Last week, Washington Mutual Inc. had its first chance to try to claw back some of the billions of dollars in assets the holding company argues were wrongfully stripped away when the government seized and sold its banking operations to JPMorgan Chase & Co.
At issue in the Oct. 22 summary judgment hearing in a federal court in Delaware: roughly $4 billion in deposits that the holding company contends JPMorgan has illegally refused to return since last year's sale of the largest failed consumer bank in American history. No matter how the judge rules, however, it's just one legal battle among many.
The hydralike litigation has become a case study in how a bank holding company can create a legal headache for the government, and for companies that buy banking assets, long after its main business has disappeared.
The Federal Deposit Insurance Corp. took control of Washington Mutual's bank on Sept. 25, 2008, selling it the same day to JPMorgan for $1.9 billion. Disputes over that day's events have yielded three separate suits in two different courts, which are unfolding alongside a Chapter 11 bankruptcy. Two suits are pending before Judge Mary Walrath of the U.S. Bankruptcy Court for the District of Delaware. Walrath, who heard the summary judgment motion, is also handling the holding company's bankruptcy. The third case is before U.S. District Judge Rosemary Collyer of the District of Columbia.
Bank holding companies have sued before to get money back after their banking operations were seized by the FDIC. But the cases are rare, largely because the failed bank's liabilities usually outstrip their assets. The FDIC generally loses money covering depositors when it takes over a bank, said Professor Steven Walt of the University of Virginia School of Law, who along with a colleague is studying the way the FDIC handles bank failures. "This is a very unusual case," he said.
In Washington Mutual's case, the FDIC lost nothing. The agency intervened soon enough that the bank still held enough assets to make it an attractive buy for JPMorgan, despite the $188 billion in deposits JPMorgan would have to take on. But Washington Mutual is arguing in its suit brought in D.C. federal trial court that the government sold the bank for less than it would have been worth in liquidation, which it further argues violates the FDIC's obligations under the Federal Deposit Insurance Act.
It also contends that many assets should never have been transferred to JPMorgan at all.
Between the lawsuits in Delaware and the District of Columbia, Washington Mutual is seeking to get back as much as $17 billion. The holding company is represented in the bankruptcy and the suits by a team from New York-based Weil, Gotshal & Manges, led by partner Brian Rosen, and another from Los Angeles-based Emanuel Urquhart Oliver & Hedges, led by New York partner Peter Calamari. Lawyers for all parties declined to comment.
Washington Mutual first sued the FDIC receiver on March 20 in the District of Columbia, demanding billions from the agency. Although it was not named in that suit, JPMorgan responded by filing an adversary proceeding in Delaware, asking the court to declare that it owned the assets at issue in the D.C. case. Washington Mutual countersued and then filed its own case in Delaware, focusing specifically on the $4 billion in deposits. JPMorgan is represented by lawyers from New York-based Sullivan & Cromwell, including Los Angeles partner Robert Sacks and New York partner Stacey Friedman.
The FDIC receiver, defended by a DLA Piper headed by New York partner John Clarke Jr., also filed counterclaims against Washington Mutual, saying the holding company had left its bank undercapitalized.
The holding company is seeking to get back $6.5 billion in capital contributions made to its bank, $4 billion in preferred securities, $3 billion in tax refunds and the $4 billion at issue last week. Washington Mutual argues that last $4 billion was an intercompany deposit without which its bankruptcy cannot move forward. JPMorgan and the FDIC have questioned whether much of that deposit was backed by any assets, calling a large portion of it a mere "book entry."
In interviews, lawyers and legal scholars divided over Washington Mutual's chances of getting money back. Professor Patricia McCoy, a banking law expert at the University of Connecticut School of Law, was skeptical of many of the holding company's claims, particularly its argument that the FDIC sold its assets for too little. Even on the open market, Washington Mutual's toxic securities would have gone for cut-rate prices, she said.
"This type of claim we occasionally saw back in the savings-and-loan crisis," McCoy said. "And the courts almost always dismissed the claim out of hand and said the holding company had no standing to raise it or that the courts didn't want to go in and second-guess the sales price. The courts just don't want to get into that."
But Ronald Glancz, chairman of the financial services group at Washington-based Venable, said he thought some of Washington Mutual's claims might hold water and would likely come down to the facts of the particular assets. The $4 billion in deposits is one such open question, said Glancz. "The fact is, when a holding company or anybody has a deposit at the bank ... I think the ordinary person would say that, no matter what happens to that deposit, it's my money," said Glancz.
Even if Washington Mutual recovers some of the disputed assets from the FDIC or JPMorgan, that doesn't mean its bankruptcy will move swiftly. The holding company for Bank of New England, which failed in 1991, managed to recover $140 million in a suit against the regulator. Its 18-year-old bankruptcy case is still in court, while the creditors fight over their shares.