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Judge puts approval of BofA's $8.5 billion mortgage settlement on hold

By Karen Freifeld

NEW YORK (Reuters) - A new judge presiding over Bank of America Corp's proposed $8.5 billion settlement with investors in soured mortgage securities on Tuesday postponed entering a final judgment in the case, raising the possibility of additional legal maneuvers.

Justice Saliann Scarpulla of New York state court in Manhattan, who took over the case this week, agreed to delay the decision from taking effect until at least February 19, according to lawyers involved in the case.

Scarpulla's decision came just four days after Justice Barbara Kapnick approved the settlement with the investors, who had bought securities issued by mortgage lender Countrywide Financial Corp. Bank of America acquired Countrywide during the financial crisis.

In her ruling last Friday, Kapnick said the ruling would take effect on February 7. Kapnick's decision came on her last day as a trial court judge. She was promoted to a state appeals court effective February 3, and most of her cases were handed over to Scarpulla.

On Tuesday, American International Group Inc , which led investors who opposed the settlement, sought a further delay. A postponement was necessary so that the "many issues that were left open" in Kapnick's decision could be litigated, AIG's lawyer, Mark Zauderer, wrote in court papers.

Scarpulla agreed to the delay at a court hearing later on Tuesday, lawyers involved in the case told Reuters.

Lawrence Grayson, a spokesman for Bank of America, declined to comment on the delay.

Kevin Heine, a spokesman for Bank of New York Mellon , the trustee for the mortgage securities, also declined to comment.

Bank of America agreed to the settlement in June 2011 to resolve the claims of investors in 530 residential mortgage-backed securities trusts issued by Countrywide before the U.S. housing crisis. The investors said Countrywide misrepresented the quality of the underlying home mortgages.

A group of 22 investors supported the settlement, including institutions such as BlackRock Inc , MetLife Inc and Allianz SE's Pacific Investment Management Co.

But other investors, led by AIG, said there was no evidence the settlement would adequately compensate them for their losses and tried to block approval of the deal in a New York state court.

In her ruling on Friday, Kapnick wrote that Bank of New York Mellon, the trustee representing investors, had acted mostly in good faith in entering into the settlement. But she withheld her approval for one part of the settlement in which she said the trustee had failed to investigate claims regarding Bank of America's obligations to repurchase modified loans.

Bank of America said on Friday it did not expect Kapnick's exception to hold up the accord.

But in its court papers on Tuesday, AIG said Scarpulla should withhold final judgment until she conducts further proceedings to determine how losses will be calculated and how the settlement money will be distributed.

Kenneth Warner, a lawyer representing the 22 investors who support the settlement, said in a letter to the judge that a delay would be "prejudicial to the thousands of certificate holders who are waiting for the settlement proceeds to be distributed."

John Moon, a lawyer who represents the Triaxx funds, which also oppose the settlement, said he was still assessing the impact of Kapnick's decision. "No one knows what's going to happen, but all indications are this is going to be a very vociferous fight," Moon said.

The case is In re Bank of New York Mellon, New York State Supreme Court, New York County, No. 651786/2011.

(Reporting by Karen Freifeld; Editing by Eddie Evans and Ken Wills)

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