Citigroup Faces Retrial on Its Role in EMI Sale

(CN) - Erroneous jury instructions led to a verdict clearing Citigroup of claims that it defrauded the investment company that now owns EMI Group, the 2nd Circuit ruled.

EMI's stable of talent includes the Beach Boys, Frank Sinatra, Miles Davis, Lenny Kravitz, Alicia Keys, Kanye West and other A-list acts.

In May 2007, Terra Firma, a private equity firm, paid a reported 2.4 billion British pounds, about $4.7 billion at the time, to buy the music label after Citigroup banker David Wormsley told it that Cerberus Capital Management was still a viable bidder.

Some months later, however, Terra Firma allegedly discovered that Cerberus had never participated in the auction for EMI.

Terra Firma sued Citigroup in 2009, claiming it had been misled into paying too much for the ailing EMI, which had been in decline since 2000 and failed twice to merge with Warner Music.

Citigroup even took a tidy 92.7 million pounds, about $182 million in 2007, for brokering the deal, according to the complaint. Neither Wormsley nor Cerberus is a party to the action.

Because Terra Firma paid for EMI in British pounds, the parties agreed that English law governed the case. That move undermined claims of negligent misrepresentation and tortious interference, and the two remaining claims of fraudulent misrepresentation and fraudulent concealment went to trial.

At the close of Terra Firma's case, U.S. District Judge Jed Rakoff dismissed the company's fraudulent concealment claim, and a jury found in Citi's favor on the remaining misrepresentation action.

On appeal, however, Terra Firma claimed that Rakoff incorrectly interpreted English law in his jury instructions by shifting the burden of proof for the reliance element from Terra Firma to Citi - a shift inconsistent with English law.

A three-judge panel of the Manhattan-based 2nd Circuit agreed and ordered a new trial Friday.

"Absent fundamental error, we are loath to overturn a jury verdict in a civil case," Judge John Walker Jr. wrote for the panel. "Jury trials are expensive, in time and resources, both for the litigating parties and for society as a whole. We are particularly reluctant to overturn a jury verdict when, as here, it appears that both parties have had a fair bite at the proverbial apple."

Despite Citi's correct argument that the reliance element of a fraudulent misrepresentation claim must be proven and not simply presumed as a matter of law, the panel noted that the issue turns on who bears the burden of proof. This differs between English law and U.S. law.

"The district court found that the presumption was procedural and therefore 'drops out' in jury trials," Walker wrote. "It analogized the contested doctrine to the burden shifting rule in McConnell Douglas Corp. v. Green, where the evidentiary burden shifts prior to trial but 'drops out' at the trial stage. As a result, the district court instructed the jury that Terra Firma had to prove, by a preponderance of the evidence, that it 'did in fact rely on one or more [of Wormsely's] misrepresentations and that the misrepresentations were a substantial factor in causing Terra Firma to make the bid it made for EMI Group on May 21, 2007.'"

"Such an instruction was inconsistent with English law and therefore was error," he continued. "Because the jury instructions incorrectly shifted the burden of proof from Citi to Terra Firma on the reliance element, they were prejudicial and require reversal."

The panel nevertheless declined to entertain arguments by Terra Firma that Rakoff mishandled its other claims in not allowing them to go to the jury.

"First, the unambiguous terms of the parties' agreement had the effect of waiving Citi's negligence liability for Wormsley's statements," Walker wrote. "Second, no reasonable juror would have found in Terra Firma's favor on the fraudulent concealment claim, especially as there is little evidence that Terra Firma ever advanced the theories necessary to its appellate argument at trial. Finally, the district court acted well within its discretion when it precluded Terra Firma from introducing factual evidence and expert testimony."

In a concurring opinion, Judge Raymond Lohier Jr. noted that this case highlights the growing number of international disputes which require U.S. judges to determine and apply foreign law. He underscored the need for a system to certify questions of international law.

"When faced with difficult questions of state law, we have a well-developed, successful system of certifying the question to state courts that promotes the development of state decisional law by state courts and strongly reflects principles of comity and federalism," Lohier wrote. "In the context of cross-border commercial disputes, there is every reason to develop a similar formal certification process pursuant to which federal courts may certify an unsettled and important question of foreign law to the courts of a foreign country."

"Fortunately, in this case, the question appears to have been neither unsettled nor especially important to the development of English law," Lohier concluded.

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