A group of bondholders plans to challenge Bank of America Corp's $8.5 billion settlement with holders in soured mortgage-backed securities, saying it may be unfair to other bond investors.

In court papers filed on Tuesday in New York State Supreme Court in Manhattan, 11 companies sharing the name Walnut Place said they had serious concerns about the secret, non-adversarial, and conflicted way in which the proposed settlement was negotiated and about the fairness of the terms.

Bank of America on June 29 announced the settlement with 22 institutional investors including BlackRock Inc , MetLife Inc , Allianz SE's Pacific Investment Management Co and the Federal Reserve Bank of New York.

That accord was part of $20 billion of mortgage-related charges that the bank said it would take, hoping to resolve much of the liability from its $2.5 billion purchase in 2008 of mortgage lender Countrywide Financial Corp.

But Walnut Place called the settlement inadequate. It said it plans on July 13 to ask Justice Barbara Kapnick, whose approval is required for the settlement, to excuse it from the accord, or else to compel greater disclosures about the pact.

Walnut Place had in February sued Bank of America, to force it to buy back loans underlying $1.06 billion of securities it owns, alleging misrepresentations by Countrywide.

Bank of New York Mellon Corp favors approval of the $8.5 billion settlement, in its capacity as trustee for 530 mortgage-securitization trusts, calling it reasonable. The settlement would cover Walnut Place's claims.

Far from being secretive, the conversations leading to the settlement have been publicly disclosed and widely reported, Bank of America spokesman Lawrence Grayson said. He added that it is difficult to believe the 22 investors subordinated their clients' interests to those of Bank of America.

Bank of New York Mellon spokesman Kevin Heine declined to comment on the Walnut Place filing.

Owen Cyrulnik, a lawyer for Walnut Place, did not immediately return a call seeking a comment.

OPPORTUNITY TO BE HEARD

The settlement also requires Bank of America to improve its servicing operations. Analysts view it as a possible template for settlements by other companies in the mortgage industry.

Kathy Patrick, lead lawyer for the 22 institutional investors, in an interview said Walnut Place has the burden of showing that the settlement as a whole is unreasonable, or that any conflicts of interest exist.

Walnut Place, like every other investor, will have an opportunity to be heard, she said. We believe that both in its amount and in its servicing improvements, the settlement is fair to the covered trusts.

In its February lawsuit, Walnut Place alleged that Countrywide had made false representations about 1,432, or nearly 66 percent, of the 2,166 loans it investigated.

It said these misrepresentations in part concerned whether underwriting guidelines were followed, and the size of the loans relative to the underlying homes' values.

A hearing to consider approval of the $8.5 billion settlement is scheduled for November 17.

Bank of America shares rose 3 percent on the day the settlement was announced, but have since given up nearly half that gain. They closed Tuesday down 9 cents at $11.

The case is In re: The Bank of New York Mellon, New York State Supreme Court, New York County, No. 651786/2011. The earlier case is Walnut Place LLC et al v. Countrywide Home Loans Inc et al in the same court, No. 650497/2011.

(Additional reporting by Joe Rauch in Charlotte, North Carolina; editing by Gerald E. McCormick, Bernard Orr)

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