MBIA likes its chances going into restructuring trial [Westchester County Business Journal (NY)]

MBIA Inc. officials remain confident their 2009 restructuring will be upheld in a trial beginning May 14, where the validity of the state Insurance Department's approval of the reorganization will be decided.

The trial stems from a 2009 lawsuit in which 18 banks sued then-New York State Insurance Commissioner Eric Dinallo for allowing the Armonk insurer to separate its structured-finance business from its traditional municipal bond business.

The state Insurance Department has since been incorporated into the state Department of Financial Services.

"We remain confident that the approval from the New York State Insurance Department will be upheld, but we can't get back the three years that National has lost in the marketplace," MBIA CEO Jay Brown wrote in a March letter to shareholders.

The transformation centered on the formation of National Public Finance Guarantee Corp. as a wholly owned subsidiary that would handle MBIA's municipal bond business, thus eliminating any exposure to the company's troubled structured finance portfolio.

However, the plaintiffs claimed the restructuring was intended to defraud policyholders, saying the state Insurance Department's approval was arbitrary and calling for its reversal.

Since the initial filing, most of the plaintiffs have agreed to out-of-court settlements with MBIA. Bank of America Corp., Natixis SA and Societe Generale are the only three of the original 18 that remain.

Justice Barbara Kapnick of the New York State Supreme Court set the trial date following an April 20 hearing. She will preside over the nonjury trial, which is expected to last two to four weeks.

Attorneys for the plaintiffs and defendants were informed that expert testimony will be kept to a minimum and must be narrow in scope due to the high burden of proof in Article 78 proceedings such as this. An Article 78 proceeding is used to appeal the decision of a New York state or local agency to the New York courts.

Sources with knowledge of the proceedings said it will be exceedingly difficult to overturn the Insurance Department's initial approval because of that high burden of proof.

The lawsuit, ABN Amro Bank NV et al. v. Dinallo, is separate from one between the banks and MBIA that was filed along with the Insurance Department challenge.

The latter case, ABN Amro Bank NV et al. v. MBIA Inc., is still in the evidence discovery phase, with a trial date yet to be set.