Editors’ Note: This article has been updated to reflect a Correction.

Bond insurer MBIA Inc. has agreed to pay French bank Societe Generale $350 million to settle the bank’s lawsuit over the insurer’s 2009 restructuring, wrapping up a four-year legal battle that also involved 17 other major banks and the New York state government.

SocGen was the last of the banks to settle. Another holdout, Bank of America, settled only two days ago (NYLJ, May 7). The other 16 plaintiffs settled months earlier.

The banks, which held bond insurance policies from MBIA, claimed that MBIA’s restructuring left MBIA unable to honor its obligations to the banks under the policies.

The deal means that SocGen will be dropping its lawsuit against MBIA and a separate Article 78 case against the New York Department of Financial Services, whose predecessor, the Department of Insurance, approved the disputed restructuring.

"Today’s settlement between SocGen and MBIA lifts the last of the litigation clouds that have been hanging over MBIA for years," said Benjamin Lawsky, New York’s superintendent of financial services, in a press release. "Today is a good day for SocGen and truly a new day for MBIA. This fair resolution will hopefully help strengthen the municipal bond market, which is critical to our nation’s infrastructure and economic recovery."

"I think it’s a fantastic result for the company and for the country because we have a monoline insurer to serve the municipal bond market," Marc Kasowitz of Kasowitz Benson Torres & Friedman, who represents MBIA, told the Litigation Daily, a Law Journal affiliate.

Robert Giuffra Jr., a partner at Sullivan & Cromwell who represents the banks, declined to comment.

At its heart, the dispute was over the extent of the state’s power to take extraordinary measures in response to the financial crisis, and about judges’ power to second-guess those measures. It spawned a far-reaching decision from the Court of Appeals, where the global financial giants had found an unlikely ally in the New York Civil Liberties Union.

SocGen’s and BofA’s settlements came just over two months after Manhattan Supreme Court Justice Barbara Kapnick dismissed their Article 78 petition (NYLJ, March 5). Kapnick’s decision held that the Insurance Department was held to a very high degree of deference: as long as it did not violate any statute or depart from its own usual practice, she ruled, its decision should not be disturbed—even if, as the banks argued, the decision relied on false information.

The banks were already in the process of appealing that decision, and were gearing up for a trial in their separate case against MBIA.

The case was extraordinarily complex, involving thousands of pages of evidence and briefing. The central accusation, however, was simple: MBIA restructured itself in order to favor one group of its policyholders over another.

MBIA was founded in 1973 to write insurance policies on municipal bonds. In such policies, the insurer agrees to guarantee municipal bond payments in the event of default. The issuer of the bonds pays the premiums.

In the 1980s and ’90s, like other bond insurers, MBIA began to insure asset-backed securities, including residential and commercial mortgage-backed securities, in addition to its core municipal bond business. By the mid-2000s, its exposure to these securities was considerable. When the market for mortgage-backed securities crashed in 2007, MBIA was flooded with claims from banks that held insurance policies on those securities.

In the summer of 2008, Moody’s and Standard & Poor’s both downgraded MBIA’s credit rating. Faced with the prospect of further deterioration, MBIA began discussing a restructuring with its regulator in the state’s Department of Insurance, then-superintendent Eric DiNallo.

DiNallo was motivated by a clear policy goal: prevent the chaos in the mortgage-backed securities market from spreading into the municipal bond market, which has traditionally served as a safe investment. To that end, he worked with MBIA to create a municipal bond insurance entity with an AAA rating that could continue to guarantee stability in the municipal bond market.

The restructuring ultimately approved by the department effectively split MBIA into two companies. One company held MBIA’s municipal bond business, and the other held its risk-prone structured finance business. The restructuring also involved a complicated series of transactions between the two entities that transferred about $5 billion to the municipal bond insurance unit. When the Insurance Department announced the deal in February 2009, it said it was satisfied that both units would be able to honor their obligations to policyholders and that the municipal bond insurance unit would be able to win an AAA rating.

Eighteen banks that held insurance policies from MBIA’s structured finance unit were not satisfied. In June 2009, they launched a two-pronged attack. In a lawsuit against MBIA, they alleged that the restructuring was effectively a $5 billion fraudulent conveyance. In a separate Article 78 petition against DiNallo, they sought to reverse the approval of the transaction. Both cases were filed in Manhattan Supreme Court and were assigned to Justice James Yates.

MBIA moved to dismiss the fraud suit, arguing that, because the restructuring had been approved by a state agency, the banks’ only remedy was to challenge that approval under Article 78. Yates denied that motion, but the Appellate Division, First Department reversed and dismissed the suit (NYLJ, Jan. 12, 2011).

The banks appealed. They argued that if an administrative review in which they had no say foreclosed their fraud claims, they would be denied their right to due process. In one of the more unusual chapters in the case, the banks were joined by civil rights groups NYCLU and two other legal rights groups, MFY Legal Services Inc. and the Urban Justice Center, which filed amicus briefs comparing the banks’ plight to that of low-income New Yorkers at the mercy of state housing and environmental agencies.

The Court of Appeals reversed the First Department in June 2011, reviving the fraud case and sending it back to the trial court, where Kapnick had since replaced Yates after his departure from the bench (NYLJ, June 29, 2011).

Throughout all of this, the banks had been settling. By the time the Article 78 proceeding went to trial before Kapnick in May 2012, only BofA and SocGen remained. All the earlier settlements were confidential except for a deal with Morgan Stanley in which MBIA paid out $1.1 billion.

As it settled the claims, MBIA’s structured finance unit was forced to borrow over $1.6 billion from its municipal bond unit, lending some support to the banks’ claim that the structured finance unit was left undercapitalized. The banks’ fears got even more support earlier this year, when MBIA revealed in a financial statement that the structured finance unit might have to be liquidated.

In the end, MBIA may have been saved by its settlement with BofA. In addition to fighting off BofA’s suit, MBIA had been pressing a case against BofA since 2008 accusing the bank of misrepresenting the riskiness of the mortgage-backed securities that MBIA insured. Under the final settlement between the two companies, BofA agreed to pay MBIA $1.6 billion, grant it a $500 million line of credit and terminate its outstanding insurance policies on commercial mortgage-backed securities.

The cases are ABN Amro Bank v. MBIA, 601475/09, and ABN Amro Bank v. Dinallo, 601846/09.