Objections Fail To Derail $500M Countrywide Settlement
This article originally appeared in the National Law Journal, an affiliate of the Litigation Daily.
A federal judge in Los Angeles has tentatively approved a $500 million settlement between Countrywide Financial Corp. and investors in its mortgage-backed securities.
U.S. District Judge Mariana Pfaelzer issued her order on Monday, according to attorneys in the case. She had preliminarily approved the settlement, which includes $89 million in attorney fees and costs, on August 7.
The agreement came as Bank of America Corp.’s chief risk officer testified in June as part of a separate proposed $8.5 billion deal that Countrywide’s legal costs could force it into bankruptcy.
“It’s a tremendous result considering the possibility of Countrywide going bankrupt, and it is the largest [mortgage-backed securities] class action settlement of all time and an excellent recovery for all investors,” said Spencer Burkholtz, a partner at Robbins Geller Rudman & Dowd in San Diego, Calif., who represents investors in two of the three class actions resolved under the settlement.
Bank of America spokesman Lawrence Grayson declined to comment.
Nearly 40 parties filed objections to the deal, including a group of 19 failed banks under Federal Deposit Insurance Corp. receivership that argued the payout wasn’t enough. Additionally, they argued, the named plaintiffs lacked standing and had a conflict of interest in pursuing claims on behalf of investors whose specific tranches were dismissed.
A second group of 16 large investors objected to the deal for similar reasons.
David Grais, a partner at New York’s Grais & Ellsworth who represents both groups of objectors, declined to comment.
Bank of America, which bought Countrywide in 2008, was dismissed from the litigation as a liable successor.
But the risk that Bank of America could put its Countrywide unit into bankruptcy was a “major issue” in reaching a settlement, said Steven Toll, a partner at Cohen Milstein Sellers & Toll in Washington who represented investors in the third case that settled.
“It was a situation where there were impediments to ever getting money if we didn’t have a good settlement,” he said.
Moreover, the chances of surviving potential dismissal were uncertain. In Toll’s case, for example, Pfaelzer had previously dismissed all but eight tranches of the securities. The case originally was filed on behalf of investors of 400 offerings, each of which had several dozen tranches, he said.
The other two cases faced motions to dismiss that might have been granted, given Pfaelzer’s earlier rulings, he said.
Under the settlement, distribution would be segmented into three groups: $325 million to class members who purchased securities within the 58 tranches that stood the best chance of surviving; $125 million to purchasers of securities in 111 tranches that had been dismissed; and $50 million to investors of securities in 9,214 tranches that hadn’t been purchased by the named plaintiffs and had been dismissed. Most of the objectors to the deal had purchased securities in the third group.
“We think it was very fair and reasonable, and those people had virtually no claims under her ruling,” Toll said, referring to the objectors. “All they had left was a very long shot at an appeal that wouldn’t happen for another three or four years.”