Court tosses bank challenge to MBIA restructuring

NEW YORK (Reuters) - A New York appeals court handed bond insurer MBIA Inc a crucial win in the legal battle over its restructuring plan, dismissing a 2009 challenge to the proposal by a group of banks.

MBIA shares surged to their highest since late September 2008, although they gave up about half their gains after trading was briefly halted in the late morning.

MBIA said in 2009 it would restructure under the supervision of New York’s insurance superintendent, splitting its municipal bond business from its structured finance operations. The company said the move would let it keep guaranteeing municipal bonds.

A group of banks sued MBIA, arguing the split left the MBIA Insurance Corp subsidiary undercapitalized and potentially unable to pay out on the banks’ claims.

MBIA, however, argued the banks should have challenged the restructuring in a separate action under New York law known as an “Article 78” proceeding, since the plan was carried out under regulatory supervision.

A lower court dismissed MBIA’s motion. The appeals court, in a 3-2 ruling, reversed the lower court on Tuesday, ordering that the motion be granted and the banks’ suit dismissed.

The banks have also initiated the Article 78 proceeding, which is still pending.

Both MBIA and its attorney declined to immediately comment on the ruling. The New York Insurance Department also declined comment.

Representatives from Citigroup Inc and HSBC Holdings Plc declined to comment. Morgan Stanley was not immediately available.

MBIA shares were up 10.3 percent at $13.54 in early afternoon trading. Earlier in the session they rose as high $14.86, their highest since September 2008.

The case is MBIA Inc et al v. ABN Amro Bank NV et al, New York State Supreme Court, Appellate Division (1st Dep’t), Nos. 3123, 3124, 3124A.

Reporting by Ben Berkowitz; additional reporting by Jonathan Stempel and Maria Aspan in New York and Tom Hals in Wilmington, Delaware; editing by John Wallace and Andre Grenon