The opinion of the court was delivered by: Ciparick, J.:
This opinion is uncorrected and subject to revision before publication in the New York Reports.
In this dispute between MBIA Insurance Corporation (MBIA Insurance) and certain of its policyholders, the principal question presented is whether the 2009 restructuring of MBIA Insurance and its related subsidiaries and affiliates authorized by the Superintendent of the New York State Insurance Department (the Superintendent) precludes these policyholders from asserting claims against MBIA Insurance under the Debtor and Creditor Law and the common law. We hold that the Superintendent's approval of such restructuring pursuant to its authority under the Insurance Law does not bar the policyholders from bringing these claims.
This appeal has its origins in the unraveling of the world's financial markets that began in 2007. As described in the complaint, plaintiffs are a group of unrelated banking and financial services institutions that hold financial guarantee insurance policies issued by defendant MBIA Insurance on their structured-finance products. In May 2009, they commenced this action against defendants MBIA Insurance, MBIA Inc., and MBIA Insurance Corp. of Illinois (MBIA Illinois) following the Superintendent's February 2009 approval of their application for restructuring. Plaintiffs contend that the restructuring constituted a fraudulent conveyance, which left MBIA Insurance undercapitalized and unable to meet its obligations under the terms of their policies.
Prior to the restructuring, MBIA Inc., a publicly traded Connecticut based corporation, provided financial guarantee insurance and other forms of credit protection to its customers worldwide. It conducted this business through its wholly-owned subsidiary, MBIA Insurance, a New York based corporation. MBIA Illinois, an essentially dormant, Illinois-domiciled corporation, was a wholly-owned subsidiary of MBIA Insurance.
As a monoline insurer, MBIA Insurance "exclusively wrote financial guarantee insurance policies and did not offer property, casualty, life, disability or other forms of insurance." Under the terms of its policies, MBIA Insurance promised to pay its policyholders if an obligor on a covered instrument defaulted. Historically, MBIA Insurance had underwritten policies that covered municipal bonds and other types of securities issued by governmental entities. However, in response to market trends, MBIA started offering guarantee insurance related to structured-finance products. Structured-finance products, which include mortgage-backed securities, are "obligations payable from or tied to the performance of pools of assets." Notably, by the end of 2008, MBIA Insurance had a portfolio of policies with a face amount of $786.7 billion. Approximately one-third of MBIA Insurance's portfolio consisted of structured-finance policies ($233 billion in face amount); the remaining two-thirds consisted of municipal bond policies ($553.7 billion in face amount).
Beginning in 2007 and continuing through 2008, the health of the real estate market deteriorated. In turn, the risks associated with certain financial products tied to real estate, such as structured-finance products, increased concomitantly. Not surprisingly, MBIA Insurance's exposure to liability with respect to its structured-finance policy portfolio grew exponentially as the real estate market crumbled during this period.
In 2008, MBIA Inc. responded to this crisis in a number of ways. On February 25, 2008, it publicly "announc[ed] that it would establish 'separate legal operating entities for MBIA's public, structured, and asset management businesses' within five years." At the same time, MBIA Inc. suspended the issuance of new structured-finance guaranty policies. In May 2008, MBIA Inc. also considered infusing $900 million of its own cash into its subsidiaries "in order to 'support MBIA Insurance['s] triple-A ratings and existing and future policyholders.'" Despite these efforts to curb the negative effects of the downturn in the real estate market, in early June 2008, both Moody's Investors Service, Inc. (Moody's) and Standard & Poor's Rating Services downgraded MBIA Insurance's credit worthiness. MBIA Inc., as a result, opted not to invest its own cash into its subsidiaries, but instead decided to pursue its plan to segregate its municipal bond portfolio from its structured-finance portfolio, which it feared was turning toxic.
Under the Insurance Law, many aspects of this plan required approval or non-disapproval by the Superintendent. To that end, on December 5, 2008, MBIA Insurance, on behalf of itself and the other defendants, submitted an ex parte application to the Superintendent, detailing a series of proposed transactions that would effectuate their desired goals. MBIA Insurance supplemented and amended its application several times in the ensuing two months. Defendants requested approval of the following transactions in order to separate their two sets of portfolios. First, MBIA Insurance would declare and distribute a $1.147 billion dividend to MBIA Inc. Second, MBIA Insurance would redeem and retire roughly one-third of its capital stock from MBIA Inc. and in exchange would give MBIA Inc. approximately $938 million more in cash and securities, as well as all of the issued and outstanding stock of MBIA Illinois. Third, MBIA Inc. would transfer the cash it received from the dividend distribution and the cash, securities and MBIA Illinois stock it received in connection with the stock redemption to MuniCo Holdings Inc. (MuniCo), a wholly-owned subsidiary of MBIA Inc. Fourth, MuniCo would capitalize MBIA Illinois, no longer a subsidiary of MBIA Insurance, by contributing $2.085 billion it received in these asset transfers.
Finally, following the capitalization of MBIA Illinois, MBIA Insurance further proposed that it and MBIA Illinois would enter into a series of transactions pursuant to which MBIA Illinois would "reinsure, on a cut-through basis, those financial guaranty insurance policies sold or reinsured by MBIA [Insurance]." Such an arrangement would allow the municipal bond policyholders to submit claims directly to MBIA Illinois as well as MBIA Insurance. In exchange, MBIA Insurance would remit about $3.66 billion to MBIA Illinois, most of which represented "the net unearned premium reserve . . . associated with" the municipal bond policies.
By letter dated February 17, 2009, the Superintendent granted each of the approvals requested by MBIA Insurance (the Transformation). The approval letter stated that the Transformation was fair to structured-finance policyholders, noting that MBIA Insurance would "continue to pay all valid claims in a timely fashion." No notice nor opportunity to be heard was given to the policyholders.
Specifically, the Superintendent approved the proposed dividend payment made by MBIA Insurance to MBIA Inc. under Insurance Law § 4105, which requires a determination that MBIA Insurance would "retain sufficient surplus to support its obligations and writings." Next, the Superintendent approved the proposed stock redemption, concluding under Insurance Law § 1411 that it was "reasonable and equitable." Finally, with respect to the proposed reinsurance transaction, the Superintendent did not disapprove, concluding that it comported with statutory factors enunciated in Insurance Law §§ 1308, 1505, and 6906. In his letter, the Superintendent stressed a number of times that his approvals and non-disapprovals were based on "the representations made in the [a]pplication [by MBIA Insurance] and its supporting submissions, and in reliance on the truth of those representations and submissions."
Following the Superintendent's issuance of its approval/non-disapproval letter, defendants consummated the Transformation, which was given retroactive effect to January 1, 2009. The very next day, MBIA Inc. publicly announced that it had succeeded in segregating its municipal bond policy portfolio from its structured-finance policy portfolio by restructuring its principal insurance subsidiary, MBIA Insurance. MBIA Inc.'s Chief Executive Officer emphasized in a letter to shareholders that the Transformation provided the holding company "with much needed clean capacity for new municipal bond business."
On February 18, 2009, the Superintendent issued his own public statement, announcing that he had overseen "a transformation of [MBIA Insurance] that effectively splits that company in two, dividing its assets and liabilities between two highly capitalized insurance companies." Despite the Superintendent's public endorsement of the restructuring, Moody's further downgraded MBIA Insurance's credit rating to B3, six steps below investment grade and three steps above "junk." One of the primary reasons Moody's cited for its downgrade of MBIA Insurance was the "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 with the ceding of its municipal portfolio to MBIA Illinois."
In May 2009, plaintiffs commenced this action in Supreme Court alleging fraudulent conveyances under New York's Debtor and Creditor Law, breach of contract, abuse of the corporate form, and unjust enrichment. "[A]midst an ongoing financial crisis," plaintiffs allege that "[i]n an unlawful attempt to escape MBIA Insurance's coverage obligations to [p]laintiffs and other policyholders, [d]efendants executed a series of bad faith fraudulent conveyances, in breach of MBIA Insurance's contracts, to transfer MBIA Insurance assets into MBIA Illinois -- an entity that [d]efendants structured to be free from liabilities or other obligations to [p]laintiffs." Plaintiffs specifically allege that "[d]efendants [fraudulently] stripped approximately $5 billion in cash and securities out of MBIA Insurance" and that MBIA Insurance received no consideration for the assets it transferred. They further allege that the fraudulent conveyances have exposed them to potentially billions of dollars in losses since MBIA Insurance is now woefully undercapitalized and insolvent. Moreover, plaintiffs allege that MBIA Inc. abused the corporate form by causing MBIA Insurance to engage in these unfair transactions in order to shield assets away from plaintiffs. Plaintiffs seek to set aside the allegedly fraudulent transfer or, in the alternative, a declaration that defendants shall be jointly and severally liable to plaintiffs under plaintiffs' insurance policies, or an award of damages.
Defendants moved to dismiss the complaint on June 9, 2009. Their principal basis for dismissal is that plaintiffs' claims in this plenary proceeding are impermissible "collateral attacks" on the Superintendent's approval of the Transformation, which can only be challenged in an article 78 proceeding. Defendants also contend that the complaint fails to state cognizable causes of action.
On June 15, 2009 -- six days after defendants moved to dismiss the complaint and within the four month statute of limitations period -- plaintiffs separately filed an article 78 proceeding in Supreme Court, assigned to the same Justice handling the plenary action, challenging the Superintendent's 2009 approval/non-disapproval of the Transformation. Plaintiffs assert in that proceeding that the Superintendent acted arbitrarily and capriciously and abused his discretion. For relief, plaintiffs seek an annulment of the Superintendent's determination and a declaration that the transactions approved by the Superintendent in connection with the Transformation are null and void. The article 78 proceeding remains pending while the parties conduct discovery.
In a written decision, Supreme Court denied defendants' motion seeking dismissal of the complaint (ABN AMRO Bank, N.V. v MBIA Inc., 26 Misc 3d 1223[A], 2010 NY Slip Op 50238[U] [Sup Ct, NY County 2010]). The court rejected defendants' "collateral attack" argument, noting that plaintiffs were not seeking a determination from the court that the Superintendent incorrectly applied New York Insurance Law (id. at *16). Rather, Supreme Court held, the "mere fact that there was earlier approval of the . . . restructuring by the Insurance Department does not immunize defendants from subsequent statutory and common law claims" (id. at *13). In so holding, the court observed that "[t]he Superintendent was not called upon to examine whether defendants intended to defraud policyholders" (id. at *15). Supreme Court then evaluated the legal sufficiency of the complaint and found that plaintiffs adequately pleaded causes of action under the Debtor and Creditor Law (see id. at *18). It also concluded that plaintiffs adequately stated claims for breach of contract premised on a breach of the implied covenant of good faith and fair dealing, abuse of the corporate form allowing for a declaratory judgment piercing the corporate veil of MBIA Insurance, and unjust enrichment (see id. at *18-*19).
The Appellate Division, with two Justices dissenting, reversed and granted defendants' motion to dismiss the complaint (ABN AMRO Bank, N.V. v MBIA Inc., 81 AD3d 237, 248 [1st Dept 2011]). The majority construed plaintiffs' complaint as a "collateral attack" on the Superintendent's authorization of the Transformation. Citing its decision in Fiala v Metropolitan Life Ins. Co. (6 AD3d 320 [1st Dept 2004]), the majority held that "[a] plenary action that seeks the overturn of the Superintendent's determination, or challenges matters that the determination necessarily encompasses, constitutes an impermissible indirect challenge to that determination" (ABN AMRO Bank, 81 AD3d at 246 [internal quotation marks omitted]). As a result, the majority opined that an article 78 proceeding challenging the Superintendent's determination is the only remedy available to the plaintiffs (see id. at 246).
The majority also held that, in any event, plaintiffs three common law claims failed to state causes of action. Specifically, the majority noted that plaintiffs' breach of contract and piercing of the corporate veil claims should have been dismissed on the ground that plaintiffs fail to allege a default on payments owed to them under their policies (see id. at 244-245). The majority found that "[p]laintiffs also fail to allege particularized statements detailing fraud or other corporate misconduct that would warrant piercing the corporate veil" (id. at 245). Finally, the majority concluded that plaintiffs failed to state a cause of action for ...