UPDATE 1-Judge dismisses most of MBIA's suit vs Merrill

Fri Apr 9, 2010 3:20pm EDT

(Adds Merrill comment and other details)

NEW YORK, April 9 (Reuters) - A New York judge threw out on Friday most of bond insurer MBIA Inc's (MBI.N) lawsuit against Merrill Lynch & Co that cited losses from complex debt securities it insured for the investment bank.

In a 13-page written decision, New York State Supreme Court Justice Bernard Fried dismissed five of six causes of action, including fraud, but allowed MBIA to move ahead with its breach of contract claim. He said MBIA could still seek damages.

"Plaintiffs may claim that the wrapped notes were not qualified to be AAA rated, as promised, regardless of the label they carried, as a claim for breach of contract," the judge ruled.

The lawsuit, filed last year in New York State Supreme Court in Manhattan, sought to void certain credit default swaps and related insurance contracts that MBIA, through a special purpose vehicle, wrote on the securities held by Merrill, which is now owned by Bank of America Corp (BAC.N).

The insurer wrote $5.7 billion in guarantees on these securities, which were packages of mortgages known as collateralized debt obligations (CDOs), MBIA said.

MBIA faces several hundred million dollars of losses on these contracts because Merrill misrepresented the credit quality of the CDOs, the insurer said.

"We are pleased with the ruling and will vigorously defend against the breach of contract claim," Shirley Norton, a spokeswoman for the investment bank, said in a statement.

Bank of America Corp bought Merrill Lynch in January, after losses from complex debt securities and mortgages forced the brokerage and investment bank to sell itself.

In late afternoon New York Stock Exchange trading, Bank of America shares were off 9 cents or 0.5 percent to $18.56 and MBI shares were up 20 cents or 2.7 percent to $7.75.

The case is MBIA Insurance Co. v Merrill Lynch, New York State Supreme Court, No. 09-601324. (Reporting by Edith Honan, Editing by Gerald E. McCormick)

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