Jeffrey R. Seckel, a shareholder in McGuire, Craddock & Strother in Dallas (Vanessa Gavalya, Handout photo)
In a ruling that’s a history lesson as much as a breach of contract decision, the U.S. Court of Appeals for the Fifth Circuit found that JP Morgan Chase Bank must assume the leases of the failed Washington Mutual Bank it bought for $1.8 billion. To rule otherwise, the court concluded, would return Fifth Circuit landlord/tenant law “to that of twelfth-century England.”
The background to the Fifth Circuit’s Jan. 10 decision in Excell Willowbrook v. JP Morgan Chase and Federal Deposit Insurance Corp. is as follows.
In early 2008, Washington Mutual (WaMu) entered into lease agreements with several landlords for undeveloped land for future branch offices. The bank failed later that year before it could complete the branch offices. The Federal Deposit Insurance Corp. (FDIC) later stepped into WaMu’s shoes as a receiver, assumed all of its assets and liabilities, and ultimately accepted a bid for those assets and liabilities from JP Morgan Chase for $1.8 billion, according to the decision.
The FDIC and Chase later executed a purchase and assumption agreement (P&A agreement) that assigned the real estate leases to Chase, according to the opinion.
The FDIC determined that compliance with the leases would be burdensome to the WaMu receivership and elected to repudiate the leases. The landlords filed several federal claims against Chase, alleging breach of the leases, which were consolidated in U.S. District Court for the Southern District of Texas.
The FDIC intervened on behalf of Chase in all of the cases and moved for summary judgment, the opinion continued. The FDIC contended that the landlords lacked standing to interpret or enforce the P&A agreement, as they were neither parties nor intended beneficiaries to the agreement and did not have a legal basis to assert the leases against Chase.
Although the district court agreed with the FDIC that the landlords were not third-party beneficiaries to the agreement, it concluded that the agreement unambiguously assigned the leases to Chase without giving Chase any option to repudiate, thereby bringing Chase into “privity of estate” with the landlords and giving the landlords a right to hold Chase liable for breach of the leases.
The FDIC appealed the decision on behalf of Chase to the Fifth Circuit.
Property Law Primer
The Fifth Circuit concluded that the landlords were not third-party beneficiaries, as two other federal circuit courts of appeals have ruled in similar cases. But it also considered whether the landlords had a right to enforce the leases against Chase by virtue of their “privity of estate” with Chase.
The landlords contended that the agreement accomplished a conveyance of the leases that, under long-standing principles of real property law, gave the landlords the legal right to enforce the leases against Chase, even in the absence of contractual privity. But the FDIC argued on appeal that, because the landlords were neither parties nor beneficiaries to the agreement, the landlords lacked standing to interpret it, which accomplished a complete assignment of the leases.
“The FDIC’s circular reasoning ignores eight centuries of legal history,” Senior Judge Patrick Higginbotham wrote for the circuit. “To be sure, in medieval England, a landlord had no right to enforce the covenants in a lease against an assignee of the original tenant; courts reasoned that while the original tenant remained contractually liable for his obligations under the lease (e.g. rent), there was no enforcement contract running between the landlord and the assignee.”
Higginbotham explained that English courts later developed the concept of “real covenants,” a concept carried over into U.S. law and Texas law. Real covenants are covenants that “run with the land” and can be enforced by the landlord against an assignee tenant by virtue of their “privity of estate,” notwithstanding the absence of contractual privity, Higginbotham wrote.
However, the content of the conveyance by the original tenant to the subsequent tenant remains critical, as the subsequent tenant only comes into the “privity of estate” with the landlord if the landlord can prove that the original tenant assigned away his entire interest in the lease.
“The FDIC’s position, under which the landlord lacks ‘standing’ to prove the content and effect of the conveyance between the tenants because he is not a party to the conveyance, would defeat the concept of real covenants, returning our law to that of twelfth-century England,” Higginbotham wrote, affirming the district court’s decision.
Joe Brooks, an attorney for the FDIC, declined to comment on the case, as did David Barr, a spokesman for the FDIC.
Allyson Ho, a partner in Morgan, Lewis & Bockius in Dallas who represents Chase, referred comment to the FDIC.
Kemp Kasling, a partner in Austin’s Kasling, Hemphill, Dolezal & Atwell who represents several landlords in the case, said he is pleased with the ruling.
“It’s important to me and my clients because it vindicates and upholds real property rights and protects landlords,” Kasling said. “To me the key is, if you sign a contract with the FDIC, you’re obligated to honor the contract.”
Jeff Seckel, a shareholder in Dallas’ McGuire, Craddock & Strother, represents other landlords in the case.
“For my clients’ standpoint, it means that they are going to recover on the lease options that Chase had assumed,” he said. “And from the legal standpoint, the court reaffirmed the notion that landlord-tenant law is not strictly the same as contract law.”