B of A Refuses to Sue Itself, Judge Disagrees

A federal judge ruled in favor of two investors involved in litigation against Bank of America offering an alternative insiders see as self-help in mitigating conflicts of interest between lenders and investors of asset-backed commercial paper.

Furthermore, according to Sally Acevedo, a senior analyst with Moody’s, the ongoing Ocala Funding LLC litigation “continues to shed light on often seen but little tested language in securitization agreements.”

The judge’s decision “is credit positive as it holds that investors can step into a recalcitrant agent’s shoes to enforce their rights,” analysts wrote, which matters because investors often rely on entities that play multiple roles in a single transaction, and consequently incur losses, Acevedo wrote.

She notes that Ocala’s investors, Deutsche Bank AG and BNP Paribas Mortgage Corp., claim that B of A failed to perform its duties in various capacities causing them to collectively suffer over $1.6 billion in losses.

In a written opinion, U.S. District Court Judge Robert Sweet in Manhattan opens the door for the investors to sue Bank of America “in certain of its capacities” such as indenture trustee under the indenture and collateral agent under the security agreement, since B of A “refused to sue itself in its additional roles as depositary, collateral agent and custodian under other transaction documents.”

The judged ruled that asset-backed commercial paper investors can sue over claims arising in documents, “even though they were not parties to those documents, when their agent refuses to sue or allow the investors to sue.”

The investors filed the suit in November 2009. They state that “B of A’s experience and reputation” along with the bank’s agreement “to play key roles in the Ocala ABCP program were essential factors in their decision to purchase the ABCP.

The analyst notes that the case illustrates how a self-help alternative can mitigate conflicts of interest since “the ruling allows investors to step into the shoes of their agents that fail to sue as instructed despite being indemnified.” Because such language found in many structured finance transactions “is rarely tested in court,” Acevedo maintains that this decision will serve as an example of how to uphold the terms of the documents and mitigate the conflicts of interest among different key finance transaction parties when a single entity wears multiple hats.

Given that most obligations are defined in multiple agreements, investors who “may not be explicitly named as direct parties or third-party beneficiaries” in single agreements that are part of a multiple agreement will benefit the most from this latest Ocala opinion.

This opinion overrides the judge’s March 23, 2011 opinion where he found B of A responsible in the transaction documentation for safeguarding the Ocala collateral as indenture trustee and collateral agent, but ruled that “the investors lacked standing to sue B of A for contractual breaches of its custodian, collateral agent and depositary roles under the custodial and depositary agreements because such agreements failed to name the investors as direct parties or third-party beneficiaries.”

Later in 2011 the investors exercised their third-party beneficiary rights to demand that “B of A as indenture trustee and collateral agent sue B of A in its other capacities under agreements where the investors lacked standing,” or allow the investors to sue directly.

Further, B of A refused the investors’ offer to indemnify B of A from the consequences of executing their interests. It brought about a court plea to reassess the investors’ standing and ultimately the judge’s opinion that granted these investors the right to sue B of A.