Editor: David Reiss
Brooklyn Law School

July 5, 2013

BofA No Worm Ouroboros

By David Reiss

The Worm Ouroboros of myth was a gigantic serpent that encircled the earth only to bite its own tail. Judge Sweet (SDNY) has ruled that Bank of America is no modern-day Ouroboros that is so enormous that it must sue itself. In BNP Paribas Mortgage Corporation et al. v. Bank of America, N..A., No. 1:09-CV-09783 (June 6, 2013), Judge Sweet granted Bank of America’s motion to dismiss in its entirety (although this did not do away with all of the plaintiffs’ claims).

The Court noted that Bank of America served “in several distinct but related capacities for” what was a type of warehouse credit facility for Taylor, Bean & Whitaker Mortgage Corp. subsidiary, Ocala. (8) In particular, BoA served “as Indenture Trustee, Collateral Agent, Depositary and Custodian” for the transaction. (8) You may remember that the chairman of TBW was sentenced to 30 years in jail for running a massive fraud, from which this case ultimately springs.

The Plaintiffs “allege that BoA had contractual duties as Collateral Agent (under the Security Agreement) and as Indenture Trustee (under the Base Indenture) to sue itself in its other capacities for breaches of the  Custodial and Depositary Agreements,  respectively, and that it breached those duties by failing to bring suit against itself for these alleged cIaims.” (15, citations omitted)

Relying on well-settled law, the Court held that the transaction documents did not require BoA to sue itself. While this case does not really cover new legal terrain, its logic brings to mind S&P’s motion to dismiss DoJ’s FIRREA case.  In that case, S&P argued that “the Complaint fails to allege that S&P possessed the requisite intent to defraud the investors in the CDOs at issue. It is more than ironic that two of the supposed ‘victims,’ Citibank and Bank of America—investors allegedly misled into buying securities by S&P’s fraudulent ratings—were the same huge financial institutions that were creating and selling the very CDOs at issue.” (3) The aftermath of the financial crisis laid much bare about the securitization process, but the utter incestuousness of it can still shock.

This is not to say that this complexity and self-dealing are per se bad. Just that it seems that the sophisticated business people who put the deals together did not think through at all what would happen if deals went south.  Will they during the next boom?  Probably not.

So what does that mean for regulators?

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