N.Y. Court Tosses Bank Suit Against MBIA

NU Online News Service, Jan. 12, 2:29 p.m. EDT

A New York state appeals court threw out a suit brought by a number of banks against bond insurer MBIA over the company's plan to split its mortgage-backed securities exposure into a separate company.

In a 3-2 decision yesterday, the Appellate Division of the New York State Supreme Court reversed a lower court's ruling that allowed a group of at least 20 banks to sue Armonk, N.Y.-based MBIA over its transformation plan.

The transformation plan is designed to split the insurer's municipal bond policies—about 70 percent of its portfolio, amounting to $554 billion—from the MBS insurance policies that amount to $233 billion. The plan was developed with the approval of the New York State Insurance Department.

The Appellate Division of the New York State Supreme Court said the banks allege that the split would deny them payment of their risks under insurance policies the banks purchased from MBIA. But the court found that the company has not defaulted on payments and that the banks had not suffered any monetary damages.

"Plaintiffs seek an advisory opinion premised on future events that are beyond defendant's control and thus are speculative," the court said.

The court also found the banks failed to show how the plan was a "fraudulent conveyance."

The state Insurance Department will still have to settle an Article 78 complaint from the banks challenging the restructuring.

In a statement, MBIA Chief Executive Officer Jay Brown said, "The banks have continuously sought to obstruct [our] goal of providing much needed insurance capacity to the municipal market and to undermine the determinations made by the New York State Insurance Department. So we are gratified by the Appellate Division's decision and are now looking forward to a prompt resolution of the Article 78 proceeding, in which we fully expect to prevail."

MBIA has sued a number of banks, among them Bank of America, over their failure to properly assess the risk of mortgage loans and not follow proper risk management procedures. Those loans subsequently made up the residential mortgage-backed securities that caused losses for the company when homeowners defaulted on their mortgage payments.