UPDATE 1-Bank of America sues Colonial for $1 bln in loans, cash

(Adds details, background, Colonial share movement)

Aug 13 (Reuters) - Bank of America Corp (BAC.N) sued Colonial BancGroup Inc (CNB.N) for more than $1 billion in loans and cash, and urged a federal court to order the struggling lender not to sell certain assets, pushing the company into further trouble.

Bank of America, which was the collateral agent for certain loans of Ocala Funding LLC, said Colonial refused to return more than $1 billion of loans and cash which it held as a custodian, agent and bailee. Ocala Funding was a commercial paper vehicle sponsored by Taylor, Bean & Whitaker Mortgage Corp (TBW).

TBW, the 12th-largest U.S. mortgage lender, has shut down its mortgage lending operations and lawyers for the firm said on Aug. 11 that a "bankruptcy filing is imminent."

TBW had offered $300 million to help keep the troubled Montgomery, Alabama-based lender Colonial afloat, but the deal fell apart later in July.

Bank of America asked for a temporary restraining order, debarring Colonial from selling certain proceeds it received from Freddie Mac (FRE.N) (FRE.P) in return of mortgage loans, and certain other loans that the company held, which were owned by Ocala Funding LLC, court documents show.

Bank of America sought an emergency injunctive relief in a complaint filed with a U.S. federal court in Florida on Wednesday.

Colonial refused to return the proceeds and the loans on termination of bailee letters, the U.S. banking giant alleged.

When contacted, a Colonial spokeswoman said the company has no comments on the lawsuit.

DEEP TROUBLE

Colonial said last Friday it faces a criminal probe by the U.S. Department of Justice on accounting irregularities at its mortgage lending unit, and warned it may be put under receivership. [ID:nBNG433906]

It had also said the Alabama State Banking Department may appoint the Federal Deposit Insurance Corp as receiver or conservator for its banking unit after Aug. 12.

However, Alabama banking regulators said their scheduled meeting on Wednesday with Colonial Bank (CNB.N) had been canceled, but did not cite any reason. [ID:nN8C121593]

Colonial has been badly battered by the credit crisis, as higher charge-offs and rising foreclosures in the bank's Florida construction-loan portfolio continue to strain its balance sheet.

The company operates 355 branches in Florida, Alabama, Georgia, Nevada and Texas and has over $25 billion in assets. If it fails, it would be the largest failure this year.

Shares of Colonial were down 8 percent at 48 cents in late morning trade on the New York Stock Exchange. They have tumbled 93 percent in the past 52 weeks through Wednesday.

The case is In re : Bank of America National Association vs Colonial Bank and John Doe, U.S. District Court, Southern District of Florida, Miami Division 1:09-cv-22384-AJ. (Reporting by Anurag Kotoky in Bangalore; Editing by Gopakumar Warrier)