JPMorgan-WaMu Deal Sparks Legal Quagmire
JPMorgan names FDIC and WaMu in lawsuit asking for billions of dollars in assets that WaMu allegedly will not release.
March 26, 2009
The legal sparring between JPMorgan Chase and the former parent of Washington Mutual Bank highlights the risk of quick-fire consolidation involving troubled institutions.
In the last week JPMorgan Chase and Washington Mutual Inc. have filed separate lawsuits contesting aspects of the takeover of WaMu's banking operation.
The Federal Deposit Insurance Corp. put Washington Mutual Bank into receivership Sept. 25 and orchestrated a deal to sell the banking operation to JPMorgan Chase the same day for $1.9 billion. Washington Mutual Inc. filed for Chapter 11 bankruptcy protection the next day.
Lawrence Kaplan, of counsel at Paul, Hastings, Janofsky & Walker, said such sales commonly devolve into legal bickering, since they usually come together in a week or less, and that is rarely enough time for comprehensive due diligence.
"The big issue that always comes up in the context of when you have a receivership is 'What did everyone really buy?'"
Such acquisitions often fail to specify the terms, he said.
Naming the FDIC and WaMu, JPMorgan Chase said in court papers filed in the U.S. Bankruptcy Court for Delaware that it is entitled to billions of dollars of assets that WaMu won't release.
The assets include $4 billion of trust securities and at least $234 million of tax refunds.
JPMorgan Chase also wants $3.7 billion that WaMu credited in a "book entry" to its subsidiary. The buyer alleges that WaMu booked the entry shortly before the takeover but never deposited the funds.
JPMorgan Chase also seeks WaMu's 2008 tax refunds and more than $400 million of payments it had won in court cases through the years.
In addition, the New York company is asking the court to allow it to assume pension and 401(k) retirement plans covering WaMu employees.
According to JPMorgan Chase, WaMu has "refused" to let it assume the retirement benefits because of "an unfounded claim that the pension plan is overfunded."
JPMorgan Chase is asking the court to declare that it owns the contested assets and to force WaMu to give them up. The suit seeks unspecified damages and repayment of attorney fees.
WaMu's suit, filed March 20 in the U.S. District Court for the District of Columbia, claims the FDIC improperly sold the company's banking assets, which WaMu claims could have been disposed of for a higher price.
The former parent of Washington Mutual Bank would like to reclaim $4 billion of trust-preferred securities it alleges were wrongfully transferred to the subsidiary.
WaMu also alleges in court papers that it is entitled to as much as $3 billion of tax refunds, among other claims. It is seeking $13 billion of damages.
Industry watchers expect the legal wrangling to continue.
Bert Ely, the president of Ely & Co., said he would not be surprised if WaMu bondholders that were burned in the takeover sought to recoup their losses in court.
"Everybody is going to counterclaim against everybody else on this thing," Ely said, adding. "When you take a big, complex organization like that and overnight you just rip it apart — and that's essentially what happened — lots of complications come from doing that."
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