NEW YORK, June 28 (Reuters) - A state appeals court on Thursday upheld the dismissal of a lawsuit brought against Bank of America Corp by investors who wanted the bank to buy back mortgage loans issued during the financial crisis.

The case was filed by entities known as Walnut Place, who had invested in more than $1 billion in securities backed by the mortgages. Walnut Place is a name used by the Baupost Group, a Boston-based hedge fund run by money manager Seth Klarman.

The investors claimed Countrywide Financial Corp made false representations about the characteristics and credit quality of loans underlying the securities in pooling and servicing agreements. Countrywide was bought by Bank of America in 2008.

Bank of America refused its demand that it buy back the loans and Bank of New York Mellon, the trustee for the securities, "unreasonably failed" to sue the bank to repurchase the loan, Walnut Place said.

Supreme Court Justice Barbara Kapnick dismissed the lawsuit on March 29. She said the investors were covered by a proposed $8.5 billion settlement between Bank of America and all investors who lost money on Countrywide mortgage-backed securities.

The Appellate Division, First Department, on Thursday unanimously affirmed Kapnick's decision.

The appeals court said Kapnick correctly decided that the case was barred by a "no-action" clause in the pooling and servicing agreements, which limit the right to sue to an "event of default," which doesn't apply.

"The court correctly held that plaintiff certificate holders' action is barred" by agreements that limit the right to sue, the appeals court wrote.

The $8.5 billion settlement was reached in June 2011 with 22 institutional investors, including BlackRock Inc and MetLife, to resolve liabilities from Bank of America's $2.5 billion purchase of Countrywide in July 2008.

Walnut Place, which was not part of talks but would be bound by the terms of the agreement, is among investors who have objected to the settlement, complaining that the $8.5 billion payout is too low.

New York attorney David Grais, who represents Walnut Place, did not immediately respond to a request for a comment.

Lawrence Grayson, a spokesman for Bank of America, declined to comment. Kevin Heine, a spokesman for Bank of New York Mellon, did not immediately respond to a request for comment.

The case is Walnut Place LLC et al v Countrywide Home Loans Inc et al, New York State Supreme Court, New York County, No. 65097-2011. 

(Reporting by Karen Freifeld)

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