In the continuing fight between MBIA and a bank group that has dwindled to two members, it appears that, due to another court decision, MBIA is ahead on points; however, some believe the insurer is running out of gas. On April 2, 2013, the New York Appellate Division, First Department, affirmed the trial court's decision holding that an underlying loan does not need to be in default to trigger the policyholder's repurchase obligation to MBIA if the insurer can prove that inaccurate information provided by the policyholder materially and adversely affected the insurer's interest.
We reported on March 8, 2013, that the New York Supreme Court's March 4, 2013 Article 78 Proceeding decision determined that the New York Insurance Department's (n/k/a the Department of Financial Services) approval in respect of MBIA's restructuring should not be rescinded. That decision, which absolved the Department of Financial Services of error in approving MBIA's restructuring, left unresolved whether the banks, which were MBIA policyholders, would pursue an appeal or prosecute an earlier action filed directly against MBIA. We now know that the banks filed their appeal on March 28, 2013; however, we have not seen evidence of their intentions in respect of the action against MBIA.
The Recent Appellate Division Decision
The more recent Appellate Division decision confirmed that a bank that remains an MBIA policyholder is at risk of losing the benefits of its coverage on each insured transaction for which MBIA can show that it relied on a material misrepresentation in issuing the policy. The Appellate Division held that a rescission was not warranted for the transaction subject to the decision, but recission damages are not needed because defeating recovery under the policy could occur notwithstanding. Moreover, the Appellate Division agreed with the trial court that the underlying transaction need not be in default to be a candidate for repurchase. Accordingly, MBIA retains a larger basket of transactions on which it can look to offset policy obligations with policyholder repurchases.
As we noted in our earlier bulletin, MBIA's ratings have suffered from concern that the Department of Financial Services will move to place MBIA Corp. in a delinquency proceeding. With that possibility approaching, it remains to be seen whether MBIA can leverage the recent court decisions into a settlement that allows MBIA to go forward. The banks may need to consider whether a settlement recovery may be more beneficial than having a claim in a delinquency proceeding where the greatest source of recovery requires the Director of the Department of Financial Services, in his role as a receiver, to reconsider the restructuring for which his department recently received absolution for having approved.
For more information and to read our March 8, 2013 bulletin please click here.