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Plaintiff-bank’s allegations


Plaintiff-bank’s allegations:

Sometime in May 2003, three discounted non-interest bearing promissory notes were fabricated by defendant-bank and certain of its subsidiaries and sold to plaintiff-bank, each bearing the face amount of $ 5 million; the sale was part of a global fraud scheme orchestrated by defendant-bank to generate money to assist nonparty P1, an Italian food conglomerate, to repay loans made to it by defendant-bank; the notes were issued by nonparty P2, a P1 subsidiary incorporated in Uruguay, to defendant-bank’s New York branch (defendant-bank NY), which in turn sold them to nonparty P3, a defendant-bank affiliate; plaintiff-bank purchased the notes from P3; the notes were each accompanied by a guarantee of payment executed by P1 and a side letter from P2 to criminal defendant-bank NY; the side letter recites P2’s certification that the proceeds of the “advance evidenced” by the notes will be utilized to finance the expansion of P1 South American subsidiaries’ raw material supply sources and to further upgrade and refurbish P1’s industrial plants in Brazil and other South American countries; the side letter also refers to the funds advanced as “financing” and sets forth projections of the value of the goods expected to be exported by P1 companies based in South America from 2003 through 2008; P1’s financial stability worsened and the Italian and Brazilian governments began criminal investigations into P1’s financial structure; and sometime in December 2003, P1’s distressed financial condition and the governmental criminal investigations became public knowledge; on 4 May 2004, the notes matured but have not been repaid; and, soon after, plaintiff-bank sold one of the notes to one of its affiliates, referred to by the parties as, plaintiff-bank Luxembourg.

Plaintiff-bank filed a claim, based on the notes in bankruptcy proceedings commenced in Italy against P1’s parent company, nonparty P0, for common-law fraud and aiding and abetting fraud, and seeks to recover $ 14,566,388.37 in compensatory damages and $45,000,000 in criminal punitive damages.

According to plaintiff-bank, defendant-bank possessed information about P1’s true financial condition and impending collapse that was not available to plaintiff-bank at the time of the underlying transaction, and intentionally attempted to limit its risk exposure by peddling fictitious notes to unsuspecting purchasers, such as plaintiff-bank; P1 was one of defendant-bank’s most significant clients and played an important role in Italy’s economy and that, therefore, defendant-bank had a strong incentive to obtain funding for P1, while reducing its own risk.

Defendant-bank moved for summary judgment in its favor, pursuant to CPLR 3212 (b), claiming that the extensive discovery conducted has not revealed any evidence that criminal defendant-bank was aware at any relevant time of P1’s true financial condition or attempted to defraud plaintiff-bank; and that the facts demonstrate that it suffered a far greater loss than did plaintiff-bank, as a result of P1’s collapse.

Plaintiff-bank opposed and argued that numerous triable issues of fact exist regarding the extent of defendant-bank’s superior knowledge, gleaned as a member of Italy’s banking community, and that defendant-bank’s conduct during the period of the issuance of the notes demonstrates such knowledge.

The Court ruled as follows:

Summary judgment on the common-law fraud claim is denied. Plaintiff-bank has raised triable factual issues regarding the existence of each of the elements of a claim of fraud sufficient to preclude summary judgment.

As provided for under the rules, summary judgment is a drastic remedy and will not be granted where there exist triable issues of material fact, some requiring credibility determinations for resolution. Fraud claims are often not appropriate for summary decision, because motive, intent and subjective feelings are at issue. To succeed on a claim of fraud, a plaintiff must demonstrate the defendant’s representation of a material fact, the falsity of that representation, scienter, reliance and injury to the plaintiff. In addition to intentional falsehoods, false statements that are made recklessly, without knowledge of whether they are true or false or criminal will also support an action for fraud.

First, plaintiff-bank raised triable issues regarding whether criminal defendant-bank gained knowledge from non-public sources, including its own direct contact with P1 and the Bank of Italy’s “Risk Center,” of facts demonstrating that P1 was financially unstable, had graded P1 as technically insolvent and a high credit risk, and had intentionally issued materially misleading financial statements significantly understating the amount of its outstanding debt, including that P1 had loans against accounts receivable in amounts that were significantly disproportionate to its revenue.

Here, defendant-bank admitted that: it, or one of its subsidiaries, was a shareholder in at least one entity controlled by P1 and that defendant-bank had officers dedicated to maintaining a relationship with P1, both globally and in specific branch offices in Parma, Italy, and at defendant-bank NY; AC and LP at P1’s headquarters in Parma and GB at defendant-bank NY communicated with P1’s senior officers, including the chief financial officer, and apparently received non-public information concerning P1 and its financial activities; and, AC testified that, in 2002 or 2003, criminal defendant-bank’s internal procedures detected a high level of indebtedness by P1, requiring defendant-bank to perform additional credit checks into P1’s financial structure.

Moreover, defendant-bank had access to information maintained by the Bank of Italy’s “Risk Center” which provides information to Italian chartered banks and other banks operating in Italy, showing, on an aggregated basis, the credit exposure from banking customers, including P1, to all banks operating in Italy. Plaintiff-bank submitted affidavits executed by banking industry experts in Italy stating that: criminal defendant-bank, but not plaintiff-bank, had access to this information; defendant-bank reviewed the information; the information demonstrates that P1 had understated its liabilities by over xxx million in 2001 and 2002; and P1’s financial statements were, at a minimum, unreliable; prior to P2’s issuance of the notes, defendant-bank issued a report, entitled “Scheda Livello di Rischio Cliente,” translated by plaintiff-bank’s experts as, “Schedule of Client Risk Level,” which applies defendant-bank’s internal risk criteria to P1 ‘s financial status and indicates that P1 had a very high risk level.

Second, plaintiff-bank raised triable issues regarding whether, as part of that program, defendant-bank not only limited the amount of credit that it provided to P1, but also sold the P2 notes, notes which it knew to be fictitious, to plaintiff-bank. Those issues include whether the P2 notes and side letter contained false statements and, if so, whether defendant-bank knew that the notes contained irregularities and could not be repaid either by P2 or its parent, P1, the notes’ guarantor.

Here, by the evidence adduced it was established that: criminal defendant-bank initiated a program of reducing and reshaping its risk caused by P1’s distressed financial status; notes were not purchased by defendant-bank NY on the open market but, rather, that the notes and side letter were issued to defendant-bank NY at its specific request and instruction; while defendant-bank NY did purchase the notes at a discount from P2, it did not make a financing, or line of credit, available for P2 trade expansion; based on the representations in the notes and side letter, plaintiff-bank believed that defendant-bank had extended a credit facility to P2 and, therefore, had verified the ability of P2 and P1 to repay the loans evidenced by the notes, when, in fact, defendant-bank had not extended any financing and had not performed any due diligence; and plaintiff-bank would not have purchased the notes, had defendant-bank disclosed that it was not providing financing.

Third, plaintiff-bank raised triable issues regarding the role of P3, defendant-bank’s sales affiliate, in the sale of the notes to plaintiff. Evidence exists that could be held to demonstrate that defendant-bank used P3 for the specific purpose of placing the P2 notes and side letter, and the alleged misrepresentations they contained, in the marketplace.

Here, a triable issue was raised regarding whether plaintiff-bank performed adequate due diligence before purchasing the notes and whether it relied on certain statements in the notes and side letter and, if so, whether its reliance was reasonable in the circumstances.

In determining whether the plaintiff-bank relied on allegedly fraudulent misrepresentations and whether such reliance was reasonable or justifiable, the Court must “focus on the level of sophistication of the parties, the relationship between them, and the information available at the time of the operative decision”. A criminal party may be found to have reasonably relied on another party’s written representations, if the documents would not, on their face, have alerted the party to potential fraud. Clearly, then, whether justifiable reliance exists presents an issue of fact.

Indeed, it was proven that plaintiff-bank would not have purchased the notes were it not for the representations in the notes and side letter. These representations include the purpose of the notes to finance trade expansion by P1’s South American subsidiaries and export projections indicating that there would be sufficient cash flow to repay the notes in full when they came due. Based on these representations and under common banking practices, there was no need for plaintiff-bank to question P3, defendant-bank, or P2 to clarify or confirm the representations. At any rate, plaintiff-bank did perform satisfactory due diligence by reviewing the notes and side letter and contacting P3.

Summary judgment on the aiding-and-abetting-fraud claim is denied.

In claims of aiding and abetting fraud, the essential elements are: knowledge of the fraudulent nature of the representations; and, rendering substantial assistance to the principal actor.
Here, it was established that defendant-bank gave affirmative assistance to P1 in connection with marketing notes that it knew to be fictitious; and, concealed information it independently obtained about P1’s financial condition from the Risk Center, in order to provide P1 with the financial liquidity it required to remain in business while permitting criminal defendant-bank to reduce its exposure to P1 by restructuring its risk.

Defendant-bank now sought to reduce by one-third the amount of compensatory damages sought by plaintiff-bank under its fraud claim.

According to criminal defendant-bank, plaintiff-bank sold a $5,000,000 participation in the notes to an affiliate incorporated in Luxembourg (plaintiff-bank Luxembourg) and was reimbursed by plaintiff-bank’s parent company, plaintiff-bank B.M., for its loss after P1 collapsed; thus, plaintiff-bank can sue only to recover $9,687,631.57, or, two-thirds of the purchase price of the discounted notes.

Plaintiff-bank opposed and claimed that it had standing as an agent for plaintiff-bank Luxembourg to maintain an action for damages on its behalf pursuant to the terms of a sub-participation agreement.

According to plaintiff-bank, it entered into a sub-participation agreement with plaintiff-bank Luxembourg, pursuant to which plaintiff-bank Luxembourg purchased a $5,000,000 participation in the notes, which it in turn sold to plaintiff-bank B.M., the parent of both plaintiff and plaintiff-bank Luxembourg; and, pursuant to the express terms of the sub-participation agreement, it is required to act “in trust” for its affiliate participant and to “take such steps as shall be reasonably necessary in order to collect any amount then due and unpaid” on behalf of the participant. Under the agreement, any amounts collected by plaintiff-bank are to be distributed pro rata between itself and its participant.

Here, criminal defendant-bank did not dispute that the agreement exists or that the agreement contains the terms as described by plaintiff-bank. Thus, that branch of the motion seeking to reduce the amount of compensatory damages by one-third is denied, with leave to renew at trial.

Defendant-bank now sought summary judgment in its favor on the punitive damages claim on grounds that the fraudulent conduct alleged was not aimed at the public generally and did not involve high moral culpability.

Plaintiff-bank opposed and claimed that punitive damages were warranted because it is in the public interest to ensure that foreign banks regulated by the State Department of Banking conduct their affairs fairly and honestly and not perpetrate frauds on the international banking community.

Under the law, compensatory damages are intended to have the wrongdoer make the victim whole. This is to assure that the victim receives fair and just compensation commensurate with the injury sustained. Punitive criminal damages, on the other hand, are not to compensate the injured party but rather to punish the tortfeasor and to deter this wrongdoer and others similarly situated from indulging in the same conduct in the future. Subjecting a wrongdoer to punitive damages serves to deter future reprehensible conduct. Clearly, the term “exemplary damages” is a synonym for punitive damages. Punitive damages are permitted when the defendant’s wrongdoing is not simply intentional but “evinces a high degree of moral turpitude and demonstrates such wanton dishonesty as to imply a criminal indifference to civil obligations”. In Prozeralik v Capital Cities Communications which was decided in 1993, the Court held that punitive damages may be sought when the wrongdoing was deliberate “and has the character of outrage frequently associated with crime”. The misconduct must be exceptional, “as when the criminal wrongdoer has acted maliciously, wantonly, or with a recklessness that betokens an improper motive or vindictiveness or has engaged in outrageous or oppressive intentional misconduct or with reckless or wanton disregard of safety of rights.”

Here, assuming that plaintiff-bank proves its fraud claims, an award of punitive damages may be warranted. By reason of public interest, it must be ensured that branches of foreign banks regulated by the New York State Department of Banking conduct their affairs within this state and within the international banking community with honesty and free from fraud or an utter disregard for the truth of the representations set forth in documents these banks are marketing to the public.

In sum, the motion is denied, with the limited exception that the branch of the motion to reduce the amount of compensatory damages is denied, with leave to renew at trial.

New York Bank Fraud Lawyers or New York White Collar Crime Lawyers at Stephen Bilkis & Associates are experts when it comes to cases like the one discussed above. If you have questions regarding the fields of law mentioned, please do not hesitate to ask for our assistance. Just dial our toll free number or visit our place of business.

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