NEW YORK, Nov 17 (Reuters Legal) - Bank of America Corp was ordered by a bankruptcy judge to return a $500 million deposit it seized from a Lehman Brothers Holdings Inc account shortly after Lehman's bankruptcy.

In an opinion handed down on Tuesday, Judge James Peck said Bank of America violated federal law by "brazenly" seizing the Lehman deposit without permission, an act that allowed the bank to avoid placing the $500 million in a pool of assets alongside other secured creditors.

In his ruling Judge Peck made a series of withering allusions to the legal approach developed for Bank of America by Shearman & Sterling. He described the bank's legal tactics as a "deliberately aggressive and calculated strategy" that was based on the concept that "possession is nine-tenths of the law."

The legal issue in the case turned on whether Bank of America was entitled to seize the $500 million in cash it had required Lehman to post as a form of security against overdrafts in Lehman's trading-related accounts.

In the normal course of business, banks are allowed to seize ordinary deposit accounts and apply them against a customer's outstanding debt - a practice known as "right of setoff" or a "banker's lien." In the case of Lehman's overdraft account, however, Bank of America had imposed terms that treated the cash as a secured instrument and not an ordinary deposit eligible for set-off. As such, Bank of America came out on the wrong side of what the judge described as an "all or nothing $500 million question."

The bank's wrongful decision to seize the account without seeking court approval means that not only does it have to return the $500 million but that it may have to pay additional damages as well.

The court's opinion concludes that Bank of America "acted with the advice of experienced and sophisticated counsel" and was fully informed about "the untested, uncertain and extremely aggressive legal position that it was advancing."

Bank of America's "aggressive" actions appear to reflect the general sense of panic and disorder that descended on the financial markets as Lehman imploded in the fall of 2008. It was that event that caused stock markets to plummet and the federal government to implement a massive rescue of the financial sector.

In an irony noted by the bankruptcy judge, Bank of America contributed to Lehman's collapse with its request that the firm set aside the $500 million in cash. Although Lehman was in no financial position to do so, it "found itself in the coerced position of facing a demand for collateral that it could not refuse."

Bank of America's demand may have helped precipitate or accelerate Lehman's ultimate collapse several weeks later. Peck added there was a further irony in that Bank of America would have been able to recover the $500 million if it had placed the funds in a "plain vanilla" account rather than a secured instrument.

Lehman owes its creditors hundreds of billions of dollars. A lawyer for the former investment bank, did not immediately return a call seeking comment.

"We are disappointed with the court's decision, and we continue to believe that our actions were fully supported by well established New York law and the unambiguous language of the bankruptcy code," said Bank of America spokeswoman Shirley Norton. "We are considering our appellate options."

Lehman is also seeking to recover $8.6 billion it said JPMorgan Chase & Co extracted just before the bankruptcy, and an $11 billion "windfall" that Barclays Plc got in acquiring a U.S. brokerage unit. Peck oversees those cases as well.

The case is Bank of America NA v. Lehman Brothers Holdings Inc et al, U.S. Bankruptcy Court, Southern District of New York, No. 08-ap-01753. William Roll, Daniel Laguardia and Kristen Fitzmaurice of Shearman & Sterling represented Bank of America. Richard Rothman and Kevin Meade of Weil, Gotshal & Manges represented Lehman.

The main bankruptcy case is In re: Lehman Brothers Holdings Inc in the same court, 08-13555.

(Reporting by Jeff Roberts of Reuters Legal; Additional reporting by Santosh Nadgir and Jonathan Stempel of Reuters)