A New York appeals court unanimously approved the Countrywide trustee’s proposed $8.5 billion rep and warranty settlement in its entirety on Thursday.
The Appellate Division of the New York Supreme Court concluded that as a trustee, BNY Mellon properly exercised its discretion in settling all the claims, including repurchase claims against loan modifications that were previously excluded by Judge Kapnick’s decision from early 2014.
This will please bondholders and investors, as it would allow the trustee to potentially distribute $8.5 billion in recoveries to affected bonds.
The court said that the issue for its determination is whether the trustee exercised its discretionary power reasonably and in good faith and that it is not the task of the court to decide whether it agrees with the Trustee’s judgment.
While agreeing with the bulk of Judge Kapnick’s decision, the appellate body ruled that in excluding the modification claims, the lower court had applied a ”stricter and far less deferential” standard and overturned that part of the decision.
In a client note, Barclays says that the appellate division’s verdict should remove the biggest hurdle for trusts finally to receive the $8.5 billion payment, close to four years after the settlement was originally struck.
This was the only ongoing proceeding in the Countrywide settlement after the New York Supreme Court lost jurisdiction over this case and, consequently, the motion to reargue pending with the Supreme Court was terminated.
There is the possibility of a further appeal in the New York Court of Appeals, which is the highest appellate court in New York.
The settlement will still require IRS/state tax approvals and it is unclear how long that may take or whether the trustee had pursued that simultaneously with court proceedings.
Overall, the appellate court’s verdict is a definite positive for the settlement, and the likelihood of cash being paid out to the trusts by the end of 2015 has increased meaningfully, which could help most on certain cash flows leveraged to the timing of the settlement.
This verdict might also be a positive for JPM and Citigroup’s rep and warranty settlement, according to Barclays.
“Although the objections against JPM and Citigroup are of a somewhat different nature (unlike in Countrywide’s case, the trustees were not active participants in the negotiations that were held between institutional investors and JPM/Citigroup), this verdict likely clarifies the standard against which trustees will be judged,” Barclays says. “As such, we believe that the likelihood of faster progress on the approval process in the JPM and Citigroup settlements has risen.”