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Appeals court to review BofA $8.5 billion MBS pact

By Jonathan Stempel and Karen Freifeld

(Reuters) - A U.S. appeals court agreed to resolve a dispute among institutional investors over whether Bank of America Corp's $8.5 billion mortgage debt settlement should be sent back to a New York state court for approval.

The 2nd U.S. Circuit Court of Appeals in New York on Tuesday said it plans to rule within a 60-day period on whether U.S. District Judge William Pauley in Manhattan correctly took the case from the state court.

It granted the requests of Bank of New York Mellon Corp, which as trustee negotiated the settlement, and investors including BlackRock Inc, MetLife Inc and Allianz SE's Pimco to appeal Pauley's decision.

Other investors, led by a group called Walnut Place, preferred that the case stay in federal court, which could result in higher recoveries.

The June settlement was intended to address much of Bank of America's remaining legal liability from the Charlotte, North Carolina-based bank's 2008 purchase of mortgage lender Countrywide Financial Corp.

It would cover claims by investors in 530 mortgage securitization trusts with $174 billion of unpaid principal that the home loans underlying their investments were toxic or underwritten poorly.

Bank of New York Mellon had negotiated the accord with 22 institutional investors, and sought approval by New York State Supreme Court Justice Barbara Kapnick in Manhattan.

But Walnut Place and other investors that were not part of the talks, but would be bound by the outcome, complained that the $8.5 billion payout was too low.

Moving the case to federal court could make it easier for these investors to back out, or negotiate higher payouts.

In a two-page order, the 2nd Circuit asked the parties to address several issues, including whether the settlement was a "mass action" allowing federal court review.

"We have jurisdiction to determine our jurisdiction," the 2nd Circuit said.

Pauley had on October 19 said the case implicated "paramount federal interests" such as the integrity of nationally chartered banks and the vitality of financial markets.

Bank of America spokesman Lawrence Grayson declined to comment. Bank of New York Mellon spokesman Kevin Heine and David Grais, a lawyer for Walnut Place, did not immediately return calls.

The 2nd Circuit also granted Bank of America's request to file papers supporting requests for an appeal.

The cases are Bank of New York Mellon v. Walnut Place LLC et al, 2nd U.S. Circuit Court of Appeals, Nos. 11-4554 and 11-4571.

(Reporting by Jonathan Stempel and Karen Freifeld in New York; Editing by Tim Dobbyn, Gary Hill)

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