Judge Approves Pact Between BofA, Investors

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A New York state judge approved most of an $8.5 billion settlement between Bank of America Corp. and investors over soured mortgage-backed securities.

But in denying approval of one portion of the deal, the decision raises questions over whether Bank of America will proceed with the pact if it remains open to future claims by investors.

"We are reviewing the decision very carefully," said a Bank of America spokesman.

The deal, struck in June 2011, was closely watched as a landmark agreement in which a bank agreed to pay billions to settle claims over mortgage securities turned toxic in the financial crisis.

American International Group Inc. and other investors opposed the settlement. Lawyers for the insurance giant argued in court that the deal was unfair and that the trustee for investors, Bank of New York Mellon Corp., didn't fulfill its fiduciary duty.

New York State Supreme Court Judge Barbara Kapnick found that the trustee acted in good faith. But she also said the trustee failed to investigate whether certain loans should have been repurchased.

An entity of investors called Triaxx argued that the trustee failed to investigate loan-modification claims worth about $31 billion. The judge agreed the trustee failed to fulfill its duty on this one portion of the deal.

"On this issue only, the Court finds the trustee acted "unreasonably or beyond the bound of unreasonable judgment" by failing to investigate claims over loan modifications," Justice Kapnick wrote.

A spokesman for AIG said its lawyers plan to appeal.

"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," said the spokesman. He added that the judge's decision to approve most of the settlement sets "a dangerous precedent that could eliminate important protections for investors."

The decision comes at a time when Bank of America is trying to persuade investors that its legal troubles are largely in the past. The second-largest U.S. bank by assets has been plagued by litigation-related costs since its 2008 acquisition of home lender Countrywide Financial Corp. The bank has spent nearly $50 billion on legal costs associated with that deal after the housing market collapsed. Just this week, the U.S. government increased the amount in penalties it is seeking from Bank of America in a Countrywide-related case to $2.1 billion, from $864 million in December.

The settlement at issue in Friday's ruling arose after nearly nine months of negotiations between a group of 22 investors who held mortgage-backed securities originally valued at $105 billion. High-profile investors who negotiated the pact include money manager BlackRock Inc., insurer MetLife Inc. and the Federal Reserve Bank of New York.

Write to Shayndi Raice at shayndi.raice@wsj.com

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