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Why Bank of America Corp (BAC) Might Lose At This Important Hearing

This is the week that the fate of a distinctly unsettled prior settlement between Bank of America Corp (NYSE:BAC) and 22 institutional investors gets put to the test in the courtroom of New York State Supreme Court Justice Barbara Kapnick. At issue is a New York law called Article 77, which will be used to answer the question of whether or not The Bank of New York Mellon Corporation (NYSE:BK), as trustee for the settlement, acted reasonably in accepting the terms on behalf of the complainants.

Certainly, the $8.5 billion settlement amount is big enough to worry about all on its own, but there is another issue here, and for Bank of America Corp (NYSE:BAC), it’s huge: Does Bank of America have successor liability for the bad behavior of Countrywide?

Intertwined with the Article 77 matter
It’s a valid question, and it is considered germane to whether The Bank of New York Mellon Corporation (NYSE:BK) acted in a reasonable manner pursuant to the settlement. As BTIG’s Mark Palmer has noted, the pact was based upon the notion that B of A did not have successor liability, so revisiting that particular point might throw the whole deal out the window, and cause Bank of America Corp (NYSE:BAC) lots of anguish — both now and in the future.

Of course, as Alison Frankel muses, Kapnick could take the path of least resistance and endorse the settlement. This would save both B of A and BONY a big hassle, and prevent everybody from having to go back to the starting gate.

Bank of America Corp (NYSE:BAC)But, it probably won’t be that easy. The question of successor liability by Bank of America Corp (NYSE:BAC) for Countrywide has come up before, in the recently settled battle between the bank and monoline insurer MBIA Inc. (NYSE:MBI). Earlier this year, the insurer filed with the New York courts a very long and colorful presentation in its bid to win summary judgment on this very issue. Despite its effort, however, New York State Supreme Court Justice Eileen Bransten wouldn’t rule either for or against the question, citing disputed facts that needed more scrutiny. But, in a blow to Bank of America, she did decide that the successor liability issue should be heard in New York, rather than Delaware, which was B of A’s preferred venue.

NY AG’s case seems to favor a loss for B of A
Kapnick could still decide that there is no such liability on Bank of America Corp (NYSE:BAC)’s part toward Countrywide, but she would be going up against the Attorney General of New York, who last year filed suit against B of A for $1 billion in damages regarding substandard loans Countrywide sold Fannie Mae and Freddie Mac several years ago.