193 F.3d 818 (4th Cir. 1999), 98-1659, Bank of Montreal v. Signet Bank

Docket Nº:98-1659, No. 98-1749 (CA-97-350-3).
Citation:193 F.3d 818
Party Name:BANK OF MONTREAL, Plaintiff-Appellee, v. SIGNET BANK, Defendant-Appellant. BANK OF MONTREAL, Plaintiff-Appellant, v. SIGNET BANK, Defendant-Appellee.
Case Date:October 06, 1999
Court:United States Courts of Appeals, Court of Appeals for the Fourth Circuit

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193 F.3d 818 (4th Cir. 1999)

BANK OF MONTREAL, Plaintiff-Appellee,


SIGNET BANK, Defendant-Appellant.

BANK OF MONTREAL, Plaintiff-Appellant,


SIGNET BANK, Defendant-Appellee.

No. 98-1659, No. 98-1749 (CA-97-350-3).

United States Court of Appeals, Fourth Circuit

October 6, 1999

Argued: January 25, 1999.

Appeals from the United States District Court for the Eastern District of Virginia, at Richmond.

Robert E. Payne, District Judge.

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COUNSEL ARGUED: Murray Hardison Wright, WRIGHT, ROBINSON, OSTHIMER & TATUM, Richmond, Virginia, for Appellant. Greg A. Danilow, WEIL, GOTSHAL & MANGES, L.L.P., New York, New York, for Appellee. ON BRIEF: Jonathan S. Geldhzahler, Paul D. Anders, WRIGHT, ROBINSON, OSTHIMER & TATUM, Richmond, Virginia, for Appellant. Harris J. Yale, Daniel S. Cahill, WEIL, GOTSHAL & MANGES, L.L.P., New York, New York; James L. Chapman, IV, CRENSHAW, WARE & MARTIN, P.L.C., Norfolk, Virginia, for Appellee.

Before WIDENER, MURNAGHAN, and HAMILTON, Circuit Judges.

Vacated and remanded by published opinion. Judge Murnaghan wrote the opinion, in which Judge Widener and Judge Hamilton joined.


MURNAGHAN, Circuit Judge:

Defendant Signet Bank ("Signet") appeals various rulings occurring during and after a trial in which the jury awarded the Plaintiff Bank of Montreal ("BMO") damages for fraud in the inducement of BMO's purchase of a non-recourse participation in a Signet credit facility. BMO cross-appeals from the grant of summary judgment against and dismissal of several of its claims. We affirm the district court's decision to dismiss the constructive fraud claim, the breach of contract claim, and several theories of fraud by omission. We also affirm most of the district court's evidentiary rulings. We hold, however, that the district court incorrectly allowed one theory of fraud to go forward, incorrectly instructed the jury on the scienter required for a concealment claim under Virginia law, and incorrectly denied admission of a key piece of evidence for Signet. Therefore, we vacate the judgment and remand for a new trial consistent with this opinion.


This case is another case arising from the fraudulent loan scheme orchestrated by Edward J. Reiners ("Reiners"). See Hitachi Credit America Corp. v. Signet Bank, 166 F.3d 614 (4th Cir. 1999); CoreStates Bank v. Signet Bank, Civ. No. 96-3199 (filed Apr. 23, 1996), 1997 WL 117010 (E.D. Pa. March 13, 1997) and 1996 WL 482909 (E.D. Pa. Aug. 26, 1996); In re Nelco Ltd., 210 B.R. 707 (Bankr. E.D. Va. 1997); United States v. Reiners , 934 F.Supp. 721

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(E.D. Va. 1996). Reiners, posing as Chief Operations Officer for a fictitious "top-secret off-shore project" supposedly conducted by Philip Morris Companies, Inc., known as "Project Star," convinced Signet to establish a credit facility in which several other banks eventually joined to loan hundreds of millions of dollars to Project Star. Eventually, Reiners' fraud was uncovered -Philip Morris was not involved in any way with Project Star and in fact there was no such project -and the banks involved in the Project Star credit facility lost large sums of money. Because Signet was a lead bank and arranged for the participation of several of the other banks, many of these banks have sued Signet. Although the facts behind Reiners' scheme have been described elsewhere, see Hitachi Credit, 166 F.3d at 619-623; Reiners, 934 F.Supp. at 721-22, they are repeated here insofar as they are relevant to the present appeal.


In the fall of 1993, Richard Nelson ("Nelson"), President of Nelco, Ltd., a computer leasing firm, contacted Signet about the possibility of providing financing for Project Star. Nelson told Connie Mooney ("Mooney") of Signet that Reiners had invited Nelco to arrange the leasing of computer equipment for Project Star. Nelson and Mooney were familiar with Reiners' name from prior deals in which Reiners had executed documents on behalf of Philip Morris for computer leasing transactions. Nelson repeated to Mooney the story that Reiners had told him -that Reiners was still employed with Philip Morris and that Project Star was a top-secret project being conducted offshore by Philip Morris which required large amounts of computer equipment. The participation of Philip Morris was a vital component of the security for the loans.

Reiners required Signet to sign a confidentiality agreement before proceeding with the transaction. Under this agreement, Signet had to treat all information concerning Project Star as confidential. Furthermore, the confidentiality agreement effectively prohibited Signet from contacting anyone at Philip Morris but Reiners regarding Project Star.1 Reiners told representatives of Signet that upon inquiry, Philip Morris would deny the existence of Project Star and would deny that Reiners was employed by Philip Morris.

In November of 1993 Reiners and Nelco entered into a computer leasing agreement (the "Master Lease"). At or near that same time, Signet extended the first of several large secured loans to Nelco so that Nelco could purchase the computer equipment required under the Master Lease (the "Credit Facility").

Apparently not satisfied with his initial fraudulent successes, Reiners began expanding the scope of Project Star. As a result, Nelco needed additional funding to meet Reiners' demands. Signet continued to meet the financing needs generated by Project Star. Eventually, Signet's exposure to Project Star became so high that it threatened to exceed external regulatory and Signet's own institutional limits on loans to one borrower. In order to maintain its status with regard to Project Star's financing, Signet began syndicating portions of the loans made under the Credit Facility in 1995. In March of that year, Signet contacted BMO about purchasing a participation. At the time, BMO was interested in expanding its business with Philip Morris.

On April 5, 1995, BMO executed a confidentiality agreement concerning Project Star (the "Confidentiality Agreement"), ostensibly with Philip Morris. Reiners required each potential participating bank to sign a confidentiality agreement before revealing Philip Morris as the lessee. BMO

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representatives testified that BMO had no reservations about signing the Confidentiality Agreement and did not consider the Confidentiality Agreement to be an impediment to its assessment of the creditworthiness of Nelco or Philip Morris. The Confidentiality Agreement did prevent BMO from contacting officials at Philip Morris as part of BMO's due diligence process.

Pursuant to its agreement with Signet (the "Participation Agreement"), BMO agreed to conduct its own, independent due diligence. See Participation Agreement § 6. Signet provided all of the documents that BMO requested. On April 13, 1995, BMO met with Signet and Nelco in Richmond, Virginia as part of BMO's due diligence. BMO never asked to review Signet's credit file. BMO did not visit Nelco's offices or request to review the Nelco files. Aside from one phone call with Reiners, BMO's only verification of Reiners' authority in Philip Morris was via an incumbency certificate which BMO obtained.

The Participation Agreement purported to limit Signet's liability in several ways. The Participation Agreement stated that Signet was not responsible for the "legality, validity, enforceability, [or] genuineness . . . of any document relating to any Participated Asset or any collateral for any Participated Asset." Participation Agreement § 7(d). Further, the Participation Agreement stated that Signet"shall incur no liability . . . by acting upon any . . . certificate or other instrument or writing believed by [Signet] to be genuine and signed or sent by the proper party." Participation Agreement § 7(e).

By the time the fraud was uncovered in March of 1996, BMO's total outstanding participation was $87.3 million. On June 26, 1997, BMO received approximately $63 million from the assets of Reiners recovered by the U.S. Attorney's office.

BMO sued Signet under a variety of legal theories. These claims revolve around several events and circumstances.

B. The Authorization Certificate and the Pickin' Parlor Notes

On October 15, 1993, Nelson presented Mooney with an"Authorization Certificate" which purported to authorize Reiners to sign documents related to Project Star on behalf of Philip Morris. The evidence is disputed as to exactly why, but Mooney told Nelson that Signet would be unable to lend money to finance Project Star based on the Authorization Certificate.

BMO maintains that Mooney rejected the Authorization Certificate because she thought it was a forgery -she thought the signature of Mike Miles, Chairman and Chief Executive Officer of Philip Morris, on the Authorization Certificate did not match Miles' signature in Philip Morris' most recent annual report.

At trial, BMO produced the "Pickin' Parlor Notes." Shortly after Mooney received the Authorization Certificate, she and Nelson had a telephone conversation in which Mooney articulated her concerns. Nelson memorialized this conversation on a "Pickin' Parlor" note pad. Nelson testified that he took the Pickin' Parlor Notes either while he was on the phone with Mooney or soon after he got off. According to Nelson's Pickin' Parlor Notes, as interpreted by BMO, Mooney told him that the "Miles signature [on the Authorization Certificate] appears diff[erent] from [his signature in the] Annual Rpt." (J.A. at 1496.) On Mooney's own copy of the Authorization Certificate, she had placed a question mark next to Miles' signature.

Mooney testified, though, that she had not...

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