New York Court Permits Banks to Sue MBIA

The state Court of Appeals in Albany, New York’s highest court, announced its decision Tuesday, overturning a lower court ruling.

A state appellate court in January dismissed the suit by the banks, which claimed the bond insurer’s overhaul had been intended to defraud policyholders. The banks claim the revamping was a “fraudulent conveyance” that left MBIA undercapitalized and possibly unable to pay future claims.

The Court of Appeals decision, in a 5-to-2 vote, turned on whether approval of the split by the state insurance superintendent had precluded the bank policyholders’ claims.

“We hold that the superintendent’s approval of such restructuring pursuant to its authority under the Insurance Law does not bar the policyholders from bringing these claims,” Judge Carmen Beauchamp Ciparick wrote for the majority.

The decision restored the banks’ claims of fraudulent conveyance, breach of contract and abuse of the corporate form. The court agreed with the lower court that a claim for unjust enrichment should be dismissed.

The banks said in court filings that the split had transferred $5 billion in cash and securities out of MBIA’s primary operating unit, the MBIA Insurance Corporation, to another entity, now known as the National Public Finance Guarantee Corporation.

The insurer argued that the restructuring had been done to help unfreeze the public finance markets during the financial crisis and had been approved by state regulators after an extensive review that found MBIA Insurance would remain solvent and have sufficient resources to meet claims, according to a brief filed in April with the Albany court.

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