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BNY Mellon Needs Court Oversight, Judge Rules

MANHATTAN (CN) - The Bank of New York Mellon cannot be left to its own devices to tie up tens of billions of dollars in toxic mortgage claims "through an arcane summary procedure in state court," a federal judge ruled Wednesday.

"The Bank of New York Mellon, as trustee for hundreds of trusts, seeks to dispose of billions of dollars in toxic mortgage claims through an arcane summary procedure in state court," U.S. District Judge William H. Pauley III wrote. "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."

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.

"BNYM veils the identity of the pioneering investor(s)," the 21-page order states. "And the June 2010 letter - which is the first investor communication with BNYM mentioned in the petition - is not part of the record before this court. But one thing is certain: no more than eight institutional investors had banded together by October 18, 2010, when they asserted a notice of nonperformance in a letter that is part of the record."

A footnote explains that the number of institutional investors "has swollen to more than twenty," including BlackRock Financial Management, Goldman Sachs Asset Management, PIMCO Investment Management Company, and several "Maiden Lane" entities controlled by the Federal Reserve Bank of New York.

Weeks after the second letter, Countrywide and Bank of America shut the original Walnut Place investors out of backroom settlement negotiations.

"In November 2010, fearing that the trusts' claims against Countrywide and Bank of America would lapse as a result of BNYM's torpor, several institutional investors-acting without Walnut Place - commenced settlement discussions with Countrywide and Bank of America," the order states.

According to the order, these negotiations may have breached securities law.

"In their negotiations, the investors considered material non-public information from Bank of America that was unavailable to other certificate-holders, including Walnut Place," the order states. "And no certificate-holders other than this clique of institutional investors participated in these discussions."

Earlier this year, Walnut Place sued Countrywide for breach of the representations and warranties, and two other investor lawsuits were later filed against BNY Mellon, Countrywide and Bank of America.

On June 28, BNY Mellon entered into an agreement with Countrywide and Bank of America to settle all potential claims belonging to 530 of their trusts.

"Although the trusts' claims may exceed $150 billion ... the settlement agreement requires a payment of $8.5 billion to trust beneficiaries and mandates certain improvements to Countrywide's mortgage servicing process," the order states. "The Settlement Agreement does not encompass sixty-three other trusts for which BNYM is trustee with a combined unpaid balance of approximately $15.3 billion as of September 26, 2011."

A day later, BNY Mellon filed a petition initiating a proceeding under Article 77 of the New York Civil Practice Law and Rules in New York Supreme Court.

The text of the allegedly "arcane" statute begins:

"A special proceeding may be brought to determine a matter relating to any express trust except a voting trust, a mortgage, a trust for the benefit of creditors, a trust to carry out any plan of reorganization of real property acquired on foreclosure or otherwise of a mortgage or mortgages against which participation certificates have been issued and guaranteed by a corporation and for which the superintendent of insurance or the superintendent of banks has been or may hereafter be appointed rehabilitator or liquidator or conservator, a trust to carry out any plan of reorganization pursuant to sections one hundred nineteen through one hundred twenty-three of the real property law or pursuant to section seventy-seven B of the national bankruptcy act, and trusts for cemetery purposes, as provided for by sections 8-1.5 and 8-1.6 of the estates, powers and trusts law."

That text is followed by six other subsections.

The Walnut Place investors intervened in the BNY Mellon proceeding and removed it to federal court.

BNY Mellon moved to remand it back to state court.

A federal judge refused on Wednesday.

Judge Pauley scheduled a status conference, in federal court, on Nov. 3, to proceed.

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