By Karen Freifeld

NEW YORK (Reuters) - A New York state judge declined to delay court approval of Bank of America Corp's (BAC) $8.5 billion settlement with investors in mortgage-backed securities, rejecting a move by American International Group Inc (AIG).

At a hearing on Wednesday, Justice Saliann Scarpulla of New York State Supreme Court ordered the judgment by her predecessor in the case, Barbara Kapnick, to be officially recorded.

"It's very straightforward," Scarpulla told lawyers for AIG, which was one of the investors in the mortgage securities. "Judge Kapnick issued the order. ... If you don't like it, your remedy is to appeal."

Kapnick approved the settlement on January 31, her last day overseeing the case before she was elevated to a state appeals court, and ordered a five-day delay before her approval was officially recorded. AIG on February 4 asked Scarpulla, the new judge on the case, to delay recording of the judgment, saying Kapnick had left some matters unresolved.

"Judge Kapnick told me the five-day stay she put in was merely a convenience to the parties," Scarpulla said on Wednesday. "She had no intention of leaving anything open."

AIG said in a statement it will appeal Kapnick's decision if necessary.

Bank of America agreed to the settlement in June 2011 to resolve claims by investors who bought mortgage-backed securities issued by Countrywide Financial before the U.S. housing crisis. The investors said Countrywide, acquired by Bank of America in 2008, misrepresented the quality of the underlying home mortgages, which went sour in the crisis.

Twenty-two institutional investors, including BlackRock Inc (BLK), Allianz SE's Pimco (ALV.DE) and Metlife Inc (MET), signed on to the settlement. AIG opposed the deal, saying there was no evidence it provided adequate compensation for losses.

"AIG's announced strategy of imposing indefinite delay was defeated today," Kathy Patrick, a lawyer for the investor group supporting the decision, told Reuters.

Lawrence Grayson, a spokesman for Bank of America, declined to comment.

Kevin Heine, a spokesman for Bank of New York Mellon, the trustee overseeing the securities, said it was pleased the court will enter the judgment, "which overwhelmingly vindicated the trustee's actions."

Bank of New York Mellon and other supporters of the deal have accused AIG of holding the settlement "hostage."

In her January 31 ruling, Kapnick said Bank of New York Mellon acted with mostly reasonable judgment in entering into the settlement. She made one exception, withholding approval relating to certain loans that had been modified. She said the trustee should not have settled those claims without investigating their potential worth.

AIG said Wednesday it will try to get Kapnick's decision vacated by pursuing a motion it filed Tuesday to reargue the case before Scarpulla.

In the motion, AIG said Kapnick overlooked disputed and unresolved issues, applied the wrong standard to the trustee's actions and failed to adequately explain her decision.

"We are pleased that the court intends to address AIG's motion for re-argument," AIG said in its statement. "If necessary, AIG also looks forward to pressing ahead with its appeal at the appropriate time."

Scarpulla said during the hearing she would hear arguments on the motion but did not set a date.

The case is In re Bank of New York Mellon, New York State Supreme Court, New York County, No. 651786/2011.

(Reporting by Karen Freifeld; Editing by Leslie Adler and Chizu Nomiyama)