JPMorgan Loses Bid to Renew Security of $1.5 Billion GM Loan

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JPMorgan Chase & Co. lost another bid to reclaim security it gave up by mistake on a $1.5 billion loan to General Motors Co.’s bankrupt predecessor.

A federal appeals court Monday declined to reconsider a ruling that the bank had forfeited its collateral. In the long-running case, JPMorgan argued its lawyers gave up rights to most of GM’s assets when they accidentally terminated the security on the $1.5 billion financing while dealing with a payoff on a separate $300 million loan.

The GM case, born after the car maker’s 2009 bankruptcy and government bailout, is one of the quirkier ones tied to the financial crisis that the bank has contended with. They include government probes into allegedly fraudulent mortgage-bond sales, a $6.2 billion trading loss by the so-called London Whale, services provided to Ponzi-scheme operator Bernard Madoff and the rigging of currency and energy markets, costing a total of more than $36 billion in legal bills.

Joseph Evangelisti, a JPMorgan spokesman, declined to comment on the latest decision.

JPMorgan might fight the decision, or try to recover losses from lawyers and fellow lenders.

U.S. courts have generally let parties correct unintended errors, said Jason Cyrulnik, a partner at Boies, Schiller & Flexner LLP who represented a developer involved in litigation over an error in a condominium offering document.

In an earlier argument to the judges, JPMorgan asked them to decide whether it intended to sell a “cow” or a “horse,” and whether GM knew.

Sell Cow

“In effect, JPMorgan told GM only to sell its cow,” the bank said in a December letter to the appeals court. Leaving aside the lawyers’ mistake, “GM understood that JPMorgan’s objective and its authority was only to sell that cow.”

Instead, GM sold the horse without asking, breaking the rules governing such loans, the bank said.

After the appeals court sided with so-called Old GM’s creditors in January, groups of lenders weighed in to say that many companies might find it harder to borrow if lenders couldn’t be confident there were assets backing the money they advanced.

Asset-backed lending is a $620 billion market, the Commercial Finance Association said in court papers. Borrowers include businesses that have trouble raising money elsewhere, the group said.

Unsecured Lender

Without the collateral, JPMorgan, the biggest U.S. bank, becomes an unsecured lender to Detroit-based GM’s bankrupt shell company, which has little money left to pay anyone.

So far, Old GM’s unsecured creditors have been paid about 30 cents on the dollar, a bankruptcy judge has estimated. They’ve said the collateral would provide more money to spread around.

In bankruptcy court, the trust for creditors has been trying to fend off possible claims from drivers suing over the carmaker’s faulty ignition switch, telling a judge that the obligation belongs to the surviving automaker bailed out by the U.S. in 2009.

90% Gone

The trust said in February that 90 percent of its assets were gone, leaving $843 million in the form of GM stock to pay creditors owed almost $32 billion, including New York-based JPMorgan.

Tuesday, JPMorgan said profit climbed 12 percent, to $5.91 billion, beating analysts’ estimates, as first-quarter revenue from trading stocks and bonds increased for the first time since 2010.

The appeals court case is Official Committee of Unsecured Creditors of Motors Liquidation Co. v. JPMorgan Chase Bank NA, 13-2187, U.S. Court of Appeals for the Second Circuit (Manhattan). The bankruptcy is In re Motors Liquidation Co., 09-bk-50026, U.S. Bankruptcy Court, Southern District of New York (Manhattan). The switch suits are In re General Motors LLC Ignition Switch Litigation, 14-md-02543, U.S. District Court, Southern District of New York (Manhattan).

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