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MBI International Holdings Inc. v. Barclays Bank PLC

Supreme Court of New York, First Department

June 1, 2017

MBI International Holdings Inc., et al., Plaintiffs-Appellants,
Barclays Bank PLC, Defendant-Respondent.

         Plaintiffs appeal from the judgment of the Supreme Court, New York County (Charles E. Ramos, J.) entered February 17, 2016, dismissing the complaint in its entirety with prejudice, and from the order of the same court and Justice, entered January 29, 2016, which dismissed plaintiffs' claims.

          Kirkland & Ellis LLP, Washington, DC (Paul D. Clement of the bar of the District of Columbia, the State of Virginia and the State of Wisconsin, admitted pro hac vice, of counsel, and Jeffrey M. Harris of the bar of the District of Columbia and the State of California, admitted pro hac vice, of counsel), Kirkland & Ellis LLP, New York (Stephen V. Potenza of counsel), and Patterson Belknap Webb & Tyler LLP, New York (Craig A. Newman and Muhammad U. Faridi of counsel), for appellants.

          Wilkie Farr & Gallagher LLP, New York (Todd G. Cosenza, William A. O'Brien and Frank Scaduto of counsel), for respondent.

          Richard T. Andrias, J.P., Paul G. Feinman, Judith J. Gische, Ellen Gesmer, JJ.

          FEINMAN, J.

         This appeal arises out of an alleged scheme to defraud a Saudi Arabian residential real estate developer out of hundreds of millions of dollars owed to it by the Saudi government. Its resolution requires us to construe New York's date of discovery rule for purposes of ascertaining when the statute of limitations was triggered with respect to plaintiffs' fraud-based claims. Ultimately, the result we reach today embraces the well-settled rule established in New York long ago: "[W]here the circumstances are such as to suggest to a person of ordinary intelligence the probability that he [or she] has been defrauded, a duty of inquiry arises, and if he [or she]... shuts his [or her] eyes to the facts which call for investigation, knowledge of the fraud will be imputed to him [or her]" (Higgins v Crouse, 147 NY 411, 416 [Nov. 26, 1895, Finch, J.]). Thus, we affirm the motion court's holding to the extent it dismissed plaintiffs' action as time-barred.

         In the early 1990s, plaintiff Jadawel International Company (Jadawel), a Saudi Arabian real estate development company, constructed two luxury residential compounds in Saudi Arabia. Jadawel is a subsidiary of plaintiff MBI International Holdings Inc. (MBI), a British Virgin Islands holding company founded by prominent Saudi Arabian billionaire Sheikh Mohamed Bin Issa Al Jaber. The compounds, containing 1, 000 luxury villas, housed senior employees of two U.S. government contractors, who passed on the costs of rental payments to the Saudi government through the U.S. Department of Defense's Foreign Military Sales program. In March 1999, at the Saudi government's request, Jadawel and the Saudi government entered into direct lease agreements for the Compounds (the Lease Agreements). Pursuant to the Lease Agreements, Jadawel was entitled to annual lease payments from the Saudi government for an 18-year term through 2017, totaling in excess of $2 billion.

         In September 2000, MBI sought to monetize the first ten years of lease payments in order to refinance a loan it took to finance construction of the compounds and to finance real estate opportunities. In order to do so, MBI created nonparty Compound Lending Company (CLC) as a special financing vehicle, which plaintiffs allege became Jadawel's designated agent to collect annual payments due from the Saudi government during the first ten years of the Lease Agreements between 2001 and 2011 [1]. These eleven annual payments under the leases were to be paid by the Saudi government directly into two New York collection accounts maintained by CLC at the Bank of New York.

         In connection with the refinancing, on June 14, 2001, CLC secured the extension of a $450 million bridge loan from defendant Barclays Bank PLC (Barclays). On December 27, 2001, Barclays led a bank syndicate in providing a $900 million term loan to CLC (the Term Facility Agreement) [2]. Of this $900 million, CLC used $450 million to repay the bridge loan, and the remaining $450 million was made immediately available for plaintiffs to finance new real estate investments. Under the Term Facility Agreement, the bank syndicate was to be repaid the $900 million term loan, plus interest, out of the $1.4 billion in expected lease payments from the Saudi government. The surplus, totaling over $200 million, or the residual payments made after the term loan plus interest was repaid in full, was to go to CLC for the benefit of plaintiffs.

         Under the Term Facility Agreement, as collateral for the $900 million term loan, CLC pledged a security interest in: (1) CLC's right to collect lease payments from the Saudi government; (2) all of CLC's shares; and (3) CLC's depositary accounts with the Bank of New York. Thus, in an event of default, the bank syndicate's Security Trustee had the right to assume control of CLC and its bank accounts, and had the right to enforce the Saudi government's payment obligations under the Lease Agreements. As further provided, in an event of default, the Security Trustee was entitled to collect such sums and distribute them in the following order of priority; first, to the bank syndicate in their relevant proportions; and then any additional amount recovered would go to CLC for plaintiffs' benefit.

         On April 1, 2002, the Saudi government failed to make its first lease payment to CLC after the Term Facility Agreement became effective. As a result, CLC failed to make its first payment to the syndicate, triggering an event of default, which entitled the Security Trustee to assume control of CLC and become responsible for collecting the lease payments from the Saudi government. The Security Trustee informed the Saudi government that it assumed control of CLC's right to enforce the lease payments. After the Saudi government failed to remedy its default, the Security Trustee, on behalf of Barclays and the rest of the bank syndicate, brought suit in 2002 against the Saudi government in the United States District Court for the Southern District of New York for breach of contract and a declaration that the Saudi government was obligated to continue payments under the Lease Agreements.

         However, on April 1, 2003, the Security Trustee voluntarily withdrew its complaint, without prejudice, allegedly to facilitate possible settlement negotiations (see Notice of Voluntary Dismissal, Dresdner Bank, et al v The Ministry of Fin., et al, U.S. Dist Ct, S.D. NY, 1:02 Civ 09618, Martin, J., 2003). In or around July 2006, the bank syndicate entered into a settlement agreement with the Saudi government, the terms of which are confidential (the 2006 settlement). In connection with the 2006 settlement, CLC did not receive any amount of the hundreds of millions of dollars in residual payments it was entitled to under the Term Facility Agreement.

         In 2007, after CLC's claims against the Saudi government were released through the 2006 settlement, the Saudi government informed Jadawel of its intent to abandon its performance under the Lease Agreements for the years of 2011 through 2017. Thereafter, Jadawel brought suit against the Saudi government in Saudi Arabia to enforce the Lease Agreements. In 2008, a Saudi court ruled that because the bank syndicate had settled CLC's claims, Jadawel no longer had any right to recover against the Saudi government. As a result of this ruling, Jadawel maintained ownership of the compounds, but with a tenant who was no longer paying hundreds of millions of dollars in rent. Jadawel was therefore forced to sell the compounds at a substantial loss.

         At no point after the 2006 settlement did plaintiffs bring suit against the bank syndicate for failing to recover the residual payments it was owed under the Term Facility Agreement. Years later, however, on May 10, 2013, the Financial Times published two articles concerning an alleged investigation by the U.S. Department of Justice into whether Barclays had made illegal payments to a Saudi prince in exchange for securing a banking license in Saudi Arabia and repayment of the $900 million term loan related to this case. According to the Financial Times, the Saudi government announced in 2003 that it was accepting applications for banking licenses from non-Arab lenders for the first time since the 1970s. Allegedly after that announcement, Barclays sought help from Saudi Prince Turki bin Abdullah bin Abdel Aziz to resolve the litigation that was pending in ...

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