12. COMMITMENTS AND CONTINGENCIES

The following commitments and contingencies provide an update of those discussed in “Note 15: Commitments and Contingencies” in the Notes to Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2012, and should be read in conjunction with the complete descriptions provided in the aforementioned Form 10-K.

Chapter 11 Reorganization

Under the Bankruptcy Code, the filing of our petition on November 8, 2010 automatically stayed most actions against Ambac. Substantially all of Ambac’s pre-petition liabilities were addressed under the Reorganization Plan, if not otherwise addressed pursuant to orders of the Bankruptcy Court. As further described in Note 1, the Reorganization Plan was substantially consummated on May 1, 2013, primarily through the distribution of new common stock and warrants. In addition to the distributions made on May 1, 2013 pursuant to the Reorganization Plan, the Company may be required to distribute additional new common stock and warrants to claimholders in its Chapter 11 case.

The Segregated Account and Wisconsin Rehabilitation Proceeding

The Rehabilitation Court entered an order on November 10, 2011 approving the transactions contemplated in the Mediation Agreement and certain parties appealed such order. On March 1, 2013, the Wisconsin Court of Appeals entered an order dismissing this appeal for lack of standing. The time for appellants to appeal that order to the Wisconsin Supreme Court has expired and appellants have not made such further appeal. Therefore, the order entered by the Rehabilitation Court approving the transactions contemplated in the Mediation Agreement has become final and non-appealable.

On June 4, 2012, the Rehabilitation Court issued an order approving Ambac Assurance’s purchase of surplus notes pursuant to the exercise of call options (“Surplus Notes Order”). Fannie Mae filed both a Petition for Leave to Appeal and a Notice of Appeal of the Surplus Notes Order. On March 7, 2013, the Wisconsin Court of Appeals denied Fannie Mae’s Petition for Leave to Appeal the Surplus Notes Order and extended Fannie Mae’s time to respond to the Commissioner’s pending motion to dismiss Fannie Mae’s appeal for lack of jurisdiction and lack of standing to March 25, 2013. On March 21, 2013 Fannie Mae filed a Notice of Voluntary Dismissal of Appeal and on April 1, 2013 the Wisconsin Court of Appeals dismissed Fannie Mae’s appeal of the Surplus Notes Order.

On April 5, 2013, the Rehabilitator filed a motion to confirm the authority of Ambac Assurance to direct Deutsche Bank National Trust Company, as Trustee, to terminate OneWest Bank, F.S.B. (“OneWest”) as servicer for the residential mortgage loans held by two trusts that had issued securities insured by Ambac Assurance, the IndyMac Certificate Trust 2004-2 and the IndyMac Residential Asset-Backed Trust, Series 2004-LH1, and to appoint Green Tree Servicing LLC as the successor servicer. In response to this motion, OneWest filed a Notice of Removal to the United States District Court for the Western District of Wisconsin on May 5, 2013. The Rehabilitator filed a motion to remand the proceedings back to Wisconsin state court on May 21, 2013 and, on May 23, 2013, advised all interested parties of record that the Notice of Removal filed by OneWest had created uncertainty as the procedural status of the entire rehabilitation proceeding. On July 8, 2013, the Western District of Wisconsin granted the Rehabilitator’s remand motion, remanding the case to the Circuit Court for Dane County, and invited the Rehabilitator to submit a request for fees and costs. At a hearing on the Rehabilitator’s motion concerning the termination of OneWest as servicer on July 31, 2013, the Rehabilitation Court granted the Rehabilitator’s motion confirming Ambac Assurance’s authority to direct the trustee to terminate OneWest as servicer for the two trusts and to appoint Green Tree Servicing LLC as the successor servicer.

On July 11, 2013, the Rehabilitator filed a motion seeking authority to pay more than 25% of certain permitted policy claims (“Supplemental Payments”), either in one lump sum or in varying proportions over time, in order to maximize reimbursements payable to Ambac Assurance and increase claims-paying resources for the benefit of all policyholders. At a hearing on August 2, 2013, the Rehabilitation Court issued an order authorizing the Rehabilitator and the Segregated Account to pay Supplemental Payments on 14 policies identified in the motion and on any other policies where similar reimbursements are available.

Tax Treatment of Ambac Assurance’s CDS Portfolio

On April 3, 2013, Ambac, the Creditors’ Committee, Ambac Assurance, the Segregated Account, OCI and the Rehabilitator submitted to the IRS and the Department of Justice, Tax Division, a letter which modified and supplemented the terms of the Offer Letter to settle the IRS Dispute and related proceedings. On April 4, 2013, the Department of Justice, Tax Division, accepted the Offer Letter as supplemented and modified. On April 8, 2013, Ambac filed a motion with the United States Bankruptcy Court for the Southern District of New York seeking approval of the terms of the IRS Settlement. On April 29, 2013, the Bankruptcy Court approved in all respects the IRS Settlement, which settled the IRS Claim, and authorized and directed Ambac, in part, to effectuate the IRS Settlement and to take any other actions as may be reasonably necessary to consummate the settlement, including, without limitation, the execution of a closing agreement with the IRS, and entry of a stipulation dismissing the IRS adversary proceeding with prejudice. On April 30, 2013, Ambac paid to the United States Department of the Treasury $1,900 and the Segregated Account paid the United States Department of Treasury $100,000. Upon confirmation of payment, Ambac and the Internal Revenue Service entered into a closing agreement on April 30, 2013 which resolved with finality all federal income tax liability of Ambac for the 2003 through 2009 tax years and resolved with finality the federal income tax liability of Ambac for the 2010 tax year solely with respect to items of income, gain, deductions or loss related to the CDS contracts. The closing agreement does not resolve the tax treatment of CDS contracts for tax years subsequent to 2010.

On May 7, 2013, following execution of the closing agreement and payment of the settlement consideration by Ambac and the Segregated Account, the Bankruptcy Court issued an order dismissing with prejudice the adversary proceeding against the IRS. On the same day, Ambac, the United States and the Creditors’ Committee filed a stipulation withdrawing and dismissing with prejudice the motion to withdraw the reference pending before the United States District Court for the Southern District of New York. In accordance with the terms of the IRS Settlement, on May 9, 2013, the United States moved to dismiss with prejudice the two appeals pending in the Seventh Circuit Court of Appeals and to vacate the opinions and orders of the District Court underlying the appeals it perfected. As part of the IRS Settlement, the Segregated Account and Ambac Assurance agreed to support the United States’ motion. On May 15, 2013, the Seventh Circuit Court of Appeals issued an order directing the United States to comply with Circuit Rule 57 by requesting that the District Court indicate whether it is inclined to vacate the orders underlying the appeal. The United States complied with that order and on July 10, 2013, the District Court issued a memorandum stating that it was “inclined to vacate the opinions in the case is returned to [the District Court] for that purpose.” Accordingly, on July 12, 2013, the United States requested that the Seventh Circuit Court of Appeals grant its May 9th motion to dismiss the appeal and vacate the underlying orders, or alternatively, to remand the case to the District Court for that purpose. The Seventh Circuit remanded the matter to the District Court which, by orders dated July 16, 2013, dismissed both cases (10-CV-788 and 11-CV-99) with prejudice and vacated its prior decisions.

Litigation Filed Against Ambac

County of Alameda et al. v. Ambac Assurance Corporation et al. (Superior Court of the State of California, County of San Francisco, second amended complaint filed on or about August 23, 2011); Contra Costa County et al. v. Ambac Assurance Corporation et al. (Superior Court of the State of California, County of San Francisco, third amended complaint filed on or about October 21, 2011); The Olympic Club v. Ambac Assurance Corporation et al. (Superior Court of the State of California, County of San Francisco, fourth amended complaint filed on or about October 21, 2011). After oral argument on March 21, 2013, the court dismissed claims related to the conspiracy branch of the complaint under the California Antitrust Law (the Cartwright Act) and after oral argument on April 22, 2013 denied defendants’ motion to dismiss claims under the California Unfair Competition Law. The court entered an order to this effect on July 9, 2013.

City of Phoenix v. Ambac Assurance Corporation et al. (United States District Court, District of Arizona, filed on or about March 11, 2010). On August 1, 2013, the court dismissed the case with prejudice pursuant to a stipulation filed by the parties.

Water Works Board of the City of Birmingham v. Ambac Financial Group, Inc. and Ambac Assurance Corporation (United States District Court, Northern District of Alabama, Southern Division, filed on November 10, 2009). On April 1, 2010, the court granted defendants’ motion to dismiss all claims. The plaintiff appealed the dismissal to the U.S. Court of Appeals for the Eleventh Circuit. In light of Ambac’s pending bankruptcy proceedings, on January 25, 2011, the Court of Appeals stayed the plaintiff’s appeal of the dismissal of all claims and lifted that stay on June 3, 2013. On August 5, 2013, the Court of Appeals affirmed the District Court’s dismissal of all claims.

Broadbill Partners LP et al. v. Ambac Assurance Corporation (Supreme Court of the State of New York, County of New York, filed November 8, 2012). Ambac Assurance filed a motion to dismiss on January 15, 2013, which the plaintiffs opposed. The court has not yet decided the motion.

Litigation Filed by Ambac

Ambac Assurance Corporation v. Adelanto Public Utility Authority (United States District Court, Southern District of New York, filed on June 1, 2009). On January 11, 2013 the court granted Ambac Assurance’s motion for summary judgment and denied defendant’s motion. At a March 13, 2013 conference, the court requested that the parties prepare submissions regarding the amount of damages and fees Ambac Assurance is entitled to recover. Ambac Assurance served its submissions upon the defendant on April 23, 2013, the defendant served its response on June 26, 2013, and Ambac Assurance served its reply on July 23, 2013. A hearing regarding Ambac Assurance’s recovery of damages and fees has been scheduled for August 26, 2013.

In connection with Ambac Assurance’s efforts to seek redress for breaches of representations and warranties and fraud related to the information provided by both the underwriters and the sponsors of various transactions and for failure to comply with the obligation by the sponsors to repurchase ineligible loans, Ambac Assurance has filed various lawsuits, which are listed and described in the Company’s Annual Report on Form 10-K for the year ended December 31, 2012, as supplemented and updated below:

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Ambac Assurance Corporation and The Segregated Account of Ambac Assurance Corporation v. EMC Mortgage LLC (formerly known as EMC Mortgage Corporation), J.P. Morgan Securities, Inc. (formerly known as Bear, Stearns & Co. Inc.), and JP Morgan Chase Bank, N.A. (Supreme Court of the State of New York, County of New York, filed March 30, 2012 and amended on August 14, 2012). Defendants filed a motion to dismiss the amended complaint on September 28, 2012, which Ambac Assurance opposed on October 26, 2012. Oral argument was held on February 21, 2013. On June 13, 2013, the court dismissed Ambac Assurance’s contractual claims but not its claims for fraudulent inducement or successor liability. On July 8, 2013, Ambac Assurance filed its notice of appeal.

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Ambac Assurance Corporation and The Segregated Account of Ambac Assurance Corporation v. First Franklin Financial Corporation, Bank of America, N.A., Merrill Lynch, Pierce, Fenner & Smith Inc., Merrill Lynch Mortgage Lending, Inc., and Merrill Lynch Mortgage Investors, Inc. (Supreme Court of the State of New York, County of New York, filed April 16, 2012). Defendants filed a motion to dismiss on July 13, 2012, which Ambac opposed on September 21, 2012. Oral argument was held on May 6, 2013. On July 18, 2013 the court dismissed Ambac Assurance’s claims for indemnification and limited Ambac Assurance’s claim for breach of loan-level warranties to the repurchase protocol, but did not dismiss Ambac Assurance’s other contractual claims or fraudulent inducement claim.

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Ambac Assurance Corporation and the Segregated Account of Ambac Assurance Corporation v. DLJ Mortgage Capital, Inc. and Credit Suisse Securities (USA) LLC (Supreme Court of the State of New York, County of New York, filed on January 12, 2010). On March 1, 2013, the parties filed a stipulation discontinuing the litigation with prejudice.

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Ambac Assurance Corporation and The Segregated Account of Ambac Assurance Corporation v. Countrywide Securities Corp., Countrywide Financial Corp. (a.k.a. Bank of America Home Loans) and Bank of America Corp. (Supreme Court of the State of New York, County of New York, filed on September 28, 2010). On May 28, 2013, Ambac Assurance filed a second amended complaint adding an alter ego claim against Bank of America alleging that, because Bank of America and Countrywide are alter egos of one another, Bank of America is responsible for Countrywide’s liabilities to Ambac. The defendants served their answers on July 31, 2013.

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Ambac Assurance Corporation and The Segregated Account of Ambac Assurance Corporation v. Capital One, N.A., as successor by merger to Chevy Chase Bank, F.S.B. (United States District Court for the Southern District of New York, filed on October 24, 2012). Ambac Assurance alleges claims for breach of contract, indemnification and reimbursement and requested the repurchase of loans that breach representations and warranties as required under the contracts, as well as damages. Defendants filed a motion to dismiss on February 6, 2013, which Ambac Assurance opposed in a brief filed on February 20, 2013. The motion was fully briefed and filed on March 5, 2013. The court held oral argument on March 7, 2013 and has not yet decided the motion.

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Ambac Assurance Corporation and The Segregated Account of Ambac Assurance Corporation v. Nomura Credit & Capital, Inc. and Nomura Holding America Inc. (Supreme Court of the State of New York, County of New York, filed on April 15, 2013). Ambac Assurance alleges claims for material breach of contract and for the repurchase of loans that breach representations and warranties under the contracts, as well as damages. Ambac Assurance has also asserted alter ego claims against Nomura Holding America, Inc. Defendants filed a motion to dismiss on July 12, 2013, which Ambac Assurance intends to oppose.