New York Court of Appeals Rules on Rights of Lender to Rely on Representations about Financial Statements
June 24, 2010
The New York Court of Appeals ruled in an unanimous opinion on June 24, 2010 that it is not unreasonable as a matter of law for lenders to rely on representations and warranties in a credit agreement regarding the accuracy of unaudited financial statements without conducting their own investigation of the statements.
The Commercial Finance Association, represented by Otterbourg and Goldberg Kohn, along with the Loan Syndications and Trading Association and The Clearing House Association L.L.C., had filed an amicus brief with the New York Court of Appeals to appeal a decision of the New York appellate division court in DDJ Capital Management LLC et al. v. Rhone Group L.L.C. et al., litigation that arose in the Chapter 11 case of American Remanufacturing.
While the lower court held it was not reasonable for a lender to rely on unaudited financial statements warranted to be accurate by the borrower, when the lender does not perform its own due diligence, the New York Court of Appeals, the highest court in the State of New York, reversed the appellate division decision to find that a trier of fact could find that the lenders were justified in relying on the representations they bargained for and received from the borrower.
At the oral arguments, the Court of Appeals questioned the parties about the impact of the decision on the corporate loan market as raised in the brief of the Commercial Finance Association and the other amici curiae.