Enron Surety Case Judge Eyes Fraud Issue

By Daniel Hays

NU Online News Service, Feb. 28, 1:46 p.m. EST, NewYork?A U.S. District Court judge heard a banking group'sarguments yesterday that 11 surety insurers must honor $1 billionin claims related to Enron gas contracts, and peppered the bankattorney with questions about fraud before reserving adecision.

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

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

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

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

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

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

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

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

Is the bank suggesting that "if a party is sophisticated, it'sfair 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, LiebWeiner & Hellman, representing the insurers, told the judgethat "under New York law, fraud cannot be waived" as an issue in abond contract.

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

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

The proceedings before Judge Rakoff yesterday began late in theafternoon and ended after 6 p.m., after extensive arguments. Everybench in the courtroom was filled, and more than 15 corporateattorneys filled the well in front of the judge.

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