(Bloomberg) -- Bank of America Corp.’s Merrill Lynch unit must face a lawsuit filed by two trusts that hold and administer mortgages on behalf of investors who own more than $1 billion worth of securities collateralized by the loans.

The trusts sued Merrill Lynch Mortgage Lending Inc. in New York State Supreme Court in Manhattan in December, seeking to force it to repurchase loans that allegedly didn’t conform to representations and warranties about their quality and characteristics.

Merrill in 2006 bought more than 6,000 mortgages with an original principal balance of more than $1.1 billion from a third-party loan originator, ResMAE Mortgage Corp., and turned them into tradeable securities that were sold to investors, according to the complaint.

ResMAE filed for bankruptcy in February 2007 and the trusts pursued claims against ResMAE in bankruptcy through LaSalle Bank, demanding that it buy back loans on which borrowers had missed their first or second payments or provide other compensation, according to the complaint. LaSalle in July 2008 settled those claims on behalf of five Merrill-sponsored trusts, including the two plaintiffs in the suit.

Contractual Obligations

The trusts said Merrill is obligated to buy back loans in which the representations and warranties were breached by ResMAE, which can no longer fulfill its contractual obligations because it has been liquidated in bankruptcy. Merrill had asked Justice Melvin Schweitzer to dismiss the suit, saying it’s not responsible for breaches made by ResMAE.

Schweitzer, in a ruling dated Sept. 10 and made public today, denied the motion to dismiss, saying Merrill has guaranteed the obligations of ResMAE under a transfer agreement.

“The force of the trusts’ arguments subordinates Merrill’s unreasonable positions, however cleverly put they may be,” Schweitzer said.

The case is Merrill Lynch Mortgage Investors Trust, Series 2006-RM4 v. Merrill Lynch Mortgage Lending Inc., 654403/2012, New York State Supreme Court, New York County (Manhattan).

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