Bank policyholders suing MBIA Inc. over its $5 billion restructuring are now able to pursue claims in court after the New York State Court of Appeals reinstated the lawsuit.

In a 5-to-2 ruling filed Tuesday, New York’s highest court reversed a January decision by the appellate division that dismissed the lawsuit. The original lawsuit was filed in May 2009 under the debtor and creditor law and common law and claimed the $5 billion restructuring of MBIA Insurance Corp. into two entities was fraudulent. The split resulted in one entity that insures municipal bond policies — National Public Finance Guarantee Corp. — and left MBIA Insurance holding riskier policies, such as mortgage-backed securities.

“The [insurance] superintendent’s approval of such restructuring pursuant to its authority under the insurance law does not bar the policyholders from bringing these claims,” Associate Judge Carmen Ciparick wrote.

Ciparick added that the New York Insurance Department approved the restructuring of MBIA Insurance in 2009 without giving the policyholders any notice or opportunity to be heard.

The ruling also said the New York Legislature did not intend for the insurance law to preempt the fraudulent conveyance and common law claims asserted by the policyholders.

“In this case, defendants essentially ask us to construe the superintendent’s exclusive original jurisdiction to approve the transformation under the relevant provision of the insurance law to mean he is also the exclusive arbiter of all private claims,” it said.

Ciparick said that conclusion would preempt the plaintiffs’ debtor and creditor law and common law claims. “We reject this argument and conclude that there is no indication from the statutory language and structure of the insurance law or its legislative history that the Legislature intended to give the superintendent such broad preemptive power,” Ciparick said.

Robert Giuffra, lead counsel for the policyholders and a partner with Sullivan & Cromwell LLP, said: “Today’s decision is an important victory for all MBIA Insurance policyholders. The Court of Appeals has squarely rejected MBIA’s efforts to shut the courthouse door, in violation of basic principles of due process, and to shield MBIA’s unprecedented $5 billion fraudulent conveyance behind a secret administrative process.

“Policyholders will now vigorously pursue our plenary DCL and common law claims alongside our Article 78 claims, and we’re confident that MBIA’s fraudulent restructuring will be reversed,” Giuffra added,

“We are disappointed by the court’s decision, but as it is strictly a procedural ruling, it does not address the merits of the case and we remain confident that we will ultimately prevail,” said Willard Hill, MBIA’s chief marketing and communications officer.

Banks holdings MBIA policies are also pursuing a separate Article 78 action against Eric Dinallo, former superintendent of the NYID, claiming the approval of the restructuring was fraudulent. In the Article 78 case, the banks must show the determination was arbitrary and capricious, or an abuse of discretion, or made in violation of lawful procedure.

“It’s a momentous decision,” said Elliott Kroll, partner at Arent Fox, who is not involved in the MBIA case. “It opens the way for close scrutiny of the entire transaction and impacts all policyholders in all structured finance deals where MBIA wraps on transactions. There is no reason now why other parties in the same position as these bank policyholders cannot file suit against MBIA.”

Shares of MBIA closed at $7.77, down 4.9%.

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