|ABN Amro Bank N.V. v MBIA Inc.|
|2010 NY Slip Op 50238(U) [26 Misc 3d 1223(A)]|
|Decided on February 17, 2010|
|Supreme Court, New York County|
|Published by New York State Law Reporting Bureau pursuant to Judiciary Law § 431.|
|As corrected in part through January 28, 2011; it will not be published in the printed Official Reports.|
ABN Amro Bank N.V.; BARCLAYS BANK PLC; BNP PARIBAS; CALYON; CANADIAN IMPERIAL BANK OF COMMERCE; CITIBANK, N.A.; HSBC BANK USA, N.A.; JP MORGAN CHASE BANK, N.A.; KBC INVESTMENTS CAYMAN ISLANDS V LTD.; MERRILL LYNCH INTERNATIONAL; BANK OF AMERICA, N.A.; MORGAN STANLEY CAPITAL SERVICES INC., NATIXIS; NATIXIS FINANCIAL PRODUCTS INC.; COOPERATIVE CENTRALE RAIFFEISEN-BOERENLEENBANK B.A., NEW YORK BRANCH; ROYAL BANK OF CANADA; THE ROYAL BANK OF SCOTLAND PLC; SMBC CAPITAL MARKETS LIMITED; SOCIETE GENERALE; UBS AG, LONDON BRANCH; and WACHOVIA BANK, N.A., Plaintiffs,
MBIA Inc., MBIA INSURANCE CORPORATIONS and MBIA INSURANCE CORP. OF ILLINOIS, Defendants.
Twenty-three of the world's largest financial corporations and investment banks, in two lawsuits, are challenging the [*2]February 2009 restructuring of MBIA Insurance Corporation and MBIA Insurance Corporation of Illinois. Plaintiffs, in their disputed capacity of policyholders and creditors, claim that the restructuring was a massive fraudulent conveyance designed to loot MBIA Insurance Corporation's assets and to evade its finance guarantee coverage obligations to them. Plaintiffs' claims have not yet fully matured.
Regulatory approval from the New York State Department of Insurance (DOI) was required for the restructuring. Defendants are MBIA Inc., MBIA Insurance, and MBIA Illinois (collectively, the MBIA Group). Before the Court is defendants' motion to dismiss the complaint, pursuant to CPLR 3211 (a) (1), (2) and (7), for lack of subject matter jurisdiction and for failure to state a cause of action.
Historically, MBIA Insurance primarily wrote financial guarantee insurance for government and municipal bonds. During the boom of structured finance products, MBIA Insurance began insuring a large amount of structured-finance policies. When the credit market began to sour in 2008, MBIA Inc. and MBIA Insurance began to experience financial difficulties.
As part of its 2009 restructuring or "Transformation," MBIA Insurance's profitable public finance insurance business, along with $5.4 billion in assets, were transferred to MBIA Illinois (now known as the National Public Finance Guarantee Corporation), a subsidiary of MBIA Insurance. This $5 billion was no longer available to MBIA Insurance to pay its obligations on its insurance policies, leaving MBIA Insurance with only $8.8 billion in claims-paying resources. MBIA Illinois, which had been a direct subsidiary of MBIA, became its sister corporation; MBIA retained assets worth nearly $10.1 billion to satisfy claims arising out of structured finance policies with a face amount of $233.5 billion; and MBIA Illinois received assets worth nearly $5.7 billion to satisfy claims arising out of public finance policies with a face amount of $531 billion. As of March 31, 2009, MBIA Insurance had only $3.7 billion in cash and investments, $6.1 billion in total assets and $8 billion in claims-paying resources. The $5 billion transfer was completed through three transactions: (a) MBIA Insurance paid a $1.147 billion dividend to MBIA Inc.; (b) MBIA transferred $938 million in MBIA Illinois stock to MBIA Inc.; and (c) MBIA Insurance paid MBIA Illinois $2.89 billion for a re-insurance agreement which allowed municipal bond policyholders to make claims directly against MBIA Illinois. Despite this agreement, if MBIA Illinois defaulted, MBIA Insurance would remain obligated to cover the policies.
Plaintiffs contend that the Transformation served to split [*3]MBIA Insurance into two entities: (1) a well-capitalized public finance insurance company (MBIA Illinois) operating to benefit MBIA Inc.; and (2) an insolvent MBIA Insurance with huge insurance exposures to the holders of the structured finance and foreign public finance securities it guarantees. Under the new structure, MBIA Inc. can retain all of its assets even if MBIA Insurance cannot pay out its structured-finance policyholders' claims in full. In effect, plaintiffs assert that the Transformation left MBIA Insurance undercapitalized and insolvent. Additionally, plaintiffs allege that the managing directors, as large stockholders of MBIA Inc., personally profited from the fraudulent conveyance because of the increase in stock price due to re-allocation of assets between MBIA Insurance and MBIA Illinois. The complaint asserts six causes of action, including three claims of fraudulent conveyance under New York Debtor and Creditor Law sections 273, 274 and 276, breach of the implied covenant of good faith and fair dealing, abuse of the corporate form and unjust enrichment.
Relying on Shah v Metropolitan Life Insurance Co., 2003 WL 728869 (Sup Ct, NY County 2003), aff as mod Fiala v Metropolitan Life Insurance Co., 6 AD3d 320, 322 (1st Dept 2004) (upholding dismissal of claims against insurer for breach of contract, breach of fiduciary duty and fraud as collateral attacks on the Superintendent's approval of the insurer's demutualization plan), defendants argue that no matter what statute or common law principles plaintiffs purport to bring their claims under, plaintiffs are challenging the Transformation approved by DOI. Because the Transformation at issue was approved by DOI, defendants contend that plaintiffs' action is an impermissible attempt to bypass the channels of review for challenging the agency's determination. Plaintiffs have no choice but to bring this matter under an Article 78 petition. Accordingly, defendants argue that the Court is barred from exercising its jurisdiction in this action and the complaint must be dismissed.
For the reasons stated below, the motion to dismiss the complaint is denied.
I.Background [FN1] [*4]
MBIA Inc. is a Connecticut corporation, with its principal place of business in Armonk, New York. The publicly traded parent company provides financial guarantee insurance. MBIA Insurance is a New York-domiciled insurance corporation with its principal place of business in Armonk, New York. Prior to February 2009, MBIA Insurance was the world's largest monoline insurer, offering financial guarantee insurance policies covering mortgage-backed securities, public debt, collaterized debt obligations, credit default swaps and other asset-backed obligations.[FN2] Prior to the restructuring, MBIA Illinois was a wholly owned and controlled subsidiary of MBIA Insurance.
Plaintiffs hold $233 billion in face amount of financial guarantee insurance policies issued by MBIA Insurance. Under those financial guarantee policies, MBIA Insurance promised to make payments if the obligors on the insured products defaulted on their payment obligations.
In 2007, MBIA, along with other companies in the finance guarantee industry, suffered huge losses when it was hit by claims on insurance policies issued on repackaged debt such as mortgaged-backed securities and collateralized debt obligations. Most companies were downgraded by Standard & Poor's Rating Services (S & P) and Moody's Investor Services (Moody's) and suspended writing new finance business by mid-2008. (Complaint ¶¶ 48, 51.) Nevertheless, as of January 1, 2008, MBIA Insurance enjoyed "AAA" credit ratings from both Moody's and S & P.
On February 25, 2008, MBIA published a set of ten "Principles and Decisions Guiding MBIA Inc.'s Transformation" that announced the company would establish "separate legal operating entities for MBIA's public, structured and asset management businesses" within five years. MBIA promised to restructure its business "after careful consideration of the impact to all constituents, including policyholders, financial institutions, shareholders and others." At the same time, MBIA announced that MBIA was suspending the writing of new [*5]structured-finance policies for approximately six months.
Plaintiffs argue that by mid-2008, MBIA Inc. had recognized that MBIA Insurance was
financially distressed when MBIA Inc. publicly committed to investing $900 million in its own
insurance subsidiaries, including MBIA Insurance, to fortify their credit ratings and balance
sheets on May 12, 2008. On June 11, 2008, however, MBIA Inc. CEO Jay Brown stated in a
letter to owners that the company would not be making capital contributions to MBIA Insurance
given the downward change in ratings status the week before, "especially since that additional
capital would not preserve its [AAA] ratings" (id. ¶ 50). The financial markets
continued to deteriorate during the remainder of 2008, partly because of concerns related to
financial institutions' and insurers' exposure to structured-finance obligations. Moody's and
Standard & Poor's (S & P) downgraded MBIA Insurance's credit rating in a series of reports,
opining that MBIA Insurance "would face diminished public finance and structured finance new
business flow and declining financial flexibility," that continuing deterioration in the
structured-finance markets would place pressure on MBIA Insurance's capital adequacy, and that
there was an "expectation of greater losses on [MBIA Insurance's] mortgage related exposure"
(see affidavit of DiBlasi, exhibit 20, [S & P Report dated June 5, 2008]; exhibit 21
[Moody's Report dated November 7, 2008]). Between August and December of 2008, MBIA Inc.
repurchased approximately $221 million worth of its own stock and repurchased $127 million in
par value of its own debt (Complaint ¶ 52). MBIA Inc.'s stock price fluctuated as the credit
crisis accelerated. The stock price more than doubled during August 2008 before falling by close
to 75% between September 2, 2008 and December 31, 2008. (See affidavit of DiBlasi,
exhibit 25 [Bloomberg Quotes of MBIA Inc. Stock Price Data].)
C.The Superintendent's Approval of the Transformation
1.The Powers of the Department and Superintendent
Under Section 201 of the Insurance Law, the Insurance Department is charged with supervising and regulating all insurance business in New York State. The Superintendent of Insurance possesses "the rights, powers, and duties, in connection with the business of insurance in this state, expressed or reasonably implied by [Insurance Law] or any other applicable law of this state." Consequently, the Insurance Superintendent is vested by statute with the general supervision, control, and regulation of insurers and has the power to make all reasonable rules and regulations necessary to enforce the laws of [*6]the state relating to these matters. This includes the making of reasonable decisions and interpretations in order to carry out the statutory provisions. The Insurance Superintendent may also examine the assets of an insurer and approve new corporate forms.
Defendants assert that the objective of the Transformation served the public interest of unfreezing credit markets and the private goal of maintaining MBIA Insurance as a well-capitalized, solvent insurer. As Superintendent of Insurance Eric DiNallo stated:
"This is a private sector solution to a public sector concern . . . It preserves MBIA's promises
to policy holders, while reducing costs and increasing opportunities for taxpayers. It will aid the
federal stimulus efforts by providing access to the credit markets to fund shovel-ready
infrastructure development, and it will help taxpayers by lowering the cost of that borrowing."
(See affidavit of Kasowitz, exhibit C, at 2.)
2.The Approval Process and Letter
MBIA was required to submit a detailed plan of reorganization which would not adversely affect the interests of policyholders (see Ins. Law § 1505). On December 5, 2008, MBIA Inc. submitted an application to the Insurance Department seeking to carry out a Transformation of MBIA Group. The application also included a solvency opinion by Bridge Associates, LLC, a restructuring firm with experience in the financial guarantee industry. Additionally, a fairness opinion from Raymond James & Associates, Inc., an investment bank and management company were made part of the application.
Over the following two months, the Insurance Department continued to conduct a review of the proposed Transformation, and an investigation of the MBIA Group companies, including an examination of each of their books and records, financial condition both before and after the Transformation, and their reserve methodologies. Materials supporting or amending the application were submitted on December 23, 2008 and February 3, 4, 5, 11, 13 and 16, 2009 to the Department. The Insurance Department made its determination without holding a hearing or seeking input from affected policyholders since no provision of the Insurance Law mandated these actions.
On February 17, 2009, the Insurance Department issued a letter to MBIA, granting each of the approvals requested by MBIA [*7]in its application. The letter stated that the Department's approval was based on its examination of the MBIA Group's financial condition prior to the Transformation and after the Transformation was completed. The Transformation was completed through a series of dividends, capital contributions, and reinsurance arrangements.
Specifically, the February 17th DOI Letter approved a series of transactions among MBIA companies, including: (1) MBIA Insurance paid a $1.147 billion dividend in cash and securities to MBIA Inc. (approved under Insurance Law § 4105 [a] which provides that "no domestic stock property/casualty insurance company shall declare or distribute any dividend to shareholders except out of earned surplus"); (2) MBIA Insurance redeemed 32,064 shares of its capital stock from MBIA Inc. in exchange for $938 million of cash and securities, as well as 100% of the common stock of MBIA Illinois (which had a $185 million capital base) (approved under Insurance Law § 1411 [d] which provides that "[n]o domestic stock insurer shall purchase its own capital shares except . . . pursuant to a plan of stock redemption . . . approved by the superintendent as reasonable and equitable.") and then transferred those assets to MBIA Inc.; and (3) MBIA Insurance and MBIA Illinois executed a reinsurance agreement whereby MBIA Insurance agreed to pay MBIA Illinois $2.89 billion (net) in cash, as well as 78% (net) of all premiums received from municipal-bond policy holders, in exchange for MBIA Illinois' agreement to reinsure those policies on a "cut-through" basis. As a result, MBIA Insurance's municipal-bond policy holders may seek payment of their claims directly from MBIA Insurance (the insurer) and MBIA Illinois (the reinsurer). These terms were approved pursuant to Insurance Law sections 1308, 1505 (a) and (d), and 6906. MBIA Inc. did not contribute any of its own cash to either MBIA Insurance or MBIA Illinois.
The approval letter found that the Transformation was fair to policyholders, and that MBIA would "retain sufficient surplus to support its obligations and writings" and "continue to pay all valid claims in a timely fashion." DOI Superintendent Eric Dinallo stated that both MBIA and National would have sufficient statutory capital to meet policy holders' claims as they become due. His findings of fact were based on "the representations made in the Application and its supporting submissions, and in reliance on the truth of those representations and submissions, (2) the [Insurance Department's] examination of the MBIA Entities' financial condition prior to the [restructuring] and (3) the [Insurance Department's] analysis of the MBIA Entities' financial condition after the effectuation of the [restructuring]" (see affidavit of DiBlasi, exhibit 1 [Feb. 17th [*8]Insurance Department letter], at §§ III.A, III.B, III.C.1, III.C.2, III.C.3, III.D., III.E., III.F). Superintendent DiNallo found that the transfers were "reasonable and equitable." Finally, the Superintendent of Insurance determined there were no statutory grounds to disapprove the Transformation.
In their complaint, plaintiffs allege that the Insurance Department analyzed the information in MBIA's application by applying statutory accounting principles (principles accepted by the Department based on those adopted by the National Association of Insurance Commissioners), rather than "Generally Accepted Accounting Principles" (GAAP) (see Ins. Law §§ 307, 308; 11 NY Comp Codes R and Regs § 83.1 et seq.).
On February 18, 2009, MBIA Inc. publicly announced it had set up a new U.S. public finance insurance company within the MBIA Inc. group by restructuring its principal insurance subsidiary, MBIA Insurance Corporation. To effectuate the Transformation, MBIA Illinois reinsured $537 billion in outstanding public finance polices on the books of MBIA as of September 30, 2008, and assumed MBIA's obligations to reinsure policies originally issued by MBIA Illinois and reinsured by MBIA.
Under the terms of the transaction, National Public Finance Guarantee Corporation (previously named MBIA Insurance Corp. of Illinois) provided cut-through reinsurance on all of MBIA Corp's existing portfolio of U.S. municipal credits through a 100% quota-share agreement, including the municipal exposure that MBIA Corp assumed from FGIC. To support its ability to pay claims, National has received a $2.1 billion capital infusion sourced through a dividend from MBIA Corp, in addition to $2.9 billion in net unearned premiums (net of ceding commissions) and loss and loss adjustment expense reserves associated with the municipal portfolio. Post-transaction, National had approximately $545 billion in municipal net par outstanding and $5.4 billion in hard capital, while MBIA Corp had $225 billion in net par exposure and approximately $7.8 billion in hard capital. After the Transformation, MBIA would be responsible for the structured-finance book of business; National would only cover domestic public finance markets. The transactions were given retroactive effect to January 1, 2009.
On February 18, 2009, MBIA Inc. Chairman and CEO Brown stated in a letter to owners
that the Transformation provided MBIA Inc. "with much needed clean capacity for new
municipal bond [*9]business" and provided "clarity as to the
claims-paying resources supporting MBIA-wrapped municipal bonds." That same day, Mr.
Brown in a television interview, stated that "[t]here is no cross liability going from the new
company to the old company, it was set up and designed that way to back up the muni bonds that
were already in the marketplace." He went on to emphasize that "[i]t's very important for that
marketplace, they now have $5.8 billion, totally isolated, separate, it's not going to pay structured
claims, it's just going to be used for the muni market."
E.The Effect of the Transformation
The Transformation was met with mixed reactions. Because the new unit could win new business for MBIA Inc., shareholders supported the move and sent the company's shares up as much as 41% in early trading. Prior to the transformation, MBIA Insurance's credit rating was AAA, or the highest possible rating. However, the credit rating of the insurer was slashed to non-investment grade or near junk levels. Moody's Investors' Services downgraded MBIA Insurance to B3, six steps below investment grade and thee steps above junk. Moody's defines B3-rated insurers as "offer[ing] poor financial security. Assurance of punctual payment of policyholders obligations over any long period of time is small" (see affidavit of DiBlasi, exhibit 37 [Excerpt from Moody's Ratings Definitions], at 9). In its press release, Moody's cited two primary factors for its downgrade of MBIA:
"First is the guarantor's substantial reduction in claims-paying resources relative to the
higher - risk exposures in its insured portfolio, given the removal of capital, and the transfer of
unearned premium reserves associated the ceding of its municipal portfolio to MBIA Illinois.
Second is the continued deterioration of the firm's insured portfolio of largely structured credits,
with stress reaching sectors beyond residential mortgage-related securities."
(See affidavit of DiBlasi, exhibit 36 [Moody's Feb. 18, 2009 Report], at 1.)
Additionally, Moody's stated that the company's outlook "reflects the potential for further deterioration in the insured portfolio" and "incorporates positive developments that could occur over the near to medium term, including greater visibility about mortgage performance" (id.).On June 5, 2009, in its ratings release, S & P lowered the credit, financial strength and financial enhancement ratings on MBIA Illinois to "A" from [*10]"AA-."
As of March 31, 2009, MBIA Insurance had approximately $3.8 billion in cash and investments (down from $4.3 billion as of December 31, 2008), $6.1 billion in total assets (down from $6.7 billion as of December 31, 2008), and $8 billion in claims-paying resources (down from $8.8 billion of as December 31, 2008) to back guarantees on about $240 billion in structured finance securities and non-U.S. bonds. The claims-paying resources of MBIA Corp post-restructuring are below Moody's expected loss estimates for the entity.
The price of credit-default swaps (i.e. derivative contracts that pay a lump sum if MBIA Insurance defaults on its obligations to creditors) almost doubled shortly after the restructuring was announced. Additionally, the price of MBIA Insurance's outstanding "surplus note" debt securities fell dramatically. By contrast, the price of MBIA Inc.'s common stock increased on February 18, 2009.
Documentary evidence, in the form of MBIA Inc.'s most recent Form 10-K filing with the Securities and Exchange Commission admits that its preparation of financial models for projections of gains or losses is "an inherently uncertain process involving numerous estimates and subjective judgments by management" and that "[s]mall changes in the assumptions underlying these estimates could significantly impact loss expectations."
To date, MBIA Corp's mortgage-related losses have exceeded the earnings generated over
the last few years, highlighting the severity of the stress faced by the firm. Moody's reports that
additional losses are likely, given higher loss estimates for sub-prime mortgages and the
substantial uncertainty that remains with respect to the ultimate performance of MBIA's
structured finance portfolio.
F.The Pending Lawsuits
Plaintiffs did not seek a stay of the Superintendent's decision pending review of the Superintendent's determination. Instead, on May 13, 2009, plaintiffs sued MBIA, contending the transfer of assets was a series of fraudulent conveyances. The complaint alleges that defendants were unjustly enriched and induced a breach of their respective insurance contracts.
Specifically, plaintiffs allege in the first, second and [*11]third causes of action that transactions approved by DOI were actual or constructive fraudulent conveyances that violated New York Debtor and Creditor Law sections 273, 274, and 276. Plaintiffs claim that MBIA fraudulently transferred approximately $5.4 billion in cash and securities out of MBIA Insurance, leaving MBIA unable to pay claims or underwrite new ones. In their fourth cause of action against MBIA Insurance, plaintiffs allege a common law claim, breach of the "implied covenant of good faith and fair dealing" and frustration of the purpose of plaintiffs' contracts with MBIA Insurance and MBIA Inc. Plaintiffs' fifth cause of action is against MBIA Inc. and MBIA Insurance, alleging an abuse of the corporate form. In support of their argument to pierce the corporate veil, plaintiffs assert MBIA Inc. completely dominated MBIA Insurance and this domination adversely affected Plaintiffs. They seek a declaratory judgment holding the two defendants jointly and severally liable to Plaintiffs under their insurance policies. The sixth cause of action against MBIA Inc. and MBIA Illinois alleges that, as a result of the fraudulent restructuring that took place, these two companies and their management were unjustly enriched and are holding assets that should be returned to MBIA Insurance.
On May 13, 2009, plaintiffs served defendants with their First Notice to Produce Documents
along with the complaint. The request sought all documents that defendants "submitted to or
received from the [Insurance Department] concerning the Transformation ncluding but not
limited to all Communications between the MBIA Group and the [Insurance Department]
concerning the Transformation" (internal quotation marks omitted). However, the MBIA Group
filed a motion to stay discovery pending a decision on this motion.
2.Article 78 Petition
On June 15, 2009, plaintiffs commenced an Article 78 proceeding against the New York
State Insurance Department, Mr. Dinallo, the outgoing Superintendent of the Insurance
Department, and the three MBIA entities that are defendants in this action under Index Number
601846-2009. The filing preserves any potential challenges to MBIA's fraudulent restructuring
before the expiration of any statutes of limitations. On June 19, 2009, MBIA filed a motion to
dismiss this action, arguing that plaintiffs' claims against MBIA constitute a collateral attack on
the Insurance Department's determination that may only be brought in an Article 78 proceeding.
Defendants seek to dismiss plaintiffs' complaint in its entirety. Initially, defendants argue that the complaint is directed at matters which are part and parcel of the restructuring plan approved by the Department of Insurance. They assert that the nature of plaintiffs' claims and the arguments made to this Court demonstrate that the relief sought can only be obtained through a challenge to the Insurance Department's authorization of the restructuring. Anything else would be directed at secondary matters and would, for all practical purposes, be a collateral attack on that decision. Given that the Superintendent of Insurance approved the transfer of assets, defendants argue that the approval of the revised company structure can only be side aside in an Article 78 proceeding. (See Insurance Law 326 ["[A]ny order, regulation or decision of the superintendent is declared to be subject to judicial review" in an Article 78 proceeding.].)
In response, plaintiffs contend that the argument is entirely misplaced since they are not challenging the Superintendent's approval of the restructuring plan. Instead, plaintiffs contend that they are aggrieved creditors asserting their rights. Consequently, they are not precluded from litigating their claims in this forum.
Defendants also move to dismiss the complaint for failure to state a cause of action. They contend that the fraudulent conveyance claims should be dismissed because they rely upon "speculative and conclusory allegations." (See CPLR § 3016 [a].) Defendants also contend that the breach of contract claim must be dismissed because MBIA Insurance failed to honor its policy obligations.
As to the cause of action for a declaratory judgment, defendants contend that an action may
not be maintained if the issue presented involves a hypothetical future event with remote
prejudice to plaintiffs. Next, defendants argue that the action for unjust enrichment should be
dismissed because plaintiffs lack standing to assert the claim. Finally, defendants argue that New
York courts have held that a party to a contract may not maintain an unjust enrichment claim
against a third-party to that contract where the claim is based on the same subject matter as the
contract. Hence, defendants contend that plaintiffs cannot assert a claim against MBIA Inc.
based on the same set of facts that purportedly instituted a breach of their contracts with MBIA
[*13]A.Standard of Review
On a motion to dismiss, pursuant to CPLR 3211 (a) (7), "the pleadings are necessarily
afforded a liberal construction" (Goshen v Mutual Life Ins. Co. of New York, 98 NY2d
314, 316 ). Accordingly, the Court must "accept the facts alleged in the complaint as true,
accord plaintiffs the benefit of every possible inference and determine only whether the facts as
alleged fit within any cognizable legal theory" (Leon v Martinez, 84 NY2d 83, 87-88
). The movant carries the initial burden of showing there is an absence of evidence to
support the non-moving party's claims.
B.Subject Matter Jurisdiction
After a review of the complaint, the Court finds it has the authority to determine the claims brought under Debtor and Creditor Law and the common law to challenge the series of asset transfers that allegedly defrauded plaintiffs.
Typically, New York courts do not construe a private right of action under the Insurance Law, in the absence of express language authorizing such enforcement (Rocanova v Equitable Life Assur. Soc. of U.S., 83 NY2d 603 ). However, simply because the state legislature may not have affirmatively created a private right of action within the Insurance Law, does not, in and of itself, strip this Court of jurisdiction to hear claims which may lie independent of the Insurance Law.
The provisions of the Debtor and Creditor Law and common law, which the defendants are charged with violating, deal with the fairness of transactions, preferential transfers and fraudulent conveyances in any commercial arena. A private right of action is not inconsistent with the mechanisms chosen by the Legislature to regulate the industry under the state's Insurance Laws.
The mere fact that there was earlier approval of the MBIA restructuring by the Insurance Department does not immunize defendants from subsequent statutory and common law claims. The MBIA Group characterizes the action as simply an attempt to invalidate the regulatory approval of the Transformation. However, plaintiffs are not asking the Court to examine whether the Superintendent of Insurance correctly interpreted and applied the state Insurance Laws. Nor is it necessary to resolve any issues that fall under the regulatory scheme of the Department of Insurance. Instead, the focus here is on the intent and conduct of defendants in stripping away assets and shielding them from [*14]the legitimate claims of a corporate creditor.
Defendants cite Fiala v Metropolitan Life Insurance Co., 6 AD3d 320 (1st Dept 2004), for support. There, plaintiffs were a class of policy holders of Metropolitan Life Insurance. Plaintiffs filed suit, complaining that they were misled and short-changed in a transaction where the insurance company demutualized and converted into a domestic stock company. The class sought to certify its claims, violations of New York Insurance Law and common law fraud which had survived a prior motion to dismiss. (See Shah v Metro. Life Ins. Co., 2003 WL 728869 [Sup Ct, NY County 2003], aff as mod Fiala v Metro. Life Ins. Co., 6 AD3d 320 [1st Dept 2004].) However, Shah and Fiala are not factually or legally analogous to the extent that both cases involved consideration of insurance laws, whereas the cause of action here is partially based on other statutory claims involving Debtor and Creditor law and the common law. Significantly, the First Department reversed the trial court's dismissal of certain plenary claims and allowed plaintiffs to re-plead their fraud claims that certain policy holders received preferential treatment (Fiala, 6 AD3d at 321).
As well, the Insurance Department's private review in this case is very different than the approval of the demutualization plan in Fiala and Shah. In those cases, the Superintendent of Insurance was required, by statute, to make a determination after notice, a hearing and a policy holder vote, that the transactions were in the best interests of the insurer and the policy holders (Shah, 2003 WL 728869, *14). Here, the February 17th approval letter released by the Insurance Department was issued without any notice or public hearing.
Nonetheless, even where a claim challenges a plan approved by the Superintendent, the preclusive effect of Superintendent's decision is limited by the scope of the agency's review. As the First Department stated in Fiala:
"[D]efendants have not established the preclusive effect of the Superintendent's
determination with respect to plaintiff's claim [that Armstrong Tire and Rubber received
preferential treatment] since there is no indication that the Superintendent was aware of the
alleged excessive allocation at the time he passed upon the plan. If there is evidence that the
Superintendent was aware of this, defendants may move defendants may move for summary
(Fiala, 6 AD3d at 321.) [*15]
Similarly, in Richards v Kaskel, 32 NY2d 524, 535 (1973), the Court of Appeals held that tenants could assert claims in a plenary law suit alleging that their landlord engaged in fraudulent conduct related to a cooperative conversion plan. They were not required to commence an Article 78 petition to challenge the New York State Attorney s approval of the plan. The Court found that the statute granting the Attorney General "exclusive primary jurisdiction" to review the plan did not deprive the court of "its traditional equitable jurisdiction to consider claims of illegality . . . apart from non-compliance with that provision" (id.). Other courts in other states have taken the same position (see La Farge Corp. v PA. Ins. Dept, 735 A2d 74, 77 [PA 1999] ["[N]o judicial remedies were foreclosed by the state's Insurance Department's approval of an insurance company's plan of restructure and division."]; Drain v Covenant Life Ins Co., 712 A2d 273 [PA 1998] [permitting policy holders to bring tort claims arising from merger approved by Insurance Department]; Rowen v LeMars Mut. Ins. Co of Iowa, 230 NW2d 905, 911-912 [Iowa 1975] [Insurance Department's regulatory power to approve transactions does not deny "aggrieved persons their common law and other statutory remedies."]). This matter is no different than Kaskel in all material respects.
Here, the parties disagree about the scope of the Superintendent's approval. According to plaintiffs, the Superintendent of Insurance acted only to approve certain aspects of the Transformation under specific statutory provisions of the Insurance Law. He was called upon to resolve issues, which under a regulatory scheme, have been placed within the special competence of the state Insurance Department. The Superintendent was not called upon to examine whether defendants intended to defraud policyholders or all the other legal or financial consequences of the Transformation upon policy holders. That the Insurance Department found the substance of the transformation in compliance with Insurance Law - which is all the approval establishes - does not deprive this Court of its jurisdiction to consider questions of law related to the restructuring plan.
Article 78, provides in part, that the "only questions to be raised in [such] a proceeding [are] whether a determination [of an agency] was made in violation of lawful procedure" or was "arbitrary or capricious or an abuse of discretion" (CPLR 7803). In effect, defendants are asking the Court to rule that plaintiffs are collaterally estopped from bringing their fraudulent conveyance and other claims of wrongful conduct. Based only on the February 17th approval letter, the scope of the Superintendent's approval is not clear enough for the Court to hold that plaintiffs' claims fail as a matter of law. It may [*16]well be, following limited discovery that DOI's review can be shown to be co-extensive with and preemptive of plaintiffs' claims. However, at this stage of the proceedings, that determination cannot be made without further discovery and affirmation. The statutory scheme does not, on its face, abolish independent claims of wrongdoing by insurers. The scope of DOI's review and the interpretative import of its approval are not matters which can be resolved as a matter of law without further factual support. As the District Court recently held in a substantially similar case attacking the Transformation, "the preclusive effect of the Superintendent's decision is necessarily limited by the scope of the Superintendent's review . . . In other words, plaintiffs cannot be precluded from litigating an issue upon which the Superintendent did not pass." (Aurelius Capital Master, Ltd. v MBIA Inc., No. 09 Civ 02242, at 5 [SD NY Feb. 11, 2010, Sullivan, J.]). Accordingly, defendants may raise the very arguments which have been asserted thus far through a summary judgment motion. Defendants' motion to dismiss the complaint as a prohibited collateral attack is denied.
C.The Sufficiency of the Six Causes of Action
Examining each of the causes asserted within the complaint, the Court finds that dismissal of plaintiffs' claims is unwarranted. At the outset, it is important to highlight once again that the motion pending before the Court, is a pre-discovery motion to dismiss, not a post-discovery motion for summary judgment. A complaint has only to provide a short and plain statement of the claim showing that the pleader is entitled to relief sufficient to provide defendants with notice of the claim and its basis. (See Siegel, NY Prac § 208, at 301 [4th ed] [pleading need only " give notice' of the event out of which the grievance arise."]; see also Holme v Global Minerals & Metals Corp., 22 Misc 3d 1123[A], *1123[A], 2009 NY Slip Op 50252[U], *4 [Sup Ct, NY County 2009].) Allegations consisting of bare legal conclusions, however, are not entitled to consideration (Franklin v Winard, 199 AD2d 220 [1st Dept 1993]). The complaint's allegations must reasonably suggest that plaintiffs have a right to relief.
At this early stage of the litigation, plaintiffs need only assert facts that may entitle it to relief. The allegations set forth in the complaint for the first cause of action are sufficient to withstand a motion to dismiss. The first cause of action against all defendants is grounded in Debtor and Creditor Law section 273 which provides as follows: "Every conveyance made and every obligation incurred by a person who is or will be thereby insolvent is fraudulent as to creditors without regard to [*17]his actual intent if the conveyance is made or the obligation incurred without fair consideration." Defendants argue that the first and second causes of action do not comply with the particularity requirement of CPLR 3016 (b). However, the complaint specifies multiple transfers made by MBIA Insurance to related parties and the rapid depletion of assets. Specifically, the complaint avers that MBIA Insurance (a) transferred $1.147 billion in cash and securities to MBIA Inc.; (b) transferred $938 million in cash and securities to MBIA Inc.; (c) transferred MBIA Illinois common stock and therefore ownership of MBIA Illinois' $185 million existing capital base to MBIA Inc.; (d) transferred approximately $2.89 billion in cash to MBIA Illinois; and (e) agreed to pay its future municipal bond insurance policy premiums (net of a ceding commission) to MBIA Illinois. Furthermore, plaintiffs allege that MBIA Insurance received no value or inadequate value in exchange for these payments. Plaintiffs have stated the circumstances constituting the alleged fraud so as to give defendants sufficient notice of the time, place and content of the alleged fraud. Accepting the factual allegations set forth in the complaint as true, and drawing all reasonable inferences in favor of plaintiffs, it does not appear beyond doubt that plaintiffs can prove no set of facts in support of this cause of action. Accordingly, the motion to dismiss Count I is denied.
In the second cause of action under Debtor and Creditor Law section 274, plaintiffs are required to show that MBIA Insurance made a transfer, without "fair consideration," when the company has "unreasonably small capital." Unreasonable small capital is "a financial condition short of equitable insolvency" where "the transferor is technically solvent but doomed to fail" (In re Manshul Constr., 2000 WL 1228866, *54, 2000 US Dist LEXIS 12576, *154 [SD NY 2000] [internal citations omitted]). "Section 274 expressly state[s] that these remedies are for the benefit of creditors or persons who become creditors" (see Laco X-Ray Systems, Inc. v Fingerhut, 88 AD2d 425 [2d Dept 1982] [stating section 274 applies to all existing creditors and persons who become creditors while business is in operation]). CPLR 3211 (d) allows for latitude in pleading requirements for facts unavailable to the non-moving party. Plaintiffs object to the transfer of assets, in specified amounts, that left MBIA Insurance with unreasonable small capital. Plaintiffs cited commentary from market analysts, the defendants' own financial statements and public statements to demonstrate MBIA's substantial drop in worth. The implication is that MBIA was rendered insolvent by the conveyance. Plaintiffs have also alleged that the sale price of shares was significantly less that the fair market value. Because plaintiffs are present creditors [*18]and because Debtor and Creditor Law section 274 does not require the existence of a present creditor in any case, the motion to dismiss the second cause of action on this ground is denied. Thus, plaintiffs have alleged all the specific elements of Debtor and Credit Law section 274 and therefore, defendants cannot prevail on a motion to dismiss the second cause of action.
The third cause of action is based on Debtor and Creditor Law section 276. This section provides that "[e]very conveyance made and every obligation incurred with actual intent, as distinguished from intent presumed in law, to hinder, delay or defraud either present or future creditors, is fraudulent as both present and future creditors." Defendants contend that this claim should be dismissed for failure to plead fraud with particularity (see Menaker v Altstaedter, 134 AD2d 412, 413 [2d Dept 1987]). The complaint here meets that pleading standard. The complaint alleges that the purpose behind the conveyance was to strip the assets of MBIA Insurance and to render it judgment proof. This is a sufficient allegation of the actual intent to hinder, delay or defraud future creditors. Because intent is rarely susceptible to direct proof, courts often rely on five "badges of fraud" to infer intent. (See Depter v Overview Equities, Inc., 4 AD3d 495, 498 [2d Dept 2004].) Those badges are specifically alleged in the complaint (e.g. MBIA Insurance transferred away $5 billion for almost no consideration, MBIA's admission that the restructuring dividend was "extraordinary," etc.). As well, significant issues of fact exist regarding whether MBIA Insurance was made insolvent or failed to receive fair consideration for its assets. Such issues cannot be resolved on a motion directed at the pleadings (see e.g. Segal v Cooper, 49 AD3d 467 [1st Dept 2009]). The complaint is therefore sufficient for the third cause of action and the motion to dismiss it is denied.
In the fourth cause of action, plaintiffs state a claim for breach of the implied covenant of good faith and fair dealing. MBIA argues that this claim should be dismissed because (1) it has not yet breached its obligations to honor its payment guarantees to plaintiffs; and (2) the policies at issue do not expressly guarantee an enhancement of the value or the credit ratings of the securities held by plaintiffs (see MBIA Br. at 18-19). However, courts "have repeatedly affirmed that a party may be in breach of an implied duty of good faith and fair dealing, even if it is not in breach of its express contractual obligations" (Gross v Empire Healthchoice Assur., Inc., 16 Misc 3d 1112[A], *1112[A], 2007 NY Slip Op 51390[U], *4 [Sup Ct, NY County 2007]). Here too, the allegations that defendants breached their duty to act in good faith to its policy holders as set forth in the allegations of the complaint are sufficient to withstand a motion to dismiss.
In the fifth cause of action, plaintiffs state a claim for abuse of corporate form. Plaintiffs seek to hold the defendants liable on an "alter ego" theory. Generally, New York courts do not [*19]favor disregarding the corporate form (see Sheridan Broad Corp. v Small, 19 AD3d 331, 332 [1st Dept 2005]). A decision to pierce the corporate veil will require a showing that MBIA exercised complete domination over MBIA Illinois and MBIA Insurance with respect to the transfer of assets attacked, and that such domination was used to commit a fraud or wrong against plaintiffs which resulted in injury to them (Matter of Morris v NY State Dept. of Taxation & Fin., 82 NY2d 135, 141 ). Those allegations have been made. Plaintiffs allege that MBIA Inc. is the sole shareholder of MBIA Insurance and that the companies have the same senior management, including its CEO, CFO and General Counsel (see Serio v Arda Ins. Co., 304 AD2d 362, 362-363 [1st Dept 2003] [corporate veil or reinsurer pierced after its shareholder diverted assets to another entity owned by shareholder, thus "depriv[ing the reinsurer] of the funds needed to meet its reinsurance obligations."]). Defendants, however, claim that plaintiffs may not seek declaratory relief until MBIA Insurance fails to make payments to plaintiffs. This argument is unavailing since plaintiffs may maintain a declaratory judgment action where, as here, the "controversy involve[s] a present, rather than hypothetical . . . or remote prejudice to plaintiffs" (Am. Ins. Assn. v Chu, 64 NY2d 379, 386 ; see also Lewis v City of Gloversville, 264 AD2d 804 [3d Dept 1998] [firefighter sought declaratory judgment that he was entitled to disability benefits when he was not presently disabled]).
In the sixth cause of action, plaintiffs assert a claim for unjust enrichment. The term "unjust enrichment" does not signify a single, well-defined cause of action. It is a general principle that underlies various legal doctrines and remedies. Under New York law, plaintiffs, to prevail on this claim, must establish that a measurable benefit has been conferred on defendants under circumstances that the defendants' retention of the benefit without payment would be unjust. The critical inquiry in an action for unjust enrichment is whether it is against equity and good conscience to permit the defendant to retain what is sought to be recovered. (Paramount Film Dist. Corp. v State of New York,30 NY2d 415, 421 .) The complaint alleges that the Transformation provided an immediate boost to MBIA Inc.'s stock price. On the day that the restructuring was announced, Jay Brown, MBIA Inc. Chairman and CEO received an additional $5 million worth of MBIA Inc. restricted stock-leaving MBIA Insurance with a "junk" credit rating and the inability to play the forthcoming claims of policy holders and that it would be unjust for defendants to retain MBIA Insurance's fraudulently transferred assets. Defendants MBIA Inc. and MBIA Illinois counter-argue that plaintiffs seek the return of the wrongfully transferred assets to MBIA Insurance, rather than directly to themselves. Defendants also argue that the unjust enrichment claim should be dismissed because plaintiffs has contracts with MBIA Insurance. However, the rule invoked by defendants applies only where a contractual provision address the "events arising out of the particular subject matter'" of the unjust enrichment claim (see Clark-Fitzpatrick, Inc. v Long Island R.R. Co., 70 NY2d 382, 388 ). Here, the insurance contracts in question do not expressly address or govern the fraudulent transfer of assets. Because the Court's task is solely to determine whether the facts as alleged fit within this cognizable legal theory, the Court finds that plaintiffs have stated a claim for unjust enrichment.
For all of the above reasons, defendants' motion to dismiss the complaint is denied and the
Clerk of the Court is directed to enter judgment accordingly. This constitutes the Decision [*20]and Order of the Court.
Dated: February 17, 2010
James A. Yates,J.S.C.