NEW YORK - A New York judge on Tuesday rejected an effort byAmerican International Group Inc and other objectors to Bank ofAmerica Corp's proposed $8.5 billion mortgage bond settlement toconvert the case to a proceeding that may have widened itsscope.

New York state Supreme Court Justice Barbara Kapnick, who mustdecide whether to approve the settlement, denied the motion by AIGand other groups of investors to turn the limited proceeding knownas an Article 77 into a broader inquiry known as a plenaryaction.

Kapnick said at a hearing on Tuesday that she could accomplishwhat was necessary under Article 77.

"I really think I have a lot of discretion," she said.

An Article 77 is a special proceeding, limited in scope, thatgenerally is used in run-of-the-mill trust matters. Objectors tothe settlement wanted to transform the case into a plenary actionfor a full hearing.

The settlement would resolve claims from investors in mortgagebonds issued by Countrywide Financial Corp, which was purchased in2008 by Bank of America.

BlackRock Inc, MetLife Inc and Allianz SE's Pacific InvestmentManagement Co are among 22 institutional investors who agreed tothe accord. Other investors have complained the payout is toolow.

In a statement, AIG said it intervened "to ensure that it andother investors have adequate information to assess Bank ofAmerica's settlement."

AIG said it looked forward "to the opportunity to examine thefacts and to assess whether Bank of New York has endorsed a dealthat unreasonably benefits Bank of America or whether itappropriately compensates investors who were harmed byCountrywide."

'POSITIVE STEP'

Kathy Patrick, an attorney for the institutional investors,viewed the judge's decision as a positive step.

"She confirmed the trustee was entitled to proceed under Article77, which is a summary, expedited form of proceeding," Patrick saidafter the hearing.

John Moon, an attorney for entities known as Triaxx, which holdunpaid principal of over $2 billion in notes, was not dissuaded bythe judge's decision to reject the motion he joined inbringing.

"Whether it's an Article 77 or a plenary action," said Moon, "Iview it as winning the battle because the judge implied there wouldbe adequate disclosure of the facts surrounding thesettlement."

Kevin Heine, a spokesman for Bank of New York Mellon, declinedcomment.

The judge asked the parties to work out proposals for providingdocuments. Objectors to the proposed settlement want widediscovery, while the trustee wants less.

"Everybody's going to get part of what they want," Kapnicksaid.

Kapnick also heard arguments on whether to allow the attorneysgeneral of New York and Delaware to intervene in the case. She madeno decision on that.

AIG, which has said Bank of America is "drasticallyunderpaying," is one of two big objectors to the settlement.Baupost Group, a Boston-based hedge fund run by Seth Klarman,operating under the name Walnut Place LLC, is the other. A handfulof Federal Home Loan Banks are among those seeking broader scrutinyof the deal.

BNY Mellon, acting as trustee for the investors, has said itdecided the settlement was in the best interest of the trusts. Itbelieves the judge's approval should be based on whether thetrustee's decision was within its reasonable discretion.

The case is In the application of the Bank of New York Mellon,651786-2011, New York state Supreme Court (New York County."