Enron Surety Case Judge Eyes Fraud Issue

By Daniel Hays

NU Online News Service, Feb. 28, 1:46 p.m. EST, New York?A U.S. District Court judge heard a banking group's arguments yesterday that 11 surety insurers must honor $1 billion in claims related to Enron gas contracts, and peppered the bank attorney with questions about fraud before reserving a decision.

Judge Jed Rakoff in Manhattan said he would attempt to rule by the end of next week on the JPMorganChase Bank's demand for a summary judgement against Liberty Mutual Insurance Company and 10 other carriers.

After that announcement, the judge commented that the issue involved has no clear-cut legal precedents. "The motion is not on point with any case I've read," he said.

Insurers argue that they should not have to honor the surety bond coverage because it involved a fraud. According to the insurers they thought they were insuring gas trades, but the transactions involved were actually disguised loans.

The trades that the bank did with Enron were made through two offshore firms based on Jersey a Channel Island--Mahonia Ltd. and Mahonia Natural Gas Ltd.

JPMorgan contends that whatever the insurers believed, the transactions involved were legal and they had signed contracts that gave them no recourse.

John M. Callagy, with the New York office of Kelley Drye & Warren, representing JPMorgan, declared that the insurers were locked in. "The obligations they agreed to pay were absolute and unconditional," he said. What was involved, he said was a "bona fide prepaid commodity transaction."

Judge Rakoff, who was careful to say he had not made up his mind and was simply pressing Mr. Callagy with "illuminating questions," repeatedly asked him about the effect that fraud would have on the insurers' agreements, and legal precedents involving cases where fraud had been found.

Mr. Callagy said that the precedents cited by insurers in their briefs involved cases that were "riddled with fraud," which he said the case at hand did not involve.

Is the bank suggesting that "if a party is sophisticated, it's fair game for any fraud?" the judge inquired at one point.

Mr. Callagy said that in providing the coverage, the insurers "include language to make the guaranty bulletproof."

Celia Goldwag Barenholtz, of the New York firm Kronish, Lieb Weiner & Hellman, representing the insurers, told the judge that "under New York law, fraud cannot be waived" as an issue in a bond contract.

There is more than enough evidence, she said, that "the contracts were false."

In answer to a question from the judge, Ms. Barenholtz said that if the case were set for trial, she would need six months for pre-trial discovery proceedings to gather evidence.

The proceedings before Judge Rakoff yesterday began late in the afternoon and ended after 6 p.m., after extensive arguments. Every bench in the courtroom was filled, and more than 15 corporate attorneys filled the well in front of the judge.

Besides Boston-based Liberty Mutual, the other defendants in the case include: Continental Casualty Company, Federal Insurance Company, Fireman's Fund Insurance Company, Hartford Fire Insurance Company, Lumbermens Mutual Casualty Company, National Fire Insurance Company of Hartford, SAFECO Insurance Company of America, St. Paul Fire and Marine Insurance Company, Travelers Casualty & Surety Company, and Travelers Indemnity Company.

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Enron Surety Case Judge Eyes Fraud Issue

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