The group of hedge funds that sued MBIA and its insurance subsidiaries over their restructuring continued to make their case last week, arguing that its allegations of a fraudulent conveyance should not be dismissed.

Aurelius Capital Master and other hedge funds said that the approval from the New York State Insurance Department superintendant should not prevent them from bringing their case. The lawyers for the hedge fund said the insurance regulators approved the transaction under parts of insurance law that are not related to the claims in the lawsuit and also that lawyers for MBIA "grossly overstate the nature of the superintendent's approval."

"The superintendent's approval letter says absolutely nothing about whether the transaction violated the New York debtor and creditor law, or whether the transaction breached the implied good faith and fair dealing in the MBIA Insurance contract," lawyers from Simpson Thacher & Bartlett wrote.

Lawyers for MBIA had argued that the lawsuit was an "improper attempt" to bypass the review set up for the challenge of an Insurance Department decision — a "special proceeding in New York State Court under Article 78 of the New York Civil Practice Law and Rules." MBIA has in the past said this and two other lawsuits filed against it are "without merit," citing the superintendent's approval.

The hedge funds were not given the prior notice or an "opportunity to be heard" that plaintiffs in cases MBIA cited as dismissed based on regulatory approval did, the hedge funds' lawyers wrote. Further, regulatory approval does not prevent the plaintiffs from alleging a private party engaged in unlawful conduct, rather than attacking the regulatory approval itself, the lawyers said.

MBIA earlier this year split its public finance and structured finance books. The hedge funds believe this benefited public finance holders at the expense of structured finance holders, leaving the hedge funds with claims backed by an "insolvent insurer."

MBIA chief executive Jay Brown earlier this year told shareholders in a letter that MBIA Insurance Corp. had enough capital to pay claims as they come due. In a note published Thursday, analysts from CreditSights said that the banks that had sued MBIA in a separate lawsuit "are most likely interested in improving their position with regards to financial guaranty contract commutations." The analysts believe MBIA would likely enter run-off if the transaction were reversed.

"The NYSID has said to us on numerous occasions that if MBIA Corp. were seized, it intends to close the books until every policy matures, which could be 40-plus years, before making any distributions," the analysts wrote. "We would also note that it remains unclear whether [credit default swaps], used as instruments that distribute risk for a fee, qualify as insurance contracts for regulatory purposes."

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