Aurelius and MBIA settle federal court suit-filing

April 11 Wed Apr 11, 2012 8:58pm EDT

April 11 (Reuters) - Hedge fund Aurelius Capital and bond insurer MBIA Inc have settled a lawsuit filed by Aurelius in March 2009, according to a stipulation filed on Wednesday in the Manhattan federal court.

Aurelius alleged that MBIA's decision to split its municipal insurance business from its structured finance unit breached the insurer's covenant of good faith and fair dealing with its policyholders. The structured finance unit had suffered huge losses from the mortgage crisis.

The Aurelius lawsuit claimed dividing MBIA's businesses left "some $241 billion of policyholders stranded in a denuded insurer that will be unable to meet its obligations as they come due."

MBIA's restructuring was approved by the New York state Insurance Department in 2009. Bank of America Corp and two other banks are suing MBIA and the Insurance Department over the restructuring in New York state court.

The case is Aurelius Capital Master, Ltd., et al v. MBIA Inc., et al., U.S. District Court for the Southern District of New York, No. 09-02242.

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