A New York state judge threw out a lawsuit filed by a group of mortgage bond investors against subprime mortgage lender Countrywide Home Loans and Bank of America (BAC) .
The case's dismissal is a boon for Bank of America, which ended up facing the ire of residential mortgage-backed securities investors who sued BofA over losses on Countrywide mortgages after the Charlotte-based bank acquired the subprime lender in 2008.
The court's dismissal of what's known as the Walnut Place v. Countrywide Home Loan case also is beneficial to the Bank of New York Mellon (BK), which oversaw the mortgage securities in question as trustee.
The trustee was ready and willing to settle the RMBS dispute with BofA for $8.5 billion last summer, but that settlement was stalled by angered RMBS investors who filed suit, believing the settlement did not consider all of the investors' interests.
New York State Supreme Court Judge Barbara Kapnick dismissed the investors' suit against Countrywide, calling it "premature" under the circumstances.
Bank of America, now the holder of Countrywide's assets and legacy business, issued a short statement on the judge's move, saying, "We are pleased with the court's ruling."
The judge's decision strengthens BONY Mellon's position as trustee by interpreting a provision in the pooling and servicing agreement tied to the trust, which describes when individual investors can assert power over a trustee to compel movement in their own interests.
Specifically, the judge analyzed Section 10.08 of the pooling and servicing agreement that guides the securitization of the loans and the trustee's position overseeing the mortgage pool.
The provision states that "no certificate holder shall have any right by virtue or by availing itself of any provisions of this agreement to institute any suit, action or proceeding in equity or at law upon or under or with respect to this agreement unless such holder previously shall have given to the trustee a written notice of an event of default and of the continuance thereof."
The provision goes on to stipulate several requirements that must be met for individual investors to prove an "event of default" has occurred to justify an action that oversteps the trustee's power as the overseer of the pooled mortgages.
Countrywide argued that the "event of default burden" that the investors must meet was not reached because BONY Mellon, as trustee, did its duties acting as master servicer and the investors' complaints were really against the loan originator.
Judge Kapnick ruled for Countrywide, and BONY Mellon, on this issue, saying an event of default has not occurred because the central allegations are not tied to the actions of the master servicer, but rather to the originator of the loans.
Furthermore, the judge ruled that even though the mortgage investors wanted the court to find BONY Mellon in the wrong for settling the case with BofA and for not filing suit at the request of investors, "the trustee did, in fact, act upon plaintiffs' complaints, as demonstrated by the settlement agreement reached with the defendants," Kapnick wrote.
The judge also called the investors suit premature when considering the trustee had acknowledged at the time of the suit's filing that it needed more time to review and evaluate the investors' demands in relation to the Countrywide loans wrapped up in the securities.