A New York court has ruled that bond insurer ACA must pay claims on defaulted bonds that it insured.
In November three OppenheimerFunds municipal bond funds sued ACA to get it to pay insurance claims for $37.18 million of bonds issued for a toll road in South Carolina.
Oppenheimer purchased ACA insurance to cover toll road revenue bonds issued for the Southern Connector Project in Greenville. The Connector 2000 Association Inc. issued the debt.
Oppenheimer's bonds are zero-coupon bonds with maturities from 2020 to 2026. Connector 2000 issued a total of $200 million for the toll road project.
On Jan. 1, 2010, Connector 2000 defaulted on interest payments, according to Oppenheimer. ACA made insurance payments to the holders of ACA insurance on the coupon bonds from that point through Jan. 1, 2011, Oppenheimer claimed.
In late June 2010, Connector 2000 filed for Chapter 9 bankruptcy protection. In July 2011, ACA refused to honor its guaranty of payment, Oppenheimer claimed.
ACA had asked the court for an order stating it "is relieved of liability for further payment obligations under the policies."
"ACA insists that the cancellation and mandatory exchange of the original insured bonds, coupled with the alleged express release of the issuer-debtor's liability under the original insured bonds, without ACA's consent, constitutes an alteration of the original insured bonds and its insurance obligations, thereby relieving it of any obligation under the policies," New York Supreme Court Judge Charles Ramos wrote in his decision.
Ramos declined ACA's request and instead approved Oppenheimer's request for summary judgment. Ramos declared that ACA is "obligated to provide coverage to plaintiffs for their claimed losses under the secondary market insurance policies." The judge signed his decision on July 23 but it was only posted to the court docket on Tuesday afternoon.
"The viability of the bond market depends on the preservation of the protections granted to bondholders," Ramos wrote. "Bankruptcy is not intended to provide a means for an insurer to escape liability simply because of the financial trouble of the insurer."
ACA, like other bond insurers, lost its investment-grade rating in the wake of the housing bust and the ensuing financial crisis. An ACA spokesman declined to comment on the judge's ruling.
"OppenheimerFunds Inc. is pleased that New York State Supreme Court Justice Charles Ramos ruled in its favor," said Digby Clements, senior vice president for fixed-income products at OppenheimerFunds. "Justice Ramos declared that the bankruptcy of the issuer and cancellation of the defaulted bonds did not give monoline insurer, ACA Financial Guaranty Corporation, an excuse to refuse or deny coverage under its policy for payments on the defaulted bonds. This ruling vindicates the rights of our funds and shareholders, and clarifies monoline insurers' legal obligations when issuers encounter financial distress, an important legal issue for the municipal bond industry."
Another suit against ACA regarding the Connector 2000 bonds is also advancing in Mississippi. Plaintiffs' attorney Jesse Mitchell 3d is organizing a class-action suit against ACA over its refusal to pay holders of the defaulted bonds. His clients are different from OppenheimerFunds in that many of them hold coupon bonds from Connector 2000 and have already not received promised coupon payments.
The suit in Federal District Court of Mississippi, Northern Division, seeks to have its class certified in September, Mitchell said. If and when this is done, the discovery period would open.
"The Supreme Court of the State of New York, New York County correctly ruled that ACA's obligations and secondary insurance policies covering the insured bonds remain intact and enforceable, despite ACA's statements and actions," Mitchell told The Bond Buyer. "This ruling is significant and supports the arguments that we have made throughout our case."
ACA was launched in 1997 as a single-A rated insurer willing to enhance lower-rated credits traditionally shunned by the triple-A rated credit enhancers. It lost its investment-grade rating after backing billions of dollars of exotic products related to mortgages. According to the ACA website, "ACA will operate as a runoff insurance company and focus on actively managing its remaining insured municipal obligations."