JPMorgan Chase & Co. (JPM) sued the Federal Deposit Insurance Corp. claiming the agency is responsible for more than $1 billion in liabilities faced by the company as a result of its 2008 takeover of Washington Mutual Inc.’s bank.
JPMorgan and the FDIC disagree over which side promised to cover losses related to the takeover at the urging of the regulator during the financial crisis. JPMorgan’s latest suit leaves it to a judge to resolve.
JPMorgan said in the complaint filed yesterday in federal court in Washington that the FDIC agreed to shield it from liability from lawsuits claiming failures by Washington Mutual. JPMorgan said it took on only limited liabilities in its purchase of the Seattle-based bank’s assets.
“JPM is simply saying, ‘Wait a minute, we’re not a punching bag.’ They’re not overreaching in the sense that they had an agreement,” Peter Henning, a former federal prosecutor and Securities and Exchange Commission attorney who teaches law at Wayne State University in Detroit. “In fairness to them, the FDIC begged them to come in and rescue WaMu. Now they’re saying, ‘Wait a minute, you’ve turned on us?’”
JPMorgan has “a reasonably good chance of success” on its claim, Henning said, making a settlement likely.
JPMorgan, the biggest U.S. bank by assets, said it is the subject of numerous lawsuits, including claims by buyers of securities backed by faulty Washington Mutual residential loans.
The bank is seeking unspecified damages and a court order declaring that the FDIC is responsible for the claims against Washington Mutual.
“The FDIC’s indemnification obligations that are the subject of this action are a matter of contract,” the New York-based bank said in its complaint. “They are promises that the FDIC made to JPMC to induce JPMC” to buy Washington Mutual’s assets, it said.
The complaint follows JPMorgan’s $13 billion settlement last month to resolve U.S. probes of its sale of mortgage bonds.
In 2008, the FDIC seized WaMu’s banking operations and sold them to JPMorgan for $1.9 billion. The bank agreed not to pursue reimbursement from the FDIC for bad loans issued by WaMu. Which side has responsibility for other claims against WaMu is less clear.
The suit filed yesterday is the latest attempt by JPMorgan to fix responsibility for WaMu liabilities on FDIC, which took over as receiver in connection with WaMu’s failure, the largest in history for a U.S. bank.
The bank bases its claim on a Sept. 25, 2008 “Purchase and Assumption Agreement” between FDIC and JPMorgan. One paragraph of the 39-page document sets out the WaMu liabilities to be taken on by JPMorgan.
JPMorgan “agrees to pay, perform, and discharge, all of the liabilities of the failed bank which are reflected on the books and records of the failed bank as of bank closing,” according to the agreement.
“It’s got all the worst attributes of a contract dispute - - a poorly-written document created in a rush,” said Henning.
The disagreement between JPMorgan and FDIC over the meaning of that agreement is the subject of JPMorgan’s new suit as well as other suits involving both sides.
In a 2010 suit, Deutsche Bank AG, as a mortgage-bond trustee, sued over $6 billion to $10 billion in securities backed by flawed WaMu mortgages. One of JPMorgan’s defenses to the claim was that any money owed in the Deutsche Bank suit was the responsibility of FDIC.
JPMorgan said in a November 2010 court filing in the lawsuit that it “never assumed any liability” for the claims asserted by Deutsche Bank and that the FDIC must indemnify JPMorgan “in full.”
Last year, JPMorgan sued the FDIC seeking to force it to pay a $2.65 million settlement of taxes Washington Mutual owed the state of Connecticut. That case is pending in federal court in Washington, D.C. And in 2010 the bank asked the court to shift liability to FDIC for unpaid taxes allegedly owed by Washington Mutual to North Carolina.
“The FDIC is saying, you’re a sophisticated party, you know what the risks were, everybody understands that when you buy a failing bank, there’s going to be a lot of carryover successor liability there,” said James Cox, a professor at Duke University School of Law in Durham, North Carolina. “At the end of the day, this was a good deal for JPMorgan.”
Greg Hernandez, an FDIC spokesman, declined to comment on the bank’s allegations. Brian Marchiony, a JPMorgan spokesman, declined to comment on the case.
The case is JPMorgan Chase Bank N.A. v. Federal Deposit Insurance Corp., 13-cv-01997, U.S. District Court, District of Columbia (Washington).
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