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Prior History: Deutsche Bank AG v. JPMorgan Chase Bank, No. 04-7192, 2007 U.S. Dist. LEXIS 71933 (S.D.N.Y. Sept. 27, 2007) [USA] noted at 2008 Annual Survey at 251.

Note: Deutsche Bank AG ("Deutsche Bank"), one of nine banks that agreed to fund a revolving credit facility and a letter of credit on behalf of the internet company, Genuity, sued JPMorgan Chase Bank ("JPMorgan Chase") regarding the allocation of proceeds among the contributing banks after the borrower became bankrupt. On appeal, the United States Court of Appeals for the Second Circuit, Raggi and Restani, JJ., affirmed the decision of the United States District Court for the Southern District of New York, finding that JPMorgan Chase was not required to distribute the bankruptcy proceeds to all nine lenders on a pro rata basis, because Deutsche Bank had breached its obligation to partially fund Genuity's demand for funding under the revolving credit facility.

Genuity arranged for a US$2,000,000,000 credit facility from a consortium of nine major international banks, including Deutsche Bank, and the Chase Manhattan Bank and Morgan Guaranty Trust Co. of New York (which later joined to form JPMorgan Chase). As amended, the credit facility included a US$1,150,000,000 letter of credit that was issued to back a Genuity bond offering, and an US$850,000,000 revolving credit line upon which Genuity could draw upon demand. In exchange, Genuity paid the banks a US$2,500,000 annual commitment fee. The lending banks appointed Chase Manhattan Bank as the Administrative Agent of the credit agreement. JPMorgan Chase was responsible for a combined 25% participation in the credit facility, and Deutshe Bank was responsible for 15% participation.

Two years later, Genuity sought to draw the full US$850,000,000 under its revolving credit facility. Each of the lending banks that were party to the credit agreement with Genuity contributed their portion of the funding, except for Deutsche Bank, which refused to provide funding. Deutsche Bank demanded, as a condition to advancing funds, that Genuity respond to a series of questions about the state of its business and provide a commitment that Genuity would also draw on other credit to which it had access. Genuity subsequently sued Deutsche Bank for refusing to honor the credit agreement and to fund its share of the revolving credit facility; that case was eventually settled. Genuity later repaid approximately US$208,000,000 of the advance under the credit facility, which was distributed among the banks that funded the advance and excluded Deutsche Bank.

Several months later, Genuity declared bankruptcy, which caused a default on the Genuity bonds that had been backed by the US$1,150,000,000 letter of credit. When a draw was made on the letter of credit, all of the banks-including Deutsche Bank-honored the draw and advanced the portion of funds for which each was obligated. In Genuity's bankruptcy proceedings, approximately US$48,000,000 was approved for distribution to JPMorgan Chase, as the Administrative Agent, for the benefit of the lending banks. When JPMorgan Chase proposed to distribute the funds to the participating banks to satisfy Genuity's draw on the revolving credit facility, rather than the letter of credit, Deutsche Bank sued JPMorgan Chase, seeking injunctive relief requiring that Deutsche Bank be included in the distribution.

Deutsche Bank alleged that it had not breached its obligation to fund Genuity's revolving credit facility as a matter of law because the district court's failed to both apply res judicata to an earlier bankruptcy court order eliminating creditor's rights with respect to Deutsche Bank's claim in Genuity's bankruptcy case and to recognize that material issues of fact existed with respect to the breach. The Second Circuit found no merit to either claim, concluding (1) that the bankruptcy court's restriction was not applicable to Deutsche Bank's alleged breach outside of Genuity's bankruptcy; and (2) that because "alleged misrepresentations targeting 'future expectations' of indefinite events are not actionable," there was not a material issue of fact that would absolve Deutsche Bank of its funding obligations. Thus, the Second Circuit affirmed the trial court's ruling that Deutsche Bank had breached its obligation to fund Genuity's revolving credit facility

Deutsche Bank also alleged that the credit agreement provided that all lender banks were to be paid at the same rate. The court, however, found that JPMorgan Chase was required to "'ratably'" distribute Genuity's advance repayments. Because the credit agreement required lenders receiving excess payments to "'purchase from the other Lending Parties such participations in the Revolving Credit Advances and Letter of Credit Advances owing to them as shall be necessary to cause such purchasing Lending Party to share the excess payment ratably with each of them,'" the credit agreement permitted JPMorgan Chase to account for Deutsche Bank's breach in the distribution of proceeds such that Deutsche Bank was excluded from the proceeds distribution. The appellate court noted that Deutsche Bank had effectively avoided its obligation to advance funds to Genuity and that JPMorgan Chase's proposed distribution would treat all of the lenders equally and not result in a disproportionate loss among all lenders, Deutsche Bank included.

[JWB/anf]

* Mr. Burd is an associate at Wiley Rein LLP.

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