The New York Supreme Court late Thursday denied Bank of America Corp. and Countrywide Financial Corp.’s motion to dismiss MBIA Insurance Corp.’s claims of fraud by Countrywide.

MBIA Insurance is a guarantor of structured finance products. Its domestic public finance portfolio was ceded to a new entity — National Public Finance Guarantee Corp. — in a company restructuring in February 2009, which spurred a series of lawsuits challenging the transfer of capital away from MBIA and into the new bond insurer.

This Countrywide case, originally filed in September 2008, is one of 11 lawsuits involving MBIA as plaintiff. Similar to the other cases, MBIA alleges that Countrywide “fraudulently induced” the insurer to back risky residential mortgage-backed securities that failed to meet typical underwriting standards and guidelines.

Many of those securities reported heavy losses during the financial crisis, causing MBIA to absorb deep losses that pummelled its stock and trashed its credit ratings, driving it out of the municipal bond insurance business. It hopes to recover billions of dollars in the lawsuits.

In her 18-page court ruling, Judge Eileen Bransten said Countrywide failed to assert a basis to dismiss MBIA’s cause of action, which is that there is an “implied covenant of good faith and fair dealing.”

She also held that Bank of America’s acquisition of Countrywide in July 2008 was “a de facto merger” and it is therefore responsible for any “pre-existing liabilities” of Countrywide.

However, reiterating a decision to allow the case to proceed last July, Bransten said: “MBIA’s cause of action remains viable only as it relates to MBIA’s allegations that Countrywide deliberately refused to take corrective action in order to collect more fees.”

Also, the judge ruled against MBIA’s argument of negligent representation, which was based on there being a “special relationship” between the two parties.

“Although the court dismissed the negligent misrepresentation action, it reaffirmed its prior decision allowing our fraud claim to proceed,” an MBIA spokesman said in an e-mailed statement. “MBIA has been substantially harmed by Countrywide and Bank of America and we will continue to pursue all available remedies.”

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