Mahonia Ltd. v JP Morgan Chase Bank

A committed letter-of-credit facility must be construed according to its express terms. Where it requires instruments for general corporate purposes, the issuing bank cannot refuse issuance because of the underlying transaction unless an express contractual exception, fraud or illegality is established. Separate swap contracts remain separate for accounting purposes where they create independent rights and obligations and contain no rights of set-off, cross-default or cross-collateralisation. Financing may properly receive non-debt accounting treatment where that treatment is justified under applicable accounting principles. An unlawful-means conspiracy requires unlawful conduct causing the claimant’s loss, and the unlawful conduct must be actionable at the claimant’s suit against at least one conspirator.

Mahonia claimed $165 million under a letter of credit issued by WestLB for the account of Enron and in support of an ENAC–Mahonia commodity swap. The letter of credit was transferable to JP Morgan Chase Bank. West alleged that the transaction formed part of three linked swaps which were economically a disguised loan, that Enron’s accounting breached US GAAP and US securities law, and that Chase, Mahonia and Enron had conspired to obtain the letter of credit by fraud or unlawful means.

West also relied on an alleged collateral agreement or estoppel restricting use of its committed facility, and on an alleged misrepresentation during a telephone call concerning the underlying swap. The issues were whether West was bound to issue and honour the letter of credit, whether the swaps were unlawfully accounted for, and whether any fraud, conspiracy or illegality defeated Mahonia’s claim.

1. Facility agreement. West was obliged to issue the letter of credit. The agreement covered instruments required for the general corporate purposes of Enron and its related entities. Its provisions concerning the form of an instrument did not permit refusal based on the purpose underlying the instrument. The agreement contained the relevant exceptions, including illegality, default and specified conditions precedent. No collateral agreement, representation or estoppel restricting use of the facility was established. The entire-agreement clause also prevented reliance on an alleged prior oral understanding.
2. Letter-of-credit conversation. The Chase lawyer’s statement that the underlying agreement was between ENAC and Mahonia was accurate in context. It concerned the transaction supported by the letter of credit. There was no deceit or misleading representation, and no positive duty to disclose the other swaps.
3. Accounting. The three swaps were legally independent. They contained separate fixed and floating payment obligations, market-price-related margin requirements and different default consequences. In the absence of enforceable rights of set-off, FIN 39 required separate accounting. It was impermissible to collapse the contracts into a synthetic loan merely because full performance produced an economic result resembling a loan. The ENAC–Mahonia swap was properly capable of treatment as an energy trading contract under EITF 98-10, and ENAC’s non-debt treatment of the prepays was not shown to contravene GAAP.
4. Conspiracy and illegality. Since the accounting was not unlawful, there was no unlawful purpose or conspiracy to facilitate unlawful accounting. Chase and Mahonia lacked the necessary knowledge and intention. An unlawful-means conspiracy also failed because no unlawful act caused West’s loss and the alleged US-law breaches were not actionable by West against a conspirator. The alternative fraud-based illegality case failed because no deception or dishonest agreement was proved. The court observed that, had deliberate and material unlawful accounting been established and Mahonia been complicit, public policy could have prevented enforcement of the letter of credit despite its autonomous character.
5. Disposition. Mahonia succeeded on the letter-of-credit claim. West’s defences and cross-claims against Mahonia and Chase failed. Costs followed the event; costs of the misrepresentation allegation and two abandoned allegations were ordered on the indemnity basis, subject to final submissions.