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Levitan Art 77

Levitan Art 77

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Published by Chris Herzeca
Expert report of Prof. Levitan in BAC Art 77 for Intervenors
Expert report of Prof. Levitan in BAC Art 77 for Intervenors

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Categories:Types, Business/Law
Published by: Chris Herzeca on Apr 14, 2013
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04/14/2013

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CONFIDENTIALEXPERT REBUTTAL REPORT OF PROFESSOR ADAM J. LEVITIN
In the matter of the application of The Bank of New York Mellon
 No. 651786/2011 (N.Y. Sup. Ct.) T
ABLE OF
C
ONTENTS
 
I
NTRODUCTION
................................................................................................................................3
 
S
UMMARY OF
O
PINIONS
O
FFERED
.................................................................................................3
 
P
ROFESSIONAL
B
ACKGROUND AND
Q
UALIFICATIONS
...................................................................5
 
I.
 
 T
HE
S
ECURITIZATION
I
NDUSTRIAL
C
OMPLEX
..........................................................................7
 
A. An Overview of the Mortgage Securitization Transaction .....................................................7
 
B. The Securitization Triangle ..................................................................................................10
 
1. The Role of Sponsors ....................................................................................................... 11
 
2. The Role of Servicers ....................................................................................................... 11
 
3. The Role of Trustees ........................................................................................................ 12
 
a.
 
 The Pocket TrusteeProblem and BONY’s Relationships with Bank of America ...14
 
b. BONYs Litigation Experts Fail to Recognize the Function of a Trustee in theSecuritization Context ..................................................................................................15
 
C. The Inside Investors (the Protective Committee) ...............................................................16
 
D. BONY Failed to Honor its Obligations to Each Individual Covered Trust .........................19
 
II.
 
BONY’
S
A
CTIONS IN
N
EGOTIATING THE
S
ETTLEMENT
A
PPEAR
A
IMED AT
P
ROTECTING
I
 TSELF AND
B
ANK OF
A
MERICA
R
ATHER THAN THE
C
OVERED
 T
RUSTS
....................................21
 
A. An Event of Default Occurred Under the PSAs ...................................................................21
 
B. BONY Undertook No Investigation of the Gibbs & Bruns Allegations ................................22
 
C. BONY Acted to Avoid the Consequences of an Event of Default .........................................23
 
D. Evidence in the Record Shows That BONY Failed to Bring or Seriously ConsiderLitigation .............................................................................................................................26
 
E. Evidence in the Record Shows That BONY Used the Settlement Experts to Paper Over thePosition It Wished to Adopt, Rather than to Provide Objective Evaluation or to StrengthenIts Negotiating Position .......................................................................................................27
 
1. BONYs Reliance on the Settlement Experts Was Not Reasonable or Authorized by thePSAs Because It Was Not “In Good Faith and in Accordance with ‘Opinion of Counsel’” ......................................................................................................................... 28
 
2. BONY Was Not Justified in Relying on Professor Adler’s Report Because of Its ExpressLimitations ....................................................................................................................... 30
 
3. BONY Relied on Professor Adler’s Opinion, But the PSA Language Analyzed byProfessor Adler Was Not Applicable to All of the Covered Trusts. ............................... 31
 
1
FILED: NEW YORK COUNTY CLERK 04/12/2013
INDEX NO. 651786/2011NYSCEF DOC. NO. 570RECEIVED NYSCEF: 04/12/2013
 
CONFIDENTIAL
4. BONY Litigation Expert Professor Fischels Report Makes Similar ErroneousAssumptions to Professor Adler’s Settlement Report ..................................................... 33
 
5. BONY Was Not Justified in Relying on Professor Daines’s Report Because It WasExpressly Limited in Its Analytic Scope and Predicated on Self-Serving FactualAssumptions Provided by BofA ...................................................................................... 33
 
6. Capstone Report ............................................................................................................... 34
 
7. RRMS/Lin Report on Valuation of Representation and Warranty Claims ...................... 34
 
F. BONY Failed to Pursue or Even Value Servicing Breaches and Documentation Exceptions,but Released Both in the Settlement Anyway.......................................................................35
 
1. BONY Failed to Investigate or Value Servicing Breaches and Documentation Exceptions......................................................................................................................................... 35
 
3. The Document Exception Provisions of the Proposed Settlement Are Largely Illusory. 36
 
4. The Document Exceptions Provisions of the Settlement Effect an Amendment of thePSAs without the Requisite Certificateholder Consent ................................................... 38
 
H. BONY Converted Trust Property During the Settlement Process by Using the Trusts’Negotiating Leverage for Its Own Benefit ...........................................................................38
 
1. The Forbearance Agreement and the Indemnity BONY Secured.................................... 38
 
2. The Side Letter ................................................................................................................. 40
 
3. BONYs Attempt to Secure a Release for Actions Unrelated to the Proposed Settlement......................................................................................................................................... 40
 
4. A Release from Indemnification ...................................................................................... 41
 
I. BONY’s Use of the Article 77 Proceeding Appears to Be Designed to Protect Bank of America ...............................................................................................................................42
 
 J. The Proposed Settlement’s Servicing Provisions Have Zero Value Because They ReplicateBank of America’s Pre-Existing Legal Duties ....................................................................43
 
1. Subservicing of High Risk Loans, Settlement § 5(a)-(b) ................................................. 45
 
2. Benchmark Adjusted Recovery of Servicing Advances, Settlement § 5(c) .................... 47
 
3. Consideration of Borrowers for Loan Modifications, Settlement § 5(d) ......................... 48
 
4. Consideration of Prudent Servicing Factors, Settlement § 5(e) ....................................... 49
 
5. Compliance Attestation, Settlement § 5(f) ....................................................................... 50
 
K. The Proposed Settlement Improperly Passes Modification Costs and Losses to the Covered Trusts ...................................................................................................................................50
 
III.
 
 T
HE
S
ETTLEMENT
W
ILL
I
MPEDE THE
R
ECOVERY OF THE
H
OUSING
M
ARKET
..................52
 
A. The Private Risk Capital Will Not Return to the Housing Finance Market Unless InvestorsAre Assured of Receiving the Benefit of Their Bargain ......................................................52
 
B. Professor Fischels Event Study Is Flawed ..........................................................................52
 
IV.
 
F
INANCIAL
 J
URASSIC
P
ARK 
:
 
BONY’
S
A
CTIONS
F
OLLOW A
P
LAYBOOK FOR
 T
RUSTEES
C
OLLUDING WITH
I
SSUERS AND
I
NSIDERS
A
GAINST
O
 THER
I
NVESTORS
. ..................................54
 
2

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