A federal judge set back a lawsuit by former holders of Puerto Rico Sales Tax Finance Corp. (COFINA) bonds against several bond insurers.
U.S. District Court for Connecticut Judge Sarah Russell dismissed a suit against Ambac Financial Group Inc., Ambac Assurance Corp., MBIA Insurance Corp. and National Public Finance Guarantee Corp., citing the court's lack of personal jurisdiction.
Russell said the plaintiffs can continue the action against MBIA Inc. by filing a second amended complaint by March 6 explaining why MBIA Inc. wholly controlled its subsidiaries MBIA Insurance Corp. and NPFG or otherwise abused its corporate form.
Russell said Ambac Financial, Ambac Assurance, MBIA Insurance and NPFG were "foreign corporations" since they were not based in Connecticut, the state the court oversees.
COFINA bondholders Dwight Jereczek and Stanley Elliott
The judge said, "I conclude that Connecticut's long-arm statute does not authorize personal jurisdiction over the foreign corporations named in this action because plaintiffs are not citizens of Connecticut and they do not allege they reside or do business in this forum."
The plaintiffs said because the court has personal jurisdiction over MBIA Inc., which is based in Connecticut, and MBIA was associated with the insurers, the court could exercise supervision over the insurers. Russell rejected this, saying the U.S. Supreme Court said a corporation's association with other corporations, even with a subsidiary, doesn't guarantee a court has jurisdiction over the other corporations.
Russell said a corporate veil can be pierced and shareholders held liable if, among other things, the corporate form is misused to accomplish wrongful purposes for shareholders' behalf or if the subsidiary is a mere "alter ego" of the parent corporation. She declined to rule on whether this was true for MBIA Inc.
Instead, Russell said the plaintiffs had made some arguments in a memorandum of law on the relationship of MBIA Inc. to its subsidiaries but had failed to include the arguments in their amended complaint and because of this, she was legally barred from considering them in the plaintiff's motion to dismiss. As the complaint stands, the facts fail to support the inference that MBIA Inc. "wholly controlled its subsidiaries or otherwise abused the corporate form," the judge wrote.
"I will exercise my discretion to offer plaintiffs leave to amend [their complaint] in an effort to state a claim against MBIA Inc.," Russell said.
In their suit the COFINA bondholders argued defendants "unilaterally" replaced bondholders' "low risk, highly marketable insured bonds, for which plaintiffs were entitled to receive cash from defendants in the event of a default, with less valuable, riskier, and less marketable financial instruments that had varying yields."
An attorney for the plaintiffs declined to comment on Russell's order. Ambac and a spokesman for MBIA and its subsidiaries didn't immediately respond to requests for comments.
