Bankruptcy Judge: Insurer’s $378M Fraud Case Against JPMorgan Stayed

by Tara Arick on April 18, 2013 · 0 comments

in Bankruptcy

- From LexisNexis® Mealey’s™ Daily Legal News.

The federal bankruptcy judge presiding over the Chapter 9 proceeding of Jefferson County, Ala., on April 15 ruled that an insurer who alleges that it was fraudulently induced to provide $ 378 million in insurance coverage could not pursue its lawsuit because of the automatic stay (In Re: Jefferson County, Ala., No. 11-05736, Chapter 9, N.D. Ala. Bkcy.).

In 2011, Jefferson County filed for Chapter 9 bankruptcy in the U.S. Bankruptcy Court for the Northern District of Alabama.

Sewer System

The U.S. District Court for the Northern District of Alabama entered a consent decree in 1996 that required Jefferson County to remediate its sewer system.

The county proceeded to raise billions of dollars for the development of its sewer system by issuing warrants secured exclusively by revenue generated by its sewer system, which were underwritten by JPMorgan Chase Bank N.A. and its affiliate J.P. Morgan Securities LLC.

The county also entered into several interest rate swap transactions with JPMorgan in relation to these warrants.

Between 2002 and 2005, the county and JPMorgan made several agreements with Assured Guaranty Municipal Corp., f/k/a Financial Security Assurance Inc. and Syncora Guarantee Inc. under which Assured and Syncora issued policies that insured against the county’s failure to pay principal and interest on the warrants. Assured also reinsured more than $ 360 million in policies originally issued by Syncora and Assured.

Fraud Alleged

In 2010, Assured sued JPMorgan in the New York County Supreme Court, alleging fraud and aiding and abetting fraud in connection with the financing of the sewer system. Specifically, Assured contended that JPMorgan made false statements and paid bribes to county officials, getting Assured to provide $ 378 million in insurance coverage for the county’s municipal debt. Syncora filed a separate lawsuit in the same court alleging the same causes of action.

Bankruptcy Judge Thomas B. Bennet held that the actions filed by Assured and Syncora are subject to the automatic stay under 11 U.S. Code Section 362(a)(1). The bankruptcy judge determined that allowing the Assured action to proceed would circumvent the purpose of the automatic stay.

Moreover, the bankruptcy judge said, Assured’s fraud allegations may affect the claims allowance, subordination and adjustment of debt processes in this court. Furthermore, the Assured action “also represents an attempt to fix the amount of Assured’s claim against the county via outside litigation even though the Bankruptcy Court is the more efficient forum for making such a determination,” Bankruptcy Judge Bennett said.

Burden

The bankruptcy judge ruled further that allowing the Assured action to proceed would impose a burden on the county that would substantially hinder its adjustment of debts by diverting its attention and resources away from the bankruptcy process.

“The stakes in the Assured Action are high, and discovery is in the early stages,” Bankruptcy Judge Bennett said. “Assured alleges that fraud occurred during the financing of the sewer system, which is responsible for approximately $ 3.14 billion of the County’s $ 4.23 billion in scheduled debt, and makes allegations that involve hundreds of millions of dollars in potential compensatory and punitive damages.”

Bankruptcy Judge Bennett also ruled that the prejudice to the county far outweighs any hardship to Assured; therefore, he said he would not modify the automatic stay for the Assured action to proceed.

Jefferson County is represented by James Blake Bailey of Bradley Arant Boult Cummings in Birmingham. JP Morgan is represented by Ian Dattner of Simpson Thacher & Bartlett in New York. Syncora is represented by Daniel Holzman of New York. Assured is represented by Samuel S. Kohn of Winston & Strawn in New York.

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