* 2nd Circuit says mortgage lawsuit belongs in state court
* BofA may press separate argument to stay in federal court
* AIG claimed losses on $28 billion mortgage securities
By Jonathan Stempel
April 19 American International Group Inc
won a legal victory over where a mortgage fraud lawsuit
it brought against Bank of America Corp should be heard,
a two-year-old case that has largely been on hold because of the
dispute over venue.
The 2nd U.S. Circuit Court of Appeals on Friday agreed with
AIG that the case belongs in state court, not federal court as
Bank of America preferred.
It threw out an October 2011 lower court ruling that had
denied AIG's bid to move the case back to the New York state
court where it had begun two months earlier.
Writing for a three-judge appeals court panel, U.S. Circuit
Judge Pierre Leval rejected Bank of America's argument that the
case belonged in federal court under the Edge Act, a 1919 law
governing international banking.
"Removal from state to federal court was not authorized by
the statute," he wrote.
AIG had sued Bank of America for $10 billion.
It accused the bank and its Countrywide and Merrill Lynch
units of engineering a "massive" fraud by misrepresenting the
quality of more than $28 billion of residential mortgage-backed
securities in 349 trusts it bought, and lying to credit rating
agencies about the underlying loans.
Shares of Bank of America plunged 20.3 percent on the day
the lawsuit was announced. The case is part of AIG's effort to
recover from activities that it says helped trigger its near
collapse in 2008, leading to $182.3 billion of federal bailouts.
It is unclear how Friday's decision affects the part of
AIG's case relating to Countrywide, which has been moved to the
court of U.S. District Judge Mariana Pfaelzer in Los Angeles.
Bank of America spokesman Lawrence Grayson called Friday's
decision "a narrow procedural ruling." AIG spokesman Jon Diat
said the insurer was pleased with the decision.
But the venue issue may not be over, because the 2nd Circuit
said Bank of America may pursue an alternative argument to keep
the case in federal court. Venue disputes often arise when
parties expect more favorable results in particular courts.
The Edge Act was adopted to help federally chartered banks
compete more effectively in offshore banking. To help free those
banks from extra burdens from state regulators, it lets federal
courts hear lawsuits against U.S. companies over banking
transactions that are international or in a U.S. territory.
In keeping the case in federal court, U.S. District Judge
Barbara Jones in October 2011 recognized that a handful of the
underlying home loans concerned properties in Guam, the Northern
Mariana Islands, Puerto Rico and the U.S. Virgin Islands.
But AIG countered that the securities it bought were created
and sold entirely in the United States. It also said that of the
1.7 million home loans underlying the trusts, just 27 involved
property in U.S. territories.
Leval accepted AIG's argument, and called Bank of America's
broader interpretation of the admittedly ungrammatical Edge Act
statute "arbitrary and illogical."
He did not address the merits of AIG's damages claims.
Jones has left the federal bench, and U.S. District Judge
Lewis Kaplan now oversees the case in Manhattan federal court.
Pfaelzer oversees a variety of litigation over the former
Countrywide Financial Corp, which Bank of America bought in July
2008. Her approval is required for the bank's record $500
million settlement, announced on Wednesday, with investors who
claimed Countrywide misled them into buying risky mortgage debt.
The case is American International Group Inc et al v. Bank
of America Corp et al, 2nd U.S. Circuit Court of Appeals, No.