On June 11, 2012, FGIC became the first New York domiciled financial guaranty insurer to be subject to a possible New York rehabilitation proceeding under Article 74 of the New York Insurance Laws as a result of the financial crisis of 2007-2008. A New York Supreme Court judge issued a Show Cause Order (available here) on that date for FGIC to appear on June 28, 2012 to show cause why a rehabilitation order should not be entered under Article 74 based upon FGIC's consent and due to FGIC's insolvency and its inability to remove its impairment of its capital. The deadline for any opposition papers is June 22, 2012.

The Order to Show Cause provides for a stay of various actions by or regarding FGIC. The proposed rehabilitation order would (i) appoint the Superintendent of Financial Services of the State of New York as Rehabilitator of FGIC, (ii) direct the Rehabilitator to take possession of FGIC's assets and property and conduct its business, and (iii) take steps to remove the causes and conditions which led to the rehabilitation order (available here).

In November 2009, the then New York Superintendant of Insurance issued an order under Section 1310 of the New York Insurance Laws ("1310 Order") that required FGIC to cease writing any new policies and to suspend payment of claims.1 FGIC's Quarterly Statement for third quarter of 2009 showed a deficit in policyholders' surplus of approximately $866 million.2 At end of first quarter 2012, FGIC's policyholder surplus deficit had grown to approximately $3.7 billion.3 According to the Verified Petition, FGIC's financial difficulties were, among other things, a result of its losses on its policies relating to certain residential mortgage-backed securities ("RMBS") and collateralized debt obligations or asset-backed securities backed primarily by subprime RMBS.4 Along with its structured finance business, FGIC also insured municipal bond business.

After issuance of the 1310 Order, FGIC presented the New York Insurance Department (now the Department of Financial Services) with a proposed "Surplus Restoration Plan" to remediate its exposure to RMBS and related instruments. Ultimately, FGIC was unable to implement its "Surplus Restoration Plan." Its subsequent loss mitigation efforts also failed.5 FGIC's failure to cure its impairment to capital and deficit to policyholders' surplus are grounds for the proposed rehabilitation proceeding.6

In August of 2010, FGIC's parent company, FGIC Corporation, entered into a voluntary Chapter 11 proceeding under the United States Bankruptcy Code.7 FGIC Corporation's Chapter 11 Plan has been confirmed but not implemented.

Assuming that the Rehabilitation Order is issued, the Superintendant, acting through the Department of Financial Services' Liquidation Bureau, intends to propose a plan of rehabilitation for court approval, but there is no time limit for the Superintendent to propose a plan, and rehabilitation proceedings in New York have lasted for years, even decades. Creditors and other interested parties should be able to file any objections to a proposed plan. If either the Court rejects the proposed plan or rehabilitation appears unfeasible, liquidation of FGIC could be sought.