NEW YORK ( TheStreet) - MBIA's ( MBI) stock surged as much as 22% on Tuesday, after a New York appeals court decided in the company's favor, potentially allowing the bond insurer to move forward with its restructuring plan.

In recent trading, MBIA shares were up 10.8% at $13.60, down from an intraday high of $14.96 earlier in the day.

Earlier in the day, the appellate division of the New York State Supreme Court reversed an earlier lower court decision that would have prevented the bond insurer from restructuring itself - a key step before MBIA can start moving forward.

A group of banks led by ABN Amro were contesting MBIA's ability to move forward, saying that the restructuring would allow MBIA to move forward and write new business without having enough money to pay old claims.

In a 3-2 decision, the appeals court panel determined that the banks filed their $5 billion lawsuit under the wrong rule. Justice Helen E. Freedman wrote for the panel, saying "the appropriate vehicle" for challenging MBIA's ability to restructure would fall under article 78, a separate law that wasn't part of this case.

The decision voided an earlier ruling by Manhattan Supreme Court Justice James A. Yates, which would have allowed the banks to overturn the Insurance Department superintendent's approval of MBIA's proposed restructuring. The banks have another petition pending under Justice Yates related to article 78.

MBIA and other bond insurers, like recently bankrupted Ambac, wrapped billions of dollars' worth of private-label subprime mortgage debt during the housing boom. When the housing market imploded, the firms received ratings downgrades, which left them unable to write new business, while paying out claims against hundreds of thousands of defaulted mortgage bonds.

For the past few years, MBIA has been locked in litigation with banks.

The firm has accused certain lenders, including Bank of America ( BAC) and Ally Financial, of misrepresenting the quality of loan pools behind the mortgage bonds that MBIA guaranteed.

It has also been fighting for survival, since MBIA can't wrap new debt until reorganizing into a new, well-capitalized entity with fewer liabilities and sufficient capital to cover future claims. That entity, called National Public Finance Guarantee Corp., hasn't gotten off the ground because banks have been contesting MBIA's ability to start a new business insuring municipal bonds.

"The banks have continuously sought to obstruct National's goal of providing much needed insurance capacity to the municipal market and to undermine the determinations made by the New York State Insurance Department," MBIA CEO Jay Brown said in a statement. "So we are gratified by the Appellate Division's decision and are now looking forward to a prompt resolution of the Article 78 proceeding, in which we fully expect to prevail."

However, Robert Giuffra, lead counsel for the banks and a partner at Sullivan & Cromwell, promised to pursue the article 78 proceeding and appeal Tuesday's decision, calling it "far from the last word."

-- Written by Lauren Tara LaCapra in New York.

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