A New York appeals court recently dismissed one of two lawsuits filed against MBIA Inc. (“MBIA”) by more than a dozen major financial institutions concerning the bond insurer’s financial restructuring. The plaintiffs – owners of insurance policies issued by MBIA for structured finance products, including residential mortgage-backed securities – claimed that the bond insurer’s split into two units was intended to defraud policyholders. For a complete copy of the decision, click here.
Specifically, the institutions alleged that the restructuring, approved by the New York Insurance Department in 2009, transferred $5 billion in cash and securities from MBIA’s primary operating unit, MBIA Insurance Corp., to a different entity, National Public Finance Guarantee Corp. The banks claimed that the transfer prevented MBIA from meeting future obligations to holders of financial-guarantee insurance policies, which included the plaintiff banks.
In a 3-2 decision, the Appellate Division determined that MBIA has continued to pay all insurance claims since the restructuring, so no breach of any contractual provision has occurred. The Appellate Division found that the banks’ allegations are essentially premised on future events that are speculative and beyond MBIA’s control. The court also determined that the banks failed to allege fraud or corporate misconduct, noting that the restructuring was accomplished via legitimate procedures with the approval of the New York Insurance Department.
The Appellate Division further noted that the appropriate proceeding for challenging the Insurance Department’s approval is through an Article 78 proceeding, which permits a party to seek court review of a state administrative decision. Indeed, in the other lawsuit filed by the banks, which has been pending before a New York trial court for over a year and a half, the banks are asking the court to review the Insurance Department’s approval of MBIA’s financial restructuring through an Article 78 proceeding. The banks are alleging in this action that the Insurance Department’s decision was “arbitrary and capricious.”
The banks are already seeking a reversal of the Appellate Court’s decision and have filed an appeal with New York Court of Appeals, New York’s highest court.