The New York Court of Appeals ruled that a group of banks can go ahead with their lawsuit against MBIA, which questions the validity of the break-up of the insurer.
In a 5-2 vote, the court ruled in the case (No. 124 ABN AMRO Bank, N.V. / Barclays Bank PLC v. MBIA Inc.) that the banks can pursue their claim that the split of MBIA into two companies left the bank policyholders with an insolvent company that would be unable to pay claims.
The court says there was no legal basis to "extinguish the historic rights of policyholders to attack fraudulent transactions."
The court ruled that former New York State Superintendent of Insurance Eric Dinallo was in his right to proceed with the split of the company, but there is nothing under the Debtor and Collection Law to prevent the banks from pursuing their case.
The court did dismiss the plaintiff's claim of action for unjust enrichment.
In an e-mail, Robert J. Giuffra Jr., lead counsel for the policyholders and a partner with the law firm Sullivan & Cromwell LLP, says of the decision that it "is an important victory for all MBIA Insurance policyholders. The Court of Appeals has squarely rejected MBIA's efforts to shut the courthouse door, in violation of basic principles of due process, and to shield MBIA's unprecedented $5 billion fraudulent conveyance behind a secret administrative process."
He says the plaintiffs plan to pursue this and other legal actions, including an Article 78 claim, an administrative action seeking to reverse the superintendant's decision. He adds, "We're confident that MBIA's fraudulent restructuring will be reversed."
Willard Hill, chief marketing and communications officer for MBIA Inc., says in a statement, "We are disappointed by the court's decision, but as it is strictly a procedural ruling, it does not address the merits of the case, and we remain confident that we will ultimately prevail."
Armonk, N.Y.-based bond-insurer MBIA was split into two companies in 2009, with National Public Finance Guarantee, holding onto the company's healthy portfolio of municipal-bond insurance.
The second company, MBIA Insurance, retains the structured-finance policies that became toxic with the housing implosion during the great recession.
The banks that secured coverage for their structured-finance agreements contend that the split left MBIA with no capital to back-up the policies. The banks produced a study that claims the insurer underestimated its losses by $10 billion.
In its defense, MBIA has noted that no claim has gone unpaid.
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