A federal district judge in New York kept the Assured Guaranty (AGO) billion dollar mortgage buy-back lawsuit against UBS (UBS) alive this week.

At the same time, Judge Harold Baer with the U.S. District Court Southern District of New York dismissed a few claims against UBS Real Estate Securities, giving onlookers a glimpse at how complex contracts governing mortgage bond guarantees can be.

Several years ago, Assured Guaranty agreed to insure RMBS sponsored by UBS. As insurer, Assured ended up on the hook for principal and interest payments on underlying mortgages that defaulted in the wake of the housing crash. Bloomberg News estimated the mortgage insurer provided guarantees on $1.5 billion in mortgage securities.

Soon after, Assured sued UBS, alleging the bank breached representations it made about the quality of the mortgages insured by Assured. The MBS insurer also alleged as a third-party beneficiary that it was entitled to force UBS to buyback toxic mortgages under the terms of initial pooling and servicing agreements.

Assured also accused UBS of breaching its commitment letters and asked the court for declaratory judgments against UBS for failing to cure contractual breaches and for failing to provide a reimbursement payment "to the full extent of its exposure under each (insurance) policy."

Judge Baer dismissed three of the claims, but allowed two to survive.

The insurer's request for the court to issue declaratory judgments on UBS contractual breaches and on the reimbursement payments were dismissed, along with Assured's assertion that as a third-party beneficiary it could request that UBS honor its loan repurchase obligations. Instead, the court said, when it comes to enforcing repurchase obligations, Assured, like other third-parties, must go through the trustee overseeing the loan pools to demand a loan repurchase.

The judge's ruling essentially limits some of the power that mortgage bond insurers have, while keeping the case alive.

Assured's claims involving breaches of mortgage representations and of commitment letters survived UBS' motion to dismiss.