Amicus Brief Filed with New York Court of Appeals on Rights of Lender to Rely on Representations about Financial Statements
November 25, 2009
The Commercial Finance Association, represented by Otterbourg, Steindler, Houston & Rosen, P.C. and Goldberg Kohn, along with the Loan Syndications and Trading Association and The Clearing House Association L.L.C., 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.
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. Instead, in order for its reliance on the information supplied by the borrower to be deemed reasonable, a lender must negotiate for and conduct its own examination of the borrower's books and records for the period subsequent to the borrower's last audited financial statements.
The Commercial Finance Association, along with the LSTA and the Clearing House argued in support of DDJ, as plaintiffs-appellants, that the rule as stated by the First Department threatens serious disruption to commercial lending in New York. When advancing credit, lenders base their decisions in large part on a borrower's financial statements. Because those statements are normally audited only once per year, it will rely on the unaudited financial statements and commonly make loans based on them, relying on the representations and warranties in the loan documents as to their accuracy. The First Department rule upsets lenders' settled expectations in countless existing loans and imposes burdensome investigatory obligations at a time when commerical lending is already painfully restricted.
The Commercial Finance Association, and the other amici curiae, in their brief submitted to the Court on November 25, 2009, have requested that the New York Court of Appeals adopt instead the rule that it is not per se unreasonable for a commercial lender in entering into a financing transaction to accept and rely upon a representation and warranty by a prospective borrower as to the accuracy of the borrower’s unaudited financial statements and other books and records. Because representations and warranties are bargained for in sophisticated business transactions, reliance on such representations and warranties may be justifiable without further investigation.