MBIA Inc. asks court to dismiss COFINA bondholder case

Bloomberg News

MBIA Inc. asked the U.S. Court for the District of Connecticut to dismiss a case that Puerto Rico Sales Tax Finance Corp. (COFINA) bondholders filed in February 2025.

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If that request is rejected, MBIA asked Judge Sarah Russell to transfer the case to the U.S. District Court for Puerto Rico, where Judge Laura Taylor Swain is handling matters connected to the Puerto Rico debt restructurings. 

Through their lawyers, MBIA argued Monday the plaintiffs’ claims are barred by the doctrine of Res Judicata, which prevents the relitigation of claims already decided by a competent court on their merits. Further, MBIA argued the plaintiffs’ allegations attempting to pierce the veil shielding the parent company from responsibility for its subsidiaries’ actions are implausible. 

Regarding Res Judicata, the bondholders’ complaint should be “dismissed as a collateral attack on the final order confirming the Puerto Rico Sales Tax Financing Corporation plan of reorganization,” MBIA said. MBIA Inc. subsidiary National Public Finance Guarantee “complied with its obligation under the plan,” the insurer said.

All but three counts in the complaint rise or fall on the plaintiffs’ adequately pleading a plausible veil piercing theory but they fail to do so, MBIA said. The allegations “fly in the face of the documents on which plaintiffs rely, are long on buzzwords like ‘domination and control,’ and are fatally short on well-pleaded facts,” MBIA said. Because of this, all the counts that rely on veil piercing should be dismissed, it said. 

MBIA said the plaintiffs’ arguments on the remaining counts are defective. While the plaintiffs assert MBIA Inc. breached its contract, MBIA Inc. never insured bonds, MBIA said. Its subsidiaries insured the bonds. As for the claim for tortious interference, as a corporate parent MBIA Inc. couldn’t, as a matter of law, tortiously interfere with a subsidiary’s contract. 

Finally, the count made under the Trust Indenture Act fails for several reasons, including the act doesn’t apply to bond insurance contracts, MBIA said. 

MBIA said if not dismissed, the case must be transferred because the COFINA plan of adjustment said the U.S. District Court for Puerto Rico would retain exclusive jurisdiction over any controversies concerning the plan. Even if this were not the case, it would be wise for Russell to transfer the case to the Puerto Rico-based court, MBIA said. 

In their original suit, COFINA bondholders argued defendants “unilaterally” replaced bondholders’ “low risk, highly marketable insured bonds, for which plaintiffs were entitled to receive cash from defendants in the event of a default, with less valuable, riskier, and less marketable financial instruments that had varying yields.”

The attorney representing the plaintiff bondholders in the case didn’t immediately respond to a request for comment.

In February, Russell said the plaintiffs had made some arguments in a memorandum of law on the relationship of MBIA Inc. to its subsidiaries but had failed to include the arguments in their amended complaint. Because of this she was legally barred from considering them in the plaintiff’s motion to dismiss. As the complaint stands, the facts fail to support the inference that MBIA Inc. “wholly controlled its subsidiaries or otherwise abused the corporate form,” the judge wrote. 

“I will exercise my discretion to offer plaintiffs leave to amend [their complaint] in an effort to state a claim against MBIA Inc.,” Russell said. She dismissed much of the rest of the bondholders’ case. This led to their filing a new complaint in March. Monday’s memo and motion responds to that.