Investors in soured Countrywide mortgage-backed securities used a legal trap Friday to block a controversial $8.5 billion MBS settlement between The Bank of New York Mellon and Bank of America (BAC). The plaintiff in the case, Walnut Place, represents investors in Countrywide MBS who are trying to block Bank of New York Mellon – a Trustee holding the plaintiffs’ MBS investments  — from settling with Bank of America over the sale of toxic, securitized loans without considering all of the investors’ concerns. The Walnut Place plaintiff filed a notice of removal Friday to get the case against the banks moved to federal court from state court on the grounds it’s a class-action complaint with multiple parties and qualified for federal jurisdiction. The controversy stems from an $8.5 billion settlement that Countrywide and BofA reached with investors who were represented by the Trustee,  The Bank of New York Mellon. As part of the settlement process, BNYM filed a petition in state court to begin proceedings under state Article 77 to gain judicial approval of the proposed settlement. The legal wrangling upset investors — including the Walnut Place plaintiffs — since it attempts to settle all claims within the Trust in one final transaction. Manal Mehta with Branch Hill Capital noted if the case is moved to federal court, it “basically renders the Article 77 (proceeding) irrelevant.” “Article 77 is a New York Statute,” Mehta explained. “Bank of America wanted to use Article 77 to make the settlement binding upon all 530 trusts including those who objected to the settlement.” He added, “Class action in federal court allows parties to opt out of the settlement.” The next play belongs to the banks, which will have to file a motion to ensure the case remains in state court. Write to: Kerri Panchuk.