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JPMORGAN CHASE BANK v. LIBERTY MUT. INS. CO.

March 5, 2002

JPMORGAN CHASE BANK, FOR AND ON BEHALF OF MAHONIA LIMITED AND MAHONIA NATURAL GAS LIMITED, PLAINTIFF,
V.
LIBERTY MUTUAL INSURANCE COMPANY, TRAVELERS CASUALTY AND SURETY COMPANY, ST. PAUL FIRE AND MARINE INSURANCE COMPANY, CONTINENTAL CASUALTY COMPANY, NATIONAL FIRE INSURANCE COMPANY OF HARTFORD, FIREMAN'S FUND INSURANCE COMPANY, SAFECO INSURANCE COMPANY OF AMERICA, THE TRAVELERS INDEMNITY COMPANY, FEDERAL INSURANCE COMPANY, HARTFORD FIRE INSURANCE COMPANY, AND LUMBERMEN'S MUTUAL CASUALTY COMPANY, DEFENDANTS.



The opinion of the court was delivered by: Rakoff, District Judge.

OPINION AND ORDER

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.

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 unconditional.

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 part:

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 such.

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 the corporation.

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.").

Furthermore, nothing in the doctrine of Plapinger precludes a defense of fraudulent inducement or concealment premised on fraudulent misrepresentations in the Bonds themselves. Here each of the Bonds is expressly premised on Mahonia's having entered with Enron into a gas or oil "Inventory Forward Sale Contract" and expressly recites that once all the contracted-for gas or oil "is fully delivered" the Sureties' obligations will cease. See Dellapina Aff., Exs. A-F, at 1. Plainly implicit in these representations is the assertion that the Sureties are being asked to insure the sale and future delivery of a commodity, rather than being asked to insure, unlawfully, a disguised loan transaction.

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 ...


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