The New York State Supreme Court on Friday dismissed most of the claims MBIA Inc. and its affiliate LaCrosse Financial levied against Merrill Lynch in May 2009. MBIA and LaCrosse claimed last year that the investment bank, knowing its mortgage assets were looking more and more likely to be affected by defaults, carried out a “deliberate strategy” to offload them to investors and parties to credit default swaps such as the plaintiffs.

The suit sought to unwind or recover payouts for $5.7 billion of credit default swaps and related insurance sold against CDOs. MBIA accused Merrill Lynch in the suit of packaging deteriorating subprime mortgages and other collateral as collateralized debt obligations. MBIA and LaCrosse wrote credit default swaps on the CDOs, largely, they claim, because Merrill represented them as high-quality securities.

But the court disagreed and dismissed claims of fraud and negligent misrepresentation, pointing out that MBIA and LaCrosse were made aware of the risk attached to the CDOs.

“MBIA and LaCrosse specifically stated that they were able to evaluate the validity of the CDOs, and were specifically warned that the transaction was appropriate only for sophisticated investors capable of analyzing the risks, including the risk related to the type of collateral involved in the transaction,” Justice Bernard Fried wrote in the April 9 opinion.

MBIA plans to appeal. Merrill still faces one remaining breach of contract claim, which Fried allowed to proceed.