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learning center: publication detail
It Pays To Read Your Syndication Agreement Very Carefully
Lending & Restructuring Alert
April 2004
Authors: Paul A. Rubin

Members of a lending syndicate must understand that they cannot blindly rely upon the lead agent to conduct due diligence, monitor the borrower's financial condition, and apprise them of important information that the agent discovers in its dealings with the borrower. Syndication agreements will very likely contain a variety of waivers and acknowledgments designed to preclude members of a lending syndicate from asserting claims that lead agents/bankers failed to disclose material information to them—and such provisions are enforceable. That is the message delivered by a New York federal court when it granted a motion to dismiss claims for fraud and negligent misrepresentation asserted by two foreign lenders (the "Foreign Lenders") that extended credit directly to Enron Corp. ("Enron") under certain syndicated credit facilities.


The Foreign Lenders sued two U.S. financial institutions and their affiliates (the "Agents") who served as co-lead arrangers, administrative/paying agents or issuing banks for loans or letters of credit, asserting that the Agents defrauded them. Enron had entered into business relationships with certain Special Purpose Entities ("SPEs") that were designed to remove from Enron's balance sheet assets that had lost or were at risk of losing value, or to hide debts of Enron, in order to make Enron appear to be financially healthy. The Foreign Lenders alleged that the Agents, directly or indirectly, participated in transactions involving the SPEs separate and apart from the transactions involving the Foreign Lenders, which generated profits for the Agents, but also contributed to the collapse of Enron's share price. The Foreign Lenders further alleged that the Agents knew that Enron's public disclosures concerning the SPEs were materially misleading, inaccurate and inadequate. The Foreign Lenders accused the Agents of withholding this information from them, even though the Agents knew that the Foreign Lenders would rely on Enron's disclosures in deciding whether to participate in the credit facilities at issue.

The Agents Owed No Duty of Disclosure to the Syndicate

The court held that the Foreign Lenders' fraud and negligent misrepresentation claims must be dismissed because the agreements under which they made their Enron loan investments precluded them from proving that: (i) the Agents had a duty to disclose information they had gained from their business dealings with Enron and (ii) the Foreign Lenders had reasonably relied on alleged misrepresentations by the Agents. The credit facility agreements specifically provided that the Agents had no duty to ascertain or inquire as to Enron's performance or observance of any terms or conditions of any loan document. The credit agreements stated, among other things, that the Agents had the right to engage in transactions with Enron "with no duty to account therefor" to lenders in the syndicate, and included an acknowledgment by such lenders that they had not relied on the Agents, but instead made their own independent credit analyses and decisions in deciding whether to extend loans to Enron. The agreements also stated that the Agents would not have any duty to provide any lending bank with any credit or other information, whether obtained before or after advances were made to Enron.

Thus, even if the Agents had the knowledge which the Foreign Lenders attributed to them, the Agents had no duty to disclose it. The court stated that sophisticated parties are held to the terms of their agreements. Having failed to bargain for the right to rely on the Agents as monitors of Enron's compliance with its disclosure, financial condition and other covenants, or for the right to benefit from any knowledge gained by the Agents or their affiliates in their dealings with the Enron companies, the Foreign Lenders were barred as a matter of law from claiming that they reasonably relied on any misrepresentations or omissions by the Agents concerning these matters.

Keep in Mind

Parties to syndicated credit facilities cannot blissfully rely upon the lead agent to provide financial information concerning a borrower or its affiliates, nor can they blame the agent for failing to do so. Rather, such agreements will in all likelihood require the members of the syndicate to perform their own due diligence, and monitor the borrower's financial condition and performance while your loan remains outstanding. While the waiver and acknowledgment provisions discussed above will not automatically block all claims syndicate members might assert against a lead agent, members of a lending syndicate should be prepared to conduct their own due diligence, investigation and monitoring regarding the borrower while their loans are outstanding. They should not have to fall back on blaming the agent if a loss is sustained.

For more information on these or other bankruptcy or restructuring issues, please contact Paul Rubin at or (212) 592-1448. 

Copyright ©2004 Herrick, Feinstein LLP. Lender's Alert is published by Herrick, Feinstein LLP for information purposes only. Nothing contained herein is intended to serve as legal advice or counsel or as an opinion of the firm.