Ambac Financial Group, a bond insurer who guarantees payments on more than $550 billion of debt has filed Chapter 11 bankruptcy and is suing the IRS in an attempt to stop the agency from blocking the payment of $700 million in tax refunds to the company.
"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.
IRS questions concerning 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.
At a court hearing, lawyers for Ambac and the IRS said they reached an accord under which the agency would not take any enforcement action contrary to any state court injunction, absent five business days notice.
Ambac's Chapter 11 bankruptcy could be shortened significantly if it is able to reach a prepackaged bankruptcy agreement with its major creditors. It is not clear at this time if an agreement has been met; but the company's debts total more than $1.6 billion owed to numerous creditors, which could create a lengthy process absent a prepackaged bankruptcy agreement. The company is hoping to use Chapter 11 bankruptcy to significantly reduce its debt load, keep the tax refunds it believes the company deserves and exit bankruptcy with an intact company. Unfortunately, the mortgage industry and other debt which is insured by the company continues to experience a record level of defaults creating a situation where Ambac is stretched thin attempting to meet its obligations as a debt insurer.