Bloomberg News

UBS, Other Banks Can Sue MBIA Over Restructuring,

June 28, 2011

(Corrects spelling of judge’s name in fifth paragraph.)

June 28 (Bloomberg) -- UBS AG, Bank of America Corp. and about a dozen other banks won reinstatement of a lawsuit against MBIA Inc. challenging the 2009 restructuring of its insurance unit that guaranteed toxic debt.

The state Court of Appeals in Albany, New York’s highest court, announced its decision today, overturning a lower-court ruling.

A state appellate court in January dismissed the suit by the banks, which claimed the bond insurer’s restructuring was intended to defraud policyholders. The banks claim the restructuring was a “fraudulent conveyance” that left MBIA undercapitalized and possibly unable to pay future claims.

The Court of Appeals decision turned on whether approval of the split by the state Insurance Department superintendent precluded the bank policyholders’ claims.

“We hold that the superintendent’s approval of such restructuring pursuant to its authority under the Insurance Law does not bar the policyholders from bringing these claims,” Judge Carmen Beauchamp Ciparick wrote for the majority.

The decision restored the banks’ claims of fraudulent conveyance, breach of contract and abuse of the corporate form. The court agreed with the lower court that a claim for unjust enrichment should be dismissed.

“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,” Willard Hill, MBIA’s chief marketing and communications officer, said in an e-mailed statement.

MBIA Falls

MBIA Inc., based in Armonk, New York, reached its lowest since July, dropping as much as 7.3 percent. The shares fell 32 cents, or 3.9 percent, to $7.85 at 12:03 p.m. in New York Stock Exchange composite trading.

Meanwhile, the cost to protect against a default by MBIA jumped to the highest since August 2009 after the decision.

“This is a significant victory,” Robert Giuffra Jr., lead counsel for the banks and a partner at Sullivan & Cromwell LLP in New York, said in an interview. “The position MBIA was proposing was one that basically would have resulted in a massive increase in the power of administrative agencies in New York state government and less power for courts.”

The banks said in court filings that the split transferred $5 billion in cash and securities out of MBIA’s primary operating unit, MBIA Insurance Corp., to another entity, now known as National Public Finance Guarantee Corp.

MBIA’s Stance

The insurer argued that the restructuring was done to help unfreeze the public finance markets during the financial crisis and was approved by state regulators after an extensive review that found MBIA Insurance would remain solvent and have sufficient resources to meet claims, according to a brief filed in April with the Albany court.

Five-year swaps on MBIA today climbed 2.5 percentage points to 24.75 percent upfront, as of 11:35 a.m. in New York, according to broker Phoenix Partners Group. That means the cost to protect against a default on $10 million of MBIA obligations rose $250,000 to $2.48 million initially, in addition to $500,000 a year.

Swaps on the insurance unit at the heart of the lawsuit fell on speculation that the split will be overturned. Contracts on MBIA Insurance Corp. dropped 1.5 percentage points to 33.75 percent upfront, Phoenix prices show.

A separate lawsuit is pending against the Insurance Department and MBIA in New York state Supreme Court under the state’s Article 78 statute, which asks the court to review a state administrative decision.

The banks suing also include French banks BNP Paribas and Societe Generale and a unit of Belgian bank KBC Groep NV, the recipient of 7 billion euros ($10 billion) in Belgian government rescue funds.

The case is ABN Amro Bank NV v. MBIA Inc., 601475-2009, New York state Supreme Court, New York County (Manhattan).

--Editors: Charles Carter, Andrew Dunn

To contact the reporters on this story: Karen Freifeld in New York at kfreifeld@bloomberg.net; Shannon D. Harrington in New York at sharrington6@bloomberg.net.

To contact the editors responsible for this story: Alan Goldstein at agoldstein5@bloomberg.net; Michael Hytha at mhytha@bloomberg.net.


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