American International Group Inc. didn’t relinquish $7.3 billion in claims against Bank of America Corporation during its 2008 government bailout, a judge ruled Monday.
In a 40-page decision, U.S. District Judge Mariana Pfaelzer in Los Angeles ruled that AIG has standing to sue over mortgage-backed securities it transferred to Maiden Lane II LLC, a special purpose vehicle created by the Federal Reserve Bank of New York as part of AIG’s $182 billion rescue. Pfaelzer rejected BofA’s argument that AIG signed away its right to sue under the terms of the bailout.
Before the financial crisis, AIG invested billions of dollars in MBS sponsored, underwritten, or originated by BofA and its Countrywide Financial and Merrill Lynch units. The investments tanked in value during the subprime crisis, putting AIG on the brink of insolvency. The insurance giant eventually agreed to a government rescue that included selling a portion of its MBS portfolio to the N.Y. Fed’s Maiden Lane vehicle.
AIG sued BofA in New York state court in 2011, accusing it of engaging in a "massive fraud" by misrepresenting the quality of its securities. AIG’s lawyers at Quinn Emanuel Urquhart & Sullivan sought $10.5 billion in damages, including $7.3 billion related to the Maiden Lane II MBS.
BofA moved to dismiss the $7.3 billion in Maiden Lane II-related claims last October on standing grounds. According to the banks’ lawyers at Munger, Tolles & Olson and Reed Smith, when AIG transferred its MBS to Maiden Lane II, it also transferred its right to bring fraud claims relating to those securities.
After granting limited discovery on the question, Pfaelzer rejected BofA’s argument on Monday. The evidence "demonstrate[s] that AIG and the FRBNY did not discuss the transfer of tort claims to Maiden Lane II," she wrote. Pfaelzer did trim the case a bit, ruling that AIG failed to allege a viable claim for negligent misrepresentation, but the decision is still very, very good news for AIG and Quinn Emanuel.
A Bank of America spokesman said that Monday’s ruling doesn’t prevent the company from revisiting its standing defense later. "The court issued its ruling for purposes of the motion to dismiss and specifically allowed Bank of America to pursue additional discovery before the matter is fully decided," he said. He added that the bank "believes it has strong defenses to the remaining allegations."
Michael Carlinsky and Maria Ginzburg of Quinn Emanuel declined to comment on the ruling. BofA counsel Richard St. John of Munger Tolles didn’t immediately return a call seeking comment.
AIG’s case has had a long and tortured procedural history. The suit was first filed in New York state court, but BofA removed it to U.S. district court in Manhattan based on an obscure federal statute called the Edge Act. Meanwhile, the Judicial Panel on Multidistrict Litigation transferred the slice of the case relating to Countrywide to Pfaelzer, who is hearing all Countrywide MBS litigation.
The U.S. Court of Appeals for the Second Circuit rejected BofA’s Edge Act argument last month. BofA can still argue that the case belongs in federal court, but AIG’s lawyers have expressed confidence that they can persuade U.S. District Judge Lewis Kaplan in New York to remand the case back to a state court judge. If they succeed, Quinn Emanuel has argued that the portion of the case that’s now before Judge Pfaelzer should be returned to New York state court as well.