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In re Rehabilitation of Financial Guaranty Insurance Co.

Supreme Court of New York, New York County

August 16, 2013


Editorial Note:

This decision has been referenced in a table in the New York Supplement.

Financial Guaranty Insurance Company by Weil Gotshal & Manges, LLP, for petitioner.

Bank of New York by the following four attorneys, Dechert, LLP Carter Ledyard & Milburn, LLP, Wall Street, Seward & Kissel, LLP, Sheppard Mullin Richter & Hampton LLP, Wells Fargo by Alston & Bird LLP, for trustees.

The Monarch Objectors by Willkie Farr & Gallagher LLP, McKool Smith, FYI by Halperin Battaglia Raicht, LLP, for objectors.


After oral argument on August 6, 2013, the court grants the rehabilitator's order to show cause (OSC), dated June 11, 2013, seeking approval of the Settlement Agreement, dated May 23, 2013, and the Plan Support Agreement, dated May 13, 2013.

Procedural History

The instant special proceeding, brought under New York Insurance Law (N.Y.IL) Article 74, is a rehabilitation proceeding. By order dated June 28, 2012, Benjamin M. Lawsky, Superintendent of Financial Services of the State of New York, was appointed rehabilitator (Rehabilitator) of Financial Guaranty Insurance Company (FGIC), without objection. The Rehabilitator proposed the Plan of Rehabilitation, and subsequently the First Amended Plan of Rehabilitation, both of which were objected to by interested parties. Thereafter, the Rehabilitator and the objectors of the proposed plan settled all objections. The First Amended Plan of Rehabilitation (Amended Plan) was approved, without objection, by order dated June 11, 2013.

Currently before the Court is the OSC, brought by the Rehabilitator, inter alia, for an order of approval of the Settlement Agreement and the Plan Support Agreement. Both agreements were negotiated and entered into as part of a global settlement in the Residential Capital, LLC (ResCap) bankruptcy case (Bankruptcy case) presided over by Honorable Martin Glenn. The Settlement Agreement, a product of an intense five month mediation, mediated by another Bankruptcy Judge, Honorable James M. Peck, inter alia, releases FGIC from actual and potential claims in exchange for a one-time payment (Commutation Payment) by FGIC. In addition, the Rehabilitator seeks a finding that the Trustees have acted reasonably and in good faith in entering into the Settlement Agreement, and that the Trustees have not acted negligently in performing their duties with respect to the Settlement Agreement.

On July 16, 2013, two interested groups, Federal Home Loan Mortgage Corporation (Freddie Mac), and Monarch Alternative Capital LP, Stonehill Capital Management LLC, Bayview Fund Management LLC, CQS ABS Master Fund Limited, and CQS ABS Alpha Master Fund Limited (the " Monarch Group" ) (collectively, the " Objecting Investors" or " Objectors" ), representing certain investors in Trusts, with investments in such Trusts totaling approximately $1.2 billion, filed objections to the instant OSC; such Trusts are FGIC policyholders. FGIC filed a reply to such objections on July 30, 2013. On the same date, the Bank of New York Mellon, The Bank of New York Trust Company, N.A., U.S. Bank National Association, Wells Fargo Bank, N.A., and Law Debenture Trust Company of New York (the " Trustees" ) jointly filed a reply in support of the relief sought by the Rehabilitator. In addition, as explained further, FYI Ltd., FFI Fund Ltd., and Olifant Fund, Ltd. (the " Funds" ) filed a Limited Objection as to computation, which is being separately resolved.


The submissions failed to raise a relevant issue of fact which warrants a full evidentiary hearing and, thus, the Court heard oral argument on the legal issues raised. See CPLR 409(b); Karr v. Black, 55 A.D.3d 82, 86 (1st Dep't 2008), In Matter of Financial Guaranty Ins. Co., 958 N.Y.S.2d 585 (Sup.Ct. N.Y. Cty 2013).

It is undisputed that, to approve the Settlement Agreement, this Court must determine whether the Rehabilitator acted arbitrarily and capriciously in entering into the Settlement Agreement. See Corcoran v. Hall & Co., Inc., 149 A.D.2d 165, 171 (1st Dep't 1989); Callon Petroleum Co. v. Superintendent of Ins., 53 A.D.3d 845, 845 (3d Dep't 2008). In so doing, the Court must give great weight and deference to the Rehabilitator's judgment that the Settlement Agreement is in the best interests of FGIC and its policyholders as a whole. See Corcoran, 149 A.D.2d at 171.

The Funds filed a limited objection to the instant OSC, seeking to obtain the information used to calculate the Trust Payment Amount set forth in the Settlement Agreement. The Funds contend that there is a calculation error which must be corrected. In its reply, the Trustees state that they are working with the Funds to resolve the limited objection. At ...

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