The ruling allows Bank of America Corp., HSBC Holdings Plc and Wells Fargo & Co. to pursue claims that the restructuring fraudulently siphoned $5 billion from the company's MBIA Insurance operating unit at their expense.

MBIA shares fell as much as 7.1 percent.

The February 2009 restructuring was prompted by MBIA's losses from insuring mortgage-related securities during the global credit crisis. This led to $4.6 billion of losses in 2007 and 2008, and raised questions about MBIA's survival.

Approved by New York's insurance superintendent at the time, Eric Dinallo, the restructuring was designed to protect MBIA's municipal bond business from its structured finance unit, which suffered losses from insuring mortgage debt.

But the banks said the restructuring would leave MBIA Insurance unable to pay billions of dollars in claims that it owed to policyholders including themselves, pension funds, charities, universities and other investors.

A divided intermediate state appeals court on Jan. 11 rejected the banks' challenge to MBIA's transfer of capital from MBIA Insurance to another entity, National Public Finance Guarantee Corp.

But in a 5-2 decision, the New York State Court of Appeals Tuesday said state insurance law did not give Dinallo broad preemptive power to block the banks' claims.

"If the legislature actually intended the superintendent to extinguish the historic rights of policyholders to attack fraudulent transactions," Judge Carmen Ciparick wrote for the majority, "we would expect to see evidence of such intent within the statute."

MBIA DISAPPOINTED

MBIA had argued that the banks' only recourse was under a so-called Article 78 proceeding, which under New York law allows challenges to state administrative rulings.

The banks have been pursuing a separate lawsuit under that provision, which has yet to go to trial.

Willard Hill, an MBIA spokesman, said the Armonk, New York-based company is disappointed by Tuesday's ruling. "We remain confident that we will ultimately prevail," he said.

Robert Giuffra, a partner at Sullivan & Cromwell who represents the banks, said his clients will pursue their claims in both proceedings.

"We're confident that MBIA's fraudulent restructuring will be reversed," he said in a statement.

Dinallo, now a partner at the law firm Debevoise & Plimpton, did not immediately return a call seeking comment.

Other plaintiffs included BNP Paribas SA, Credit Agricole, KBC Investments Cayman Islands, Morgan Stanley, Natixis SA, Royal Bank of Scotland Group Plc, Societe Generale and UBS AG.

RIVAL AMBAC WENT BANKRUPT

MBIA and Ambac Financial Services Group Inc., once the world's largest bond insurers, branched out beyond traditional municipal bond underwriting early last decade by insuring risky mortgage-related securities.

As losses mounted, both companies stopped insuring municipal bonds. Ambac, based in New York, filed for bankruptcy protection last November. MBIA's restructuring was designed to avoid a similar occurrence.

Billionaire investor Wilbur Ross' Assured Guaranty Ltd still insures municipal bonds, but the bond insurance market is a fraction of its earlier size.

In Tuesday's ruling, Ciparick said the banks could pursue claims that the restructuring violated state debtor and creditor law, and that MBIA Insurance's "harmful transactions" exposed them to "significant liability."

She agreed with the intermediate appeals court that the banks' claim for unjust enrichment should be dismissed.

In dissent, Judge Susan Read wrote that state insurance law preempted the banks' lawsuit, and that the restructuring could be challenged only in an Article 78 proceeding.

In early afternoon trading, MBIA shares were down 31 cents, or 3.8 percent, at $7.86 on the New York Stock Exchange, after earlier falling to $7.59.

The case is ABN Amro Bank NV et al v. MBIA Inc et al, New York State Court of Appeals, No. 124.