BofA and Countrywide Appeal Order Allowing MBIA Vicarious Liability Claim To Proceed

In a move that could have dramatic consequences for the financial stability of Bank of America (BofA), a New York state court judge has held that monoline bond insurer MBIA can go forward with claims that BofA be held vicariously liable for claims against its subsidiary, Countrywide.  BofA has already filed an appeal of the Order, issued by Judge Eileen Bransten in New York State Supreme Court in the case of MBIA v. Countrywide Home Loans, et al. Bransten held, among other things, that MBIA could proceed with its argument that BofA was vicariously liable for the debts of Countrywide as successor-in-interest, based on a claim of a de facto merger between the companies.

In the case, MBIA alleges that a significant percentage of tens of thousands of home equity lines of credit (HELOCs) and second-lien loans issued by Countrywide entities in various securitizations insured by MBIA failed to comply with Countrywide’s underwriting guidelines or other reps and warranties.  Bransten’s Order Granting in Part and Denying in Part Defendants’ Motion to Dismiss, issued on April 27, 2010, denied Countrywide and BofA’s motion to dismiss as to MBIA’s claims for fraud, breach of the implied covenant (though this claim was narrowed) and successor and vicarious liability against BofA, while granting the motion to dismiss as to MBIA’s claim for negligent misrepresentation.

The transcript of the oral argument surrounding this motion makes for particularly entertaining reading (at least for mortgage litigation nerds, such as myself).  In that hearing, David Apfel, counsel for BofA and Countrywide, argued that the successor liability claim was “frivolous,” and that MBIA should not be allowed even to pursue discovery regarding the issue.  Judge Bransten did not buy these arguments, denying BofA’s motion to dismiss as to the successor liability claim and ordering discovery to move forward.  Bransten also expressed significant dissatisfaction with the pace of the production of documents from BofA and Countrywide.  In response to Apfel’s statement that, “Countywide ha[s] been working hard [at discovery],” the Judge responded, “It’s not going well enough… Get discovery, documentary discovery done.”

This ruling came on the heels of another adverse ruling for Countrywide emanating from Bransten’s pen.  In a related case styled Syncora Guarantee, Inc. v. Countrywide Home Loans, Inc., et al., Bransten ordered Countrywide to begin producing loan files underlying the delinquent loans in three securitizations insured by bond insurer, Syncora.  The Syncora case (along with MBIA v. Countrywide and FGIC v. Countrywide) is one of three related bond insurance cases involving BofA and Countrywide before Judge Bransten (note: bond insurers provide insurance on an entire securitization, or pool of loans, rather than on individual loans).  The acquisition of loan files, and servicers’ reluctance to turn over the same, is a critical issue for investors pursuing claims against originators and servicers for irresponsible lending practices in connection with the loans underlying the mortgage-backed securities they purchased.

Bill Frey, whose broker-dealer, Greenwich Financial Services, is the plaintiff in a lawsuit against Countrywide in New York state court, has been closely following the bond insurance litigation against Countrywide and BofA in New York.  He commented on Judge Bransten’s recent rulings that, “it sounds like [Judge Bransten] understands that you need to honor commitments and contracts if you are going to have an economy work.”  Frey’s suit, which seeks to force Countrywide to pay for the loan modifications it has agreed to perform in a settlement with the Attorney Generals from more than 30 states, awaits a ruling on Countrywide’s motion to dismiss.

Yet, while those with claims against Countrywide are watching this litigation closely, most of the mainstream media has been slow to recognize the significance of these decisions.  Certainly, if BofA is on the hook for the massive potential liabilities of Countrywide stemming from its years of volume lending, this could undermine Bank of America’s solvency, which, in turn, could have a dramatic ripple effect on the other major banks and the financial system as a whole.  BofA will have to take a stand, and whether or not this litigation is where BofA’s ultimate liability is determined, contesting Bransten’s vicarious liability ruling will be an important first battle.

Andrew Longstreth gets it.  In an April 29, 2010 article for AmLaw Litigation (subscription required), Longstreth notes that this is the first time a judge has allowed claims to proceed against BofA for the liabilities of Countrywide.  Longstreth quotes MBIA’s attorney, Phillip Selendy, as saying, “[the decision] is going to have an impact beyond this case.”  That could be the understatement of the year.

BofA/Countrywide filed the Notice of Appeal (available here) on May 28, 2010, indicating that it would be challenging the adverse portions of the April 27 ruling before the Appellate Division of the Supreme Court of the State of New York, in and for the First Division.  BofA/Countrywide also filed a Pre-Argument Statement (available here) before the Appellate Court, in which it argued that Judge Bransten improperly applied New York law, rather than Delaware law, to determine the issue of successor liability, and that MBIA failed to allege, as required, that the merger between the companies “was engineered to disadvantage Countrywide’s shareholders or creditors.”  BofA/Countrywide further decried the fact that, since Bransten’s decision on vicarious liability, both FGIC and Syncora have amended their complaints against Countrywide to add BofA as a defendant.

This may be one of the primary reasons that BofA has chosen to pursue the risky strategy of appealing Bransten’s Order.  Though the ruling does not definitively hold that BofA and Countrywide entered into a de facto merger–it simply allows such a claim to move forward–BofA faces the prospect of other litigants being emboldened to bring claims against BofA wherever they have claims against Countrywide.  Though BofA runs the risk that, by appealing, it could suffer an adverse ruling at the hands of the Appellate Division of New York Supreme Court–a ruling that would have broader precedential value than Bransten’s Order–BofA has presumably decided to take an early stand in the hopes of cutting off the flood of litigation before it begins.

Yet, it is unclear whether BofA has as strong a case as it thinks.  The de facto merger exception to the general rule that an acquirer does not become responsible for the liabilities of the acquired corporation turns on whether the acquirer absorbs and continues the prior operations of the acquired corporation or dissolves the company’s management and general business operations.  MBIA has alleged facts showing that BofA retired the Countrywide brand, including its website, and cites favorable New York case law holding that all-stock acquisitions, such as BofA’s acquisition of Countrywide, suggest that a de facto merger has occurred.  MBIA also cites BofA’s pursuit of a settlement of predatory lending suits with state Attorneys General immediately following its acquisition as evidence of the cessation and dissolution of Countrywide’s business.

BofA’s primary argument on appeal appears to be that Bransten erred in applying New York law to the vicarious liability claim.  The bank argues that Bransten should have instead applied Delaware law, which is more favorable to acquirers wishing to avoid successor liability.  But the argument has the distinct feel of a Hail Mary, as it did not appear to be a focus in BofA’s briefs, and Apfel did not even raise it during oral argument on the motion.

In fact, Apfel repeatedly exhorted Judge Bransten to read an order from Judge Mariana Pfaelzer the Central District of California from the case Argent v. Countrywide, which Apfel described as featuring “the exact same facts” as MBIA. Bransten actually excoriated Apfel at one point to direct her towards a New York case, saying “please, please, there must be a New York case that we can rely on.  At least, give me some guidance” (see transcript at 41-42).  Apfel responded, simply, “[o]kay.”  Id. At no point did BofA’s counsel argue that Delaware law should actually apply.

Instead, Bransten appeared to become quite irritated at Apfel’s repeated entreaties for her to read Argent–again, a California case.  At one point, after Bransten asked Apfel to move on to his next argument and Apfel again asked Bransten to read Argent, Bransten responded, “as I stated before, I’m going to read it, all right.  I mean, you don’t have to remind me to read it… It’s only been the tenth time asking me to read it” (see transcript at 41-42).

Meanwhile, the MBIA litigation moves forward, and MBIA has filed a Motion to Compel, to force Countrywide to produce 1) delinquent loan files, 2) documents Defendants previously produced to various state Attorneys General in connection with their settlement with Countrywide, and 3) documents relating to BofA’s successor liability.  The Reply brief, filed June 8, is available here.  BofA and Countrywide will certainly fight hard to avoid turning over these critical documents.  But, judging by Judge Bransten’s recent opinions, and her palpable frustration with BofA’s discovery conduct, I don’t like the bank’s chances of avoiding this production.

[Many thanks to Manal Mehta for sharing many of the documents featured in this post - IMG]

This entry was posted in Attorneys General, BofA, bondholder actions, Countrywide, Greenwich Financial Services, loan files, merger, mortgage insurers, predatory lending, settlements, successor liability, vicarious liability, William Frey. Bookmark the permalink.
  • http://www.blogger.com/profile/11501168638041947453 Isaac Gradman

    >What do readers think about BofA's chances of succeeding in overturning Bransten's Order on appeal?

  • http://Anonymousnoreply@blogger.com Anonymous

    >http://www.abajournal.com/news/article/countrywide_plaintiffs_include_borrowers_investors_shareholders/Countrywide Financial Corp. general counsel Sandor Samuels has his work cut out for him.Samuels also serves as Countrywide’s litigation chief and “he's facing huge lawsuits on all fronts” arising from its subprime problems, Corporate Counsel reports. But Samuels and his company will be getting some help under a planned $4 billion buyout by Bank of America announced in January. Bank of America will assume Countrywide’s legal liabilities. “We are aware of the claims and potential claims against the company and have factored these into the purchase," bank spokesman Scott Silvestri told the legal publication.

  • http://www.blogger.com/profile/11501168638041947453 Isaac Gradman

    >Wow. Those are some bad facts for Bank of America. The longer article linked from the article you cite (http://www.law.com/jsp/cc/PubArticleCC.jsp?id=1203602189184) goes into even more detail about BofA's purchase of Countrywide. BofA's spokesman, Scott Silvestri, is quoted as saying, "We bought the company and all its assets and liabilities." It doesn't get much more straightforward than that.Thanks for the comment – IMG

  • http://Anonymousnoreply@blogger.com Anonymous

    >Richard SI was able to recieve damning evidence againts CW/BoA thru my state AG, by getting the actual income verification form, that they faked all the numbers, shows they stole over 10k from me with the refinance, and it was never signed or dated by me, it wasn't even dated by the broker, nor was it signed by the broker, it was signed by someone else.I'd love to send my documents to these guys in new york, they want the proof, i'll give it to them.BTW after signing my paperwork, at home, alone, i mailed it back to the broker, who had it notarized with out my presense, never met me in person, and never sent my completed copies of the loan documents. Which means then never gave my my papers for right of reccission.I was 22 at the time, young and dumb, now i'm almost 28, and much much more smarter.I'm about to start in sueing the bank(s) for my right of reccission, based on my proof of notary fraud, multiple TILA and RESPA violations, and fraudlent income verification.I even sent them proper income verification, 3 months before they frauded the form, which they only completed 4 days before the loan finished. I have proof of both.Please help me get in contact with these people in New York, i'm right in PA.Thanks so much, and reach me at Transmut12002@yahoo.com

  • http://Anonymousnoreply@blogger.com Anonymous

    >You keep bringing up the settlement that BofA reached with CA and other state's AGs. Yet NO ONE is taking a look at the widespread BREACH by BofA of the loan modification contracts that were offered AND ACCEPTED BY BORROWERS under that settlement agreement.IF BofA had honored my notarized final modification contract, I would not now be sitting in a Foreclosure litigation mess.BofA/CW offered the contract and then reneged on the contract without so much as contacting me. Their own personnel refer to the modification contracts under the AG agreement as 'All of them were canceled'.The breached mods have been used as a perfect set-up to force people into foreclosure. The mods were offered and accepted, then months later the borrower finds that they must cure the mounting default that they believed was solved by the mod. For me, I had other financial options that I did not make use of at the critical point. I could have taken other steps, although they included renting out my home, covering the difference between the rent and the mortgage, and moving into an apartment I own, but I would have been able to avoided this foreclosure 'setup'.

  • http://JeffBnoreply@blogger.com Jeff B

    >Well five months since your article and now the issues are getting coverage in the press.Isaac, I know it is dangerous for non-attorneys to speculate on this stuff but investors don't really don't have a choice. Going to ask you three questions. I hope they make sense and you have time.1) Has the appeals court ruled on whether or not there was a de-facto merger yet and if no do you have any idea how long it might be?2) In the oral arguments (and thanks for posting to them) at page 86 it looks like BAC might have purchased the assets from Countrywide (between internal legal entities). This is just interesting as I can't recall seeing this sort of thing in my career although I do remember Texas Air, of Frank Lorenzo fame, purchasing certain Eastern Airline assets. Having said that, if they did do a purchase and it was at a fair value it seems like a really good way of shielding and limiting their liability while keeping the assets in the group. No question there but it just seems like a really tough issue for MBIA to actually win and if they do win it would be devastating to the M&A game as it would make stock acquisitions virtually impossible. If you had to put a percentage chance of their successfully pulling BAC into this what would you say they are? Yes I know it is wild speculation.3) Is MBIA bringing a common law claim because they did not buy securities? If they had bought securities (as the private label bond were) could they bring a 10-5(b) case? What I'm really driving at here is that I think a common law tort action is more difficult to win than a securities action and I wonder if you agree?

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