NEW YORK (

TheStreet

) -- A New York State Supreme judge on Thursday denied a motion by

Morgan Stanley

(MS) - Get Report

to dismiss a mortgage putback lawsuit filed by

MBIA

(MBI) - Get Report

.

MBIA filed its suit in December against Morgan Stanley and its subsidiaries Morgan Stanley Capital Holdings LLC and Saxon Mortgage Services, alleging "fraud and breach of contract," related to a securitization of roughly 5,000 second-lien residential mortgage loans with a total balance of $269 million, as well as a "breach of Saxon Mortgage Inc.'s servicing obligations."

MBIA alleged that Morgan Stanley and its subsidiaries had misrepresented the quality of the underlying loans, misrepresented the underwriting diligence performed on the loans, the percentage of the loans confirming to Morgan Stanley's underwriting requirements and the capabilities of Saxon Mortgage Services.

The insurer also said that 93% of the 982 randomly selected loan files for the second mortgages in the Morgan Stanley pool that it had reviewed as of October 2010 contained breaches of what Morgan represented.

In February, Morgan Stanley filed a motion to dismiss MBIA's claims, arguing that MBIA's fraud claim should be stricken, in part it duplicated MBIA's branch of contract claim. Judge Gerald Loehr rejected this argument.

Morgan also said MBIA's request for punitive damages should be denied because MBIA had not alleged that Morgan had acted with "evil motive" or "wonton" disregard, and since MBIA didn't allege that Morgan's behavior was part of a general pattern directed against the public.

The Judge called the argument that MBIA's complaint didn't allege a pattern of harm directed at the public, "fallacious."

While the judge denied most of Morgan Stanley's motions to dismiss MBIA's case, the motion to dismiss the "unjust enrichment" claim against Saxon Mortgage Services was granted, as MBIA had "failed to allege that it paid fees to Saxon which were received unjustly."

A preliminary conference for the case is scheduled for June 23.

MBIA also has pending legal actions, with fraud and mortgage putback claims against

Bank of America

(BAC) - Get Report

, subsidiaries of

Ally Bank

, and

Credit Suisse

(CS) - Get Report

.

An MBIA spokesman told

TheStreet

that the insurer was "pleased that the Court has allowed our fraud and contract claims to move forward against Morgan Stanley. The decision continues and reinforces the string of favorable rulings in our RMBS litigations against Bank of America, Countrywide, Credit Suisse, GMAC Mortgage and Residential Funding Co."

Morgan Stanley declined a request for comment.

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--

Written by Philip van Doorn in Jupiter, Fla.

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Philip W. van Doorn is a member of TheStreet's banking and finance team, commenting on industry and regulatory trends. He previously served as the senior analyst for TheStreet.com Ratings, responsible for assigning financial strength ratings to banks and savings and loan institutions. Mr. van Doorn previously served as a loan operations officer at Riverside National Bank in Fort Pierce, Fla., and as a credit analyst at the Federal Home Loan Bank of New York, where he monitored banks in New York, New Jersey and Puerto Rico. Mr. van Doorn has additional experience in the mutual fund and computer software industries. He holds a bachelor of science in business administration from Long Island University.