By Karen Freifeld
NEW YORK Feb 18 American International Group
is holding "hostage" an $8.5 billion deal to compensate
investors who bought Bank of America Corp mortgage
securities, supporters of the deal said in court filings ahead
of a hearing on Wednesday.
The supporters urged the judge overseeing the deal to reject
AIG's efforts to delay its approval, according to documents
submitted to the court late on Friday.
Bank of America agreed to the settlement in June 2011 to
resolve claims by investors who had bought $174 billion of
mortgage-backed securities issued by Countrywide Financial
before the U.S. housing crisis. The investors said Countrywide,
acquired by Bank of America in 2008, misrepresented the quality
of the underlying home mortgages, which went sour in the crisis.
AIG, one of the investors in the mortgage securities,
objected to the deal, saying there was no evidence it provided
adequate compensation for losses.
Justice Barbara Kapnick in New York state court approved the
settlement on Jan. 31, but four days later AIG asked a new judge
overseeing the case to delay the decision, saying Kapnick had
left issues unresolved.
The new judge, Justice Saliann Scarpulla, has called a
hearing Wednesday to hear arguments on AIG's request.
"The court should not permit AIG to nullify the judgment and
hold the entire settlement hostage indefinitely," supporters of
the deal said in their court filing. Kapnick overruled AIG on
the unresolved issues, they said.
AIG is seeking to delay the settlement as leverage against
Bank of America in another case, the supporters said. In that
case, AIG sued Bank of America over $10 billion of securities
fraud claims in August 2011, the same day it intervened to
object to the $8.5 billion settlement.
In a reply filed with the court on Tuesday, AIG's lawyers
said Kapnick had "refused to give any weight" to the idea that
AIG was objecting "merely" as a way to benefit its securities
fraud claim. Scarpulla should delay approval of the settlement
until investors like AIG can find out how the money will be
allocated, the reply said.
CONSIDERING WHETHER TO GRANT AIG'S REQUEST
Scarpulla must decide whether to grant AIG's request to
further delay Kapnick's judgment or enter the judgment into the
court record and leave AIG to appeal if it chooses.
If Scarpulla grants AIG's request, AIG should be required to
post $1 million a day that the delay is costing other investors,
supporters of the deal said.
Twenty-two institutional investors, including BlackRock
Inc, Allianz SE's Pimco, and Metlife Inc,
, and Bank of New York Mellon, the trustee for the
securities, agreed to the settlement with Bank of America.
In her ruling on Jan. 31, Kapnick said Bank of New York
Mellon was concerned that Countrywide would be unable to pay a
future judgment that even approached $8.5 billion, and thought
it was reasonable to lock in a one-time payment.
Kapnick made one exception in her ruling, withholding her
approval from settlement of claims relating to certain loans
that had been modified. Bank of New York Mellon should not have
settled claims related to mortgages that had been modified
without investigating their potential worth, she said.
In its latest court filing, Bank of New York Mellon said it
would do nothing about those claims until the settlement is
"There is no decision to be made, by anyone, about any
action to take with respect to these claims until it is
determined whether the settlement agreement is finally approved
and appeals are exhausted," the bank and investor group said.
In its reply Tuesday, AIG disagreed, saying the court should
withhold final judgment until the parties resolve the claims
related to loan modifications and determine how the settlement
will be allocated.
Separately on Tuesday, AIG asked a state appeals court for
more time to submit briefs in its appeal of Kapnick's decision
to hear the case without a jury. The appeals court is not
expected to rule on that request until next month at the
The case is In re: The Bank of New York Mellon, New York
State Supreme Court, New York County, No. 651786/2011.