BofA One Step Closer to Swallowing $8.5 bln Countrywide Pill

Bank of America (BoA) came a step closer today to ending litigation that has plagued it since it bought Countrywide Mortgage in 2008.  A New York State judge approved most of an $8.5 billion settlement agreement between the bank and nearly two dozen mortgage securities investors which had itself been the subject of litigation since it was first reached over two years ago.

The original suit involved claims that over 500 securities backed by mortgages originated by Countrywide before it was acquired by BoA were not of the quality promised in their prospectuses.  Investors in the securities included Blackrock, Inc., Pacific Investment Management Company (PIMCO) and American International Group (AIG). 

Bank of New York Mellon Corp was trustee for the investors and filed a petition with the courts in June 2011 seeking approval of the settlement.  However a dozen investors led by AIG objected on the basis that the settlement resolved the claims for only pennies on the dollar and that the trustee did not push aggressively enough for more money from BoA and had shirked its duties in a process; making claims of conflicts of interest.  The AIG group maintained that investor losses from the securities totaled more than $100 billion.

New York State Supreme Court Justice Barbara Kapnick presided over a nine week hearing regarding the settlement after Bank of New York petitioned her to approve it under New York Article 77 which allows trustees to seek such approval for their actions.  The bank said the settlement would save investors years of uncertain and costly litigation.

In approving the agreement the judge said 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." However, she qualified her ruling by allowing some loan modification claims by investors to go forward and said in those instances, the trustee settled the claims "without investigating their potential worth or strength."

In a statement issued after the ruling AIG seized on the judges exceptions, saying in part, "We are pleased that the court refused to approve the proposed settlement in its entirety and found that the trustee acted unreasonably in agreeing to compromise billions of dollars of investor claims. We respectfully disagree with the other aspects of the court's ruling, which are not supported by the record and which set a dangerous precedent that could eliminate important protections for investors. This case is very far from over because the settlement will not take effect until a variety of potential post-trial motions and appeals are resolved."

Kapnick delayed the entry of the ruling until Feb. 7.