A federal judge ruled in favor of two investors involved in litigation against Bank of America, offering an alternative insiders see as a self-help way to mitigate 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.