A state judge in Manhattan yesterday rejected a bid by Bank of America Corp. and Societe Generale SA to undo the 2009 restructuring of bond insurer MBIA Inc., which the banks claim illegally transferred $5 billion in assets from MBIA's structured finance insurance business to its municipal bond insurance business.
Supreme Court Justice Barbara Kapnick (See Profile) ruled in ABN Amro Bank v. Dinallo, 601846/09, that there is no basis for overturning the decision by the New York Insurance Department, which has since been merged into the Department of Financial Services, to approve the restructuring. The decision comes almost nine months after the conclusion of a three-week-long oral argument, which capped off nearly three years of voluminous discovery and briefings (NYLJ, June 11, 2012).
MBIA's restructuring, approved in the wake of the financial collapse, effectively split the company in two, with one newly created entity taking on MBIA's core municipal bond insurance business and the other taking on its business insuring much riskier structured finance products.
Following the split, 18 banks filed an Article 78 petition against then-Superintendent of Insurance Eric Dinallo in an effort to undo the approval. They argued that about $5 billion in assets had been transferred from the structured finance unit to the municipal bond unit through a series of illegal transactions, leaving the structured finance unit insolvent in the long term. All the banks except Bank of America and Societe Generale have since settled.
MBIA is represented by Marc Kasowitz of Kasowitz Benson Torres & Friedman.
Robert Giuffra Jr., a partner at Sullivan & Cromwell, represented the banks.
In addition to the Article 78 case, the banks are pursuing a fraudulent conveyance case against MBIA, ABN Amro Bank v. MBIA, 601475/09. That case, which is also before Kapnick, is in the discovery phase and is not affected by yesterday's order.
Kapnick considered and rejected numerous arguments put forth by the banks in yesterday's decision.
For example, she rejected their claim that a dividend paid by the structured finance unit to the municipal bond unit was illegal because it depended on a surplus created by a separate, simultaneous reinsurance transaction between the two. Nothing in the Insurance Law bans such a transaction, she said.
"Nor is the Court aware of any provision in the Insurance Law which sets out any procedural requirements that must be followed to effectuate these types of transactions," she wrote. "As such, this Court will not read into the Insurance Law such requirements or disturb the actions of the Superintendent, which were made in his discretion and were not affected by an error of law."