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BofA Loses Bid for Dismissal of AIG Securities Suit

American International Group Inc. can proceed with a lawsuit against Bank of America Corp. over residential mortgage-backed securities purchased from the bank’s Countrywide Financial unit, a judge ruled.

U.S. District Judge Mariana Pfaelzer in Los Angeles yesterday partly denied a defense request that she throw out the case, ruling that New York-based AIG can pursue claims of fraudulent inducement.

AIG sued Charlotte, North Carolina-based Bank of America and Countrywide for $10 billion in damages in 2011, alleging it was misled into thinking that loans underlying its investment were issued according to underwriting guidelines that had been “long abandoned.”

AIG “plausibly alleges that the underwriting guidelines stated in the offering documents were false,” Pfaelzer said in her 40-page ruling.

The judge rejected claims that the defendants orally misrepresented underwriting practices and gave false assurances to investors about the quality of guidelines. She gave AIG permission to amend the claims.

Countrywide Malfeasance

She also threw out allegations that underwriters Merrill Lynch and Banc of America Securities knew of malfeasance at Countrywide, while again giving the insurer permission to re-plead them. Bank of America bought Countrywide in 2008.

Pfaelzer threw out AIG’s claims of negligent misrepresentation.

“AIG has had a number of its claims dismissed,” Lawrence Grayson, a Bank of America spokesman, said today in a phone interview. “We believe we have strong defenses to the remaining allegations.”

Bank of America had also challenged the insurer’s right to bring the lawsuit, arguing that $7 billion of the claims arose from mortgage-backed securities sold to another entity, Maiden Lane II, in exchange for almost $20 billion loaned to it by the Federal Reserve Bank of New York in December 2008 as part of a government aid package for AIG as it restructured amid the fiscal crises that year.

Maiden Lane

While the lender argued the right to sue followed the securities to Maiden Lane II, AIG countered that it had not assigned those claims.

Pfaelzer ordered additional disclosure on the issue in January and, in yesterday’s decision, sided with the insurer, citing the deposition testimony of two Federal Reserve Bank officials and two AIG executives.

“All of the witnesses agree on this key point,” she said in her ruling. “Each witness stated that AIG and FRBNY did not discuss the transfer of tort or litigation claims,” while negotiating the sale of the securities to Maiden Lane II.

“As a result of the court’s decision, AIG is able to pursue its full damages claim against Bank of America,” Jon Diat, a spokesman for the insurer, said in a statement e-mailed to Bloomberg News today.

The case is AIG v. Countrywide, 11-10549, U.S. District Court, Central District of California (Los Angeles).

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