Policyholders contesting bond insurer MBIA Inc.’s February 2009 restructuring will soon have their chance in court to try and overturn the decision that allowed the transformation to take place.
The New York Supreme Court on Tuesday set a tentative start date of Jan. 19, 2011, for a two-week trial in the Article 78 proceeding, one of four cases in which MBIA is defending the division of its subsidiary MBIA Insurance Corp. into two entities.
The case was filed in June 2009 by 17 financial institutions holding insurance policies issued by MBIA Insurance for structured finance products such as residential mortgage-backed securities.
The banks contend that when MBIA Insurance divided its public finance portfolio from its structured finance holdings — which included transferring $5 billion of cash and securities to a new municipal-only insurer called National Public Finance Guarantee Corp. — it severely diminished its claims-paying abilities for its non-muni obligations.
MBIA says its regulator, the New York Insurance Department, only approved the transaction after a thorough investigation which determined the insurer would still have “sufficient assets to cover its reserves and loss claims over the long term (30-plus years),” court documents said.
Both insurer platforms have to date paid all owed claims. MBIA Insurance is rated B3 by Moody’s Investors Service and BB-plus by Standard & Poor’s, while NPFG is rated Baa1 by Moody’s and A by Standard & Poor’s. Before the mortgage meltdown and ensuing credit crisis, MBIA Insurance boasted triple-A ratings.
The Article 78 proceeding is presided over by Justice James A. Yates. It is the only avenue allowing the plaintiffs to directly contest the Insurance Department’s approval of the restructuring. However, Article 78 is fairly limited. In seeking to overturn the approval, the banks must show the determination was arbitrary and capricious, or an abuse of discretion, or made in violation of lawful procedure.
Jay Brown, CEO of MBIA, told investors earlier this year that the Article 78 procedure “has a very high threshold.” He said MBIA, the NYID, and the New York State attorney general’s office view it as “the only appropriate procedure for challenging our insurance transformation.”
MBIA has been unsuccessful in trying to have other lawsuits contesting the transformation dismissed.
Robert J. Giuffra Jr., from Sullivan & Cromwell LLP, lead counsel for the policyholder group, said he was pleased a trial date has been set and he looks forward to pursuing claims against MBIA.
“Our lawsuit seeks to ensure that policyholders receive what they have paid premiums for — contractually guaranteed insurance protection,” Giuffra wrote Wednesday in an e-mailed statement.
Giuffra accused MBIA of “trying to hide behind” the NYID and use its approval “as a shield to deflect any legal challenges to their $5 billion fraudulent restructuring.”
He hopes to show in the trial that MBIA provided the Insurance Department with “outdated, inaccurate, and incomplete information” about its financial health. He also said there has been “no public record” showing why the NYID “approved this patently unfair, inequitable, and unreasonable transaction.”
Kevin Brown, spokesman for MBIA, was also pleased a trial date had been set. He pointed out that Judge Yates acknowledged a trial may not even be necessary to issue a ruling. Yates may instead rule based on his review of legal briefs and expert reports that both parties are scheduled to submit this calendar year.
Brown said he remains confident “the court will conclude that the approval of the New York State Insurance Department was proper and followed a thorough examination of MBIA Insurance Corp.’s ability to meet its obligations to policyholders.” The trial would follow a discovery period that has been going on for several months.