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."
Kapnick also declined to reverse the approval on the basis of errors, which MBIA admitted, in an "extreme stress test" projection submitted by MBIA to the Insurance Department.
She noted, first, that the Insurance Department was following its own usual practice of presuming that materials submitted to it were true, and that it is "not for this Court to disturb NYID practices absent a violation of law or regulation; nor is it this Court’s role to promulgate new NYID policies or procedures."
She said that, while in some other cases, courts had overturned regulatory determinations because they relied on inaccurate information, those cases "do not stand for the broad proposition that all agency determinations must be annulled if based on inaccurate information, regardless of what that information is or what role it played in the decision making process.
"There is a difference between the instant situation where the NYID may have used incorrect numbers in hypothetical ‘extreme stress’ tests and a parole board having the wrong information about the number and types of crimes an inmate was convicted of when considering his or her parole application, because in the latter scenario there is an obvious ‘likelihood that such error may have affected the board’s decision to deny parole,’" she wrote as an example, citing Brazill v. New York State Bd. of Parole, 76 AD2d 864.
Kapnick further said that MBIA’s failure to share an unfavorable analysis of its finances prepared in 2008 by Lehman Brothers was not a basis for granting the Article 78 petition, writing that the banks "fail to provide any legal authority to support their argument that this Court can annul the Department’s decision based on claims that MBIA concealed or withheld potentially damaging information from the NYID."
The judge repeatedly emphasized that it is not her role to evaluate the merits of the Insurance Department’s review process.
"The inquiry is not whether the result would have been different had the NYID hired certain experts or conducted the review on a different time line or with different resources," she said. "Absent statutes or regulations that prescribe the manner in which the NYID must review the applications it receives, this Court cannot say that it was arbitrary and capricious for the NYID not to have taken the course that Petitioners insist, after the fact, would have been more prudent."
Kasowitz said that "MBIA is very pleased with Justice Kapnick’s decision, which was thorough and well-reasoned. The decision, which came after a month-long hearing in which there were literally thousands of pages of evidence and briefing, addressed all of the banks’ arguments and rejected every one of them. It held, at the end of the day, that Superintendent Dinallo’s approval of the transformation transaction was neither erroneous nor an abuse of discretion."
Bank of America and Societe Generale said in a written statement: "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 underway."
Giuffra said his clients planned to appeal.
A spokesman for the Department of Financial Services declined to comment.
@|Brendan Pierson can be contacted at email@example.com.