Judge Rakoff yesterday issued one of his short “bottom line” Orders — with full opinion to follow — granting JP Morgan near complete summary judgment in a case in which the European bank Dexia and its former subsidiary accused Bear Stearns (later acquired by JP Morgan) of failing to comply with its stated underwriting guidelines for certain mortgage-backed securities. Reuters’ Alison Frankel is reporting that the win reduces JP Morgan’s exposure by $770 million, to about $5.7 million. The motion papers are here: motion; opposition; reply. Based on the transcript (here and here), it appears Judge Rakoff was likely persuaded by the fact that the plaintiffs did not read the offering documents referencing the underwriting guidelines that the complaint alleged were ignored, and, instead, the plaintiffs appeared to try to switch theories for summary judgment:
[T]he most troubling issue for the Court on the first reading of the papers was the reliance issue, and plaintiffs seem to have moved away from some of the representations that they, in their pleadings, say they relied on, and I will flag for plaintiffs right now, because this is going to be the question I’ll put to them when counsel for the plaintiffs gets up, is, show me with some precision what it is exactly you say you relied on to your detriment in this case.
The plaintiffs argued that 84 percent of the pooled loans failed to comply with the underwriting guidelines, but Judge Rakoff questioned whether that could be actionable, absent some representation about compliance with the guidelines:
THE COURT: If hypothetically there is no representation about the guidelines in some of these deals, and nevertheless 84 percent or whatever high percentage of the loans are found not to comply with the guidelines, isn’t that what you mean by defective? How is that actionable? MR. DeLANGE: It’s an omission to make representations – THE COURT: They are not saying that these loans are bad. The omission is that 84 percent in this example are defective because they do not comply with the guidelines, right? It doesn’t mean they are defective based on some false statement or something like that. They may be. We don’t know. So you’re saying that if you know that 84 percent of a given loan pool does not comply with your own guidelines, but you make no representation about compliance with your guidelines, it’s still an actionable omission to fail to reveal this noncompliance with the guidelines. How could that be?
Consistent with Judge Rakoff’s reputation for working long hours (see here and here), he seemed disappointed that the argument would have to end when the courthouse lights went off at 8:00 p.m.:
Now, there has been one devastating development since you were last here. As a result of the sequester, power in this courtroom, and all the courtrooms in this courthouse, will go off at 8 p.m., which only gives you about two hours. I, of course, am devastated at what this will do to my reputation. My wife is even more devastated because it means I might come home early, but notwithstanding that, there we are.
UPDATE: Reuters’ Alison Frankel, citing a statement from JP Morgan’s counsel at Cravath, indicates that the ruling is likely based on a lack of standing. Dexia bought the vast majority of the certificates at issue from an affiliate for 100 cents on the dollar without (as New York law requires) specifically taking assignment of tort claims. The only surviving claims are those brought by the affiliate and relating to certificates it transferred to Dexia at a discount. We will of course post the full decision as soon as it is available.