MBIA Inc. defeated a lawsuit by Bank of America Corp. and Societe Generale SA that sought to reverse approval of the bond insurer’s $5 billion asset-transfer because it cut money available to cover their policy claims.
MBIA rose 24 percent to close at $12.78 after Justice Barbara Kapnick of New York State Supreme Court in Manhattan dismissed the case. Bank of America and Societe Generale had sought to reverse the state approval under New York laws that allow court challenges to state agency decisions.
In 2009, New York Insurance Department Superintendent Eric Dinallo approved the split, allowing MBIA to move the company’s guarantees on state and municipal bonds out of subsidiary MBIA Insurance Corp., which guaranteed some of Wall Street’s most toxic mortgage debt.
The banks argued during a month of oral arguments last year that the approval was based on inaccurate and incomplete information provided by Armonk, New York-based MBIA. They say the split exposed them to losses as holders of financial-guaranty policies by siphoning more than $5 billion in assets from MBIA Insurance.
A second suit over the restructuring is still pending in New York state court.
The dismissal removes one potential roadblock to MBIA’s efforts to jump-start its primary business of insuring municipal bonds. MBIA has told investors that as long as the litigation challenging the split remained, the company’s ability to win public-finance business would be constrained.
“We look forward to resolving the remainder of our litigation so that we can support the financing needs of towns and cities across America by re-establishing National Public Finance Guarantee Corp., our U.S. muni-only insurer, as a leader in the U.S. public finance insurance market,” MBIA Chief Executive Officer Jay Brown said in a statement.
The ruling may also remove one bargaining chip for Bank of America in lawsuits between it and the bond insurer, which is separately suing the lender to force it to buy back faulty loans that were included in residential-mortgage securities it insured.
Kapnick’s decision may spur Bank of America to offer MBIA a “reasonable settlement,” which could be $2.5 billion or more, Mark Palmer, an analyst for BTIG LLC, said in a blog post. A ruling in favor of Bank of America would have given the lender significant leverage in settlement talks, he said.
The lawsuit over MBIA’s restructuring “has now largely been reduced to a lever in our ongoing dispute with Bank of America and its Countrywide subsidiary over their mortgage-putback obligations,” Brown said in a conference call last week.
Robert Giuffra, an attorney for the banks, said in an e-mail that he would appeal the decision.
Lawrence Grayson, a spokesman for Charlotte, North Carolina-based Bank of America, and James Galvin, a spokesman for Paris-based Societe Generale, said they were reviewing the decision and that they would pursue their claims in a parallel lawsuit.
“We continue to believe that MBIA wrongfully transferred $5 billion from its structured finance subsidiary, to the harm of its policyholders, which we intend to prove in the separate fraudulent conveyance litigation that is underway,” Grayson said in a statement.
David Neustadt, a spokesman for the Department of Financial Services, declined to comment. The department merged the state’s banking and insurance regulators.
MBIA warned investors last week that there was “substantial doubt” about the ability of the MBIA Insurance unit to continue as a going concern. If it can’t reach an agreement with Bank of America, the lender could make claims on commercial-mortgage debt that MBIA guaranteed that the insurer said could leave it without sufficient funds and trigger a regulatory seizure.
S&P cited that risk in its downgrade of the National Public Finance unit last week, saying it may not be able to recover about a $1.6 billion intercompany loan to the old insurance unit if the regulator acts.
Bank of America and Societe Generale have a separate lawsuit in New York state court against MBIA over the restructuring. That complaint, which relies on different legal grounds, seeks to set aside the asset transfers. Kapnick said today’s decision doesn’t extinguish claims in that case.
“The issue before this court is whether there was a rational basis for the approval of the transformation or whether it was an arbitrary decision, taken without regard to facts,” Kapnick wrote in her decision. “The inquiry is not whether the result would have been different had the NYID hired certain experts or conducted the review on a different time line or with different resources.”
The case is ABN Amro Bank NV v. Dinallo, 601846-2009, New York State Supreme Court (Manhattan).