BofA $8.5 Billion Mortgage Settlement Delay Bid Rejected

Feb 19, 2014 3:08 pm ET

(Updates with excerpt from hearing in third paragraph.)

Feb. 19 (Bloomberg) -- Bank of America Corp.’s $8.5 billion settlement with mortgage-bond investors won’t be delayed after American International Group Inc. and other objectors asked for a hearing to address loan modifications excluded from the accord, a state judge ruled.

New York State Supreme Court Justice Barbara Kapnick in Manhattan on Jan. 31 approved most of the bank’s 2011 deal to end claims by investors in more than 500 mortgage-security trusts that the loans backing the bonds didn’t meet promised quality. Kapnick refused to include claims Bank of America was required to repurchase modified loans, saying the trustee, Bank of New York Mellon Corp., failed to properly evaluate them.

The settlement is part of Bank of America’s push to resolve liabilities tied to faulty mortgages that have cost it at least $50 billion since the financial crisis, most inherited with its 2008 purchase of Countrywide Financial Corp. Pools of home loans securitized into bonds were a central part of the housing bubble that helped send the U.S. into the biggest recession since the 1930s. The housing market collapsed and the crisis swept up lenders and investment banks as the market for the securities evaporated.

Justice Saliann Scarpulla, who took over the Bank of America case last month when Kapnick moved to an appeals court, today denied a motion by the objectors to delay entry of the judgment.

Initial Stay

Scarpulla said Kapnick told her an initial five-day stay of the ruling was simply a convenience to attorneys who are scattered throughout the country.

“She had no intention of leaving anything open,” Scarpulla said today. The parties will return to court in the future for a hearing on a request from the objectors to reargue their case, vacate the judgment and proceed to trial.

Scarpulla on Feb. 5 agreed to delay entry of the judgment by two weeks after the objectors argued that the modified-loan claims are a “significant piece” of the settlement and that the ruling left open questions as to how much of the settlement funds will go to the trusts, which trusts are covered by the accord and how funds will be divided.

Move On

During a hearing in Manhattan today, attorneys for the objectors urged Scarpulla to place the ruling on hold, saying that it may lead to additional lawsuits over the claims on the modified loans.

“If it’s not kept under one tent with 530 trusts, there’s going to be litigation all over,” said Mark Zauderer, an attorney with Flemming Zulack Williamson Zauderer LLP in New York representing the objectors.

Matthew Ingber, an attorney representing the trustee, told Scarpulla that the judgment needs to be entered in order for the appeals process to begin. 

“Once the judgment is entered, the world is not going to come to an end,” Ingber said. “We think it’s time to move on. We shouldn’t stay under this tent.”

Kathy Patrick, a lawyer representing BlackRock Inc., Pacific Investment Management Co. and the other institutional investors who negotiated the pact, told Scarpulla that the ruling on modified-loan claims doesn’t mean that the settlement is unenforceble.

“They don’t get to remake the settlement agreement because they’re unhappy with part of Justice Kapnick’s decision,” Patrick said.

Complicated Case

Scarpulla declined today to further delay the settlement, saying that the objectors can proceed with appeals if they’re unhappy with Kapnick’s ruling.

“It’s a complicated case, I agree with you,” Scarpulla said. “But it’s not for me to stay.”

AIG said in a statement it was pleased that the court intends to address its motion for reargument and “looks forward to pressing ahead with its appeal at the appropriate time.” Lawrence Grayson, a spokesman for Bank of America, declined to comment on today’s decision.

Bank of New York, as trustee for more than 500 residential mortgage-securitization trusts, filed a petition in June 2011 seeking approval of the settlement. AIG and other objectors asked the court to reject the deal, which it said resolves claims for “pennies on the dollar” while investor losses totaled more than $100 billion.

Bad Faith

While Kapnick found that the trustee didn’t abuse its discretion or act in bad faith in reaching the settlement, she allowed the claims on modified loans to continue, saying that the trustee failed to evaluate or investigate them.

“We are pleased that the court will move forward and enter the judgment which overwhelmingly vindicated the trustee’s actions in this case,” Kevin Heine, a spokesman for Bank of New York Mellon, said in a phone interview.

Objectors to the settlement included a group of funds known as the Triaxx entities. They argued that pooling and servicing agreements for most of the trusts required Countrywide to buy back modified loans, according to Kapnick’s ruling. Triaxx funds lawyers argued that the trustee failed to investigate about $31 billion in modified mortgage repurchase claims.

The case is In the matter of the application of the Bank of New York Mellon, 651786-2011, New York State Supreme Court, New York County.

--Editors: Mary Romano, Michael Hytha