NEW YORK (1/13/11)--The appellate division of the New York Supreme Court Tuesday upheld the dismissal of banks' lawsuit against bond insurer MBIA Insurance Corp.'s over its reorganization, which split its business into a mortgage-backed securities (MBS) company and a municipal bond insurance company. It is not known yet what the impact, if any, would be to the National Credit Union Administration's temporary corporate stabilization fund or how it would affect losses of corporate credit unions. Corporates aren't part of the lawsuit filed in May 2009 by about 20 banks, including JPMorgan Chase, Bank of America, Morgan Stanley, Canadian Imperial Bank of Commerce, Barclays PLC, and UBS AG. The lawsuit, ABN AMRO Bank, N.V. v. MBIA Inc., challenged the restructuring plan approved in February 2009 by the Superintendent of New York State Insurance Department. It alleged that the bond insurer's decision to split its businesses amounted to a "fraudulent conveyance that left MBIA Insurance undercapitalized and potentially unable to pay out" on future claims on their policies. The suit claimed the split was "an unlawful attempt to escape" its contractual obligations to cover losses from bad mortgage securities. Corporate credit unions were among the institutions that suffered other-than-temporary-impairment losses from MBS investments insured by bond insurers such as New York-based MBIA and Wisconsin-based Ambac. Both insurers had promised some payment on the securities. However, as losses mounted during the financial crisis, both companies took steps to reorganize. "The impact of the ruling on credit unions is unclear at this time," said Credit Union National Association spokesman Pat Keefe. It was not known whether NCUA considered possible decisions when it put together its corporate stabilization plan. "Had it ruled differently, or if a higher court reverses the ruling, it would be a big recovery in MBIA mortgage backed securities and result in fewer losses for corporates," said Michael Edwards, CUNA counsel on special projects. He added the current decision means "MBIA would pay less in theory" to investors who have experienced the MBS losses. Very few natural person credit unions have private label MBSs. Federal credit unions are allowed up to one-fourth of their investments. How much would be picked up by the NCUA guarantee notes in the corporate stabilization fund is unknown, Edwards told News Now. NCUA did not respond to News Now's requests for comments as of press time.