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Bank of America’s $8.5 Billion Settlement Will Not Be Delayed by AIG

Financial Services Blog

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March 07, 2014

Late last month, a New York state judge denied AIG’s request to delay approval of Bank of America’s $8.5 billion settlement with private investors in connection with certain mortgage-backed securities that had soured. Bank of America agreed to the settlement in June 2011 in order to resolve claims brought by institutional investors such as Black Rock, Metlife and Allianz SE’s Pimco. The investors alleged that Countrywide, acquired by Bank of America in 2008, misrepresented the quality of 1.6 million mortgages underlying 530 mortgage-secured trusts purchased by the investors prior to the U.S. housing market collapse.

On January 31, 2014, Justice Kapnick delivered a partial victory to Bank of America when she approved the settlement, except for a portion concerning modified mortgages. Certain opponents of the settlement claimed that Bank of America should be required to repurchase the modified mortgages. Kapnick found that Bank of New York Mellon, the trustee overseeing the trusts, failed to take this factor into account when agreeing to the settlement.

Shortly thereafter, Kapnick was elevated to a New York appellate court. However, before leaving the bench, she ordered a five-day delay before her order on the settlement was officially recorded.

New York State Judge Rejected AIG’s Delay Request; AIG Plans to Appeal

On February 4, 2014, AIG filed a motion asking Justice Saliann Scarpulla, the new judge assigned to the case, to delay recording the judgment. AIG alleged that the $8.5 billion settlement fell too far short of what investors lost, and that Justice Kapnick’s ruling failed to address key issues related to the settlement, including how the funds should be allocated.

Ruling from the bench, Justice Scarpulla ordered the judgment by her predecessor to be officially recorded. “It’s very straightforward,” Scarpulla told AIG’s lawyers, “Judge Kapnick issued the order. … If you don’t like it, your remedy is to appeal.”

A spokesperson for AIG said that the insurer “looks forward to pressing ahead with its appeal at the appropriate time.” In the meantime, AIG is pursuing a motion it filed on February 18, 2014 to have the matter reargued before Scarpulla, arguing that Kapnick applied the wrong legal standard and overlooked certain unresolved issues.

Kapnick’s January ruling was good news for Bank of America, which is trying to move past costly litigation stemming from the 2008 financial crisis. To date, the bank has paid out more than $55 billion to resolve litigation arising from the crisis.

The case is In re Bank of New York Mellon, New York State Supreme Court, New York County, No. 651786/2011.

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