Another group of MBIA Insurance Corp. policyholders has filed a lawsuit against the insurer and its parent, alleging MBIA Inc.'s split of its public finance and structured finance books constitutes an "unlawful restructuring."

The plaintiffs - which include banks such as Citi, JPMorgan Chase, Bank of America, and Wachovia - say the restructuring "enriched" MBIA Inc. and its management at the expense of policyholders, according to the lawsuit filed in New York Supreme Court. The structured finance policyholders have been left with guarantees from an "effectively insolvent shell company," the lawsuit says.

"MBIA's decision to fraudulently strip $5 billion out of MBIA Insurance and render it effectively insolvent was a blatant attempt to enrich MBIA Inc. and its management at the expense of MBIA Insurance and its policyholders - with assets the company had no right to use in this way," Vince DiBlasi, lead counsel for the MBIA policyholder group at Sullivan & Cromwell, said in a statement. "Our lawsuit simply seeks to ensure that policyholders receive what they have paid premiums for: contractually guaranteed insurance protection."

Under the restructuring plan, MBIA Insurance Corp. of Illinois - now National Public Finance Guarantee Corp. - received $5 billion from MBIA, including $2.89 billion for taking on the public finance book.

An MBIA Inc. spokesman said the company had no immediate comment on the lawsuit. MBIA has in the past noted the New York Insurance Department approved the deal.

A group of hedge funds had already sued MBIA in federal district court alleging the split favored public finance policyholders at the expense of structured finance policyholders. Two investment funds run by Third Avenue Management LLC - one of the largest holders of MBIA Insurance surplus notes - also sued MBIA in Delaware Chancery Court, alleging a fraudulent transfer.

The plaintiffs say MBIA management will benefit by running National Public Finance Guarantee Corp., "a business that is now propped up by assets that were fraudulently stripped from MBIA Insurance and is projected to generate approximately $300 million in statutory income annually."

The plaintiffs said they are also interested in supporting the municipal bond market and bondholders, but believe MBIA could have pursued alternatives. They say that MBIA "designed and executed its fraudulent restructuring in complete secrecy," even though the plaintiffs are some of the world's leading financial institutions, accustomed to working out deals to protect all stakeholders.

Instead of sitting down with policyholders and other creditors to discuss options for reorganization, MBIA’s management designed its restructuring in secret and only announced it to the public after it had stripped assets from MBIA Insurance,” DiBlasi said. “While other monoline insurers have moved to restructure their businesses, only MBIA has chosen to pursue a fraudulent restructuring of this sort.”

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