A New York judge on Friday approved most of the $8.5 billion Bank of America settlement over investor losses from mortgage-backed securities, concluding that trustee Bank of New York Mellon acted reasonably with one exception.
Critics of the settlement had argued that it represented only a fraction of the losses.
State Supreme Court Justice Barbara Kapnick wrote that BNY Mellon "did not abuse its discretion" in entering the 2011 settlement agreement and did not act in bad faith. However, she said the trustee acted unreasonably in settling loan modification claims without investigating their potential worth. She approved the settlement excluding those claims.
"The uncertainty and risk associated with litigation played a large role in the trustee's decision," Kapnick wrote. "It is also clear that the trustee placed considerable weight on the fact that the settlement was supported by 22 institutional investors, including arms of the federal government, prominent investment managers acting as fiduciaries for their clients, and institutions managing their own money."
The offers and demands exchanged in negotiating the settlement ranged from $1.5 billion from Bank of America to $16 billion by the institutional investors, Kapnick noted.
Bank of America spokesman Lawrence Grayson said Friday the company was carefully reviewing the 54-page ruling. Calls to BNY Mellon were not returned.
According to court papers, the claims arose from "a massive collapse in value" of mortgage loans in 530 New York trusts in 2007 and 2008. The claims were against trust creator Countrywide Financial Corp. and trust servicer Bank of America, which bought Countrywide in 2008.
Big insurer American International Group Inc., one of the investors in the securities, had objected to the settlement on grounds that BNY Mellon failed to make a strong enough effort to recover money for the investors.
In a statement, AIG said parts of Kapnick's ruling "are not supported by the record and ... set a dangerous precedent that could eliminate important protections for investors." New York-based AIG said the case is "very far from over" because the settlement won't take effect until several potential appeals of the ruling are resolved.
AIG said it was pleased, however, with Kapnick's decision to allow billions of dollars in investors' claims on home-loan modifications by Bank of America to go forward because in that instance Bank of New York Mellon settled the claims without sufficiently examining the issue.
Associated Press writer Marcy Gordon in Washington contributed to this report.