Deutsche Bank - FDIC Memo in Support of JPMorgan Chase's Motion To Dismiss Filed 22nov2010

Case 1:09-cv-01656-RMC Document 54-1
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UNITED STATES DISTRICT COURT FOR THE DISTRICT OF COLUMBIA
DEUTSCHE BANK NATIONAL TRUST COMPANY, Plaintiff, v. FEDERAL DEPOSIT INSURANCE CORPORATION (as receiver of WASHINGTON MUTUAL BANK); JPMORGAN CHASE BANK, National Association; and WASHINGTON MUTUAL MORTGAGE SECURITIES CORPORATION, Defendants. Case No. 09-CV-1656-RMC Hon. Rosemary M. Collyer
MEMORANDUM OF POINTS AND AUTHORITIES IN SUPPORT OF FDIC RECEIVERS MOTION TO DISMISS Of Counsel: Kathryn R. Norcross (D.C. Bar No. 398120) Senior Counsel, Commercial Litigation Unit Anne M. Devens Counsel, Commercial Litigation Unit Kaye A. Allison Counsel, Commercial Litigation Unit FEDERAL DEPOSIT INSURANCE CORPORATION 3501 Fairfax Drive, Room VS-D-7062 Arlington, Virginia 22226 Telephone: (703) 562-2204 Facsimile: (703) 562-2475 Email: knorcross@fdic.gov Email: adevens@fdic.gov Email: kallison@fdic.gov November 22, 2010 William R. Stein (D.C. Bar No. 304048) Scott H. Christensen (D.C. Bar No. 476439) Jason S. Cohen (D.C. Bar No. 501834) HUGHES HUBBARD & REED LLP 1775 I Street, N.W. Washington, D.C. 20006-2401 Telephone: (202) 721-4600 Facsimile: (202) 721-4646 Email: stein@hugheshubbard.com Email: christen@hugheshubbard.com Email: cohenj@hugheshubbard.com Attorneys for Federal Deposit Insurance Corporation in its capacity as Receiver for Washington Mutual Bank
TABLE OF CONTENTS Page Table of Authorities ....................................................................................................................... iii INTRODUCTION ...........................................................................................................................1 BACKGROUND AND SUMMARY OF ALLEGATIONS ...........................................................4 A. B. The WaMu Receivership And The P&A Agreement ..............................................6 WaMus Mortgage-Backed Securities Business ....................................................10 1. 2. C. D. E. The Securitization Process .........................................................................10 The Trusts and the Governing Agreements ...............................................12
WaMus Disclosure Of Liabilities And Obligations Under The Governing Agreements ............................................................................................................16 JPMCs Acknowledgment Of Liabilities And Obligations Under The Governing Agreements ..........................................................................................19 DBNTCs Amended Complaint.............................................................................22
ARGUMENT .................................................................................................................................23 I. FDIC RECEIVER HAS NO LIABILITY TO DBNTC UNDER THE GOVERNING AGREEMENTS. .......................................................................................23 A. The P&A Agreement Transferred The Governing Agreements And All Of WaMus Rights, Obligations, And Liabilities Thereunder To JPMC. ..................24 1. 2. The Governing Agreements are Assets that transferred to JPMC under Section 3.1 of the P&A Agreement. ................................................25 All of WaMus obligations and liabilities under the Governing Agreements transferred to JPMC under Section 2.1 of the P&A Agreement. .................................................................................................29
B. II.
The Transfer Of The Governing Agreements To JPMC Extinguished FDIC Receivers Potential Liability. .....................................................................38
CLAIMS AGAINST FDIC RECEIVER BASED ON ALLEGED POSTRECEIVERSHIP BREACHES SHOULD BE DISMISSED. ...........................................40 A. DBNTC Failed To Exhaust The Administrative Claims Process With Respect To Its Claims Of Post-Receivership Breach. ...........................................40
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TABLE OF CONTENTS (continued) Page B. The Amended Complaint Fails to State A Claim Of Post-Receivership Breach Against FDIC Receiver. ............................................................................42
CONCLUSION ..............................................................................................................................45
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TABLE OF AUTHORITIES Page(s) C ASES Acevedo v. First Union Natl Bank, 357 F.3d 1244 (11th Cir. 2004) ............................................39 Aljaf Assocs. Ltd. Pship v. FDIC, 879 F. Supp. 515 (E.D. Pa. 1995)...........................................42 Ameren Servs. Co. v. FERC, 330 F.3d 494 (D.C. Cir. 2003) ........................................................24 Bank of N.Y. v. FDIC, 453 F. Supp. 2d 82 (D.D.C. 2006).............................................................26 Beal Bank, SSB v. Pittorino, 177 F.3d 65 (1st Cir. 1999) ..............................................................30 Brady Dev. Co., Inc. v. RTC, 14 F.3d 998 (4th Cir. 1994) ............................................................40 Brown Leasing Co. v. FDIC, 833 F. Supp. 672 (N.D. Ill. 1993) ...................................................42 In re Chicago, Milwaukee, St. Paul, & Pac. R. Co., 789 F.2d 1281 (7th Cir. 1986).....................38 Coleman v. FDIC, 826 F. Supp. 31 (D. Mass. 1993).....................................................................42 Conseil Alain Aboudaram, S.A. v. de Groote, 460 F.3d 46 (D.C. Cir. 2006) ................................24 Courtney v. Halleran, 485 F.3d 942 (7th Cir. 2007) .....................................................................39 E.I. du Pont de Nemours & Co. v. FDIC, 32 F.3d 592 (D.C. Cir. 1994).......................................30 FDIC v. Condit, 861 F.2d 853 (5th Cir. 1988) ..............................................................................39 FDIC v. Great Am. Ins. Co., 607 F.3d 288 (2d Cir. 2010) ............................................................30 Flynn v. Dick Corp., 481 F.3d 824 (D.C. Cir. 2007) .....................................................................33 Flynn v. So. Seamless Floors, Inc., 460 F. Supp. 2d 46 (D.D.C. 2006) ........................................34 Forest Mktg. v. State Dept. Natural Res., 104 P.3d 40 (Wash. Ct. App. 2005) ............................35 Freeman v. FDIC, 56 F.3d 1394 (D.C. Cir. 1995) ..................................................................40, 41 Goodman v. Challenger Intl, Ltd., No. 94-1262, 1995 WL 402510 (E.D. Pa. July 5, 1995) ........................................................................................................................................38 Hatco Corp. v. W.R. Grace & Co., 59 F.3d 400 (3d Cir. 1995) ....................................................38 Henderson v. Bank of New England, 986 F.2d 319 (9th Cir. 1993) ..............................................41 Hennessy v. FDIC, 58 F.3d 908 (3d Cir. 1995) .............................................................................39
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Home Capital Collateral, Inc. v. FDIC, 96 F.3d 760 (5th Cir. 1996) ...........................................41 India Breweries, Inc. v. Miller Brewing Co., 612 F. 3d 651 (7th Cir. 2010).................................30 Langley v. FDIC, 484 U.S. 86 (1987) ............................................................................................30 Lone Star Fund V (U.S.), L.P. v. Barclays Bank PLC, 594 F.3d 383 (5th Cir. 2010) ...................26 In re MBIA, Inc. Sec. Litig., 700 F. Supp. 2d 566 (S.D.N.Y. 2010) ................................................5 McCarthy v. FDIC, 348 F.3d 1075 (9th Cir. 2003) .......................................................................41 McGlothlin v. RTC, 913 F. Supp. 15 (D.D.C. 1996) .....................................................................42 Mintz v. FDIC, ___ F. Supp. 2d ____, No. 09-1894, 2010 WL 3064373 (D.D.C. Aug. 6, 2010) ..........................................................................................................................................5 Paylor v. Winter, 600 F. Supp. 2d 117 (D.D.C. 2009) ....................................................................4 Payne v. Sec. Sav. & Loan Assn, F.A., 924 F.2d 109 (7th Cir. 1991) ..........................................39 Pfeiffer v. Duncan, 659 F. Supp. 2d 160 (D.D.C. 2009)................................................................33 Rothman v. Gregor, 220 F.3d 81 (2d Cir. 2000)..............................................................................5 Segar v. Mukasey, 508 F.3d 16 (D.C. Cir. 2007).....................................................................24, 33 Simon v. FDIC, 48 F.3d 53 (1st Cir. 1995) ....................................................................................41 SR Intl Bus. Ins. Co. v. World Trade Ctr. Props., 467 F.3d 107 (2d Cir. 2006) ..........................35 Staehr v. Hartford Fin. Servs. Group, 547 F.3d 406 (2d Cir. 2008) ...............................................5 Tri-State Hotels, Inc. v. FDIC, 79 F.3d 707 (8th Cir. 1996)..........................................................44 United States v. First N. Dakota Natl Bank, 137 F.3d 1077 (8th Cir. 1998)................................38 United States v. Sunoco, Inc., 637 F. Supp. 2d 282 (E.D. Pa. 2009) .............................................38 Village of Oakwood v. State Bank and Trust Co., 539 F.3d 373 (6th Cir. 2008) ..........................41 Wilson Court Ltd. Pship v. Tony Maronis, Inc, 952 P.2d 590 (Wa. 1998) .................................35
STATUTES AND R ULES 12 U.S.C. 1821 .................................................................................................................... passim 12 U.S.C. 1823 ........................................................................................................................6, 30
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Fed. R. Civ. P. 12(b)(1)..................................................................................................................42 Fed. R. Civ. P. 12(b)(6)....................................................................................................3, 4, 40, 44 Financial Institutions Reform Recovery and Enforcement Act of 1989, Pub. L. No. 101-73 .................................................................................................22, 38, 40, 41
L EGISLATIVE AND ADMINISTRATIVE M ATERIALS H.R. Conf. Rep. No. 103-213, 1993 U.S.C.C.A.N. 1088 (Aug. 4, 1993)......................................44
T REATISES AND P ERIODICAL M ATERIALS RESTATEMENT (SECOND) OF CONTRACTS 202(1), CMT. C (1993) ................................................35
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Defendant Federal Deposit Insurance Corporation in its capacity as Receiver for Washington Mutual Bank (FDIC Receiver) submits this memorandum in support of its motion to dismiss the First Amended Complaint (the Amended Complaint). INTRODUCTION Plaintiff Deutsche Bank National Trust Company (DBNTC) asserts claims for monetary damages and declaratory relief against FDIC Receiver and, in the alternative, Defendant JPMorgan Chase Bank, N.A. (JPMC) as purported successors-in-interest to Washington Mutual Bank (WaMu). DBNTCs claims arise from alleged breaches by WaMu of contractual obligations reflected in the Governing Agreements of 127 separate trusts created for the securitization of residential mortgage loans between 1992 and 2007. Am. Compl. 2-3. As Trustee for these 99 Primary Trusts and 28 Secondary Trusts (which DBNTC refers to collectively as the Trusts), DBNTC seeks damages of more than $10 billion on behalf of the Trusts and investors in securities issued by the Trusts. See id. 3, 5-6, 85. DBNTCs claims against FDIC Receiver should be dismissed in their entirety, because FDIC Receiver transferred all of WaMus liabilities and obligations under the Governing Agreements to JPMC. Under the Purchase and Assumption (P&A) Agreement 1 that JPMC and FDIC Receiver entered into when the Office of Thrift Supervision (OTS) closed WaMu on September 25, 2008, JPMC acquired WaMus ongoing banking operations in a whole bank transaction, purchas[ing] substantially all of the assets and assum[ing] all deposit and substantially all other liabilities of WaMu, for a purchase price of $1.9 billion. P&A Agreement
1.
The P&A Agreement is Exhibit 2 to the Amended Complaint. The P&A Agreement is maintained in the publicly-available files of the FDIC and can be accessed at http://www.fdic.gov/about/freedom/Washington_Mutual_P_and_A.pdf.
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at 1, Art. VI. JPMC expressly agreed to pay, perform, and discharge all liabilities reflected on WaMus books and records as of September 25, 2008, including specifically all mortgage servicing rights and obligations. Id. 2.1. JPMC purchased all the assets of WaMu, including specifically all the mortgage servicing rights and obligations, id. 3.1, and all rights of [WaMu] to provide mortgage servicing for others . . . and related contracts, id. Schedule 3.2. Further, the assets were purchased subject to all liabilities affecting those assets, as provided in Section 2.1. Without question, JPMC succeeded to all of WaMus interests, rights, obligations, and liabilities under the Governing Agreements, which, according to DBNTC, are for each Trust an integrated set of agreements governing the transfer of loans into the Trust, the securitization of the loans in the Trust, the servicing of the loans, and the rights and obligations of all the parties to the transaction. As a result of the P&A Agreement, JPMC acquired from FDIC Receiver assets with a net fair value of nearly $12 billion, including WaMus nationwide mortgage banking operations and its valuable mortgage servicing rights. Despite its extraordinary gain and continuing profits, JPMC now seeks to walk away from the associated obligations and liabilities, by denying the plain meaning of the P&A Agreement and asserting that FDIC Receiver should bear the cost of WaMus liabilities and obligations under the Governing Agreements. Yet as DBNTC alleges, these liabilities and obligations such as the obligation to repurchase defective mortgage loans and to indemnify the Trusts for certain expenses are express provisions in the Governing Agreements, which constituted official books and records of [WaMu] at the time of [its] closing on September 25, 2008. Am. Compl. 42(e); see also id. 40, 43. As illustrated by WaMus public filings in 2007 and 2008, WaMu disclosed its liabilities and obligations under the Governing Agreements long before OTS had closed, and JPMC had acquired, WaMu. In fact, in
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its own public filings following the WaMu transaction, JPMC acknowledged its assumption of WaMus liabilities and obligations under the Governing Agreements. Now, JPMC is attempting to rewrite history. The unambiguous terms of the P&A Agreement, which the Court may construe as a matter of law, demonstrate that any and all of WaMus rights, obligations, and liabilities under the Governing Agreements were transferred to and assumed by JPMC. Accordingly, FDIC Receiver can have no liability to DBNTC for any obligation owed under the Governing Agreements, whether arising before or after WaMus closure, and all claims against FDIC Receiver should be dismissed under Rule 12(b)(6). DBNTC also appears to allege that either JPMC or FDIC Receiver, as successor to WaMu, committed post-receivership breaches of servicing or repurchase obligations under the Governing Agreements. Any claims against FDIC Receiver based on post-receivership breaches should be dismissed for two additional reasons. 2 First, this Court lacks subject matter jurisdiction to consider such claims because DBNTC did not include in its administrative Proof of Claim to FDIC Receiver any claim or allegation based on post-receivership breaches by FDIC Receiver or anyone else, but instead limited its claims to alleged pre-receivership breaches by WaMu. See 12 U.S.C. 1821(d)(13)(D). Second, the post-receivership breach claims against FDIC Receiver should be dismissed under Rule 12(b)(6), because the Amended Complaint does not establish a basis for those claims against FDIC Receiver. As to post-receivership servicing obligations, the P&A Agreement unambiguously provides that JPMC would assume all
2.
In its Amended Complaint, DBNTC refers to WaMu, JPMC, and FDIC Receiver indiscriminately under the blanket term WaMu. Am. Compl. 13. By conflating WaMu, JPMC and FDIC Receiver in this fashion, DBNTC adds unnecessary confusion to the Courts task, particularly when DBNTC ascribes post-receivership actions to WaMu. See infra Section II.
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mortgage servicing rights and obligations and that FDIC Receiver would transfer all loan and mortgage files to JPMC; accordingly, FDIC Receiver indisputably had no post-receivership obligations to service loans in any Trust or provide DBNTC with access to loan files, and could not possibly have breached obligations it did not have. As to post-receivership repurchase obligations, DBNTC acknowledges that it has not provided FDIC Receiver with the required notice and opportunity to cure with respect to any specific mortgage loan in any Trust pools, which is DBNTCs sole remedy under the Governing Agreements; accordingly, even if FDIC Receiver had retained any repurchase obligations under those Agreements (which it did not), those obligations have never been triggered and thus could not have been breached. BACKGROUND AND SUMMARY OF ALLEGATIONS 3 Before its closure, WaMu was the nations largest savings and loan association. Its business was heavily focused on residential mortgage lending. During the years preceding the current financial crisis, WaMu, along with a number of other mortgage lenders, began using a variety of high-risk mortgage products that enabled it to increase revenue and market share. 4 Borrowers ability to repay or refinance these mortgages often depended upon home prices continuing to increase. WaMu also was a major participant in the residential mortgage-backed
3.
In evaluating a motion under Rule 12(b)(6), the Court may consider facts alleged in the complaint, any documents attached to or incorporated in the complaint, matters of which the court may take judicial notice, and matters of judicial record. Paylor v. Winter, 600 F. Supp. 2d 117, 123 (D.D.C. 2009). The documents cited herein in support of FDIC Receivers motion to dismiss are attached as exhibits to the Declaration of Jason S. Cohen, received on November 22, 2010, and submitted herewith. When citing these materials, the notation Ex. ___ refers to the corresponding exhibit attached to Mr. Cohens Declaration. Dan Margolies, US Senate Panel: High-Risk Loans Brought Down WaMu, REUTERS, Apr. 12, 2010, available at http://www.reuters.com/article/idUSN1220708420100412.
4.
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securitization market. 5 Securitization of the loans it originated was an important source of liquidity for WaMu. 6 When home prices began to plateau and fall, and when the credit markets began to lose their appetite for mortgage-backed securities, WaMus business model could not withstand the resulting stresses. In 2008, WaMu was having increasingly large mortgage loan losses. It suffered three straight quarters of losses totaling $6.1 billion, and was encountering increasingly difficult market conditions. 7 On September 15, 2008, an outflow of deposits began that reached $16.7 billion in only eight business days. 8 As a result, on September 25, 2008, OTS closed WaMu, finding the bank to have insufficient liquidity to meet its obligations and thus to be in an unsafe and unsound condition to conduct business. 9 OTS appointed FDIC as Receiver on the same day. See Am. Compl. 10; OTS Order 2008-36. FDIC Receiver was thus called upon to help resolve the problems with one of the nations most troubled mortgage lenders at the low point of the financial crisis only ten days
5.
See, e.g., Ex. 1, Washington Mutual, Inc. (WMI) 2007 Form 10-K (2/29/08) at 132-133. The Court may take judicial notice of documents required by law to be, and that have been, filed with the SEC. In re MBIA, Inc. Sec. Litig., 700 F. Supp. 2d 566, 574 n.5 (S.D.N.Y. 2010) (quoting Rothman v. Gregor, 220 F.3d 81, 88 (2d Cir. 2000)); accord, e.g., Staehr v. Hartford Fin. Servs. Group, 547 F.3d 406, 425 (2d Cir. 2008); Mintz v. FDIC, ___ F. Supp. 2d ____, No. 09-1894, 2010 WL 3064373, at *2 n.2 (D.D.C. Aug. 6, 2010). References to WMI filings are relevant because WaMu was wholly-owned by WMI, a publicly traded bank holding company. See Ex. 1, WMI 2007 Form 10-K (2/29/08) at 2. See, e.g., Ex. 1, WMI 2007 Form 10-K (2/29/08) at 87. Office of Thrift Supervision, OTS Fact Sheet on Washington Mutual Bank, 3 (Sept. 25, 2008) (available at http://www.ots.treas.gov/_files/730021.pdf). Id. Office of Thrift Supervision, Press Release, Washington Mutual Acquired by JPMorgan Chase (No. OTS 08-046) (Sept. 25, 2008).
6. 7. 8. 9.
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after Lehman Brothers filed for bankruptcy protection. Since the beginning of 2008, 314 banks have been closed and placed in FDIC receiverships, 10 but WaMus closure remains the largest bank failure in United States history. 11 In order to resolve the failed bank quickly at the least cost to the FDICs Deposit Insurance Fund during a period of great financial stress, FDIC Receiver conducted a competitive bidding process and, immediately upon being appointed Receiver, sold WaMus banking operations substantially all assets and all deposits and substantially all other liabilities to JPMC. FDIC Receiver thus was able to resolve WaMu without disruption for depositors and other bank customers, without cost to the Deposit Insurance Fund, and without posing additional systemic risk to the U.S. financial system. A. The WaMu Receivership And The P&A Agreement
Upon its appointment, FDIC Receiver succeeded to all the rights, titles, powers, privileges, and operations of WaMu with respect to the bank, its assets, and its valid obligations. 12 U.S.C. 1821(d)(2). The powers and duties of FDIC Receiver include the ability to transfer any asset or liability of the institution in default . . . without any approval, assignment, or consent with respect to such transfer, id. 1821(d)(2)(G)(i)(II), and to otherwise act in the best interests of the [failed] depository institution, its depositors, or the [FDIC], id. 1821(d)(2)(J). FDIC Receiver has a statutory duty to resolve a failed financial institution in the manner least costly to the Deposit Insurance Fund with respect to the total amount of the expenditures . . . and obligations incurred by the [FDIC] (including any immediate and long-term obligation of the
10. See Failed Bank List, available at http://www.fdic.gov/bank/individual/failed/banklist.html. 11. Elinor Complay and Jonathan Stempel, WaMu Is Largest U.S. Bank Failure, REUTERS, Sept. 26, 2008, available at http://www.reuters.com/article/idUSTRE48P08920080926.
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[FDIC] and any direct or contingent liability for future payment by the [FDIC]). 12 U.S.C. 1823(c)(4)(A)(ii). Immediately following FDIC Receivers appointment on September 25, 2008, FDIC Receiver accepted JPMCs bid to purchase substantially all of the assets and assume all deposit and substantially all other liabilities of [WaMu] in a P&A Agreement designed to transfer the whole bank. P&A Agreement at 1; id. 2.1, 3.1; see id. at 20. As a result of this transaction, JPMC acquired the ongoing banking operations of WaMu, which consisted of a retail bank network of 2,244 branches, a nationwide credit card lending business, a multi-family and commercial real estate lending business, and nationwide mortgage banking activities, specifically including WaMus valuable mortgage servicing rights with respect to hundreds of billions of dollars of residential mortgage loans. 12 Ex. 9, JPMC 2009 Form 10-K (2/24/10) at 58; see, e.g., Ex. 7, JPMC Form 8-K (1/15/09), Ex. 99.1 Earnings Release at 6 (Total third-party mortgage loans serviced [in 2008] were $1.2 trillion, an increase of $557.9 billion, or 91%, predominantly due to the Washington Mutual transaction.); Am. Compl. 38-39. According to JPMC, the Washington Mutual transaction . . . contributed to increases in net interest income, lending- and deposit-related fees, and mortgage fees and related income. Ex. 9, JPMC 2009 Form 10-K (2/24/10) at 45. In exchange for WaMus ongoing banking operations i.e., for purchas[ing] substantially all the assets and assum[ing] all deposit and substantially all other liabilities of WaMu JPMC paid $1.9 billion in cash. P&A Agreement, Art. VII; see Am. Compl. 86.
12. See Ex. 9, JPMC 2009 Form 10-K (2/24/10) at 58 (The [WaMu] transaction expanded [JPMCs] U.S. consumer branch network in California, Florida, Washington, Georgia, Nevada and Oregon and created the nations third-largest branch network.).
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According to JPMC, however, the fair value of the net assets it acquired from FDIC Receiver in the WaMu transaction (i.e., WaMus assets net of its liabilities) was $11.99 billion at the time of sale. See Ex. 9, JPMC 2009 Form 10-K (2/24/10) at 144. 13 Thus, by JPMCs own reckoning, the total fair value of the assets and liabilities it assumed under the P&A Agreement, even after [a]djustments to reflect liabilities assumed at fair value, was more than six times greater than JPMCs $1.9 billion purchase price. 14 Id. The projected future cash flow for WaMus mortgage servicing rights alone was valued as an asset worth $5.87 billion on JPMCs balance sheets immediately after the purchase. Id. Section 3.1 of the P&A Agreement provided that JPMC purchases from the Receiver, and the Receiver hereby sells, assigns, transfers, conveys, and delivers to [JPMC], all right, title, and interest of the Receiver in and to all of the assets of WaMu, whether or not reflected in the books of [WaMu] as of Bank Closing, and subject to all liabilities . . . affecting such Assets to the extent provided in Section 2.1. 15 Section 2.1 of the P&A Agreement, which governs JPMCs assumption of WaMus liabilities, provided that:
13. Such a transaction, in which the acquisition-date fair value of the net assets acquired exceeds the purchase price, is literally considered a bargain purchase by GAAP standards. See FASB Statement (SFAS) No. 141R (Business Combinations) at iv-v (Fin. Accounting Standards Bd. 2007). 14. Concluding that [t]he fair value of the net assets of Washington Mutuals banking operations exceeded the $1.9 billion purchase price, by over $10 billion, JPMC ultimately recorded a $2 billion extraordinary gain in 2008 and 2009. Ex. 9, JPMC 2009 Form 10-K (2/24/10) at 143-44; see Ex. 8, JPMC 2008 Form 10-K (3/2/09) at 123-24. 15. The P&A Agreement also stated that [t]he conveyance of all assets purchased by JPMC shall be made . . . without any warranties whatsoever with respect to such assets, express or implied, with respect to . . . freedom from liens or encumbrances (in whole or in part), or any other matters. P&A Agreement 3.3.
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Subject to Sections 2.5 and 4.8, [JPMC] expressly assumes at Book Value . . . and agrees to pay, perform, and discharge all of the liabilities of [WaMu] which are reflected on the Books and Records of [WaMu] as of Bank Closing, . . . except as listed on the attached Schedule 2.1, and as otherwise provided in this Agreement. (Emphasis added.) 16 Schedule 3.2 specifically identified the rights of [WaMu] to provide mortgage servicing for others . . . and related contracts as assets purchased by JPMC. P&A Agreement at 36. The P&A Agreement also provided that notwithstanding Section 4.8, JPMC specifically assumes (under Section 2.1) and purchases (under Section 3.1) all mortgage servicing rights and obligations of [WaMu]. Id. 2.1, 3.1. Thus, while JPMC generally had the right under Section 4.8 of the P&A Agreement to elect not to assume existing agreements which provide for the rendering of services by or to [WaMu], JPMC could not reject any agreements providing for WaMus mortgage servicing rights and obligations. 17 Id. 4.8. Consistent with JPMCs irrevocable purchase and assumption of WaMus mortgage servicing activities, the P&A Agreement required FDIC Receiver to deliver to JPMC as soon as practicable all [l]oan and collateral records and Credit Files and other documents, title records pertaining to real
16. As DBNTC alleges, [t]he list [in Schedule 2.1] of liabilities not assumed by JPMC pursuant to the [P&A Agreement] does not include or reference any liabilities or obligations arising under the Governing [Agreements]. Am. Compl. 87; see P&A Agreement at 34. Section 2.5, which is entitled Borrower Claims, excludes from the scope of liabilities assumed by JPMC any liability associated with borrower claims for payment of or liability to any borrower, and thus is not relevant. 17. Section 4.8 permitted JPMC to elect not to assume existing service agreements if JPMC provided written notice of its decision with respect to each such agreement within 120 days of WaMus closing. P&A Agreement 4.8. Section 4.8 provided that JPMC shall be deemed to have assumed agreements for which no notification is timely given. Id.
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estate mortgages, and other Records pertaining to the Assets purchased by JPMC. 18 Id. 6.1. B. WaMus Mortgage-Backed Securities Business
Prior to WaMus closure, the sale and servicing of securitized mortgage loans through large-scale, multi-billion dollar financial transactions was a central aspect of WaMus residential mortgage banking operations. See Ex. 1, Washington Mutual, Inc. (WMI) 2007 Form 10-K (2/29/08) at 133 (reflecting $113.5 billion and $82.6 billion in proceeds from new residential mortgage loan securitizations in 2006 and 2007, respectively). 1. The Securitization Process
The securitization transactions at issue involve the creation and sale of securities backed by underlying pools of thousands of residential mortgage loans, typically held in trusts formed for that purpose. 19 See Am. Compl. 25-30; see also Ex. 2, WMI Form 10-Q (8/11/08) at 60 (describing securitization process). Broadly speaking, the securitization process occurs as
18. Records is defined in the P&A Agreement as any document, microfiche, microfilm and computer records . . . of [WaMu] generated or maintained by [WaMu] that is owned by or in the possession of the Receiver at Bank Closing. P&A Agreement at 6; see also id. at 4 (defining Credit File), 5 (defining Loan). 19. FDIC Receiver assumes (as it must) only for purposes of this motion the specific factual allegations contained in the Amended Complaint, but does not necessarily concede their accuracy, particularly the allegations relating to the scope and extent of breaches of the Governing Agreements and the amount of damages caused by any alleged breaches. If this case proceeds, DBNTC will, of course, be required to prove each and every breach for which it seeks to recover, and for each such breach, that it caused a material loss to the relevant Trust. DBNTC also must establish, for each Trust, that it has standing to assert the breach claims and that each Defendant is contractually liable under the agreement allegedly breached. For example, Governing Agreements provided as exhibits to the Amended Complaint indicate on their face that any breach claims with respect to forty-two of the Primary Trusts (see Am. Compl. Ex. 1-A, Trust Nos. 46 through 87) can only be asserted against Washington Mutual Mortgage Securities Corp. (WMMSC), a co-defendant in this action and a wholly-owned subsidiary of JPMC. See Ex. 8, JPMC 2008 Form 10-K (3/2/09) at 245 (Ex. 21.1 List of Subsidiaries of JPMorgan Chase & Co.); Am. Compl. 9.
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follows: The entity sponsoring the securitization (the seller) typically a bank or bank subsidiary originates or acquires a pool of mortgage loans and sells those loans to an intermediate entity (the depositor), which in turn places the pooled loans into a trust as collateral for mortgage-backed securities. 20 See Am. Compl. 28(a); Ex. 3, WaMu 2007 Form 10-K (3/21/08) at 76-77. The trust then issues different classes of securities, each of which entitles investors to specific interests in periodic disbursements from the cash flows available to the trust from borrower payments of principal, interest, and fees made over the life of the underlying mortgages. See Am. Compl. 28(c); Ex. 1, WMI 2007 Form 10-K (2/29/08) at 48. A trustee ensures the proper distribution of trust funds to investors in accordance with the terms of the trust agreements. See Am. Compl. 28(b). The sponsoring entity often retains the right to service the pooled loans after they have been sold, because those rights are a valuable source of revenue that can be worth billions of dollars annually. See Ex. 1, WMI 2007 Form 10-K (2/29/08) at 48, 133; Am. Compl. 28(d). The servicer acts as the day-to-day administrator of the mortgage loan assets held by the trust, responsible for collecting payments due from the borrowers [and] remitting those payments to the trust for ultimate payment to the investors. Am. Compl. 28(d). In exchange, the servicer receives servicing fees equal to a percentage of the outstanding principal balance of mortgage loans . . . being serviced. Ex. 3, WaMu 2007 Form 10-K (3/21/08) at 91. In 2006 and 2007, the
20. The depositor is typically a wholly-owned subsidiary of the sponsoring entity or its holding company. See, e.g., Am. Compl. Ex. 1-A (identifying WaMu as both seller and depositor for 95 of 99 Primary Trusts); Ex. 1, WMI 2007 Form 10-K (2/29/08), Ex. 21 (listing depositor entities Long Beach Securities Corporation, WaMu Asset Acceptance Corporation, and Washington Mutual Mortgage Securities Corporation, inter alia, among WMI subsidiaries).
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mortgage servicing rights retained by WaMu in connection with its sale of securitized mortgage loans generated revenue streams of $2.1 billion and $1.9 billion, respectively. See id. These mortgage servicing rights are so lucrative that the expected future cash flow from such rights is often recorded as an asset on the banks income statements because the expected future cash flows from servicing are projected to be more than adequate compensation for such services. Ex. 1, WMI 2007 Form 10-K (2/29/08) at 116. 21 Along with mortgage servicing rights, the sponsoring entity typically retains certain residual or other continuing interests in the securitized loans. See Ex. 3, WaMu 2007 Form 10-K (3/21/08) at 76-77. Such retained interests commonly include the right to cash flows remaining after the investors in the securitization trusts have received their contractual payments. Id. at 91; see Am. Compl. 26. 2. The Trusts and the Governing Agreements
DBNTC purports to assert breach claims with respect to 127 separate Trusts created between 1992 and 2007, for which DBNTC allegedly served in the capacity of Trustee or Indenture Trustee, and for which WaMu (or subsidiaries, affiliates, or predecessors-in-interest of WaMu) allegedly served as seller, depositor, and servicer. Am. Compl. 3, 28; see also id., Ex. 1 (listing 99 Primary Trusts and 28 Secondary Trusts). According to DBNTC, the original outstanding balance of the 99 Primary Trusts was approximately $165 billion, while the
21. According to the Notes to Consolidated Financial Statements in WMIs 2007 annual report, [a]dequate compensation is where the benefits of servicing would fairly compensate a substitute servicer should one be required, including a profit margin that would be demanded in the market place. Ex. 1, WMI 2007 Form 10-K (2/29/08) at 116. As of December 31, 2007, WaMus financial statements reflected $6.3 billion in recorded assets for the projected excess cash flow of the banks mortgage servicing rights. Id. at 104.
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outstanding principal balance of the Primary Trusts at the time of WaMus closure on September 25, 2008 was approximately $45 billion. Id. 4. DBNTC alleges that the 28 Secondary Trusts are trusts through which WaMu issued mortgage-backed or derivative securities whose performance is dependent, in whole or in part, on the performance of the Primary Trusts or of other residential mortgage-backed securities issued by [WaMu]. Id. 3. Each Trust is governed by a complex web of interrelated transaction documents (the Governing Agreements), each set of which comprises hundreds of pages of executory contracts memorializing the rights, interests, liabilities, and continuing obligations of the contracting parties in exhaustive detail. See Am. Compl. 29-33. Among other things, the Governing Agreements set forth the terms by which mortgage loans are to be contributed to the Trusts, securitized, insured, and serviced; how the resulting securities are to be sold to investors; and how cash flows from payments of principal, interest and fees on the loans are to be allocated and distributed. See id. 29. As DBNTC alleges, the Governing Agreements for each Trust represent a unitary and integrated set of contractual undertakings . . . that involve obligations that are ongoing, mutual, and interrelated. Id. 31-33. As DBNTC also alleges consistent with the importance of the Governing Agreements to WaMus mortgage banking business and with the amount of money at risk the Governing Agreements constituted official books and records of [WaMu] at the time of [WaMus] closing on September 25, 2008, maintained in the banks formal files and executed on behalf of WaMu by individuals duly authorized by the applicable WaMu entitys Board of Directors. See id. 42(c), (e). According to DBNTC, while the related ancillary documents and agreements may vary from Trust to Trust, each set of Governing Agreements generally includes a Mortgage Loan Purchase Agreement (MLPA), which governs the transfer of the mortgage loans from the
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sponsoring entity (the seller) to the depositor, and a Pooling and Servicing Agreement (PSA), which governs the administration of the Trust, the transfer of the loans into the Trust, the securitization process, the servicing of the underlying mortgage loans, and the management of the Trust cash flow. See id. 29-30. DBNTC alleges that all of WaMus liabilities and obligations under the Governing Agreements that DBNTC seeks to enforce are contained within these MLPAs and PSAs. Id. 30, 47, 52, 57, 62, 64; see also id., Ex. 7 (purporting to identify the contractual provisions giving rise to WaMus obligations with respect to each Primary Trust). 22 DBNTC also alleges that the MLPAs and PSAs also contain provisions describing WaMus continuing rights and interests in the Trusts as seller, depositor, and servicer. See, e.g., Am. Compl. Ex. 4, WaMu Series 2007-HE1 Trust (Issue ID No. WA07H1), MLPA 3; id., PSA 2.01, 3.01, 6.01 et seq. More specifically, DBNTC alleges WaMu undertook certain continuing obligations under the Governing Agreements (see Am. Compl. 43) that have been breached and continue to be breached: a. Repurchase and Indemnification Obligations
According to DBNTC, the Governing Agreements contain a number of representations and warranties made by WaMu in connection with its securitization activities regarding, inter alia, the underwriting of the mortgage loans, the loan to value ratios for the mortgage loans, and
22. DBNTC uses the term WaMu indiscriminately in its Amended Complaint, although in fact (as the charts and exhibits to the Amended Complaint show), the sponsoring entity, seller, depositor, and servicer for many of the Trusts were entities other than Washington Mutual Bank. If this case proceeds against FDIC Receiver, DBNTC will be required to prove not simply that these entities were affiliates or subsidiaries of Washington Mutual Bank, but that Washington Mutual Bank was legally obligated for the other entities liabilities as of September 25, 2008. For ease of reference, we will continue to use the term WaMu throughout this memorandum, subject to the issue noted in this footnote.
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compliance of the loans with local, state and federal laws. Am. Compl. 45. DBNTC alleges that WaMu breached representations and warranties regarding the loans. Id. 93. DBNTC asserts that the Governing Agreements impose upon WaMu: (1) the obligation to cure, repurchase, or substitute any mortgage loans with respect to which any material breach of such representations and warranties or other material defect exists, within a specified period of days following discovery or written notice (Repurchase Obligations), id. 53; and (2) the duty to indemnify the Trustee for certain losses or expenses resulting from WaMus breach of its representations, warranties, and obligations under the Governing Agreements (Indemnification Obligations), id. 60. DBNTC acknowledges that, under the Governing Agreements, the sole remedy available to the Trustee or the Trust investors for any such breach or defect is to invoke the Repurchase Obligations. Id. 54-55; see, e.g., Am. Compl. Ex. 4, WaMu Series 2007-HE1 Trust (Issue ID No. WA07H1), PSA 2.03(a). b. Notice Obligations
DBNTC alleges that the Governing Agreements impose upon WaMu, in its capacities as Seller and Servicer, the duty to give prompt written notice to the Trustee and other parties upon discovery of any material breach of its representations and warranties with respect to the underlying mortgage loans (Notice Obligations). Am. Compl. 49. DBNTC acknowledges that, as Trustee, it has a reciprocal obligation under the Governing Agreements to provide prompt written notice to WaMu, as the Seller, regarding material breaches or defects in the underlying mortgage loans. See id. 50-51. The sole remedy provisions of the Governing Agreements uniformly require that, upon discovery or receipt of notice from the Trustee, WaMu must be given the opportunity to cure the alleged breach or defect, or to substitute or repurchase the affected loans, within a specific period of time typically 60 to 90 days before DBNTC as Trustee is entitled to enforce the Repurchase Obligations. See, e.g., Am. Compl. Ex. 4, WaMu
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Series 2007-HE1 Trust (Issue ID No. WA07H1), PSA 2.03(a); id., GSAMP Series 2005-S2 Trust (Issue ID No. GS05X2), PSA 2.08. DBNTC concedes that it has not provid[ed] WaMu with notice of a breach with respect to, and demand[ed] cure, substitution or repurchase of, specific mortgage loans included in the Trusts. Am. Compl. 99. c. Servicing Obligations and Access Rights
DBNTC alleges that the Governing Agreements impose upon WaMu, solely in its capacity as Servicer, the duty to service and administer the mortgage loans in the Trusts on behalf of the Trustee, in accordance with the terms of each specific Governing Agreement (Servicing Obligations). Am. Compl. 63. Among these alleged Servicing Obligations is the duty to provide the Trustee, upon request, with access to all records maintained by WaMu in respect of WaMus rights and obligations under the Governing [Agreements], including information about the mortgage loans and the mortgage loan files (Access Rights). 23 Id. 58. DBNTC also alleges that WaMu as the Seller, Depositor and/or Servicer has exclusive possession of the loan origination and servicing records, id. 48, and has denied the Trustee access to the loan-level books and records[] and information concerning the mortgage loans in the Trusts, id. 81. C. WaMus Disclosure Of Liabilities And Obligations Under The Governing Agreements
Public disclosures made by WaMu and its holding company, Washington Mutual Inc. (WMI), in 2007 and 2008 repeatedly made it clear that the Governing Agreements imposed
23. According to DBNTC, [s]uch documents and other information includes origination and underwriting files, servicing records, borrower statements both recorded on tape and transcribed into servicing notes, borrower statements made during the origination of the loan, payment histories, and borrower correspondence. Am. Compl. 44.
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liabilities and continuing obligations on WaMu as the seller and servicer of securitized loans. See, e.g., Ex. 2, WMI Form 10-Q (8/11/08) at 10-11. 24 For example, in the Commitments, Guarantees and Contingencies section of the Notes to Consolidated Financial Statements in WaMus 2007 annual report, WaMu stated: In the ordinary course of business, the Bank sells loans to third parties and . . . [may] be required to repurchase sold loans when representations and warranties made by the Bank in connection with those sales are breached. . . . [I]f the breach had a material adverse effect on the value of the loan, the Bank will be required to either repurchase the loan or indemnify the investor for losses sustained. In addition, the Bank is a party to . . . agreements that contain general indemnification provisions, primarily in connection with agreements to sell and service loans or other assets or the sales of mortgage servicing rights. These provisions typically require the Bank to make payments to the purchasers or other third parties to indemnify them against losses they may incur due to actions taken by the Bank prior to entering into the agreement or due to a breach of representations, warranties, and covenants made in connection with the agreement. Ex. 3, WaMu 2007 Form 10-K (3/21/08) at 107. Elsewhere in this same document, WaMu stated that [i]n the event of a breach of the representations and warranties . . . the Bank bears the risk of any loss on the loans. Id. at 77 (emphasis added); see also, e.g., Ex. 1, WMI 2007 Form 10-K (2/29/08) at 117, 152. WaMu established reserves on its balance sheets based on estimates of its probable exposure to the potential repurchase or indemnification liabilities, but cautioned that the
24. WaMus separate financial statements are presented within the Consolidated Financial Statements and other information provided in WMIs SEC filings. See Ex. 1, WMI 2007 Form 10-K (2/29/08) at 16 (Overview); Ex. 2, WMI Form 10-Q (8/11/08) at 6 (Basis of Presentation). WaMus separate filings of periodic reports with the Office of Thrift Supervision e.g., Ex. 3, WaMu 2007 Form 10-K (3/21/08) reflect the same information and are cited as appropriate throughout.
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estimated reserves were subject to adjustment and did not represent the maximum risk exposure [t]hroughout the life of these repurchase or indemnification liabilities. Ex. 3, WaMu 2007 Form 10-K (3/21/08) at 15-16; see also, e.g., Ex. 2, WMI Form 10-Q (8/11/08) at 10-11; Ex. 1, WMI 2007 Form 10-K (2/29/08) at 22. In March 2008, WaMu offered a candid assessment of its continuing exposure to repurchase liability under the Governing Agreements based on the principal outstanding balance of securitized loans: The Banks liquidity could also be adversely affected by unanticipated demands on its cash, such as having to repurchase securitized loans if it were found to have violated representations and warranties contained in the securitization agreements. In such event, the Bank generally would be required to repurchase these loans or indemnify the investor for losses sustained. Since in most instances the repurchased loans would be in default, it is unlikely that the Bank would be able to resell these loans in the secondary market. If the Bank were required to repurchase a substantial amount of these loans, its liquidity and capital would be adversely affected as the amount of nonperforming assets on its balance sheet would increase. Ex. 3, WaMu 2007 Form 10-K (3/21/08) at 50 (emphasis added). The extent to which WaMus Repurchase and Indemnification Obligations mature into current cash demands is driven primarily by the performance of the underlying loans in providing cash flow to the Trust, because WaMu is required to repurchase defective loans only if the breach had a material adverse effect on the value of the loan. Id. at 107; see also id. at 25 (The degree of credit risk and level of credit losses is highly dependent on the economic environment that unfolds subsequent to originating or acquiring assets.); Ex. 1, WMI 2007 Form 10-K (2/29/08) at 133 (recording $1.8 billion in repurchased mortgage loans in 2006 and $431 million in repurchased mortgage loans in 2007). Indeed, WaMus filings in the months prior to its closing demonstrated WaMus increasing risk of exposure to liabilities arising from its Repurchase and Indemnification
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Obligations, as [h]igher delinquencies drove increased repurchase requests from investors resulting in an increase in the provision for repurchase reserves. Ex. 2, WMI Form 10-Q (8/11/08) at 58; see, e.g., Ex. 1, WMI 2007 Form 10-K (2/29/08) at 85 (noting significant increases in loan delinquencies and credit losses); Ex. 5, WMI Form 8-K (7/22/08), Ex. 99.1 (Press Release) at 6 (noting an increase in repurchase demands); Ex. 4, WaMu Form 10-Q (8/14/08) at 21-22 (noting sharply higher delinquency rates and an increase in the volume of investor requests to repurchase loans the Bank had previously sold). D. JPMCs Acknowledgment Of Liabilities And Obligations Under The Governing Agreements
Notwithstanding the plain terms of the P&A Agreement and the many benefits that JPMC has received from the acquisition of WaMus assets, JPMC has denied assuming any of WaMus liabilities under the Governing Agreements. 25 See Am. Compl. 91 (JPMC further contends that all other liabilities of [WaMu], including the DBNTC liabilities, remain with [FDIC Receiver].) (quoting 8/25/10 letter from JPMC counsel to DBNTC counsel) (emphasis in original). JPMCs public statements both before and after the WaMu transaction, however, belie this denial, and instead evince a clear awareness that those liabilities were reflected on WaMus books and records prior to its closure and transferred to JPMC along with all of WaMus rights, interests, and obligations under the Governing Agreements. In connection with its own loan securitization activities, JPMC has consistently demonstrated its familiarity with the liabilities and obligations assumed by seller and servicer
25. According to DBNTC, JPMC has taken the position that the P&A Agreement transferred liabilities reflected on WaMus pre-closure books and records only if and to the extent they had a Book Value. Am. Compl. 90 (emphasis in original). As we demonstrate below, this is incorrect.
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banks in residential mortgage loan securitizations, including the sellers repurchase and indemnification obligations. See Ex. 6, JPMC 2007 Form 10-K (2/29/08) at 172 (acknowledging that the maximum amount of future payments the [bank] would be required to make under such repurchase and/or indemnification provisions would be equal to the current amount of assets held in the trust). 26 JPMCs public filings after the P&A Agreement make repeated reference to its assumption of WaMus rights and responsibilities under the Governing Agreements. When discussing its accounting for the WaMu transaction in its 2008 Form 10-K, for example, JPMC noted that the liabilities it had assumed include WaMus executory contracts and other commitments. Ex. 8, JPMC 2008 Form 10-K (3/2/09) at 124. Elsewhere in that Form 10-K, in presenting data about its residential mortgage securitization activities, JPMC included the principal balances of the loans in securitizations sponsored by WaMu in a table displaying the total unpaid principal amount of assets held in JPMorgan Chase-sponsored securitization entities . . . to which the Firm has continuing involvement such as ongoing repurchase or indemnification obligations. Id. at 168 (emphasis added) (defining continuing involvement); see also id. at 169 (noting that the overview of securitized assets held in QSPEs as of December 31, 2008 [i]ncludes securitization-related QSPEs sponsored by . . . Washington Mutual), 171172 (JPMCs securitization activities include securitizations sponsored by . . . Washington Mutual). Thus, JPMC expressly acknowledged that it had stepped into WaMus shoes with
26. See also, e.g., Ex. 9, JPMC 2009 Form 10-K (2/24/10) at 233 (stating that the seller banks maximum liability for breaches under [its] representations and warranties . . . [is] equal to the unpaid principal balance of such loans held by purchasers . . . that are deemed to have defects).
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respect to WaMu-sponsored securitizations. Indeed, in the Risk Factors section of a December 2009 prospectus supplement, JPMC forthrightly discussed its potential exposure resulting from its assumption of WaMus repurchase and indemnification obligations. Under the heading Defective and repurchased loans may harm our business and financial condition, JPMC stated: In connection with the sale and securitization of loans (whether with or without recourse), the originator is generally required to make a variety of customary representations and warranties regarding both the originator and the loans being sold or securitized. We and certain of our subsidiaries, as well as entities acquired by us as part of the Bear Stearns, Washington Mutual and other transactions, have made such representations and warranties in connection with the sale and securitization of loans (whether with or without recourse), and we will continue to do so as part of our normal Consumer Lending business. Our obligations with respect to these representations and warranties are generally outstanding for the life of the loan, and relate to, among other things, compliance with laws and regulations; underwriting standards; the accuracy of information in the loan documents and loan file; and the characteristics and enforceability of the loan. . . . Accordingly, such repurchase and/or indemnity obligations arising in connection with the sale and securitization of loans (whether with or without recourse) by us and certain of our subsidiaries, as well as entities acquired by us as part of the Bear Stearns, Washington Mutual and other transactions, could materially increase our costs and lower our profitability, and could materially and adversely impact our results of operations and financial condition. Ex. 11, 424B7 Prospectus Supplement (12/8/09) at S-7 (emphases added); see also, e.g., Ex. 9, JPMC 2009 Form 10-K (2/24/10) at 58 (stating that the positive impact of the Washington Mutual transaction on its 2009 net revenue was partially offset by $1.6 billion in estimated losses related to the repurchase of previously sold loans). These disclosures make clear that
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JPMC understood what the P&A Agreement unambiguously provides: that WaMus rights, interests, obligations, and liabilities under the Governing Agreements transferred to JPMC. 27 E. DBNTCs Amended Complaint
DBNTC initially submitted some of the claims asserted in the Amended Complaint to FDIC Receiver through its administrative process, as required by the Financial Institutions Reform Recovery and Enforcement Act of 1989 (FIRREA), Pub. L. No. 101-73. See Am. Compl. 14; Proof of Claim (Am. Compl. Ex. 3); 12 U.S.C. 1821(d)(13)(D). In its Proof of Claim, DBNTC asserted only that WaMu had breached its contractual obligations; DBNTC did not assert any separate claim or make any allegation that FDIC Receiver itself had assumed WaMus obligations under the Governing Agreements, had breached those Agreements postreceivership, or otherwise had engaged in wrongful post-receivership conduct regarding these Agreements. DBNTCs Proof of Claim was deemed disallowed by operation of law on June 28, 2009 (180 days after it was submitted). Pursuant to 12 U.S.C. 1821(d)(6)(A), DBNTC commenced this action on August 26, 2009. Am. Compl. 19. On September 8, 2010, DBNTC filed its Amended Complaint and added JPMC as a defendant. In Count I (Breach of Contract), DBNTC alleges that FDIC Receiver or JPMC, or both, is or are liable, as WaMus successor-in-interest, for alleged breaches of WaMus (1) Representations and Warranties as seller, depositor, and servicer, Am. Compl. 93; (2) Notice, Repurchase and Indemnification Obligations as seller, depositor, and servicer, id.; and (3) obligations as servicer with respect to DBNTCs Access Rights, id. 98. DBNTC also
27. Since being named in this lawsuit, JPMC has tried to walk away from its previous acknowledgements, to the point of publicly disclaiming responsibility for WaMus repurchase obligations. See Ex. 10, JPMC Form 10-Q (11/9/10) at 58.
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alleges that FDIC Receiver or JPMC continues to breach WaMus Servicer Obligations with respect to DBNTCs Access Rights, which has made it impossible for the Trustee . . . to enforce WaMus Repurchase Obligations, including the enforcement mechanism of providing WaMu with notice of a breach with respect to . . . specific mortgage loans included in the Trusts. Id. 99; see also id. 82. Without access to this information, DBNTC alleges that it is unable to specifically identify particular mortgage loans that breached particular Representations and Warranties or for which the Notice and/or Repurchase Obligations have been triggered and breached. Id. 81; see id. 44, 98. DBNTC estimates that the Trusts have incurred losses due to the alleged breaches rang[ing] from approximately $6 billion to $10 billion, with such losses continuing to accrue. Am. Compl. 85. DBNTC contends, without specifying any basis for such a claim, that [t]he Trusts and the Trustees claims against the FDIC for breaches of these assumed contracts are entitled at least to administrative expense priority in the [WaMu] receivership estate. Id. 97. In other words, DBNTC seeks to be paid ahead of any depositor claims and any other creditors of WaMu. In Count II (Declaratory Judgment), DBNTC seeks a determination as to whether, and to what extent, WaMus liabilities for alleged breaches of the Governing Agreements and ongoing obligations under those Agreements were transferred by FDIC Receiver and assumed by JPMC pursuant to the P&A Agreement. See Am. Compl. 103-106. ARGUMENT I. FDIC RECEIVER HAS NO LIABILITY TO DBNTC UNDER THE GOVERNING AGREEMENTS. DBNTCs claims arise from WaMus alleged pre-closure breach of representations, warranties and obligations under the Governing Agreements, and from alleged post-closure continuing breaches by WaMus successor-in-interest. Under the plain terms of the P&A - 23 -
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Agreement, the Governing Agreements and any of WaMus rights, interests, liabilities, and obligations thereunder were transferred to JPMC on September 25, 2008. That transfer extinguished any liability of FDIC Receiver for the claims asserted by DBNTC. This Court can make these determinations as a matter of law, based on the unambiguous language of the P&A Agreement. See, e.g., Conseil Alain Aboudaram, S.A. v. de Groote, 460 F.3d 46, 50 (D.C. Cir. 2006) ([W]here the language and the inferences to be drawn from it are unambiguous, a district court may construe a contract as a matter of law and grant judgment accordingly.); see also Ameren Servs. Co. v. FERC, 330 F.3d 494, 499 (D.C. Cir. 2003) ([Courts] determine the plain meaning of a contract from the language used by the parties to express their agreement.). [A] contract provision is not ambiguous merely because the parties later disagree on its meaning. Segar v. Mukasey, 508 F.3d 16, 22 (D.C. Cir. 2007). 28 Indisputable, judicially-noticeable facts reflected on the public record confirm and support the plain meaning construction of the P&A Agreement. A. The P&A Agreement Transferred The Governing Agreements And All Of WaMus Rights, Obligations, And Liabilities Thereunder To JPMC.
The Governing Agreements, and any and all of WaMus attendant interests, rights, obligations, and liabilities thereunder transferred to JPMC under the P&A Agreement as part of JPMCs acquisition of WaMus mortgage banking operations. Section 3.1 of the P&A Agreement transferred to JPMC all right, title, and interest in and to all of WaMus assets,
28. The P&A Agreement provides this agreement and the rights and obligations hereunder shall be governed by and construed in accordance with the federal law of the United States of America, and in the absence of controlling federal law, in accordance with the laws of the state in which the main office of the failed bank is located. P&A Agreement 13.4.
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subject to all liabilities . . . affecting such Assets to the extent provided in Section 2.1. P&A Agreement 3.1. Under Section 2.1, JPMC agree[d] to pay, perform, and discharge all of the liabilities of [WaMu] which are reflected on the Books and Records of [WaMu] as of Bank Closing, . . . except as listed on the attached Schedule 2.1 and as otherwise provided in this Agreement. 29 Id. 2.1. These provisions effect the transfer to JPMC of the Governing Agreements in their entirety, inclusive of all of WaMus obligations and liabilities thereunder. 1. The Governing Agreements are Assets that transferred to JPMC under Section 3.1 of the P&A Agreement.
The P&A Agreement unambiguously treats the Governing Agreements as Assets that transferred to JPMC under Section 3.1 and its related provisions. The P&A Agreement states that JPMC specifically assume[d] (under Section 2.1) and specifically purchase[d] (under Section 3.1) all mortgage servicing rights and obligations of [WaMu]. P&A Agreement 2.1, 3.1. Schedule 3.2, which lists the notional purchase price of certain types of assets, identifies as assets transferred to JPMC the rights of [WaMu] to provide mortgage servicing. . . and related contracts. Id. at 36 (emphasis added). Because [t]he mortgage servicing rights and obligations of WaMu with respect to the Trusts arose under the Governing [Agreements], Am. Compl. 40, the Governing Agreements are among the related contracts referred to in Schedule 3.2 and transferred to WaMu under Section 3.1 of the P&A Agreement. The Governing Agreements for each Trust comprise several complex, integrated agreements containing various valuable rights and interests bundled together with certain
29. The list of Certain Liabilities Not Assumed in Schedule 2.1 does not include or reference any liabilities or obligations arising under the Governing [Agreements]. Am. Compl. 87; see P&A Agreement at 34 (Schedule 2.1).
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attendant and ongoing duties, obligations, and liabilities. See Am. Compl. 31-33. Such interrelated securitization agreements formed part of a single transaction and were designed to effectuate the same purpose. Bank of N.Y. v. FDIC, 453 F. Supp. 2d 82, 99-100 (D.D.C. 2006). As DBNTC alleges, the Governing Agreements here are executory contracts that involve obligations that are ongoing mutual, and interrelated, Am. Compl. 33, and these obligations as well as WaMus other rights, interests, and duties reflected therein are part of an integrated set of contractual undertakings, id. 31. See Lone Star Fund V (U.S.), L.P. v. Barclays Bank PLC, 594 F.3d 383, 388 (5th Cir. 2010) ([T]he representations are isolated portions of complex contractual documents that must be read in their entirety to be given effect.). WaMus rights and interests under the Governing Agreements include the valuable mortgage servicing rights, as well as residual interests in the underlying Trust assets. See, e.g., Ex. 3, WaMu 2007 Form 10-K (3/21/08) at 77 (describing WaMus retained interests in the securitized assets), 91 (Generally, [WaMu] . . . receives the right to cash flows remaining after the investors in the securitization trusts have received their contractual payments.). 30 Along with these rights and interests, WaMu expressly took on a number of related and continuing obligations under the Governing Agreements with respect to the cash flow of the Trusts, such as the duty to monitor the Trust assets and notify the Trustee of material breaches of its representations and warranties or defects in the underlying loans (the Notice Obligations), and the duty to remedy such material breaches or defects, upon discovery or notice, by curing,
30. See also, e.g., Am. Compl., Ex. 4, WaMu 2007-HE1 MLPA 3 (In consideration for the Mortgage Loans to be purchased hereunder, the Purchaser shall . . . deliver to the Seller . . . the Class C Certificates, the Class P Certificates, the Class R Certificates, the Class R-CX Certificates, and the Class R-PX Certificates (the Retained Certificates).); id., WaMu 2007-HE1 PSA 10.01 (identifying such certificates as residual interests).
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substituting, or repurchasing the affected loans and indemnifying losses to the Trust (the Repurchase and Indemnification Obligations). See Am. Compl. 49-55, 60-61; see also, e.g., Ex. 3, WaMu 2007 Form 10-K (3/21/08) at 107. DBNTC alleges that, as to many of the loanrelated representations and warranties, the breach takes place at the time the loan is sold into the Trust. 31 As of that time, therefore, to the extent WaMu had made and breached a loan-related representation or warranty, WaMu had a contingent liability under its express Repurchase and Indemnification Obligation; whether and when the contingent liability would mature into a current payment demand would depend on whether the loan goes into default, whether the breach or defect was material, whether the breach or defect actually caused the loss, whether notice is given, and whether the breach or defect cannot be cured. The Repurchase and Indemnification Obligations, therefore, include the duty to make good on these contingent liabilities arising from existing breaches and default, if and when they mature. These rights and related executory obligations are all part of the related contracts referred to in Schedule 3.2. Schedule 3.2 makes clear that the Governing Agreements, as related contracts to WaMus mortgage servicing rights, were among WaMus assets and, as such, were transferred to JPMC under Section 3.1. Thus, the Governing Agreements under which WaMu had ongoing rights and obligations, including obligations that had not yet given rise to specific recorded liabilities at the time of WaMus closure, were also transferred to JPMC
31. See, e.g., Am. Compl. 46(b) (Each Mortgage Loan at origination complied in all material respects with applicable local, state and federal laws.), (j) (The Loan-to-Value Ratio for each Mortgage Loan was no greater than 100% at the time of origination.), (m) (The Seller did not select the Mortgage Loans with the intent to adversely affect the interests of the Purchaser.) (quoting Long Beach Mortgage Loan Trust Series 2006-2 (Issue ID No. LB0602), MLPA 6).
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under Section 3.1. In fact, JPMC has acknowledged as much: in its 2008 Form 10-K, for example, JPMC noted that, under the P&A Agreement, it had assumed WaMus executory contracts and other commitments. Ex. 8, JPMC 2008 Form 10-K (3/2/09) at 124. Other aspects of the P&A Agreement make it clear that the Governing Agreements in their entirety transferred to JPMC. Section 4.8 of the P&A Agreement provides a mechanism for JPMC to elect not to assume individual agreements existing as of Bank Closing which provide for the rendering of services by or to the Failed Bank, by giving written notice to the FDIC within 120 days of WaMus closure. (Emphasis added.) As noted above, Sections 2.1 and 3.1 provide that [n]otwithstanding Section 4.8, JPMC specifically assume[d] and specifically purchase[d] all mortgage servicing rights and obligations of WaMu, thereby exempting these rights and obligations from Section 4.8. Because Section 4.8 applies to agreements, this carveout in Sections 2.1 and 3.1 necessarily reflects JPMCs irrevocable assumption of the entire agreements containing all the mortgage servicing rights and obligations i.e., the Governing Agreements, including all the rights and obligations thereunder. Those obligations include the ongoing Service Obligations and Access Obligations upon which DBNTC bases its breach claims against WaMu as servicer and which undeniably transferred to JPMC. For each Trust, however, those same Governing Agreements also contain the Repurchase and Indemnification Obligations and Notice Obligations on which DBNTC bases its breach claims against WaMu as seller and depositor. See Am. Compl. 43. DBNTC alleges WaMus Repurchase and Indemnification Obligations and Notice Obligations with respect to each Trust are contained within the same agreement the Pooling and Servicing Agreement (PSA) as WaMus mortgage servicing rights and obligations for that Trust. See id. 50 (Notice Obligation), 54-55 (Repurchase Obligation), 59-60 (Indemnification Obligation and
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Access Obligation), 63 (Servicing Obligation); see also id., Ex. 7 (identifying the contractual provisions giving rise to WaMus obligations with respect to each Primary Trust). By expressly excluding all mortgage servicing rights and obligations from the scope of Section 4.8, the P&A Agreement ensured that the agreements containing these rights and obligations i.e., the Governing Agreements would be transferred in their entirety to JPMC. 2. All of WaMus obligations and liabilities under the Governing Agreements transferred to JPMC under Section 2.1 of the P&A Agreement.
The transfer to JPMC of WaMus obligations and liabilities under the Governing Agreements also was effected by Section 2.1, which provides that JPMC expressly assumes at Book Value (subject to adjustment pursuant to Article VIII) and agrees to pay, perform, and discharge, all of the liabilities of [WaMu] which are reflected on the Books and Records of [WaMu] as of Bank Closing. P&A Agreement 2.1 (emphasis added). The only limitation on JPMCs assumption of WaMus liabilities is that the liability be reflected on WaMus Books and Records as of September 25, 2008. While the term Records is defined broadly in the P&A Agreement to include all of WaMus paper and electronic files, the terms Books is not defined. See id. at 6 (defining Records). Whatever the outside limits of these terms, however, they include the operative agreements for the large-scale financial transactions at the heart of WaMus business, involving hundreds of billions of dollars in mortgage loan securitizations. The Governing Agreements and WaMus obligations and liabilities thereunder unquestionably were reflected in WaMus pre-closure Books and Records. DBNTC alleges that the Governing Agreements were executed, in writing, on behalf of WaMu by individuals duly authorized by the applicable WaMu entitys Board of Directors, and have been maintained continuously in the banks formal files since the time of execution. Am. Compl. 42(a)-(d). DBNTC further alleges that the Governing Agreements constituted
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official books and records of [WaMu] at the time of [WaMus] closing on September 25, 2008. Id. 42(e). Indeed, common sense dictates that these are the kinds of major agreements that, as a matter of policy and practice, were carefully maintained by the bank in its formal files. See, e.g., India Breweries, Inc. v. Miller Brewing Co., 612 F. 3d 651, 658 (7th Cir. 2010) (Common sense is as much a part of contract interpretation as is the dictionary or arsenal of canons.). If the allegations in Paragraph 42 of the Amended Complaint are not true, the Governing Agreements would be unenforceable against FDIC Receiver as a matter of law. These allegations track the statutory requirements of 12 U.S.C. 1823(e), which are intended to ensure that the purported preexisting obligations of a failed bank are sufficiently memorialized in the banks pre-closure records before claims arising from those obligations can be enforced against the FDIC as receiver. See 12 U.S.C. 1821(d)(9)(A), 1823(e); Beal Bank, SSB v. Pittorino, 177 F.3d 65, 68 (1st Cir. 1999) (claims arising from agreements that are not properly recorded in the records of the bank are unenforceable against FDIC Receiver). The purpose of Section 1823(e) is to limit the enforceable obligations of FDIC Receiver to those liabilities and obligations of the failed bank the existence of which was readily discernable by bank examiners prior to the banks closure. See Langley v. FDIC, 484 U.S. 86, 91 (1987); E.I. du Pont de Nemours & Co. v. FDIC, 32 F.3d 592, 600 (D.C. Cir. 1994) (The key question is whether [the case concerns] . . . matters that would generally be reflected in the records of ordinary banking transactions.) (citation omitted). This prevents counterparties and creditors from alleging the existence of unrecorded agreements imposing obligations upon FDIC Receiver as the failed banks successor-in-interest, since FDIC Receiver lacks the institutional history of the bank yet is expected to honor all of its valid obligations. See FDIC v. Great Am. Ins. Co., 607 F.3d 288, 293 (2d Cir. 2010). Whatever the outer contours of the term Books and
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Records for purposes of Section 2.1, any obligation or liability that is reflected on the face of an agreement that meets the criteria of Section 1823(e) necessarily is reflected on the Books and Records of the Failed Bank as of Bank Closing, and thus included within the scope of Section 2.1. Here, DBNTC alleges that the Repurchase and Indemnification Obligations, and the other contractual obligations upon which DBNTC premises its claims, are clearly stated on the face of the Governing Agreements. See Am. Compl. 50, 54-55, 59-60, 63 (providing examples of specific provisions); id. Ex. 7 (identifying provisions in each of the Governing Agreements). 32 JPMC asserts, however, that it did not assume any of WaMus liabilities under the Governing Agreements. See Am. Compl. 90-91. JPMCs argument is premised entirely on three words in Section 2.1 at Book Value and the definition of Book Value in the P&A Agreement as the dollar amount . . . stated on the Accounting Records of the Failed Bank. 33 JPMC argues that it assumed only liabilities for which there was a specific line item with a stated dollar amount on WaMus accounting ledgers, which WaMus liabilities under the Governing Agreements purportedly lack. See id. 91. JPMCs position is not consistent with the contractual language, common sense, or JPMCs own public filings. Section 2.1 does not by its terms limit the Liabilities Assumed to those with a stated dollar amount on WaMus Accounting Records i.e., its general ledger, subsidiary ledgers, and 32. This does not mean, of course, that DBNTC can prove that WaMu or its successor-interest is liable for the breaches and damages that it claims, or even that DBNTC can establish a basis for asserting a claim against WaMu or its successor-interest with respect to each and every Trust. 33. See P&A Agreement at 2 (defining Accounting Records as the general ledger, subsidiary ledgers, and any schedules supporting the general ledger balance), 3 (defining Book Value).
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supporting schedules as of September 25, 2008. See Am. Compl. 90-91. Nor does Section 2.1 provide that JPMC assumes all liabilities reflected on WaMus Accounting Records, which is what JPMCs interpretation amounts to. Rather, Section 2.1 expressly and unambiguously states that JPMC assumes at Book Value . . . and agrees to pay, perform, and discharge, all of the liabilities of [WaMu] which are reflected on the Books and Records of [WaMu] as of Bank Closing. P&A Agreement 2.1 (emphasis added). Books and Records necessarily means something other and broader than Accounting Records. In fact, the reference to Book Value in the liability assumption provision of Section 2.1 is a parallel to the references to Book Value and Market Value in Section 3.2 and Schedule 3.2, which address the price of the specific assets transferred under Section 3.1. Of course, JPMC did not pay specific prices for specific assets. As indicated in Article VII of the P&A Agreement, JPMC bid and paid a lump sum of approximately $1.9 billion for the Assets purchased and Liabilities Assumed. Thus, the Book Value and Market Value prices of the specific assets as reflected in Section 3.2 and Schedule 3.2 were notional prices, useful in allocating the Bank Closing date purchase price among the acquired assets as required by GAAP purchase accounting (e.g., for basis purposes). 34 Likewise, the Book Value reference for the assumption of liabilities had a similar purpose JPMC assumed the liabilities at Book Value for accounting purposes as of the Bank Closing Date. Compare P&A Agreement 2.1 (assume at Book Value) with id. 3.2 (purchases at Book Value). Nothing in that phrase or the rest of
34. See Ex. 8, JPMC 2008 Form 10-K (3/2/09) at 123-24; SFAS No. 141 (Business Combinations) 35-41 (Fin. Accounting Standards Bd. 2001).
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Section 2.1 suggests that these three words were intended to define or limit the scope of the Liabilities Assumed by JPMC. 35 Moreover, JPMCs construction of the phrase assumes at Book Value gives no meaning to the portion of Section 2.1 in which JPMC expressly agrees to pay, perform, and discharge all of the liabilities reflected on WaMus pre-closure Books and Records, because pay, perform, and discharge is not limited by Book Value. P&A Agreement 2.1. To interpret Section 2.1 to mean that liabilities are transferred to JPMC only if and to the extent they had a Book Value, Am. Compl. 90 (emphasis in original), would allow the phrase assumes at Book Value to nullify the remainder of Section 2.1, and it is a cardinal principle of contract construction that a document should be read to give effect to all its provisions and to render them consistent with each other. Segar, 508 F.3d at 22. Contractual provisions should be interpreted to avoid rendering any provision meaningless. See, e.g., Flynn v. Dick Corp., 481 F.3d 824, 831 (D.C. Cir. 2007). There is no reasonable basis to interpret the word liabilities narrowly to mean only those liabilities that have become sufficiently concrete to warrant recording as specific line item amounts on WaMus financial accounting records. The word liabilities as used in Section 2.1 is not a defined term in the P&A Agreement, and it therefore should be interpreted consistent with its ordinary meaning. 36 See, e.g., Pfeiffer v. Duncan, 659 F. Supp. 2d 160, 165 (D.D.C.
35. Likewise, nothing in the language of Section 2.1 suggests that any assumed liability is capped or limited by its Book Value. Section 2.1 does not provide that JPMC will pay, perform and discharge liabilities only to the extent of their Book Value, or that JPMC assumes liabilities up to the amount of their Book Value. 36. While the P&A Agreement does define Liabilities Assumed, that definition states only that the term has the meaning provided in Section 2.1 P&A Agreement at 5.
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2009) (The starting point for [contractual] interpretation is the plain language of the contract and the ordinary meaning of its terms unless the parties mutually intended and agreed to an alternative meaning.); Flynn v. So. Seamless Floors, Inc., 460 F. Supp. 2d 46, 54 (D.D.C. 2006) (citing cases). In common legal usage, the term liabilities is not limited to items with recordable value for accounting purposes. The use of the words perform and discharge in Section 2.1 confirms that liabilities was intended in this more inclusive sense, since these words connote continuing obligations like those memorialized in unitary and integrated executory contracts like the Governing Agreements, as well as contingent and unmatured liabilities arising under such obligations. Indeed, it is particularly appropriate to construe the term liability in this way in a whole bank P&A Agreement intended to convey the failed banks ongoing operations to an acquiring bank that desires to purchase substantially all of the assets and assume all deposit and substantially all other liabilities of the Failed Bank. P&A Agreement at 1. Section 2.5 provides additional confirmation that the term liabilities in Section 2.1 has a broader meaning than JPMC pretends. Section 2.5 excludes Borrower Claims from the scope of Liabilities Assumed. The section provides that JPMC does not assume any liability associated with borrower claims for payment of or liability to any borrower for monetary relief, or that provide for any other form of relief to any borrower, whether or not such liability is reduced to judgment, liquidated or unliquidated, fixed or contingent, matured or unmatured, disputed or undisputed . . . whether asserted affirmatively or defensively. . . . (Emphasis added). If JPMC had assumed only liabilities with stated dollar Book Values on WaMus accounting ledgers, the italicized language would be entirely unnecessary, since many unliquidated, contingent, unmatured and disputed claims are not so recorded.
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Contracts should be interpreted, where possible, in accordance with standards of commercial reasonableness and in accordance with the parties apparent principal purpose. 37 Here, the purpose of the P&A Agreement was to transfer to JPMC substantially all of the assets and all the deposit and substantially all other liabilities of [WaMu] so that JPMC could succeed to and carry on WaMus ongoing banking operations. P&A Agreement at 1; see Ex. 8, JPMC 2008 Form 10-K (3/2/09) at 124, 168-72. In entering into this deal, JPMC paid $1.9 billion in cash, but reaped a huge benefit, as described above. See supra pp. 7-8. Yet on the liability side of the ledger, JPMC says it can walk away, leaving FDIC Receiver with the obligation to pay any liabilities incurred under the Governing Agreements. The plain text of the P&A Agreement belies this result. JPMC cannot feign ignorance about WaMus obligations under the Governing Agreements or the liabilities to which the obligations could give rise. As a sophisticated actor in the mortgage banking field, JPMC was familiar with the obligations and potential liabilities arising from representations and warranties made in connection with residential mortgage loan securitizations, including repurchase and indemnification obligations. JPMC made similar representations and warranties as a matter of course in connection with its own securitization activities. See, e.g., Ex. 6, JPMC 2007 Form 10-K (2/29/08) at 172 ([T]he Firm provides
37. See, e.g., SR Intl Bus. Ins. Co. v. World Trade Ctr. Props., 467 F.3d 107, 125 (2d Cir. 2006); Wilson Court Ltd. Pship v. Tony Maronis, Inc, 952 P.2d 590, 597 (Wa. 1998) (Where two commercial entities sign a commercial agreement, we will give such an agreement a commercially reasonable construction.); Forest Mktg. v. State Dept. Natural Res., 104 P.3d 40 (Wash. Ct. App. 2005) (We adopt the contract interpretation that best reflects the parties reasonable expectations.); RESTATEMENT (SECOND) OF CONTRACTS 202(1), cmt. c (1993) (If such a purpose is disclosed further interpretation is guided by it. Even language which is otherwise explicit may be read with a modification needed to make it consistent with such a purpose.).
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representations and warranties that certain securitized loans meet specific requirements . . . [and] may be required to repurchase the loans and/or indemnify the purchaser of the loans against losses due to any breaches of such representations or warranties.); supra pp. 19-22. Likewise, WaMus public disclosures made quite clear the nature and scope of JPMCs assumed liabilities with respect to WaMus Repurchase and Indemnification Obligations. For example, WaMu plainly disclosed that [i]n the event of a breach of the representations and warranties . . . the Bank bears the risk of any loss on the loans. Ex. 3, WaMu 2007 Form 10-K (3/21/08) at 77 (emphasis added). WaMu cautioned that its estimates for necessary loss reserves for obligations arising from securitized mortgage loans were subject to continual revision [t]hroughout the life of these repurchase or indemnification liabilities. Id. at 15; see also Ex. 1, WMI 2007 Form 10-K (2/29/08) at 22. WaMu also discussed the impact of increasing delinquencies and credit loss on its Repurchase and Indemnification Obligations, and warned that its liquidity could also be adversely affected by unanticipated demands on its cash, such as having to repurchase securitized loans if it were found to have violated representations and warranties contained in the securitization agreements. Ex. 3, WaMu 2007 Form 10-K (3/21/08) at 50; see also Ex. 2, WMI Form 10-Q (8/11/08) at 58 (Higher delinquencies drove increased repurchase requests from investors resulting in an increase in the provision for repurchase reserves.). In short, while all the Governing Agreements were contained in WaMus records, the very obligations and liabilities at issue here were publicly disclosed in WaMus books and records at the time of the P&A Agreement. 38 See supra pp. 17-19. 39
38. Moreover, it was no secret that WaMu itself faced sharply increasing liabilities arising from its Trust-related repurchase obligations. WaMus public filings amply detail its potential
(Footnote continued on next page)
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In fact, as noted above (p. 21), in December 2009, JPMC warned investors that WaMu had made representations and warranties in connection with the sale and securitization of loans, but that JPMCs obligations with respect to these representations and warranties are generally outstanding for the life of the loan, and that [a]ccordingly, such repurchase and/or indemnity obligations arising in connection with the sale and securitization of loans (whether with or without recourse) by . . . [WaMu] . . . could materially increase [JPMCs] costs and lower [JPMCs] profitability, and could materially and adversely impact [JPMCs] results of operations and financial condition. Ex. 11, 424B7 Prospectus Supplement (12/8/09) at S-7. Clearly, JPMC which appears to have been referring to WaMus liabilities under the Repurchase and Indemnification Obligations understood what the P&A Agreement unambiguously provides. Accordingly, the Court should determine, as a matter of law, that under the P&A Agreement JPMC is solely liable to DBNTC for all of WaMus liabilities as of September 25, 2008, for all liabilities arising after that date, and for all continuing obligations, under the Governing Agreements.
(Footnote continued from previous page)
exposure to repurchase or indemnification liabilities and warn of the prospect of increased delinquencies and defaults leading to greater losses to the trusts. Ex. 3, WaMu 2007 Form 10-K (3/21/08) at 15-16, 50; Ex. 1, WMI 2007 Form 10-K (2/29/08) at 85; Ex. 2, WMI Form 10-Q (8/11/08) at 58. According to DBNTC, JPMC conducted a due diligence review of WMB, including a review of WMBs loan taped and data and discussions with WMB employees, before entering into the P&A Agreement. Am. Compl. 12. 39. JPMC itself expressly acknowledged both before and after the WaMu transaction that [g]enerally, the maximum amount of future payments [JPMC] would be required to make for breaches under these representations and warranties would be equal to the current amount of assets held as outstanding principal in the securitization Trusts. Ex. 8, JPMC 2008 Form 10-K (3/2/09) at 209; see also, e.g., Ex. 6, JPMC 2007 Form 10-K (2/29/08) at 172.
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B.
The Transfer Of The Governing Agreements To JPMC Extinguished FDIC Receivers Potential Liability.
In entering into the P&A Agreement, FDIC Receiver was exercising its statutory power under FIRREA to transfer WaMus assets and liabilities (including the Governing Agreements and WaMus rights and obligations thereunder) to JPMC. See 12 U.S.C. 1821(d)(2)(G)(i)(II). In the P&A Agreement, FDIC Receiver exercised its transfer power fully, and did not retain any aspect of the liabilities assumed by JPMC. Nothing in the statute or the P&A Agreement even hints that FDIC Receiver remained obligated for the transferred liabilities, including for any liabilities under the Governing Agreements. FDIC Receivers exercise of the transfer provision in this case is consistent with the general principle that when an entity purchases the assets of an ongoing business and expressly or impliedly assumes the related liabilities, the acquiring entity succeeds to the pre-sale debts and obligations of the business, thereby extinguishing the liability of the seller. See, e.g., United States v. First N. Dakota Natl Bank, 137 F.3d 1077, 1080 (8th Cir. 1998); Hatco Corp. v. W.R. Grace & Co., 59 F.3d 400, 406 (3d Cir. 1995); In re Chicago, Milwaukee, St. Paul, & Pac. R. Co., 789 F.2d 1281, 1282-83 (7th Cir. 1986); United States v. Sunoco, Inc., 637 F. Supp. 2d 282, 288 (E.D. Pa. 2009); Goodman v. Challenger Intl, Ltd., No. 94-1262, 1995 WL 402510, at *3-4 (E.D. Pa. July 5, 1995) ([W]here the purchaser expressly or impliedly assumes the sellers liabilities . . . courts have determined that the transferor is no longer responsible for the transferred liability, including the conducting of litigation over that liability.) (citing cases).
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A liability is held by either FDIC Receiver or the assuming institution, not both, and FDIC Receivers liability ends when the transferees liability begins. 40 See, e.g., Acevedo v. First Union Natl Bank, 357 F.3d 1244, 1248 (11th Cir. 2004) (rejecting argument that P&A agreement provision shift[ed] the liability for a particular asset back to the FDIC); Hennessy v. FDIC, 58 F.3d 908, 913 (3d Cir. 1995) (describing liabilities retained by FDIC Receiver after signing P&A agreement as only the liabilities not assumed by [the assuming institution]); FDIC v. Condit, 861 F.2d 853, 855 (5th Cir. 1988) (concluding that FDIC Receiver maintained no direct interest in [transferred assets] after the purchase and assumption transaction was consummated). That principle follows from the substantial discretion that Section 1821(d)(2)(G)(i)(II) grants FDIC Receiver to determine which assets and liabilities of a failed thrift should be sold and transferred, and which it should keep. Payne v. Sec. Sav. & Loan Assn, F.A., 924 F.2d 109, 111 (7th Cir. 1991). Here, JPMC purchased substantially all of WaMus assets in a whole bank transaction, including its ongoing banking operations and nationwide mortgage banking activities. Ex. 9, JPMC 2009 Form 10-K (2/24/10) at 58; see P&A Agreement at 1. In connection with that purchase, FDIC Receiver transferred to JPMC, and JPMC expressly agreed to assume and to pay, perform and discharge, substantially all of WaMus liabilities which, as discussed, included WaMus liabilities and obligations under the Governing Agreements. P&A Agreement 2.1. Under its statutory transfer power, FDIC Receiver was thereby relieved of its liability for
40. Indeed, some provisions of the P&A Agreement would make little sense if JPMC and FDIC Receiver had concurrent liability. For instance, Section 12.1 of the Agreement provides that FDIC Receiver will not indemnify JPMC for any claims based on, related to, or arising from any . . . liability assumed by the Assuming Bank. P&A Agreement 12.1(b)(14). Concurrent liability would essentially render this provision a nullity.
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these obligations, and only JPMC remains liable. Consequently, the Amended Complaint should be dismissed against FDIC Receiver. II. CLAIMS AGAINST FDIC RECEIVER BASED ON ALLEGED POST-RECEIVERSHIP BREACHES SHOULD BE DISMISSED. DBNTC asserts claims against FDIC Receiver or JPMC for alleged post-receivership breaches of the Governing Agreements. See Am. Compl. 95-98. DBNTC also contends that its breach claims are entitled to priority as administrative expenses of FDIC Receiver under 12 U.S.C. 1821(d)(11)(A). Id. 97. These claims should be dismissed under Rule 12(b)(6) for the reasons stated in Section I, and under Rules 12(b)(1) and 12(b)(6) for the additional reasons set forth below. A. DBNTC Failed To Exhaust The Administrative Claims Process With Respect To Its Claims Of Post-Receivership Breach.
Before DBNTC may proceed with any action alleging liability against FDIC Receiver, FIRREA requires that DBNTC exhaust the administrative claims procedures prescribed by that statute. See, e.g., Freeman v. FDIC, 56 F.3d 1394, 1401 (D.C. Cir. 1995); Brady Dev. Co., Inc. v. RTC, 14 F.3d 998, 1005-06 (4th Cir. 1994). FIRREA provides: Except as otherwise provided in this subsection, no court shall have jurisdiction over (i) any claim or action for payment from, or any action seeking a determination of rights with respect to, the assets of any depository institution for which the [FDIC] has been appointed receiver, including assets which the [FDIC] may acquire from itself as such receiver; or (ii) any claim relating to any act or omission of such institution or the [FDIC] as receiver. 12 U.S.C. 1821(d)(13)(D). Subsection (d) elsewhere provides for an administrative claims process before the FDIC. Id. 1821(d)(3) & (5). Courts have uniformly interpreted these provisions as depriving courts of jurisdiction over claims seeking payment from the assets of a
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failed depository institution or from its receiver unless the claimant has exhausted the administrative claims process. See, e.g., Freeman, 56 F.3d at 1400 (Section 1821(d)(13)(D) acts as a jurisdictional bar to claims or actions [against FDIC Receiver] by parties who have not exhausted their 1821(d) administrative remedies.) (citing cases). 41 The requirement that DBNTC exhaust the administrative claims process applies equally to any claims against FDIC Receiver that may have arisen after WaMu closed. See 12 U.S.C. 1821(d)(13)(D)(ii); Village of Oakwood v. State Bank and Trust Co., 539 F.3d 373, 387 (6th Cir. 2008) (The overwhelming majority of courts to address the issue have concluded that the administrative process applies to post-receivership claims.); McCarthy v. FDIC, 348 F.3d 1075, 1081 (9th Cir. 2003) (Therefore, we join the majority of courts in holding that claimants . . . who challenge conduct by the FDIC as receiver[] must exhaust administrative remedies before seeking judicial review.); Home Capital Collateral, Inc. v. FDIC, 96 F.3d 760, 763-64 (5th Cir. 1996) (We agree . . . that all claims subject to the jurisdictional bar of 1821(d)(13)(D), including both claims against the receiver and against the assets of the failed financial institution, and both pre-receivership and post-receivership claims, must comply with the [administrative claims review procedure].). DBNTCs claims against FDIC Receiver for post-receivership breach and administrative priority, however, are nowhere to be found in its Proof of Claim filed with FDIC Receiver. See
41. See also, e.g., Henderson v. Bank of New England, 986 F.2d 319, 320-21 (9th Cir. 1993) (Section 1821(d)(13)(D) strips all courts of jurisdiction over claims made outside the administrative procedures of section 1821 . . . . [and] bars judicial review of any nonexhausted claim, monetary or nonmonetary, which is susceptible of resolution through the claims process.); Simon v. FDIC, 48 F.3d 53, 56 (1st Cir. 1995) (Failure to comply with the [FIRREA-mandated administrative claims review process] deprives the courts of subject matter jurisdiction over any claim to assets of the failed financial institution.).
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Am. Compl. Ex. 3. DBNTCs Proof of Claim does not include any claim for wrongful actions or omissions by FDIC Receiver or, indeed, by any other party after the failure of WaMu on September 25, 2008; rather, the Proof of Claim is limited to pre-receivership actions or omissions by WaMu. Consequently, this Court lacks jurisdiction to hear those claims, and they should be dismissed. See e.g., McGlothlin v. RTC, 913 F. Supp. 15, 19 (D.D.C. 1996) (dismissing claims not admitted in administrative claims process); Aljaf Assocs. Ltd. Pship v. FDIC, 879 F. Supp. 515, 518 (E.D. Pa. 1995) (same); Brown Leasing Co. v. FDIC, 833 F. Supp. 672, 675-76 (N.D. Ill. 1993) (same); Coleman v. FDIC, 826 F. Supp. 31, 32 (D. Mass. 1993) (same). B. The Amended Complaint Fails to State A Claim Of PostReceivership Breach Against FDIC Receiver.
Although the Amended Complaint is not entirely clear largely due to DBNTCs use of the term WaMu to refer indiscriminately to WaMu, JPMC, and FDIC Receiver it appears that DBNTC is alleging that either FDIC Receiver or JPMC, as successor-in-interest to WaMu, breached provisions of the Governing Agreements by action or inaction after WaMu was closed, and rights and obligations under the Governing Agreements transferred, on September 25, 2008. See Am. Compl. 95-98. The face of the Amended Complaint makes clear, however, that FDIC Receiver could not possibly have breached these Agreements post-receivership. First, DBNTC alleges that WaMu presumably FDIC Receiver or JPMC discovered and/or had notice of WaMus breaches of the Representations and Warranties and thus breached post-receivership WaMus Notice Obligation in their capacity or capacities as successor Servicer for WaMu. Am. Compl. 95. Under the P&A Agreement, however, JPMC specifically purchased and assumed all of WaMus mortgage servicing rights and obligations immediately upon WaMus closure. See P&A Agreement 2.1, 3.1. By the clear terms of the
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P&A Agreement, therefore, FDIC Receiver never retained any servicing rights and obligations, and thus could not have any duty to act as successor Servicer for WaMu. Accordingly, FDIC Receiver had no post-receivership Notice Obligations as successor Servicer for WaMu; and could not possibly have breached an obligation it did not have. Second, DBNTC asserts claims arising from the alleged post-receivership breach of DBNTCs Access Rights to WaMus loan files. See, e.g., Am. Compl. 82, 98. But DBNTCs alleged Access Rights arise only under the Governing Agreements servicing obligations, see id. 58, and (as explained above) only JPMC took over WaMus mortgage servicing obligation. Moreover, Section 6.1 of the P&A Agreement makes clear that upon WaMus closure, FDIC Receiver was required to transfer to JPMC all Records pertaining to . . . Loan and collateral records and Credit Files and to deeds, mortgages, abstracts, surveys, and other instruments or records of title pertaining to real estate or real estate mortgages. P&A Agreement 6.1. 42 Thus, the P&A Agreement demonstrates that JPMC, and not FDIC Receiver, possesses both the records that DBNTC seeks and, under the Governing Agreements, the obligation as servicer to provide access to the records. 43 As a result, FDIC Receiver cannot possibly be liable for the post-receivership breach of WaMus Access Rights. Third, DBNTC alleges that FDIC Receiver is liable for post-receivership breaches of Repurchase Obligations under the Governing Agreements. Am. Compl. 96, 97. As discussed in Section I, because all the liabilities and obligations under the Governing Agreements have 42. See P&A Agreement at 4 (defining Credit Files), 5 (defining Loans). 43. According to DBNTC, [s]uch documents and other information include origination and underwriting files, servicing records, borrower statements both recorded on tape and transcribed into servicing notes, borrower statements made during the origination of the loan, payment histories, and borrower correspondence. Am. Compl. 44.
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transferred to JPMC under the unambiguous terms of the P&A Agreement, FDIC Receiver can have no liability to DBNTC for these Obligations. Moreover, the Amended Complaint does not allege that DBNTC has ever provided FDIC Receiver with the notice of defect or breach, and the opportunity to correct, required by the Governing Agreements with respect to any specific mortgage loan in the Trust pools. See id. 99; supra pp. 15-16. Indeed, DBNTC admits that it has not yet determine[d] whether Repurchase Obligations exist with respect to particular mortgage loans in the Trusts, id. 98, let alone confirm[ed] whether a particular mortgage in the Trusts is in breach of any of the Representations and Warranties, id. 44. Thus, FDIC Receiver cannot be liable for any post-receivership breaches or indeed, any pre-receivership breaches of any Repurchase Obligations. Finally, DBNTC has articulated no basis upon which it could claim administrative expense priority. DBNTC certainly cannot seek administrative priority for claims arising from acts of the failed bank prior to its closure. See, e.g., Tri-State Hotels, Inc. v. FDIC, 79 F.3d 707, 713 (8th Cir. 1996) (plaintiff could not characterize its claim as arising after the appointment of FDIC as receiver when the genesis of its claim is the prereceivership misconduct by the failed bank[]); H.R. Conf. Rep. No. 103-213, 1993 U.S.C.C.A.N. 1088, 1125 (Aug. 4, 1993) (limiting administrative expenses of the receiver under 12 U.S.C. 1821(d)(11)(A) to ordinary and necessary expenses of the [failed] institution . . . , but only those that the receiver determines are necessary to maintain services and facilities to effect an orderly resolution of the institution). Thus, at a minimum the Court should strike the demand for administrative claim priority. In sum, the Amended Complaint fails to state a claim against FDIC Receiver for any post-receivership breaches, and any claims against FDIC Receiver arising from alleged postreceivership breaches should be dismissed on the merits under Rule 12(b)(6).
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CONCLUSION For the foregoing reasons, the complaint against FDIC Receiver should be dismissed in its entirety. Dated: November 22, 2010 Of Counsel: Kathryn R. Norcross, D.C. Bar No. 398120 Senior Counsel, Commercial Litigation Unit Anne M. Devens Counsel, Commercial Litigation Unit Kaye A. Allison Counsel, Commercial Litigation Unit FEDERAL DEPOSIT INSURANCE CORPORATION 3501 Fairfax Drive, Room VS-D-7062 Arlington, Virginia 22226 Telephone: (703) 562-2204 Facsimile: (703) 562-2475 Email: knorcross@fdic.gov Email: adevens@fdic.gov Email: kallison@fdic.gov Respectfully submitted, /s/ William R. Stein William R. Stein, D.C. Bar No. 304048 Scott H. Christensen, D.C. Bar No. 476439 Jason S. Cohen, D.C. Bar No. 501834 HUGHES HUBBARD & REED LLP 1775 I Street, N.W. Washington, D.C. 20006-2401 Telephone: (202) 721-4600 Facsimile: (202) 721-4646 Email: stein@hugheshubbard.com Email: christen@hugheshubbard.com Email: cohenj@hugheshubbard.com Attorneys for Federal Deposit Insurance Corporation in its capacity as Receiver for Washington Mutual Bank
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Deutsche Bank - FDIC Memo in Support of JPMorgan Chase's Motion To Dismiss Filed 22nov2010

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Deutsche Bank - FDIC Memo in Support of JPMorgan Chase's Motion To Dismiss Filed 22nov2010

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