American International Group Inc. may pursue a lawsuit accusing Bank of America Corp’s Countrywide unit of causing billions of dollars of losses by fraudulently inducing it to buy risky residential mortgage-backed securities.
U.S. District Judge Mariana Pfaelzer in Los Angeles on Monday said AIG could pursue claims that Countrywide falsely represented in offering documents that it followed underwriting guidelines, as part of a “companywide culture of abandonment of underwriting standards and wholesale use of ‘exceptions.'”
Pfaelzer dismissed AIG claims related to alleged oral misstatements and negligent misrepresentations. She also allowed AIG to submit an amended complaint.
The case is part of overlapping litigation begun in 2011, when AIG sued Bank of America for $10 billion over activities it said helped trigger its near collapse in 2008 and subsequent $182.3 billion federal bailout.
Bank of America has paid more than $40 billion to settle legal, regulatory and borrower disputes tied to its purchases of Countrywide Financial Corp. in July 2008 and Merrill Lynch & Co. six months later.
On Monday, it reached a $1.6 billion cash settlement with bond insurer MBIA Inc. over Countrywide.
And on May 30 it will ask Justice Barbara Kapnick of the New York State Supreme Court to approve an $8.5 billion settlement with Countrywide investors, an accord that AIG also opposes.
In the $10 billion case, AIG accused Bank of America, Countrywide and Merrill of a “massive” fraud by misrepresenting the quality of more than $28 billion of RMBS it bought, and lying to credit rating agencies about the underlying loans.
Pfaelzer handles a part of that case related to Countrywide, and ruled even though New York-based AIG and Charlotte, North Carolina-based Bank of America are battling over whether the case belongs in federal court at all.
Last month, a federal appeals court in New York agreed with AIG that the case should return to the state court where it began, but gave Bank of America another chance to keep it in federal court.
A separate issue is whether AIG assigned its right to sue over $7.3 billion of losses in the Bank of America case to Maiden Lane II, a vehicle created by the Federal Reserve Bank of New York to buy troubled RMBS from the insurer.
Pfaelzer said AIG may for now sue over RMBS sold to Maiden Lane II, but that Bank of America may later renew its objection.
Bank of America spokesman Lawrence Grayson said the bank believes it has strong defenses to the remaining claims.
AIG spokesman Jon Diat said: “As a result of the court’s decision, AIG is able to pursue its full damages claim against Bank of America.”
Pfaelzer oversees a variety of litigation over Countrywide. Her approval is required for the bank’s record $500 million settlement, announced last month, with investors who also claimed Countrywide misled them into buying risky mortgage debt.
The case is American International Group Inc. et al v. Bank of America Corp. et al, U.S. District Court, Central District of California, No. 11-10549.