When Bank of America Corp. announced its MBS settlement last week, the company warned that activist investors would likely fight it. It was right.

Citing alleged conflicts of interest in the negotiation of the deal, an investor in two mortgage-backed securities trusts has sought to exempt itself from the $8.5 billion deal and to force a deeper review of Countrywide's practices.

In a brief filed with Judge Barbara Kapnick of New York Supreme Court, attorneys for the investor — 28 Walnut Place LLC — argue that the settlement proposal is riddled with self-dealing by the trustee, Bank of New York Mellon, and fails to adequately compensate investors for their losses on poorly underwritten Countrywide loans. (Bank of America acquired Countrywide in 2008.)

Front and center was Bank of America's agreement to protect BNY against any legal liability for entering into the settlement, which was a prelude to negotiations. Bank of New York's willingness to actively represent the 530 Countrywide trusts by entering into private settlement talks was a notable departure from the trustee's previous actions and essential to a global settlement's feasibility.

"It is very unusual, to say the least, for a trustee that says it is representing the interests of the beneficiaries of a trust, to demand and obtain an indemnity from the very party that is adverse to that trust and its beneficiaries," an Grais & Ellsworth LLP partner Owen Cyrulnik wrote in the July 5 filing.

Bank of New York had no immediate comment on Tuesday.

The papers also question the arm's-length nature of the settlement talks between Bank of America, Bank of New York, and a group of 22 large investors which have pledged to support the deal. The complaint echoes similar investor concerns when negotiations began late last year. Bank of America's ties with asset manager Blackrock Inc. received special attention.

At the time of the talks, "Blackrock and Bank of America owned large parts of each other and [Blackrock] was negotiating its own deal to buy out Bank of America's remaining stake," Cyrulnik wrote.

Even if the judge approves the settlement proposal, she should allow investors to sue independently, the filing says.

Walnut Place, which has already filed a lawsuit seeking recoveries for representation and warranty violations, argues that it can prove damages in excess of its share of the $8.5 billion pot.

In the two trusts in which it has invested, well over half the loans suffer from breaches.

Extrapolating on that ratio, Cyrulnik wrote, suggests that "Countrywide may be liable to repurchase loans with unpaid principal balances of as much as $242 billion."

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