Copia Bondholder Amends Suit To Include Bad-Faith Claim vs. ACA

The bankruptcy claims trader that last week filed a securities lawsuit seeking class-action status over a refunding by the now-bankrupt Copia: The American Center for Wine, Food, and the Arts has now amended its complaint to include an insurance bad-faith claim against ACA Financial Guaranty Corp.

Copia Claims LLC, the bondholder, alleges that ACA is protecting itself at the expense of the 2007 bondholders. Copia Claims had earlier interjected itself into the bankruptcy case by buying a $12,000 unsecured claim for $4,000, attempting to get the Copia estate to pursue a fraudulent transfer claim over what it believes is a botched defeasance.

Copia Claims argues that ACA - which insured the original $70 million issue and the $77 million refunding - has "engaged in persistent and unconscionable efforts" to convince the debtor to give up the rights to go after the 1999 bondholders' escrow. It says ACA has a conflict of interest because it will have an obligation to the 1999 bondholders if they lose the escrow.

Copia Claims further alleges the bad faith is "exacerbated" because ACA is "actually insolvent or close to actual insolvency."

ACA had a policyholders' surplus of $103.8 million as of March 31, according to documents filed with Maryland insurance regulators. ACA insures issues with a par value of $6.7 billion, according to a Bond Buyer analysis of data provided on its Web site.

"ACA's bad faith claim in the Copia Bankruptcy is willful, malicious and oppressive and ought to be punished by way of example by an award of punitive damages according to proof at trial," Copia Claims wrote.

Copia Claims added the bad faith claim to a securities law complaint it had already filed against the conduit issuer, California Infrastructure and Economic Development Bank, trustee Bank of New York Mellon and ACA. It also added bond counsel Orrick Herrington & Sutcliffe LLP to the amended complaint. Orrick did not respond to a request for comment.

Copia Claims first filed its lawsuit last week alleging the defendants broke securities laws by failing to disclose in the bond prospectus the possibility that the 2007 bondholders could lose their secured status.

It says there was never a defeasance of the 1999 bonds, which left the bondholders with an "equitable but unrecorded lien" the debtor has the right to avoid. But the debtor is also "empowered ... to preserve that avoided lien for the benefit of the state thus keeping the 2007 bonds in an essentially unsecured posture," the lawsuit says.

"As the result of all of the events and conduct alleged above, the 2007 bonds were always vulnerable to the catastrophic loss of secured status in case of the debtor's filing for bankruptcy," the lawsuit says.

The lawsuit comes as ACA and the Copia estate last week announced a settlement that could result in the property reopening. ACA will work with community groups to see if the 12-acre property can be reopened.

ACA will contribute about $622,000 to help pay for certain expenses. The groups seeking to reopen the so-called wine shrine will still need to raise funds to acquire it, which could take months, Copia's lawyer said, according to press reports.

The agreement still needs to be approved by the judge and creditors.

"ACA is a proponent of a plan to expeditiously and efficiently take possession of the Copia facility," ACA chief executive officer Raymond Brooks said. "ACA has and will continue to seek the highest and best use for the facility for the benefit of all of its stakeholders."

Copia agreed to drop a bankruptcy plan that would have included trying to sue over the defeasance. ACA had earlier said it did not believe a fraudulent transfer claim would succeed, disputing Copia's arguments.

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