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* Chicago pension fund said banks failed to protect investors
* Trusts backed by residential mortgage loans
By Jonathan Stempel
NEW YORK, Dec 7 (Reuters) - Bank of America Corp and U.S. Bancorp can be sued over a pension fund's allegations they failed to protect investors while acting as trustees of mortgage-backed securities for Washington Mutual Inc, a federal judge ruled on Friday.
U.S. District Judge Katherine Forrest of Manhattan nonetheless narrowed the lawsuit brought in April by a Chicago pension fund, saying it could sue only over some of the 41 trusts in the case.
The Policemen's Annuity and Benefit Fund of the City of Chicago accused Bank of America and successor trustee, U.S. Bancorp, of causing millions of dollars of losses. It said they failed to take possession of loan files or ensure they were complete, or require Washington Mutual to fix or buy back defective loans.
Bank of America spokesman Lawrence Grayson declined to comment. U.S. Bancorp spokeswoman Teri Charest did not immediately respond to a request for comment.
Max Schwartz, a lawyer for the pension fund, did not immediately respond to a request for comment.
The lawsuit was filed eight days after a different Manhattan federal judge, William Pauley, let pension funds pursue a similar case against Bank of New York Mellon Corp.
That was considered the first ruling to allow mortgage-backed securities investors to challenge a trustee under the 1939 federal Trust Indenture Act.
In her 44-page decision, Forrest said the Chicago policemen's fund had standing to sue the Washington Mutual trustees over the five trusts in which it bought certificates.
She also said it could sue on behalf of purchasers of certificates it did not buy, but which were backed or cross-collateralized by loan groups that backed its own certificates.
She cited a Sept. 6 decision by the 2nd U.S. Circuit Court of Appeals in New York, in a case against Goldman Sachs Group Inc, that let a pension fund sue on behalf of investors in certificates it did not own because the underlying concerns were the same.
"To the extent that any of the trustee's alleged breaches caused diminution in the value of plaintiff's certificates (based on mortgagors' defaults in principal or interest payments), investors holding tranches backed by the same loan group as plaintiff's tranches have the 'same set of concerns' as plaintiff in redressing those purported breaches," Forrest wrote.
Goldman has appealed the 2nd Circuit decision to the U.S. Supreme Court, saying it could expose Wall Street to "tens of billions of dollars of potential liability" through class-action litigation. The Supreme Court has not decided whether to hear that appeal.
Washington Mutual, once the largest U.S. savings and loan, failed on Sept. 25, 2008. JPMorgan Chase & Co bought most of its operations, in a transaction arranged by the FDIC.
Bank of America is based in Charlotte, North Carolina, and U.S. Bancorp is based in Minneapolis.
The case is Policemen's Annuity and Benefit Fund of the City of Chicago v. Bank of America NA et al, U.S. District Court, Southern District of New York, No. 12-02865.