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 Justice Barbara Kapnick ruled that Bank of New York Mellon <BK.N>,
the trustee representing investors, had acted mostly in good faith
in agreeing to the settlement. But she withheld her approval for one
part of the settlement where she said the trustee had not acted
reasonably.
A spokesman for Bank of America said the bank did not expect that
Kapnick's exclusion would hold up the accord.
But a lawyer for American International Group Inc <AIG.N>, which led
investors that opposed the settlement, said the insurer foresees a
long legal fight ahead.
Bank of America agreed to the settlement in June 2011 to resolve the
claims of investors who had bought $174 billion of mortgage-backed
securities issued by Countrywide before the U.S. housing crisis. The
investors said Countrywide misrepresented the quality of the
underlying home mortgages, which went sour in the crisis.
Countrywide, based in Calabasas, California, was the biggest home
mortgage lender in the United States until the housing market
collapsed, specializing in so-called subprime loans, most of which
it packaged into securities and resold to investors. It was bought
by Bank of America in 2008.
A group of 22 investors supported the settlement, including
institutions such as BlackRock Inc <BLK.N>, MetLife Inc <MET.N> and
Allianz SE's <ALVG.DE> Pacific Investment Management Co.
But investors led by AIG <AIG.N> objected, arguing that they were
cut out of negotiations and that there was no evidence the
settlement was big enough.
In her ruling on Friday, Kapnick wrote that, at the time the
settlement was reached, it was clear Bank of New York Mellon was
concerned that Countrywide would not be able to pay a future
judgment that approached $8.5 billion, and believed it was
reasonable to lock in a one-time payment.
This was especially so, given that it was "uncertain, at best"
whether Bank of America would be held responsible for Countrywide's
liabilities, she wrote.
Kapnick found that "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."
Kapnick made one exception in her ruling, withholding her approval
from settlement of claims relating to certain loans that Countrywide
had modified. Bank of New York Mellon should not have settled those
claims without investigating their potential worth, she said.
It was not clear what impact the judge's exclusion would have on the
settlement.
"The issue has the prospect of adding another wrinkle in the timing
of the next steps and eventually in determining when the cash flows
get paid to bondholders," analysts at Barclays said in a report for
clients.
The loan modification question was raised by Triaxx funds, which
argued during the lengthy proceedings that Bank of New York Mellon
failed to investigate claims by investors relating to the modified
mortgages.
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"We're still assessing the impact of the carve-out," John Moon, a
lawyer representing the Triaxx entities, said of Kapnick's
exclusion.
Bank of America shares closed down 1.1 percent to $16.75 Friday.
Representatives of Bank of America and Bank of New York Mellon both
said they were pleased with the decision.
"We believe any outstanding issues raised in the opinion can be
addressed without undue delay," said Lawrence Grayson, a spokesman
for Bank of America.
A lawyer for AIG, Mark Zauderer, took the opposite view. He said the
insurer was pleased by the judge's exception for modified loans but
disagreed with the other aspects of the ruling.
"This case is very far from over because the settlement will not
take effect until many potential post-trial motions and appeals are
resolved," Zauderer said in a statement. He also called the loan
modification issue "critical."
Kathy Patrick, who represented the institutional investors who
supported the deal, did not return a call for comment
The settlement is part of Bank of America's efforts to put
liabilities for the financial crisis behind it. It has agreed to pay
more than $45 billion to end disputes that came from the financial
crisis, including the $8.5 billion Countrywide settlement.
Bank of New York Mellon sought judicial approval of the settlement
two-and-a-half years ago.
As the case dragged on, the number of opponents dwindled. Among
them, the attorneys general of New York and Delaware, who intervened
in the proceeding in 2011, said last May they would no longer block
the accord.
Kapnick oversaw a months-long proceeding to determine whether to
approve the settlement, which ended on November 21. [ID:nL2N0J5203]
Her ruling on Friday came just days before she was to take up a new
post on a New York state appeals court on February 3.
[ID:nL2N0KR1YX]
The case is In re Bank of New York Mellon, New York State Supreme
Court, New York County, No. 651786/2011.
(Reporting by Karen Freifeld; editing by
Eddie Evans and Ken Wills)
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