OPINION OF THE COURT

BARBARA R. KAPNICK, J.

The instant proceeding was commenced by notice of petition and a verified petition, both dated June 15, 2009, seeking an order and judgment pursuant to CPLR article 78:1

1. Declaring null and void and annulling the New York State Insurance Department (the NYID) letter's approvals of (a) the $1.147 billion dividend paid by MBIA Insurance Corporation (MBIA Insurance or MBIA Corp.) to MBIA Inc., (b) the $938 million transfer of cash and securities from MBIA Insurance to MBIA Inc., (c) the transfer of all National Public Finance Guarantee Corporation (formerly known as MBIA Insurance Corp. of Illinois) (MBIA Illinois or MuniCo) common stock from MBIA Insurance to MBIA Inc., and (d) the reinsurance agreement between MBIA Insurance and MBIA Illinois;

2. Ordering that MBIA Inc. immediately pay all unlawfully paid dividends (approximately $2.085 billion in cash and securities, and all the common stock of MBIA Illinois) into a constructive trust for the benefit of all MBIA Insurance creditors, including petitioners. Alternatively, ordering the Superintendent to direct MBIA Inc. and/or the MBIA Insurance directors who voted in favor of such unlawful dividends to restore the dividends to MBIA Insurance and, if necessary, to sue MBIA Inc. and/or such directors to recover such dividends on behalf of the creditors of MBIA Insurance;

3. Declaring that the NYID letter does not extinguish petitioners' causes of action against MBIA Inc., MBIA Insurance, and MBIA Illinois, in the action commenced by petitioners on May 13, 2009 in this court, captioned ABN AMRO Bank N.V. v MBIA Inc. (index No. 601475/09);2 and

4. Awarding petitioners their attorneys' fees and costs in connection with this proceeding.

The parties to this article 78 proceeding provided the court with a voluminous record that included legal memoranda, several of which are over 100 pages in length, factual and expert affidavits and deposition testimony, commencing with the petition dated June 15, 2009 and continuing even after petitioners submitted their sur-surreply papers on or about March 16, 2012. The nearly three years of briefing culminated in the court hearing extensive oral argument on May 14, 15, 17, 18, 21, 22, 24, 29, 31 and June 1, 4, 5, and 7, 2012. Additional post-hearing submissions were made by the parties for sometime thereafter.

I. Background

Petitioner Bank of America, N.A. is a bank organized under the laws of the United States. Petitioner Société Générale is a banking corporation organized under the laws of the Republic of France, acting through its New York branch. Petitioners hold insurance policies with MBIA Insurance, whereby MBIA Insurance guaranteed (directly or indirectly) the repayment of structured-finance products. (Verified petition ¶¶ 25, 32.)

Respondent Eric R. Dinallo was the Superintendent of the NYID during the relevant time period and is named as a respondent in his former official capacity. (Verified petition ¶ 35.)

Respondent NYID was an agency of the State of New York during the relevant time period. On October 3, 2011, the newly enacted Financial Services Law took effect, pursuant to which the New York State Insurance Department and the New York State Banking Department were consolidated into the New York State Department of Financial Services, an agency headed by the Superintendent of Financial Services. (See L 2011, ch 62.)

Respondent MBIA Inc. is a Connecticut corporation, with its principal place of business in Armonk, New York. Respondent MBIA Insurance Corporation, also known as MBIA Corp., is a New York domiciled insurance corporation with its principal place of business in Armonk, New York. It is a wholly owned and controlled subsidiary of MBIA Inc. and was regulated by the NYID during the relevant time period. (Verified petition ¶¶ 37-38.)

Respondent National Public Finance Guarantee Corporation is an Illinois domiciled insurance corporation with its principal place of business in Armonk, New York. Until June 5, 2009, National Public Finance Guarantee Corporation was known as MBIA Insurance Corp. of Illinois, which was a wholly owned and controlled subsidiary of MBIA Insurance. It is now a wholly owned and controlled subsidiary of another entity, which is a wholly owned and controlled subsidiary of MBIA Inc. (Verified petition ¶ 39.)

According to former Superintendent Dinallo,

Beginning in late 2007, the NYID met with representatives from the principal FGIs to discuss their financial condition, including their projected losses from structured finance exposure, and directed each of these FGIs to provide the NYID with frequent updates as to their ongoing financial condition. (Dinallo affirmation ¶¶ 19-21.) According to Dinallo, after receiving input from FGIs, financial institutions, private equity investors, potential reinsurers, rating agencies and federal regulators, he learned that "FGIs' ability to provide significant value to bond insurers hinged on their ability to maintain a AAA rating from the major credit rating agencies, and that without AAA credit rating an FGI could not remain viable as a provider of municipal bond insurance." (Id. ¶¶ 22-23.)

On January 22, 2008, the NYID issued a news release, which announced its three-part plan regarding bond insurance companies:

In early 2008, the NYID retained Perella Weinberg Partners L.P. and the law firm of Fried, Frank, Harris, Shriver & Jacobson LLP to provide advice on FGI industry issues. (Dinallo affirmation ¶¶ 24, 27.) While working with its outside consultants, the NYID reviewed and analyzed the financial conditions and potential exposures of each FGI under its jurisdiction and came to the understanding that not every FGI was in a similar financial position or equally capable of helping to address the market liquidity concerns presented by the financial crisis. (Id. ¶ 31.)

Also in early 2008, the NYID was considering various ways in which MBIA Corp. could further strengthen its capital position. (Id. ¶ 35.) Then in February 2008,

According to Dinallo, the "Department was not favorably disposed toward either of these proposals in early 2008 because [they] did not believe they would advance the interests of any MBIA Corp. policyholders" and because they "would have jeopardized MBIA Corp.'s AAA rating." (Id. ¶ 37.)

Then, in the spring of 2008, "MBIA Corp.'s circumstances changed significantly. On June 5, 2008, S & P downgraded MBIA Corp.'s credit rating two notches, from AAA to AA, based on its structured finance policy exposures. On June 19, 2008, Moody's downgraded MBIA Corp.'s credit rating five notches from Aaa to A2." (Id. ¶ 39.)

According to Dinallo,

On December 5, 2008, MBIA Corp. and its related subsidiaries and affiliates (collectively, the MBIA entities) requested approval of transactions under articles 13, 14, 15, 41, 69 and 71 of the New York State Insurance Law (the application) (as supplemented and/or amended on Dec. 23, 2008, Feb. 3, 4, 5, 10, 11, 13 and 16, 2009).

By the application, the MBIA entities sought the following:

1. Approval, pursuant to Insurance Law § 4105 (a), for MBIA Corp. to declare and distribute to MBIA Inc. a dividend (the dividend) in the amount of $1.147 billion in cash and securities.

2. Approval for MBIA Corp., pursuant to Insurance Law § 1411 (d), to redeem from MBIA Inc., its sole shareholder, 32,064 shares of MBIA Corp. capital stock in exchange for approximately $938 million in cash and securities and all of the issued and outstanding shares of MBIA Illinois or Munico, MBIA Corp.'s wholly-owned subsidiary, pursuant to a plan to redeem and retire shares of MBIA Corp.'s stock (the stock redemption).

3. Approval, pursuant to Insurance Law §§ 1505 (d) and 1308 (e), for MBIA Corp. to enter into a reinsurance transaction (the reinsurance transaction) with MuniCo. The reinsurance transaction would be effectuated through the execution of a number of agreements between MBIA Corp. and MuniCo, including, inter alia, a reinsurance agreement (the MBIA reinsurance agreement).

4. Confirmation, pursuant to Insurance Law § 6906 (a), that MBIA Corp. will receive full financial credit for the reinsurance provided by the MBIA reinsurance agreement, including the ability to release all unearned premium, contingency, and other reserves applicable to the policies covered by the terms of the MBIA insurance agreement.

5. Non-objection, pursuant to Insurance Law § 6904 (e), to MuniCo's and MBIA Corp.'s proposed plans to reduce their respective exposures to loss to no more than permitted amounts under Insurance Law § 6904 (c) and (d).

6. Approval, pursuant to Insurance Law § 1505 (d), for MBIA Corp. to enter into a master services agreement with MuniCo.

7. Determination, pursuant to Insurance Law § 7105, that, in the aggregate, the series of transactions contemplated does not constitute a transfer of all or substantially all of the assets of MBIA Corp.

Upon receiving the application, Dinallo called upon NYID staff, including senior lawyers within the NYID's Office of General Counsel, and outside consultants and counsel to assist in the application's review. (Dinallo affirmation ¶¶ 46-47.) In addition, because MBIA Corp. had submitted extensive statements of financial condition in support of its application, which were based in part on loss modeling, Dinallo also called upon Jack Buchmiller, who at the time was the supervising risk management specialist in the NYID's Capital Markets Bureau. (Id. ¶¶ 48, 51.)

According to Dinallo, he delegated to Buchmiller, under the supervision of Deputy Superintendents Hampton Finer, Michael Moriarty and Matti Peltonen, Chief of the Capital Markets Bureau, the responsibility of determining the scope of his review, with the understanding that his principal focus should be on whether MBIA Corp. would have sufficient claims-paying resources to pay all of its claims as they came due post-transformation. (Id. ¶¶ 51-52.) Buchmiller, who is currently a capital markets program manager with the Capital Markets Bureau of the National Association of Insurance Commissioners (NAIC), was given this assignment because he was the NYID's most experienced and knowledgeable employee with respect to structured finance products and had substantial experience in creating, analyzing and comparing financial models and projections. (Dinallo affirmation ¶¶ 51, 53; Buchmiller supp aff, Dec. 21, 2011, ¶¶ 2, 12.)

In a letter dated February 17, 2009, signed by Michael Moriarty, the Deputy Superintendent for Property and Capital Markets, the NYID approved various components of the application (the approval letter). The approval letter describes the contemplated transactions, in relevant part, as follows:

In approving the transformation, the approval letter stated the following, in relevant part:

On February 18, 2009, the NYID issued a news release, which stated the following in relevant part:

II. Applicable Standard of Review

CPLR 7803 provides in relevant part as follows:

CPLR article 78 "was adopted for the purpose of achieving procedural, not substantive, reform in the law of prerogative writs." (Vincent C. Alexander, Practice Commentaries, McKinney's Cons Laws of NY, Book 7B, CPLR C7803:1.) CPLR 7803 (1) corresponds to the writ of mandamus to compel; CPLR 7803 (2) corresponds to the writ of prohibition; and CPLR 7803 (4) corresponds to the writ of certiorari. (Id.) CPLR 7803 (3), which is at issue in this proceeding, corresponds to the writ of mandamus or mandamus to review. (Id.)

"In a proceeding in the nature of mandamus to review, ... a court examines an administrative action involving the exercise of discretion." (Scherbyn, 77 NY2d at 757.)

As stated above, CPLR 7803 (3) provides several grounds for challenging an agency determination. At issue here are three of the four available grounds: (1) whether the determination was affected by an error of law, (2) whether it was arbitrary and capricious, or (3) whether it was an abuse of discretion. (Tr at 135:19-136:9, May 15, 2012; petitioners' slide 185.)3

A. Affected by an Error of Law

According to Professor Alexander, "Courts seldom single out `error of law,' by name, as the question for consideration in an Article 78 proceeding. This question is often implicit, however, in the nature of the grievance, such as an allegation that the agency improperly interpreted or applied a statute or regulation." (Vincent C. Alexander, Practice Commentaries, McKinney's Cons Laws of NY, Book 7B, CPLR C7803:1.)

In this context, "the construction given statutes and regulations by the agency responsible for their administration, if not irrational or unreasonable, should be upheld." (Matter of Howard v Wyman, 28 N.Y.2d 434, 438 [1971], rearg denied 29 N.Y.2d 749 [1971].) Moreover, "in questions relating to its expertise, the [agency's] interpretation of the statute's terms must be `given great weight and judicial deference, so long as the interpretation is neither irrational, unreasonable nor inconsistent with the governing statute.'" (Matter of Toys "R" Us v Silva, 89 N.Y.2d 411, 418-419 [1996] [citations omitted].)

B. Arbitrary and Capricious

Moreover, a "fundamental tenet of CPLR article 78 review" is that "[j]udicial review of administrative determinations is confined to the `facts and record adduced before the agency.'" (Matter of Featherstone v Franco, 95 N.Y.2d 550, 554 [2000], citing Matter of Yarbough v Franco, 95 N.Y.2d 342, 347 [2000]; see also Matter of Fanelli v New York City Conciliation & Appeals Bd., 90 A.D.2d 756, 757 [1st Dept 1982], affd 58 N.Y.2d 952 [1983].) In other words, "the court may not consider evidence concerning events that took place after the agency made its determination" (Matter of Rizzo v New York State Div. of Hous. & Community Renewal, 6 N.Y.3d 104, 110 [2005]), and "can only review the grounds presented by the agency at the time of its determination." (Matter of Weill v New York City Dept. of Educ., 61 A.D.3d 407, 408 [1st Dept 2009].)

During oral argument, the state respondents referred to a recent case decided by the Appellate Division, Third Department, Matter of Office Bldg. Assoc., LLC v Empire Zone Designation Bd. (95 A.D.3d 1402 [2012]), in which the Court held that where, as here, no administrative hearing was held, the Court may properly consider an affidavit "despite the fact that it was not submitted during the administrative process." (Id. at 1405.) However, the Court also found that the affidavit could not be used to "supply the rationale otherwise missing from the Board's [or Department's] determination." (Id.; see also Matter of Brown v Sawyer, 85 A.D.3d 1614, 1615-1616 [4th Dept 2011] [holding that a court may properly consider an affidavit submitted in opposition to an article 78 petition despite the fact that it was not submitted during the administrative process, because there was no administrative hearing, and thus the issue was not one of substantial evidence, but rather whether the agency's determination has a rational basis]; Matter of Kirmayer v New York State Dept. of Civ. Serv., 24 A.D.3d 850, 852 [3d Dept 2005].)

C. Abuse of Discretion

"Aside from consideration of administrative sanctions, however, most courts continue to analyze abuses of discretion in traditional terms of whether the agency's action was arbitrary and capricious or lacked a rational basis." (Id., citing Matter of Older v Board of Educ., Union Free School Dist. No. 1, Town of Mamaroneck, 27 N.Y.2d 333 [1971].) It is important to note, however, that when reviewing an agency's exercise of discretion "a court may not substitute its judgment for that of the board or body it reviews unless the decision under review is arbitrary and unreasonable and constitutes an abuse of discretion." (Matter of Pell, 34 NY2d at 232 [citation and internal quotation marks omitted].)

III. Application

A. Affected by an Error of Law

At the outset, the court notes that it is well settled that "[r]esponsibility for administering the Insurance Law rests with the Superintendent of [Financial Services], who has `broad power to interpret, clarify, and implement the legislative policy.'" (Matter of Medical Socy. of State of NY v Serio, 100 N.Y.2d 854, 863-864 [2003] [citations omitted]; see also Financial Services Law §§ 201, 202; Insurance Law §§ 301, former 201.)

Petitioners generally argue that each of the three transformation transactions was illegal under the Insurance Law because (1) the dividend was declared and distributed in excess of its "earned surplus"; (2) the stock redemption had no legitimate business purpose other than as a disguised illegal dividend to MBIA Inc.; and (3) the reinsurance transaction between MBIA Illinois and MBIA Insurance was on inherently unfair terms because it was funded by the illegal dividend and stock redemption. Petitioners also contend that the transactions were not "fair and equitable," under section 1505 of the Insurance Law.

1. The MBIA Corp. Dividend and the MBIA Reinsurance Transaction

Insurance Law § 4105 governs payment of dividends and provides in relevant part as follows:

Insurance Law §§ 1308, 1505 and 6906 govern reinsurance transactions. Section 1505, which is at issue here, provides in relevant part as follows:

Petitioners argue that under Insurance Law § 4105 "a company must comply with financial dividend restrictions when declaring and paying a dividend," meaning that "the term `out of earned surplus' in § 4105 (a) requires that an insurer have sufficient `earned surplus' when the dividend is both `declared' and `distributed.'" (Petitioners' reply brief at 114.) Here, petitioners contend that MBIA Insurance did not have sufficient earned surplus either when it declared or when it distributed the $1.147 billion dividend. Petitioners maintain that as of September 30, 2008, it is undisputed that the earned surplus of MBIA Insurance was approximately $189 million, which is farless than the $1.147 billion dividend declared by the MBIA Insurance Board of Directors on December 16, 2008. (Id. at 115.) Furthermore, petitioners contend that as of December 31, 2008, it is undisputed that MBIA Insurance's earned surplus was $1 million. (Id.) Thus, petitioners argue that MBIA Insurance violated section 4105 (a) by distributing, on February 17, 2009, the $1.147 billion dividend to MBIA Inc.

To rebut this, the state respondents first assert that the NYID complied with Insurance Law § 4105 (a) by finding "that MBIA Corp. will retain sufficient surplus to support its obligations and writings following payment of the MBIA Corp. Dividend."4 (Approval letter at 6; see also State's surreply brief at 49.) Both the state respondents and the MBIA respondents further argue that the transformation transactions occurred simultaneously, and as a result:

Furthermore, the MBIA respondents point out that the dividend was not declared or distributed on December 16, 2008; rather, the Board of Directors only provided contingent approval on that date, "subject to receipt of any applicable regulatory approvals." (Record at R00631; see also MBIA surreply brief at 15.) Therefore, the MBIA respondents contend that there is no basis to measure earned surplus as of December 2008; instead, they claim, it should be measured as of the date it was paid — February 18, 2009. (MBIA surreply brief at 15.)

Petitioners, however, argue that the alleged illegal dividend cannot be salvaged by claiming that the reinsurance transaction and the dividend were simultaneous. (Petitioners' reply brief at 116.) First of all, petitioners contend that the transactions did not occur simultaneously — citing the approval letter and respondents' affidavits, which describe the transformation as a "series of transactions," which they argue means that the transactions occurred sequentially, not simultaneously. (Id. at 116-117; see also petitioners' sur-surreply brief at 84.) Next, they argue that assuming arguendo that the transactions did happen simultaneously, MBIA Insurance still lacked the necessary earned surplus prior to the declaration of the dividend on December 16, 2008 and the distribution of the dividend on February 17, 2009. (Petitioners' reply brief at 116.) Petitioners point out that the approval letter fails to mention either "earned surplus" or the theory that the reinsurance transaction would create the earned surplus used to fund the dividend. (Id. at 117; see also petitioners' sur-surreply brief at 83.) Petitioners also argue that the simultaneity theory "violates the letter and spirit of section 4105 and eviscerates the earned surplus requirement." (Petitioners' reply brief at 117.)

As to whether or not the transformation transactions occurred simultaneously, the MBIA respondents point out that transformation was a "package deal," whereby MBIA Insurance presented the transactions to the NYID in one application and they were all approved at the same time. Indeed, the MBIA respondents point to Mr. Moriarity's testimony in which he stated that "[t]he transactions, as far as I know, were not performed in any specific order but were done simultaneously as part of the transformation application." (Moriarty deposition 93:17-94:02.)

The court is aware that a specific finding regarding Insurance Law § 4105 (a)'s earned surplus test is absent from the approval letter. However, the court disagrees that this omission alone mandates it to find that the agency's determination was "affected by an error of law." This is especially true where, as here, the agency was not required to make specific findings because it was not acting in a quasi-judicial capacity. The court also cannot ignore the fact that, despite the approval letter's silence as to the earned surplus test, the parties here have extensively briefed and argued the issue of whether or not the transformation transactions were simultaneous and whether the dividend and reinsurance transactions actually satisfied the earned surplus test. The court thus concludes that it must resolve these issues.

In his affirmation, Dinallo states the following:

Moreover, it is clear from the application itself that MBIA proposed and intended for the transactions to happen simultaneously. MBIA submitted only one application, which describes and asks for the Superintendent's approval of all of the transformation transactions, none of which occurred prior to February 17, 2009, when the NYID issued the approval letter. Additionally, in exhibit B to the application, MBIA stated that the closing of the stock redemption "shall be simultaneous with the closing of the transactions contemplated by Transformation[]...." (Exhibit B to the application; record at R00054.) Therefore, there can be no dispute that the simultaneity of the transformation transactions was contemplated from the start, and as a result, petitioners' arguments to the contrary are without merit.

To satisfy Insurance Law § 4105, however, the simultaneous transactions still must have created enough earned surplus to effect the dividend. The MBIA respondents point to the deposition testimony of Richard H. Hershman who was retained by petitioners' counsel as an expert witness and later deposed by counsel for the MBIA respondents. Hershman testified with respect to the issue of simultaneity and earned surplus, in relevant part, as follows:

There is nothing in Insurance Law §§ 4105, 1308 or 1505 that bars payment of a dividend out of earned surplus created by a simultaneous transaction. Nor is the court aware of any provision in the Insurance Law which sets out any procedural requirements that must be followed to effectuate these types of transactions. As such, this court will not read into the Insurance Law such requirements or disturb the actions of the Superintendent, which were made in his discretion and were not affected by an error of law.

Petitioners also argue that the reinsurance transaction was not "fair and equitable" in accordance with Insurance Law § 1505. Petitioners urge that the NYID failed to properly review the reinsurance transaction in light of the entire transformation, and only reviewed it individually. (Petitioners' reply brief at 128-129.)

In his affidavit, dated November 24, 2009, Moriarty stated the following, in relevant part:

Moreover, the approval letter itself makes clear that the NYID considered the relevant provisions of the Insurance Law in making its decision to not object to the reinsurance transaction. (See supra at 15-17.) The state respondents argue that the Superintendent followed the plain language of section 1505 and specifically adhered to the requirement in section 1505 (e) to consider whether the reinsurance transaction may adversely affect the interests of policyholders. (State respondents' surreply brief at 44-45.) Specifically, Dinallo found that the transaction was "fair and equitable" because it "would leave MBIA Corp. solvent and that those policyholders' claims would be paid as they came due." (Dinallo affirmation ¶ 66.) Therefore, this court finds that the NYID's interpretation of section 1505 was not "irrational or unreasonable" and "should be upheld." (Matter of Howard, 28 NY2d at 438.)

2. The Stock Redemption

According to the approval letter, the portion of the transformation referred to as the "stock redemption" allowed MBIA Corp. to redeem and retire 32,064 shares of its stock that were owned by MBIA Inc. in exchange for approximately $938 million in cash and securities and all of the shares of MuniCo owned by MBIA Corp. The "stock redemption" was reviewed under section 1411 of the Insurance Law, which provides, in relevant part, as follows:

Petitioners first argue that MBIA's "stock redemption" was a "poorly disguised illegal dividend" that involved the exact same economic principles as a dividend, and, therefore, should have been subject to review under Insurance Law § 4105 (a)'s earned surplus test.

To support this contention, petitioners rely on People v Santi (3 N.Y.3d 234 [2004]), which involved the appeal of a conviction of one of the defendants for the unauthorized practice of medicine. The Santi Court undertook a review of Education Law § 6512 (1), which criminalizes the unauthorized practice of medicine, and provides as follows:

One of the defendants, Corines, who was a licensed physician, was convicted of aiding and abetting an unlicensed person to practice medicine. On appeal, he argued that his conviction could not be upheld because the plain language of Education Law § 6512 (1) makes clear that it only applied to "anyone not authorized to practice," which did not include him. The Court held that although courts "normally accord statutes their plain meaning," they would not "blindly apply the words of a statute to arrive at an unreasonable or absurd result" and would "examine the purpose of the statute and determine the intention of the Legislature." (Id. at 242-243.) The Court concluded that although Corines' interpretation of the statute represented a "fair and literal reading of the text," it ignored "the legislative intent underlying the statute's enactment" and would make it lawful for authorized and licensed practitioners to aid and abet in the unlicensed and unauthorized practice of a profession, requiring the statute to be applied in an unreasonable manner. (Id. at 243.) As a result, the Court rejected Corines' argument.

Here, petitioners reason that it would be an "unreasonable or absurd application of the law" to interpret Insurance Law § 1411 (d) to permit stock repurchases that are not restricted by Insurance Law § 4105 (a)'s earned surplus test, and urge this court, as did the Santi Court, to look to the legislative intent when applying Insurance Law § 1411 (d). (Petitioners' reply brief at 120.) The difference, however, between the instant case and the facts presented in Santi is that in the latter, the Court of Appeals concluded that Corines' argument was based on a "fair and literal reading of the text," while here there is nothing in the text of Insurance Law § 1411 (d) to support the argument that stock redemptions are subject to the provisions of Insurance Law § 4105 (a). Even if this court were to look to the legislative intent which petitioners cite, i.e., that the legislature wanted the Superintendent to have to approve stock redemptions to prevent possible self-dealing by management and insiders (see petitioners' reply brief at 120), this intention is not at odds with the plain language of Insurance Law § 1411 (d), which clearly states that "a plan of stock redemption and retirement [must be] approved by the superintendent as reasonable and equitable." If the legislature wanted to incorporate any portions of Insurance Law § 4105 (a) into § 1411 (d), it certainly could have done so, but instead chose not to. Therefore, this court will not impose the standards set out in Insurance Law § 4105 (a) on Insurance Law § 1411 (d).

Next, petitioners argue that "under settled New York law, transactions having the economic substance of dividends are treated as dividends regardless of how those transactions are formally structured." (Petitioners' reply brief at 121.) However, petitioners fail to cite any authority to support this statement. Instead, petitioners cite Small v Sullivan (245 N.Y. 343 [1927]), which was a plenary action sounding in fraud and involved review of the Business Corporation Law. Petitioners quote the following passage to support their argument: "Compliance with forms of law does not amount to absolution for fraud. All of these corporation statutes have their legitimate purposes, but they cannot be used as a blind to pay dividends when there are no actual profits out of which to pay them." (Id. at 354.) This notion, however, has no bearing on the issue before this court, which is whether the Superintendent or the NYID improperly interpreted or applied a statute or regulation in making its decision. There is no basis to find that the NYID committed an error of law when it failed to treat the proposed stock redemption as a proposed dividend.

Petitioners also argue that even if the transaction was properly examined solely under Insurance Law § 1411 (d), the NYID still erred in finding that it was "reasonable and equitable," because "the Stock Redemption removed assets from MBIA Insurance to enrich its parent and affiliate, and to discriminatorily benefit one class of policyholders at the expense of another." (Petitioners' reply brief at 125.) Petitioners also contend that the Superintendent was in no position to make a determination as to whether the stock redemption was "reasonable and equitable" because the stock was valued according to MBIA Insurance's own accounting book value, not what an arm's length purchaser would offer for the stock. (Id. 125-126.)

The state respondents, on the other hand, argue that nothing in the Insurance Law defines "reasonable and equitable," or provides criteria for the Superintendent to use when evaluating whether a particular share redemption is "reasonable and equitable." (State's surreply brief at 47.) Here, Superintendent Dinallo decided that the stock redemption was "reasonable and equitable" as long as MBIA Corp. would be able to pay its claims as they became due following transformation. (Id.) According to Dinallo, he concluded, based on the Department's analysis of MBIA Corp.'s post-transformation financial condition, that MBIA Corp. would "retain sufficient surplus to retain its obligations and writings" and, therefore, it would be able to pay claims as they became due. (Dinallo affirmation ¶ 72.) Accordingly, because Insurance Law § 1411 (d) leaves the determination of whether a share redemption is "reasonable and equitable" to the Superintendent's discretion, the state respondents contend that Dinallo did not violate or otherwise misapply Insurance Law § 1411 (d) by approving the share redemption.

The court agrees that the term "reasonable and equitable," as it applies under Insurance Law § 1411 (d), is undefined. As such, the court finds that in interpreting the meaning of "reasonable and equitable," it must "defer to the governmental agency charged with the responsibility for administration of the statute." (Kurcsics v Merchants Mut. Ins. Co., 49 N.Y.2d 451, 459 [1980].) Here, the Department determined that a stock redemption would be "reasonable and equitable" as long as the insurer would be able to pay claims as they came due after the redemption. The court cannot say that this interpretation is "irrational or unreasonable" (id.), or that, as petitioners urge, the Superintendent had an obligation under the Insurance Law to consider a third-party stock valuation. Therefore, the court does not find that the stock redemption was affected by an error of law.

B. Arbitrary and Capricious/Abuse of Discretion

Petitioners argue that the approval letter must be annulled because it contains no findings of fact to demonstrate the basis for its conclusion. In making this assertion, petitioners principally rely on Matter of Montauk Improvement v Proccacino (41 N.Y.2d 913 [1977]), which employs the "substantial evidence" test, which is the "exclusive standard for the review of an agency's fact-finding determination in an Article 78 proceeding in the nature of certiorari." (Vincent C. Alexander, Practice Commentaries, McKinney's Cons Laws of NY, Book 7B, CPLR C7803:3.) However, it has already been established that CPLR 7803 (4) is not at issue here because an administrative hearing was never held, nor was one required under the Insurance Law. (ABN AMRO Bank, N.V. v MBIA Inc., 17 N.Y.3d 208, 227 [2011].) Therefore, petitioners' reliance on Montauk Improvement, or any other cases brought pursuant to CPLR 7803 (4), is misplaced.5

In both their sur-surreply brief and during oral argument, petitioners argued that because administrative action, if taken without foundation in fact, is arbitrary and capricious as a matter of law, the approval letter here must be annulled because it rests on false and misleading information. (Petitioners' sur-surreply brief at 14; see also tr at 438:12-440:4, May 18, 2012.) Petitioners contend that this "false and misleading information" concerns MBIA Insurance's financial condition and impacts the results of MBIA's stress testing analysis. Specifically, petitioners argue that MBIA relied on stale financial data when running its models because it used financial information from the third quarter of 2008 and never updated the models with information from the fourth quarter. (Tr at 1317:8-22, May 31, 2012.) Petitioners urge that with the corrected numbers, the "extreme-stress" scenario would have shown a negative surplus, meaning that MBIA Insurance would have been "insolvent" under Buchmiller's and the NYID's analysis. (Petitioners' sur-surreply brief at 15-17.)

MBIA admits that the application contained errors and describes them, in relevant part, as follows:

During oral argument on May 18, 2012, petitioners handed up a case appendix entitled, "Courts Have Long Held that Article 78 Petitions Should be Granted When an Agency Acts on Inaccurate or Incomplete Information." After reviewing the appendix, the court finds that none of the 14 cases cited provide a basis for this court to annul the approval letter.

For example, in Matter of Brady v City of New York (22 N.Y.2d 601 [1968]), while the Court held that agencies such as the pension board "must make a careful and painstaking assessment of all the available evidence and should defer final determinations until they are satisfied that all the evidence has been fully and fairly considered," it did so because the pension board had a statutorily imposed duty "to determine from all the available evidence whether the death in question was sustained as the result of an accident while the decedent was in the performance of his duties." (Id. at 605-606.) This court is not aware of a similar statutory duty in the Insurance Law that would have required the NYID to consider "all available evidence" before deciding whether or not to approve the transformation.6

The instant factual pattern is also unlike the one that was before the Appellate Division, First Department in Matter of Byrne v Board of Stds. & Appeals of City of N.Y. (5 A.D.3d 261 [2004]). In Byrne, the Appellate Division affirmed the motion court's granting of an article 78 petition, and annulling the resolution of the Board of Standards and Appeals (the BSA), which had upheld the determination of the Department of Buildings (DOB) declining to seek revocation of a certificate of occupancy (C/O), where the owner had failed to substantially comply with numerous safety, fire, and habitability standards. The motion court found that the DOB was without authority to issue a C/O under those circumstances, and thus that the C/O was void. The Appellate Division held that "no judicial deference is owed to an agency's statutory interpretation that is premised on an erroneous factual conclusion." (Id. at 265.) The Court further reasoned that

Petitioners highlighted this passage perhaps to suggest that this court should annul the approval letter because to do otherwise would essentially be sanctioning a policy of allowing insurers to submit false information to the NYID. However, as the state respondents pointed out, the Appellate Division disagreed with the motion court's suggestion that the BSA would have to revoke a C/O "for any violation of the approved plans or applicable laws, no matter how inconsequential." (Id. at 267 n 3.) Moreover, it is clear that the NYID had a practice of "relying on and presuming the accuracy of the materials submitted" because "prior Superintendents had exercised their discretion in that way, in reliance on the Department's authority to take punitive action against any regulated entity that willfully provided false or misleading information." (Dinallo affirmation ¶ 48; see also Insurance Law § 109.) It is also clear from the September 2, 2010 deposition of Michael Moriarty that the Department had a policy regarding how it reviews the accuracy of the applications it receives:

It is, therefore, not for this court to disturb NYID practices absent a violation of law or regulation; nor is it this court's role to promulgate new NYID policies or procedures.

Moreover, the cases cited by petitioners do not stand for the broad proposition that all agency determinations must be annulled if based on inaccurate information, regardless of what that information is or what role it played in the decision making process. There is a difference between the instant situation where the NYID may have used incorrect numbers in hypothetical "extreme stress" tests and a parole board having the wrong information about the number and types of crimes an inmate was convicted of when considering his or her parole application, because in the latter scenario there is an obvious "likelihood that such error may have affected the board's decision to deny parole...." (Matter of Brazill v New York State Bd. of Parole, 76 A.D.2d 864, 864 [2d Dept 1980]; see also Matter of Williams v Travis, 20 A.D.3d 622 [3d Dept 2005]; Matter of Schwartz v Dennison, 14 Misc.3d 1220[A], 2006 NY Slip Op 52543[U] [Sup Ct, NY County 2006].) Here, however, petitioners have not shown that there is a likelihood that the admitted errors in the numbers used in a hypothetical "extreme (break-the-bank) stress" test scenario would have affected the NYID's decision.

The court also notes that petitioners put forth arguments regarding allegations that MBIA concealed certain information from the NYID, including, but not limited to, a 2008 analysis of MBIA's multi-sector CDO portfolio, prepared by Lehman Brothers. (Petitioners' sur-surreply brief at 29-43.) Aside from quoting the Honorable James A. Yates, who presided over this case before he resigned from the bench in January 2011, and stated on the record during a conference on May 18, 2010 that "if there is material misleading of the Department, I think it would be relevant to the Article 78," petitioners fail to provide any legal authority to support their argument that this court can annul the Department's decision based on claims that MBIA concealed or withheld potentially damaging information from the NYID.

Petitioners next argue that the NYID's review of the application and Buchmiller's review, in particular, was too limited, was rushed and was based on errors. (See petitioners' sur-surreply brief at 53-59.) In their sur-surreply brief, petitioners also draw particular attention to the uncertain and volatile economic climate that existed at the time of the review and argue that Dinallo's response to this uncertainty was not rational because a rational regulator would have deliberated more carefully. (Petitioners' sur-surreply brief at 50-52.)

The state respondents take issue with petitioners' characterization of the NYID's review and point out that the NYID received and reviewed thousands of pages of documents along with the application, including the draft agreements for each of the proposed transactions, supplemental information from MBIA requested by the NYID, including supplemental information regarding the terms of the reinsurance agreement and related administrative services agreement between MBIA Corp. and National, pro forma balance sheets of MBIA Corp. reflecting year-end 2008 financial information, the opinion of Bridge Associates LLC concerning the solvency of MBIA, a fairness opinion from Raymond James Financial, Inc. and documents relating to MBIA Corp.'s loss models for its various exposures, including the inputs and assumptions for those models, and the results of the various stress scenarios. (State's surreply brief at 63.)

The state respondents also argue that Buchmiller undertook an extensive, "risk focused" review of MBIA Corp.'s statements of financial condition and loss modeling methodologies to evaluate their analytical soundness, a review that included interviews and meetings with MBIA executives and a review of presentations, inputs and assumptions, outputs and other information relating to loss modeling. (State's surreply brief at 64.) Additionally, the state respondents point out that, pursuant to Insurance Law § 309 (b) (1), the NYID routinely conducts solvency examinations of "every domestic property/casualty insurance company," every three to five years, which can take from 12 to 18 months to complete. In this case, the NYID had begun a solvency exam of MBIA on or about September 25, 2008, which was also conducted, in part, by Buchmiller, along with a team of other NYID employees. (Tr at 640:7-645:7, May 21, 2012.)

As stated earlier, it is not for this court to oversee or to review the practices of the Superintendent or the NYID. The issue before this court is whether there was a rational basis for the approval of the transformation, or whether it was an arbitrary decision, taken without regard to facts. The inquiry is not whether the result would have been different had the NYID hired certain experts or conducted the review on a different time line or with different resources. Absent statutes or regulations that prescribe the manner in which the NYID must review the applications it receives, this court cannot say that it was arbitrary and capricious for the NYID not to have taken the course that petitioners insist, after the fact, would have been more prudent.

Petitioners also argue that the NYID failed to evaluate solvency under Insurance Law § 1309 and that the failure to make such a finding was arbitrary and capricious.

Insurance Law § 1309 provides as follows:

The MBIA respondents, on the other hand, argue that Insurance Law § 1309 does not apply here because that section empowers the Superintendent to take action against an insurer upon finding that the insurer is insolvent. (Tr at 1803:21-26, June 5, 2012.) MBIA and the state respondents contend that there was never a finding of insolvency here and, therefore, Insurance Law § 1309 is not implicated, because the approval letter expressly states, inter alia, that the NYID found that "MBIA Corp. will retain sufficient surplus to support its obligations and writings following payment of the MBIA Corp. dividend."

Petitioners insist, however, that because the NYID only purports to have measured MBIA's solvency by whether or not it would retain a sufficient surplus post-transformation and not by Insurance Law § 1309's two-prong analysis (i.e., the loss reserve test or the reinsurance/market test), its approval of the transformation was arbitrary and capricious. (Tr at 302:12-306:26, May 17, 2012.)

The state respondents, on the other hand, argue that at the time of the review of the application, the "bond insurance market was essentially frozen," and, therefore, a market based test was not an option because there was essentially no market. (Tr at 760:11-25, May 21, 2012.) The state respondents also point to Mr. Moriarty's deposition testimony that in his experience the NYID has never relied on Insurance Law § 1309's reinsurance test and that it would have been inappropriate to do so during the financial crisis when no entities were willing to reinsure anything relating to mortgage backed securities. (Id. at 760:26-762:8; Moriarty deposition at 345:23-348:12.)

The court agrees with the MBIA and state respondents that Insurance Law § 1309 is not implicated here because the Superintendent never made a finding of insolvency.

IV. Conclusion

Accordingly, for all the reasons stated herein, it is hereby adjudged that the relief sought in petitioners' verified petition dated June 15, 2009 is denied, except that it is declared that the approval letter does not extinguish petitioners' causes of action against MBIA Inc., MBIA Insurance and MBIA Illinois in the related plenary action commenced by petitioners on May 13, 2009, captioned ABN AMRO Bank N.V. v MBIA Inc., index No. 601475/09, in accordance with the decision of the Court of Appeals in ABN AMRO Bank, N.V. v MBIA Inc. (17 N.Y.3d 208 [2011]).

The proceeding is hereby dismissed, without costs or disbursements to either party.