The Manhattan Supreme Court judge who inherited the American International Group-led challenge to an $8.5 billion deal struck between Bank of America and investors of mortgage-backed securities refused to suspend her predecessor's ruling approving the settlement, stating Wednesday she saw no need to do so.
In a lively court hearing focused entirely on one procedural request by AIG’s counsel, Commercial Division Justice Saliann Scarpulla said it was clear Justice Barbara Kapnick did not intend to further delay entry of judgment beyond a five-day stay issued merely out of “convenience” for out-of-state parties.
“I’m not her Appellate Division. All I can do is effectuate what she did,” Scarpulla told the parties during a 45-minute hearing in the case, In Re: Bank of New York Mellon, 651786/2011.
Kapnick, who was recently elevated to the Appellate Division, First Department, signed off on the majority of the settlement between 22 institutional investors and Bank of America, which acquired Countrywide Financial, the lender that issued the home mortgages which unraveled during the housing crisis.
AIG, an investor, opposed the settlement, arguing that the deal low-balled the actual value of losses suffered by certificate-holders and was the result of back-door negotiations that failed to account for the full spectrum of investors’ losses.
Kapnick held in her Jan. 31 decision, based off a nine-week Article 77 hearing last year, that the trustee representing the institutional investors, Bank of New York Mellon, did not abuse its discretion in entering into the 2011 deal, save for releasing up to $31 billion in loan modification claims without further investigating their potential worth.
AIG sought an indefinite stay of Kapnick’s judgment, arguing that the loan modification exception left open certain issues that would be easier managed “under one tent” rather than go all the way up to appeal and back down again.
AIG is represented by Mark Zauderer of Flemming Zulack Williamson Zauderer; Daniel Reilly of Reilly Pozner; and Michael Rollin of Jones & Keller.
Mayer Brown and Dechert, counsel to Bank of New York of Mellon, in addition to Gibbs & Brunn and Warner Partners, counsel to the institutional investors, argued that AIG's request was an attempt to hold the settlement “hostage” and extend the statutory period in which it must file notice of appeal.
“Of all the unusual procedural moves, we’ve never heard of this before. To stay entry of a judgment? That’s something we’ve never heard of before,” Matthew Ingber, partner at Mayer Brown, told the court Wednesday.
Reilly, AIG's counsel, argued that the since Kapnick’s ruling did not “conform in all material respects” to the underlying settlement agreement by including the exception on loan modification claims, the settlement was unenforceable.
Scarpulla said in court that she would not enter judgment on the portion of the settlement that took exception to releasing those claims, but later indicated that she “disagreed” with AIG’s stance that the claims formed “a significant part” of the decision.
Although she allowed each side to be heard at length, Scarpulla made it clear from the start she believed this was a “straightforward” ruling.
Scarpulla informed the parties that she had personally spoken with Kapnick about the insertion of a five-day stay of judgment in the 54-page ruling and confirmed it was merely a ministerial courtesy to all parties involved.
“The settlement agreement says what it says,” Scarpulla told counsel. “If you’re unhappy with it and you’re unhappy with Justice Kapnick’s ruling, your remedy is to go to the Appellate Division and seek a stay, not to come to me and seek a stay of the supplemental proceedings.”
At one point during the proceeding, the judge asked Ingber whether “chaos” would break out if she entered judgment—something which merely triggers the 30-day window in which AIG has to file a notice of appeal to the First Department and has no practical consequence other than to formally set into motion the appeals process.
The $8.5 billion settlement cannot be enforced until all appeals have been exhausted. AIG has nine months in which to submit its appellate brief.
Wednesday’s hearing was far from the last opportunity Scarpulla will have to weigh in on the merits of the dispute. Late Tuesday, AIG filed a motion for leave to reargue Kapnick’s decision, calling it inadequate in its analysis to grant BNY Mellon summary judgment.
In court papers, AIG said the $8.5 billion settlement figure is “but a fraction of the $32-52 billion repurchase liability estimated by the institutional investors.”
The brief also states that Kapnick’s abuse of discretion standard was “unduly narrow” and that it overlooked disputed issues of fact material to whether there was an abuse of discretion, such as the trustee’s decision to hire Mayer Brown as counsel, when it counted both Bank of America and Bank of New York Mellon as clients.
The brief further argues that had a more stringent reasonableness standard been applied, the court “could not have resolved this proceeding on summary judgment because there are disputed issues of fact” concerning whether there was an adequate investigation into the trusts’ losses, whether trustee sought to maximize recovery for beneficiaries and whether settlement was sufficient.
“The Order’s lack of analysis also makes it impossible to implement the settlement in any coherent way—a concern that is especially problematic since the Court refused to endorse many of Petitioners’ proposed findings,” the motion states.
Scarpulla told the parties Wednesday that the motion for re-argument would not be heard until after April 24.
“We thought it would be administratively easier if the judge would not enter the judgment,” Zauderer told CLI after the hearing. “We thought it would be administratively better for these various issues to be litigated now. We wanted to keep everything under one tent.”
Zauderer added that the appellate brief would largely focus on many of the same arguments presented in the motion for re-argument now before Scarpulla.
Suevon Lee can be reached at firstname.lastname@example.org Follow CLI on Twitter @NYComLitInsider.