OppenheimerFunds has filed a lawsuit against ACA Financial Guaranty Corp. for failure to pay on defaulted bonds it insured.
Oppenheimer AMT-Free Municipals, Oppenheimer Multi-State Municipal Trust, and Oppenheimer Municipal Fund are suing ACA to get it to provide coverage for $37.18 million of bonds issued for a toll road in South Carolina.
Oppenheimer filed the suit in New York State Supreme Court on Nov. 28.
Oppenheimer says it purchased ACA insurance to cover toll road revenue bonds issued for the Southern Connector Project in Greenville, S.C. The debt was issued by Connector 2000 Association Inc.
The bonds are zero-coupon bonds with maturity dates from 2020 to 2026.
On Jan. 1, 2010, Connector defaulted on interest payments, Oppenheimer said. ACA made insurance payments to the holders of ACA insurance on the interest-bearing bonds from this point through Jan. 1, 2011, it said.
In late June 2010, Connector 2000 filed for chapter 9 bankruptcy. “In July 2011 … ACA refused to honor its guaranty of payment with respect to those interest-paying bonds, in violation of its insurance obligations under the related certificates of bond insurance and policies,” OppenheimerFunds claimed.
“ACA refused to make the insurance payments, asserting that the bonds had been 'exchanged for new obligations of the issuer’ pursuant to the issuer’s Chapter 9 plan 'and were effectively canceled,’” according to OppenheimerFunds’ version of what ACA said. “ACA further alleged that 'the bonds are no longer enforceable obligations, and as such, neither is the guaranty obligation originally provided by ACA under the policy.’ ”
“The law is well settled that the discharge or restructuring of a debtor’s obligations in a bankruptcy does not discharge a guarantor such as ACA from its liability for the unpaid portion of the debtor’s obligations,” OppenheimerFunds said in its lawsuit.
Oppenheimer is asking the court to declare that ACA is obligated to make payments on the bonds when they become due.
ACA spokesman Elliot Sloane declined to comment.
“The complaint in this matter was filed to vindicate the rights of our funds and shareholders,” said Samuel Wang, director of corporate communications at OppenheimerFunds. “It also highlights an important issue for the municipal bond industry regarding monoline insurers’ obligations when issuers encounter financial distress.”
Massachusetts Mutual Life Insurance Co. owns OppenheimerFunds.
OppenheimerFunds’ suit echoes one filed in Mississippi in June. James Davis bought $100,000 of Connector 2000 bonds at a discount. ACA insured the bonds on the secondary market in June 2001, according to the suit. Davis sued ACA for failing to cover the fixed-rate bonds. He asked for compensatory damages, punitive damages, attorney fees, and costs.
Davis’ attorney is currently seeking class action status for the suit. The attorney is waiting for the court to certify a variety of individual and institutional clients in the suit.
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 its website, “ACA will operate as a runoff insurance company and focus on actively managing its remaining insured municipal obligations.”