A federal court panel said Bank of America Corp. (BAC) can't consolidate multiple lawsuits involving losses suffered from the collapse of Taylor Bean & Whitaker Mortgage Corp. and Colonial Bank in a multibillion-dollar fraud.
The U.S. Judicial Panel on Multidistrict Litigation on Friday rejected Bank of America's bid to transfer ongoing litigation in Washington with three other suits involving losses related to the Taylor Bean fraud that are pending in New York.
Bank of America — which is suing the Federal Deposit Insurance Corp., the receiver of Alabama's defunct Colonial Bank, for $1.75 billion in federal court in Washington — wanted the case moved to New York, where another judge is overseeing lawsuits filed by Germany's Deutsche Bank AG (DB, DBK.XE) and a unit of BNP Paribas SA (BNPQY, BNP.FR) against Bank of America.
The decision is a victory for the FDIC and the European banks, which had all opposed the transfer request.
Lawyers for the FDIC had accused Bank of America with "procedural gamesmanship" in an attempt to seek delay. In addition the regulator charged the bank with "forum shopping" in order to avoid a ruling by the Washington judge.
Bank of America spokesman Bill Halldin declined to comment on the decision.
When Taylor Bean's mortgage assembly line collapsed in the summer of 2009, those involved — the banks, investors and the receiver — pointed fingers at one another, each claiming to have been injured by conduct of others.
At the center of the fraud was the Ocala Funding LLC conduit, a mortgage-financing vehicle that Taylor Bean created in 2005 to purchase its home loans, which were then bundled into securities and sold to investors such as Freddie Mac (FMCC). It funded its business by issuing short-term notes that it sold to investors.
The Ocala note investors — Deutsche Bank and the mortgage subsidiary of BNP Paribas — sued Bank of America in 2009 for alleged breach of contract over BofA's alleged failure to secure $1.75 billion in cash and mortgage loans on their behalf. Bank of America, which served as the trustee for the notes issued by Ocala, has denied any wrongdoing.
Looking to turn the tables, Bank of America then sued the firms that arranged the sales of the notes, which happen to be BNP Paribas Securities Corp. and Deutsche Bank Securities Inc. A judge dismissed that suit last week.
Meanwhile, in the Washington case, Bank of America says that the FDIC, as Colonial's receiver, is on the hook for the $1.75 billion in losses investors suffered when Taylor Bean and Colonial collapsed. Bank of America sued the FDIC in the fall of 2010.
The FDIC, which argued the bank didn't have the authority to sue it over losses incurred by the Taylor Bean subsidiary, countersued, claiming Bank of America's actions constituted breach of contract, malfeasance, bad faith, gross negligence and willful misconduct with respect to Colonial. Further, the FDIC says Bank of America, as the middleman between the Ocala unit and investors, owes Colonial and thus the FDIC $900 million.
The Ocala conduit was a key element in a seven-year, multibillion-dollar fraud orchestrated by Taylor Bean founder Lee Farkas.
The scheme involved Colonial "purchasing" mortgage loans from Taylor Bean that had already been sold to other investors. In this way, Taylor Bean masked its financial problems and maintained its licenses as mortgage lender, seller and, importantly, issuer of mortgage-backed securities. Colonial, which was Taylor Bean's main lender and "co-conspirator," according to Bank of America's lawyers, provided Taylor Bean with $3 billion in mortgage financing, much of which went through Ocala.
Farkas, a Florida businessman who built Taylor Bean from a small mortgage company into the largest U.S. mortgage lender not owned by a bank, is serving a 30-year prison sentence for his role in the scheme. A handful of other executives from Colonial and Taylor Bean have also been sentenced to prison for their roles in the fraud.
Taylor Bean collapsed after federal regulators uncovered evidence of fraud and suspended its authority to make loans insured by the government agencies.
Colonial Bank, which had $25 billion in assets and $20 billion in deposits, was the biggest bank failure of 2009. The FDIC estimates Colonial's collapse will cost its insurance fund $3.8 billion, making it one of the most expensive bank failures in U.S. history.
The FDIC was named receiver of Colonial Bank after regulators seized the Montgomery, Ala., bank on Aug. 14, 2009, and sold its assets to BB&T Corp. (BBT). Taylor Bean filed for Chapter 11 bankruptcy protection 10 days later.
