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Judge approves $8.5 billion Bank of America mortgage settlement

A New York State judge Friday approved an $8.5 billion agreement by Bank of America to settle most of the claims by nearly two dozen mortgage securities investors.

In a 53-page decision, Justice Barbara R. Kapnick of State Supreme Court in Manhattan ruled that the 2011 settlement was reached in good faith.

The settlement had been challenged by the American International Group, an investor in the mortgage securities, which contended that the trustee overseeing the bonds did not push aggressively enough for more money from Bank of America.

Lawyers for AIG argued that the settlement shortchanged investors and accused the trustee, Bank of New York Mellon, of shirking its duties in a process fraught with conflicts of interest.

“The trustee did not abuse its discretion in entering into the settlement agreement,” the judge wrote, “and did not act in bad faith or outside the bounds of reasonable judgment.”

Kapnick took one exception. She said claims by investors regarding loan modifications could stand because the trustee, in this instance, had settled the claims “without investigating their potential worth or strength.”

The ruling could be a significant step in Bank of America’s protracted legal battles related to subprime lender Countrywide Financial, which the bank acquired in the summer of 2008. As part of the settlement, Bank of America agreed to make servicing improvements to the Countrywide loans in the 530 mortgage-backed securities at issue in the case.

The case also sheds light on how active a role a bond trustee plays in protecting the rights of bondholders when their investments drop in value. The ruling could serve as a precedent for other mortgage securities cases still winding their way through the courts five years after the financial crisis.

“We are pleased that the court refused to approve the proposed settlement in its entirety and found that the trustee acted unreasonably in agreeing to compromise billions of dollars of investor claims,” AIG said in a statement.

“We respectfully disagree with the other aspects of the court’s ruling, which are not supported by the record and which set a dangerous precedent that could eliminate important protections for investors. This case is very far from over because the settlement will not take effect until a variety of potential post-trial motions and appeals are resolved.”