July 31 (Reuters) - The heirs of a longtime friend of Elvis Presley can proceed with a lawsuit over a chunk of the King's hair and other memorabilia they say were stolen and sold at auction, an appeals court ruled on Tuesday.

At stake is $218,000 in proceeds from the sale of a trove of collectors' items that allegedly belonged to Elvis's personal friend and fan club president, Sterling Gary Pepper.

Pepper's heirs, John Tate and Norma Deeble, filed the suit in 2009 on behalf of their late cousin. They accused Pepper's former caretaker, Nancy Pease Whitehead, of stealing the collection when Pepper was transferred into a home for the disabled.

An Iowa district court refused to block the auction, which ultimately reaped $28,000 for an Elvis-worn red suede shirt, $15,000 for a clump of hair cut off when he went into the Army, and $1,400 for two dried white roses from his funeral. The lower court found that Pepper's relatives had waited too long to file the lawsuit and ruled for Whitehead before a trial.

Deeble appealed to the 8th Circuit Court of Appeals on behalf of Pepper's estate, arguing that the family members had no knowledge that the collection existed and were not able to file the suit earlier.

That argument was enough to convince a three-judge panel of the 8th Circuit to revive the suit, which on Tuesday sent the case back to the lower court for a trial.

The $218,000 in sale proceeds is in escrow while the case is still pending, said Matthew Sease, a lawyer for Pepper's estate. Also in escrow is a pastel painting of Elvis and his wife Priscilla Presley.

Brant Leonard, a lawyer for Whitehead, did not immediately respond to a request for comment.

The case is Estate of Nell G. Pepper et al v. Nancy Whitehead et al, 8th U.S. Circuit Court of Appeals, No. 11-2764.

For Pepper's estate: Matthew Sease of Kemp Sease & Dyer.

For Whitehead: Brant Leonard of Dickinson Mackaman Tyler & Hagen. 

(Reporting By Terry Baynes)

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