Judge puts off JP Morgan insurer suit ruling
By Mary Kelleher
NEW YORK, Feb 27 (Reuters) - A federal judge on Wednesday put off ruling on a request from J.P. Morgan Chase & Co. Inc. <JPM.N> for immediate payment of $965 million from a group of insurers for natural gas and oil that bankrupt energy trader Enron Corp. <ENRNQ.PK> failed to deliver.
Judge Jed Rakoff told a packed Manhattan federal courtroom he hoped to make a decision by the end of next week and put related proceedings on hold until he rules. Rakoff must decide whether to hold a trial and let parties dig up evidence, or force the insurers to pay out on so-called surety bonds Enron bought from them to guarantee commodity contract deliveries.
"To me the matter in this very interesting motion is not exactly on point with any case that I've read," Rakoff told the court, after an hour-long questioning of both parties' legal teams. "It seems to me somewhat sui generis."
"I have not made up my mind about any issue in this case," Rakoff said.
J.P. Morgan wants speedy payment on the bonds, which pay out when a company fails to finish a project or make a delivery or scheduled payment. It sued 11 insurers in December over the money, which amounts to about half of its $2.06 billion Enron exposure, after Enron went bankrupt and failed to ship the gas and oil to two offshore entities called Mahonia. It is seeking summary judgment on the case.
The insurers, which include Chubb Corp. <CB.N>, CNA Financial Corp. <CNA.N> and Citigroup Inc.'s <C.N> Travelers Property, dispute the payments, saying they did not understand the nature of the deals they were insuring.
They allege the sale contracts appear to be part of a complicated and undisclosed loan from J.P. Morgan to Enron through the bank's Jersey Island Mahonia entities, not genuine agreements for the purchase and sale of a physical commodity.
"Under New York law, fraud can't be waived," a defendants' attorney Celia Goldwag Barenholtz told the court, arguing the insurers allegedly were deceived about the purpose of the forward sale contracts that the surety bonds guaranteed.
When Enron entered into a surety bond-backed December 2000 forward sale contract to sell gas to Mahonia, it also entered into another contract to buy the same amount of gas in the same months at nearly the same price from a firm called Stoneville Aegean Ltd, Barenholtz told the court, citing a letter as evidence the December 2000 contract was a disguised loan to Enron not a genuine contract for delivery of the commodity.
Stoneville and Mahonia were set up by the same law firm, Mourant & Co; have the same director, Ian James; and the same shareholders, Barenholtz told the court.
"Why would Enron agree to sell gas to Mahonia only to buy the same amount of gas back from Stoneville?" the defendants ask in a court filing. "The arrangement makes sense only if the December 2000 contract was a mechanism to contrive a loan to Enron, and the Stoneville agreement was a mechanism for Enron to repay the money with interest."
Insurers are not permitted by law to use surety bonds to guarantee loans, the defendents argue. When asked by the judge, Barenholtz said it might take six months or less to unearth all the necessary evidence.
U.S. banking regulators also are looking into how J.P. Morgan accounted for certain trades made with Enron. The review centers on the Mahonia operations.
J.P. Morgan, a leading Enron creditor, for its part argues the insurers must pay up on the bonds even if there was a violation of the underlying forward sale contracts because the bonds are "absolute and unconditional."
"If they include that language, they've done so for the sake of making these guarantees bullet-proof," J.P. Morgan attorney John Callagy told the court. "Lawyers are writing these guarantees as we speak."
J.P. Morgan has claimed oil and gas were sent to Mahonia under forward sale contracts through November 2001. Defendants' counsel reviewed the bond deals during the negotiations, and said they were valid obligations, J.P. Morgan alleged.
The Mourant law firm also set up the Mahonia operations in 1992 at the behest of a charitable trust which beneficially owns shares in Mahonia, Callagy told the court. J.P. Morgan and Enron do not have direct interest in Mahonia, he said. The bank is suing the insurers for and on behalf of Mahonia.
"The sureties' much-publicized refusal to pay and meritless fraud allegations have caused significant reputational damage to J.P. Morgan Chase, to say nothing of putting over $1 billion dollars at risk," the bank wrote in a Feb. 22 court filing, requesting summary judgment from the court.
J.P. Morgan's share of $1.1 billion in allegedly overdue total surety bond payments is $965 million.
"Our belief is that from day one this case is about a commitment made and a commitment not kept," a J.P. Morgan spokesman said after the hearing. "We believe we are entitled to a summary judgment and will ultimately prevail in this case."
19:47 02-27-02 |
