ALBANY — New York’s top court on Tuesday reinstated a breach-of-contract lawsuit by a dozen banks challenging MBIA’s state-approved restructuring of its bond-insurance business, concluding the state insurance superintendent’s approval doesn’t prohibit creditor and common-law claims.
The Court of Appeals noted the institutions hold financial guarantee insurance policies issued by MBIA Insurance on their structured-finance products, including mortgage-backed securities, in a case that has its origins “in the unraveling of the world’s financial markets that began in 2007.”
The banks claim Armonk, N.Y.-based MBIA Inc. used a series of transactions that accompanied its 2009 restructuring to shift more than $5 billion from the subsidiary that issued the policies to another subsidiary, leaving the first unable to pay future claims.
A midlevel court dismissed the lawsuit, noting there had been no default on payments owed under their policies, and any attempt to challenge the insurance superintendent’s approval had to come in a separate, specific type of court proceeding. That challenge is pending in a separate suit.
But the Court of Appeals, split 5-2 on Tuesday, allowed the policyholders’ contract, common law and creditor claims to proceed also, rejecting MBIA’s argument that New York’s Insurance Law gives the insurance superintendent exclusive authority on such matters. The court majority noted that the policyholders had no notice or input into the insurance department decision.