Bond Insurer's Pledge to Maintain AAA Ratings Was `Puffery,' Court Says

Financial Guaranty Insurance Co.’s pledge to maintain its AAA credit ratings was “commercial puffery,” and the loss of its top grade doesn’t constitute a breach of contract, a New York court ruled.

U.S. District Judge Loretta Preska last week dismissed a lawsuit by the operator of the Louisiana Superdome, which sought to recover premiums paid to FGIC before the bond insurer lost its top-level credit ratings. The dismissal follows several court rulings against municipalities that said they were harmed by relying on bond insurers’ statements that they followed a “remote loss” underwriting standard or a “time-tested business model.”

“Courts have frequently held this type of ‘general and vague’ language to be inactionable corporate puffery,” Preska wrote in her May 11 decision dismissing the suit against FGIC.

Municipalities have sued bond insurers, including FGIC and Ambac Financial Group Inc., after downgrades of the companies’ credit ratings caused the yields on bonds sold by stadiums, hospitals and schools to soar. Investors balked at buying the debt, known as insured auction-rate securities, beginning in the summer of 2007 when they feared the bond insurers might lose their AAA ratings.

Yields on the Louisiana Superdome’s auction-rate securities jumped to 12 percent after FGIC was downgraded, according to the court decision.

FGIC Downgraded

FGIC was downgraded six levels to A3 by Moody’s Investors Service in February 2008. Its credit rating has since been withdrawn by Standard & Poor’s and Moody’s, which said it expected FGIC’s losses on securities backed by mortgages will exceed its ability to pay claims, according to the suit.

The stadium, the New Orleans home to the Super Bowl champion Saints, is seeking to be reimbursed for $13 million in premiums paid to FGIC.

While the stadium’s board “may have viewed as remote the possibility that FGIC would lose its triple-A ratings later in the life of the bonds, it cannot reasonably have believed that the possibility was nonexistent,” Preska wrote.

Bond documents stated that FGIC’s ratings were “not guaranteed, they were controlled by outside rating agencies, and they could be subject to a downgrade or withdrawal at any time,” Brian Fraser, a partner with Richards Kibbe & Orbe LLP, which represented FGIC, said in a brief supporting the dismissal.

Bill Curl, a spokesman for the Louisiana Superdome, didn’t have an immediate comment. A message left for John Dubel, FGIC’s chief executive officer, wasn’t immediately returned.

Ambac Victories

Other rulings have favored bond insurers. A Massachusetts court granted summary judgment in favor of Ambac in February after the bond insurer filed suit against an affiliate of the New England Patriots. NPS LLC sold Ambac-insured bonds to finance the construction of Gillette Stadium and refused to make a payment on the insurance after Ambac was downgraded. NPS said Ambac had misrepresented its intention to uphold its AAA credit rating.

William Acker, a federal judge in Birmingham, Alabama, dismissed a case against Ambac by the Water Works Board of the City of Birmingham on April 1. The board sued Ambac after a downgrade of the company’s AAA rating triggered a requirement for the issuer to deposit $15 million into a reserve account to protect bondholders.

“The Board ostensibly had knowledge of the relevant facts and was aware of the obvious possibility that Ambac might, in the next 35 years, have its credit rating downgraded,” Acker wrote. “Neither party apparently was Nostradamus.”

The FGIC case is Louisiana Stadium and Exposition District, et al, v. Financial Guaranty Insurance Co., et al, No. 09 Div. 5404 and No. 09 Div. 6770, United States District Court, Southern District of New York.

The Ambac cases are: NPS LLC v. Ambac Assurance Corp., 08- 11281-DPW, U.S. District Court, D. Massachusetts and Water Works Board of the City of Birmingham v. Ambac Financial Group Inc. and Ambac Assurance Corp., CV-09-AR-2296-S, U.S. District Court for the Northern District of Alabama, Southern Division.

To contact the reporter on this story: Christine Richard in New York at Crichard5@bloomberg.net

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