NY Court Dismisses Suit Challenging MBIA's 2009 Restructuring - UPDATED

After four years of uncertainty, MBIA Inc.’s public finance subsidiary is one step closer re-entering the municipal bond insurance marketplace.

New York Supreme Court Justice Barbara Kapnick on Monday dismissed the lawsuit brought by a group of banks against MBIA Inc. over its 2009 restructuring, which created National Public Finance Guarantee Corporation and transferred $5 billion to that unit from its sister company, MBIA Insurance Corp.

In a 59-page decision, the court rejected each of the banks’ arguments that the New York State Insurance Department’s approval of transformation was either “arbitrary and capricious” or contrary to law.

“With the Court’s ruling now in hand, we look forward to resolving the remainder of our litigation so that we can support the financing needs of towns and cities across America by re-establishing National Public Finance Guarantee Corporation, our U.S. muni-only insurer, as a leader in the U.S. public finance insurance market,” MBIA chief executive officer Jay Brown said in a statement following the ruling.

The suit, filed in 2009, challenged the approval by Eric Dinallo, then superintendent of the New York State Insurance Department, of MBIA’s split into two businesses.

The banks, which originally included a group of 18, hold insurance policies with MBIA and have said the value of MBIA’s guarantee was irreparably harmed when the insurer split its structured finance portfolio from its safer portfolio of municipal bonds.

By the start of hearings before the court, just Bank of America and Société Générale remained.

In addition to Dinallo and MBIA, the suit was also brought against the NYSID and National.

During MBIA’s conference call to discuss its 2012 fourth quarter earnings last week, Brown said that efforts to position National in the bond insurance market place have to overcome three hurdles; the first hurdle was resolved by Monday’s ruling, assuming it is not overturned. The remaining hurdles include the reduction or retirement of intercompany facility and the achievement of stable ratings.

The reduction of the intercompany facility, a $1.6 billion loan from the company’s public finance unit to its structured finance unit, could be resolved with a positive outcome of MBIA’s other major ongoing litigation with Bank of America involving mortgage putback obligations. If MBIA is granted the $4.5 billion it’s seeking or if Bank of America settles, MBIA could pay off some or all of its loan.

BTIG analyst Mark Palmer said Monday’s ruling could serve as a catalyst that could finally motivate Bank of America to offer the bond insurer a reasonable settlement in the five-year-old lawsuit.

“We believe Judge Kapnick’s ruling represents BAC’s last bit of optionality in its effort to undermine MBIA’s efforts to force it into a settlement,” Palmer said.

Bank of America immediately appealed the ruling on Monday.

“Given that Judge Kapnick’s rulings have been overturned twice in the past five years, we don’t like the bank’s chances on appeal,” Palmer said. “With that said, we don’t think the case progresses nearly long enough for such an appeal to be heard.”

Société Générale said they are reviewing the decision and expect to appeal.

“We continue to believe that MBIA wrongfully transferred $5 billion from its structured finance subsidiary, to the harm of its policyholders, which we intend to prove in the separate fraudulent conveyance litigation that is underway,” the bank said in a statement.

Standard & Poor’s last week downgraded National three notches to BB from BBB, and MBIA Insurance Corp. to CCC from B. The downgrades were based on concerns that MBIA Corp. will likely come under regulatory control in the next 12 months.

A spokesperson for Standard & Poor’s said Monday’s ruling will not have an impact on the company’s ratings.

The case is ABN AMRO Bank N.V. et al. vs. Eric Dinallo et al., New York Supreme Court, County of New York, 601846/09.

Following the ruling, MBIA shares were up 23.96% to close at $12.78 on Monday.

For reprint and licensing requests for this article, click here.
Bankruptcy Buy side
MORE FROM BOND BUYER