JRF International Factoring

In an important victory for the commercial finance industry, the New York Court of Appeals unanimously ruled 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 questioning those who prepared them. 

 The Commercial Finance Association, joined by the Loan Syndication and Trading Association and the Clearing House Association, filed an amicus brief on behalf of the lenders in DDJ Capital Management v. Rhone Group, arguing that since most companies issue audited financial statements once a year, lenders lend on the basis of the latest audited statements, plus unaudited financial statements since the last audit.  In addition, lenders often require borrowers to represent and warrant that the unaudited statements are accurate, rather than engage in their own financial audits of the borrowers.  To require more of the lenders, the CFA argued, would cause material disruption in the commercial lending market. 

 The lower court had ruled, as a matter of law, that a lender cannot rely on a borrower’s representations and warranties regarding unaudited financial statements without doing its own independent examination. 

 In reversing the lower court’s decision, New York’s highest Court held 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.  The Court adopted the rule of law proposed by CFA in our amicus brief, namely that reliance on representations and warranties about the accuracy of unaudited financial statements is not per se unreasonable.  

 The CFA was represented by Co-General Counsel Jonathan H. Helfat and Richard G. Haddad of Otterbourg, Steindler, Houston & Rosen, P.C. and Richard Kohn of Goldberg Kohn. Click here to read CFA’s amicus brief.