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J.P. Morgan Chase & Co. has lost its bid to force insurance companies to immediately pay more than $1 billion in guarantees on oil and gas contracts that were defaulted on by Enron Corp. Southern District of New York Judge Jed S. Rakoff found that 11 defendant insurance companies had raised a triable issue of fact on whether the contracts and other arrangements between Enron and a J.P. Morgan affiliate, Mahonia Limited, were part of a fraudulent scheme to help Enron disguise loans as assets. Rakoff rejected a motion for summary judgment by J.P. Morgan, finding that insurers had stated a plausible fraud defense to their obligation to cover Enron’s default on the contracts in the case of J.P. Morgan Chase Bank v. Liberty Mutual Insurance Companies, 01 Civ. 11523. Enron’s default on its obligations came in December, just days after the Houston-based energy concern filed for bankruptcy amid allegations that it inflated profits and concealed billions of dollars of debt. Mahonia then demanded payment on the six surety bonds purchased to cover six natural gas and crude oil forward sales contracts signed by Enron, Mahonia Limited and Mahonia Natural Gas Limited between June 1998 and December 2000. When the insurance companies hesitated and asked for more information, J.P. Morgan filed suit on behalf of its affiliate, Mahonia, claiming that the insurance companies’ obligation to pay was immediate and unconditional. But the insurers argued that they were the victims of fraud because the contracts between Mahonia and Enron were part of a scheme that allowed Enron to disguise as assets loans made by J.P. Morgan’s predecessor — the Chase Manhattan Bank. Judge Rakoff said that Chase would lend Mahonia the money to pay Enron and, while Enron was contracting to sell Mahonia future deliveries of gas and oil, “Enron was secretly contracting to repurchase the very same gas and oil from one or more entities commonly controlled by Mahonia, at a price equal to what was owed by Mahonia.” “The net effect was simply a series of loans from Chase to Enron; but by disguising them as sales of assets, Enron could book them as revenue while Chase and Mahonia could, among other things, induce the Sureties to issue Bonds that would effectively guarantee repayment of the loans — something the Sureties were otherwise forbidden to do under applicable New York law (which here governs),” he said. Rakoff rejected J.P. Morgan’s assertion that broad disclaimer language in the bonds prevented the companies from claiming they were the victims of fraud when they agreed to underwrite Enron’s obligations. “In short, nothing in the broad disclaimer language of the Bonds excludes the defense — whether characterized as a defense of fraudulent inducement or fraudulent concealment — that the arrangements were a total sham whose reality was totally concealed from the Sureties,” he said. THEORY SUPPORTED Rakoff also disagreed with J.P. Morgan’s argument that the allegations of fraud were too speculative. “In particular, defendants have offered substantial evidence that, even while plaintiff was moving with alacrity to obtain summary judgment, defendants were repeatedly rebuffed in their informal attempts to obtain the information regarding the underlying transactions needed to confirm (or refute) defendants’ theory,” he said. Despite those obstacles, the insurance companies were still able to obtain some “important evidence” that supported their theory, he said. For example, Rakoff said that on the same day that Enron agreed to sell Mahonia a quantity of natural gas, it reached an agreement to buy the same quantities of gas with a company called Stoneville Aegean Limited — with the gas to be delivered on “the very same futures dates … . “ “The fact that Enron would be simultaneously buying from Stoneville the very gas it was selling to Mahonia becomes even more suspicious when considered in light of the further evidence adduced by defendants to the effect that both Mahonia and Stoneville — offshore corporations set up by the same company, Mourant & Company — have the same director, Ian James, and the same shareholders,” Rakoff said. Judge Rakoff said that, unless the case is otherwise disposed of, trial would begin Dec. 2. Celia G. Barenholtz of New York-based Kronish Lieb Weiner & Hellman was one of several lawyers who argued for the insurers. John M. Callagy of New York-based Kelley Drye & Warren represented J.P. Morgan Chase Bank.

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