On Friday a judge decided that a case seeking to reverse bond insurer MBIA’s 2009 transformation into two companies will go to trial on May 14.

MBIA experienced major losses on MBS following the housing bust and it petitioned the New York Insurance Department to allow it to split into two companies. One of the companies focuses on structured finance called MBIA Insurance Corp. and the other insures municipal bonds called National Public Finance Guarantee Corp.

In February 2009, the department approved this transformation. In June 2009, several banks sued MBIA and the department seeking to reverse the transformation, claiming the split reduced the value of their insurance.

For almost three years the Article 78 case has advanced through the submission of depositions of witnesses, relevant documents and other written materials. This is one of two cases seeking to reverse the transformation.

New York State Supreme Court Judge Barbara Kapnick had a hearing Friday morning to determine if there should be a trial and, if so, what type.

Bank of America Merrill Lynch, Natixis and Société Générale are the plaintiffs. MBIA, its two subsidiaries, the New York State Insurance Department and Eric Dinallo, in his former capacity as department superintendent, are the defendants.

Earlier this month the judge had the case’s law firms submit letters with their views about a possible trial.

In his letter, the attorney for Dinallo and the department, David Holgado, asked for there to not to be a trial or, if there was one, for it to cover a narrow range of issues. The lead attorney for MBIA, Marc Kasowitz, also called for a trial on a narrow set of issues.

The lead attorney for the banks, Robert Giuffra Jr., called for a trial that would address a broader array of issues. Among these was a claim that MBIA executives concealed financial information from the insurance department when it was considering the transformation.

From the beginning of the hearing it was clear that Kapnick was inclined to hold a brief trial. It also soon became clear that none of the three chief attorneys would object to this.

At the end of the hearing Kapnick declared that she would set aside 16 working days over four weeks for the trial. The trial would allow the attorneys to make oral arguments and present some witnesses for testimony and cross-examination, she said.

Kapnick told Giuffra to provide a list of proposed witnesses to the defendants’ attorneys. If the defending attorneys disagree as to who the witnesses should be, Kapnick said she would issue a ruling on which witnesses to accept.

In the hearing Giuffra repeatedly said that during the Insurance Department’s consideration of MBIA’s transformation, MBIA concealed evidence from the department. He said this was central to the case.

However, at least two times Judge Kapnick said she thought any concealment by MBIA in the lead-up to transformation was irrelevant for the Article 78 case. “I think you’re making [the case] broader than it is,” Kapnick told Giuffra.

Later in the hearing, Giuffra said it was well-established law that plaintiffs can point to what was not provided to government agencies in Article 78 cases.

Earlier in the hearing Kapnick said that in order to overturn a state agency decision, she would have to find that it was “arbitrary, capricious and an abuse of discretion.”

Kasowitz noted that the plaintiffs could bring up the issue of the allegedly concealed testimony in the other transformation case, which is now anticipated to go to trial in about a year.

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