Proximate Cause in the Biggest Cases of Professional Malpractice

Yesterday we took a look at RGH Liquidating Trust v Deloitte & Touche LLP  2013 NY Slip Op 31224(U)  June 6, 2013 Sup Ct, New York County  Docket Number: 600057/06  Judge: Eileen Bransten on the issue of standing.  Today, we'll look at the proximate cause issue.  Just to remind you, this billion dollar professional malpractice case involves some of the following parties: According to the Amended Complaint, the Banks included Chemical Bank, Bank of
America of Illinois, Bank of New York, Bankers Trust Company, Credit Lyonnais New York
Branch, Credit Lyonnais Caymen Islands Branch, National Westminster Bank USA, Bank of
Montreal, Corestates Bank, N.A., Union Bank, ABN AMRO Bank N.V., New York Branch,
Sanwa Bank California, Banque Paribas, New York Branch, The Yasuda Trust and Banking Co.,
Ltd., and PNC Bank, National Association.

One of the more interesting parts of the professional malpractice world is the deep (really deep) plunge the court is willing to take in looking at the underlying case.  It's no exception in this case

"Defendants argue that their reports did not proximately cause Plaintiff s loss, since there is no evidence that the Banks would have taken any of the actions alleged in the pleading but for Defendants' alleged misrepresentations. These actions include: (1) exercising their rights under the Credit Agreement to declare the loans due and payable and terminate all loan commitments to Reliance Financial Services; (2) refusing to extend the loans from March 31,2000 to August 31, 2000; (3) selling the collateral that secured the loans; (4) recommending that Reliance sell its Financial Products Division and its Excess and Surplus Lines Division, to generate funds to repay the loans; and, (5) contacting Reliance's independent audit committee and/or state insurance regulators. (Am. Compi. ~~ 44-47.) Each of these allegations is discussed below.

1. Declaring the Loans Due and Terminating RFS Loan Commitments

Plaintiff alleges that, had the Banks known that the financial reports were overstated, they would have exercised their rights under the Credit Agreement to declare the loans due and payable on the original maturity date of March 31, 2000, terminating all loan commitments to Reliance Financial Services. However, Defendants submit the Banks' testimony, stating that they never called due their loans even after discovering Reliance's true financial condition. (Affirmation of Michael 1. Dell ("Dell Affirm."), Ex. 13 at 29, 67; Ex. 14 at 129; Ex. 15 at 110-111; Ex. 16 at 17; Ex. 17 at 96-97; Plaintiffs Rule 19-a Response ~ 91.) In February 2000, RFS informed the Banks that it could not repay the loans, and Reliance sought a five-month extension for repayment. Thereafter,
the Banks agreed to extend the maturity date of the loans from March 31,2000 to August 31,2000, because failing to do so would have caused a downgrade in Reliance's ratings, making it difficult for Reliance to write new insurance and repay the loans. (Dell Affirm., Ex. 6 at 32-33,48-50,56-57,87; Ex. 7 at 21,30-33,55-57; Ex. 9 at 40,47; Ex. 10 at 0054; Ex. 11 at 4024; Ex. 18 at 23-24; Ex. 19 at 398,404; Ex. 20 at 5929-5930; Ex. 21 at 3258.) The Banks' testimony, internal memoranda, and credit extension applications all indicate that the Banks "[did] not have any viable alternative" other than to agree tto RFS's extension request."

The Banks also did not call due their loans in August 2000, when Reliance announced that: it was increasing loss reserves by $460 million~ it could not repay the loans~ it was further downgraded to "B"; it was unable to write new business and operating in a run-off mode; the sale of Reliance to Leucadia National Corporation fell through in July of 2000; and it was considering a bankruptcy filing. (Dell Affirm. Ex. 6 at 73-74, 78, 89-90, 95; Ex. 7 at 80, 83; Ex. 13 at 29-30, 53-54; Ex. 14 at 88-90; Ex. 29 at 3366-3367; Ex. 31 at 0365; Ex. 43 at 2; Ex. 44 at 0065.) Instead, the Banks agreed to
waive Reliance's default under the Credit Agreement and to further extend the loan maturity date to November 10, 2000. The Banks acknowledged the possibility that regulators could place Reliance in rehabilitation or liquidation, and that the "regulators are likely to prohibit the upstreaming of any normal dividends, i.e., from the insurance subsidiaries to our Borrower [RFS]." Id., Ex. 29 at 3367; Ex. 13 at 54-55. The Banks testified that, in August 2000, Reliance was not operating as a going
concern, but rather, was operating in a run-off/liquidation mode. "

"Like the plaintiff in Starr Foundation, the Banks "remained in possession of the rue value of the [loans], whatever that value may have been at any given time," and any decline in the value of the loans or RFS's ability to repay them was caused by RIC's massive losses, which "would have been incurred regardless of any earlier misrepresentation [defendants] made concerning [RIC's loss reserves]." Starr Found., 76 A.D.3d at 28-29 ("the paper 'loss' the [plaintiff] seeks to recover in this action was caused by the underlying business decision of [defendant's] management to build up the CDS portfolio on which the losses reported in early 2008 were sustained, not by the earlier alleged misrepresentations forming the basis of the [plaintiffs] complaint"). For the foregoing reasons, Defendants have made a prima facie showing that the Banks would not have called due their loans, and that even if they did, the Pennsylvania Insurance Department would not have permitted RIC to make any payments to RFS, thereby preventing RFS from repaying the loans.


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