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What do these words mean in the context of a financial agreement? Financial lawyers are very familiar with this phrase because it is included in most loan participation agreements and syndicated loan agreements for the purpose of protecting the lead or agent bank.

A recent case, Firstar Metropolitan Bank & Trust v FDIC, 964 F Supp 1353 (D Ariz 1997), sheds some light on the meaning of this phrase. In June 1989, Firstar purchased a 20% participation in a US$1.5 million loan made by Century Bank to M&D Electrical Parts Remanufacturing, Inc. The participation agreement contained a standard disclaimer:

"Neither Bank nor any of its directors, officers, employees, agents or attorneys shall be liable on account of any action taken or omitted hereunder by Bank, except for Bank's gross negligence or wilful misconduct."

Later that year, Century Bank became insolvent and the FDIC stepped in as Century's receiver. When the M&D loan went bad, Firstar sued the FDIC in Arizona state court alleging breach of contract and breach of covenant of good faith and fair dealing. Firstar based its allegations on Century Bank's acts and omissions such as waiving loan convenants, mismanagement of the loan, and deviation from applicable commercial banking industry standards. FDIC, as defendant, asserted that Firstar could only sue for gross negligence and wilful misconduct under the disclaimer in the Participation Agreement. Thus, in the view of the FDIC, Firstar could only sue in tort, not in contract.

In deciding whether to grant the FDIC's motion for summary judgment, the court was confronted with the Ninth Circuit's 1994 decision in Chemical Bank v Security Pacific National Bank 20 F3d 375 (9th Cir 1994). In that case, the Ninth Circuit held that an agent bank could, by agreement, relieve itself from all liability other than liability attributable to its own gross negligence or wilful misconduct even though the bank had clearly breached its contract and fiduciary duty.

However, the Arizona court held that the decision in ChemicalBank did not warrant dismissal of Firstar's claim. The court found that Firstar could maintain an action against the lead bank for breach of contract or violation of a contractual covenant of good faith and fair dealing "as long as the causes of action asserted allege contractual breaches to have occurred in a gross negligent or wilful manner". In other words, the disclaimer did not extinguish all contract claims as argued by the FDIC, although these claims must meet a higher standard of gross negligence or wilfulness.

Thus, the court's decision in Firstar opens the door somewhat to assert contractual claims against a lead or agent bank. The plaintiff will, however, be compelled to prove gross negligence or wilful misconduct. This will be a much more difficult standard to meet than an ordinary claim for breach of contract. Unfortunately for future plaintiffs, the court in Firstar did not spell out what is needed to establish gross negligence or wilful misconduct on the part of lead or agent banks.

Robert S Rendell

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