BofA, SocGen Case Over MBIA Split Goes to New York Judge

Bank of America Corp.’s effort with Societe Generale SA to reverse New York’s approval of MBIA Inc.’s 2009 restructuring is being considered by a judge after the conclusion of a four-week trial over the transaction.

New York State Supreme Court Justice Barbara Kapnick heard final arguments from the banks today in Manhattan, capping a hearing that began last month over the decision by former New York Insurance Department Superintendent Eric Dinallo to approve the bond insurer’s restructuring.

Kapnick said it’s going to “take a while” to review the evidence and make a ruling.

“There’s a lot of stuff to go through,” Kapnick said.

A win for MBIA would bolster the Armonk, New York-based company as it grapples with litigation stemming from the restructuring approved more than three years ago. Bank of America and Societe Generale are the only plaintiffs remaining after more than a dozen financial institutions sued the insurer and the insurance department. A separate lawsuit filed against MBIA in state court is pending.

Kapnick is considering claims by the banks that the state’s approval was based on inaccurate and incomplete information and should be annulled under state insurance laws. Lawyers for banks argued during the trial that the approval was done in secret and based on a rushed, flawed analysis.

New Division

The banks claim the restructuring exposed them to losses as policyholders by transferring $5 billion in assets out of an MBIA unit that issued financial guaranty insurance policies into a new division that guaranteed municipal bonds.

Kapnick heard arguments over a four-week period from the banks, MBIA and New York Attorney General Eric Schneiderman’s office, which represents the state. There was no jury, and witnesses weren’t called.

Marc Kasowitz, a lawyer with Kasowitz Benson Torres & Friedman LLP who represents MBIA, said the approval was based on a yearlong state investigation that included weeks of on-site review at the company’s headquarters.

The banks rely on “distortions and misrepresentations” about the process and haven’t met their burden of showing that that Dinallo’s approval was arbitrary and capricious, Kasowitz said. The decision was rational and within the scope of the department’s authority, he argued.

Analyzed Investments

“What we have here is a decision by a responsible state official, Superintendent Dinallo, making a decision that was critical to the interest of the state,” Kasowitz told Kapnick in his final argument.

David Holgado, a lawyer with the attorney general’s office, argued during the trial that the review was based on a thorough investigation by the insurance department, which analyzed investments insured by MBIA and conducted interviews with company employees.

Dinallo approved the restructuring after finding that it protected all policyholders, including the banks, and determining it would help to boost MBIA’s credit ratings and spur investment in municipal projects to help bring the U.S. out of recession, Holgado said.

“The amount of diligence was extraordinary,” Holgado said.

Robert Giuffra, a lawyer with Sullivan & Cromwell LLP who represents the banks, told the judge during his closing argument today that the case is important to all current and future holders of insurance policies in the state of New York, whether they are banks, homeowners or owners of student loans that have been securitized into bonds.

“This time it’s the banks,” Giuffra said. “Next time it will be hurricane victims or victims of a toxic drug.”

The case is ABN Amro Bank v. Dinallo, 601846-2009, New York State Supreme Court, New York County (Manhattan).

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