Security Capital Assurance Ltd. (SCA) has been accused of having 'sellers remorse' in a lawsuit filed by Merrill Lynch as the bank attempts to force the bond insurer to honour $3.1 billion of guarantees on collateralised debt obligations (CDOs).

The lawsuit stems from seven credit default swap contracts Bermuda-based Security Capital Assurance Ltd. wrote with Merrill Lynch.

The bank, which is the third largest in the US and has wracked up $24.5 billion in mortgage-related write downs and losses, is suing SCA's financial guarantor subsidiary XL Capital Assurance Inc.

SCA, which was stripped of its AAA bond insurer ratings this year by the three major ratings companies as result of losses related to subprime securities it protected, has already vowed to fight the lawsuit "vigorously".

In an e-mail statement yesterday Merrill Lynch spokesman Mark Herr said: "We filed suit to make clear that XL Capital Assurance Inc. is required to meet its contractual obligations.''

The company is seeking a court order that each of the credit default swaps remains in full force and effect.

In a complaint filed yesterday in Manhattan federal court the company said: "Apparently in light of the current dramatic downturn and deterioration in the credit markets, defendants are having sellers' remorse."

Yesterday, SCA spokesman Michael Gormley confirmed that Merrill Lynch was the company SCA CEO Paul Giordano referred to last week when he announced SCA would seek to void contracts with a company that failed to meet requirements "in a fundamental way".

Mr. Gormley said the company maintained that the termination of contracts was correct and said: "We intend to defend any challenge by Merrill Lynch to the terminations vigorously."

He added that he could not go into details of the lawsuit as their lawyers were still examining the documents.

SCA became the second bond insurer to say it will try to cut losses on guarantees it wrote on CDOs.

The announcement was the latest in a string of subprime related issues for SCA. In early March the company stated it expected to take a charge of $1.5 billion for the fourth quarter on sub-prime mortgage related obligations.

And SCA's share price dropped 80 cents or 53 percent, to 72 cents in New York Stock Exchange composite trading after the company said it would have to delay filing its annual results with the US Securities and Exchange Commission.

Yesterday SCA's share price rose nearly 10 percent to finish the day at 79 cents.