By Karen Freifeld
NEW YORK (Reuters) - A New York state judge on Friday approved Bank of America Corp's (BAC) $8.5 billion settlement with investors in mortgage securities, which would resolve much of the bank's liability from its acquisition of Countrywide Financial Corp during the financial crisis.
Justice Barbara Kapnick ruled that Bank of New York Mellon (BK), the trustee overseeing the securities, had mostly acted reasonably and in good faith in determining that the settlement was in the best interests of the investors.
American International Group Inc (AIG), which led opposition to the settlement, plans to appeal aspects of the decision, a lawyer for the insurer said.
Bank of America agreed to the settlement in June 2011 to resolve the claims of investors who had bought $174 billion of mortgage-backed securities issued by Countrywide. The investors said Countrywide misrepresented the quality of the underlying home mortgages, which went sour in the housing crisis.
Countrywide, based in Calabasas, California, was the biggest home mortgage lender in the United States until the housing market collapsed, specializing in so-called subprime loans, most of which it packaged into securities and resold to investors. It was bought by Bank of America in 2008.
But investors led by AIG (AIG) objected, arguing that they were cut out of negotiations and that there was no evidence the settlement was adequate.
The objectors said Bank of New York Mellon was protecting its own interests in supporting the settlement, saying that it did business with Bank of America. The objectors also criticized the Bank of New York Mellon for failing to review loan files to identify defective loans in the securities.
In her ruling on Friday, Kapnick wrote that it was clear Bank of New York Mellon was concerned that Countrywide would be unable to pay a future judgment that even approached $8.5 billion, and thought it was reasonable to lock in a one-time payment.
This was especially so, given that it was "uncertain, at best" whether Bank of America would be held responsible for Countrywide's liabilities, she wrote.
Kapnick made one exception in her ruling, withholding her approval from settlement of claims relating to certain loans that had been modified. Bank of New York Mellon should not have settled claims related to mortgages that had been modified without investigating their potential worth, she said.
"This court finds that, except for the finding ... regarding the loan modification claims, the trustee did not abuse its discretion in entering into the settlement agreement and did not act in bad faith or outside the bounds of reasonable judgment," Kapnick wrote.
It was not clear what impact the judge's exclusion would have on the settlement.
"The issue has the prospect of adding another wrinkle in the timing of the next steps and eventually in determining when the cash flows get paid to bondholders," analysts at Barclays said in a report for clients.
Bank of America shares closed down 1.1 percent to $16.75 Friday.
Representatives of Bank of America and Bank of New York Mellon both said they were pleased with the approval.
"We believe any outstanding issues raised in the opinion can be addressed without undue delay," said Lawrence Grayson, a spokesman for Bank of America.
A lawyer for AIG, Mark Zauderer took the opposite view. He said the insurer was pleased by the judge's exception for modified loans but disagreed with the other aspects of the ruling.
"This case is very far from over because the settlement will not take effect until many potential post-trial motions and appeals are resolved," Zauderer said in a statement. He also called the loan modification issue "critical."
The settlement is part of Bank of America's efforts to put liabilities for the financial crisis behind it. It has agreed to pay more than $45 billion to end disputes that came from the financial crisis, including the $8.5 billion Countrywide settlement.
Bank of New York Mellon sought judicial approval of the settlement two-and-a-half years ago.
As the case dragged on, the number of opponents dwindled. Among them, the attorneys general of New York and Delaware, who intervened in the proceeding in 2011, said last May they would no longer block the accord.
Kapnick oversaw a months-long proceeding to determine whether to approve the settlement, which ended on November 21. [ID:nL2N0J5203] Her ruling on Friday came just days before she was to take up a new post on a New York state appeals court on February 3. [ID:nL2N0KR1YX]
The case is In re Bank of New York Mellon, New York State Supreme Court, New York County, No. 651786/2011.
(Reporting by Karen Freifeld; Editing by Nick Zieminski)