* Consummation of proposed deal could be lengthened
* Stakes high for Bank of America's potential liability
* Investor objectors win round against the banks
By Grant McCool
NEW YORK, Oct 19 A judge on Wednesday decided
to keep a proposed $8.5 billion settlement over Bank of America
Corp's mortgage-backed securities in federal court,
potentially dragging out the litigation.
The stakes are high for Bank of America, which had hoped
the agreement would resolve uncertainty over potential
liabilities tied to pools of soured loans sold to investors by
Countrywide Financial Corp, the mortgage lender it bought in
Countrywide was the largest U.S. mortgage lender before
being taken over by BofA, a disastrous purchase analysts say
has effectively cost more than $30 billion after accounting for
lawsuits and writedowns.
Any delay in resolving the case will add to uncertainty
about the bank and could result in a higher payout to the
mortgage-backed securities investors.
The proposed agreement also calls for Bank of America to
improve its mortgage servicing practices, but lawyers for a
class of homeowners argued the servicing changes called for
would not be corrective.
A number of investors objected to the proposed settlement,
which Bank of New York Mellon Corp , the trustee for the
mortgage securities, presented to a state judge in June for
approval. A hearing to consider approving the deal had been
scheduled for Nov. 17 in New York State Supreme Court.
In Wednesday's written ruling, U.S. District Judge William
Pauley in Manhattan agreed with one objector, institutional
investor Walnut Place, that the case belonged in federal
"The settlement agreement at issue here implicates core
federal interests in the integrity of nationally chartered
banks and the vitality of national securities markets,"
Pauley's order said in part. "A controversy touching on these
paramount federal interests should proceed in federal court."
HEARING SET FOR NOV. 3
The judge ordered the parties to appear in his court on
Nov. 3 to discuss management of the case.
Among others who sought to block the accord is New York
Attorney General Eric Schneiderman. He accused Bank of New York
Mellon of fraud for misleading investors about its role and
saying the accord provided benefits that put that bank in a
conflict of interest.
Danny Kanner, a spokesman for Schneiderman, had no
immediate comment on Wednesday's ruling.
In response to the ruling, Bank of America spokesman
Lawrence Grayson said, "We believe there are compelling reasons
why the agreement should receive judicial approval in the court
with appropriate jurisdiction."
Bank of New York Mellon spokesman Kevin Heine had no
immediate comment. A lawyer for Walnut Place could not
immediately be reached for comment.
In general, when complex financial litigation is removed to
federal court from state court, it slows down the process,
according to lawyers not involved in the case.
"The judge is going to want to look through the case, he's
going to want to review what was filed in the state court, see
new submissions and no doubt hear from counsel for the parties
directly," said Mark Rifkin, a lawyer with Wolf Haldenstein
Adler Freeman & Herz LLP in New York.
Last month, Pauley peppered lawyers for Bank of New York
Mellon and Walnut Place with questions in the bid by Walnut for
the case to be resolved under the Class Action Fairness Act of
2005. CAFA requires big-money class actions to be supervised by
a federal judge.
The proposed settlement was filed in state court as a
special proceeding known as Article 77 and not as a class
action. Article 77 in state court usually covers family trust
matters. The agreement covers 530 mortgage pools with $174
billion of unpaid principal balances.
Walnut Place argued in court papers that negotiations
between the trustee and investors were held in secret.
But the trustee said it had given public notice of talks
over eight or nine months with investors including BlackRock
Inc and Allianz SE's Pimco.
The cases are re: The Bank of New York Mellon, New York
State Supreme Court, New York County, No. 651786/2011; and The
Bank of New York Mellon et al v. Walnut Place LLC et al, U.S.
District Court, Southern District of New York, No. 11-05988.