At issue is whether then Superintendent of Insurance Eric Dinallo had the authority to allow Armonk, N.Y.-based guaranty insurer MBIA to split itself in two. The action separated the insurer's healthy portfolio of municipal bonds into one company, National Public Finance Guarantee. The second company, MBIA, retained the structured financed instruments consisting of mortgage backed securities.

The policyholders are asking the judge to annul the approval three years ago claiming that the MBIA has spent more than $9 billion to pay claims and resolve liabilities, more than five times the $1.7 billion in reserves that MBIA told the insurance department would be necessary for an extended period of time.

“We're confident that, on the law and the evidence, this approval cannot stand,” says Robert J. Giuffra Jr. lead counsel for the policyholders and a partner at Sullivan & Cromwell LLP, in a statement.

In a statement, Kevin Brown, director, corporate communications for MBIA says, “We remain confident that the New York State Insurance Department's approval of transformation was appropriate and will be upheld by the court.”

The plaintiffs include Bank of America, Société Générale S.A. and Natixis S.A.

The proceedings have been less than cordial at times. Most recently, the parties traded accusations about wrongdoing where the Giuffra accused MBIA Chief Executive Officer Joseph W. Brown of engaging in insider trading. A charge MBIA vehemently denied.

Brown, on several occasions, accuses the banks of misrepresenting the mortgages it insured saying the carrier would never have insured the sub-prime mortgage loans it was saddled with.