Court Revives Banks’ Suit Against Bond Insurer MBIA

By and | June 28, 2011

New York’s highest court Tuesday revived a lawsuit by several large banks challenging bond insurer MBIA Inc.’s 2009 restructuring, which they complained was unfair to policyholders.

MBIA shares fell as much as 7.1 percent.

The restructuring, approved by New York’s insurance superintendent at the time, Eric Dinallo, was designed to protect the Armonk, New York-based company’s municipal bond business from its troubled structured finance unit, which had suffered big losses from insuring mortgage-related debt.

Banks such as Bank of America Corp., HSBC Holdings Plc and Wells Fargo & Co. objected, saying the plan siphoned $5 billion from the MBIA Insurance operating unit and transferred it to another entity, National Public Finance Guarantee Corp. They said this left MBIA unable to pay out on billions of dollars of their claims.

A divided intermediate state appeals court on Jan. 11 upheld the restructuring, leading to the appeal.

But in a 5-2 decision, the New York State Court of Appeals said state insurance law did not give the superintendent “broad preemptive power” to block the banks’ claims,

“If the legislature actually intended the superintendent to extinguish the historic rights of policyholders to attack fraudulent transactions,” Judge Carmen Ciparick wrote for the majority, “we would expect to see evidence of such intent within the statute.”

Lawyers for MBIA and the banks were not immediately available for comment. Dinallo also could not immediately be reached.

MBIA and Ambac Financial Services Group Inc., once the world’s largest bond insurers, branched out beyond traditional municipal bond underwriting early last decade by writing insurance for exotic financial products. They got into trouble as credit conditions worsened and defaults soared.

Other plaintiffs in the case included BNP Paribas SA , Credit Agricole, KBC Investment Cayman Islands, Morgan Stanley, Natixis SA, Royal Bank of Scotland Group Plc and Societe Generale.

In morning trading, MBIA shares were down 33 cents, or 4 percent, at $7.84 on the New York Stock Exchange, after earlier falling to $7.59.

The case is ABN Amro Bank NV et al v. MBIA Inc et al, New York State Court of Appeals, No. 124.

(Reporting by Ben Berkowitz and Jonathan Stempel, editing by Gerald E. McCormick and John Wallace)

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