The opinion of the court was delivered by: Rakoff, District Judge.
By this lawsuit, plaintiff JPMorgan Chase Bank, for and on
behalf of Mahonia Limited and Mahonia Natural Gas Limited
(collectively "Mahonia"), seeks to compel the eleven defendant
insurance companies (collectively the "Sureties") to pay Mahonia
over $1 billion, pursuant to six surety bonds (the "Bonds") that
guaranteed the obligations of Enron Natural Gas Marketing
Corporation and Enron North America Corporation (collectively
"Enron") on six corresponding natural gas and crude oil forward
sales contracts (the "Contracts") entered into between June,
1998 and December, 2000.
According to plaintiff, the facts are simple and
straightforward. Under each of the Contracts, Mahonia paid Enron
a set sum in return for subsequent deliveries of
natural gas or crude oil extending over many months. See
Affidavit of Jeffrey Dellapina, sworn to on December 28, 2001
("Dellapina Aff.") ¶¶ 3-4, Ex. G; Affidavit of Philip N. Bair,
sworn to on February 7, 2002 ("Bair Aff.") Exs. A-F. To insure
against the risk that Enron might default in part or whole on
its promise to deliver the gas and oil, Mahonia not only
obtained contractual guarantees from Enron to make monetary
payments in the event of such failures but also simultaneously
obtained from the Sureties the Bonds here in issue, which
guaranteed payment to Mahonia upon any default by Enron.
Dellapina Aff. ¶¶ 2, 5, Exs. A-F.
In due course, Enron did indeed default, following which, on
December 7, 2001, plaintiff, on behalf of Mahonia, sent written
notices to the Sureties demanding payment in accordance with the
terms of the Bonds. When the sureties demurred, plaintiff
brought this lawsuit and promptly moved for summary judgment in
Mahonia's favor, contending that, by the express terms of the
Bonds, the Sureties' obligation to pay was immediate and
In response to the motion, defendants allege quite different
facts. They allege that, unbeknownst to the Sureties at the time
they issued the Bonds, the Contracts between Mahonia and Enron
were part of a fraudulent arrangement by which simple loans to
Enron by plaintiffs predecessor, the Chase Manhattan Bank
("Chase"), were disguised as sales of assets. Specifically, they
allege that Chase lent Mahonia the money used to pay Enron on
the Contracts, and that, at the very time Enron was contracting
to sell to Mahonia future deliveries of gas and oil, Enron was
secretly contracting to repurchase the very same gas and oil
from one or more entities commonly controlled with Mahonia, at a
price equal to what was owed by Mahonia to Chase on the loan.
The net effect was simply a series of loans from Chase to Enron;
but by disguising them as sales of assets, Enron could book them
as revenue while Chase and Mahonia could, among other things,
induce the Sureties to issue Bonds that would effectively
guarantee repayment of the loans — something the Sureties were
otherwise forbidden to do under applicable New York law (which
here governs). See N.Y. Ins. Law §§ 1102, 1113(16)(E);
6901(a)(1)(A) (McKinney 2000). In short, defendants allege that
the Bonds were the product of fraudulent inducement and
fraudulent concealment by the plaintiff.
Fraudulent inducement and fraudulent concealment are familiar
defenses to contractual performance. Yet, New York law does not
permit a contracting party to lightly evade its contractual
obligations by simply crying "fraud." Thus, for example, under
New York law, a claim for breach of contract cannot be converted
into a fraud claim by simply alleging that the promisor intended
not to perform its promise. See Papa's-June Music v. McLean,
921 F. Supp. 1154, 11601161 (S.D.N.Y. 1996) (collecting cases).
Also, of particular relevance here, New York law will not permit
a sophisticated party that, in negotiating a contract, has
expressly disclaimed reliance on specific oral representations
extrinsic to the contract to thereafter claim that the
fraudulence of these representations is a defense to contractual
performance. See Danann Realty Corp. v. Harris, 5 N.Y.2d 317,
32021, 184 N.Y.S.2d 599, 157 N.E.2d 597 (1959).
Here, defendants, in seeking to defeat plaintiffs motion for
summary judgment on the grounds of fraudulent inducement and/or
fraudulent concealment, face three principal hurdles.
First, paragraph 7 of each of the Bonds states, inpertinent
The obligations of each Surety hereunder are absolute
and unconditional, irrespective of the value,
validity or enforceability of the obligations of
[Mahonia] under the [corresponding Contract] or Enron
under [its separate guarantees] or any other
agreement or instrument referred to therein and, to
the fullest extent permitted by applicable law,
irrespective of any other circumstance whatsoever
that might otherwise constitute a legal or equitable
discharge or defense of a surety in its capacity as
Dellapina Aff., Exs. A-F, ¶ 7. Disclaimer language similar to
this was given effect in the decision of the New York Court of
Appeals in Citibank, N.A. v. Plapinger, 66 N.Y.2d 90,
495 N.Y.S.2d 309, 485 N.E.2d 974 (1985), in which, extrapolating on
Danann, the Court held that corporate officers who had signed
guarantees of corporate debt containing such language could not
escape payment by arguing that they had been fraudulently
induced to sign the guarantees in reliance on the lenders'
unfulfilled oral promises to extend a further line of credit to
But neither Plapinger nor its progeny, see, e.g., Banco Do
Estado De Sao Paulo S.A. v. Mendes Jr. International Co.,
249 A.D.2d 137, 672 N.Y.S.2d 28, 29 (1st Dep't 1998); Preferred
Equities Corp. v. Ziegelman, 190 A.D.2d 784, 593 N.Y.S.2d 548,
549 (2d Dep't 1993), avails plaintiff here, for several reasons.
To begin with, a full and fair reading of Plapinger makes
plain that it does not stand for the extraordinary proposition
— the logical extension of plaintiffs interpretation — that a
general sweeping disclaimer can serve to disclaim any and all
extrinsic fraud between sophisticated parties. As the Second
Circuit stated in Manufacturers Hanover Trust Company v.
Yanakas, 7 F.3d 310, 316 (2d Cir. 1993), "the mere general
recitation that a guarantee is `absolute and unconditional' is
insufficient under Plapinger to bar a defense of fraudulent
inducement. . . ." Rather, the Court continued, "the touchstone
is specificity," that is, a clear indication that the
disclaiming party has knowingly disclaimed reliance on the
specific representations that form the basis of the fraud claim.
Id. Thus, in Plapinger, even though the disclaimer language
may have been broad and general, it was negotiated as part of
the same negotiations in which, the defendants later claimed,
they were orally promised an additional line of credit, so that,
in agreeing to the disclaimers, the corporate officers had to
know that, at a minimum, the disclaimers precluded reliance on
any specific oral promises made during the defendants'
negotiations with the lenders.
Here, by contrast, even if one assumes arguendo that the
disclaimers in paragraph 7 of the Bonds preclude reliance on the
representations in the underlying Contracts of which the
Sureties knew or were on notice, there is no suggestion that the
Sureties knew or were on notice of the allegedly circular
arrangements between Mahonia, Enron, and other entities that
transformed what purported to be insurable sales contracts into
disguised loans that the Sureties were prohibited by law from
insuring. See generally Turkish v. Kasenetz, 27 F.3d 23, 27-28
(2d Cir. 1994) ("It is well settled that parties cannot use
contractual limitation of liability clauses to shield themselves
from liability for their own fraudulent conduct.").
In short, nothing in the broad disclaimer language of the
Bonds excludes the defense — whether characterized as a defense
of fraudulent inducement or fraudulent concealment — that the
insured arrangements were a total ...