A U.S. appeals court on Monday threw out a jury's finding that Bank of America Corp was liable for mortgage fraud leading up to the 2008 financial crisis, voiding a $1.27 billion penalty and dealing the U.S. Department of Justice a major setback.

The 2nd U.S. Circuit Court of Appeals in New York found insufficient proof under federal fraud statutes to establish Bank of America's liability over a mortgage program called "Hustle" run by the former Countrywide Financial Corp.

The Justice Department claimed Countrywide, which Bank of America bought in July 2008, defrauded government-sponsored mortgage financiers Fannie Mae and Freddie Mac by selling them thousands of toxic loans.

But in a 3-0 decision, U.S. Circuit Judge Richard Wesley said the evidence at most showed that Countrywide breached contracts to sell investment-quality loans, and that there was no proof it intended any deception.

"The trial evidence fails to demonstrate the contemporaneous fraudulent intent necessary to prove a scheme to defraud through contractual promises," Wesley wrote.

Bank of America said it was pleased with the ruling. A spokesman for Manhattan U.S. Attorney Preet Bharara, whose office pursued the case, had no immediate comment.