NEW YORK – A New York appeals court dismissed a lawsuit against MBIA yesterday, potentially clearing a reorganization of the bond insurer that could cost big banks and corporate credit unions billions of dollars on their insured mortgage securities.
The ruling could allow MBIA to more forward with its controversial reorganization that will give priority to payments owed to municipal bond holders, at the expense of holders of private investments such as mortgage-backed securities held by banks ad credit unions. Ambac Securities is undergoing a similar reorganization.
The two companies were the biggest insurers of MBS held by corporate credit unions, promising to pay a portion of value of the securities if the bonds went bad. The likelihood that the two troubled insurers will not pay the corporates’ claims caused the corporates to increase their losses by billions of dollars.
The MBIA suit was brought by 20 of the world’s largest financial institutions, including JPMorgan Chase, Citibank, Bank of America, Morgan Stanley, Merrill Lynch, Barclays, Wachovia, UBS and HSBC. The lawsuit claimed the 2009 split of MBIA amounted to fraudulent conveyance.
The Appellate Division, First Department in Manhattan granted MBIA’s motion to dismiss the lawsuit. A trial court had denied MBIA’s dismissal motion.
In 2009, the insurance regulator for New York State approved a plan that split MBIA into two companies, dividing its relatively healthy municipal insurance business from its troubled structured products insurance business. The banks had argued that the split favored muni-insurance policy holders over other policy holders and left the structured products division undercapitalized.
The MBIA reorganization is still being challenged in at least three other cases – one in Delaware courts, a case in federal court and a case that seeks to have the Superintendent of Insurance’s approval overturned on the grounds that it is arbitrary.
