MBIA Inc. on Monday won the dismissal of a lawsuit by Bank of America Corp. and Societe Generale SA challenging its 2009 restructuring, sending the bond insurer’s shares up 24 percent.
New York Supreme Court Justice Barbara Kapnick said Eric Dinallo, the state insurance superintendent at the time, was not “arbitrary and capricious” in authorizing a split of MBIA’s traditional municipal bond business from a structured finance unit that had suffered big losses from guaranteeing debt backed by risky mortgages.
Bank of America and Societe Generale, the French bank, were the only remaining plaintiffs among 18 financial companies that said the split defrauded policyholders such as themselves.
They said it left the MBIA Insurance unit undercapitalized, and siphoned $5 billion from the unit to benefit another entity, National Public Finance Guarantee Corp, at their expense.
But in a 59-page decision, Kapnick said it was not her job to second-guess Dinallo’s decision, which had a rational basis. MBIA had supported the restructuring as a means to help unfreeze municipal finance markets following the 2008 financial crisis.
“Dinallo found that the transaction was ‘fair and equitable’ because it would leave [MBIA Insurance] solvent and that those policyholders’ claims would be paid as they came due,” and Dinallo interpreted the law in a manner that was not “irrational or unreasonable,” Kapnick wrote.
Kapnick said her decision does not affect claims by the banks against MBIA itself in a case that the state’s highest court, the Court of Appeals, allowed to go ahead in June 2011.
The judge oversaw a three-week nonjury trial over the restructuring last May and June in her Manhattan courtroom.
Robert Giuffra, a partner at Sullivan & Cromwell representing Bank of America and Societe Generale, said the banks plan to appeal Monday’s decision.
MBIA Chief Executive Jay Brown said in a statement he was pleased with the decision, and that the Armonk, N.Y.-based company looks forward to resolving the remaining litigation.
Shares of MBIA closed up $2.47 at $12.78 on the New York Stock Exchange. Earlier the shares rose as much as 25.4 percent to $12.93, their highest level since Feb. 2, 2012.
“Fair And Equitable”
In the lawsuit, Bank of America and Societe Generale sought to force MBIA to set aside $2.09 billion in dividends, cash and securities it had received from its insurance unit for the benefit of creditors.
Alternatively, the banks sought to force the state, or MBIA Insurance directors, to sue the parent company to recover that sum.
MBIA was once the largest U.S. bond insurer. Its main rival, Ambac Financial Group Inc., filed for bankruptcy protection in November 2010 after also suffering big losses from guaranteeing mortgage-backed debt.
Bank of America spokesperson Lawrence Grayson and Societe Generale spokesperson Jim Galvin said in separate statements: “We continue to believe that MBIA wrongfully transferred $5 billion from its structured finance subsidiary, to the harm of its policyholders, which we intend to prove in the separate fraudulent conveyance litigation that is under way.”
The insurance department is now part of the New York State Department of Financial Services. David Neustadt, a spokesperson for that department, declined to comment.
Dinallo is now a partner at Debevoise & Plimpton. Through a spokesperson for the law firm, he declined to comment.
The case is ABN AMRO Bank NV et al v. Dinallo et al, New York State Supreme Court, New York County, No. 601846/2009. The case against MBIA is ABN Amro Bank NV et al v. MBIA Inc et al in the same court, No. 601475/2009.
(Reporting By Ben Berkowitz, Karen Freifeld and Jonathan Stempel in New York; and Rick Rothacker in Charlotte, N.C.; Editing by Leslie Adler, Andre Grenon, John Wallace and Diane Craft)