Opinion
601430/04.
Decided on December 23, 2008.
Plaintiff was represented by Otterbourg, Steindler, Houston Rosen, P.C., New York, NY, William M. Silverman, Esq.
Defendant was represented by Gilmartin, Poster Shafto LLP, New York, NY, Michael C. Lambert, Esq.
Defendant Banca Intesa S.p.A. moves for summary judgment in its favor, CPLR 3212 (b).
The facts and circumstances underlying this action and the relevant procedural history are fully set forth in this Court's prior order dated August 14, 2006, and will not be repeated here, except as is necessary for clarification.
Briefly, plaintiff Bank Hapoalim (Switzerland) Ltd. alleges that, in May 2003, Banca Intesa and certain of its subsidiaries fabricated and sold to Bank Hapoalim three discounted non-interest bearing promissory notes, each bearing the face amount of $5 million. Bank Hapoalim further alleges that the sale was part of a global fraud scheme orchestrated by Banca Intesa to generate money to assist nonparty Parmalat S.p.A., an Italian food conglomerate, to repay loans made to it by Banca Intesa. The notes were issued by nonparty Wishaw Trading S.A., a Parmalat subsidiary incorporated in Uruguay, to Banca Intesa's New York branch (Intesa NY), which in turn sold them to nonparty BCI Soditic Trade Finance, Ltd. (BCI), a Banca Intesa affiliate. Bank Hapoalim purchased the notes from BCI.
The notes were each accompanied by a guarantee of payment executed by Parmalat and a side letter from Wishaw to Intesa NY. The side letter recites Wishaw's certification that the proceeds of the "advance evidenced" by the notes "will be utilized to finance the expansion of Parmalat South American subsidiaries' raw material supply sources and to further upgrade and refurbish Parmalat's industrial plants in Brazil and other South American countries." The side letter also refers to the funds advanced as "financing" and sets forth projections of the value of the goods expected to be exported by Parmalat companies based in South America from 2003 through 2008.
Meanwhile, Parmalat's financial stability worsened and the Italian and Brazilian governments began criminal investigations into Parmalat's financial structure. In December 2003, Parmalat's distressed financial condition and the governmental criminal investigations became public knowledge.
The notes matured on May 4, 2004, and have not been repaid. Soon after, Bank Hapoalim sold one of the notes to one of its affiliates, referred to by the parties as, Hapoalim Luxembourg.
In addition to commencing this action, Bank Hapoalim has filed a claim based on the notes in bankruptcy proceedings commenced in Italy against Parmalat's parent company, nonparty Parmalat Finanziaria S.p.A.
In this action, Bank Hapoalim alleges that Banca Intesa possessed information about Parmalat's true financial condition and impending collapse that was not available to Bank Hapoalim at the time of the underlying transaction, and intentionally attempted to limit its risk exposure by peddling fictitious notes to unsuspecting purchasers, such as Bank Hapoalim. Bank Hapoalim alleges that Parmalat was one of Banca Intesa's most significant clients and played an important role in Italy's economy ( see DiMaggio Depo Tr, at 34:17 to 35:2; Casalini Depo Tr, Vol. I, at 74:16 to 75:9) and that, therefore, Banca Intesa had a strong incentive to obtain funding for Parmalat, while reducing its own risk.
On these allegations, Bank Hapoalim asserts claims for common-law fraud and aiding and abetting fraud, and seeks to recover $14,566,388.37 in compensatory damages and $45,000,000 in punitive damages.
Banca Intesa now moves for summary judgment in its favor, contending that the extensive discovery conducted to date has not revealed any evidence that Banca Intesa was aware at any relevant time of Parmalat's true financial condition or attempted to defraud Bank Hapoalim. Instead, the facts demonstrate that it suffered a far greater loss than did Bank Hapoalim, as a result of Parmalat's collapse.
In opposition, Bank Hapoalim contends that numerous triable issues of fact exist regarding the extent of Banca Intesa's superior knowledge, gleaned as a member of Italy's banking community, and that Banca Intesa's conduct during the period of the issuance of the notes demonstrates such knowledge.
Summary judgment on the common-law fraud claim is denied. Summary judgment is a drastic remedy and will not be granted where, as here, there exist triable issues of material fact, some requiring credibility determinations for resolution ( Ugarriza v Schmieder, 46 NY2d 471, 474; Mason v Dupont Direct Fin. Holdings, Inc., 302 AD2d 260, 262 [1st Dept 2003]). Fraud claims are often not appropriate for summary decision, because motive, intent and subjective feelings are at issue ( Friedman v Meyers, 482 F2d 435, 439 [2d Cir 1973] [applying New York law]). To succeed on a claim of fraud, a plaintiff must demonstrate the defendant's representation of a material fact, the falsity of that representation, scienter, reliance and injury to the plaintiff ( Ross v Louise Wise Serv., Inc. , 8 NY3d 478, 488). Here, Bank Hapoalim has raised triable factual issues regarding the existence of each of the elements of a claim of fraud sufficient to preclude summary judgment.
Bank Hapoalim has raised triable issues regarding whether Banca Intesa gained knowledge from non-public sources, including its own direct contact with Parmalat and the Bank of Italy's "Risk Center," of facts demonstrating that Parmalat was financially unstable, had graded Parmalat as technically insolvent and a high credit risk, and had intentionally issued materially misleading financial statements significantly understating the amount of its outstanding debt, including that Parmalat had loans against accounts receivable in amounts that were significantly disproportionate to its revenue.
In addition to intentional falsehoods, false statements that are made recklessly, without knowledge of whether they are true or false will also support an action for fraud ( Fidelity Deposit Co. of Md. v Arthur Andersen Co., 131 AD2d 308, 311 [1st Dept 1987]).
Banca Intesa admits that it, or one of its subsidiaries, was a shareholder in at least one entity controlled by Parmalat and that Banca Intesa had officers dedicated to maintaining a relationship with Parmalat, both globally and in specific branch offices in Parma, Italy, and at Intesa NY. Antonello Casalini and Luigi Panizzi at Parmalat's headquarters in Parma and Giancarlo Baiocchi at Intesa NY communicated with Parmalat's senior officers, including the chief financial officer, and apparently received non-public information concerning Parmalat and its financial activities. Moreover, Casalini testified that, in 2002 or 2003, Banca Intesa's internal procedures detected a high level of indebtedness by Parmalat, requiring Banca Intesa to perform additional credit checks into Parmalat's financial structure ( see Casalini Depo Tr, Vol. II, at 220:4 to 223:1).
In addition, Banca Intesa had access to information maintained by the Bank of Italy's "Risk Center," which provides information to Italian chartered banks and other banks operating in Italy, showing, on an aggregated basis, the credit exposure from banking customers, including Parmalat, to all banks operating in Italy. Bank Hapoalim has submitted affidavits by experts on the banking industry in Italy in which it is attested that: Banca Intesa, but not Bank Hapoalim, had access to this information; Banca Intesa reviewed the information; the information demonstrates that Parmalat had understated its liabilities by over ? million in 2001 and 2002; and Parmalat's financial statements were, at a minimum, unreliable ( see Tedesco Aff., ¶ 19; Dispinzeri Aff., ¶¶ 4, 11-15, 20-28). Moreover, prior to Wishaw's issuance of the notes, Banca Intesa issued a report, entitled "Scheda Livello di Rischio Cliente," translated by Bank Hapoalim's experts as, "Schedule of Client Risk Level," which applies Banca Intesa's internal risk criteria to Parmalat's financial status and indicates that Parmalat had a very high risk level ( see Gamba Depo Tr, at 81:6 to 83:21).
In addition, Bank Hapoalim has raised triable issues regarding whether, as part of that program, Banca Intesa not only limited the amount of credit that it provided to Parmalat, but also sold the Wishaw notes, notes which it knew to be fictitious, to Bank Hapoalim. Those issues also include whether the Wishaw notes and side letter contained false statements and, if so, whether Banca Intesa knew that the notes contained irregularities and could not be repaid either by Wishaw or its parent, Parmalat, the notes' guarantor.
The record includes evidence that Banca Intesa initiated a program of reducing and reshaping its risk caused by Parmalat's distressed financial status ( see 2003 Banca Intesa Credit Committee Rpt.; Minutes of Banca Intesa Bd. of Directors Meeting held Dec. 16, 2003). The record also includes evidence that the notes were not purchased by Intesa NY on the open market but, rather, that the notes and side letter were issued to Intesa NY at its specific request and instruction. For example, Calisto Tanzi, Parmalat's chairman and chief executive officer, would sign the promissory notes (or cause his signature to be affixed thereto), and purportedly verify the signature of Andrea Ventura, the Wishaw officer whose responsibility it was to sign the notes on behalf of Wishaw. However, at the time that Tanzi's signature was affixed to the notes, Ventura had not yet signed them. The trier of fact may find that this conduct, together with Intesa NY's refusal to purchase the notes before Banca Intesa found a buyer for them, demonstrates Banca Intesa's knowledge that the notes and side letter were fraudulent and that the Parmalat guarantee was not a sufficient guarantee of the transaction. The trier of fact may also find that this conduct resulted in Banca Intesa's adoption of the representations in the notes and side letter.
Each of the notes and the side letter describe a transaction in which Intesa NY, the notes' named payee, made a "financing" to Wishaw, as evidenced by the notes, and that such advances were made in support of a program of building exports of Parmalat's South American subsidiaries, including Wishaw. The record includes evidence that, while Intesa NY did purchase the notes at a discount from Wishaw, it did not make a financing, or line of credit, available for Wishaw trade expansion ( see DiMaggio Depo Tr, at 142:16 to 147:25). The record includes evidence that, based on the representations in the notes and side letter, Bank Hapoalim believed that Banca Intesa had extended a credit facility to Wishaw and, therefore, had verified the ability of Wishaw and Parmalat to repay the loans evidenced by the notes ( see Helmut Aff., ¶ 17; Gareus Depo Tr, at 215:17 to 218:9), when, in fact, Banca Intesa had not extended any financing and had not performed any due diligence. There is also evidence that Bank Hapoalim would not have purchased the notes, had Banca Intesa disclosed that it was not providing financing ( see id., ¶¶ 18-20; see Gareus Depo Tr, at 215:9-16).
Plaintiff has also raised triable issues regarding the role of BCI, Banca Intesa's sales affiliate, in the sale of the notes to plaintiff. Evidence exists that could be held to demonstrate that Banca Intesa used BCI for the specific purpose of placing the Wishaw notes and side letter, and the alleged misrepresentations they contained, in the marketplace.
A triable issue has been raised regarding whether Bank Hapoalim performed adequate due diligence before purchasing the notes and whether it relied on certain statements in the notes and side letter and, if so, whether its reliance was reasonable in the circumstances. In determining whether the plaintiff relied on allegedly fraudulent misrepresentations and whether such reliance was reasonable or justifiable, the Court must "focus[] on the level of sophistication of the parties, the relationship between them, and the information available at the time of the operative decision" ( JP Morgan Chase Bank v Winnick, 350 F Supp 2d 393, 406 [SDNY 2004] [applying New York law]). A party may be found to have reasonably relied on another party's written representations, if the documents would not, on their face, have alerted the party to potential fraud ( E*Trade Fin. Corp. v Deutsche Bank AG, 420 F Supp 2d 273, 288 [SDNY 2006] [applying New York law]). Clearly, then, whether justifiable reliance exists presents an issue of fact ( Paris v Metroflag POLO, 2007 WL 2175644, 2007 NY Slip Op 31854[U], *4 [Sup Ct, NY County 2007]).
Here, as discussed above, Gareus attests that Bank Hapoalim would not have purchase the notes were it not for the representations in the notes and side letter. These representations include the purpose of the notes to finance trade expansion by Parmalat's South American subsidiaries and export projections indicating that there would be sufficient cash flow to repay the notes in full when they came due. Further, Gareus attests that, given these representations and under common banking practices, there was no need for Bank Hapoalim to question BCI, Banca Intesa, or Wishaw to clarify or confirm the representations ( see Gareus Aff., ¶¶ 6-7, 10, 14-15 [d], 17). Gareus also attests that, in any event, Bank Hapoalim did perform satisfactory due diligence by reviewing the notes and side letter and contacting BCI ( id., ¶¶ 10-13).
For the foregoing reasons, that branch of the motion for summary judgment on the fraud cause of action is denied.
Similarly denied is that branch of the motion for summary judgment on the aiding and abetting fraud claim. The essential elements of a claim of aiding and abetting fraud are knowledge of the fraudulent nature of the representations and rendering substantial assistance to the principal actor ( Houbigant, Inc. v Deloitte Touche LLP, 303 AD2d 92, 100 [1st Dept 2003]; Franco v English, 210 AD2d 630, 633 [3d Dept 1994]). Here, as discussed in detail above, the record includes evidence that may well demonstrate that Banca Intesa gave affirmative assistance to Parmalat in connection with marketing notes that it knew to be fictitious, concealed information it independently obtained about Parmalat's financial condition from the Risk Center, in order to provide Parmalat with the financial liquidity it required to remain in business while permitting Banca Intesa to reduce its exposure to Parmalat by restructuring its risk.
Banca Intesa seeks to reduce by one-third the amount of compensatory damages sought by Bank Hapoalim under its fraud claim. Banca Intesa contends that Bank Hapoalim sold a $5,000,000 participation in the notes to an affiliate incorporated in Luxembourg (Hapoalim Luxembourg) and was reimbursed by Bank Hapoalim's parent company, Bank Hapoalim B.M., for its loss after Parmalat collapsed. Banca Intesa further contends that, therefore, Bank Hapoalim can sue only to recover $9,687,631.57, or, two-thirds of the purchase price of the discounted notes.
In opposition, Bank Hapoalim contends that it has standing as an agent for Hapoalim Luxembourg to maintain an action for damages on its behalf pursuant to the terms of a sub-participation agreement.
Bank Hapoalim represents that it entered into a sub-participation agreement with Hapoalim Luxembourg, pursuant to which Hapoalim Luxembourg purchased a $5,000,000 participation in the notes, which it in turn sold to Bank Hapoalim B.M., the parent of both plaintiff and Hapoalim Luxembourg. Pursuant to the express terms of the sub-participation agreement, Bank Hapoalim is required to act "in trust" for its affiliate participant and to "take such steps as shall be reasonably necessary in order to collect any amount then due and unpaid" on behalf of the participant. Further, the agreement provides that any amounts collected by Bank Hapoalim are to be distributed pro rata between itself and its participant.
Banca Intesa does not dispute that the agreement exists or that the agreement contains the terms as described by Bank Hapoalim.
The Court notes that Bank Hapoalim has failed to produce a copy of the agreement for the Court's scrutiny.
For these reasons, that branch of the motion seeking to reduce the amount of compensatory damages by one-third is denied, with leave to renew at trial.
Banca Intesa seeks summary judgment in its favor on the punitive damages claim on grounds that the fraudulent conduct alleged was not aimed at the public generally and does not involve high moral culpability.
In opposition, Bank Hapoalim contends that punitive damages are warranted because it is in the public interest to ensure that foreign banks regulated by the State Department of Banking conduct their affairs fairly and honestly and not perpetrate frauds on the international banking community. Compensatory damages are intended to have the wrongdoer make the victim whole — to assure that the victim receive fair and just compensation commensurate with the injury sustained. Punitive damages are not to compensate the injured party but rather to punish the tortfeasor and to deter this wrongdoer and others similarly situated from indulging in the same conduct in the future ( Walker v Sheldon, 10 NY2d 401, 404; see Krohn v New York City Police Dept. , 2 NY3d 329, 335; Sharapata v Town of Islip, 56 NY2d 332, 335). Subjecting a wrongdoer to punitive damages serves to deter future reprehensible conduct. Hence the term "exemplary damages" is a synonym for punitive damages. Punitive damages are permitted when the defendant's wrongdoing is not simply intentional but "evince[s] a high degree of moral turpitude and demonstrate[s] such wanton dishonesty as to imply a criminal indifference to civil obligations" ( Walker, 10 NY2d at 405; see Rocanova v Equitable Life Assur. Socy. of U.S., 83 NY2d 603, 613). In Prozeralik v Capital Cities Communications ( 82 NY2d 466, 479), the Court wrote that punitive damages may be sought when the wrongdoing was deliberate "and has the character of outrage frequently associated with crime" (citation omitted). The misconduct must be exceptional, "as when the wrongdoer has acted maliciously, wantonly, or with a recklessness that betokens an improper motive or vindictiveness . . . or has engaged in outrageous or oppressive intentional misconduct or with reckless or wanton disregard of safety of rights" ( Sharapata, 6 NY2d at 335 [citations and internal quotation marks omitted]; see also Wilson v City of New York, 7 AD3d 266, 267 [1st Dept 2004] [misconduct lacked "the character of spite, malice or evil motive"]) ( Ross v Louise Wise Serv., Inc., 8 NY3d at 489).
Here, and assuming that Bank Hapoalim proves its fraud claims, an award of punitive damages may be warranted. It is in the public interest to ensure that branches of foreign banks regulated by the New York State Department of Banking conduct their affairs within this state and within the international banking community with honesty and free from fraud or an utter disregard for the truth of the representations set forth in documents these banks are marketing to the public.
Accordingly, it is
ORDERED that the motion is denied, with the limited exception that the branch of the motion to reduce the amount of compensatory damages is denied with leave to renew at trial. Dated: December 23, 2008