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Note: Ten banks established a US$2 billion credit facility in favor of Genuity, Inc. (Borrower), a spin off of Verizon Communications, Inc. Pursuant to the credit faculty, JP Morgan Chase, the entity that resulted from the merger of The Chase Manhattan Bank and Morgan Guaranty Trust Co., issued a US$1.5 billion LC to support a bond issue, a LC in which the other eight banks participated. The banks were: The Chase Manhattan Bank, Citicorp USA, Inc., Credit Suisse First Boston, Deutsche Bank AG, BNP Paribas, Morgan Guaranty Trust Co., The Bank of New York, The Industrial Bank of Japan, Toronto Dominion (Texas) Inc., and Wachovia Bank N.A.

Borrower demanded the balance of the credit facility as an advance. Pursuant to an understanding that they were required to act in concert under the terms of the facility, all of the banks except Deutsche Bank disbursed their share. Claiming that it was not obligated, Deutsche Bank refused.

Subsequently, Borrower defaulted under the credit facility, sued Deutsche Bank for breach of the credit facility agreement (an action that was settled), and filed for bankruptcy protection under 11 U.S.C. § 101 Chapter 11 (Reorganization).

When Borrower filed for bankruptcy protection, it caused a default in the bonds which, in turn, led to a draw on the JP Morgan Chase US$1.15 billion letter of credit which was honored. Pursuant to the terms of the participation agreement, all the banks paid their agreed share. The bankruptcy court declined to resolve the dispute over Deutsche Bank's entitlement to assets of the estate and appointed JP Morgan Chase as "Administrative Agent" of the escrowed assets of the estate, approximately US$4,760,000.

In this action, Deutsche Bank sued for declaratory judgment, naming JP Morgan Chase as defendant and seeking an order that it recover approximately 50% of the escrowed funds. JP Morgan Chase counterclaimed, seeking an order that priority be given to repaying the advance, thereby effectively excluding Deutsche Bank. The parties cross moved for summary judgment. The United States Court for the Southern District of New York, Stein, J., granted summary judgment in favor of JP Morgan Chase.

The court ruled that a subsequent agreement regarding allocation of the funds not entered into by Deutsche Bank was null and void but ruled that Deutsche Bank had breached the credit agreement by its failure to fund the advance requested. Accordingly, it concluded that JP Morgan Chase had discretion to disburse the funds in proportion to the advance.

[JEB/alh]

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