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Bank Fights Federal Oversight of $8.5B Deal

MANHATTAN (CN) - A Bank of New York Mellon lawyer urged the 2nd Circuit on Wednesday morning to let the state court sort out a proposed $8.5 billion settlement of toxic mortgage claims.

U.S. District Judge William H. Pauley III wrested control of the case in October, claiming that the bank hoped to use an "arcane summary procedure in state court" to dispose of the toxic claims.

"The question presented is whether this mass settlement, which implicates core national interests in the integrity of the financial markets, is immune from review in federal court," Pauley wrote on Oct. 19.

Countrywide Home Loans, which is now owned by Bank of America, raised money with various affiliates by entering into hundreds of securitization transactions between 2004 and 2008. "In these transactions, Countrywide conveyed portfolios of securitized residential mortgages through a third party to BNYM, as trustee, to hold in trust," the court explained. "In turn, investors purchased certificates or notes evidencing various categories of ownership interests in the trusts."

In June 2010, at least one institutional investor operating under the entity Walnut Place LLP sent a letter to BNY Mellon, accusing Countrywide of selling a large number of mortgages into the trusts that breached signed warranties.

As evidence, the letter cited early default and foreclosure rates for the mortgages, Countrywide's settlements with various state attorneys general, and publicly disclosed emails from Countrywide officials.

Walnut Place demanded that Countrywide and Bank of America repurchase the defaulting mortgage loans.

Acting as trustee, BNY Mellon allegedly shut the Walnut Place investors out of backroom settlement negotiations with several institutional investors, including Blackrock Financial Management, Goldman Sachs Asset Management.

BNY Mellon agreed to settle the claims for $8.5 billion, through a proceeding in New York Supreme Court known as an Article 77 hearing.

Then, Judge Pauley interrupted the plan by claiming federal jurisdiction under the Class Action Fairness Act of 2005.

In an appellate brief, BNY Mellon attorney Andrew Frey claimed that the statute was meant to be used for claims involving "monetary relief," whereas the Article 77 hearing does not involve enforcement of a judgment.

If the settlement were to be approved after Article 77, BNY Mellon would have to file a separate breach-of-contract action to get a judgment from Bank of America.

"The Article 77 proceeding itself thus is not, by any stretch of the language, a claim for "monetary relief" within the meaning of CAFA," Frey wrote.

A lawyer for Walnut Place balked at the distinction at Wednesday's hearing.

"If the approval of one of the largest settlements in history isn't monetary relief, what is," he asked.

The appellate judges reserved decision, acknowledging the case could drag through the Supreme Court even if they uphold the jurisdiction of New York's Southern District.

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