Unicredito Italiano S.p.A. v. JPMorgan Chase Bank

United States District Court for the Southern District of New York · Corporations

Corporationssyndicated credit facilitiesfraudcontract disclaimersaiding and abetting fraudNew York lawfraudulent concealmentfraudulent inducement

Facts

Plaintiffs were sophisticated foreign banks that participated in Enron syndicated credit facilities administered by JP Morgan Chase Bank and Citibank, with related offering materials distributed by defendants' securities affiliates. The operative agreements expressly stated that the agent banks had no fiduciary or disclosure duties, could do business with Enron without accounting to participants, and that each lender made and would continue to make its own credit decisions without reliance on the agent banks. Plaintiffs alleged defendants knew Enron's public financial disclosures were false because defendants had participated in prepays and off-balance-sheet transactions that concealed Enron's true debt and financial condition. Plaintiffs claimed they funded Enron facilities and suffered losses because defendants concealed this information and helped Enron's fraud.

Issue

Whether plaintiffs stated claims for fraud-based and related causes of action against the defendant banks and their affiliates despite express contractual disclaimers negating disclosure duties and reliance, and whether the complaint nonetheless adequately alleged aiding and abetting fraud and conspiracy based on defendants' participation in Enron's fraudulent accounting transactions.

Rule

Under New York law, fraud and negligent misrepresentation claims require, among other things, a duty to disclose where concealment is alleged and reasonable reliance by the plaintiff. In agreements among sophisticated financial institutions, specific contractual provisions disclaiming disclosure duties, permitting independent dealings with the borrower, and requiring each lender to make its own credit decisions without reliance on the agent banks preclude, as a matter of law, claims premised on a duty to disclose or reasonable reliance; the implied covenant cannot be used to impose duties inconsistent with those express terms. Aiding and abetting fraud requires an underlying fraud, the defendant's knowledge of it, and substantial assistance, and conspiracy allegations may stand only insofar as they connect defendants to an otherwise actionable tort.

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Riverton Bank in Denver joined a syndicated revolving credit facility for Mesa Grid LLC. The credit agreement stated that the administrative agent, Harbor Summit Bank, had no fiduciary relationship with lenders, had no duty to monitor the borrower or provide credit information, and could conduct other business with Mesa Grid without accounting to the lenders. After Mesa Grid collapsed, Riverton alleged Harbor Summit knew from separate financing deals that Mesa Grid had hidden liabilities and fraudulently concealed that information.

Under New York law as applied by the majority opinion, is Riverton most likely to state a fraudulent concealment claim against Harbor Summit?

Explanation. A fraudulent concealment claim requires a duty to disclose. The majority held that where sophisticated financial institutions expressly agreed that the agent had no duty to provide credit information, no duty to monitor the borrower, and could engage in separate business without accounting to lenders, those provisions bar omission-based fraud claims as a matter of law. The result follows from the contract, not from any blanket immunity among lenders. (Derived from Unicredito Italiano S.p.A. v. JPMorgan Chase Bank (n.d.).)