Despite the nature and magnitude of these allegations, B of A has a critical advantage in court stemming from the fact that the objections are being made in the context of an Article 77 proceeding. This gives a trustee — in this case, BNY Mellon — the right to seek a judicial endorsement of trust-related decisions.
As Reuters’ Alison Frankel has pointed out, while the Article 77 vehicle is typically invoked in “garden-variety” trust disputes and not multibillion-dollar deals affecting hundreds of beneficiaries, its advantage to B of A is clear:
Under trust law, the bar for blocking a decision by the trustee is incredibly high. Anyone with an interest in the trust has a right to challenge the trustee’s decision. But unless objectors can show that the trustee, in this case [BNY Mellon], abused its discretion, acted unreasonably, or otherwise breached its fiduciary duty to the trusts’ beneficiaries, the court is not supposed to interfere with the trustee’s power.
Thus, the onus is not on the settling parties — B of A and BNY Mellon — to prove the agreement was reasonable. Instead, the burden is on the opposing investors to prove that the Bank of New York Mellon acted inappropriately in one form or another. And while this may appear to be just a semantic difference, it’s a powerful, often times definitive, distinction.
What if the challenging parties nevertheless prevail and the settlement is set aside? While this is a valid question, it’s almost unfathomable for one reason: None of the individual investors appear to have viable claims on their own.
On March 29, 2012, the judge overseeing the settlement dismissed one of the most ardent challenger’s separate lawsuits for breach of contract, ruling that only the Bank of New York Mellon, in its capacity as the trustee of the underlying MBSes, has the authority to sue on the investors’ behalf. This ruling was upheld two months later on appeal. And a month after that, the challenger dropped its opposition to the $8.5 billion settlement altogether. At most, in turn, it seems like the judge would simply force the existing parties back to the negotiating table for a higher figure. It’s worth noting here that the expert opinion that BNY Mellon received prior to entering into the $8.5 billion settlement put B of A’s range of liability at $8.8 billion to $11 billion.
That being said, if B of A’s public statements are any indication, then there’s at least reason for the bank’s shareholders to be optimistic. In the midst of an exchange with an analyst on its fourth-quarter conference call, B of A’s CEO Brian Moynihan — who, notably, is also a lawyer — predicted that this litigation will wrap up “sometime in the second quarter or early in the third quarter” of this year, and that he was “comfortable with our legal positions across the board.”
Take that for what it’s worth. However, if it does end favorably, B of A’s remaining liability from contract actions related to private-label MBSes will drop to an estimated $4 billion in excess of current accruals — a highly digestible figure.
The many fronts in B of A’s legal war
As I noted at the beginning, there are multiple fronts in B of A’s war to atone for the sins of Countrywide. While the struggle to consummate the settlement with BNY Mellon is only one such battle, it’s one of the larger skirmishes remaining outside of a constellation of securities fraud actions that are making their way through a federal court in California.
The article The Lawsuit That’ll Make or Break Bank of America originally appeared on Fool.com and is written by John Maxfield.
John Maxfield owns shares of Bank of America. The Motley Fool recommends American International Group (NYSE:AIG), BlackRock, and Goldman Sachs. The Motley Fool owns shares of American International Group and Bank of America and has the following options: Long Jan 2014 $25 Calls on American International Group.
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