforcing repurchase
remedies. But it would make enforcement more difficult, may result in fewer loans subject to repurchase, and would result in litigation that would be extraordinarily complex, costly and timeconsuming, with the outcome dependent on fact-intensive issues that may not be susceptible to
resolution short of trial.

74. In order to properly assess the strength of Countrywide’s defense, the Trustee has, among other things, considered the arguments of the Institutional Investors, Countrywide and Bank of America, analyzed Section 2.03 of the Governing Agreements, and considered the case law interpreting contractual provisions similar to Section 2.03.

75. The Trustee has also sought and obtained an expert opinion from a leading law school professor who teaches, among other things, the law of contracts. That expert 25 independently considered the question of whether Countrywide presents a reasonable argument that the Trustee would have to prove a causal link between any breach of a representation and warranty, on the one hand, and a significant loss to Certificateholders, on the other. The expert has opined that Countrywide’s argument is reasonable and could be adopted by a court considering the issue.

76. This conclusion is supported by precedent. For instance, in a recent case, the court denied summary judgment against a similarly situated trustee on the ground that an issue of fact existed as to whether the alleged breach of warranties made in the PSA “materially and adversely affected the value of the mortgage loan or the interest of the certificateholders.” In another recent case, the court rejected plaintiff’s attempt to exclude – on the basis that the “material and adverse affect” determination must be made as of the closing date – an expert witness who would testify that breaches of representations made in a PSA did not materially and adversely affect the interests of certificateholders because any losses were caused by the decline in the housing and real estate markets. And in the cases that have proceeded to trial, juries have been instructed, based on nearly identical PSA provisions, that trustees need to “prove by a preponderance of the evidence that the material breach of any of the Representations and Warranties involved in this case caused a material and adverse effect on the value of the loan, the value of the property, or the interests of the investors.”

77. For all of these reasons, in the Trustee’s judgment, Countrywide’s position that Section 2.03 imposes an element of causation could be accepted by a court, and if this occurred it would present significant challenges to the Trustee in proving, for each Mortgage Loan or even a
sample of Mortgage Loans, that the harm was caused specifically by a breach of representation and warranty rather than by the individual circumstances of the borrower or the various 26macroeconomic events affecting the U.S. and global economy. The Trustee’s judgment that this
defense must be taken into account in assessing the reasonableness of the Settlement Payment was made in good faith and is within the bounds of reasonableness.

3. Countrywide Will Be Unable to Pay a Judgment in an Amount Exceeding (or Even Approaching) the Settlement Payment

78. The Trustee has considered the ability, or inability, of Countrywide to pay a judgment that would exceed the Settlement Payment. If the Trusts will be unable to recover an amount that exceeds the Settlement Payment after years of costly litigation, it is the Trustee’s
judgment that entering into the Settlement now, on behalf of the Trusts, is reasonable. In fact, a decision to not enter into the Settlement with knowledge that the Trusts may receive, at best, substantially less than the Settlement Payment if the Trustee were to prevail in litigation several years from now, would be unreasonable.

79. Countrywide has taken the position that it, standing alone, would be unable to pay a judgment in the amount of the Settlement Payment. In order to test that statement, the Trustee retained a leading valuation expert to conduct an independent valuation of Countrywide and
prepare a report of his analysis. More specifically, the valuation expert was asked to opine on the maximum economic value that the Trustee could recover from Countrywide assuming that the Trustee obtained a judgment in its favor. The analysis was conducted as of March 31, 2011.
This expert, too, had no prior knowledge of the amount of the Settlement Payment before issuing his opinion.

80. In estimating the economic value available to satisfy any judgment, the valuation expert estimated the value of Countrywide’s assets in conformance with the fair market value standard. Without taking into account litigation costs or other losses accruing to Countrywide
between March 31, 2011 and the date of any future hypothetical judgment – losses that may well be substantial – the valuation expert opined that the Trustee’s maximum recovery is significantly less than the Settlement Payment.

81. Based on this analysis, the Trustee has concluded that Countrywide will be unable to pay any future judgment that exceeds, equals or even approaches the Settlement Payment. Under these circumstances, the Trustee’s decision to accept a Settlement Payment of $8.5 billion
on behalf of the Trusts now, rather than proceed with litigation that may result in a recoverable judgment, if any, billions of dollars less than that amount, was made in good faith and is not outside the bounds of reasonableness.

4. The Trustee May Be Unlikely to Recover Any Future Judgment From Bank of America

82. Countrywide and Bank of America have taken the position that if Countrywide is unable to pay the full amount of any judgment against it, and the Trustee were to assert claims against Bank of America based on theories of successor liability, veil piercing or similar legal
theories (collectively, “Successor Liability Theories”), Bank of America would prevail on those claims.

83. In order to assess the strength of its Successor Liability Theories, the Trustee has, among other things, considered the arguments of Countrywide and Bank of America and wellestablished case law addressing the Successor Liability Theories. The Trustee also sought and
obtained an independent expert opinion from a law professor who holds an endowed chair in lawand business at a major law school, and who teaches and writes on corporate law, corporate finance, corporate governance, mergers and acquisitions, and the law and economics of complex
transactions.

84. In order to prevail on a traditional claim for successor liability, the Trustee would have to demonstrate, among other things, that Bank of America is a continuation of Countrywide, that Countrywide has ceased operations and dissolved, and that the sale was
designed to disadvantage shareholders or creditors of Countrywide.

85. There are several obstacles to this claim. Among them are that (i) Countrywide remains in existence and has not ceased operations, and (ii) the doctrine of de facto merger, which could be used in an effort to impose successor liability, has been used sparingly under
Delaware law, which may govern the Trustee’s claims.

86. It would be equally difficult for the Trustee to prevail on any veil-piercing claim. The Trustee would have to establish either (1) that Bank of America misused the corporate form to perpetrate a fraud on the Certificateholders, or (2) (i) that Bank of America dominated and controlled Countrywide such that Countrywide was an instrumentality of Bank of America, and (ii) that Bank of America further misused that control to cause harm to the Trustee and the Certificateholders.

87. The Trustee would likely have difficulty establishing a claim for veil-piercing based on fraud – even if it could meet the heightened pleading standards for that claim. Indeed, the Trustee is aware of no case that has made any credible allegation of a fraudulent scheme by
Bank of America. The so-called “instrumentality” or “alter ego” theory probably would fare no better. The Trustee would have to prove that Bank of America totally dominated and controlled Countrywide at the time of the transactions at issue, a claim that is inconsistent with those
entities’ observance of corporate formalities and separate accounting. The Trustee then would have to prove that Bank of America misused its control to perpetrate a fraud or other similar injustice that actually harmed the Certificateholders, a difficult burden under any circumstances.

88. These conclusions are supported by the independent expert opinion that the Trustee obtained. The expert was asked to consider legal theories under which the Trustee could potentially seek to recover money from Bank of America if Countrywide was unable to meet its
obligations to pay a money judgment to the Trustee. In particular, the expert was asked to focus on certain business combination transactions between Countrywide, on the one hand, and Bank of America, on the other, in 2008, and whether such transactions could provide a basis for the
Trustee to recover from Bank of America under the Successor Liability Theories.

89. It is the expert’s opinion that the Trustee would have difficulty prevailing on such legal theories, and that the legal positions of Countrywide and Bank of America are, at the very least, reasonable.

90. This is also reinforced by precedent. In a number of recent cases against Countrywide, plaintiffs have sought to hold Bank of America liable for Countrywide’s alleged misconduct on the basis that it is the parent of, and/or successor-in-interest to, certain Countrywide entities. Although one court has allowed this issue to proceed past the motion to dismiss stage, the Trustee is aware of no case to date that has imposed liability on Bank of America under any of the Successor Liability Theories. Most recently, a federal court in California, applying Delaware law, rejected all of the plaintiffs’ successor liability claims against Bank of America and NB Holdings, a Bank of America subsidiary, in a putative class action asserting claims against Countrywide under Sections 11, 12 and 15 of the Securities Act of 1933. See Maine State Ret. Sys. v. Countrywide Fin. Corp., Case No. 2:10–CV–0302, 2011 WL1765509 (C.D. Ca. Apr. 20, 2011).

91. Given this holding, the existence of case law presenting significant obstacles to a party seeking to assert successor liability claims, to pierce the corporate veil or to apply similar legal theories, and the independent expert legal opinion obtained by the Trustee, in the Trustee’s judgment, the legal positions of Countrywide and Bank of America are viable and need to be considered in weighing the reasonableness of the Settlement Payment.

92. Accordingly, when combining (i) the likelihood that Countrywide would be unable to pay any future judgment approaching the amount of the Settlement Payment, with (ii) the obstacles to the Trustee of holding Bank of America liable for the alleged breaches by Countrywide, it is the Trustee’s good faith judgment that entering into the Settlement is in the best interests of and advantageous to the Trusts, and certainly is within the bounds of reasonablenes.