New briefs back banks fighting MBIA restructuring

Tue Apr 26, 2011 2:30pm EDT

* Scholar backs banks fighting MBIA restructuring

* MBIA confident Court of Appeals will affirm ruling

NEW YORK, April 26 (Reuters Legal) - A well-known legal scholar on Tuesday called on New York state's highest court to revive a $5 billion lawsuit brought by a group of banks challenging the restructuring of bond insurer MBIA (MBI.N).

Arthur Miller, a professor at New York University School of Law, joined Patrick J. Borchers, a professor at Creighton University School of Law in Nebraska, in making the argument in court papers filed with the New York Court of Appeals in Albany.

They said a state appeals panel decision in January dismissing the case posed a "grave threat to the coherence and fairness of New York law and is unconstitutional in its application."

In 2009, the New York State Insurance Department approved MBIA's move to split its municipal bond business from its structured-finance operations. As part of the restructuring, $5 billion in cash was moved from MBIA Insurance Corp into a new entity called National Public Finance Guarantee Corp.

A coalition of banks, including UBS AG (UBS.N)UBSN.VX and Bank of America Corp (BAC.N), sued MBIA, claiming the split had stripped assets from MBIA Insurance Corp that could potentially leave it unable to pay out insurance claims.

In January, a sharply divided appeals panel held that the banks could not sue MBIA directly, but instead should challenge the State Insurance Department under a separate proceeding known as Article 78.

The banks are pursuing the Article 78 proceeding, but have also asked the Court of Appeals to overturn the January ruling.

Miller's and Borchers' court filing on Tuesday was an amicus brief in support of the banks' appeal. They argued that the insurance superintendent's approval of the restructuring was not a formal agency proceeding and it should not preclude the banks from suing MBIA.

Upholding the January decision would mean that "thousands upon thousands of informal determinations made by state agencies would have binding effect in judicial proceedings," the brief said.

MBIA believes the Court of Appeals will affirm the January ruling by the appeals panel, a spokesman for MBIA said. "None of these proposed briefs adds anything new to the legal issues before the Court of Appeals," he said.

The New York Civil Liberties Union, two nonprofit legal service groups and a group of investment funds also submitted amicus briefs supporting the banks.

In an interview, Robert J. Giuffra Jr. of Sullivan & Cromwell, the lead attorney for the banks, said the amicus briefs confirm that there is more at stake "than just between the banks and MBIA." The issues affect all parties in New York state who want to litigate cases that in "any way touch upon government approval or review," he added.

The Court of Appeals is slated to hear arguments on May 31.

Meanwhile, the Article 78 proceeding filed by the banks is pending before Manhattan Supreme Court Justice Barbara Kapnick.

The case is ABN Amro Bank NV v. MBIA Inc., 601475-09. (Reporting by Noeleen Walder of Reuters Legal; Editing by Gary Hill)