Bloomberg News

BofA’s Mortgage-Bond Accord Kept in Federal Court for Review

October 20, 2011

Oct. 20 (Bloomberg) -- Bank of America Corp.’s proposed $8.5 billion settlement with mortgage-bond investors must be considered in federal court and not in New York state court where it was first filed, a U.S. judge said.

“The settlement agreement at issue here implicates core federal interests in the integrity of nationally chartered banks and the vitality of the national securities markets,” U.S. District Judge William Pauley in Manhattan said in a decision filed yesterday. “A controversy touching on these paramount federal interests should proceed in federal court.”

The proposed agreement would settle claims from investors in Countrywide Financial Corp. mortgage bonds and is a move by Charlotte, North Carolina-based Bank of America to resolve liabilities tied to its 2008 purchase of the home lender. The deal was reached with an institutional investor group that includes BlackRock Inc. and Pacific Investment Management Co. and would apply to 530 mortgage-securitization trusts.

Bank of New York Mellon Corp., the trustee for the mortgage-bond trusts, filed the settlement in state court and planned to seek approval at a November hearing. Under the state proceeding, approval would bind investors outside the group that negotiated the agreement.

‘Garden Variety’

Bank of New York filed the case as an Article 77 proceeding, which Pauley said has been used in the past for “garden variety matters” of trust administration. Bank of New York is seeking “to dispose of billions of dollars of toxic mortgage claims through an arcane summary procedure in state court,” he wrote.

Kevin Heine, a Bank of New York spokesman, declined to comment on the ruling. The bank had asked Pauley to return the case to state court after it had been moved to federal court. Kathy Patrick, a lawyer for the institutional investor group that negotiated the agreement, didn’t respond to an e-mail seeking comment on it yesterday.

The proposed settlement agreement has been criticized by some investors in the bonds, including American International Group Inc., which said in a court filing that Bank of America is “drastically underpaying on its liability.” Other investors have filed objections to the agreement, saying they need more information to evaluate it.

‘Serious Concerns’

“We believe there are compelling reasons why the agreement should receive judicial approval in the court with appropriate jurisdiction,” Bank of America spokesman Lawrence Grayson said in an e-mailed statement when asked to comment on the ruling.

One investor group, Walnut Place LLC and related entities, moved the case to federal court in August. They said in a court filing that they have “serious concerns about the adequacy of the settlement and conflicts of interests of the parties that negotiated it.” Investor claims “are worth many times” more than $8.5 billion, they said.

Owen Cyrulnik, a lawyer for the Walnut Place entities, declined to comment after a Sept. 21 court hearing about why they wanted the case in federal court. In court papers, they said Bank of New York filed the Article 77 proceeding, to “cherry-pick” the benefits of class-action settlements and “cast aside the aspects that it finds inconvenient,” mainly the right of investors to opt out.

David J. Grais, a lawyer for Walnut Place, declined to comment.

The case is Bank of New York Mellon v. Walnut Place LLC, 11-cv-5988, U.S. District Court, Southern District of New York (Manhattan).

--Editors: Andrew Dunn, Mary Romano

To contact the reporters on this story: David McLaughlin in New York at dmclaughlin9@bloomberg.net; Bob Van Voris in New York federal court at rvanvoris@bloomberg.net.

To contact the editor responsible for this story: John Pickering at jpickering@bloomberg.net; Michael Hytha at mhytha@bloomberg.net.


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