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Tougher BofA Mortgage Stance Opposed by BlackRock, Pimco Lawyer

Gibbs & Bruns LLP’s Kathy Patrick
Gibbs & Bruns LLP’s Kathy Patrick. Source: Gibbs & Bruns LLP via Bloomberg

The lawyer who helped craft a proposed $8.5 billion settlement with Bank of America Corp. over soured mortgages urged some of her biggest bondholder clients to oppose a more aggressive stance set forth by a rival attorney.

Gibbs & Bruns LLP’s Kathy Patrick told clients including BlackRock Inc. and Pacific Investment Management Co. last year that they shouldn’t authorize a competing plan to threaten Bank of New York Mellon Corp., the trustee for the bondholders, for failing to act adequately on their behalf.

“I want to be able to distance this effort from any declaration of default so that we can continue to try to work constructively with Bank of New York,” Patrick wrote in the Aug. 4, 2010, e-mail, a copy of which was obtained by Bloomberg News. “We don’t want to be forced to go to war with them if there is an opportunity to achieve victory by other means.”

Investors including American International Group Inc. and local pension funds, along with New York Attorney General Eric Schneiderman, have criticized the settlement in court, saying the payout should be larger or that more information is needed to evaluate it.

The 22 investment firms that hired Patrick and worked with BNY Mellon may have conflicts of interest that prevented them from negotiating for more money on behalf of all investors in the Countrywide bonds, due to “significant ongoing business dealings with Bank of America,” according to a court filing by the Policemen’s Annuity and Benefit Fund of Chicago, the Grand Rapids, Michigan, General Retirement System, and two other retirement systems.

Countrywide Paper

The settlement covers $424 billion of home-loan securities created by Countrywide Financial Corp. before Charlotte, North Carolina-based Bank of America bought the firm in 2008. Some of the bonds involved aren’t owned by the 22 firms, a group that grew from a total of eight last October and also includes the Federal Reserve Bank of New York and MetLife Inc.

Mortgage-bond investors typically must rely on the trustee for their transactions to take legal action, and must band together to have standing to force certain steps. BNY Mellon has sought court approval of the settlement.

Robert Madden, Kathy Patrick’s colleague at Houston-based Gibbs & Bruns, said at a Sept. 21 court hearing that proof of the honest intentions of the investors represented by his firm can be seen by their decision to organize and pursue payments for faulty loans.

“No one was doing anything until we started,” Madden said. “It was in no way collusive and in no way intended to assist either Bank of New York or Bank of America.”

Franklin Initiative

Patrick’s e-mail shows that another group was also preparing a bid to force Countrywide to buy back mortgages that failed to meet its contractual promises about their quality through Talcott Franklin, a Dallas-based attorney whose clients include the Knights of Columbus, a charitable organization that now objects to the settlement.

Franklin’s so-called RMBS Investor Clearing House involved more than a third of the $1.5 trillion of U.S. home-loan bonds without government backing as of July 2010, he said at the time. The initiative lets bondholders pool their holdings to take legal or other action by providing them a way to find other investors in deals without disclosing their positions to rivals.

Joining the clearinghouse doesn’t mean investors are hiring Franklin to speak on their behalf about specific issues.

Default Threat

In early August 2010, Franklin was “on the verge of sending a letter to Bank of New York declaring BONY in default of its obligations” on Countywide mortgage-bond deals, according to Patrick’s e-mail to several investment firms including BlackRock and Pimco, as well as the New York Fed and MetLife. “If you have not already done so, it is important you promptly advise him that he is not authorized to send a notice of default on your behalf,” she wrote.

Franklin didn’t return telephone and e-mail messages seeking comment.

Brian Beades, a spokesman for New York-based BlackRock, the world’s largest money manager, John Calagna, a spokesman for New York-based MetLife, the biggest U.S life insurer, and Andrea Priest, a spokeswoman for the New York Fed, declined to comment. Mark Porterfield, a spokesman for Newport Beach, California-based Pimco, which manages the biggest bond fund, didn’t return a message.

Kevin Heine, a spokesman for BNY Mellon, declined to comment. Dan Frahm, a Bank of America spokesman, didn’t immediately return a call for comment.

Better Results

Several of the investors wanted to stick with Patrick’s approach because they thought it would produce better results, according to two people familiar with the matter who declined to be identified because they weren’t authorized to talk.

Patrick declined to comment on the advice in her e-mail. In it, she also said that she was “skeptical” Franklin’s group would have enough holdings to take action involving Countrywide deals without her clients and that it would be “a terrible shame to waste the traction we have gained with” BNY Mellon.

“The effort you’re referring to is an effort by Mr. Franklin to act on behalf of clients that he did not represent,” Patrick said in a telephone interview. “Our clients had engaged us many months before to pursue their rights aggressively. Understandably our clients did not want another lawyer purporting to act for their holdings.”


The statement by Madden, her colleague, at the Sept. 21 hearing “was absolutely accurate,” she said. “Our clients were the only ones that had aggressively pursued their rights.”

U.S. District Judge William Pauley held the hearing in Manhattan on whether to keep the case in federal court or send it back to New York state court where it was first filed.

Walnut Place LLC and related entities, representing anonymous investors who own Countrywide mortgage bonds and have criticized the proposed settlement, said the case belongs in federal court. BNY Mellon, which was scheduled to seek approval for the agreement at a November court hearing, wants the case moved back to state court. Pauley hasn’t ruled on the issue.

The judge asked a lawyer for BNY Mellon how the institutional investor group organized and whether BlackRock, which last October counted Bank of America as its third-biggest shareholder, was the “architect” of the agreement.

BNY Mellon’s description in court papers of its role in the settlement discussion “conveys a certain passiveness” on the part of the bank, the judge said. Matthew Ingber, an attorney for BNY Mellon, said the bank didn’t play a role in organizing the investor group and didn’t lead the negotiations.

Faulty Mortgages

Patrick’s group, which entered discussions with Bank of America and BNY Mellon over soured Countrywide mortgages at least as early as June 2010, last October sent a letter representing the start of its own attempt to get BNY Mellon to declare Countrywide in default of its duties as a loan servicer, including its need to seek repurchases of faulty mortgages.

The case is Bank of New York Mellon v. Walnut Place LLC, 11-cv-5988, U.S. District Court, Southern District of New York (Manhattan).

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