Oppenheimer AMT-Free Municipals v. ACA Fin. Guar. Corp.

• Decision Date: 23 July 2012
• Docket Number: No. 653290/11.,653290/11.
• Citation: 2012 N.Y. Slip Op. 51541,959 N.Y.S.2d 90,36 Misc.3d 1229
• Parties: OPPENHEIMER AMT–FREE MUNICIPALS, Oppenheimer Multi–State Municipal Trust, on behalf of its series Oppenheimer Rochester National Municipals, and Oppenheimer Municipal Fund, on behalf of its series Oppenheimer Limited Term Municipal Fund, Plaintiffs, v. ACA FINANCIAL GUARANTY CORPORATION, Defendant.
• Court: New York Supreme Court

36 Misc.3d 1229

959 N.Y.S.2d 90

2012 N.Y. Slip Op. 51541

OPPENHEIMER AMT–FREE MUNICIPALS, Oppenheimer Multi–State Municipal Trust, on behalf of its series Oppenheimer Rochester National Municipals, and Oppenheimer Municipal Fund, on behalf of its series Oppenheimer Limited Term Municipal Fund, Plaintiffs,

v.ACA FINANCIAL GUARANTY CORPORATION, Defendant.

No. 653290/11.

Supreme Court, New York County, New York.

July 23, 2012.

John G. Hutchinson, Esq., or Sidley Austin LLP, for plaintiff.

Steven H. Holinsat, Esq., Samantha Springer, Esq., of Proskauer Rose LLP, for defendant.

CHARLES E. RAMOS, J.

Before the court are cross-motions for summary judgment.

This litigation, seeking a declaration of coverage under financial guarantee insurance policies, focuses on the intersection of federal bankruptcy, and New York State contract and insurance law. The action arises from the sale of over $200 million in Greenville, South Carolina toll road revenue bonds issued by Connector 2000 Association, Inc. (the Issuer/Debtor), a now bankrupt municipal bond issuer, in February 1998. Defendant ACA Financial Guaranty Corporation (ACA), a monoline insurer, is authorized to provide financial guarantee insurance against payment default for public finance obligations, such as the special revenue bonds at issue here. To improve the bonds' marketability, and reduce the risk of default on its payment obligations, the Issuer purchased financial guarantee insurance policies (the Policies) from ACA. Plaintiffs Oppenheimer AMT–Free Municipals, Oppenheimer Multi–State Municipal Trust, and Oppenheimer Municipal Fund (collectively, Oppenheimer) acquired their insurance rights through their purchase of a limited subset of the original bonds (i.e., zero-coupon bonds) in an aggregate amount of $37.18 million.

Eventually, in 2010, the Issuer/Debtor, struggling with decreased revenues and its debt obligations, filed for Chapter 9 bankruptcy, which permits a municipality to restructure and adjust its debts. ACA was one of the Issuer/Debtor's largest creditors in the bankruptcy case.

Oppenheimer seeks a judgment declaring that the Policies issued to the Issuer/Debtor and related Certificates of Bond Insurance (CBIs), also issued by ACA, are enforceable, and that Oppenheimer is entitled to the protection and coverage of the Policies to pay for losses resulting from the Issuer/Debtor's default and subsequent bankruptcy. It argues that ACA's conduct and admissions after the bankruptcy confirm ACA's understanding that its insurance obligations under the Policies and CBIs became a fixed liability when (1) ACA allegedly admitted its liability exposure to Oppenheimer on its website until withdrawing that information after Oppenheimer referenced the admission in its complaint; and (2) ACA began purchasing the CBIs at a discount in the secondary market long after the insured bonds to this case had been cancelled. Oppenheimer characterizes these acts as “admissions.” On the other hand, ACA contends that these two alleged admissions were an administrative oversight and error.

ACA moves for summary judgment, pursuant to CPLR 3212, for an order denying the declaratory relief sought by Oppenheimer, and declaring that ACA is relieved of liability for further payment obligations under the Policies as a matter of New York guaranty law. ACA accepts that under the Policies, ACA was obligated to pay the shortfall in the amount the Issuer/Debtor is obligated to pay on the original insured bonds. However, ACA insists that the cancellation and mandatory exchange of the original insured bonds, coupled with the alleged express release of the Issuer/Debtor's liability under the original insured bonds, without ACA's consent, constitutes an alteration of the original insured bonds and its insurance obligations, thereby relieving it of any obligation under the Policies. Since nothing is allegedly due under the cancelled bonds, there cannot be any claim for a shortfall payable by ACA. It contends, as well, that its subrogation rights under the Policies have been irreparably impaired because the Issuer/Debtor's liability under the original insured bonds cannot be resurrected.

Plaintiffs cross-move, pursuant to CPLR 3212, for an order granting summary judgment. Oppenheimer claims that the basis of this state court action is a garden-variety contract action pursuant to the terms of the Policies, and that ACA is attempting to circumvent its contractual obligations to it. Pointing to the language of the Policies, specific provisions of New York Insurance Law and the Bankruptcy Code, Oppenheimer asserts that ACA's liability obligation became fixed when the Issuer/Debtor defaulted on its payment obligations and became bankrupt, causing Oppenheimer to suffer a payment loss after the old bonds were exchanged for new bonds, and the principal amount and maturity dates of the bonds were modified. Oppenheimer therefore seeks an order declaring that, on the maturity date of the original insured bonds covered by the Policies, ACA must pay all sums that the Issuer/Debtor fails to pay on the original insured bonds. Oppenheimer also contends that ACA's claim that it lost its subrogation rights in the bankruptcy proceeding is pure fiction.

The parties presented their arguments to the court on April 18, 2012. Having reviewed the pleadings and supporting documents, arguments and applicable case law, the court cannot agree with each side in full, as each side's position is mistaken in some regard. However, for the reasons that follow, ACA's motion for summary judgment is denied, and Oppenheimer's cross motion for summary judgment is granted.

Factual Background

The common thread in this litigation is Connector 2000 Association, a South Carolina public benefits corporation formed in 1996 to assist the South Carolina Department of Transportation (SCDOT) in the funding, construction and operation of turnpikes and other highway and transportation projects. On February 11, 1998, the Issuer/Debtor issued tax-exempt municipal bonds under a Master Indenture of Trust and First Supplemental Indenture of Trust for the purpose of financing the costs of a toll highway and roadways in Greenville, South Carolina (the Southern Connector project ¹.

Specifically, $200,177,680 original principal amount of Toll Road Revenue Bonds, Series 1998A, 1998B and 1998C (collectively, the Original Bonds) were issued for the Southern Connector project. The Series 1998A Original Bonds represent interest-paying obligations, with interest payable semi-annually on January 1 and July 1 of each year. The Series 1998B and 1998C Original Bonds consist of zero-coupon obligations that do not pay periodic interest, but instead pay the full principal amount due on a maturity date, with serial maturity dates beginning on January 1, 2008, and continuing until January 1, 2038.

Under the terms of the Master Indenture, if the Issuer/Debtor files a voluntary petition in a federal bankruptcy court, this action is considered an “Event in Default” ( see affirmation of Ryan, exhibit 4–2, Master Indenture dated Feb. 1, 1998, at 52, ¶ 4). The U.S; Bank Trust National Association (the Trustee ² became responsible for carrying out the cash transactions of the bond issue.

ACA is a monoline insurance company licensed throughout the United States, and regulated by the Maryland Insurance Administration. It offers financial guaranty insurance which provides for payment of any loss to an insured claimant arising from the failure by a debt issuer to pay the principal, interest, premium, or dividend due when the failure is the result of a financial default or insolvency.³

In June 2001, ACA issued a number of Secondary Market Insurance Policies to increase the perceived creditworthiness of certain Original Bonds. Pursuant to those policies, effective June 8, 2001, ACA contractually committed to guarantee the payment of scheduled interest and payment obligations by the Issuer for a subset of the Original Bonds (the Original Insured Bonds) in the event of a payment default by the Issuer/Debtor.

Each of the Policies contains multiple provisions that afford protections to Oppenheimer. ACA agreed to “pay the [Trustee], for the benefit of each Holder or Owner, as the case may be, the Amount Due for Payment resulting from the Nonpayment by the Issuer of the Obligations” covered by the respective policy insured bond ( see affidavit of Ryan, exhibit 1, Policy, at 1, 1 1). The “Amount Due for Payment” means the amounts of Nonpayment as reduced, if applicable, by the amount of any partial payment by or on behalf of the Issuer/Debtor. Anything less than “payment in full” on the “Due Date of Payment” would constitute nonpayment ( id. at 1, ¶ 2). The term “Non–Payment” is defined as “the failure of the Issuer to have provided sufficient funds to the Custodian for payment in full” ( id.).

The Policies further state that “[i]n any event of a Nonpayment” of those Obligations by the Issuer/Debtor, “the [Trustee] shall make a claim for payment under this Policy” ( id. at 2, 12). Consequently, if the U.S. Bank Trust National Association is informed by the Issuer/Debtor, through receipt of a Notice of NonPayment, that there are insufficient funds to make the next payment of interest and principal, then the Trustee calls on the insurance policy, orders the insurance company to deposit sufficient funds to its trustee account, and proper bondholder payments are then supposed to be made by the Trustee on a timely basis.

ACA was required to provide the Trustee with payment in full on “the later of the Due Date of Payment or within one Business Day after receipt of Non–Payment” ( id. at 1, ¶ 3). “Upon any such disbursement, the Insurer shall become fully subrogated to the Rights of the Holder or Owner” ( id. at ¶ 4).

The Policies also state that they are “noncancellable” except if the bondholder or owner surrenders its interest in the CBIs or position ( id. at 2, ¶ 7). Each...