By Karen Freifeld
NEW YORK Jan 31 A New York state judge on
Friday approved most of Bank of America Corp's $8.5
billion settlement with investors over toxic mortgage
securities, but left a caveat that could complicate the bank's
efforts to implement the deal.
Justice Barbara Kapnick ruled that Bank of New York Mellon
, the trustee representing investors, had acted mostly in
good faith in agreeing to the settlement. But she withheld her
approval for one part of the settlement where she said the
trustee had not acted reasonably.
A spokesman for Bank of America said the bank did not expect
that Kapnick's exclusion would hold up the accord.
But a lawyer for American International Group Inc,
which led investors that opposed the settlement, said the
insurer foresees a long legal fight ahead.
Bank of America agreed to the settlement in June 2011 to
resolve the claims of investors who had bought $174 billion of
mortgage-backed securities issued by Countrywide before the U.S.
housing crisis. The investors said Countrywide misrepresented
the quality of the underlying home mortgages, which went sour in
Countrywide, based in Calabasas, California, was the biggest
home mortgage lender in the United States until the housing
market collapsed, specializing in so-called subprime loans, most
of which it packaged into securities and resold to investors. It
was bought by Bank of America in 2008.
A group of 22 investors supported the settlement, including
institutions such as BlackRock Inc, MetLife Inc
and Allianz SE's Pacific Investment Management Co.
But investors led by AIG objected, arguing that they
were cut out of negotiations and that there was no evidence the
settlement was big enough.
In her ruling on Friday, Kapnick wrote that, at the time the
settlement was reached, it was clear Bank of New York Mellon was
concerned that Countrywide would not be able to pay a future
judgment that approached $8.5 billion, and believed it was
reasonable to lock in a one-time payment.
This was especially so, given that it was "uncertain, at
best" whether Bank of America would be held responsible for
Countrywide's liabilities, she wrote.
Kapnick found that "the trustee did not abuse its discretion
in entering into the settlement agreement and did not act in bad
faith or outside the bounds of reasonable judgment."
Kapnick made one exception in her ruling, withholding her
approval from settlement of claims relating to certain loans
that Countrywide had modified. Bank of New York Mellon should
not have settled those claims without investigating their
potential worth, she said.
It was not clear what impact the judge's exclusion would
have on the settlement.
"The issue has the prospect of adding another wrinkle in the
timing of the next steps and eventually in determining when the
cash flows get paid to bondholders," analysts at Barclays said
in a report for clients.
The loan modification question was raised by Triaxx funds,
which argued during the lengthy proceedings that Bank of New
York Mellon failed to investigate claims by investors relating
to the modified mortgages.
"We're still assessing the impact of the carve-out," John
Moon, a lawyer representing the Triaxx entities, said of
Bank of America shares closed down 1.1 percent to $16.75
Representatives of Bank of America and Bank of New York
Mellon both said they were pleased with the decision.
"We believe any outstanding issues raised in the opinion can
be addressed without undue delay," said Lawrence Grayson, a
spokesman for Bank of America.
A lawyer for AIG, Mark Zauderer, took the opposite view. He
said the insurer was pleased by the judge's exception for
modified loans but disagreed with the other aspects of the
"This case is very far from over because the settlement will
not take effect until many potential post-trial motions and
appeals are resolved," Zauderer said in a statement. He also
called the loan modification issue "critical."
Kathy Patrick, who represented the institutional investors
who supported the deal, did not return a call for comment
The settlement is part of Bank of America's efforts to put
liabilities for the financial crisis behind it. It has agreed to
pay more than $45 billion to end disputes that came from the
financial crisis, including the $8.5 billion Countrywide
Bank of New York Mellon sought judicial approval of the
settlement two-and-a-half years ago.
As the case dragged on, the number of opponents dwindled.
Among them, the attorneys general of New York and Delaware, who
intervened in the proceeding in 2011, said last May they would
no longer block the accord.
Kapnick oversaw a months-long proceeding to determine
whether to approve the settlement, which ended on Nov. 21.
Her ruling on Friday came just days before she
was to take up a new post on a New York state appeals court on
The case is In re Bank of New York Mellon, New York State
Supreme Court, New York County, No. 651786/2011.