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Deutsche Bank National Trust Co. v. Federal Deposit Insurance Corporation

United States District Court, District of Columbia

June 17, 2015

DEUTSCHE BANK NATIONAL TRUST COMPANY, Plaintiff,
v.
FEDERAL DEPOSIT INSURANCE CORPORATION, et al., Defendants.

AMENDED MEMORANDUM OPINION

ROSEMARY M. COLLYER, District Judge.

This is a contract action of some moment. Washington Mutual Bank (WaMu), the largest savings and loan (or "thrift") in the country, failed in a spectacular way when the housing bubble burst in 2007-08. On September 25, 2008, the Office of Thrift Supervision seized WaMu and transferred ownership of the thrift to the Federal Deposit Insurance Corporation (FDIC). FDIC in turn immediately sold all of WaMu's assets and substantially all of its liabilities to JPMorgan Chase Bank, National Association (JPMC). The acquisition of WaMu was governed by a Purchase and Assumption Agreement (P&A Agreement or Agreement), drafted by FDIC, which defined the "Liabilities Assumed" by JPMC to mean those "reflected on the Books and Records" of WaMu.

Plaintiff Deutsche Bank National Trust Company (Deutsche Bank) seeks to enforce WaMu's contractual obligation to repurchase hundreds of faulty mortgage-backed securities that have since collapsed. Before addressing the merits of Deutsche Bank's case, the Court must first determine which defendant-JPMC or FDIC-is responsible for WaMu's repurchase liabilities. Specifically, the present litigation concerns interpretation of the P&A Agreement and the question of whether FDIC transferred liabilities beyond their "Book Value" as reflected on WaMu's "Books and Records" (i.e., unbooked liabilities) to JPMC or whether those liabilities remained with FDIC.[1] The answer to this question will likely affect other pending cases.[2] Ultimately, the Court finds that JPMC did not assume WaMu's unbooked mortgage repurchase liabilities and will grant summary judgment in part to JPMC, finding that JPMC assumed liability for the disputed mortgage repurchase liabilities only to the extent that such liabilities were reflected at a stated Book Value on WaMu's financial accounting records as of September 25, 2008. The Court will also grant summary judgment in part to FDIC, because it is not liable for mortgage repurchase obligations of Washington Mutual Mortgage Securities Corporation (WMMSC), which JPMC acquired in its entirety.

I. FACTS

A. Residential Mortgage-Backed Securities

WaMu, its subsidiaries, and Deutsche Bank all participated in securitizing and servicing residential mortgage loans. In mortgage loan securitization transactions, securities backed by thousands of residential mortgage loans are created and sold to investors; these are known as Residential Mortgage-Backed Securities or RMBS. Ex. 778 (Expert Rebuttal Report of George S. Oldfield (Oldfield Report)) [Dkt. 166-9], ¶¶ 14-16.[3] In the securitization process, the seller-the entity sponsoring the transaction (typically a bank or bank subsidiary)- originates or acquires a pool of residential mortgage loans and sells them to the depositor-an intermediate entity-which then places the loans into an investment trust as collateral for the securities. Id. ¶¶ 14, 20; Ex. 775 (Expert Report of Michelle Minier (Minier Report)) [Dkt. 166-8], ¶¶ 14-16. The process also includes an underwriter, which buys the mortgage-backed securities issued by the trust and sells them to investors as RMBS. Oldfield Report, ¶ 14; Minier Report, ¶¶ 17, 21. The trust is run by a trustee, which directs payments to investors in accord with the terms of trust agreements and reports to investors about the performance of the trust's assets. Oldfield Report, ¶ 14, 24; Minier Report, ¶¶ 17, 20. The originator, seller, underwriter, and depositor may be the same entity or subsidiaries of the same institution. Minier Report, ¶ 10; Oldfield Report, ¶ 21. The seller may also play the role of servicer, which has various responsibilities, including collecting principal and interest payments from residential mortgagors and sending the funds to the trust. Minier Report, ¶¶ 10, 18-19; Oldfield Report, ¶¶ 14, 21. In contractual agreements between the trustee and the seller, the seller makes certain representations and warranties about the quality of the residential mortgage loans sold to the investment trust. Oldfield Report, ¶ 26; Minier Report ¶ 14. The trustee usually has the ability to return defective residential mortgage loans to the seller, and the seller warrants that it will repurchase non-compliant loans. Oldfield Report, ¶ 26; Minier Report ¶ 14. The securitization process creates vast profit potential for the depositor, seller, servicer, and underwriter, providing a source of capital to the banks that approve residential mortgage loans for home buyers and subsequently sell the mortgages. Oldfield Report, ¶ 15.

B. Relevant Parties and Procedural Background

WaMu was a federally chartered savings and loan institution that engaged in residential mortgage lending and participated in the mortgage-backed securitization market. In the spring of 2008, it was the largest savings and loan association in the United States. Am. Compl. [Dkt. 32], ¶ 10. Its business operations consisted of Washington Mutual, Inc. (WMI), a parent holding company, WaMu, a wholly-owned subsidiary, and various subsidiaries of WaMu. In early 2008, WaMu had over 42, 000 employees, 2, 200 branch offices in 15 states, and $188.3 billion in deposits. Ex. 327 [Dkt. 163-26] at 8;[4] Ex. 819 [Dkt. 162] at 1.

WaMu's collapse on September 25, 2008 was the largest thrift failure in the nation's history as measured by dollar value. A significant part of WaMu's business focused on the sale and servicing of securitized residential mortgage loans through large-scale financial transactions. Ex. 801 [Dkt. 161-16] at 132-33. WaMu sold two types of loans. The first type involved loans that met the standards of federal mortgage agencies, such as the Federal National Mortgage Association (FNMA, commonly known as Fannie Mae) and the Federal Home Loan Mortgage Corporation (FHLMC, commonly known as Freddie Mac). Oldfield Report, ¶ 17. Both Fannie Mae and Freddie Mac are government sponsored enterprises (GSEs) that are not agencies of the federal government. Residential mortgage loans that complied with Fannie Mae or Freddie Mac standards were sold into securitization trusts sponsored by those entities. Id. The second kind of residential mortgage loans that were sold and securitized by WaMu were sold to "private label" trusts sponsored by private sector institutions, like WaMu, and were administered by private sector trustees such as Deutsche Bank. Id. ¶ 18.

Deutsche Bank serves as Trustee for 99 "Primary Trusts" and 28 "Secondary Trusts" (collectively the Trusts) at issue in this case. Am. Compl. ¶¶ 2, 3. The Primary Trusts were created, sponsored, and/or serviced by WaMu and its subsidiaries, their predecessors-in-interest, and their affiliates; the Primary Trusts issued RMBS and other securities, holding as collateral mortgage loans originated or acquired by WaMu and sold into the Primary Trusts. Id. ¶ 2. WaMu also issued securities through 28 Secondary Trusts, which are express or implied third-party beneficiaries of the Primary Trusts, and whose performance is allegedly dependent, in whole or in part, on the performance of the Primary Trusts or other RMBS issued by WaMu. Id. ¶ 3. Defendant WMMSC, now a subsidiary of JPMC, serves as the seller and depositor for 44 of the 99 Primary Trusts. Id. WaMu served as the seller and depositor (or assumed similar roles) for the remaining Trusts. See id.

Each Trust is governed by a series of agreements memorializing the rights and obligations of the contracting parties (the Governing Agreements). See, e.g., Ex. 802 (WaMu Series 2007-HE1 Trust) [Dkts. XXX-XX-XXX-XX]. Specifically, the Governing Agreements imposed various obligations upon WaMu in its capacity as seller, including the obligation to cure, repurchase, or substitute new mortgage loans for any that were materially defective or in material breach of their representations or warranties. See id. [5] WaMu accounted for the possibility that it would have to repurchase loans by recording on its balance sheet a reserve for the liabilities associated with repurchasing loans. See Ex. 753 (Expert Report of S.P. Kothari) [Dkt. 167-1], ¶¶ 17-18; Ex. 769 (Expert Report of Thomas Blake) [Dkt. 167-3] at 9. That reserve balance "at any given point in time reflects a dollar estimate of future resources that could be needed to satisfy this contingent liability." Ex. 753, ¶ 21; Ex. 769 at 9 ("WMB's repurchase reserve was based on an estimate because in many cases the liability had not yet been identified, meaning that a claim had not been made, or a determination had not been made by WMB that a representation or warranty had been breached and that the breach caused a material adverse effect on the value of a particular loan.").

The Office of Thrift Supervision (OTS) was an agency within the U.S. Department of the Treasury, established by the Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA), Pub. L. No. 101-73, 103 Stat. 183 (1989), on August 9, 1989. See Ex. 767 (FDIC Resolution Handbook) [Dkt. 161-12] at 96.[6] It was the primary regulator of all federal and many state chartered thrift institutions. Id. As WaMu's primary regulator, Ex. 912 [Dkt. 162-16] at 1, OTS determined that the bank had "insufficient liquidity to meet its obligations" and thus was in an "unsafe and unsound condition to conduct business." Ex. 819 at 1. On September 25, 2008, OTS closed WaMu and placed it into an FDIC receivership. See Ex. 911 [Dkt. 162-15].

FDIC is an independent federal agency established by the Banking Act of 1933, Pub. L. 73-86, 48 Stat. 162 (establishing temporary FDIC), and the Banking Act of 1935, Pub. L. 74-305, 49 Stat. 684 (making FDIC permanent), to provide insurance for depositors in U.S. banks. See Ex. 767 at 1. FDIC maintains a Deposit Insurance Fund by assessing insurance premiums against banks and savings and loan associations. See Federal Deposit Insurance Reform Act of 2005, Pub. L. 109-71, 110 Stat. 9 (merging the Bank Insurance Fund and the Savings Association Insurance Fund into the Deposit Insurance Fund). FDIC's "primary mission is to maintain stability and public confidence in the United States financial system by insuring deposits up to the legal limit and promoting sound banking practices." Ex. 767 at 1 (footnote omitted). "Whenever a federally insured depository institution fails, the FDIC pays off insured deposits or, more frequently, it arranges for the transfer of accounts from the failed institution to a healthy one." Id. In this process, FDIC operates as two distinct legal entities: (1) FDIC-Receiver (FDIC-R), which assumes control of the failed bank, closes it, liquidates any assets, and distributes the proceeds of the liquidation to, among others, FDIC-Corporate, certain customers of the failed bank, and general creditors, all with the goal of avoiding costs to the Deposit Insurance Fund, and (2) FDIC-Corporate (FDIC-C), which values the failed institution, markets it to potential acquirers, solicits and accepts bids, decides which bid is least costly to the Deposit Insurance Fund, and works with the acquirer(s) through the closing process. Id. at 2. "In its role as receiver for a failed depository institution, the [FDIC-R] has a statutory obligation generally to maximize the return on the sale or disposition of the receivership estate's assets. The receiver distributes any funds realized from its liquidation efforts to the failed institution's creditors and shareholders in accordance with the FDIC's priority scheme." Id. (footnote omitted).

FDIC-R received WaMu from OTS and closed WaMu momentarily after its seizure. FDIC-C and FDIC-R jointly sold all of WaMu's assets and most of its liabilities to JPMC on September 25, 2008, the same date on which OTS seized WaMu. Ex. 911.

On December 30, 2008, Deutsche Bank filed a proof of claim with FDIC-R based on WaMu's alleged breach of various obligations under the Governing Agreements relating to the mortgage-backed securities held by the various Trusts for which Deutsche Bank is the Trustee. Am. Compl. ¶ 14. FDIC failed to respond and Deutsche Bank subsequently sued FDIC-R on August 26, 2009, alleging, inter alia, that WaMu had breached its contractual obligations by selling "defective" mortgage loans and failing to repurchase those loans. See Compl. [Dkt. 1]. When FDIC answered that the claims asserted by Deutsche Bank had been assumed by JPMC, Deutsche Bank added JPMC as a defendant and now seeks a money judgment from WaMu and its "successors or successors-in-interest, whoever they are adjudicated to be." Am. Compl. ¶ 13. FDIC and JPMC engaged in discovery on the question of liability under the P&A Agreement and have filed cross-motions for summary judgment on the scope of the Agreement.

C. Context for JPMC's Purchase of Washington Mutual Bank

In 2008, the United States was undergoing one of the most severe financial crises in the nation's history. The deteriorating housing market caused an increased delinquency rate among residential borrowers who defaulted on their mortgages, which in turn increased demands that WaMu repurchase at-risk securitized loans. In early March 2008, OTS and FDIC pressured WaMu to raise more capital or find a buyer. See Ex. 327 at 3. JPMC, other banks, and various private equity groups were invited to participate in the potential transaction. Id. JPMC engaged in "an exhaustive due diligence process, " id., of which "the most critical component... was the assessment of losses in WaMu's consumer loan portfolios, particularly home lending" id. at 4. On March 31, 2008, JPMC offered to purchase WaMu at $5/share plus a contingent $3/share dependent "on the magnitude of losses realized on certain WaMu loan portfolios." Id. at 5. It was contemplated that any acquisition would be via an open bank transaction.[7] See Ex. 486 [Dkt. 164-10]. However, WaMu obtained a capital infusion from a private equity firm and remained independent. Ex. 327 at 5.

In early September of 2008, as WaMu's financial status continued to weaken, OTS and FDIC again demanded that WaMu raise additional capital or engineer a sale. Id. Advised by FDIC that FDIC was closely monitoring WaMu and anticipated a seizure of its assets and a quick sale, JPMC (and others) began a new round of due diligence, "including updating the loan portfolio loss estimates." Id. In mid-September, Sheila Bair, then-Chairman of the FDIC, contacted Jamie Dimon, Chairman and CEO of JPMC, to "pitch[ ] an open bank transaction." Ex. 135 [Dkt. 159-15]. However, FDIC officials changed course soon thereafter and asked various potential acquiring banks to prepare bids in the event WaMu were seized by federal regulators. See Ex. 327 at 5. On September 22, 2008, FDIC representatives Jim Wigand, Herb Held, and David Gearin[8] met with various prospective bidders, including JPMC, to discuss a potential WaMu transaction. See Ex. 54 [Dkt. 158-9]; Ex. 142 [Dkt. 159-16].

D. FDIC's Internal Drafting of the Purchase and Assumption Agreement

FDIC began drafting a purchase and assumption agreement for WaMu in mid-September 2008. See Deposition of David Gearin (Gearin Dep.) [Dkt. 169-24] at 18-21. FDIC attorneys David Gearin and Lee Van Fleet, Counsel, Division of Resolutions and Receiverships, "principally drafted" what would ultimately become the September 25, 2008 P&A Agreement at issue here, "based on instructions from Jim Wigand, Herb Held, and Richard Aboussie."[9] Ex. 901 (FDIC Interrogatory Responses) [Dkt. 162-5] at 6. Mr. Van Fleet testified that the "P&A was a completely one-off deal. It had several unique provisions that were never seen in a prior P&A and some of them have never been seen since." Deposition of Lee Van Fleet (Van Fleet Dep.) [Dkt. 169-9] at 37; see also id. at 46 ("Article 2 was totally different than any other one we've done before or since."); Wigand Dep. at 37 (WaMu transaction "was unique in that it was different from the standard transactions in which only identified liabilities and identified assets pass to the acquirer."). Nonetheless, Messrs. Van Fleet and Gearin started with FDIC's pre-existing template for a whole-bank purchase and assumption agreement, originally crafted in the 1990s by an FDIC attorney, and modified the template in various ways for the WaMu receivership transaction. Ex. 901 at 6-7. The template contained pre-existing definitions for "Record" and "Accounting Records." Id. at 7; see also Ex. 242 [Dkt. 163-20] at 6, 12.

On September 22, 2008, Mr. Van Fleet sent an internal-FDIC email to Mr. Gearin, Sheri Foster, [10] and other FDIC officials, attaching drafts of two different options for whole-bank purchase and assumption agreements. Ex. 248 [Dkt. 159-25]. The first "all deposit version" would "convey all assets and all liabilities, including all deposits, except those liabilities specifically excluded on the attached Schedule 2.1." Id. The second was described as "a standard' whole bank P&A" that would pass to the acquirer "all assets and only the insured and other certain liabilities listed in section 2.1." Id.

On the morning of September 23, 2008, [11] in response to Mr. Van Fleet's email, Mr. Gearin asked if Mr. Van Fleet could send the "current draft of the all deposit version." Ex. 253 [Dkt. 160] at 1. Later that day, Mr. Van Fleet forwarded a draft agreement. Id. The relevant sections of that draft stated:

§ 2.1: Subject to Section 2.5, the Assuming Bank expressly assumes at Book Value (subject to adjustment pursuant to Article VII) and agrees to pay, perform, and discharge, all of the liabilities of the Failed Bank as of Bank Closing, including the Assumed Deposits and all liabilities associated with any and all employee benefit plans, except as otherwise provided in this Agreement (such liabilities referred to as "Liabilities Assumed").
Schedule 2.1 attached hereto and incorporated herein sets forth certain categories of Liabilities Assumed and the aggregate Book Value of the Liabilities Assumed in such categories. Such schedule is based upon the best information available to the Receiver and may be adjusted as provided in Article VIII.

Id. at 12. At the beginning of this draft, the second introductory clause stated: "WHEREAS, the Assuming Bank desires to purchase certain assets and assume certain deposit and other liabilities of the Failed Bank on the terms and conditions set forth in this Agreement...." Id. at 4.

In the afternoon of September 23, 2008, Ms. Foster sent an email to Messrs. Wigand and Held, forwarding a question from Mr. Van Fleet: "Lee Van Fleet called with the following questions: Can we limit liabilities assumed to just the liabilities on the books and records' and then give the options to take out the different categories of liabilities? Initial Payment = Bid Amount? These are coming from David Gearin." Ex. 903 [Dkt. 162-7]. A positive answer presumably came very soon thereafter, because Mr. Van Fleet immediately sent an email to Mr. Gearin and other FDIC representatives, attaching a revised draft P&A Agreement. See Ex. 255 [Dkt. 160-1]. In that draft, Section 2.1 was amended as follows:

Subject to Section 2.5, the Assuming Bank expressly assumes at Book Value (subject to adjustment pursuant to Article VIII) and agrees to pay, perform, and discharge, all of the liabilities of the Failed Bank which are reflected on the Books and Records of the Failed Bank as of Bank Closing, including the Assumed Deposits and all liabilities associated with any and all employee benefit plans, except as listed on the attached Schedule 2.1, and as otherwise provided in this Agreement (such liabilities referred to as "Liabilities Assumed").
Schedule 2.1 attached hereto and incorporated herein sets forth certain categories of Liabilities Assumed and the aggregate Book Value of the Liabilities Assumed in such categories. Such schedule is based upon the best information available to the Receiver and may be adjusted as provided in Article VIII.

Ex. 256 (changes tracked to compare updated version of agreement) [Dkt. 160-2]. The second introductory clause in this draft was changed to "WHEREAS, the Assuming Bank desires to purchase substantially all of the assets and assume all deposit and substantially all other liabilities of the Failed Bank on the terms and conditions set forth in this Agreement...." Ex. 255 at 6 (emphasis added).[12]

E. External Bidding Process

As it internally drafted and redrafted a purchase and assumption agreement, FDIC was also putting together a "Transaction Recap" for potential bidders. Ex. 151 [Dkt. 159-18]; see also Ex. 56 [Dkt. 158-11]. The Transaction Recap outlined five alternative possible transaction structures from which bidders could choose:

(1) All liabilities are assumed except the preferred stock;
(2) All liabilities are assumed, except the preferred stock and the subordinated debt;
(3) All liabilities are assumed, except the preferred stock, the subordinated debt, and the senior debt;
(4) All deposits and secured liabilities are assumed by the acquirer; and
(5) All insured deposits and secured liabilities are assumed.>

Ex. 56 at 2.[13] According to FDIC, different proposed structures were offered in order to provide options for prospective acquirers that did not want to assume all liabilities. Wigand Dep. at 116 (The bidding "structure was set up intentionally to allow bidders to make the election of which liabilities they felt had to be assumed in order to... make the transaction move forward."). The Transaction Recap emphasized that "[t]he legal documents will be the governing documents for this transaction." Ex. 56 at 2.

In connection with the Transaction Recap, the FDIC also prepared a set of bid instructions for potential bidders. Ex. 57 [Dkt. 158-12]. The instructions described Transaction Option 3 (on which JPMC ultimately bid) as a "Whole Bank, All Deposits" transaction and stated that:

Under this transaction, the Purchase and Assumption (Whole Bank), the Potential Acquirer whose Bid is accepted by the Corporation assumes the Assumed Deposits of the Bank and all other liabilities but specifically excluding the preferred stock, non-asset related defensive litigation, subordinated debt and senior debt, and purchases all the assets of the Bank, excluding those assets identified as excluded assets in the Legal Documents....

Id. at 3.[14] Transaction Options 1 and 2 also provided that the assuming bank would take "the Assumed Deposits of the Bank and all other liabilities." Id. Under Transaction Options 4 and 5, the assuming bank would take "the Assumed Deposits of the Bank and only certain other liabilities, " subject to certain excluded categories of liabilities. Id. at 3-4. The Transaction Recap and bid instructions were subsequently provided to potential bidders, including JPMC, later in the day on September 23, 2008. Exs. 56 and 57.[15]

Also on September 23, 2008, FDIC officially invited JPMC to bid on WaMu. See Ex. 55 [Dkt. 158-10]. The invitation came via Ms. Foster, who sent an email to Dan Cooney and Mike Cavanagh[16] of JPMC advising: "The FDIC is offering select financial institutions, such as yours, an opportunity to bid on a depository institution.... If you have any questions about this process, please contact me at any time." Id. The invitation included a link to a web site known as IntraLinks, which contained additional information about WaMu and the potential acquisition. Id.

FDIC first provided drafts of the various proposed agreements to potential bidders, including JPMC, during the evening of September 23, 2008. See FDIC Opp. to JPMC Statement of Facts [Dkt. 148-1], Undisputed JPMC Fact ¶ 40, at 11 (citing Ex. 257 [Dkt. 160-3]; Ex. 276 [Dkt. 160-8]; Ex. 908 [Dkt. 162-12]). In the proposed P&A Agreement for Transaction Options 1-3, Section 2.1 provided that

Subject to Section 2.5, the Assuming Bank expressly assumes at Book Value (subject to adjustment pursuant to Article VIII) and agrees to pay, perform, and discharge, all of the liabilities of the Failed Bank which are reflected on the Books and Records of the Failed Bank as of Bank Closing, including the Assumed Deposits and all liabilities associated with any and all employee benefit plans, except as listed on the attached Schedule 2.1, and as otherwise provided in this Agreement (such liabilities referred to as "Liabilities Assumed").

Ex. 276 at 60.[17]

Section 12.1 provided for various situations in which FDIC would indemnify the assuming bank. See id. at 77. Specifically, Section 12.1 stated that:

... the Receiver agrees to indemnify and hold harmless the Indemnitees against any and all costs, losses, liabilities, expenses (including attorneys' fees) incurred prior to the assumption of defense by the Receiver pursuant to paragraph (d) of Section 12.2, judgments, fìnes and amounts paid in settlement actually and reasonably incurred in connection with claims against any Indemnitee based on liabilities of the Failed Bank that are not assumed by the Assuming Bank pursuant to this Agreement....

Id.

According to the testimony of Mitchell Eitel, [18] after JPMC received the draft P&A Agreement, email discussion ensued between JPMC and FDIC regarding Mr. Eitel's concern that there was a disconnect between Sections 2.1 and 12.1 of the draft agreement. Deposition of Mitchell Eitel (Eitel Dep.) [Dkt. 169-17] at 140-41.[19] Mr. Eitel testified that JPMC wanted to make sure that the indemnity provision did not "undermine the limitation" that JPMC was only taking "booked liabilities, " that is, only liabilities entered on WaMu's accounting books and underlying records. Id. at 143. Mr. Gearin similarly recalled that JPMC and FDIC had discussions about the indemnification provisions in the P&A Agreement and stated his belief that Mr. Eitel was trying to discern what liabilities were covered by Section 12.1. Gearin Dep. at 175-177.

During the evening of September 23, 2008, Mr. Gearin wrote to Mr. Cooney of JPMC, under the subject line "Indemnity Question, " stating that "the liabilities assumed are described as booked liabilities which should address the concern raised by Mitch [Eitel]." Ex. 66 [Dkt. 158-16] at 2. Mr. ...


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