The key sentence in New York State Supreme Court Justice Barbara Kapnick's 17-page decisiondismissing Walnut Place's $1 billion put-back suit against Countrywide is buried in the middle of the penultimate paragraph. But for Bank of America, it's pure gold. The Manhattan judge said that contrary to Walnut's assertion, Countrywide's mortgage-backed securities trustee, Bank of New York Mellon, acted on Walnut's complaints about deficiencies in underlying Countrywide loans by reaching the proposed $8.5 billion settlement announced last June. That language should shield BofA and BNY Mellon from reps and warranties claims by any Countrywide MBS investor -- and may offer a hint of the fate of the proposed global deal, which is also now before Kapnick after a detour in federal court.

Walnut (a nom de litigation for the hedge fund Baupost) is the leading objector to the proposed $8.5 billion deal, mostly because at the time the settlement was filed as an Article 77 trust proceeding in New York state court last June, Walnut had already sued Countrywide and BNY Mellon for breaching representations and warranties about the mortgage pool underlying trusts it had bought into. Walnut's lawyers at Grais & Ellsworth asserted in a complaint filed back in February 2011 that the investor had jumped through the requisite procedural hoops in the MBS pooling and servicing agreements. Walnut Place, the complaint said, controlled 25 percent of the voting rights in the trusts on whose behalf it was making claims; and it had demanded action from BNY Mellon before filing suit. The trustee, according to Walnut, failed to take appropriate action on its demands.

BofA's counsel at Wachtell, Lipton, Rosen & Katz countered in a dismissal brief last July that in fact BNY Mellon had t aken action on put-back demands: It had entered the negotiations that resulted in the proposed $8.5 billion settlement. "Far from 'declining to act at all,' the trustee has acted decisively by settling, among other things, the precise claims brought by Walnut Place here," the bank's brief said. "That it has done so underscores Walnut Place's complete failure -- indeed, inability -- to plead refusal of its demand."

Kapnick's ruling Thursday didn't offer much elaboration, but she said first that BNY Mellon's responses to Walnut -- that it needed more time to investigate its claims -- "belied" Walnut's "conclusory allegations that the trustee refused to sue." Even more importantly, she continued: "Moreover, the trustee did, in fact, act upon [Walnut's] complaints, as demonstrated by the settlement agreement reached with the defendants and submitted to this court.... That settlement includes the claims at issue here."

Given that the pooling and servicing agreements governing the 503 Countrywide MBS trusts in the proposed settlement are similar to those at issue in the Walnut case, it's hard to see how any investor could get past Kapnick's reasoning on the trustee's action. That means all Countrywide reps and warranties claims against BofA and BNY Mellon are at stake in the proposed global deal.

Kapnick's ruling also seems to me to reduce the leverage of settlement objectors as the Article 77 proceeding continues before her. For one thing, Walnut and the few other objectors who brought their own suits against Countrywide, BofA, and BNY Mellon can't argue that the settlement is usurping their individual claims; under Kapnick's reasoning, they don't have viable cases because of the settlement. For another, Kapnick's ruling means more uncertainty for investors thinking about blowing up the settlement and bringing individual claims. At the very least, it gives the banks an argument that investors are procedurally barred from bringing individual suits, even if Kapnick decides BNY Mellon's agreement to the deal was unreasonable. The procedural argument would further complicate an already unprecedented scenario. Those pooling and servicing agreements never contemplated anything like the Countrywide MBS litigation. (Walnut Place counsel David Grais and Owen Cyrulnik of Grais & Ellsworth didn't respond to an email request for comment.)

Meanwhile, next week will officially relaunch the Article 77 proceeding before Kapnick. The case returned to state court last month. BNY Mellon counsel Matthew Ingber of Mayer Brown sent a letter outlining the issues to the judge on March 12; Daniel Reilly of Reilly Pozner, on behalf of the steering committee for settlement objectors, responded on March 16 with a letter contending that Article 77 is an improper vehicle for deciding the case.

In a March 19 conference call, according to this transcript, Kapnick called for briefing and a conference on what she identified as "two of the major issues": whether the settlement is evaluated under a state trust law that grants the trustee broad discretion, or whether she somehow converts the case into a different kind of proceeding; and the scope of discovery she will permit against the banks and the Gibbs & Bruns-represented institutional investors who support the deal. The first briefs are due next week.

(Reporting by Alison Frankel)