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Merrill Lynch Must Face $1 Billion Mortgage Suit, Court Says

Bank of America Corp.’s Merrill Lynch unit must face a lawsuit filed by two trusts administering mortgages on behalf of investors owning more than $1 billion of securities collateralized by the loans, an appeals court in New York ruled, upholding a lower-court decision.

The trusts sued Merrill Lynch Mortgage Lending Inc. in New York State Supreme Court in Manhattan in December 2012, seeking to force it to buy back allegedly misrepresented loans.

Merrill in 2006 bought more than 6,000 mortgages with an original principal balance of more than $1.1 billion from a third-party loan originator, ResMAE Mortgage Corp., and turned them into tradeable securities that were sold to investors, according to the complaint.

An appellate court in Manhattan today unanimously upheld a September 2013 ruling by Justice Melvin Schweitzer denying a motion to dismiss the suit, saying only that it reached the decision for different reasons as “extrinsic evidence” had to be used to determine the meaning of an “ambiguous” contract provision. Schweitzer said Merrill had guaranteed the obligations of ResMAE under a transfer agreement.

ResMAE filed for bankruptcy in February 2007 and the trusts subsequently pursued claims against it through LaSalle Bank, demanding that it buy back loans on which borrowers had missed their first or second payments or provide other compensation, according to the complaint.

2008 Accord

LaSalle in July 2008 settled those claims on behalf of five Merrill-sponsored trusts, including the two plaintiffs in the suit.

The trusts said Merrill is obligated to repurchase loans in which the representations and warranties were breached by ResMAE, which can no longer fulfill its contractual obligations because it has been liquidated in bankruptcy. Citadel Investment Group paid $180 million for ResMAE’s assets in June 2007.

Pools of home loans securitized into bonds were a central part of the housing bubble that helped send the U.S. into the worst recession since the 1930s. The housing market collapsed, and the market for the securities evaporated.

Lawrence Grayson and William Halldin, spokesmen for Bank of America, didn’t immediately respond to e-mail messages seeking comment on the ruling.

The case is Merrill Lynch Mortgage Investors Trust, Series 2006-RM4 v. Merrill Lynch Mortgage Lending Inc., 654403/2012, New York State Supreme Court, New York County (Manhattan).

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