BONY-Countrywide Settlement Removal Reversed by 2d Circuit

Lost in the attention to the state-federal mortgage servicing settlement is the other major servicing fraud settlement:  the $8.5B deal between BONY as trustee for various MBS trusts and Countrywide (Bank of America) over putback claims for securitization of mortgages that didn't comply with the requirements of the securitization documents.  

BONY filed an Article 77 action in NY state court, which is a CYA procedure for a court to bless BONY's actions as trustee.  A large group of institutional investors (the Institutional Investors) supported the deal, but many other MBS investors (and the NY Attorney General) intervened in opposition.  

The investors removed the case to Federal District court under the Class Action Fairness Act (CAFA), where the sharp-eyed district judge immediately saw what was up and noted that BONY was dancing around like a marionette with strings being pulled by BoA and the Institutional Investors, rather than acting as an independent trustee and fiduciary.  The removal order was appealed to the 2d Circuit, which reversed.  [Yves Smith is surprised that the NY AG did not file a brief supporting removal.  I'm not (and don't think it would have affected the outcome here).  State AGs have to be very careful about how they treat their state courts; these are relationships that affect many cases. Pushing for removal is not how an AG makes nice with home court judges.  Silence here speaks loudly.]

On the surface, this is just a venue ruling; it is not a substantive ruling on the merits of the settlement of the putback claims.  But there are real concerns in this case that venue matters--why else would BONY fight removal?

The reversal was because CAFA's removal provision has an exception for securities claims. The investors pushing removal argued that their claims were not related to securities but derived independently from NY trust law.  I'm sympathetic with these investors, but I'm having trouble seeing their argument under the statute--while BONY is a trustee, all of the trust's beneficiaries exist only by way of securities; absent the issuance of the RMBS, I'm not sure who BONY would be a trustee for.  Assets are held in trust for someone;  they aren't just held in trust.  The RMBS create the beneficiaries for the trust.  That's why the PSA is both the indenture for the RMBS and creates the trust.  I'm open to being persuaded otherwise, but from reading the 2d Circuit opinion, I just wasn't seeing the removal argument.  

That said, what is up with the 2d Circuit describing "Bank of New York Mellon, acting in its capacity as trustee of trusts established to hold residential mortgage-backed securities"?  BONY is trustee for a trust that holds mortgages, not RMBS.  The trust issues RMBS.  The 2d Circuit generally seems to get securitization, so this misdescription at the beginning of the opinion was pretty glaring.