March 5, 2015 / 5:23 PM / 2 years ago

BofA's $8.5 billion mortgage bond settlement wins approval

A Bank Of America sign is pictured in the Manhattan borough of New York August 21, 2014.Carlo Allegri

NEW YORK (Reuters) - A New York state appeals court on Thursday approved Bank of America Corp's $8.5 billion settlement with mortgage securities investors in its entirety.

The decision by the Appellate Division in Manhattan likely resolved one of the second-largest U.S. bank's last and largest legal liabilities related to the financial crisis.

Bank of America had agreed to the 2011 settlement with 22 institutional investors including BlackRock Inc, MetLife Inc and Allianz SE's Pacific Investment Management Co to resolve claims over $174 billion of mortgage securities issued by the former Countrywide Financial Corp.

Many of these securities went into default after Bank of America bought Countrywide in 2008, leading to huge losses.

But some investors claimed the settlement shortchanged them. They said Bank of New York Mellon Corp, which negotiated the accord as trustee for 530 trusts involved in the case, did not work hard enough to recover more money.

In Thursday's decision, Justice David Saxe wrote for a five-judge panel that Bank of New York Mellon did not abuse its discretion in arranging the settlement.

The court also said Barbara Kapnick, a state judge who approved most of the accord in January 2014, erred in excluding claims by investors regarding loan modifications on the ground that the trustee didn't properly investigate their strength.

Saxe said Kapnick imposed too tough a standard on Bank of New York Mellon, "one that allows a court to micromanage and second guess the reasoned, and reasonable, decisions of a trustee.

"We therefore find that the trustee did not abuse its discretion in deciding to release the claims based on the failure to repurchase the modified mortgages, and we approve the settlement in its entirety," Saxe wrote.

The Retirement Board of the Policemen's Annuity and Benefit Fund of the City of Chicago led the appeal on behalf of objecting investors.

American International Group Inc had previously objected to the accord, but the insurer settled with Bank of America last July.

A lawyer for the objecting investors did not immediately respond to requests for comment. Bank of America spokesman Lawrence Grayson declined to comment. Bank of New York Mellon was not immediately available for comment.

The $8.5 billion accord is separate from Bank of America's $16.65 billion mortgage settlement last August with federal and state authorities.

The case is In re: Bank of New York Mellon et al, New York State Appellate Division, 1st Department, No. 13527.

Reporting by Karen Freifeld and Jonathan Stempel; Editing by Lisa Von Ahn and Richard Chang

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