BofA Can Pursue FDIC for Taylor Bean Fraud Losses, Judge Says

Bank of America Corp. can proceed with its 2010 lawsuit against the Federal Insurance Deposit Corp. over $1.75 billion in corporate client losses stemming from a mortgage-fraud scheme at failed lender Taylor, Bean & Whitaker Mortgage Corp., a federal bankruptcy judge said.

U.S. Bankruptcy Judge Jerry Funk in Jacksonville, Florida, who is overseeing the bankruptcy of Ocala Funding LLC, a financing vehicle used and controlled by Taylor Bean, ruled today that the bank’s pursuit of the FDIC in a case in Washington wouldn’t interfere with the Florida proceedings.

“In the interests of judicial economy and the expeditious and economical resolution of litigation, the court finds cause exists to lift the automatic stay for the purpose of permitting Bank of America to prosecute the D.C. action to its conclusion,” Funk said in the ruling.

Bank of America was trustee of Ocala Funding, an Orlando- based company, which filed for Chapter 11 bankruptcy protection on July 10 listing assets and debt of more than $1 billion. Ocala Funding issued asset-backed commercial paper to financial institutions including Deutsche Bank AG, Germany’s biggest bank, and Paris-based BNP Paribas SA, according to court papers. Under bankruptcy law, certain actions can be barred or “stayed” that interfere with the proceedings.

Bank of America sued in federal court in Washington in October 2010 after the FDIC denied the bank’s claims against Colonial Bank and another financial institution in receivership that bought fake mortgages from Ocala Funding, according to the complaint.

Arguments Scheduled

A judge in Washington has scheduled arguments for Sept. 13 on the FDIC’s motion to dismiss.

From 2002 through August 2009, Lee Farkas, while he was chairman of Taylor Bean, directed the sale of more than $1.5 billion in fake mortgage assets to Colonial Bank and misappropriated more than $1.5 billion from Ocala Funding, according to court papers.

Farkas is serving a 30-year sentence after being convicted in April 2011 of 14 counts of conspiracy and bank, wire and securities fraud in what prosecutors said was a $3 billion scheme involving fake mortgage assets.

Taylor Bean, based in Ocala, Florida, was servicing more than 500,000 mortgages, including $51 billion of Freddie Mac loans, when it collapsed in August 2009, according to court records.

Bill Halldin, a spokesman for Charlotte-based Bank of America, declined to comment on the ruling. David Barr, an FDIC spokesman, said the FDIC doesn’t comment on active litigation.

‘Substantially All’

Bank of America, acting for noteholders who own “substantially all” of Ocala’s assets, is seeking to pursue recovery of monies from Colonial and Platinum Bank, which it alleges were stolen from Ocala, Funk said in today’s ruling.

Under U.S. law, it is entitled to sue the FDIC for denying its claims to the money, he said. Because Bank of America has shown that it is “the party that can best enforce the debtor’s rights” in the case, he was willing to remove a bankruptcy law obstacle to its pursuit of the money for noteholders, he said.

Trustees often pursue claims on behalf of investors. In the Lehman Brothers Holdings Inc. bankruptcy, a trustee services unit of Bank of New York Mellon Corp. (BK) acted for investors in disputes over swap agreements they had with the defunct investment bank. They settled the disputes.

The bankruptcy case is In re Ocala Funding LLC, 12-bk-4524, U.S. Bankruptcy Court, Middle District of Florida (Jacksonville). The Washington case is Bank of America v. FDIC, 10-cv-01681, U.S. District Court, District of Columbia (Washington).

To contact the reporters on this story: Tom Schoenberg in Washington at tschoenberg@bloomberg.net; Linda Sandler in New York at lsandler@bloomberg.net.

To contact the editor responsible for this story: Michael Hytha at mhytha@bloomberg.net.

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