By Ilaina Jonas

NEW YORK (Reuters) - A state appeals court ruledagainst hedge fund manager William Ackman Tuesday, pavingthe way for bondholders to sell the massive Manhattan apartmentcomplexes Stuyvesant Town and Peter Cooper Village in aforeclosure auction next week.

The New York State Supreme Court Appellate Division, FirstDepartment, denied a request by a joint venture of Ackman'sPershing Square Capital Management LP and Winthrop Realty Trust to reverse a lower court judge's ruling that theventure could not elbow past holders of $3 billion of mortgagebonds to gain control of the properties.

The lower court lifted a temporary injunction that stoppedthe bondholders from foreclosing on the property, and did notallow the Ackman joint venture to go ahead with its plan toforeclose on the equity in the owners.

The bondholders have scheduled an Oct. 4 auction to sellthe properties to the highest bidder.

"We're going to ahead on Monday," said Greg Cross, attorneyfor CWCapital, the bondholders' representative. "They had nomore ability to enjoin our foreclosure than the Red Sox have tostop the Yankees from signing free agents."

But the Pershing/Winthrop venture, called PSW, vowed tocontinue to fight.

"The decision by the appellate court is not a ruling on themerits of the appeal from the trial court's September 16thinjunction, which PSW intends to vigorously pursue," theventure said in a statement.

Ackman is set to meet with CWCapitalFriday.

Some potential buyers said they would like to acquire theproperty outside of a foreclosure sale to avoid hundreds ofmillions of dollars of transfer taxes and additional mortgagerecording taxes.

The bondholders' securities are backed in part by the $3billion mortgage that investors, led by private equity firmTishman Speyer Properties, used in 2007 to buy the 56-buildingapartment complex on the east side of Manhattan for $5.4billion.

The properties were built after World War Two to housereturning veterans. About 25,000 people live in the 11,277apartments. Tishman announced its agreement to buy theproperties from original owner MetLife Incin late2006, near the height of the U.S. commercial real estate boom.

As part of the financing, the companies Tishman Speyer setup to buy the properties, called PCV ST Owner LP and ST OwnerLP, also borrowed $1.4 billion in junior loans. Those loanswere secured by the interest in the companies, while themortgage was secured by the properties. The Ackman venturesought to gain control of the property by gaining control ofPCV ST Owner and ST Owner.

The slump in the U.S. commercial real estate market and anadverse court decision forced the owners to default on theloans in January. By then, the property had lost more than halfits value.

After no junior lender stepped up to take over the ownersand assume the mortgage, CWCapital, which represents thebondholders, moved to foreclose on the property.

In August, Ackman created PSW with Winthrop, the originalmaker of three junior loans, to buy $300 million worth ofjunior loans for 15 cents on the dollar. The joint venture thenmoved to foreclose on the interest in the limited partnershipswithout first paying the $3.66 billion mortgage principal plusaccrued interest and fees due the bondholders.

On Sept. 16, the lower court ruled against Ackman's PSW.

The case is Bank of America NA et al v. PSW NYC LLC, NewYork State Supreme Court, New York County, No. 651293/2010. (Reporting by Ilaina Jonas; Editing by Gerald E. McCormick,Richard Chang and Steve Orlofsky)