Bank of America Corp. (BAC:US) and Societe Generale SA (GLE) went to court today seeking to overturn New York’s approval of MBIA Inc. (MBI:US)’s restructuring in 2009, alleging the bond insurer misled the regulator.
New York State Supreme Court Justice Barbara Kapnick is beginning a nonjury trial in Manhattan on the banks’ claims that the approval of MBIA’s proposal by then Insurance Superintendent Eric Dinallo was based on misleading information and violated insurance law.
“There’s no question that the burden here is going to be on the banks,” said Elliott Kroll, an insurance law attorney at Arent Fox LLP who isn’t involved in the case. “You look at this and say, ‘Absolutely give deference to the state,’ but the state still has to have some kind of rational basis to support this.”
More than a dozen financial institutions sued MBIA and the insurance department in 2009 over the restructuring. Bank of America and Societe Generale are the only banks left in the litigation after JPMorgan Chase & Co. (JPM:US), Morgan Stanley (MS:US), UBS AG (UBSN) and others dropped out.
The banks claimed the restructuring harmed them as policyholders by transferring $5 billion in assets out of the MBIA unit that insured risky mortgage debt, exposing the banks to potential losses. Bank of America and Societe Generale have another lawsuit pending against MBIA, while MBIA is suing Bank of America over mortgage loans.
A victory for MBIA would move the Armonk, New York-based insurer closer to resolving litigation over its restructuring and may push Bank of America toward a settlement, said Mark Palmer, an analyst at BTIG LCC in New York, who has a “buy” rating on MBIA.
“It all ties together because what MBIA wants is to have the fraudulent conveyance cases go away, which would unlock the value of the municipal bond insurance unit,” Palmer said.
Kapnick said today during a hearing that the trial will be “more akin to a glorified oral argument,” with some possible testimony. The judge said she has set aside at least three weeks for the case. Opening statements are scheduled for tomorrow.
The banks have asked Kapnick to allow them to call and question Dinallo and Jack Buchmiller, a former supervising risk management specialist at the New York State Insurance Department who reviewed the restructuring when it was proposed. Lawyers for MBIA and the state have objected, saying that there is a “voluminous record” in the case that includes affidavits and depositions.
“Our view remains that cross examination is the best way to get to the truth,” Robert Giuffra, a lawyer for the banks, said during a hearing today.
Kapnick said she will decide later whether there are “triable issues of fact, and whether witnesses, including Dinallo and Buchmiller, can be called.
‘‘I’m sure this case will wind up in the appellate division or the Court of Appeals no matter what I do,’’ Kapnick said today.
Bank of America, based in Charlotte, North Carolina, and Paris-based Societe Generale claim the insurance department approval violated insurance law and was based on false and misleading information. MBIA concealed from the insurance regulator a Lehman Brothers study, paid for by the insurer, showing its MBIA Insurance unit was insolvent and that a policyholders’ surplus of $3.3 billion ‘‘was in reality negative,’’ the banks said in a court filing.
‘‘If an applicant for a regulatory approval misleads its regulator, the law is clear that the approval must be vacated,’’ Robert Giuffra, a lawyer for the banks, said before the trial. ‘‘An applicant can’t speak in half-truths or keep in its back pocket information that contradicts what it has told its regulator.’’
The insurance regulator approved the restructuring after finding that all policyholders would be protected, while a well- capitalized insurer would be established for the municipal bond market, Attorney General Eric Schneiderman’s office said in court papers. The state and MBIA argue the insurance department’s approval is entitled to ‘‘deference.”
“We remain confident that the New York State Insurance Department’s approval of transformation was appropriate and will be upheld by the court,” Kevin Brown, an MBIA spokesman, said in an e-mailed statement.
David Neustadt, a spokesman for the New York Department of Financial Services, declined to comment on the trial. The department combines the former New York state insurance and banking departments.
The case is ABN Amro Bank v. Dinallo, 601846-2009, New York State Supreme Court (Manhattan).
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