Bond insurer Ambac Financial Group Inc. has sued the United States to block a seizure of $700 million of tax refunds that it said could destroy its ability to reorganize in bankruptcy court.
The company said the Internal Revenue Service has been examining and may seek to recoup the refunds, which relate to losses that Ambac suffered from credit default swaps on which it insured municipal, corporate and asset-backed debt.
Ambac is seeking a court order letting it keep the refunds, and declaring it has no tax liability from 2003 to 2008.
"Ambac's ability to reorganize successfully will be jeopardized or destroyed" if the refunds are seized quickly, Peter Ivanick, a partner at Dewey & LeBoeuf LLP representing Ambac, wrote in Tuesday's complaint.
Dean Patterson, an IRS spokesman, did not immediately respond to a request for a comment.
IRS questions over Ambac's accounting for the refunds, and for $7.3 billion of operating losses it hoped to use to offset future taxes, were among the reasons Ambac filed for bankruptcy on Monday, sooner than expected, court papers show.
Ambac was once the second-largest U.S. bond insurer and guaranteed payments on more than $550 billion of debt.
The New York-based company collapsed after suffering huge losses from its guarantees on risky mortgages and other debt.
Ambac filed its Chapter 11 petition after failing to agree with creditors on a "prepackaged" bankruptcy to allow a quick restructuring. It filed the petition and the complaint in the U.S. bankruptcy court in Manhattan.
SEIZURE COULD CAUSE BIG DEFAULTS
In the lawsuit, Ambac said seizing the tax refunds would allow the IRS "effectively without warning" to tie up assets in affiliates that did not seek bankruptcy, including the company's Ambac Assurance Corp. operating unit.
It said this could cause Wisconsin Insurance Commissioner Sean Dilweg, who oversees that unit, to take steps that could lead to defaults by issuers of $20 billion of asset-backed notes that the unit insured.
Ambac essentially stopped writing new business in 2008 after major credit agencies took away its triple-A rating.
Larger rival MBIA Inc also lost its triple-A rating in 2008. Assured Guaranty Ltd., backed by billionaire investor Wilbur Ross, is effectively the last insurer still writing new municipal bond business.
In March, Dilweg seized $64 billion of Ambac's worst assets and put them in a segregated account. A court hearing on a proposed rehabilitation plan is scheduled for Nov. 15.
Ambac shares now trade on the Pink Sheets. In afternoon trading, they were quoted down 2.5 cents at 20.5 cents. They closed Monday at 52 cents on the New York Stock Exchange.
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