2nd UPDATE: MBIA To Appeal Denial Of Motion To End Lawsuit

For the second time this month, bond insurer MBIA Inc. (MBI) failed in an attempt to have a lawsuit against it dismissed.

On Wednesday, Judge James A. Yates denied MBIA's motion to dismiss a suit brought against it in New York state court by a group of banks challenging MBIA's split into two insurers.

In a statement, MBIA said it plans to appeal the decision. It also said the presiding judge acknowledged that the appellate division may disagree with his decision.

"As both MBIA and the New York State Insurance Department have stated, this lawsuit is an improper collateral attack on the Insurance Department's approval of our transformation, and the currently pending Article 78 proceeding is the only appropriate forum for challenging it," MBIA spokesman Kevin Brown said in an email.

"We are confident that the Appellate Division will reach the same conclusion and reverse today's decision," Brown said. "We expect to ultimately prevail in this and any other litigation challenging our transformation."

The banks have also brought a so-called Article 78 proceeding to challenge the insurance department's decision to allow MBIA's split into two insurance companies. The banks argue the split removed capital that would otherwise be available to pay claims on securities they insured.

The banks include ABN Amro Bank NV, Canadian Imperial Bank of Commerce (CM), Citibank (C), JP Morgan Chase Bank (JPM), and several other large global banks.

All obtained financial guarantees from MBIA to cover losses in structured securities such as collateralized debt obligations backed by mortgage loans.

Last week, MBIA failed to win in its motion to dismiss a similar suit brought against it in federal court. The attorney representing plaintiffs in the federal suit said he will seek to begin discovery soon.

MBIA has filed lawsuits against some of the banks, charging that they misrepresented the credit quality of securities they had asked MBIA to guarantee. Its latest suit, filed in January against Royal Bank of Canada (RY, RY.T) and some of its affiliates, is over credit default swaps with a face value of $4.425 billion and guaranteed by MBIA. The first court hearing in that case is currently scheduled for Friday.

MBIA has also initiated lawsuits against Bank of America Co. (BAC) and Credit Suisse Securities LLC.

Shares of MBIA closed up 1.2% at $5.11 on Wednesday.

-By Lavonne Kuykendall, Dow Jones Newswires; 312-750-4141; lavonne.kuykendall@dowjones.com

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