Mahonia Ltd v JP Morgan Chase Bank
| Jurisdiction | England & Wales |
| Judge | The Honourable Mr. Justice Cooke,Mr Justice Cooke |
| Judgment Date | 03 August 2004 |
| Neutral Citation | [2004] EWHC 1938 (Comm),[2003] EWHC 1927 (Comm) |
| Docket Number | Case No: 2001/1400 |
| Court | Queen's Bench Division (Commercial Court) |
| Date | 03 August 2004 |
[2004] EWHC 1938 (Comm)
IN THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION COMMERCIAL COURT
Royal Courts of Justice
Strand, London, WC2A 2LL
The Honourable Mr Justice Cooke
Case No: 2001/1400
Lord Grabiner QC, Mr Laurence Rabinowitz QC, Ms Clare Reffin and Mr David Wolfson, Mr Steven Elliott (instructed by Slaughter and May, Solicitors, London) for the Claimant
Mr Michael Brindle QC and Mr Derrick Dale (instructed by Berwin Leighton Paisner, Solicitors, London) for the Defendant
Hearing dates: June 14 th, 15 th, 16 th, 17 th, 21 st, 22 nd, 23 rd, 24 th, 28 th, 29 th, 30 th; July 1 st, 5 th, 6 th, 7 th, 8 th, 16 th, 23 rd, 26 th
Approved Judgment
I direct that pursuant to CPR PD 39A para 6.1 no official shorthand note shall be taken of this Judgment and that copies of this version as handed down may be treated as authentic.
Index
| Introduction | page 3 |
| West's Defences / Causes of Action | page 6 |
| Prepay transactions | page 8 |
| Chase I - XI | page 9-18 |
| Chase XII | page 19 |
| Mahonia | page 23 |
| The Nature of Chase XII | page 35 |
| The West Facility Agreement | page 46 |
| The Effect of the Facility Agreement | page 55 |
| The alleged Collateral Agreement/Representation/Estoppel | page 58 |
| The 4 th October 2001 telephone conversation | page 77 |
| ENAC's Accounting & US G.A.A.P | page 82 |
| Materiality | page 120 |
| US Law | page 123 |
| Andersens views | page 135 |
| Enron's understanding | page 140 |
| Chase's knowledge | page 145 |
| Mahonia's Knowledge | page 172 |
| Conspiracy between Chase, Mahonia & Enron to devise a transaction to enable Enron wrongfully to account, in breach of US Securities Law | page 180 |
| Conspiracy between Enron, Mahonia & Chase to mislead West to obtain the L/C | page 190 |
| The Hypothetical Situation - what West would have done | page 197 |
| Illegality | page 213 |
| Conclusions | page 220 |
Mr Justice Cooke
INTRODUCTION
In this action the Claimant ("Mahonia") claims on a letter of credit (the "L/C") issued by the Defendant, WestLB AG ("West") on 5 th October 2001, at the request and for the account of Enron Corporation ("Enron") on behalf of its subsidiary, Enron North America Corp ("ENAC"). The amount payable under the L/C is $165 million. Demand was made under this L/C on 5 th December 2001 and it is common ground that a conforming document, namely an Event of Default Statement, was presented for payment there under. It is accepted that the burden is on West to establish a defence in relation to the circumstances in which the L/C came to be issued if judgment is not to be given against it. This matter came before Colman J on applications by Mahonia to strike out the defences or to grant summary judgment in its favour which he refused in a judgment given on 30 th July 2003.
West is a German bank with offices in London, New York, Houston and elsewhere. Mahonia is a special purpose vehicle (SPV) incorporated in Jersey. The other party to the action is JP Morgan Chase Bank ("Chase"), at whose instance Mahonia was incorporated and with whom Chase concluded transactions parallel to those concluded by Mahonia with ENAC. West also has a Part 20 claim against Mahonia and Chase, should its defences fail. In essence West maintains that the L/C was induced by fraud or conspiracy, that it is unenforceable because of the illegal purpose for which it was issued or alternatively that West can recover damages for the fraud or conspiracies in which Mahonia and Chase were involved.
At the time of the transaction Enron was a primary customer of both Chase and West and each bank was one of Enron's primary ("Tier 1") banks. Although much discredited since its sudden and dramatic collapse, precipitated by revelations of its involvement in plainly questionable off -balance sheet transactions, throughout the period with which this action is concerned Enron was considered one of the world's most successful companies, employing innovative methods to raise what was referred to as "structured finance". Enron's auditor at the time was Arthur Andersen ("Andersens"). Andersens, like Enron itself, was held in high regard, as one of the major international auditing firms.
West issued the L/C under a committed bank instrument facility dated 10 th September 2001 ("the Facility Agreement"). Issues arise as to whether it was bound to do so and whether the L/C is unenforceable by reason of illegality. The L/C had been requested by Enron, pursuant to an Instrument Request ("the Instrument Request") in order to support a Swap transaction entered into by ENAC with Mahonia ("the ENAC/Mahonia Swap"). The Instrument Request referred only to this single Swap. The beneficiary of the L/C was stated by Enron to be Mahonia.
Shortly after the L/C was issued on 5 th October 2001, Enron's financial difficulties began to come to light. On 16 th October 2001, Enron published its third-quarter results which reported a non-recurring charge of $1.01billion. On 8 th November 2001, Enron filed a form 8K with the SEC in which it gave notice of its intention to restate its accounts going back to 31 st December 1997 and confirmed that its previous accounts could not be relied on. On 19 th November 2001, Enron made a 10Q filing with the US Securities Exchange Commission (the SEC) and on 2 nd December 2001, Enron went into Chapter 11 Bankruptcy. An event of default having thus occurred under the L/C, demand was made by Mahonia on 5 th December 2001.
It is common ground between the parties that there were two other Swaps which related to the ENAC/Mahonia Swap. The two other Swaps were the "Mahonia/Chase Swap" and "the ENAC/Chase Swap". These Swaps provided for fixed and floating payments in opposite directions. The fixed payments in the ENAC/ Mahonia swap and the Mahonia/Chase swap, which were made on 28 th September 2001, amounted to $350 million (less an agreed arrangement fee of $1 million to Chase). Chase paid this sum to Mahonia under the Mahonia/Chase Swap and Mahonia paid it to ENAC under the ENAC/Mahonia Swap. Under the ENAC/Chase Swap, the fixed payment which ENAC agreed to pay Chase was $355,961,248.40, payable on 26 th March 2002. In each Swap contract, the floating payments under the Three Swaps were calculated by reference to the price of a notional quantity of gas, being 127, 923, 977 Mmbtu of Natural Gas, multiplied by the settlement price on 25 th March 2002 of the Nymex Henry Hub Gas Futures Contract for the April 2002 delivery month. The effect of these Three Swap transactions was that $350 million was paid by Chase to Mahonia and by Mahonia to Enron in September 2001 and Enron was obliged, approximately six months later, to pay a sum amounting to approximately $356 million to Chase. Because the floating payments were exactly the same in each of the Three Swap transactions, the ultimate effect, if all parties performed their obligations, was to provide Enron with $350 million (less $1 million arrangement fee) for a period of about six months, for which it was obliged to pay a figure which equated to repayment of a loan of $350 million with an effective annual interest rate of 3.44%. It is clear that the figure of $356 million was calculated specifically by reference to interest rates.
Issues arise between the parties as to the proper characterisation of these transactions and the appropriate method of accounting for them in Enron's balance sheet and financial accounts. In simple terms, West maintains that these transactions constitute a loan, that they should have been the subject of accounting as a loan and that the existence of the 3 limbs of the composite transaction and its nature as a loan should have been disclosed prior to its issue of the L/C. In wrongly accounting for it, Enron acted in breach of US GAAP (Generally Accepted Accounting Principles) and thus in breach of the US Securities Exchange Act of 1934.
WEST'S DEFENCES / CAUSES OF ACTION
West contends that it is entitled not to pay the demand made under the L/C or is entitled to cross-claim against Mahonia and Chase because it has six defences or causes of action:
i) Mahonia and Chase were party to a conspiracy with Enron to devise a transaction to enable Enron wrongfully to account for the transaction in breach of US Securities law. The transaction involving the Three Swaps and the L/C was part of this conspiracy enabling Enron to account wrongfully for the proceeds of the transaction and thereby commit a breach of US Securities law. The bank asked to issue the L/C in support of one leg of the swaps would inevitably suffer loss by relying on the apparent financial strength of Enron and the apparent legality of the purpose behind the ENAC/Mahonia Swap.
ii) Mahonia and Chase were party to a conspiracy to obtain the L/C. The allegation is that Enron/Chase conspired to obtain the L/C (which secured the disguised loan from Chase to Enron) by misleading the bank issuing the L/C (West) as to the underlying transaction, the true purpose behind the L/C and the real obligation that the L/C would secure.
iii) West contends that in the course of a conversation on 4 th October 2001 Mr Levy of Chase expressly or impliedly represented to West that the underlying transaction was a Swap transaction and that the real obligation secured by the L/C was the ENAC/Mahonia Swap, whereas in fact the transaction secured a disguised loan between Enron and Chase.
iv) West contends that the transaction involving the Three Swaps and the L/C is illegal, whether directly or pursuant to the doctrine of taint, as the purpose behind it was to enable Enron to...
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