Bank of America Monday won a key court ruling in its attempt to put behind it legal claims arising from its purchase of Countrywide, the mortgage giant that investors say misrepresented the quality of bad loans that were pooled and securitized.
A three-judge federal appeals panel said a New York state court can weigh a controversial $8.5 billion settlement with Bank of America over mortgage-backed securities, rather than a federal court favored by a group of investors that bought into the pool of loans.
In seeking approval of the settlement in a New York court, the financial giants are relying on a state law that allows a trustee to negotiate settlements if it acted appropriately, even if some investors reject the deal.
Bank of America was attempting to settle accusations from Bank of New York Mellon -- the trustee of 530 trusts created from 2004 to 2008 containing Countrywide mortgages -- that Countrywide falsely claimed the mortgages met credit guidelines and other loan standards.
Bank of America and Bank of New York brokered the $8.5 billion settlement with 22 major institutional investors like BlackRock, MetLife and Goldman Sachs signing off. The deal to resolve claims from the trust was placed before a state judge in June for approval.
A second group of investors, led by a company called Walnut Place, said they were frozen out of the negotiations and charged the settlement was too small considering the damage subprime mortgages caused. Walnut Place also alleged the settlement approval proceedings were initiated without notifying all of the trusts' investors.
New York Attorney General Eric Schneiderman had voiced similar concerns and sought to derail approval of the settlement in state court, as well.
These investors wanted a federal court to weigh in on the settlement, citing a law that allows a party to move "mass actions" to federal jurisdiction. An attorney representing Walnut Place did not immediately return a request for comment.
A lower court federal judge backed the Walnut Place investors, but the Second Circuit Court of Appeals Monday said the law carved out an exception for class actions relating to securities.
"We believe the trustee acted reasonably in entering into the settlement agreement and we look forward to completing the judicial proceedings to approve that decision," said Lawrence Grayson, a Bank of America spokesman.