Bank of America

Federal Court Dismisses United States Action Against Countrywide In Part

On May 8, Judge Jed Rakoff of the United States District Court for the Southern District of New York dismissed claims by the United States for damages and civil penalties under the False Claims Act against Countrywide and Bank of America.  The court held that the government could proceed with its claims for violations of the Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA) of 1989.  FIRREA permits the government to recover civil penalties for fraudulent activities that “affect” federally insured financial institutions.  The government alleged that Countrywide’s mortgage origination business had defrauded Fannie Mae and Freddie Mac.  The court noted it would explain its reasoning at a later date.  OrderAmended Complaint.

District Court Denies Countrywide’s Motion to Dismiss AIG Suit

On May 6, Judge Mariana Pfaelzer of the United States District Court for the Central District of California allowed American International Group, Inc. (AIG) to proceed with several of its claims against Bank of America and related entities arising from AIG’s purchase of Countrywide-issued RMBS.  The court held that AIG has standing to bring suit, rejecting the argument that AIG had assigned its claims to the Federal Reserve Bank of New York.  Among other causes of action, the court upheld certain claims for fraudulent inducement on the grounds that AIG adequately alleged misstatements regarding loan-to-value ratios, compliance with underwriting guidelines, appraisal values and credit ratings, but dismissed fraud claims as to borrower-provided owner-occupancy data.  The court also dismissed AIG’s claims based on alleged oral misrepresentations for failure to specify the speakers, and dismissed AIG’s fraud claims against two underwriters for failure to allege awareness of any misconduct at Countrywide.  Order.

District Court Denies Banks’ Motions to Dismiss Litigation Concerning Role of MBS Trustees

On May 6, Judge Katherine Forrest of the United States District Court for the Southern District of New York denied Bank of America and U.S. Bank’s motions to dismiss an action relating to their roles as trustees of Washington Mutual mortgage-backed securities.  Plaintiffs, including the Policemen’s Annuity and Benefit Fund of Chicago and other entities, claimed the trustees failed to notify certificate-holders of breaches of the Pooling and Servicing Agreements relating to the completeness of mortgage files and compliance with loan underwriting guidelines.  The court held the Trust Indenture Act plausibly applies to the securities at issue and requires trustees to provide notice of all defaults known to it within ninety days.  The court also held that Plaintiffs adequately pleaded that defaults occurred, such as the failure of certain entities to correct flaws in the mortgage files, and that defendants plausibly knew that certain representations in the Pooling and Servicing Agreements had been breached.  Judge Forrest noted that Plaintiffs must ultimately prove that the trustees had actual, rather than constructive, knowledge of the alleged breaches and that the existence of even pervasive practices is not necessarily sufficient evidence of actual knowledge.  Order.

MBIA and Bank of America Settle MBS Litigation for $1.7 Billion

On May 6, monoline insurer MBIA announced that it had reached a $1.7 billion settlement with Bank of America in connection with alleged fraud and breach of contract claims related to Countrywide-issued mortgage-backed securities insured by MBIA.  Under the terms of the settlement, Bank of America will make a $1.6 billion cash payment, will transfer back $134 million of MBIA’s securities, and will extend MBIA a $500 million credit line.  The settlement ends litigation pending in the Supreme Court for the State of New York since 2008.  The agreement also affected other MBIA-issued policies insuring Bank of America’s credit default swaps, and grants Bank of America warrants to purchase approximately 10 million shares of MBIA common stock.  The settlement is subject to approval by the New York State Department of Financial Services.  Press Release.

Federal Court Dismisses $31 Million FDIC Suit as Time-Barred

On April 22, Judge Mariana R. Pfaelzer of the United States District Court for the Central District of California dismissed as time-barred the Federal Deposit Insurance Corporation’s (FDIC) $31 million suit against JPMorgan Chase & Co., Bank of America, Citigroup and Deutsche Bank AG related to the sale of RMBS originated by Countrywide.  FDIC sued as receiver for Strategic Capital Bank.  Judge Pfaelzer held that a reasonable investor in Countrywide securities could have sued before May 22, 2008, and therefore a reasonably diligent investor should have discovered alleged misstatements in the offering documents before that date.  The Court held that the statute of limitations for later-filed federal claims was not tolled by an earlier action because it was filed in state court, and the plaintiff had not purchased any of the same tranches as Strategic Capital Bank.  Decision.

Second Circuit Rejects Edge Act Jurisdiction in AIG RMBS Case

On April 19, the Second Circuit ruled that a lawsuit brought by American International Group (AIG) against several Bank of America entities involving alleged fraud in connection with $28 billion in RMBS had been improperly removed from state to federal court.  Judge Barbara Jones of the United States District Court for the Southern District of New York had denied AIG’s motion to remand the case to New York state court, finding removal proper under the Edge Act, a statute enacted in 1919 that provides for federal jurisdiction if two conditions are met:  (1) an international banking and financial corporation organized under the laws of the United States (an Edge Act corporation) must be a party; and (2) the lawsuit must involve an offshore banking transaction.  The district court found that these conditions had been met because one defendant – Bank of America, N.A. (BANA) – was an Edge Act corporation and because 27 of the 1.7 million residential mortgage loans underlying the RMBS at issue were secured by properties outside of the United States.  The Second Circuit vacated and remanded the district court’s decision for further proceedings, allowing defendants to press their other ground for removal – “related to” bankruptcy jurisdiction – that was not addressed in this interlocutory appeal.  It held that the Edge Act only provided jurisdiction where the Edge Act corporation has engaged in the relevant offshore banking transaction.  Because BANA did not originate the 27 international mortgage loans, the Second Circuit found that the Edge Act’s requirements were not satisfied, and that federal jurisdiction under the Edge Act therefore did not exist.  Opinion.

Federal Judge Dismisses FDIC’s Securities Fraud Claims Against Countrywide

On April 8, U.S. District Judge Mariana R. Pfaelzer of the Central District of California dismissed the FDIC’s suit against Countrywide.  FDIC, as the receiver for Colonial Bank, filed suit against Countrywide and Bank of America as its successor for violations of the 1933 Securities Act.  FDIC alleged Countrywide made false statements in offering documents in connection with the issuance of residential mortgage-backed securities in violation of Sections 11 and 15 of the Act.  Judge Pfaelzer held that each claim was barred by the statute of limitations of one year from when the plaintiff discovered, or a reasonably diligently investor would have discovered, the alleged misstatement.  Judge Pfalezer held that a reasonably diligent plaintiff would have had adequate information to make such a discovery before August 14, 2008, and consequently the bank’s claims had expired by the time the FDIC was appointed receiver, one year later.  Decision.

Bank of America Reaches Pre-Litigation Settlement with NCUA for RMBS Losses

On April 2, the National Credit Union Administration (NCUA), an independent federal agency that supervises and charters federal credit unions, reached a $165 million settlement with Bank of America, stemming from BofA’s sale of RMBS to failed credit unions.  Bank of America did not admit any fault in the agreement.  NCUA previously reached similar settlements with Citigroup, Deutsche Bank and HSBC.  NCUA did not file a lawsuit against Bank of America, although litigation is pending between NCUA and several other financial institutions.  Press Release.

Prudential Sues Bank of America Over $2 Billion in RMBS

On March 14, several Prudential entities filed suit in the United States District Court for the District of New Jersey against several Bank of America and Merrill Lynch entities in connection with Prudential’s investments in more than $2 billion in RMBS sold by the Defendants.  The Complaint alleges that the Defendants made knowingly false statements of material fact and omissions regarding compliance with underwriting guidelines, omissions regarding due diligence results and misrepresentations as to owner-occupancy rates, appraisals, loan-to-value ratios, assignments of the loans underlying the securities to the trusts and the credit ratings of the securities.  Prudential asserts causes of action for common-law fraud and fraudulent inducement, aiding and abetting fraud and fraudulent inducement, equitable fraud, negligent misrepresentation, violations of New Jersey’s civil RICO statute and violations of sections 11 and 12(a)(2) of the Securities Act of 1933.  Complaint.

$193 Million RMBS Suit Against Countrywide Dismissed as Untimely

On January 10, Judge Mariana R. Pfaelzer of the United States District Court for the Central District of California dismissed a $193 million suit brought by mutual fund Asset Management Fund against several Bank of America and several related entities, including Merrill Lynch and Countrywide Financial.  The case initially was brought in New York Supreme Court and was removed to federal court and later transferred to be part of the Countrywide Multi-District Litigation.  The plaintiffs brought claims for common law fraud, fraudulent concealment, negligent misrepresentation, and aiding and abetting the fraud of others.  The court held that the suit, alleging misrepresentations regarding the underlying mortgage loans including compliance with underwriting rate of owner occupancy, ratio of LTV, and transfer of title, was untimely under all of the statutes of limitations that could apply.  The court granted Asset Management Fund leave to replead as to the $10 million purchase of RMBS it allegedly made after March 1, 2007.  Decision.