It’s Alive! Dexia’s $775 mln MBS case vs JPMorgan Back From the Dead

The Foreclosure Crisis Puzzle: Navigating the Changing Landscape of Foreclosure
By: Alison Frankel

Here is how U.S. Senior District Judge Jed Rakoff led off his blockbuster ruling Friday in Dexia’s mortgage-backed securities case against Bear Stearns successor JPMorgan Chase: “Those who don’t believe in ghosts have never been in court, where legal claims are regularly seen rising from the grave. This is a case in point.” Is it ever! Rakoff’s resurrection and remand of Dexia’s $775 million suit merits its own chapter in the annals of zombie litigation.

You may recall that little more than a month ago, the judge issued one of his famous bottom-line orders, granting JPMorgan’s motion for summary judgment on all but five of the 65 certificates for which Dexia’s lawyers at Bernstein, Litowitz, Berger & Grossman had asserted securities fraud claims. At the time, JPMorgan’s lawyers at Cravath, Swaine & Moore publicly estimated that Dexia’s potential losses on its remaining claims were about $5.7 million, down $769 million from the Franco-Belgian bank’s original claims. In typical fashion, Rakoff said he would issue an opinion explaining his reasoning in due time. But before he did, the 2nd Circuit Court of Appeals ruled that the heretofore obscure Edge Act, which involves international transactions and federally chartered institutions, did not justify federal court jurisdiction in AIG’s case against Bank of America. JPMorgan had cited the Edge Act in removing Dexia’s case from New York State Supreme Court, and Rakoff had denied remand partly on Edge Act grounds. So on April 22, the judge docketed a sua sponte order directing the parties to brief whether the 2nd Circuit’s ruling in the AIG case meant that Dexia’s suit should be remanded to state court, and, if so, whether his summary judgment decision should be vacated.

Both sides took predictable positions in their briefs. Dexia said the case should go back to state court, where Rakoff’s ruling should have no effect because he never had proper jurisdiction. JPMorgan argued that under the 2nd Circuit’s interpretation of the Edge Act, Dexia’s case still belonged in federal court. And even if Rakoff determined that the case should be remanded, the bank said, he should leave intact his summary judgment ruling because federal courts have broad power to decide questions of standing. (JPMorgan’s lawyers at Cravath were making a very educated guess that Rakoff’s April 2 summary judgment ruling involved standing – specifically, Dexia’s right to assert claims based on assignments from its corporate affiliate FSA Asset Management, known as FSAM – because Rakoff hadn’t laid out his reasoning.)

In Friday’s ruling, Rakoff sided with Dexia on both points. The Edge Act, he said, does not confer federal-court jurisdiction because none of the Virgin Islands mortgages JPMorgan cited in its brief opposing remand were originated by a nationally chartered institution. And even worse for JPMorgan, Rakoff said that because he never really had jurisdiction, his summary judgment ruling was void. Cravath had properly surmised that his decision was based on Dexia’s standing to bring suit, the judge said, but he believes the resolution of that issue “raises difficult questions of state law that are more appropriately decided by a state court in these unusual circumstances.”

So Dexia, which was devastated by Rakoff’s opaque summary judgment order, now benefits from the absence of an opinion explaining Rakoff’s reasoning. JPMorgan won’t be able to tether its arguments in state court to Rakoff’s interpretation, and Dexia won’t have to push uphill against it.

It’s not entirely clear how the case will proceed in state court. Discovery was complete in federal court, but Rakoff’s finding that he didn’t have jurisdiction could technically mean that nothing in the federal court record carries over. Presumably, the parties will have to reach some agreement that permits them to avoid starting over from scratch. Both JPMorgan and Dexia counsel at Bernstein Litowitz declined to comment.

If you’re wondering how the Edge Act controversy will impact Dexia’s MBS case against Deutsche Bank, which is also before Rakoff, the answer is that it won’t: The Deutsche Bank removal to federal court wasn’t based on the Edge Act. In that case, Deutsche Bank’s motion to dismiss Dexia’s amended complaint is pending.

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