ABN AMRO Bank, N.V. v. MBIA Inc.

• Decision Date: 11 January 2011
• Citation: 916 N.Y.S.2d 12,81 A.D.3d 237
• Parties: ABN AMRO BANK, N.V., et al., Plaintiffs-Respondents, v. MBIA INC., et al., Defendants-Appellants. Aurelius Capital Master, Ltd., Aurelius Capital Partners, LP, Fir Tree Value Master Fund, L.P., Sir Tree Capital Opportunity Master Fund L.P. and Fir Tree Mortgage Opportunity Master Fund, L.P., Amici Curiae.
• Court: New York Supreme Court — Appellate Division

916 N.Y.S.2d 12
81 A.D.3d 237

ABN AMRO BANK, N.V., et al., Plaintiffs-Respondents,
v.
MBIA INC., et al., Defendants-Appellants.
Aurelius Capital Master, Ltd., Aurelius Capital Partners, LP, Fir Tree Value Master Fund, L.P., Sir Tree Capital Opportunity Master Fund L.P. and Fir Tree Mortgage Opportunity Master Fund, L.P., Amici Curiae.

Supreme Court, Appellate Division, First Department, New York.

Jan. 11, 2011.

916 N.Y.S.2d 13

Defendants appeal from orders of the Supreme Court, New York County (James A. Yates, J.), entered February 18, 2010,

916 N.Y.S.2d 14

March 2, 2010 and March 5, 2010, which denied their motion to dismiss the complaint.

Kasowitz, Benson, Torres & Friedman LLP, New York (Marc E. Kasowitz, Daniel R. Benson, Aaron H. Marks, Albert S. Mishaan and Kenneth R. David of counsel), for appellants.

Sullivan & Cromwell LLP, New York (Gandolfo V. DiBlasi, Michael T. Tomaino, Jr. and Brian T. Frawley of counsel), for respondents.

Simpson Thacher & Bartlett LLP, New York (David W. Ichel, Barry R. Ostrager, Joseph M. McLaughlin, Patrick T. Shilling and Seth M. Kruglak of counsel), for amici curiae.

PETER TOM, J.P., ANGELA M. MAZZARELLI, JOHN W. SWEENY, JR., HELEN E. FREEDMAN, SHEILA ABDUS-SALAAM, JJ.

FREEDMAN, J.

81 A.D.3d 239

Plaintiffs are institutions that hold insurance policies issued by defendant MBIA Insurance Corporation (MBIA Insurance), that along with the other defendants form a conglomerate. By this plenary action, plaintiffs challenge the restructuring of the conglomerate in 2009, which the Superintendent of the New York State Insurance Department had approved. Plaintiffs claim that the restructuring amounted to a fraudulent conveyance

81 A.D.3d 240

that left MBIA Insurance undercapitalized and potentially unable to pay out on plaintiffs' future claims on their policies. The complaint asserts causes of action for breach of contract, unjust enrichment, and violation of the Debtor and Creditor Law, and also seeks a declaratory judgment piercing the corporate veil.

Defendants contend in a motion to dismiss the complaint that plaintiffs fail to state causes of action, and that the claims constitute an impermissible collateral attack on the Superintendent's approval of the restructuring, which plaintiffs can only challenge in the article 78 proceeding that they have also commenced. The motion court denied defendants' dismissal motion and we reverse.

The following is not in dispute: Before the restructuring, MBIA Insurance was the wholly-owned subsidiary of defendant MBIA Inc., a publicly traded holding company, and defendant MBIA Insurance Corp. of Illinois (MBIA Illinois), ¹ an essentially dormant company, was the wholly-owned subsidiary of MBIA Insurance. MBIA Insurance, the only active insurer of the three, was licensed under Insurance Law article 69 to offer financial guaranty insurance policies in New York covering securities and other financial instruments held by its policyholders. Under each policy, MBIA Insurance promised to pay the policyholder if the obligor on the covered instrument failed to pay amounts owing on it. Historically, MBIA Insurance had been the world's largest guaranty insurer for municipal bonds and other securities issued by public entities, and its business had exclusively consisted of writing those policies, but in recent years the company had branched out into providing coverage for "structured-finance" products, which are obligations payable from or tied to the performance of pools of assets (such as mortgage-backed securities and collateralized debt obligations). As of the end of 2008, roughly 70% of MBIA Insurance's portfolio consisted of municipal bond policies ($553.7 billion in face amount) and 30% consisted of structured-finance product policies ($233 billion in face amount).

916 N.Y.S.2d 15

Plaintiffs in this action hold MBIA Insurance policies guaranteeing payment on structured finance products in plaintiffs' portfolios. With the onset of turmoil in the financial markets in 2007, the risk of payment defaults for structured-finance products increased, as did MBIA Insurance's potential liability under its structured-finance policies. The company's

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growing exposure caused the rating agencies to downgrade its creditworthiness. MBIA Insurance stopped writing new structured-finance policies as of early 2008.

On February 25, 2008, MBIA Inc. publicly announced its plan to establish separate business entities to operate its "public, structured, and asset management businesses." On December 5, 2008, MBIA Insurance, on behalf of itself and its affiliates, submitted an application to the Superintendent setting forth its plan to restructure defendants' business through a series of transactions, many of which required the approval or non-objection of the Superintendent pursuant to various sections of the Insurance Law.

In its application, which was supplemented and amended a number of times through February 16, 2009, MBIA Insurance proposed the following transactions: First, MBIA Insurance would pay a $1.147 billion dividend to MBIA Inc. Second, MBIA Insurance would redeem about a third of its capital stock from MBIA Inc. and retire it, and in exchange would give MBIA Inc. about $938 million more in cash and securities plus all of the outstanding stock of MBIA Illinois. Third, MBIA Inc. would transfer the approximately $2.27 billion of cash and securities it had received from MBIA Insurance for its dividend and stock redemption, along with the stock of MBIA Illinois, to MBIA Inc.'s wholly-owned subsidiary, MuniCo Holdings, Inc. (MuniCo Holdings). The transfer would change MBIA Illinois from a subsidiary of MBIA Insurance to a subsidiary of MuniCo Holdings. Fourth, MuniCo Holdings would capitalize MBIA Illinois by contributing $2.085 million of the cash and securities that it had received from MBIA Inc.

As the final step of the restructuring, MBIA Insurance proposed that MBIA Insurance and MBIA Illinois would enter into a complex reinsurance transaction, in which, among other things, MBIA Illinois would reinsure nearly all of MBIA Insurance's policies for municipal bonds and other public finance securities on a "cut-through" basis, meaning that public finance policyholders could claim directly against MBIA Illinois as well as MBIA Insurance. In exchange, MBIA Insurance would pay MBIA Illinois about $3.66 billion, which included about $3 billion in premiums that public finance policyholders had prepaid. Under the proposal, MBIA Illinois would also agree to administer and service all of MBIA Insurance's reinsured policies. The end result of the restructuring was to segregate MBIA Insurance's public finance and structured finance

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portfolios by having the newly-capitalized MBIA Illinois take responsibility for the public finance portfolio, leaving only MBIA Insurance liable for claims under the structured finance portfolio.

The Superintendent responded to MBIA Insurance's application by letter dated February 17, 2009. After describing the proposed transactions in detail, the Superintendent issued the following determinations, among others: First, the Superintendent approved the MBIA Insurance dividend payment to MBIA Inc. under Insurance Law § 4105(a), which required the Superintendent to determine that MBIA Insurance would "retain sufficient surplus to support its obligations and writings." Second, the Superintendent approved the stock redemption as "reasonable and equitable"

916 N.Y.S.2d 16

to MBIA Insurance, as required under Insurance Law § 1411(d).

The Superintendent next addressed aspects of the proposed reinsurance transaction which required his permission or non-disapproval under a number of Insurance Law provisions. Sections 1505(a) and 1505(d) of the Insurance Law provide, in relevant part, that a "domestic controlled insurer" (here, MBIA Insurance) and "any person in its holding company system" (here, MBIA Illinois) may enter into a reinsurance transaction upon 30 days advance notice to the Superintendent, if, after considering (among other factors) "whether the transaction may adversely affect the interests of policyholders," the Superintendent does not disapprove the transaction. In his letter, the Superintendent specified that, based upon the statutory factors, he did not disapprove. The Superintendent also confirmed that MBIA Insurance would receive full financial credit for the reinsurance arrangement under Insurance Law §§ 1308 and 6906(a), so that it could release all unearned premium, contingency, and other reserves attributable to the reinsured public finance policies.

For each approval, non-disapproval or other determination in the letter, the Superintendent stated that he relied on the truth of MBIA Insurance's representations in its application and other submissions, on the Superintendent's examination of defendants' financial condition before the restructuring, and on his analysis of defendants' financial condition after the restructuring.

On February 17, 2009, the same day that the Superintendent issued his letter, defendants consummated the restructuring transactions. On February 18, the Superintendent issued a press

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release entitled "Department Facilitates, Supervises MBIA Split; Should Add Capacity to Municipal Bond Insurance Market." The press release announced that the Superintendent had overseen "a transformation of [MBIA Insurance] that effectively splits that company in two, dividing its assets and liabilities between two highly capitalized insurance companies." The Superintendent added that

"[b]oth [MBIA Insurance] and [MBIA Illinois] will continue to pay all valid claims in a timely fashion, and both entities will have sufficient resources to meet policyholder claims as they come due. Consistent with New York State Insurance Law, the [Superintendent] only approved the transaction after deciding that both companies would have sufficient statutory capital to meet the letter and spirit of the Insurance Law. The

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