Banque Arabe v. Maryland Nat. Bank

• Decision Date: 04 May 1994
• Docket Number: No. 90 Civ. 6433 (RJW).,90 Civ. 6433 (RJW).
• Citation: 850 F. Supp. 1199
• Parties: BANQUE ARABE ET INTERNATIONALE D'INVESTISSEMENT, Plaintiff, v. MARYLAND NATIONAL BANK, Defendant.
• Court: U.S. District Court — Southern District of New York

850 F. Supp. 1199

BANQUE ARABE ET INTERNATIONALE D'INVESTISSEMENT, Plaintiff, v. MARYLAND NATIONAL BANK, Defendant.

No. 90 Civ. 6433 (RJW).

United States District Court, S.D. New York.

May 4, 1994.

COPYRIGHT MATERIAL OMITTED

Joseph H. Levie, John K. Carroll, Mark Holland, Donald E. Griffith, Rogers & Wells, New York City, for plaintiff.

Harvey S. Feuerstein, James A. Moss, Susan L. Meekins, Herrick, Feinstein, New York City, for defendant.

ROBERT J. WARD, District Judge.

On April 23, 1993, this Court issued an opinion granting in part and denying in part defendant Maryland National Bank's ("MNB") motion for summary judgment against plaintiff Banque Arabe et Internationale d'Investissement ("Banque Arabe"). 819 F.Supp. 1282 (S.D.N.Y.1993) ("Banque Arabe I"). As a result of that decision, only claims for breach of contract and fraudulent inducement remained for trial.¹ Following discovery, however, plaintiff abandoned the breach of contract claim and sought only damages for rescission under the fraud claim.

Plaintiff alleges that defendant fraudulently induced BAII Banking Corp. ("BAII"), a former subsidiary of Banque Arabe, into purchasing a participation interest in a real estate loan by failing to disclose material information and by making material misrepresentations prior to execution of a participation agreement. MNB denies the allegations of fraud and counters that plaintiff is procedurally barred from bringing a fraud claim. In particular, MNB argues that Banque Arabe is not the real party in interest and, therefore, lacks standing. It also asserts that plaintiff ratified the participation agreement by failing to assert the fraud claim in a timely fashion and by accepting benefits under the agreement after being put on notice of facts sufficient to inquire about the fraud.

The Court conducted a bench trial on November 3-10, 1993. Upon a review of the evidence and testimony offered at trial, the parties' pre and post-trial submissions and the applicable law, the Court issues this opinion, which constitutes its findings of fact and conclusions of law, pursuant to Rule 52, Fed. R.Civ.P. For the following reasons, the Court finds that Banque Arabe lacks standing to assert a fraud claim in this action but that it raised its rescission claim in a timely fashion and it did not ratify the participation agreement. The Court also finds that Banque Arabe has failed to prove intent to defraud on the part of MNB by clear and convincing evidence.

BACKGROUND

The factual background of this case has already been recited in Banque Arabe I, with which familiarity is presumed. However, Banque Arabe I was based on stipulated facts submitted exclusively for the purposes of the summary judgment motion. Subsequent to discovery, the parties revised the stipulated facts and submitted the newer version together with their pre-trial order. Therefore, the Court deems it necessary to restate those facts pertinent to the issues raised at trial.

A. The Marceca Loans and the Participation Agreement

The loan at issue was a mortgage loan arranged by MNB's merchant banking affiliate, MNC International Bank ("MNCIB"), in June 1988 for real estate developer Robert K. Marceca ("Marceca") and partnerships owned or controlled by him (the "Marceca borrowers"). Referred to as the Marceca II loan, it was divided into two portions with the first having an original principal amount of $35 million and the second an original principal amount of $12.5 million. The loan's purpose was to provide the Marceca borrowers with the funds necessary to refinance, renovate and convert to condominium or cooperative use eight rent-controlled or rent-stabilized apartment buildings in Manhattan. Marceca personally guaranteed payment of principal and interest on the first mortgage component but only payment of interest on the second mortgage component. Before the Marceca II loan was made, the gross retail sellout value of the properties collateralizing the loan after conversion to cooperative ownership was estimated at $59,345,000 (the "appraisal"). The appraisal was based upon various factual assumptions, including that one hundred percent of the units would be sold at "outsider" prices.

In December 1987, prior to Marceca II, MNB had acquired a first Marceca loan, known as the Marceca I loan, from London Interstate Bank. Marceca I had an original principal amount of $50 million on which Marceca personally guaranteed payment of interest. The loan was secured by sixteen rent-controlled or rent-stabilized Manhattan apartment buildings. While MNB did not seek participation in the Marceca I loan, it did intend to seek the participation of other banks under the first portion of Marceca II to other banks.

Toward the end of May 1988, MNCIB officials had contacted prospective participants, including BAII, and requested commitments by mid-June.² Almost immediately, BAII engaged in arm's length negotiations with MNCIB and BAII vice president Maurice Nhan ("Nhan") drafted a credit analysis of the Marceca II loan, based on documents supplied to it by MNCIB officials. Included in these documents were schedules of projected principal prepayments which had been prepared by the Marceca II borrowers in June 1988 (the "June projections" or the "paydown schedules"). The Marceca borrowers advised MNB that they expected to make the projected prepayments from the conversion proceeds. The June projections were based on a number of assumptions, including, inter alia, that (a) the first projected repayment allocable to each building would be made at the time of the closing of the building to cooperative ownership, and (b) the closing of the conversion of each building would occur ninety days after an offering plan for the conversion of the building was accepted for filing by the New York State Department of Law (the "AG" or the "Department of Law"). In June 1988, BAII recognized that the paydown schedules were projected prepayments of the Marceca II loan, but they also understood the projections to be realistic.

In addition, to its documentary analysis of the Marceca II loan, BAII conducted a due diligence investigation. Nhan, in particular, met with Marceca at the developer's office and inquired about the eight properties collateralizing the Marceca II loan. Although an MNCIB official was present for the first ten to fifteen minutes, the balance of the hour-long meeting was a "broad conversation" between Nhan and Marceca. Nhan Dep. at 76-77. While they discussed the real estate market in New York, the Marceca properties and Marceca's experience, Nhan did not make specific inquiry regarding renovations at any of the buildings nor did he review with Marceca any of the documents he had received from MNB. Nhan also spoke with others in the real estate business in order to familiarize himself with the cooperative and condominium conversion process in general.

Based upon its credit analysis and due diligence investigation, BAII decided to purchase a $10 million participation interest in the Marceca II loan. BAII indicated in a letter dated July 13, 1988 that it was committed to participating in the loan (the "Commitment Letter"). As a condition to its purchase of the participation interest, BAII required that the Marceca II loan be "cross collateralized," such that a portion of the proceeds from sales of units in each of the Marceca II properties be applied to pay down portions of the loan allocable to the other properties. It took approximately six weeks for MNB to obtain the Marceca borrowers' agreement to this condition. On September 29, 1988, BAII executed a participation agreement with MNB, which became effective on October 3, 1988, when the participant paid $10 million to the lead bank and, in return, received a fee of $200,000 (the "Participation Agreement"). In the Participation Agreement, BAII warranted that its participation was based on independent investigation and not as the result of documents and information supplied by the lead bank.

B. The Co-Sponsorship Issue

Repayment of the Marceca II loan depended on the Marceca borrowers successfully converting the properties to cooperative ownership. As was explained in Banque Arabe I, in New York, a closing cannot occur until the sponsor completes a three stage process that results in the plan being declared effective by the Department of Law. The three stages include: (1) the "red herring" stage during which a draft plan is submitted by the sponsor to the Department of Law and to the existing tenants in the building; (2) the "black book" stage when a final plan is allowed to be filed because the Department of Law has determined there to be full and fair disclosure in the plan as well as complete regulatory and statutory approval; and (3) the "post effective" stage at which time the sponsor enters into subscription agreements with the tenants and files an amendment to the plan declaring it effective. Typically, the closing does not take place until at least ninety days after the Department of Law accepts the plan, and usually occurs later.

Conversion of the Marceca properties, in fact, was delayed, because the Department of Law raised questions concerning the sponsorship of the Marceca loans as disclosed in some of the offering documents (the "co-sponsorship issue"). In particular, MNB had not been identified as a co-sponsor, even though it had a right under the Marceca mortgages to approve the terms of the offering plans.

The co-sponsorship issue was raised prior to the execution of the Participation Agreement but subsequent to the issuance of the Commitment Letter. On August 9, 1988, the Department of Law notified Marceca of sponsorship problems in the offering plans for some of the properties and indicated that it was referring the matter to the Enforcement Division. Marceca informed MNCIB officials of the co-sponsorship issue in mid-August 1988. On August 18, R.B. Diffenderfer ("Diffenderfer"), one of the MNCIB...