09/01/2011 02:12 pm ET Updated Nov 01, 2011

U.S. judge pans rush in BofA $8.5 billion mortgage pact

By Jonathan Stempel

NEW YORK (Reuters) - A judge questioned why Bank of America Corp's $8.5 billion settlement with mortgage securities investors was being rushed for approval and whether the trustee that negotiated it treated investors fairly.

U.S. District Judge William Pauley set a September 21 hearing to consider requests from some investors to move the case to Manhattan federal court from a New York state court, where the trustee Bank of New York Mellon Corp wants it handled.

That timetable is slower than Bank of New York Mellon wanted and could imperil a scheduled November 17 hearing before New York State Supreme Court Justice Barbara Kapnick to consider approving the settlement.

"It strikes me there are some novel and complex issues," Pauley said at a hearing on Thursday. "The court would benefit from some fulsome briefing."

A delay could help unhappy investors learn more through additional litigation, which could lead to higher payouts.

"There's nothing special about the dates," said Owen Cyrulnik, a lawyer for 11 investment entities sharing the Walnut Place name that have challenged the accord. "None of these dates are set in stone."

The settlement covers 530 mortgage pools with $174 billion of unpaid principal balances from Countrywide Financial Corp, which was the largest U.S. mortgage lender before Charlotte, North Carolina-based Bank of America bought it in 2008.

Bank of America spokesman Lawrence Grayson did not immediately return a call seeking comment. Bank of New York Mellon spokesman Kevin Heine declined to comment. Bank of America were down 14 cents at $8.03 in afternoon trading.


The settlement was negotiated by the trustee with 22 institutional investors such as BlackRock Inc and Allianz SE's Pimco and also requires Bank of America to improve its mortgage servicing practices.

But 44 groups of investors, including banks, hedge funds, insurers and pension funds, complained they do not have enough information to know whether the accord is fair. Some say the 5 cents on the dollar payout is too low. Others suggested Bank of New York Mellon has conflicts of interest.

Among those investors seeking to intervene were Walnut Place, American International Group Inc, the regulator for Fannie Mae and Freddie Mac, the Federal Deposit Insurance Corp and Goldman Sachs Group Inc.

At Thursday's hearing, Pauley asked Matthew Ingber, a lawyer for Bank of New York Mellon, why the bank seemed to push for a quick settlement and failed to notify all of the trust beneficiaries.

"What is the extreme exigency here?" Pauley said. "You did unilaterally just fix those dates, and the state court judge went along with it ... in a vacuum."

Ingber said quick approval would assure the return of money to investors and improve Bank of America's mortgage servicing.


But Pauley questioned Bank of New York Mellon's decision to seek approval of the accord through a so-called Article 77 proceeding, which under New York law lets a trustee seek a judicial endorsement of trust-related decisions.

It is usually invoked in smaller disputes rather than large commercial cases and the judge said its "main benefit appears to limit the right of the trust beneficiaries to opt out."

That makes a resolution to an Article 77 case unlike a typical class-action settlement, which the Bank of America accord resembles in other respects.

Ingber said Bank of New York Mellon in fact was "open and transparent," adding: "I disagree with the premise that we're not giving others opportunities to be heard."

Pauley also challenged the bank's reliance on opinions from professors and mortgage specialists to help it settle the $8.5 billion payout.

"How can any expert opine on the amount a certificate holder could recover through litigation?" he said.

Prior to setting the September 21 hearing date, Pauley gave Walnut Place until September 14 to file papers. He then chided Ingber's request for a week to respond.

"Now it's not so expedited," the judge said.

He gave two days.

The cases are In re: The Bank of New York Mellon, New York State Supreme Court, New York County, No. 651786/2011; and The Bank of New York Mellon et al v. Walnut Place LLC et al, U.S. District Court, Southern District of New York, No. 11-05988.

(Reporting by Jonathan Stempel; editing by Andre Grenon)