One of the big overhangs over Bank of America (NYSE:BAC) has been Litigation Risk. Friday a New York court brought clarity to one of the larger cases against Bank of America. The "Walnut" case involved investors in a Countrywide MBS deal suing Countrywide for a breach of contract.
As background, investors may remember that Bank of America had previously reached a global settlement with institutional investors for $8.5bn. One of the investors in that settlement was Bank of New York Mellon (NYSE:BK), the trustee for some of Countrywide's mortgages. Walnut Place, an investor in a Countrywide MBS, had objected to this settlement and sued Bank of America. Walnut as we now know is The Baupost Group. The court had previously found for Bank of America but that decision was being appealed by Walnut.
Friday, the appeal was decided in New York. In a huge win for Bank of America, the court upheld the appeal.
On Thursday the Appellate Division, First Department, upheld Manhattan State Supreme Court Justice Barbara's Kapnick's ruling that the mortgage-backed securities investor Walnut Place may not proceed with a breach of contract case against Countrywide. That ruling will severely limit the options for Walnut and the other investors who have objected to Bank of America's proposed $8.5 billion global settlement with Countrywide MBS noteholders.
Since the Judge overseeing the settlement is the same Judge that heard this case, it appears increasingly likely that no Countrywide MBS investor will be able to sue Bank of America and the settlement that BAC agreed to last year will be accepted. Bank of America may just have finally managed to contain its Countrywide related MBS lawsuits. I am sure it is a relief to management to finally put this one behind them.
This is a big win for Bank of America and certainly removes one of the overhangs on the stock. It also shows management was right to fight these suits all along rather than settling.
There are of course other issues and lawsuits. The MBIA lawsuit in particular still has the potential to throw a wrench on getting past litigation risk. BAC however has reserved for that one and continues to build its equity cushion as more time passes before the case is settled.
All in all, Friday was a good day for BAC shareholders and management.
Disclosure: I am long BAC.