* Bank of NY Mellon was trustee for Countrywide trusts
* Trusts contained residential mortgage loans
* Decision relates to $8.5 billion BofA/Countrywide pact
* Plaintiffs may pursue claims on trusts
(Adds comment from Bank of NY Mellon)
By Jonathan Stempel
April 3 A federal judge rejected Bank of New
York Mellon Corp's bid to dismiss a lawsuit by investors
over its role as trustee for mortgage-backed securities that led
to an $8.5 billion settlement by Bank of America Corp.
U.S. District Judge William Pauley in Manhattan said on
Tuesday that bondholders who invested in 26 trusts alleged to
have contained risky mortgage loans from the former Countrywide
Financial Corp may pursue claims against Bank of New York
Mellon. He dismissed a variety of other claims.
The decision relates to a lawsuit challenging Bank of New
York Mellon's performance of its day-to-day obligations as a
trustee, which includes ensuring that underlying home loans are
properly documented and that bondholders' rights are protected.
Beth Kaswan, a lawyer for four pension funds in Chicago,
Michigan and Pennsylvania that brought the case, said the
decision leaves intact claims over securities backed by more
than $30 billion of loans, and which have suffered more than $9
billion of losses or delinquencies.
She said she believes the decision is the first to let
investors in mortgage-backed securities pursue claims against a
trustee under the 1939 federal Trust Indenture Act.
"The decision is a watershed," Kaswan said.
Kevin Heine, a spokesman for Bank of New York Mellon, said
the company was pleased that the court narrowed the issues to be
considered and removed the vast majority of trusts from the
suit. "We respectfully disagree with ruling's application of the
Trust Indenture Act to non-indenture securitizations and will
continue to defend against those claims," he said.
Countrywide had been the largest U.S. mortgage lender before
being acquired by Charlotte, North Carolina-based Bank of
America in July 2008.
The lawsuit was filed six weeks after Bank of America
reached the $8.5 billion settlement in June, which was to
resolve claims by investors in 530 mortgage securitization
trusts that lost billions of dollars when the housing market
Some investors in that case faulted Bank of New York Mellon,
which negotiated the accord, for accepting a low payout. The
settlement was intended to resolve many of Bank of America's
liabilities from the Countrywide purchase.
In the current case, the pension funds accused Bank of New
York Mellon of negligence and breach of fiduciary duty for doing
nothing to remedy Countrywide's inadequate servicing of home
loans contained in the trusts.
The bondholders said Bank of New York Mellon failed to take
possession of loan files, including the original mortgage notes,
or require Countrywide to fix or buy back defective loans.
Such failures "created considerable uncertainty" and should
make the bank responsible for bondholder losses, regardless of
the fairness of the $8.5 billion settlement, the complaint said.
Pauley said the bondholders could pursue claims that Bank of
New York Mellon did not properly notify them that Countrywide
had defaulted on some obligations, whether as a servicer or as a
The judge nonetheless said the bondholders could sue only on
the basis of the 26 trusts in which they invested, not all 530
trusts covered by the $8.5 billion settlement.
On Feb. 27, Bank of America won a victory when the 2nd U.S.
Circuit Court of Appeals ruled that the $8.5 billion settlement
should be reviewed in a New York State court.
That ruling reversed Pauley's October decision to move the
case to federal court. It meant the settlement's fairness will
be reviewed under a state law that gives Bank of New York Mellon
wide discretion to negotiate with bondholders.
The case is Retirement Board of the Policemen's Annuity and
Benefit Fund of the City of Chicago et al v. Bank of New York
Mellon, U.S. District Court, Southern District of New York, No.
(Reporting By Jonathan Stempel in New York; Editing by Leslie