More Than 2 Years Later, Court Finally Signs Off On $8.5 Billion Settlement… Sort Of

In June 2011, Bank of America reached an $8.5 billion settlement deal with 22 groups of investors who had been misled into sinking their money into securities that they didn’t know were backed by worthless home mortgages. Today, more than two-and-a-half years later, it appears that this matter may be nearing an end, but maybe not.

Immediately after the settlement was announced, some investors, including AIG, challenged the deal, alleging that $8.5 billion is only a “small fraction of the potential liability that [BofA] would have faced in litigation,” and that a number of the other investor groups involved in the settlement either do a significant amount of business with BofA or were part-owned by the bank. Thus, contended the rogue investors, these groups had an interest in keeping the damage to BofA to a minimum.

In total, the 22 investor groups held $105 billion worth of disputed securities.

The investors claimed that the trustee in charge of the securities involved in this dispute, Bank of New York Mellon, failed in its fiduciary duty to the investors, and that it was remiss in investigating $31 billion worth of loan modification claims brought by the investors.

On the first allegation, a New York State Supreme Court judge ruled today that BoNY Mellon “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.”

However, regarding BoNY Mellon’s investigation into the loan mods, the court found that the trustee “acted ‘unreasonably or beyond the bound of unreasonable judgment’ by failing to investigate claims over loan modifications.”

This unresolved issue leaves the settlement in a spot where discontent investor groups can continue to challenge the deal.

A rep for AIG tells the Wall Street Journal that “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.”

Court approves Bank of America’s $8.5 bln mortgage settlement [Reuters]

Judge Approves $8.5 Billion Pact Between Bank of America, Investors [WSJ.com]