An attorney representing banks holding MBIA Insurance policies guaranteeing structured finance products argued Tuesday that the $5 billion restructuring of MBIA’s insurance subsidiary was done without giving a group of policy-owning banks a chance to object.

The case, being heard in the New York State Court of Appeals — one of two lawsuits filed by the banks contesting MBIA’s restructuring — claims the value of the company’s guarantee for its structured finance portfolio was irreparably harmed when the insurer split it from its safer portfolio of insured municipal bonds.

If the court rules in favor of the banks owning the policies, the fraudulent conveyance lawsuit may be reinstated and heard by the New York State Supreme Court. If the court rules in favor of MBIA, the lawsuit will be dismissed and the bank policyholders will be allowed to raise the issue in a challenge under Article 78 of the New York Insurance Department’s decision to allow MBIA to restructure.

The original case was filed by bank policyholders in May 2009 after the restructuring of MBIA Insurance in February 2009. Originally, the New York Supreme Court denied MBIA’s motion to dismiss the case. Last January, the appellate division of the high court reversed that decision by ruling in favor of MBIA by a margin of three to two. Counsel for the bank policyholders appealed that decision and argued their position Tuesday.

Robert Giuffra Jr., lead counsel for the bank policyholders and a partner at Sullivan & Cromwell LLP, argued that the NYID’s approval of the restructuring did not extinguish or pre-empt entirely separate claims against MBIA under the state’s Debtor and Creditor Law and common law. He also argued that the claims the banks have for monetary damages and liabilities against MBIA under the Debtor and Creditor Law and common law could not be heard in an Article 78 proceeding. Giuffra further that argued the NYID’s decision to approve the restructuring was made without giving the banks any notice or opportunity to be heard.

“This case is not simply about whether MBIA should have the power to trample the rights of its policyholders by hiding behind a backroom administrative decision in which only its voice was heard,” Guiffra said. “It is above all about upholding the fundamental principles of fairness and openness.”

Representing MBIA was Marc Kasowitz, partner at Kasowitz, Benson, Torres & Friedman LLP. Kasowitz argued that MBIA continues to pay all insurance claims since the restructuring, so there has been no breach of contract. He also contended that policyholders can only challenge the restructuring approved by the NYID under Article 78 of New York Civil Practice Law and Rules.

Kasowitz also argued that legally, notice does not have to be given to policyholders prior to approval of the restructuring.

About 35 minutes into the hearing, NYID attorney Steven Wu said “whether or not it’s helpful, it’s not required” that the superintendent of the department tell policyholders about a restructuring. But when pressed by the panel of judges, he said that “it may be helpful” to tell policyholders about the restructuring.

“Has it ever happened in the history of the world that an administrator with large, active, sophisticated policyholders like this one decided whether they are adequately protected or not without consulting them, and then says, sorry, you’re precluded, you can’t challenge my decision except in Article 78 review?” one judge asked. Wu could not provide a specific example. 

Lawyers from MBIA and the NYID declined to comment.

Shares of MBIA have fallen 7.48% since Tuesday.

Subscribe Now

Independent and authoritative analysis and perspective for the bond buying industry.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.