A dispute among banks that normally would be resolved behind closed doors is headed for a public airing, after a recent court ruling that Citicorp may proceed with a $243 million lawsuit against Bankers Trust New York Corp.
In the case before New York State Supreme Court, Citicorp is alleging that false information from Bankers Trust on the credit status of Chicago businessman William J. Stoecker resulted in losses of $143 million from several loans made in 1987 and 1988.
Just two years after Citicorp made the loans, Mr. Stoecker and his holding company, Grabill Corp., filed for bankruptcy.
Citicorp is seeking reimbursement plus $100 million in punitive damages, blaming Bankers Trust for failing to disclose Mr. Stoecker's problems.
The case could raise some thorny issues surrounding the responsibility of banks to share information with their competitors.
"There is an inherent conflict between providing accurate information, respecting customer confidence, and providing the institution that's involved with the customer the necessary flexibility any lender needs to have," said J. Samuel Tenenbaum, a lawyer with Schwartz, Cooper, Greenberger & Krauss in Chicago.
"Sharing information, however, is a part of how banks do business," said Mr. Tenenbaum, who has been involved in a number of lender liability suits. "It definitely creates a dilemma for how banks deal with these situations."
Bankers said they would talk about the case only on condition of anonymity, citing the need to protect relationships with both money- center banks.
Primarily, they expressed surprise and regret that the suit has become public.
Both banks had tried for four years to resolve the dispute privately, but to no avail, with increasingly vitriolic exchanges leaving both parties frustrated.
In the midst of one heated exchange, a witness asked the mediator "When are you going to call this nonsense to an end?"
Now that the case is headed to trial, several bankers say they are worried about the implications of a Citicorp victory.
"It's not Bankers Trust's business to make sure Citicorp doesn't make a lending mistake," said one banker.
"Citicorp is trying to allege a duty of care on Bankers Trust's part that is pretty incredible," added another. This kind of case might "raise the burden on exchanging information."
Bankers wondered why Citicorp, which has alleged that a number of Bankers Trust officers were not forthcoming with information about Mr. Stoecker's alleged double-pledging of collateral, made its credit inquiries orally.
"It's really surprising that Citicorp was relying on information from oral communications with competitors," said Mr. Tenenbaum. "There are certain ways you deal with a written request, in terms of confidentiality and other factors."
Loans of this size usually involve some form of written communication, said bankers.
At one point, Citicorp asked why Bankers Trust was seeking to reduce its exposure to Mr. Stoecker. Citicorp alleges that Bankers Trust indicated the decision resulted from a change in its own lending strategy direction rather than a problem with Mr. Stoecker.
Sideline speculators suggested, however, that dropping a lending relationship with a client is often a red flag for credit trouble.
"When a new bank comes into an existing facility where a line lender is backing out, that's a real flag," said a banker. "The question is whether Citicorp asked the right questions. If they did, Bankers Trust would have given some signals."
Indeed, Citicorp has already lost a suit alleging fraud in connection with Grabill.
In 1991, Citicorp lost a claim against the K-H Corp. for acquisition loans to the Grabill Aerospace Industries. In that case, Citicorp alleged that nondisclosure of a promissory note resulted in the decline in value of securities pledged as collateral against the purchase.
The court, however, ruled that Citicorp's losses "were a result of its imprudent decision to lend."
To be sure, there are some circumstances that would seem to bolster Citicorp's position.
A former senior official at Bankers Trust, Gregory P. Pace, is currently under indictment in Illinois for his role in assisting Mr. Stoecker.
A former vice president in charge of Chicago lending for BT Private Clients, Mr. Pace allegedly helped Mr. Stoecker secure over $150 million from 25 banks.
Mr. Pace was accused by the Illinois court of providing fraudulent information to a host of banks, and accepting $1 million from Mr. Stoecker.
However, none of the other banks that took losses from loans to Mr. Stoecker or to the Grabill Corp., have filed a similar suit.
Currently, Bankers Trust is preparing a motion to dismiss the case. A number of legal experts expect Bankers Trust to argue that Citicorp was more than capable of making its own credit assessments.
Bankers Trust's attempt to delay the suit until completion of the private resolution process was denied by a New York judge.
Fortunately for both Citicorp and Bankers Trust, speculation about the case will not determine the outcome.
Meanwhile, bankers said they tread a fine line in exchanging information. One suggested that it is important to go beyond serving as a conduit for information, implying the need for translation and interpretation.
At the same time, bankers recognize that liability in credit cases can exceed explicit agreements.
"Even though in loan agreements (which bring several banks together on a single loan), there will be outright statements to the effect that each bank is responsible for its own credit determination . . . you do assume a level of responsibility by being the agent," said another banker.
Bankers agree that sensitivity to the needs of the client and the ramifications of shared information often puts them in touch with their legal counsel.
Curiously enough, some bankers suggest that legal firewalls separating different divisions of banks have enhanced their awareness of information- related issues. "Bankers are incredibly alert to how they share information even in their own institution," said a banker.
Regardless of due-diligence procedures, bankers will be duped some of the time. "A scheming person has 24 hours a day to figure out how to get your money," said one banker. "The scales are such that he can if he's smart."
