New York’s highest court was asked by Bank of America Corp., UBS AG and other institutions to reinstate their lawsuit claiming that bond insurer MBIA Inc.’s 2009 restructuring was intended to defraud policyholders.
A lower-court decision throwing out the lawsuit improperly blocked claims the banks could bring as creditors, their lawyer told the New York State Court of Appeals at oral arguments yesterday in Albany.
Eric Dinallo, the state’s former insurance superintendent, approved the split in 2009, allowing Armonk, New York-based MBIA to move its guarantees on state and municipal bonds out of the unit that insured some of Wall Street’s riskiest mortgage debt. Robert Giuffra Jr., lead counsel for the banks, called the action unprecedented.
“They did one of the biggest transactions in history in secret,” Giuffra, a partner at Sullivan & Cromwell LLP, said. “There was no notice, no opportunity to be heard.”
Chief Judge Jonathan Lippman asked why the banks, which are MBIA policyholders, shouldn’t be allowed to pursue their claims under debtor-creditor law and whether it was fair that they weren’t given notice of the approval of the restructuring by the superintendent.
“On a pure fairness basis, does that sound right to you?” Lippman asked Marc Kasowitz, a lawyer for MBIA.
MBIA fell yesterday as the court heard the arguments, reversing an earlier gain. The shares dropped 16 cents, or 1.8 percent, to close at $8.80 in New York Stock Exchange composite trading after climbing as high as $9.16.
Judge Robert S. Smith also questioned the lack of notice to policyholders.
“Here we have people who never got to talk to the agency,” he said. “They learned about this the same day everybody else did, when the superintendent issued his approval.”
MBIA argued that the only recourse the banks have is under New York’s Article 78 statute, which allows court review of state administrative decisions. A separate lawsuit under that provision is pending.
“The key determination he made was that after this restructuring was done, MBIA would be solvent,” he told the court. “It would be able to pay all of the claims of its policyholders as they came due. Solvency under the debtor-and-creditor law and solvency under insurance law are precisely the same.”
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, to another entity, now known as National Public Finance Guarantee Corp.
“There are no money damages until there are no payments on claims,” Kasowitz said yesterday. “For the past two years, this insurer has paid all claims as they’ve come due.”
The case is ABN Amro Bank NV v. MBIA Inc., 601475-2009, New York state Supreme Court (Manhattan).