Sharp used the time provided by State Street to arrange to borrow an additional $25 million in financing ($10 million more than Sharp owed State Street) from a group of unsuspecting investors and, in 1999, these investors purchased $25 million in subordinated notes from Sharp. However, rather than blow the whistle and expose the fraud, State Street agreed to forebear from exercising its rights under the credit documents and "arranged quietly for the to repay the State Street loan from the proceeds of new loans from unsuspecting lenders" and ignored inquiries from noteholders regarding Sharp's financial condition. State Street's investigation confirmed its suspicion that there was rampant fraud at Sharp. State Street retained a forensic accountant to investigate Sharp. Approximately two years later, State Street became concerned that Sharp was growing at an alarmingly rapid pace and consuming a large amount of cash. The relationship began in 1996, when State Street granted Sharp a $20 million demand line of credit secured by Sharp's assets. 2005), involved a lending relationship between Sharp and State Street Bank. In re Sharp Int'l Corp., 403 F3d 43 (2d Cir. The difference in the outcome of Sharp and Lerner can simply be described as the difference between the absence and existence of a duty. ![]() 2006), highlights the potential liability banking institutions may face if they fail to actively monitor trust accounts maintained at their banks. However, the Second Circuit's recent decision in Lerner v. 2005), gave lenders comfort that in extricating themselves from relationships with borrowers they believe to be engaged in fraudulent activity they will not be held liable for failing to blow the whistle and expose the fraud. Court of Appeals for the Second Circuit's opinion in In re Sharp Int'l Corp., 403 F3d 43 (2d Cir.
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