UPDATE 2-MBIA says NY block on payment does not spell insolvency
* MBIA says block is tied to liquidity issues
* Blames BofA failure to pay MBIA $5 bln
* BofA says block bolsters its case against MBIA
By Karen Freifeld
NEW YORK, Jan 17 (Reuters) - Bond insurer MBIA Inc said on Thursday that New York's decision to prevent it from making an interest payment on a series of notes does not mean it cannot meet its financial obligations.
The decision "does not reflect MBIA Insurance's current solvency or ability to pay claims to policyholders," Marc Kasowitz, a lawyer for the insurer, wrote in a letter to a New York state judge.
New York's Department of Financial Services blocked the interest payment on Tuesday, but at the time neither the company nor the regulator would say why the measure had been taken.
Thursday's letter came in a long-running court battle between MBIA and two banks, Bank of America Corp and Societe Generale, over whether MBIA's restructuring in 2009 was proper.
The banks, which were MBIA policyholders, claim they were harmed in the restructuring when $5 billion was transferred out of the MBIA unit that insures risky mortgage debt and into a new unit that guarantees municipal bonds.
On Wednesday, Robert Giuffra, a lawyer for the two banks, said the regulator's "extraordinary" step blocking the interest payment bolsters the banks' case that the restructuring should be annulled.
The block "confirms that MBIA Insurance cannot meet its financial obligations without the $5 billion improperly siphoned from MBIA Insurance in the transformation," Giuffra wrote.
In its reply on Thursday, MBIA said the regulator's action was irrelevant to the court proceeding and blamed any liquidity issues at MBIA on Bank of America Corp's refusal to pay $5 billion in obligations it says the bank owes MBIA.
Bank of America's failure to honor its obligations to "buy back billions of dollars in ineligible mortgages" caused the action by the state regulator, MBIA's letter said.
MBIA also noted that the Department of Financial Services has not put MBIA Insurance into a rehabilitation or liquidation proceeding.
A spokesman Charlotte, North Carolina-based Bank of America, declined comment on Thursday. The Department of Financial Services also declined to comment on Thursday.
MBIA shares rose 0.37 percent to $8.06 in afternoon trading.
The banks and insurer are awaiting a decision in the case by State Supreme Court Justice Barbara Kapnick.
The case is ABN Amro Bank v Dinallo, No. 601846/2009, New York state Supreme Court, New York County.