July 4 (Bloomberg) — Investors suing over Bank of America Corp.’s $2.5 billion buyout of Countrywide Financial Corp. lost an attempt to stop a settlement of claims that company officials sold the largest U.S. home lender too cheaply.

Delaware Chancery Judge John Noble yesterday refused to put on hold a settlement of lawsuits alleging Countrywide directors’ miscues damaged the lender and that the board failed to get a fair price.

“I’m reluctant to stop the settlement at this stage,” Noble said at a hearing in Wilmington, Delaware. He said he plans to hold a hearing in October on final approval of the settlement.

Pension funds for state employees and teachers in Arkansas, Colorado, Mississippi and Louisiana are suing Countrywide directors in federal court in California. The funds asked Noble to throw out the Delaware settlement, which doesn’t provide any money to shareholders, saying it will wipe out their claims. The funds estimate they may be able to win as much as $2 billion in damages, according to court records.

Bank of America, based in Charlotte, North Carolina, bought Calabasas, California-based Countrywide July 1 in a share swap valued at $2.5 billion. That’s 37 percent less than the $4 billion in stock the bank agreed to pay in January.

Subprime Woes

Countrywide, battered by the collapse of the subprime mortgage market, faced bankruptcy as mortgage defaults and foreclosures rose during the past eight months. Late payments on Countrywide’s loans climbed to 4.6 percent as of March 31, up from 3 percent in the previous quarter.

In the Delaware lawsuit, shareholders in February accused Countrywide directors of violating their duties by approving the proposed sale on unfair and inadequate terms. The combined suits were settled in May.

Allowing the Delaware settlement to trump the California litigation would show a “total lack of monetary consideration for claims worth potentially billions of dollars” against Countrywide, Stuart Grant, a lawyer for the pension funds, said in court papers.

As part of the settlement, Countrywide agreed to disclose details of merger negotiations, including Bank of America’s initial $2 billion investment in non-voting convertible preferred securities, according to court documents. Countrywide also disclosed the federal plaintiffs’ estimates of the potential value of their claims.

`Facing Disaster’

Investors had that information when they voted to back the merger by more than 98 percent, said Stephen R. DiPrima, a New York-based lawyer for Countrywide.

DiPrima said the company “was facing disaster” and had to move quickly to find a buyer. Directors “negotiated the best deal they could,” he said.

Bank of America officials relied on the settlement agreement when they made disclosures about the buyout, David McBride, a Wilmington-based lawyer for the bank, told Noble.

“It will be a nightmare for us if the settlement can be second-guessed,” he said

Scott Silvestri, a Bank of America spokesman, didn’t return calls for comment on the judge’s ruling.

While Noble agreed to allow the settlement to proceed, he allowed investors to gather evidence about how the accord was negotiated that they can present at the final approval hearing.

Bank of America fell 14 cents to $22.40 in New York Stock Exchange composite trading yesterday. The stock has fallen 46 percent this year.

The consolidated Delaware case is In re Countrywide Corp. Shareholders Litigation, CA3464, Delaware Chancery Court (Wilmington.)

To contact the reporters on this story: Jef Feeley in Wilmington, Delaware, at jfeeley@bloomberg.net; Phil Milford in Wilmington, Delaware pmilford@bloomberg.net