Judge Paul Levy of the New Jersey Superior Court late Wednesday sided with insurance regulators and Mutual Benefit Life Insurance Co. by forgin an agreement forbidding trustees from foreclosing on properties backed by the failed life insurer.
As long as Mutual Benefit and its rehabilitators -- including the state's insurance commissioner, Samuel F. Fortunato -- comply with nine conditions set forth in Tuesday's agreement, trustees may not "commence or continue any action of foreclosure," the order says.
Not all of the trustees submitting briefs to Judge Levy agreed to the standstill. Attorneys representing Maryland National Bank, trustee on two Mutual Benefit-insured issues, and John Nuveen & Co., which owns all of one Florida deal, refused to agree to the terms. These firms may challenge Judge Levy's jurisdiction over the matter, according to court sources, by attempting to foreclose anyway.
The parties agreeing to the standstill essentially complied with Mutual Benefit's strategem to buy time. Gregory Petrick, an associate at Cadwalader, Wickersham & Taft and counsel for the deputy rehabilitator, said it was "probable" that Judge Levy would issue an extended restraining order enjoining the trustees not party to the agreement from foreclosing.
"What we are trying to achieve is a chance to find a long-term solution to the problem," Mr. Petrick said. "But we can't be fighting 44 foreclosure actions, while at the same time trying to analyze each project and find out what makes sense."
In exchange for cessation of foreclosure proceedings, the banks received guarantees of interest, access to monthly financial reports from the project owners, assurance that their trustee fees and litigation expenses will be paid, the right to proceed against the properties in the future, and allowance for bondholder disapproval of the agreement.
This last point gives bondholders the right to overturn the agreement and direct trustees to try their luck by defying Judge Levy. In many of the issues, a simple majority of bondholders could direct the trustees to withdraw from the standstill agreement.
The standstill and expected permanent restratining order could change the way municipal analysts view guaranteed bonds, suggested Jonathan Rich, a partner at Maguire, Voorhis, & Wells in Orlando and counsel to Sun Bank. As precedent, he said, the order raises questions about the ability to get to the underlying assets.
"If it appears less certain that you could get your hooks into it through foreclosure proceedings," he said, "then your security is less certain."
Although the rating agencies rate the claims-paying ability of the insurer in the first place, he said, a "ripple effect" could not be discounted. Sun Bank signed on to the standstill agreement.
Defiance of the restraining order, through plowing ahead with a foreclosure, would throw the Mutual Benefit case into an entirely new stage. In short, state courts where the foreclosures took place would have to decide whether Judge Levy's order carries weight there.
Mr. Rich, whose client Sun Bank is trustee for eight tax-exempt Mutual Benefit issues, speculated that state courts may not recognize the order. "They could hope for a ruling by, say, a Florida court that his order was nonbinding." Mr. Rich said. "A different court may find the order didn't have extra-jurisdictional validity."
Mr. Petrick of Cadwalader, however, said such a development is not at all clear. A pact between 28 states known as the Uniform Insurers Liquidation Act, to which Florida has agreed, would work in favor of the restraining order, he said. The act says participating states should cooperate and give deference to the domiciliary state, in this case New Jersey.
"If the trustees go ahead and attempt to foreclose -- in Florida, for example -- they run the risk of contempt," Mr. Petrick said. "We would then go down there and try to have his order enforced and recognized."