NEW YORK (Reuters) - Bank of New York Mellon Corp <BK.N> must face a Commerzbank AG <CBKGn.DE> lawsuit seeking to hold it liable for toxic mortgage-backed securities that the German lender bought before the financial crisis, resulting in more than $1 billion of losses.

U.S. District Judge George Daniels in Manhattan ruled on Tuesday that Commerzbank may pursue breach of contract and negligence claims, as well as a claim that Bank of New York Mellon violated the federal Trust Indenture Act.

Bank of New York Mellon had no immediate comment. David Wollmuth, a lawyer for Commerzbank, declined to comment.

Commerzbank had sued over Bank of New York Mellon's role as trustee for 72 residential mortgage trusts and the Millstone II collateralized debt obligation, backed by home loans from lenders such as Countrywide Home Loans and NovaStar Mortgage.

The lawsuit accused Bank of New York Mellon of having "sat idly" for years as losses piled up, rather than require lenders to buy back defective loans and press servicers to address defaulted loans faster.

Daniels said Commerzbank could pursue arguments that Bank of New York Mellon failed to act prudently, and may have had a conflict of interest because taking action against lenders and servicers could imperil "lucrative business relationships."

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