Ruling Clears Way for $7 Billion A.I.G. Suit Against Bank of America

The ruling, issued late Monday, is a setback for Bank of America, which has been trying to rid itself of numerous legal claims from investors who bought mortgage securities issued by the bank’s Countrywide Financial and Merrill Lynch units. In the California case, in which A.I.G., the giant insurance company, sued Bank of America over fraudulent mortgage securities, the bank had argued that A.I.G. had no standing to sue because it had transferred that right when it sold the instruments to the Federal Reserve Bank of New York in the fall of 2008.  

Mariana R. Pfaelzer, a federal judge in the central district of California, disagreed. She sided with A.I.G. in a ruling that also raised questions about the role of the Federal Reserve Bank of New York in the wake of its efforts to contain the huge damage from the financial crisis that erupted when Lehman Brothers was forced into bankruptcy in September 2008.

A.I.G. said in a statement, “As a result of the court’s decision, A.I.G. is able to pursue its full damages claim against Bank of America.”

Asked to comment on the judge’s decision, Lawrence Grayson, a spokesman for Bank of America, said the court ruling allowed it to “pursue additional discovery before the matter is fully decided.” He added that the bank believed it has strong defenses to A.I.G.’s accusations.

New York Fed officials, testifying earlier on behalf of Bank of America, maintained that they had intended to receive the rights to bring fraud claims related to the mortgage securities purchased by Maiden Lane II, the investment vehicle set up to complete the A.I.G. bailout.

But in depositions in March, Fed officials could produce no evidence that the fraud claims had been specifically transferred under the deal, as required under New York law. Judge Pfaelzer wrote: “To the extent that the Federal Reserve Bank of New York intended for Maiden Lane II to acquire these claims, its intentions were not expressed to A.I.G.”

The Fed’s view on who held the legal claims for fraudulent mortgages in Maiden Lane II has shifted over time. In October 2011, Thomas C. Baxter Jr., the general counsel at the New York Fed, said in a letter to A.I.G. that he and his colleagues “agree that A.I.G. has the right to seek damages” under securities laws for the instruments it sold to Maiden Lane II.

But after A.I.G. sued Bank of America, that opinion changed. Last December, James M. Mahoney, a vice president at the New York Fed who said he had principal responsibility for the Maiden Lane II transaction, testified that the New York Fed intended to receive litigation claims associated with the troubled mortgage securities. Bank of America filed Mr. Mahoney’s testimony in support of its position that A.I.G. had no standing to sue.

Yet in a deposition three months later, Mr. Mahoney was asked if he could recall discussing the assignment of fraud claims from A.I.G. to the Fed. He answered: “No, I do not.”

The New York Fed never filed any claims against banks relating to the A.I.G. rescue that might have benefited taxpayers. New York Fed officials agreed to testify on behalf of Bank of America as part of a confidential settlement with the bank that came to light in February. Under the terms of the deal, the New York Fed released Bank of America from all fraud claims on mortgage securities the Fed had bought.

A spokesman for the New York Fed declined to comment on the ruling. Previously, the New York Fed said it had agreed to testify in the case because doing so helped it obtain the best possible settlement for Maiden Lane II.

While Judge Pfaelzer’s ruling added to the legal claims faced by Bank of America, it emerged after the bank successfully disposed of several others. On Monday, in the latest such effort, the bank agreed to pay $1.7 billion to settle a long-running dispute with MBIA, a mortgage bond insurer.

The bank could erase another claim on May 30 if a judge in New York State court allows an $8.5 billion settlement struck between Countrywide and a group of big investors in 2011 to be completed. Investors objecting to the deal say the amount of the settlement is insufficient.

The California judge’s finding that A.I.G. has standing to sue Bank of America may also be bad news for other banks that sold troubled mortgage securities to the insurer. A.I.G. has not yet sued other institutions related to the securities that went into Maiden Lane II; at least $11 billion in losses involve other banks.

“We are eager to start discovery,” said Michael Carlinsky, a partner at Quinn Emanuel Urquhart Sullivan who led the arguments for A.I.G., “and get the case before a jury.”

Article source: http://www.nytimes.com/2013/05/08/business/ruling-clears-way-for-aig-suit-against-bank-of-america.html?partner=rss&emc=rss