COFINA bondholders argue MBIA Inc. is responsible for actions of subsidiaries

Bloomberg News

Holders of Puerto Rico Sales Tax Finance Corp. (COFINA) bonds filed a second amended complaint against MBIA Inc. Friday, saying it is responsible for its subsidiaries' breaches of contract.

In late February a U.S. District Court for Connecticut judge dismissed the bondholders' complaints against the subsidiaries National Public Finance Guarantee and MBIA Insurance as well as Ambac Financial Group Inc. and Ambac Assurance Corp.

She said because they were not headquartered in Connecticut and the bondholders were not citizens of the state, she didn't have jurisdiction. She let the plaintiffs continue the action against parent MBIA Inc. if they filed an amended complaint explaining why MBIA Inc. wholly controlled its subsidiaries or otherwise abused its corporate form.

MBIA Inc. is based in Connecticut. 

In their filing, the two COFINA bondholders said MBIA Inc., "has used its control over its subsidiaries to allocate assets in a manner that benefits MBIA Inc. at the expense of bondholders." In this way, MBIA Inc. has perpetrated a "fraud on investors." 

MBIA Inc. "exercises complete domination and control over the finances of MBIA Corp. and National Public Finance Guarantee," the bondholders said.

"The corporate veil between MBIA Inc. and its subsidiaries should be pierced to hold MBIA Inc. liable for the breaches of contract committed by its subsidiaries," the bondholders said. 

The actions that harmed COFINA bondholders during and after the COFINA bankruptcy were "not independent acts of autonomous subsidiaries," the bondholders said. Rather, the acts were aimed at protecting holding-company liquidity and reducing exposure to Puerto Rico bonds at expense of plaintiffs' contractual rights.

The bondholders say the certificates they received from NPGG and MBIA Insurance are inferior in several respects to what the bondholders had been promised — cash payments in amounts and timing equal to the original bonds. 

The new certificates carry significantly lower interest rates than the original guaranteed bonds, the bondholders said. They are taxable as compared to the original bonds' tax-exempt status. 

The certificates are non-marketable and carry structural risks, the bondholders said. 

The bondholders set out eight legal causes of action and asked the judge to allow their action to proceed as a class action case. They asked her to find that MBIA Inc. breached its contractual obligations and that the plaintiffs have been injured and deserve compensation. 

MBIA Inc. didn't immediately respond to a request for a comment.

The plaintiffs in the case are Dwight Jereczek and Stanley Elliott, citizens of Florida and California.  They filed their case against the bond insurers in February 2025.