Judge revives big banks’ case vs. MBIA

A New York appellate court reinstated a $5 billion lawsuit filed by some of the nation’s largest banks against bond insurer MBIA Inc. (MBI). The case, which deals with the controversial restructuring of MBIA in 2009, was thrown out by a lower court earlier in the year. The New York State Court of Appeals revived the suit, allowing the plaintiffs to move forward with fraudulent conveyance and breach of contract claims. The case alleges MBIA, through a complex restructuring in February 2009, essentially stripped “$5 billion in cash and securities out of MBIA Insurance to start a new business owned by MBIA,” according to court records. The plaintiffs contend MBIA did this to shield the mortgage insurer from potential payouts tied to the economic meltdown. The original suit included 18 plaintiffs from the banking sector, but has dwindled to 11, including Bank of America (BAC), Morgan Stanley (MS), UBS (UBS), HSBC (HBC) and the Royal Bank of Scotland (RBS). The plaintiffs assert National Public Finance Guarantee Corp. was created as a spin-off entity during the restructuring of MBIA to handle municipal bond insurance. The plaintiffs claim the unit left “MBIA as a dying entity … that is effectively insolvent and unable to meet long-term claims.” “Today’s decision is an important victory for all MBIA insurance policyholders,” said Robert Giuffra, counsel for the plaintiffs. “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. The court of appeals has reinstated all of policyholders’ debtor and creditor law claims and our claims for breach of contract and for abuse of the corporate form.” Another case involving MBIA’s restructuring is pending with a coalition of banks challenging the New York State Insurance Department’s decision to allow the transformation of MBIA in the midst of the economic meltdown. “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,” said Willard Hill, chief marketing and communications officer for MBIA. Write to: Kerri Panchuk.