Deutsche Bank Nat'l Trust Co. v. Fed. Deposit Ins. Corp.

109 F.Supp.3d 179

Deutsche Bank National Trust Company, Plaintiff,

v.Federal Deposit Insurance Corporation, et al., Defendants.

Civil Action No. 09–1656 (RMC)

United States District Court, District of Columbia.

Signed June 17, 2015

Ian M. Dumain, Motty Shulman, Boies Schiller & Flexner LLP, Armonk, NY, Jack G. Stern, Robin A. Henry, Boies, Schiller & Flexner LLP, New York, NY, Talcott J. Franklin, Talcott Franklin PC, Dallas, TX, for Plaintiff.

Scott H. Christensen, William Robert Stein, Jason Samuel Cohen, Hughes Hubbard

& Reed LLP, Brent James McIntosh, Mia Whang Spiker, Sullivan & Cromwell, LLP, Washington, DC, Anne M. Devens, Federal Deposit Insurance Corporation, Arlington, VA, Ian D. McDonald, Jonathan M. Sedlak, Joshua Fritsch, Laura R. Paliani, Penny Shane, Stacey R. Friedman, Sullivan & Cromwell LLP, New York, NY, Robert A. Sacks, Sullivan & Cromwell LLP, Los Angeles, CA, for Defendants.

AMENDED MEMORANDUM OPINION

ROSEMARY M. COLLYER, United States 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. 161–17–161–21]. 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...