Wisconsin Appeals Court Upholds Ambac Account Rehab Plan

The Wisconsin insurance commissioner’s plan to “rehabilitate” a segregated $50 billion portfolio of Ambac Assurance Corp. policies and corporate liabilities was upheld on appeal.

Wisconsin’s intermediate-level Court of Appeals today affirmed the January 2011 decision by state Circuit Court Judge William D. Johnston to approve the plan and related rulings.

“The interested parties have the burden of challenging specific findings of fact and conclusions of law,” Judge Paul B. Higginbotham wrote for a three-judge panel. “The interested parties have failed to meet their burden in this case.”

Ambac Assurance, a unit of New York-based Ambac Financial Group Inc., was the second-largest U.S. bond insurer before the 2008 financial crisis. Mounting defaults in mortgages underlying the securities swamped the company with claims, threatening its viability.

The insurer was paying as much as $150 million a month in claims, exceeding its revenue, Sean Dilweg, then the state’s insurance commissioner, said in a 2010 interview.

Dilweg placed the 1,000 of Ambac’s 15,000 policies that posed the greatest threat to its financial stability in the segregated account, according to the appeals court ruling.

Cash, Notes

Under the plan approved by Johnston after a five-day evidentiary hearing in November 2010 and upheld today, holders of claims associated with that account will be paid 25 percent of those claims in cash and the remainder in surplus notes that mature in 2020.

“Some time before the maturity date, the commissioner will assess the need to modify that date to allow for the continuation or reissuance of surplus notes after 2020,” according to the appellate ruling. “It is projected that the surplus notes may not be paid until 2050, if not later.”

Ted Nickel succeeded Dilweg as Wisconsin’s insurance commissioner in January 2011.

“Today’s appellate rulings are an important victory for the rehabilitation effort and the Segregated Account’s policyholders,” Nickel said in an e-mailed statement.

Hedge Funds

Among the parties opposing the plan was a group of five hedge funds including Aurelius Capital Management LP, Fir Tree Inc., King Street Capital LP, Monarch Alternative Capital LP and Stonehill Capital Management LLC, collectively referring to themselves in court papers as the RMBS -- or residential mortgage-backed securities -- policyholders.

In their appellate brief, they argued that the segregated account was inadequately capitalized and that it had been formed without prior notice to them, violating their rights.

The appellate court rejected each of these arguments, saying the segregated account was capitalized by in part by a $2 billion secured note and could draw upon Ambac’s general account to meet liabilities, provided payment of those claims didn’t cause the company’s assets to fall below $100 million, less than 2 percent of its claims-paying assets.

RMBS policyholders’ attorney David Greenwald, a partner in the Chicago-based law firm Jenner & Block LLP, didn’t reply to voice-mail and e-mail requests for comment on the court’s ruling.

Philip Bentley, an attorney who represented Las Vegas Monorail bondholders objecting to Johnston’s approval of a related $4.6 billion credit default-swaps liability settlement, declined to comment on the decision. He is a partner in the New York law firm Kramer Levin Naftalis & Frankel LLP.

The case is In the Matter of the Rehabilitation of: Segregated Account of Ambac Assurance Corp., 2010AP1291, 2010AP2022, 2010AP2838 and 2011AP561, Wisconsin Court of Appeals, District IV (Madison).

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