57 F.3d 146 (2nd Cir. 1995), 817, Banque Arabe Et Internationale D'Investissement v. Maryland Nat. Bank

Docket Nº:817, 982, Dockets 94-7571, 94-7595.
Citation:57 F.3d 146
Party Name:BANQUE ARABE ET INTERNATIONALE D'INVESTISSEMENT, Plaintiff-Appellant-Cross-Appellee, v. MARYLAND NATIONAL BANK, Defendant-Appellee-Cross-Appellant, 1 East 93 Associates; 36 East 64th Associates; 51st Owners Corp.; 55 West 89th Associates; 107 East 63rd Owners Corp.; 405 East 72nd Owners; 57 West 89th Associates; 342 East 67th Owners Corp., Defendan
Case Date:May 11, 1995
Court:United States Courts of Appeals, Court of Appeals for the Second Circuit
 
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Page 146

57 F.3d 146 (2nd Cir. 1995)

BANQUE ARABE ET INTERNATIONALE D'INVESTISSEMENT,

Plaintiff-Appellant-Cross-Appellee,

v.

MARYLAND NATIONAL BANK, Defendant-Appellee-Cross-Appellant,

1 East 93 Associates; 36 East 64th Associates; 51st Owners

Corp.; 55 West 89th Associates; 107 East 63rd Owners

Corp.; 405 East 72nd Owners; 57 West 89th Associates; 342

East 67th Owners Corp., Defendants.

Nos. 817, 982, Dockets 94-7571, 94-7595.

United States Court of Appeals, Second Circuit

May 11, 1995

Argued Jan. 19, 1995.

Page 147

John K. Carroll, New York City (Joseph H. Levie, Mark Holland, Donald E. Griffith, Shannon R. Clark, Rogers & Wells, of counsel), for plaintiff-appellant-cross-appellee.

James A. Moss, New York City (Darlene Fairman, Jonathan S. Lawlor, Herrick, Feinstein, of counsel), for defendant-appellee-cross-appellant.

Before: WALKER, JACOBS, and CALABRESI, Circuit Judges.

JACOBS, Circuit Judge:

In 1988, Maryland National Bank ("MNB") financed a real estate venture for the conversion of several New York City apartment buildings to cooperative or condominium ownership, and sold participations in that $35 million mortgage loan to other banks. A $10 million participation was sold to BAII Banking Corporation ("BAII"), an American subsidiary of Banque Arabe et Internationale D'Investissement ("Banque Arabe"). Banque Arabe, as transferee from BAII, asserts (among other things) that MNB fraudulently failed to disclose that the developer was experiencing a regulatory delay in obtaining necessary approvals for the conversions at the time Banque Arabe made its funding decision. On a motion for summary judgment, the United States District Court for the Southern District of New York (Ward, J.) dismissed Banque Arabe's claim for negligent misrepresentation, among others. We affirm the dismissal of the negligent misrepresentation claim. Following a bench trial on the sole remaining count--common law fraud--Judge Ward determined that Banque Arabe lacked standing as a transferee to assert the fraud claim and that, in any event, Banque Arabe failed to prove scienter or fraudulent intent. Judgment was entered dismissing the complaint. We affirm the dismissal of the fraud claim and the judgment;

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however, we do so on the somewhat different ground that, as a matter of law, MNB had no duty under the terms of Banque Arabe's participation to disclose the current regulatory status of the conversions, and that Banque Arabe could not have relied reasonably on MNB for readily available information concerning a disclosed regulatory risk.

I. Background

A detailed account of the events and transactions in this case is set forth in Judge Ward's opinion granting in part and denying in part MNB's motion for summary judgment, Banque Arabe et Internationale D'Investissement v. Maryland Nat'l Bank, 819 F.Supp. 1282 (S.D.N.Y.1993) (Banque Arabe I ), and in Judge Ward's opinion granting judgment in favor of MNB, Banque Arabe et Internationale D'Investissement v. Maryland Nat'l Bank, 850 F.Supp. 1199 (S.D.N.Y.1994) (Banque Arabe II ). We iterate only those facts that bear upon and are necessary to resolve the issues raised on appeal.

On June 23, 1988, MNB extended a mortgage loan in the principal amount of $35 million to eight real estate partnerships owned and controlled by Robert K. Marceca (the "Marceca Loan"). The loans were secured by mortgages on eight rent-controlled or rent-stabilized apartment buildings in New York City (the "Marceca Properties"). The proceeds of the loans were to be used to refinance, renovate and convert the buildings to cooperative or condominium ownership. After packaging the loans, MNB arranged the sale of four participation interests, totalling $25 million, to other unaffiliated banks. The fourth and last participation agreement, in the principal amount of $10 million, was sold on September 29, 1988 to BAII, which was then Banque Arabe's American subsidiary (the "Participation Agreement").

MNB had first approached BAII concerning the Marceca Loan in May 1988. The following month, as part of the ensuing arm's length negotiations, MNB gave BAII a projected loan repayment schedule prepared by Marceca. Both parties understood that the projected principal payments were to be funded out of the proceeds of converting the Marceca Properties to cooperative or condominium ownership. In addition, BAII was aware that the repayment schedule was based on a number of assumptions, including: (a) that the first projected repayment allocable to each building would be made at the time of the closing of the conversion of the building to either cooperative or condominium ownership; and (b) that the closing of the conversion of each building would occur approximately 90 days after an offering plan for the conversion was accepted for filing by New York State's Department of Law ("Department of Law"). 1

In June and July, BAII conducted its own due diligence and credit analysis of the Marceca Loan. Officers of BAII reviewed documents provided by MNB, conducted numerous conversations with MNB, and met individually with Marceca. After completing its due diligence on or about July 13, BAII decided to purchase the $10 million participation interest and so advised MNB. As a condition to its participation, however, BAII required that the Marceca Loan be "cross-collateralized" such that the proceeds from the sale of each apartment in any building would be applied fractionally to all of the eight partnerships. The cross-collateralization negotiations lasted nearly two months. At no time during its due diligence investigation or subsequent negotiations did BAII request any information or documents from MNB, Marceca or the Department of Law concerning the progress in obtaining regulatory approvals for converting the Marceca Properties.

No apartment building may be converted to cooperative ownership in New York State until the conversion plan has been accepted for filing by the Department of Law. As detailed in the district court opinions, the conversion occurs in several steps. First, the sponsor submits a draft proposal, referred to as a "red herring," to which the Department of Law must respond within six months. The Department of Law can accept

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it in the form proposed, reject it outright, or issue a deficiency letter and allow the sponsor an opportunity to cure. Once the Department of Law determines that the conversion plan fully and fairly discloses the nature of the transaction and satisfies other regulatory and statutory requirements, the sponsor is notified that the plan will be accepted upon submission of the final corrected version, called a "black book". The conversion plan does not become final, however, until a designated percentage of a building's occupants enter into subscription agreements to acquire their apartments. Once that percentage is achieved, the sponsor files an amendment with the Department of Law, the conversion is declared effective, and the closing on the conversion may then take place. After the conversion plan is accepted, a minimum of 90 days typically elapses before the closing.

At the time the Marceca Loan closed on June 23, 1988, Marceca had submitted red herrings for two of the eight properties. As of July 13, the date BAII completed its due diligence, the regulatory status of the Marceca Properties was unchanged. On August 9, however, the Department of Law issued a deficiency letter informing Marceca that, because the mortgage agreement afforded MNB the right to approve the terms of the conversion plan, MNB was deemed a "co-sponsor" and should have been identified as such in the red herring's disclosure of sponsorship. This deficiency is referred to hereinafter as "the co-sponsorship issue". Marceca informed MNB of the co-sponsorship issue soon thereafter. On August 18, MNB wrote to the Department of Law explaining that MNB was a lender and was not actively involved with the conversion of the Marceca Properties. In mid-September, Marceca informed MNB that the Department of Law would be considering the co-sponsorship issue at a hearing scheduled for September 22 and that Marceca expected the issue to be resolved quickly. The co-sponsorship issue, however, remained unresolved until January 1989, when MNB agreed to modify the loan documents to eliminate the offending term of the mortgage.

On September 29, 1988, BAII executed the Participation Agreement committing it to purchase $10 million of the Marceca Loan. The Participation Agreement specifically addressed issues of disclosure and due diligence:

The Participant [BAII] acknowledges that it has reviewed all such relevant documents and financial statements as it deemed appropriate or necessary at the time and has had access to all of the records of the Borrowers and of the Lender [MNB] it wished to have, and an opportunity to make such inquiry of the Lender as to the Borrowers' financial conditions and as to the arrangements between the Borrowers and the Lender, and, has, in fact, made inquiry of the Lender in connection therewith to the extent the Participant felt such inquiry necessary or appropriate.

* * * * * *

The Participant acknowledges that it has, independently and without reliance upon the Lender and based on such documents and information as the Participant has deemed appropriate or necessary, made its own credit analysis and decision to enter into this Participation Agreement. The Participant acknowledges that it has not relied upon any investigation performed by the Lender or upon any financial summaries, or credit memoranda or appraisals prepared by or on behalf of the Lender.... The Participant further acknowledges that it will, independently and without reliance upon the Lender and based on such documents and information as the Participant shall deem...

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