MBIA Inc (MBI)

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UBS, Bank of America Appeal Dismissal of MBIA Suit
Karen Freifeld and Shannon D. Harrington
Jan 21, 2011

UBS AG, Bank of America Corp. and more than a dozen other banks appealed to New York’s highest court to reverse a lower court ruling that threw out their lawsuit against MBIA Inc. that challenged its restructuring.

MBIA won dismissal Jan. 11 of a lawsuit by banks including Citibank NA and Royal Bank of Scotland Plc that claimed the bond insurer’s split into two units was intended to defraud policyholders. MBIA climbed to its highest level since September 2008 on news of the dismissal by the state’s Appellate Division.

The banks said in their notice of appeal, filed yesterday in state trial court, that they are challenging “each and every part of the order” by the Appellate Division.

The banks claim the restructuring, approved by New York’s insurance department in 2009, transferred $5 billion in cash and securities out of MBIA’s primary operating unit, MBIA Insurance Corp., to another entity now known as National Public Finance Guarantee Corp., according to the complaint.

The move meant MBIA Insurance wouldn’t be able to meet future obligations to holders of financial-guarantee insurance policies, the banks said.

A five-judge appellate panel dismissed the suit in a 3-2 decision.

Expedited Appeal Request

“We are confident that the Appellate Division’s decision will be affirmed by the Court of Appeals,” Marc Kasowitz, an attorney for MBIA, said in an interview today.

In a letter to the Court of Appeals, Sullivan & Cromwell LLP lawyer Robert Giuffra Jr., who represents the banks, requested an expedited appeal.

“MBIA Insurance’s liquidity is evaporating,” Giuffra wrote, according to a copy of the letter provided by Sullivan & Cromwell at Bloomberg’s request.

The unit paid out more than $4.8 billion in gross loss payments during 2009 and the first three quarters of 2010, while total cash and invested assets declined by $2.1 billion, Giuffra said in the letter. The unit had $795 million of cash and cash equivalents as of Sept. 30, he said, citing a third-quarter 2010 New York Insurance Department statement. MBIA sold its headquarters in March “presumably to raise cash,” he said.

Kevin Brown, a spokesman for MBIA, said in an e-mailed statement, that “the banks have been maintaining that MBIA Insurance Corp. has been on the verge of imminent financial collapse since shortly after our transformation.

‘Meritless’ Argument

“Their argument continues to be meritless, as almost two years later we remain solvent and continue to pay all claims and obligations as they come due,” Brown said. “As of September 30, 2010, MBIA Insurance Corp. had statutory capital of $3.1 billion and a $2.0 billion liquidity position, which includes $844 million of highly liquid assets.”

Kasowitz, the MBIA lawyer, added there was “no valid reason” to expedite the appeal.

“The banks’ proposed schedule is seeking to cut in half the amount of time that the rules provide for appeals to the Court of Appeals,” he said. “There is no reason to depart from those rules and shortcut the briefing on these issues.”

Gary Spencer, a spokesman for the state Court of Appeals, said the court was not averse to granting calendar preference if a party could show “substantive need,” though it had to be balanced with the possible prejudice to the other party.

Spencer said the average period from the filing of notice to putting on the calendar for oral argument is about seven and a half months.

Two Lawsuits

The lawsuit is one of two that banks filed to challenge the split. The second, brought under New York state’s Article 78 statute, which asks the court to review a state administrative decision, has yet to be resolved.

Kasowitz said the Article 78 suit, which has been going on for a year and a half, was “the only proper forum” to challenge the superintendent of insurance’s approval of the restructuring.

The litigation has thwarted MBIA Chief Executive Officer Jay Brown’s efforts to reenter the business of guaranteeing state and municipal government bonds. The insurer was shut out after losing its top rankings in 2008 over losses on subprime mortgage debt it guaranteed. The restructuring in 2009 split the municipal bond policies from its guarantees on mortgage debt and other securities.

Cut Ratings

Standard & Poor’s last month cut its ratings on both insurance units and the holding company because of “significantly higher” projections of potential losses from residential and commercial mortgage debt. S&P downgraded the National Public Finance unit because of the “risk that the two companies could be required to be recombined or that National would be required to bolster MBIA Insurance’s capital,” the analysts said in a Dec. 22 statement.

MBIA rose 18 cents, or 1.5 percent, to $12.51 as of 4 p.m. in New York Stock Exchange composite trading today.

http://www.bloomberg.com/news/2011-01-21/banks-appeal-mbia-decision-dismissing-restructuring-litigation.html?cmpid=yhoo