MBIA accused of fraudulent transfer by noteholder Third Avenue

New York, April 6 - MBIA Inc. was accused of fraudulent transfer in litigation begun by Third Avenue Management LLC.

The fund manager said that three of the mutual funds it advises have filed a lawsuit in Delaware Chancery Court against the bond insurer.

Third Avenue alleges that MBIA's recent corporate restructuring was illegal and was "accomplished without due consideration in an attempt to defraud holders of MBIA Insurance Corp.'s debt."

The funds bought MBIA surplus notes in February 2008, an investment they say was based on the balance sheet of the issuer and representations that the note issue and other capital raises would be used to recapitalize and revitalize MBIA Insurance Corp. following losses in its structured finance insurance business, Third Avenue said.

However, Third Avenue continued, "little more than a year later" MBIA announced that MBIA Insurance Corp. was transferring $5 billion in cash and its entire profitable domestic public finance business to another entity, MBIA Insurance Corp. of Illinois, that has no obligation under the surplus notes.

Third Avenue's complaint asserts that of the roughly $5 billion transferred approximately $2.1 billion was transferred for no consideration.

The investor also alleges that the domestic public finance insurance business of MBIA Insurance and another $2.9 billion in cash was transferred to MBIA Illinois in exchange for an inadequate and pretextual "ceding commission."

Following the transactions, MBIA Insurance Corp. has only "toxic" structured finance and credit derivative insurance liabilities and a credit rating that was downgraded deep into junk territory, Third Avenue claims.

As a result, MBIA Insurance Corp. now has no viable business or earnings, the fund manager added.

Third Avenue is asking the court to order that the transfers be unwound or "appropriate monetary damages" awarded.

"MBIA sold us these surplus notes, and then to our surprise and distress, stripped away the principal assets as well as the only going concern operations within MBIA Insurance Corp.. That's wrong, and a big disappointment to us, especially after we went to bat for them with our pocketbooks and more," said Martin J. Whitman, chairman of Third Avenue Funds, in a news release:

MBIA is an Armonk, N.Y.-based bond insurer. Third Avenue is a New York investment manager.

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