S&C Achieves Significant Appellate Victory in MBIA Case, Reinstating $5 Billion Suit Against the Insurer

June 28, 2011

On June 28, the Court of Appeals of the State of New York reinstated the fraudulent conveyance action brought by 11 S&C clients (including Bank of America, Morgan Stanley, UBS and other leading global financial institutions) against the monoline insurer MBIA Insurance (“MBIA”). In February 2009, MBIA's parent company obtained permission from the New York State Insurance Superintendent to remove $5 billion in assets from MBIA Insurance during the financial crisis. This restructuring left MBIA as a “dying” insurer with a “junk” credit rating and $230 billion in structured finance insurance policies.

In May 2009, the financial institutions sued MBIA in the Commercial Division of the Supreme Court, New York County under the New York Debtor and Creditor Law (“DCL”) and the common law, challenging MBIA's restructuring as a fraudulent conveyance. The Commercial Division denied MBIA's motion to dismiss this action on the ground that it was an impermissible “collateral attack” on the Superintendent's approval. In January 2011, the Appellate Division reversed in a 3-2 decision, and dismissed the case. S&C appealed as of right to the Court of Appeals, where Mr. Giuffra argued on behalf of the financial institutions.

On June 28, the Court of Appeals reinstated the financial institutions' fraudulent conveyance action in a 5-2 decision, available here. In doing so, the Court rejected MBIA's argument that the Insurance Superintendent's ex parte regulatory approval barred the bank policyholders from asserting their claims against MBIA. The Court held that the New York Insurance Law did not extinguish the bank policyholders' claims, and that it would violate due process to allow the Superintendent's approval to bar those claims.