What is the duty of a trustee to protect investors?

The answer to that question is at stake in an $8.5 billion settlement that is awaiting approval by a justice in New York State Supreme Court. Early this week, the court will hear closing arguments in a case about the settlement struck by Bank of America and 22 mortgage securities investors two years ago. The settlement would resolve Bank of America’s legal liability for more than one million loans made by Countrywide Financial — now owned by Bank of America — during the mortgage mania. The court will decide whether the settlement is fair and reasonable and can go forward.

While this case may appear to be about Countrywide’s lending practices, what’s really on trial here is the role played in the settlement by Bank of New York Mellon, the trustee charged with protecting all investors in these securities. Trustees for asset-backed securities have a duty to ensure that the companies administering them, known as servicers, do right by the investors who own them.

But testimony in the case, known as an Article 77 proceeding, indicates that during months of settlement talks, Bank of New York Mellon did not do all it could to ensure that all investors holding the Countrywide securities got the best deal possible from Bank of America. If the settlement is blessed by the justice, Barbara R. Kapnick, the standard for acceptable behavior by a trustee on behalf of investors will be low indeed. Her ruling will undoubtedly be cited as a precedent for other similar mortgage matters waiting to be heard.

All investors in every one of the 530 Countrywide securities covered by the settlement must abide by its terms, and its approval would let Bank of America extinguish legal liability for loans that could lose investors up to $100 billion, according to one estimate. This is the case even though some investors were kept out of the negotiation process and many others didn’t know it was going on.