Article

Factual Summary: Citibank, N.A. ("Citi") and JP Morgan Chase Bank, through its predecessor in interest The Chase Manhattan Bank ("Chase"), administered three credit facilities for Applicant. The first was a US$1.25 billion medium-term credit facility, the second was a US$1.75 billion short-term credit facility, and the third was a US$ 500 million LC facility ("2001 LC Facility"). Chase was the issuing bank for the 2001 LC Facility.

Participant contributed US$10,416,667.67 under the medium-term facility, US$11,666,666.67 under the short-term facility, and US$3,333,333.33 under the 2001 LC Facility.

The agreements between Participant and Citi and Chase disclaimed Citi's and Chase's warranties in connection with any loan document, acknowledged that Citi and Chase could engage in separate business dealings with Applicant, and acknowledged that Participant made its own credit decisions without reliance on the Citi and Chase. Participant had affirmative covenants under each of the agreements allowing it to solicit documents from Applicant and visit Applicant's properties. Affiliates of Citi and Chase marketed the participations; the marketers never disclosed knowledge of Applicant's manipulations of its reported financial condition.

Independently, Participant was the issuing bank on a separate US$30 million LC Facility ("2000 LC Facility"). The 2000 LC Facility was not collateralized. Participant declined to contribute its exposure under the 2000 LC Facility to the 2001 LC Facility.

Prior to this, Citi and Chase invested in special purpose entities (SPEs) that Applicant used to remove assets from its balance sheet that were losing or were likely to lose value. Applicant guaranteed to provide the SPEs with new shares of Applicant's stock to cover losses in the value of assets in the SPEs. This release of new stock contributed to Applicant's financial collapse. Citi and Chase knew that Applicant's public disclosures regarding the SPEs were misleading.

Chase also engaged in "prepay" transactions with Applicant through Mahonia, one of Applicant's SPEs, that allowed Applicant to hide funded debt by recording it as a trading liability. Chase provided to Participant a list of 11 LCs issued under the 2001 LC Facility. A few days later, Chase requested US$1,050,000 from Participant for an LC issued under the 2001 LC Facility. Participant paid. Applicant then filed for bankruptcy.

Chase provided Participant with a different list of LCs issued under the 2001 LC facility; this new list included an LC benefiting Mahonia.

Although Chase continued to demand payments from Participant under the 2001 LC Facility, Participant refused. Chase failed to give Participant access to information to which Participant claimed entitlement under its agreement with Chase.

Participant then sued Citi and Chase for fraud, misrepresentation, unjust enrichment, breach of implied duty of good faith and fair dealing, civil conspiracy, and aiding and abetting fraud. Participant also sought declatory relief through a judgment that:

it has no further obligations under the 2001 L/C Facility, 2) [Chase] has an obligation to return all funds paid by [Participant] under the facility, and 3) [Chase] must grant full access to [Participant] to any documents or other information made available to any other bank participating in the facility.

On Citi and Chase's motion to dismiss, the court granted the motion on the fraud, misrepresentation, and unjust enrichment claims, granted the motion on the breach of implied duty of good faith and fair dealing claim and claim to declatory relief to the extent they relied on the fraud and misrepresentation claims, and denied the motion to dismiss the civil conspiracy and aiding and abetting fraud claims.

Legal Analysis:

1. Fraud; Misrepresentation: The court stated that:

Participant's fraud and misrepresentation claims must be dismissed because the contracts pursuant to which [it] made [its] ... investments preclude [it] from establishing essential elements of those claims, namely, that [Citi and Chase] had a duty to disclose information regarding or gained from their business dealings with [Applicant], and that any reliance by [Participant] on misrepresentations by [Citi and Chase] was reasonable.

The court found that:

[H]aving failed to bargain for the right to rely on the banks as monitors of Enron's compliance with its disclosure, financial condition and other covenants, or for the right to benefit from any knowledge gained by [Citi or Chase] or their affiliates in connection with their own business dealings with [Applicant] and its affiliates, [Participant] cannot, as a matter of law, be held reasonably to have relied on any misrepresentations or omissions by [Citi or Chase] concerning those matters.

Participant had argued its waiver of reliance on Citi's and Chase's representations did not take effect because Citi and Chase had peculiar knowledge of Applicant's fraud. The court noted "all of the other peculiar knowledge cases cited by [Participant] involved alleged concealment or misrepresentation of material information by counterparties in the transactions at issue." The court declined to extend the doctrine of peculiar knowledge to the case at bar because Citi and Chase were third parties to the transaction between Participant and Applicant.

Participant also argued that Citi's and Chase's knowledge that Participant had issued the 2000 LC Facility created a duty to disclose Applicant's fraud to Participant. The court found that because Citi and Chase had no duty to disclose in the credit agreements to which they were parties, Participant could not reasonably rely on their representations for an LC facility to which neither Citi nor Chase was a party.

2. Fraud, Aiding and Abetting: Participants alleged that Citi and Chase "knowingly participated in and helped structure the transactions ... that enabled [Applicant] to distort its public financial statements," and that, "[Citi's and Chase's] participation in those transactions contributed to [Applicant's] collapse, and thus its inability to meet its obligations under the credit agreements." The court found the claim was plead with sufficient particularity to justify denial of Citi and Chase's motion for dismissal.

3. Duty of Good Faith: Participant alleged, "the failure of [Citi and Chase] to disclose [Applicant's] true financial condition in connection with the credit transactions prevented [Participant] from taking advantage of [its] various rights under the credit agreements." The court found that because the credit agreements expressly absolved Citi's and Chase's failure to disclose Applicant's financial condition, "[i]mplication of a duty, notwithstanding these provisions, of the banks to make disclosures regarding [Applicant's] financial conditions would clearly be inconsistent with the governing contracts."

Participant further alleged that Chase breached its duty of good faith by its submission to Participant for payment LCs "that were not validly issued under the 2001 LC facility" and claims for legal expenses "not subject to indemnification under the 2001 LC Facility" and its failure to provide Participant with requested information regarding the 2001 LC Facility.

Participant also sought declatory relief on the same grounds.

The court dismissed the claim of a breach of duty of good faith and the claim to declatory relief "for failure to state a claim only to the extent they are premised on allegedly fraudulent conduct by [Chase]." The court noted that, "[Participant] will, however, be required to amend its Complaint to clarify the nature of any non-fraud based claims intended to be asserted in these Counts."

4. Unjust Enrichment: Participant alleged that Citi and Chase "unjustly used the funds [Participant] paid under the agreements to reduce the debt [Applicant] owed them" and that "[t]aking advantage of their superior knowledge concerning [Applicant's] actual, dire financial condition, Citi and Chase seized the opportunity to flood [Applicant with Participant's cash] in order to have their debt paid off."

The court found that the complaint failed to state a claim and dismissed the allegation because "the payments in question were made pursuant to the credit agreements" and Citi and Chase "and their affiliates had no duty to account to [Participant] for their dealings with [Applicant], and the banks had no duty to provide [Participant] with any information in connection with payments under the agreements."

5. Civil Conspiracy: Participant alleged that Citi and Chase "knowingly participated in [Applicant's] fraudulent accounting scheme." The court found that, by tying Issuer's conduct to the underlying tort of Applicant's fraud, Participant's allegation stated a claim for which relief could be granted. The court did not dismiss the civil conspiracy count.

[JEB/bso]

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