The Appellate Division of the New York State Supreme Court on Tuesday reversed an earlier decision by a lower court and granted MBIA's motion to dismiss the plenary lawsuit brought by a group of banks challenging its restructuring (SCI passim), but ruled that a separate court action by the plaintiffs - called an Article 78 proceeding - could proceed. Uncertainty related to the timing and outcome of this and other litigation involving the monoline remains a material credit factor, according to Moody's in its latest Weekly Credit Outlook publication.

In its decision, the Appellate Division agreed with MBIA's position that the lawsuit was an improper collateral attack on the New York State Insurance Department's approval of MBIA's restructuring. The Court also dismissed all of the other causes of action stated in the banks' complaint.

"The banks have continuously sought to obstruct National's goal of providing much needed insurance capacity to the municipal market and to undermine the determinations made by the New York State Insurance Department. So we are gratified by the Appellate Division's decision and are now looking forward to a prompt resolution of the Article 78 proceeding, in which we fully expect to prevail," comments Jay Brown, MBIA ceo.

The trial hearings for the Article 78 proceeding were scheduled for this month, but have been postponed and are unlikely to begin before 2Q11, Moody's notes. Another potential delay may arise due to the judge that presides over the case and two other plenary actions against MBIA stepping down from his position in the Manhattan Supreme Court later this month.

"All these outstanding issues lead us to believe that there is significant uncertainty about the timing of any resolution of the lawsuits," the agency observes.

Barclays Capital, JPMorgan and RBC pulled out of the lawsuits at the end of December, following SMBC, CIBC and Rabobank's lead in 3Q10. MBIA, in turn, dropped its lawsuit against RBC four days later.

"These developments would be credit positive for the MBIA insurance companies if they indicate that MBIA and some of its counterparties are able to execute mutually acceptable out-of-court agreements to settle outstanding litigations. Such solutions would be an effective alternative to the time-consuming legal process," Moody's suggests.

Although none of the parties involved have disclosed their motives, there is speculation that the decision to withdraw was influenced by progress in settlement discussions related to the litigations initiated by MBIA against some MBS originators and CDO managers. Other factors that might influence the likelihood of settlements include more certainty about ultimate losses in some insured segments and improvement in MBIA Insurance's liquidity position, which increases the company's capacity to execute commutations that involve immediate cash outlays.

Nevertheless, the reduction in the number of litigants does not necessarily affect the process or outcome of the pending litigations, Moody's says. The list of remaining litigants includes some of MBIA's largest counterparties, such as Bank of America, Morgan Stanley and Citi.

As of 3Q10, MBIA had recorded US$2bn of put-back credit for its RMBS transactions - a material portion of which were originated by Countrywide/Bank of America. "The lack of resolution between MBIA and Bank of America is in sharp contrast with the agreement that Bank of America recently reached with Fannie Mae and Freddie Mac over put-back rights, which suggests that MBIA's already protracted legal battles may continue," Moody's concludes.

CS