A group of 18 financial institutions sued MBIA Inc., claiming the bond insurer's decision to split its businesses earlier this year was fraudulent and left one of the units effectively "insolvent."

The lawsuit, filed in New York state court, was brought by U.S. and foreign banks, including J.P. Morgan Chase & Co., Bank of America Corp., Morgan Stanley, Canadian Imperial Bank of Commerce, Barclays PLC and UBS AG.

An MBIA spokesman had no comment on the lawsuit. MBIA executives have said that recent legal challenges to their restructuring are "without merit."

The case follows similar suits brought against MBIA in recent weeks by hedge funds and investment funds that own debt securities issued or insured by MBIA.

MBIA in February separated its troubled mortgage exposures from its profitable U.S. municipal-bond insurance portfolio in an attempt to resume writing guarantees on municipal debt.

The original MBIA Insurance unit was left with $10 billion in claims-paying resources to back guarantees on about $240 billion in structured-finance securities and non-U.S. bonds, and its rating was downgraded to "junk" by credit-rating agencies.

The banks allege MBIA's split and the transfer of $5 billion in cash and securities from its main insurance unit to a dedicated muni-bond insurance company was "fraudulent" and "an unlawful attempt to escape" its contractual obligations to cover losses from souring mortgage securities.

Many of the banks had bought credit derivatives from MBIA that insured them against losses on securities backed by subprime mortgage assets and commercial real-estate loans.

Banks that were counterparties to MBIA were kept in the dark about the restructuring until it was complete and made public. In mid-March, representatives of about 15 financial institutions complained to New York State Insurance Superintendent Eric Dinallo, who had approved MBIA's split. A few weeks ago, some representatives of the banks met with MBIA and insurance regulators to discuss the situation.

"Our lawsuit simply seeks to ensure that policy holders receive what they have paid premiums for: contractually guaranteed insurance protection," said Vince DiBlasi, a lawyer at Sullivan & Cromwell who is representing the banks suing MBIA.

While MBIA's business split has disadvantaged policy holders of its weakened insurance unit, the move has so far benefited shareholders of the holding company as well as MBIA's top management, the lawsuit said.

MBIA and insurance regulators have said their internal projections and estimates of future losses indicate the original insurance unit remains solvent. The banks, however, said they believe MBIA Insurance is "undercapitalized and has no prospect of writing new insurance" and will end up with more liabilities than claims-paying resources.

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