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UNITED STATES DISTRICT COURT FOR THE DISTRICT OF COLUMBIA

DEUTSCHE BANK NATIONAL TRUST COMPANY, as Trustee for the Trusts listed in Exhibits 1-A and 1-B,

Plaintiff,

v.

FEDERAL DEPOSIT INSURANCE CORPORATION, as receiver for Washington Mutual Bank; JPMORGAN CHASE BANK, National Association; and WASHINGTON MUTUAL MORTGAGE SECURITIES CORPORATION,

Defendants.

Case No. 09-CV-1656-RMC

Hon. Rosemary M. Collyer

MEMORANDUM OF POINTS AND AUTHORITIES IN SUPPORT OF THE FDIC-RECEIVER’S MOTION FOR SUMMARY JUDGMENT ON LIABILITY

Of Counsel:

Kathryn R. Norcross, D.C. Bar No. 398120 Senior Counsel Kaye A. Allison, Counsel Anne M. Devens, Counsel FEDERAL DEPOSIT INSURANCE CORPORATION 3501 Fairfax Drive, Room VS-D-7092 Arlington, Virginia 22226 Telephone: (703) 562-2676 Facsimile: (703) 562-2475 Email: [email protected] Email: [email protected] Email: [email protected]

William R. Stein, D.C. Bar No. 304048 Scott H. Christensen, D.C. Bar No. 476439 Jason S. Cohen, D.C. Bar No. 501834 HUGHES HUBBARD & REED LLP 1775 I Street, N.W., Suite 600 Washington, D.C. 20006-2401 Telephone: (202) 721-4600Facsimile: (202) 721-4646 Email: [email protected] Email: [email protected] Email: [email protected]

Attorneys for Federal Deposit Insurance Corporation in its capacity as Receiver for Washington Mutual Bank

June 20, 2014

Case 1:09-cv-01656-RMC Document 173 Filed 10/03/14 Page 1 of 53

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TABLE OF CONTENTS

Page

INTRODUCTION ...........................................................................................................................1

SUMMARY OF FACTS .................................................................................................................2

SUMMARY OF ARGUMENT .......................................................................................................9

ARGUMENT .................................................................................................................................11

I. THE LANGUAGE AND THE PRIMARY PURPOSE OF THE P&A AGREEMENT LEAVE NO DOUBT THAT CHASE ASSUMED THE WAMU MORTGAGE REPURCHASE LIABILITIES. ...................................................13

A. Under Section 2.1, Chase Assumed All WaMu Liabilities Arising From The Governing Agreements. ........................................................................14

B. The Principal Purpose Of The P&A Agreement Was To Transfer Substantially All Of WaMu’s Assets And Liabilities. ...........................................18

C. Chase Understood That The Transaction It Bid On Transferred All Liabilities Except Those Specifically Excluded. ...................................................20

II. THE UNDISPUTED EXTRINSIC EVIDENCE ESTABLISHES THAT CHASE AGREED TO ASSUME WAMU’S MORTGAGE REPURCHASE LIABILITIES. .........................................................................................22

A. The FDIC-Receiver Told All Prospective Bidders That The Acquiring Bank Would Assume WaMu’s Mortgage Securitization Liabilities. ....................23

B. Chase Unsuccessfully Tried To Change The P&A Agreement To Exclude The Mortgage Securitization Liabilities. .................................................25

C. As A Matter Of Law, The Only Reasonable Interpretation Of The P&A Agreement Is That Chase Assumed WaMu’s Mortgage Repurchase Liabilities. ...........................................................................................27

D. The Course Of Performance Confirms That Chase Assumed WaMu’s Mortgage Repurchase Liabilities. ..........................................................................28

III. CHASE ACKNOWLEDGED ASSUMING THE WAMU MORTGAGE REPURCHASE LIABILITIES IN FULL. ........................................................................31

A. Chase Acknowledged Assuming WaMu’s Ongoing Contractual Obligations Irrespective Of A Book Value Cap. ...................................................32


TABLE OF CONTENTS (continued)

Page

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B. Chase’s Actions Are Inconsistent With Chase’s Position That The Assumed Liabilities Were Capped At Book Value. ..............................................33

IV. CHASE WAS AWARE OF THE NATURE AND SCOPE OF THE WAMU MORTGAGE REPURCHASE LIABILITIES PRIOR TO THE TRANSACTION. ..............................................................................................................36

A. WaMu Repeatedly Disclosed The Mortgage Repurchase Liabilities. ...................36

B. Chase Was Familiar With The Mortgage Repurchase Liabilities. ........................37

C. Chase Long Sought To Acquire WaMu And Conducted Exhaustive Due Diligence Prior To Submitting Its Bid. ..........................................................38

D. Chase Concluded The Benefits Of The Deal Outweighed The Risks. ..................41

CONCLUSION ..............................................................................................................................44


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TABLE OF AUTHORITIES

Page(s)CASES

Am. First Inv. Corp. v. Goland, 925 F.2d 1518 (D.C. Cir. 1991) ..................................................12

Anderson v. Duncan, ___ F. Supp. 2d ___, No. 06-CV-1565 (RMC), 2013 WL 5429274 (D.D.C. Sept. 30, 2013) .....................................................................................................11, 12

A.W.G. Farms, Inc. v. Federal Crop Ins. Corp., 757 F.2d 720 (8th Cir. 1985) ............................11

Baldwin v. Univ. of Pitt. Med. Ctr., 636 F.3d 69 (3d. Cir. 2011) ......................................12, 13, 14

Bowden v. United States, 106 F.3d 433 (D.C. Cir. 1997) ..............................................................11

* Castle v. Caldera, 74 F. Supp. 2d 4 (D.D.C. 1999) ...........................................................11, 12, 13

Colorado Interstate Gas Co. v. FERC, 599 F.3d 698 (D.C. Cir. 2010) ..................................13, 14

Connors v. Link Coal Co., 970 F.2d 902 (D.C. Cir. 1992) ......................................................12, 13

Dobson v. Hartford Fin. Servs. Grp., Inc., 389 F.3d 386 (2d Cir. 2004) ......................................11

Fomby-Denson v. Dep’t of Army, 247 F.3d 1366 (Fed. Cir. 2001) ...............................................11

Hillside Metro Associates, LLC v. JPMorgan Chase Bank, Nat’l Ass’n, 747 F.3d 44 (2d Cir. 2014) .................................................................................................................................11

Mobil Oil Exploration & Producing Se., Inc. v. United States, 530 U.S. 604 (2000) ...................11

Muldrow v. EMC Mortg. Corp., 766 F. Supp. 2d 230 (D.D.C. 2011) ...........................................32

Perry & Wallis, Inc. v. United States, 427 F.2d 722 (Ct. Cl. 1970) ........................................27, 29

TEG-Paradigm Envtl., Inc. v. United States, 465 F.3d 1329 (Fed. Cir. 2006) ..............................12

* United Mine Workers of Am. 1974 Pension v. Pittston Co. 984 F.2d 469 (D.C. Cir. 1993) .....................................................................................12, 13, 14

United States v. Basin Elec. Power Co-op., 248 F.3d 781 (8th Cir. 2001) ....................................11

United States v. Kanu, 695 F.3d 74 (D.C. Cir. 2012) ..............................................................14, 36

United States v. Westlands Water Dist., 134 F. Supp. 2d 1111 (E.D. Cal. 2001) .........................11

* Wash. State Repub. Party v. Wash. State Grange, 676 F.3d 784 (9th Cir. 2012) ....................13, 27


TABLE OF AUTHORITIES (continued)

Page(s)

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STATUTES AND RULES

12 U.S.C. § 1821(d) .........................................................................................................................3

12 U.S.C. § 1823(c) .........................................................................................................................3

Fed. R. Civ. P. 56(a) ......................................................................................................................11

TREATISES AND PERIODICAL MATERIALS

5 Corbin on Contracts § 24.7 (1998) .............................................................................................14

* Restatement (Second) of Contracts § 201 (1993) .................................................................. passim

* Restatement (Second) of Contracts § 202 (1993) .................................................................. passim

OTHER AUTHORITIES

Robert E. Jones, Gerald E. Rosen, William E. Wegner, & Jeffrey Scott, Federal Civil Trials and Evidence ¶ 8:4455 (2000) .......................................................................................11


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TABLE OF RELEVANT INDIVIDUALS1

Richard Aboussie – FDIC, Associate General Counsel, Large Bank Resolutions

John Barren – Chase, Controller and Senior Vice President, Home Lending (also Chase’s Rule 30(b)(6) witness)

Brian Bessey – Chase, Managing Director and Senior Vice President, Corporate Mergers and Acquisitions

Corinne Burger – Chase, Senior Controller, Retail Financial Services

Patrick Carr – Chase, Vice President and Director of Accounting Policy and External Reporting, Retail Financial Services

Michael Cavanagh – Chase, Chief Financial Officer and Executive Vice President

John Coffee – Expert witness for the FDIC-Receiver

Daniel Cooney – Chase, General Counsel and Senior Vice President, Retail Financial Services

Jamie Dimon – Chase, Chairman and Chief Executive Officer

Sally Durdan – Chase, Chief Financial Officer, Retail Financial Services

Mitchell Eitel – Partner, Sullivan & Cromwell LLP, counsel for Chase

David Gearin – FDIC, Senior Counsel, Special Issues Unit, Legal Division

Mitchell Glassman – FDIC, Director, Division of Resolutions and Receiverships

Tod Gordon – Chase, Managing Director, Treasury Department

Robert Hartheimer – Expert witness for Chase

Herbert Held – FDIC, Assistant Director, Institution Sales Unit, Franchise and Asset Marketing Branch, Division of Resolutions and Receiverships

William Holder – Expert witness for Chase

Michael Lipsitz – Chase, General Counsel and Senior Vice President, Consumer Banking

Ryan McInerney – Chase, Senior Vice President and Chief Risk Officer, Branch Banking

1. The job titles for FDIC and Chase employees are as of September 2008.


TABLE OF RELEVANT INDIVIDUALS (continued)

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Michelle Minier – Expert witness for Chase

George Oldfield – Expert witness for the FDIC-Receiver

Fernando Rivas – Chase, Managing Director, Financial Institutions Group

Charles Scharf – Chase, Chief Executive Officer, Retail Financial Services

Ravi Shankar – Chase, Senior Vice President and Chief Financial Officer, Home Lending

James Wigand - FDIC, Deputy Director, Franchise and Asset Marketing Branch, Division of Resolutions and Receiverships


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GLOSSARY

Deutsche Bank – Plaintiff Deutsche Bank National Trust Company

DRR – FDIC’s Division of Resolutions and Receiverships

FDIC-Receiver – Defendant Federal Deposit Insurance Corporation, in its capacity as Receiver of Washington Mutual Bank

GSE – government sponsored entities such as the Federal National Mortgage Association (“Fannie Mae”) and the Federal Home Loan Mortgage Corporation (“Freddie Mac”)

Heritage WaMu or hWaMu – terms denoting assets, liabilities, and personnel of WaMu that were transferred to Chase on September 25, 2008

Chase – Defendant JPMorgan Chase Bank, N.A.

P&A Agreement – Purchase and Assumption Agreement dated September 25, 2008 among Chase, the FDIC-Receiver, and the FDIC in its corporate capacity

WaMu – Washington Mutual Bank

WMI – Washington Mutual, Inc., WaMu’s holding company

WMMSC – Defendant Washington Mutual Mortgage Securities Corporation


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INTRODUCTION

Washington Mutual Bank (“WaMu”) was the largest savings and loan association in the

United States to fail. On September 25, 2008, the Office of Thrift Supervision closed WaMu and

appointed the Federal Deposit Insurance Corporation (“FDIC”) as its receiver (the “FDIC-

Receiver”). In furtherance of its statutory mission, the FDIC-Receiver immediately transferred

“substantially all” of WaMu’s assets and liabilities, including WaMu’s mortgage banking

operations, to JPMorgan Chase Bank, N.A. (“Chase”) in a purchase and assumption agreement

(“P&A Agreement”). Under Section 2.1 of that agreement, Chase “expressly assume[d],” and

“agree[d] to pay, perform, and discharge, all of the liabilities” reflected on WaMu’s pre-closure

books and records, with specified exceptions.

The material facts of this case cannot be disputed. Before Chase submitted a bid for

WaMu, the FDIC-Receiver informed all potential bidders, in writing, that under the terms of the

P&A Agreement the acquirer would assume WaMu’s “interests and obligations associated with

the off-balance sheet . . . mortgage securitizations.” As a sophisticated participant in mortgage

banking that had conducted “exhaustive” due diligence on WaMu, Chase indisputably knew that

these ongoing contractual obligations included WaMu’s mortgage repurchase liabilities. Chase

understood that the P&A Agreement transferred these repurchase liabilities, because it asked the

FDIC-Receiver to revise the agreement specifically to exclude them. The FDIC-Receiver

refused. Having been told that it would be assuming these liabilities, Chase submitted its bid for

WaMu and signed the P&A Agreement anyway.

Charlie Scharf, the lead Chase executive in charge of the transaction, understood that

Chase had assumed WaMu’s “contractual obligations” and was responsible for all liabilities on

WaMu’s balance sheet, “no matter what the ultimate liability turned out to be.” No statements or


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documents from Chase at the time of the WaMu transaction – or, indeed, prior to this litigation –

suggest that Chase interpreted the P&A Agreement to cap its assumption of WaMu’s liabilities at

their book value. Chase cannot retroactively attempt to change the terms of the deal by asserting

it did not assume the repurchase liabilities or that it assumed them only up to a book value.

Chase never communicated this position to anyone at the time of the transaction, and Chase’s

own words and actions contradict it.

Chase chose to acquire “substantially all” of WaMu’s assets. In exchange, it paid $1.888

billion and agreed to assume and “pay, perform, and discharge” substantially all of WaMu’s

liabilities. Chase wanted to purchase WaMu’s operations and did so knowing the benefits it was

receiving and the risks it was assuming. The P&A Agreement and the undisputed evidence

demonstrate that one of the risks Chase assumed was WaMu’s continuing liability to repurchase

residential mortgage loans. The only reasonable interpretation of Section 2.1 is that Chase

assumed WaMu’s repurchase liabilities. For this reason, summary judgment should be entered

for the FDIC-Receiver.

SUMMARY OF FACTS

The FDIC is an independent agency created by Congress in 1933 to maintain stability and

public confidence in the nation’s financial system. The FDIC accomplishes this mission by

insuring deposits, examining and supervising insured financial institutions for safety and


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soundness and consumer protection, and managing the receiverships of failed financial

institutions.2

WaMu’s business was heavily focused on residential mortgage lending, and in particular

the sale and servicing of securitized mortgage loans through large-scale, multi-billion dollar

financial transactions. See, e.g., Ex. 801, WMI 2007 Form 10-K (2/29/08) at 87, 132-33. WaMu

sold loans into securitization trusts sponsored by federal mortgage agencies such as Fannie Mae

or Freddie Mac (collectively government-sponsored enterprises (“GSEs”)) or, as with the loans

at issue here, into “private label” trusts sponsored by private-sector institutions and administered

by private-sector trustees. See Deposition Exhibit (“Dep. Ex.”) 778, Oldfield Rebuttal Rep. ¶¶

17-18.

Plaintiff Deutsche Bank National Trust Company (“Deutsche Bank”) serves as trustee for

the 99 “Primary Trusts” and 28 “Secondary Trusts” at issue in this case. See Amended

Complaint (“Am. Compl.”) Ex. 1-A. Deutsche Bank is suing Chase and the FDIC-Receiver

based on express contractual provisions in the agreements governing these securitizations (the

“Governing Agreements”), to which WaMu or Defendant Washington Mutual Mortgage

2. When the FDIC is appointed as a receiver for a failed depository institution, it succeeds to all assets and liabilities of the failed institution and may transfer or retain any asset or liability. 12 U.S.C. § 1821(d)(2). In resolving the institution, the FDIC is required to use the resolution type that is the least costly to the Deposit Insurance Fund and that maximizes the return on these assets, see id. §§ 1821(d)(13)(E), 1823(c)(4)(A), and may take any action that it determines to be in “the best interests of the [failed] depository institution, its depositors, or the [FDIC],” id. § 1821(d)(2)(J). “As a result, bidders of failed institutions [are] offered a number of options, which tends to increase the number of bids the FDIC receives.” Dep. Ex. 767, FDIC Resolutions Handbook, ch. 2, at 8. If a bidder chooses to bid on an option in which fewer liabilities transfer, then that bidder will presumably need to pay a higher price if it wants to be the successful bidder. See Wigand Dep. 115:5-116:18.


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Securities Corporation (“WMMSC”) are parties.3 The Governing Agreements for each

securitization comprise hundreds of pages of contracts memorializing in detail the rights,

interests, liabilities, and continuing obligations of the contracting parties. See, e.g., Ex. 802,

WaMu Series 2007-HE1 Trust (Issue ID WA07H1), Final Binder. Among other things, the

Governing Agreements impose ongoing obligations on WaMu or WMMSC to repurchase

mortgage loans from the trusts in the event of breaches of certain representations or warranties.

It was well-known that these obligations existed and arose from the transaction documents that

formed an inextricable part of one of WaMu’s core business activities. See Minier Dep. 20:10-

21:20 (repurchase obligations were “a well known fact to anyone who [was] in the industry”).

The securitization of the mortgage loans that WaMu originated was an important source

of liquidity for WaMu. See Ex. 801, WMI 2007 Form 10-K (2/29/08) at 87. In 2008, WaMu

experienced a significant increase in the delinquency rates of residential mortgage loan

borrowers, which in turn increased the repurchase risk for securitized loans subject to WaMu’s

representations and warranties. See, e.g., id. at 52, 85. With the financial crisis worsening,

WaMu’s public filings throughout 2008 detailed the deteriorating conditions in the residential

mortgage market and warned repeatedly of the effect of increased delinquencies and defaults on

its mortgage business. See, e.g., Dep. Ex. 522, WMI Form 10-Q (8/11/08) at 58 (“[h]igher

delinquencies drove increased repurchase requests from investors resulting in an increase in the

3. WMMSC served as the seller and depositor for 44 of the 99 Primary Trusts. Am. Compl. Ex. 1-A. WMMSC was a WaMu subsidiary that was transferred in whole to Chase under the P&A Agreement. See Dep. Ex. 1 § 3.1. Chase has therefore acknowledged assuming the repurchase liabilities of WMMSC without any cap or limitation. See, e.g., Barren Dep. 73:3-6.


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provision for repurchase reserves”). WaMu disclosed a net operating loss of $4.5 billion for the

first two quarters of 2008, and its business model was increasingly unable to withstand the stress

of the growing financial crisis. See id. at 4.

In mid-September 2008, the FDIC was preparing for a potential resolution of WaMu. See

Wigand Dep. 33:1-36:10. On the weekend of September 20, Jim Wigand, the Deputy Director

of DRR, and Herb Held, the Assistant Director of DRR, developed an “everything-but”

transaction structure for WaMu’s resolution that they believed best satisfied the FDIC’s mission.

See id. at 44:18-45:15, 111:13-18; Held Dep. 43:16-21. Unlike typical failed-bank resolutions in

which all or some assets and only specified liabilities would be passed to the acquiring

institution, Wigand and Held determined that the best method of resolving WaMu would be to

transfer “as many assets and liabilities as possible.” Held Dep. 176:1-5; see also Wigand Dep.

37:6-9. Accordingly, they developed a transaction structure in which the acquiring institution

would assume all liabilities except those that were specifically excluded. See Wigand Dep.

36:13-39:11. Anticipating that some prospective acquirers might not wish to assume so many

liabilities, Wigand and Held also planned to present bidders with options that allowed the

acquirer to leave behind in the receivership all liabilities other than deposits and secured

liabilities. See id. at 114:18-116:18; Dep. Ex. 56.

On September 22, 2008, Wigand, Held, and David Gearin, FDIC Senior Counsel,

traveled to New York to meet with prospective bidders, including Chase, regarding a potential

WaMu transaction. See Held Dep. 88:14-21. At these meetings and in subsequent bid

documents, the FDIC-Receiver told bidders that it would be presenting five transaction options

for WaMu’s resolution. See Wigand Dep. 113:22-115:4. Of these options, three would transfer

substantially all of WaMu’s assets and “all liabilities” except one or more of WaMu’s preferred


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stock, subordinated debt, and senior debt, while the other two options transferred substantially all

assets but only a limited number of specified liabilities. Dep. Ex. 56 at 1; see Dep. Ex. 57 at 1-3.

Chase board members understood that these options “rang[ed] from assuming all bank liabilities

to assuming liability only for insured deposits.” Dep. Ex. 492 (emphasis added). The

“transaction recap” received by prospective bidders outlined the five transaction options as

follows:

Dep. Ex. 56 at 1.

Chase had been interested in acquiring WaMu’s banking operations since the spring of

2007 and in March 2008 had attempted to acquire all assets and liabilities of WaMu and its

holding company in an open market transaction. See Dep. Ex. 327 at 1-3. As a result, when the

FDIC met with Chase in September 2008 about a potential WaMu transaction, Chase was

already very familiar with WaMu, having conducted “exhaustive” due diligence in the spring of

2008. See id. at 1; Wigand Dep. 132:7-18. Chase updated its prior due diligence and completed

what it described as a “detailed” and “thorough” assessment of WaMu’s assets and liabilities,

including the mortgage repurchase liabilities at issue in this case. Dep. Ex. 327 at 8; see Dep.

Ex. 483 at 10 (due diligence “was probably one of the most thorough things we’ve ever done”);

Dep. Ex. 49 at 2, 6, 7 (repurchase items on due diligence list).


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On September 23, 2008, the FDIC-Receiver made draft P&A Agreements available to

prospective bidders. See Wigand Dep. 117:13-118:5. In accordance with the “everything-but”

structure developed for Options 1, 2, and 3, the preamble of the corresponding P&A Agreement

stated that the acquirer would “purchase substantially all of the assets and assume all deposit and

substantially all other liabilities” of WaMu. Dep. Ex. 1 at 1.

Later on September 23, 2008, a prospective bidder emailed Held with questions regarding

the terms of the “everything-but” transaction options. See Dep. Ex. 83. One question was

whether WaMu’s “off-balance sheet . . . mortgage securitizations” were included in the

transaction. Id. at 4. In response, the FDIC-Receiver posted a list of questions and answers

(“Q&As”) on September 24, 2008 for all prospective bidders to view. See Dep. Ex. 153; Wigand

Dep. 227:4-7, 236:2-9. In these Q&As, the FDIC-Receiver stated that “[t]he bank’s interests and

obligations associated with the off-balance sheet . . . mortgage securitizations pass to the

acquirer.” See Dep. Ex. 153 at 2; Dep. Ex. 71 at 2.

Copies of the Q&As were circulated widely within Chase on the afternoon of September

24, 2008. See, e.g., Dep. Ex. 71 (“Good info on a number of topics”); Dep. Ex. 75. Within

hours, Chase’s outside counsel sent an email to David Gearin proposing to change the language

of Section 2.5 of the draft P&A Agreement specifically to exclude WaMu’s mortgage

securitization liabilities from passing to Chase. Dep. Ex. 78. After reaffirming internally that

the FDIC-Receiver understood and intended the acquirer to assume “rep and warrant/repurchase

claims,” Dep. Ex. 79, Gearin declined to make Chase’s proposed changes, writing that “to the

extent we make adjustments to the transaction, that will be covered in updated Q&As,” Dep. Ex.

80. No updates to the Q&As were ever made, and Chase stated in the cover letter for its bid that

it “accept[ed] as drafted” the language of Section 2.5. Dep. Ex. 59 at 2.


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Notwithstanding the FDIC-Receiver’s refusal to exclude WaMu’s mortgage

securitization liabilities from the transaction, Chase submitted a bid for WaMu under Option 3

on the evening of September 24, 2008. Dep. Ex. 58 at 4. Under this option, Chase would

purchase substantially all of WaMu’s assets in exchange for a payment of $1.888 billion and the

assumption of “all liabilities” of WaMu other than its preferred stock, subordinated debt, and

senior debt. Dep. Ex. 56 at 1. Chase chose not to bid on either of the transaction options

(Options 4 and 5) that would have transferred substantially all WaMu assets but left behind in the

receivership all of WaMu’s liabilities other than the deposit and secured liabilities. Dep. Ex. 58

at 5-6. Chase demonstrated its understanding of the “everything-but” nature of Option 3 when it

represented to its Board of Directors and to rating agencies Standard & Poor’s and Moody’s on

September 24, 2008 that it would be assuming “substantially all” of WaMu’s liabilities. Dep.

Ex. 63 at 20 (Chase Board); Dep. Ex. 62 at 20 (rating agencies).

On September 25, 2008, the FDIC was appointed as receiver of WaMu. See Ex. 803,

OTS Order 2008-36. Chase and the FDIC-Receiver entered into the P&A Agreement

immediately thereafter. See Dep. Ex. 1. Chase thereby acquired WaMu’s ongoing banking

operations, which “consisted of a retail bank network of 2,244 branches, a nationwide credit card

lending business, a multi-family and commercial real estate business, and nationwide mortgage

banking activities,” including WaMu’s valuable mortgage servicing rights. Dep. Ex. 542, Chase

2009 Form 10-K (2/24/10) at 66 (emphasis added); see also id. at 152 (mortgage servicing rights

valued as $5.87 billion asset).

Section 2.1 of the P&A Agreement provides that, in return for WaMu’s assets, Chase

“expressly assumes at Book Value . . . and agrees to pay, perform, and discharge, all of the

liabilities of [WaMu] which are reflected on the Books and Records of [WaMu] as of Bank


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Closing,” with certain limited and enumerated exceptions. Dep. Ex. 1 § 2.1. Consistent with the

Q&As, which told prospective bidders that WaMu’s mortgage securitization liabilities would be

assumed by the acquirer, none of the enumerated exceptions concern the liabilities at issue in this

case. See id. §§ 2.5, 4.8; see also id. at 34 (“Certain Liabilities Not Assumed”).

Notwithstanding Chase’s current litigation position, Chase itself has stated that it assumed

WaMu’s ongoing contractual obligations under the terms of the P&A Agreement without cap or

limitation, “no matter what the ultimate liability turned out to be.” Scharf Dep. 70:25-71:9; see

id. at 73:12-20; Burger Dep. 54:12-14, 55:25-56:7.

SUMMARY OF ARGUMENT

The question before the Court is whether Chase “expressly assume[d]” and “agree[d] to

pay, perform, and discharge” WaMu’s mortgage repurchase liabilities under Section 2.1 of the

P&A Agreement. If so, Chase is the only proper defendant in this case, and summary judgment

should be granted in favor of the FDIC-Receiver. The plain language of the P&A Agreement,

and its purpose and structure, demonstrate that the answer to the question before the Court is

“yes.” The only reasonable interpretation of Section 2.1 is that Chase assumed all of WaMu’s

repurchase liabilities.

The undisputed and indisputable extrinsic evidence confirms this conclusion. The FDIC-

Receiver told all bidders that it intended for the acquiring institution to assume all liabilities

except those specifically excluded in the transaction. In response to a question from a bidder, the

FDIC-Receiver unambiguously stated that WaMu’s mortgage securitization liabilities would be

assumed by the acquirer. Chase did not communicate a contrary understanding at the time to the

FDIC-Receiver. Instead, it asked the FDIC-Receiver to change the P&A Agreement to exclude

mortgage securitization liabilities from those being assumed, and the FDIC-Receiver refused.


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Without further communication on this issue with the FDIC-Receiver, and with knowledge of the

potential risks and rewards of the transaction – knowledge gained through “exhaustive” and

“thorough” due diligence – Chase submitted its bid, accepting the P&A Agreement as drafted.

Additionally, Chase’s post-transaction public filings, internal communications, and repurchase

activity demonstrate that Chase assumed these liabilities. Chase’s execution of the P&A

Agreement with full knowledge of the FDIC-Receiver’s interpretation of the agreement and

without expressing a contrary interpretation, together with Chase’s conduct after the contract was

formed, establish, as a matter of law, that Chase assumed the liabilities at issue.

In a final effort to rewrite its deal, Chase now contends that the P&A Agreement included

a book value cap on liabilities assumed. Chase’s lead executive on the transaction, however, has

testified that Chase assumed the ongoing contractual obligations of WaMu without a cap, which

would include WaMu’s repurchase liabilities. In discussing the WaMu transaction with its

Board of Directors, Audit Committee, rating agencies, and investors, Chase also acknowledged

assuming substantially all of WaMu’s liabilities without mention of a cap. And no documents

produced by Chase indicate that it understood Section 2.1 to impose a book value cap, either at

the time of the transaction or in the years afterward.

In sum, the language of the P&A Agreement and the extrinsic evidence lead to the

inescapable conclusion that Chase expressly assumed and agreed to pay, perform and discharge

all of WaMu’s repurchase liabilities without limitation. Because that conclusion is the only

reasonable interpretation of Section 2.1 of the P&A Agreement, Chase is the only proper

defendant in this case and the FDIC-Receiver should be granted summary judgment as a matter

of law.


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ARGUMENT

Contract interpretation is a question of law and, therefore, may be resolved on summary

judgment.4 Under Rule 56 of the Federal Rules of Civil Procedure, summary judgment should

be granted when the evidence presented “shows that there is no genuine dispute as to any

material fact and that the movant is entitled to judgment as a matter of law.”5

The P&A Agreement is construed under the federal common law of contracts.6 In

applying the federal common law of contracts, courts look to “general principles of contract

law”7 embodied in: (1) the Restatement (Second) of Contracts, (2) the Uniform Commercial

Code, (3) federal case law, and (4) state law.8

“Cases involving contractual interpretation ‘may be resolved as a matter of law if the

contested agreement admits of only one reasonable interpretation’” when all appropriate

4. Castle v. Caldera, 74 F. Supp. 2d 4, 9 (D.D.C. 1999).

5. Fed. R. Civ. P. 56(a); see Anderson v. Duncan, ___ F. Supp. 2d ___, No. 06-CV-1565 (RMC), 2013 WL 5429274, at *8 (D.D.C. Sept. 30, 2013).

6. Dep. Ex. 1 § 13.4; see Hillside Metro Associates, LLC v. JPMorgan Chase Bank, Nat’l Ass’n, 747 F.3d 44, 49 (2d Cir. 2014) (“[F]ederal common law governs our interpretation of the PAA, a federal government contract.”).

7. Dobson v. Hartford Fin. Servs. Grp., Inc., 389 F.3d 386, 399 (2d Cir. 2004); see also, e.g.,Bowden v. United States, 106 F.3d 433, 439 (D.C. Cir. 1997); Fomby-Denson v. Dep’t of Army, 247 F.3d 1366, 1373-74 (Fed. Cir. 2001); United States v. Basin Elec. Power Co-op.,248 F.3d 781, 796 (8th Cir. 2001).

8. United States v. Westlands Water Dist., 134 F. Supp. 2d 1111, 1135 (E.D. Cal. 2001); seealso, e.g., Mobil Oil Exploration & Producing Se., Inc. v. United States, 530 U.S. 604, 608 (2000); A.W.G. Farms, Inc. v. Federal Crop Ins. Corp., 757 F.2d 720, 726 (8th Cir. 1985); Robert E. Jones, Gerald E. Rosen, William E. Wegner, & Jeffrey Scott, Federal Civil Trials and Evidence ¶ 8:4455 (2000).


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evidence is considered.9 To determine if there is only one reasonable interpretation of a contract,

courts look to “the meaning a reasonable person in the position of the parties would have given

the disputed provision,” given knowledge of “all the circumstances surrounding the making of

the contract.”10

When making this determination, the federal common law of contracts permits courts to

consider extrinsic evidence to decide whether a contract is ambiguous.11 When a contract is

unambiguous, courts may review extrinsic evidence to “confirm that the parties intended for the

term to have its plain and ordinary meaning.”12 If a contract is determined to be ambiguous,

courts use such extrinsic evidence to clarify the contract’s meaning,13 and summary judgment is

appropriate “so long as there is no evidence that would support a conflicting interpretation of the

agreement.”14 Such evidence must be something more than “mere allegations or denials”

unsupported by specific facts.15 Thus, “in divining the meaning of contract terms, the court is

not limited to the four corners of the agreement” when assessing a motion for summary

judgment, but may consider “affidavits and other extrinsic evidence that gives color to the words

9. Castle, 74 F. Supp. 2d at 9 (quoting United Mine Workers of Am. 1974 Pension v. Pittston Co., 984 F.2d 469, 473 (D.C. Cir. 1993)).

10. Id. at 10-11 (internal quotation marks and citations omitted).

11. See id. at 9; see also, e.g., Baldwin v. Univ. of Pitt. Med. Ctr., 636 F.3d 69, 76 (3d. Cir. 2011).

12. TEG-Paradigm Envtl., Inc. v. United States, 465 F.3d 1329, 1338 (Fed. Cir. 2006); see also, e.g., United Mine Workers of Am. 1974 Pension v. Pittston Co., 984 F.2d 469, 473 (D.C. Cir. 1993); Connors v. Link Coal Co., 970 F.2d 902, 904-05 (D.C. Cir. 1992).

13. See, e.g., Pittston, 984 F.2d at 473; Baldwin, 636 F.3d at 76.

14. Castle, 74 F. Supp. 2d at 9 (quoting Am. First Inv. Corp. v. Goland, 925 F.2d 1518, 1522 (D.C. Cir. 1991)).

15. Anderson, ___ F. Supp. 2d at ____, 2013 WL 5429274 at *8.


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of the agreement or otherwise reveals the intent of the contracting parties at the time of the

agreement.”16

The extrinsic evidence that can be reviewed to “give[] color to the words of the

agreement” and “reveal[] the intent of the contracting parties at the time of the agreement”17

includes (1) the surrounding circumstances of a contract;18 (2) the objectives of the contract;19

(3) the parties’ statements at the time of the agreement regarding their understanding of the

contract;20 (4) the trade usage of a contract term;21 and (5) the parties’ conduct subsequent to the

contract.22

I. THE LANGUAGE AND THE PRIMARY PURPOSE OF THE P&A AGREEMENT LEAVE NO DOUBT THAT CHASE ASSUMED THE WAMU MORTGAGE REPURCHASE LIABILITIES.

“The paramount goal of contract interpretation is to determine the intent of the parties,”

and “[t]he strongest objective manifestation” of the parties’ intent is the language of the contract

16. Pittston, 984 F.2d at 473 (emphasis added).

17. Id. See also Baldwin, 636 F.3d at 76 (“The objective, extrinsic evidence proffered may include . . . the structure of the contract, the bargaining history, and the conduct of the parties that reflects their understanding of the contract’s meaning.”). In affirming summary judgment in Pittston, for example, the D.C. Circuit reviewed “voluminous extrinsic evidence” about the proffered reading of the contract clause at issue, including the declarations of individuals “directly involved in the negotiations” regarding that clause and “copies of notes and minutes prepared contemporaneously with those negotiations which indicate an intention to create a continuing obligation.” 984 F.2d at 474.

18. See, e.g., Castle, 74 F. Supp. 2d at 11.

19. See, e.g., Restatement (Second) of Contracts § 202(1) & cmt. b; Connors, 970 F.2d at 904.

20. See, e.g., Restatement (Second) of Contracts § 201(2) & cmt. b; Wash. State Repub. Party v. Wash. State Grange, 676 F.3d 784, 797 n.9 (9th Cir. 2012).

21. See, e.g., Colorado Interstate Gas Co. v. FERC, 599 F.3d 698, 703 (D.C. Cir. 2010); Restatement (Second) of Contracts §§ 202(3), 202(5).

22. See, e.g., Restatement (Second) of Contracts § 202(5) & cmt. g.


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itself.23 The contractual language, in turn, should be “interpreted in the light of all the

circumstances,” including the commonly understood meaning of contractual terms used and the

“principal purpose of the parties” when entering into the agreement.24 Here, the language,

purpose, and structure of the P&A Agreement make it clear that Chase assumed WaMu’s

repurchase liabilities.

A. Under Section 2.1, Chase Assumed All WaMu Liabilities Arising From The Governing Agreements.

By its terms, the P&A Agreement transferred all of WaMu’s repurchase liabilities to

Chase. Construing contract terms “in light of their commonly understood meaning is a hallmark

of reasonable interpretation.”25 The language of Section 2.1 of the P&A Agreement, as

interpreted in accordance with the “commonly understood meaning” of its terms, supports the

FDIC-Receiver’s interpretation that Chase assumed all of WaMu’s repurchase liabilities.

Section 2.1 states that Chase “expressly assumes at Book Value (subject to adjustment

pursuant to Article VIII) and agrees to pay, perform, and discharge, all of the liabilities of

[WaMu] which are reflected on the Books and Records of [WaMu] as of Bank Closing.” Dep.

23. Baldwin, 636 F.3d at 75-76.

24. Restatement (Second) of Contracts § 202; see also United States v. Kanu, 695 F.3d 74, 78 (D.C. Cir. 2012); Pittston, 984 F.2d at 474; 5 Corbin on Contracts § 24.7 (1998) (“Before the meaning of words in a contract can be plain and clear, at least some of the surrounding circumstances must be known.”).

25. Colo. Interstate Gas Co., 599 F.3d at 703; see Restatement (Second) of Contracts § 202(5) (“Wherever reasonable, the manifestations of intention of the parties to a promise or agreement are interpreted as consistent with each other and with any relevant . . . usage of trade.”); id. § 202(3) (“Unless a different intention is manifested, (a) where language has a generally prevailing meaning, it is interpreted in accordance with that meaning; (b) technical terms and words of art are given their technical meaning when used in a transaction within their technical field.”).


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Ex. 1 § 2.1 (emphasis added). Other than certain enumerated exceptions not at issue here (see

infra at 19-20), the only limitation on Chase’s assumption of WaMu’s liabilities is that the

liability be “reflected” on WaMu’s “Books and Records” as of September 25, 2008.26 The term

“Record” is defined broadly in the P&A Agreement to include any document, paper or

electronic, that WaMu generated or that was maintained by WaMu at the time of its closure; the

term “Books” is not defined. See id. at 6 (defining “Record”). Unquestionably, “Books and

Records” includes the Governing Agreements for the mortgage securitizations – the large-scale

financial transactions at the heart of WaMu’s business, involving hundreds of billions of dollars

in securitized mortgage loans. The Governing Agreements, and the obligations and liabilities

described on the face of those Agreements, necessarily were reflected on WaMu’s pre-closure

books and records.

Jim Wigand, the architect of the transaction structure, testified that in Section 2.1, the

phrase “books and records” is “a very broad term . . . [that] includes all hard and electronic

records of the financial company,” including “accounting records, other documents, contracts,

[and] asset records.” Wigand Dep. 144:4-9, 156:22-157:6; see Held Dep. 63:18-21 (“Books and

Records” means “[a]ll of the books and all of the records, the loan files, the agreements, the sales

documents, the disclosures, . . . everything that related to the operations of the bank.”). Chase’s

expert witness William Holder likewise testified that “sales invoices, purchase invoices,

requisitions, purchase orders, receiving reports, [and] payroll records” were among the

26. As explained infra at 33, the phrase “at Book Value” in Section 2.1 does not impose any cap or limitation on the liabilities assumed by Chase under the P&A Agreement, nor did Chase or the FDIC-Receiver ever express the understanding that it did so at the time of the transaction.


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documents that would be considered as part of the “records” component of the phrase “general

ledger and related books and records.” Holder Dep. 31:22-33:3; see also id. 53:16-23 (“books

and records” is not “limited to the general ledger, the related subsidiary ledgers, and the related

supporting schedules”).

The FDIC-Receiver’s witnesses explained that including the phrase “reflected on the

Books and Records of the Failed Bank” was meant to give some comfort to the acquiring bank

that it would not be assuming a liability that it could not possibly have uncovered in thorough

due diligence. See Gearin Dep. 85:14-20; id. at 90:8-13.27 Ongoing contractual obligations

memorialized in multi-billion dollar securitization agreements are indisputably susceptible to

discovery as part of a reasonable due diligence effort. Indeed, Chase was well aware of the

potential for repurchase exposure arising from WaMu’s ongoing contractual repurchase

obligations. See infra at 36-38. Chase specifically reviewed and evaluated these liabilities and

factored the potential future cost of the liabilities into its evaluation of the WaMu transaction.

See infra at 39-41.

Contemporaneous evidence demonstrates that Chase attributed the same broad meaning

to the phrase “Books and Records.” In fact, Chase counsel Dan Cooney acknowledged to David

Gearin on September 23, 2008 that “[a]ny liability” arising from a contract “included in”

27. The inclusion of the “books and records” provision in Section 2.1 is in harmony with the FDIC’s institutional use of “due diligence.” Dep. Ex. 767, FDIC Resolutions Handbook,ch. 1, at 12 (“[d]ue diligence is the bidder’s on-site inspection of the books and records of the institution and the bidder’s assessment of the value of the franchise, and is performed so the bidder can submit an educated bid”) (emphasis added); see Brumbaugh Dep. 33:3-6 (Chase’s expert testifying that industry constituents would look to the Resolutions Handbook to see how the FDIC-Receiver uses different terms).


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WaMu’s books and records was “arguably a liability reflected in the Books and Records,” and

noted that under the language of Section 2.1, “one would most likely conclude that liabilities

under that contract are assumed.” Dep. Ex. 66 (emphasis added).

This conclusion is inescapable. “Books and records” is commonly understood in the

financial industry (as well as the wider business world), and would have been understood by the

parties to the P&A Agreement, to encompass more than simply an organization’s accounting

records. See, e.g., Dep. Ex. 748, Coffee Rep. at 6-7; see also Dep. Ex. 778, Oldfield Rebuttal

Rep. ¶¶ 27-28. As Professor Coffee, the FDIC-Receiver’s expert, opined, a competent legal

practitioner representing financial institutions would have understood “books and records” to

include a large selection of corporate documents.28 See Dep. Ex. 748, Coffee Rep. at 6-7. Chase

itself, moreover, uses “books and records” to encompass “settlement instructions, custodial and

accounting reconciliations and evidence thereof, daily custodial and accounting

operational/control checklists and evidence of performance thereof, securities servicing records,

accounting records, reports and risk events.” See id. at 23 (quoting Chase contract with Federal

Reserve Bank of New York). There should be no dispute that “books and records” as used in

Section 2.1 refers to an expansive set of business documents that would include the Governing

Agreements and the liabilities therein.

28 For example, in granting the right to inspect a domestic corporation’s books and records, state law has defined the term “books and records” much more broadly than merely “accounting records.” See Dep. Ex. 748, Coffee Rep. at 7-9. Federal securities laws, and the courts applying those laws, use the terms “books” and “records” together to extend well beyond accounting records. See id. at 9-13. The Federal Reserve’s examination authority for “all books and records maintained on the premises of a financial institution” extends to “all documents on the premises.” See id. at 19.


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B. The Principal Purpose Of The P&A Agreement Was To Transfer Substantially All Of WaMu’s Assets And Liabilities.

In interpreting a contract, “if the principal purpose of the parties is ascertainable, it is

given great weight.”29 Here, there is no question that the principal purpose of the P&A

Agreement – as understood by both parties – was to transfer to Chase “substantially all” of

WaMu’s assets and liabilities. The FDIC-Receiver’s interpretation of Section 2.1 is consistent

with that purpose. Chase’s interpretation is not.

The FDIC-Receiver decided to present an “everything but” structure for the WaMu

transaction, which “was unique from the perspective that all assets and all liabilities were

assumed except for those liabilities that were specifically excluded.” Wigand Dep. 39:8-11.

This structure was designed to be one in which “virtually all of the assets would pass to the

acquirer and virtually all of the liabilities would pass to the acquirer.” Id. at 37:7-9 (emphasis

added). In contrast, “the typical whole-bank transaction identifies the liabilities assumed, so

there’s a schedule or a specific listing of those liabilities assumed in the transaction.” Id. at

38:20-39:2; see Dep. Ex. 242 § 2.1.

The language of the P&A Agreement confirms that the WaMu transaction was intended

“to pass as many assets and liabilities as possible.” Held Dep. 176:1-5. The preamble provides

that the acquiring institution would “purchase substantially all of the assets and assume all

deposit and substantially all other liabilities of the Failed Bank.” Dep. Ex. 1 at 1 (emphasis

added). This differs from the preamble to the FDIC’s form purchase and assumption agreement

29. Restatement (Second) of Contracts § 202(1).


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in use at the time, which stated that the acquiring bank will assume only “certain deposit and

other liabilities of the Failed Bank.” Dep. Ex. 242 at 1 (emphasis added).

In developing the WaMu transaction, it was the FDIC-Receiver’s purpose that “all . . .

obligations and liabilities associated with loan sales,” including “the mortgage rep warrant

repurchase claims,” would be among the liabilities passed to the acquirer. Wigand Dep. 266:22-

267:18; see id. at 265:1-15; Held Dep. 147:1-3 (“All the liabilities of the institution contracts

passed, excluding those that were enumerated in their bid.”). The contemporaneous evidence

supports this testimony: On September 24, 2008, FDIC Associate General Counsel Rick

Aboussie wrote to David Gearin and others at the FDIC-Receiver that “Jim Wigand has stated

that he understood and intended that all liabilities associated with loan sales (i.e., rep and

warrant/repurchase claims) are to be passed to the assuming bank.” Dep. Ex. 79 (emphasis

added); see also Dep. Ex. 153 at 2.

The WaMu repurchase liabilities were not among the limited set of liabilities retained by

the FDIC-Receiver under the P&A Agreement. Section 2.1 transferred all liabilities reflected on

WaMu’s books and records at the time of its closing except liabilities (a) specifically enumerated

on Schedule 2.1 (list of “Certain Liabilities Not Assumed”), (b) encompassed by Section 2.5

(borrower claims), and (c) in contracts that the acquirer elects to put back under Section 4.8

(service agreements). Dep. Ex. 1 § 2.1; see id. §§ 2.5, 4.8 and at 34. Chase does not dispute

that WaMu’s mortgage repurchase liabilities were not enumerated in Schedule 2.1 or


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encompassed by Section 2.5, and that it knew that all non-enumerated liabilities would be

assumed. Similarly, the service agreements encompassed by Section 4.8 are not relevant here.30

C. Chase Understood That The Transaction It Bid On Transferred All Liabilities Except Those Specifically Excluded.

Chase understood that it would be assuming all but a limited subset of WaMu’s assets

and liabilities when it bid on Transaction Option 3. The bid structure for the WaMu transaction,

as established by the FDIC-Receiver and understood by Chase, shows that the parties entered

into a transaction to transfer all non-excluded assets and liabilities to the acquiring institution.

Chase’s own representations at the time of the transaction likewise demonstrate a clear

understanding that all liabilities not specifically excluded by the transaction terms would be

assumed by Chase.

On September 22, 2008, the FDIC-Receiver outlined the terms of the proposed

transaction to Chase and several other potential bidders during separate meetings in New York,

including the fact that, under the bidding options to be offered, “the acquirer would assume all

liabilities, except there would be specific liabilities excluded under certain options.” Wigand

Dep. 114:5-7; see also id. at 113:22-114:1 (the FDIC-Receiver discussed with bidders “the

unique approach that we were taking to this transaction”). Present on behalf of Chase were

Jamie Dimon, Charlie Scharf, and other top Chase executives, as well as Sullivan & Cromwell

30. After the parties executed the P&A Agreement, Chase attempted to put back to the FDIC-Receiver the contractual agreements giving rise to private label WaMu repurchase liabilities under Section 4.8. The FDIC-Receiver refused and made it clear to Chase – and Chase ultimately accepted – that such contracts were not covered by the scope of Section 4.8, which covered only agreements providing “for the rendering of services by or to the Failed Bank,” and did not apply to agreements containing mortgage servicing rights and obligations. Dep. Ex. 1 § 4.8; see id. §§ 2.1, 3.1; Dep. Ex. 436; Dep. Ex. 518; Dep. Ex. 519.


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LLP lawyers. See Dep. Ex. 54; Wigand Dep. 109:15-20. The FDIC-Receiver explained that it

was offering five different transaction options, each with a different level of assumed liabilities.

See Held Dep. 92:15-18. Under the first three options, the acquiring institution would assume all

liabilities except specific enumerated liabilities, while under the latter two options, the acquirer

would assume only deposit and secured liabilities. See Wigand Dep.114:8-115:4. This 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.” Id. at 116:14-18.

Following the meeting in New York, Chase’s corporate secretary circulated a description of the

bid process to Chase board members (including Dimon and Scharf), stating that Chase could bid

on multiple options for WaMu’s “assets and varying levels of bank liabilities ranging from

assuming all bank liabilities to assuming liability only for insured deposits.” Dep. Ex. 492

(emphasis added).

As described in the “transaction recap” that the FDIC-Receiver sent to prospective

bidders (including Chase) on September 23, 2008, Options 1, 2, and 3 required the acquirer to

assume “all liabilities” except one or more of the preferred stock, the subordinated debt, and the

senior debt. Dep. Ex. 56 at 1 (emphasis added). By contrast, Option 4 contemplated that “[a]ll

deposits and secured liabilities are assumed by the acquirer,” and nothing else. Id. Under

Option 5, the only liabilities assumed by the acquirer are “[a]ll insured deposits and secured

liabilities.” Id.

Similarly, as described in the FDIC-Receiver’s bid instructions for the WaMu

transaction, Options 1, 2, and 3 all provided for the assuming bank to take “the Assumed

Deposits of the Bank and all other liabilities,” excluding only the preferred stock (all Options),

the non-asset related defensive litigation (all Options), the subordinated debt (Options 2 and 3),


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and the senior debt (Option 3). Dep. Ex. 57 at 2 (emphasis added). The “everything-but” nature

of these three transaction options contrasted with Options 4 and 5, which provide for the

assuming bank to take “the Assumed Deposits of the Bank and only certain other liabilities.”

Id. at 2-3 (emphasis added).

Consistent with the “everything-but” options offered in the bid documents, Chase

represented to its Board of Directors and to rating agencies Moody’s and Standard & Poor’s

prior to the WaMu transaction that it would be assuming all but a limited subset of WaMu’s

liabilities. The “Key terms of transaction” section of Chase’s September 24, 2008 presentations

to its Board of Directors and to the rating agencies stated that Chase would be assuming “[a]ll

the deposits and substantially all [WaMu] liabilities, excluding senior and subordinated debt.”

Dep. Ex. 63 at 20; Dep. Ex. 62 at 20 (emphasis added); see Cavanagh Dep. 160:15-20.

Following the transaction, Chase made these same representations to investors and the

Chase Audit Committee. In an investor call immediately after the transaction, Charlie Scharf

characterized the liabilities assumed by Chase as everything but “the unsecured debt, the

subordinated debt, and the preferred.” Dep. Ex. 483 at 2. In a December 2008 presentation to

the Chase Audit Committee, Scharf stated that under the P&A Agreement, “Chase essentially

assumed all pre-closing liabilities and assets of WaMu.” Dep. Ex. 343 at 31 (emphasis added);

see also Durdan Dep. 289:7-24 (agreeing with statement to Audit Committee); Scharf Dep.

245:14-246:18. These repeated statements flatly contradict Chase’s litigation position that it

assumed, or intended to assume, only certain, limited liabilities in the P&A Agreement.

II. THE UNDISPUTED EXTRINSIC EVIDENCE ESTABLISHES THAT CHASE AGREED TO ASSUME WAMU’S MORTGAGE REPURCHASE LIABILITIES.

The FDIC-Receiver told Chase and the other potential bidders that WaMu’s mortgage

securitization liabilities would transfer to the acquirer. After being told this, Chase tried to


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change the language of the P&A Agreement to carve out WaMu’s mortgage securitization

liabilities from the liabilities being assumed, but the FDIC-Receiver refused to do so. Chase

nevertheless bid on one of the transaction options that transferred all but a limited subset of

WaMu’s liabilities, fully aware of the FDIC-Receiver’s position that the mortgage securitization

liabilities would be assumed by the acquirer under the transaction option that it selected.

Because Chase knew that the FDIC-Receiver understood and intended the P&A Agreement to

transfer the repurchase liabilities and did not articulate any contrary understanding at the time of

the WaMu transaction, Chase necessarily accepted the FDIC-Receiver’s understanding when it

bid. As a matter of law, the FDIC-Receiver’s construction of the P&A Agreement controls.

A. The FDIC-Receiver Told All Prospective Bidders That The Acquiring Bank Would Assume WaMu’s Mortgage Securitization Liabilities.

The FDIC-Receiver unambiguously communicated to Chase and other bidders that the

acquirer would assume WaMu’s repurchase liabilities under the P&A Agreement. In response to

questions posed by a prospective bidder, the FDIC-Receiver posted Q&As for all bidders on

September 24, 2008 that stated that all WaMu mortgage securitization liabilities would transfer

to the acquirer:

Are the off-balance sheet credit card portfolio and mortgage securitizations included in the transaction? Do you expect the acquirer to assume the servicing obligations? If there are pricing issues associated with the contracts (e.g., the pricing is disadvantageous to the assuming institution), can we take advantage of the FDIC’s repudiation powers to effect a repricing?

Answer: The bank’s interests and obligations associated with the off-balance sheet credit card portfolio and mortgagesecuritizations pass to the acquirer. Only contracts and obligations remaining in the receivership are subject to repudiation powers.

Dep. Ex. 153 at 2; Dep. Ex. 71 at 2 (emphases added); see also Dep. Ex. 83; Wigand Dep.


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120:11-122:1; Gearin Dep. 51:9-12. Such “off-balance sheet” interests and obligations

unquestionably would include WaMu’s repurchase obligations under the Governing Agreements.

See Ex. 804, WaMu 2007 Form 10-K (3/21/08) at 76; Dep. Ex. 526 at 2-3; Carr Dep. 52:18-25.

The purpose of the Q&As was to provide all prospective bidders with the same

opportunity to understand the FDIC-Receiver’s responses to bidders’ questions about the

structure and terms of the transaction options. See Wigand Dep. 120:11-121:4; Held Dep. 138:5-

7. Through the Q&As, “[t]he FDIC provides notification to potential acquirers regarding

transactional changes prior to the bid date so that all potential acquirers can essentially bid off of

a level playing field. . . . The intent is so that [all prospective bidders] will have available the

same information.” Wigand Dep. 236:2-9; see Held Dep. 100:18-101:13.

Chase understood at the time that the Q&As represented the FDIC-Receiver’s guidance

to all prospective bidders regarding the terms of the transaction. See Scharf Dep. 227:14-18 (the

manner in which the FDIC-Receiver would answer bidders’ questions “was through FAQs to

everyone involved in the process”); Gordon Dep. 88:9-13 (the purpose of the Q&As was “[t]o

provide clarity in a consistent manner to a larger group of people”). Chase also understood that

in order to be fair to all bidders, any changes to statements made in the Q&As would have to be

communicated to every bidder in updated Q&As or a revised P&A Agreement. See Bessey Dep.

201:15-19. Chase executives coordinating the deal therefore expected the Chase transaction

team to read the Q&As and to pass along salient information. See Scharf Dep. 232:8-10;

Cavanagh Dep. 172:15-22, 173:21-25.

On the afternoon of September 24, 2008, Chase personnel received notification that the

Q&As had been made available to all bidders. See Dep. Ex. 69. The Q&As were then circulated

extensively within Chase, both before and after Chase submitted its bid. See, e.g., Dep. Exs. 72-


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77, 130, 427. Upon the Q&As being made available, Senior Vice President of Corporate M&A

Brian Bessey forwarded them to Dan Cooney, Sally Durdan, and other Chase principals with the

following comment: “In case you are not able to access data room, recently posted FAQ is

pasted and attached below. Good info on a number of topics.” Dep. Ex. 71 (emphasis added);

see also, e.g., Dep. Ex. 674 (“FDIC FAQ response to our bid may help answer some

questions.”); Burger Dep. 77:3-13 (using Q&As for treatment of deferred tax assets). Chase

cannot dispute that it received, reviewed, discussed, and relied on the Q&As as guidance from

the FDIC-Receiver regarding the terms of the “everything-but” transaction options.

B. Chase Unsuccessfully Tried To Change The P&A Agreement To Exclude The Mortgage Securitization Liabilities.

Within hours of Chase receiving the Q&As, Chase’s outside counsel, Mitch Eitel of

Sullivan & Cromwell LLP, sent an email to David Gearin in which Chase proposed to change

Section 2.5 of the P&A Agreement to omit WaMu’s repurchase liabilities from those transferring

to Chase. Dep. Ex. 78. Chase’s draft language for Section 2.5 would have expanded the scope

of the section to preclude Chase’s assumption of liabilities for any claims arising from WaMu’s

“mortgage loan securitization activities.” Id. at 3-4.


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The FDIC-Receiver rejected Chase’s proposed revision and refused to change the

language of Section 2.5 to exclude repurchase liabilities from the liabilities being transferred.

Dep. Ex. 80. After reaffirming internally that the FDIC-Receiver intended to pass “all liabilities

associated with loan sales (i.e., rep and warrant/repurchase claims)” to the acquiring institution,

Dep. Ex. 79, Gearin informed Eitel that “to the extent we make adjustments to the transaction,

that will be covered in updated Q&As.” Dep. Ex. 80 (emphasis added). No updates to the

Q&As were ever made, a fact that Chase does not and has never disputed.

Notwithstanding the FDIC-Receiver’s refusal to change Section 2.5, Chase submitted its

bid for Option 3 later that evening (see supra at 20-22). See Dep. Ex. 58 at 5. The cover letter

for Chase’s bid stated that Chase “accept[ed] as drafted” the language of Section 2.5. Dep. Ex.

59 at 2 (emphasis added). Thus, Chase bid knowing that the FDIC-Receiver understood that the

P&A Agreement transferred WaMu’s repurchase liabilities to the acquirer. And when the FDIC-

Receiver refused to add language to the P&A Agreement that would have excluded those

liabilities, Chase agreed to the P&A Agreement and signed it anyway. Chase therefore

understood and agreed at the time that it was assuming WaMu’s repurchase liabilities under the

P&A Agreement, and Chase’s assertion of a contrary position after the fact should be rejected.

There is no evidence that Chase believed, prior to submitting its bid, that the P&A

Agreement left the repurchase liabilities with the FDIC-Receiver. In fact, Chase did not decide

to take the position that it had not assumed WaMu’s repurchase liabilities until after the

transaction closed. See, e.g., Durdan Dep. 335:18-21 (it was “certainly not until after

September” that Chase formed a belief as to whether it had assumed WaMu’s repurchase

exposure in the P&A Agreement); Shankar Dep. 176:9-22 (“lack of clarity” existed within Chase

as to who had the private label repurchase liabilities as of mid-October 2008); Barren Dep.


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178:20-21 (as of mid-November 2008, “[t]here were conflicting views” within Chase as to

whether Chase had assumed the WaMu repurchase liabilities). Thus, Chase could not have

entered into the P&A Agreement with an affirmative belief that it had not assumed WaMu’s

repurchase liabilities under the terms of Section 2.1.

C. As A Matter Of Law, The Only Reasonable Interpretation Of The P&A Agreement Is That Chase Assumed WaMu’s Mortgage Repurchase Liabilities.

If, during the formation of a contract, one party articulates to the other party its

understanding of a subsequently disputed provision and the second party does not articulate a

contrary understanding, the understanding articulated by the first party prevails as a matter of

law.31 This is so because the law presumes that the second party understood and accepted the

understanding of the first party when entering into the agreement.32

The interactions between Chase and the FDIC-Receiver at the time of the P&A

Agreement demonstrate that Chase is bound by the FDIC-Receiver’s contemporaneous

understanding that the P&A Agreement transferred all repurchase liabilities to the acquirer.

When the FDIC-Receiver told bidders that WaMu’s mortgage securitization liabilities would be

31. Restatement (Second) of Contracts § 201(2) (contracts to be “interpreted in accordance with the meaning” expressed by one party “at the time the agreement was made,” if the other party knew of this meaning and expressed no contrary understanding); see Wash.State Repub. Party, 676 F.3d at 797 n.9 (the plaintiffs’ contractual interpretation controlled where extrinsic evidence “show[ed] that the state was on notice of the meaning attached to the agreement by the plaintiffs” when the agreement was made).

32. See Restatement (Second) of Contracts § 201 cmt. b (“[T]he question of meaning [of disputed provisions] . . . depends on an inquiry into what each party knew or had reason to know.”); Perry & Wallis, Inc. v. United States, 427 F.2d 722, 725 (Ct. Cl. 1970) (A party “who willingly and without protest enters into a contract with knowledge of the other party’s interpretation of it is bound by such interpretation and cannot later claim that it thought something else was meant.”).


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assumed by the acquirer, Chase did not offer a contrary understanding of the P&A Agreement as

drafted. Rather, Chase tried to change the P&A Agreement to exclude those liabilities and, when

it was unsuccessful, bid on Option 3 – an “everything-but” option – later that day. If, in light of

the FDIC-Receiver’s statement that WaMu’s mortgage securitization liabilities would pass to the

acquirer, Chase had wanted to leave such liabilities behind, it could have bid on Options 4 or 5,

which transferred only deposit and secured liabilities. It did not do so, and the FDIC-Receiver’s

uncontroverted articulation of the liabilities that would pass in the transaction controls.

In the face of the Q&As and Chase’s rejected attempt to change Section 2.5, Chase can

offer only the conclusory and self-serving post hoc assertions of some of its deponents with

respect to their intent at the time. But Chase has not produced a single piece of contemporaneous

documentary evidence corroborating this testimony. And there can be no dispute that, even if

some at Chase held that view, Chase never contemporaneously expressed it to the FDIC-

Receiver. By contrast, the FDIC-Receiver expressed to Chase and all other bidders prior to the

transaction its intent for the acquiring institution to assume all “interests and obligations

associated with the off-balance sheet . . . mortgage securitizations,” and subsequently refused to

revise the P&A Agreement to alter this understanding. In these circumstances, the FDIC-

Receiver’s contemporaneous understanding controls, and Chase is bound by it.33

D. The Course Of Performance Confirms That Chase Assumed WaMu’s Mortgage Repurchase Liabilities.

Not only did Chase bid on WaMu knowing that it would be assuming all of WaMu’s

repurchase liability, but after entering into the P&A Agreement, Chase acted as if it acquired that

33. See Restatement (Second) of Contracts § 201(2).


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liability. A party’s conduct after entering into a contract demonstrates that party’s understanding

of its obligations under the contract, and “[w]herever reasonable, the manifestations of intention

of the parties to a promise or agreement are interpreted as consistent with each other and with

any relevant course of performance.”34 Thus, “[t]he knowledge that each of the parties had as to

the intended meaning of the other party to the contract must be considered along with the acts

and conduct of each party in executing the contract in the light of such knowledge.”35

Chase acknowledged having assumed WaMu’s repurchase liabilities and treated the

liabilities as its own in its post-transaction public filings. See Carr Dep. 209:10-33 (Chase has

“disclosed securitization-related information for private label securitizations for WaMu deals as

part of our 10-K and 10-Q disclosures.”). In its 2008 Form 10-K, Chase included the principal

balances of loans in WaMu securitizations in a table displaying “the total unpaid principal

amount of assets held in JPMorgan Chase-sponsored securitization entities . . . to which [Chase]

has continuing involvement.” Dep. Ex. 540, Chase 2008 Form 10-K 3/2/09) at 181; see also id.

at 183-84 (Chase’s residential mortgage securitization activities “include securitizations

sponsored by . . . Washington Mutual”). In the “Risk Factors” section of its 2009 Form 10-K,

Chase forthrightly discussed how heritage WaMu repurchase obligations “to private third-party

purchasers could materially and adversely impact our results of operations and earnings in the

future.” Dep. Ex. 542, Chase 2009 Form 10-K (2/24/10) at 5; see also Dep. Ex. 541, 424B7

Prospectus Supplement (12/8/09) at S-7 (disclosing WaMu repurchase liability under the heading

“Defective and repurchased loans may harm our business and financial condition”).

34. Id. § 202(5).

35. Perry & Wallis, 427 F.2d at 726.


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Internally, Chase discussed and analyzed the WaMu repurchase reserves after the

transaction as if it had assumed the repurchase liabilities in full. In the last quarter of 2008, for

example, Chase personnel continued to assess the adequacy of WaMu repurchase reserves

relative to expected repurchase exposure in 2009. See, e.g., Dep. Ex. 574 (“The biggest risk is

with the 2009 number which could be as much as double the current forecast on the Prime

side.”); Ex. 805, JPMC_DBNTC_0009247342 (finding that Chase was “short in reserves”

because “the WAMU demands particularly since September have exceeded modeled projections

in excess of 2x projections”). At the end of 2008, Chase instructed its WaMu personnel to

continue calculating and adjusting reserves for private label WaMu repurchase liabilities. See

Ex. 806, JPMC_DBNTC_0009246703 (“Adjust what you think prudent on [WaMu] Subprime

exposures.”); Dep. Ex. 641 (heritage WaMu team “planning to run the normal reserve process

for the non-agency subprime loans”). Chase, of course, would have had no need to do so if it

had not assumed the repurchase liabilities – or if it had assumed them only to the extent of the

recorded reserves at the time WaMu closed.

Moreover, in response to demands from private investors following the WaMu

transaction, heritage WaMu employees, under the supervision of Chase, continued to review and

approve for repurchase loans sold or securitized by WaMu.36 Shankar Dep. 149:18-153:2; see

36. Internal Chase documents show private investor repurchase demands on heritage WaMu, non-WMMSC loans totaled in the three months following the WaMu transaction, including in October 2008 and in December 2008. See Dep. Ex. 173 at 3. Such private, non-WMMSC repurchase demands also totaled

in the first two months of 2009 and throughout that year. Dep. Ex. 180 at 6; see also Dep. Ex. 586 at 8 (in second quarter of 2009, Chase had “[p]rivate WaMu reserves of driven by demands outstanding”); Ex. 807, JPMC_DBNTC_0009247061.


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also, e.g., Ex. 808, JPMC_DBNTC_0009247010; Ex. 809, JPMC_DBNTC_0009247003; Ex.

810, JPMC_DBNTC_0009230021. Indeed, Chase not only approved but repurchased millions

of dollars of heritage WaMu private label loans throughout 2009. See Dep. Ex. 394 at 7 (tab

entitled “RC-P Detail”), 9 (tab entitled “Agency vs. Private”) in “hWaMu Non-

Agency Repurchases” in the first two quarters of 2009 combined); Dep. Ex. 648

of “Non-Agency” “hWaMu Repurchases” recorded in the fourth quarter of 2009). In October

2009, a Chase document entitled “WaMu Non-Agency Repurchase Exposure” recommended

that Chase settle WaMu’s private label repurchase obligations because “[t]he FDIC has

concluded that origination reps and warrants on the private deals would come to Chase.” Dep.

Ex. 391 at 1. In late 2009 and early 2010, Chase settled heritage WaMu private label repurchase

liability with See Ex. 811, JPMC_DBNTC_0009274247;

Dep. Ex. 686.

III. CHASE ACKNOWLEDGED ASSUMING THE WAMU MORTGAGE REPURCHASE LIABILITIES IN FULL.

Chase cannot dispute that the FDIC-Receiver informed all bidders prior to the transaction

that WaMu’s mortgage securitization liabilities would be assumed by the acquirer. Nor can it

contest that the FDIC-Receiver rejected Chase’s attempt to change the language of the P&A

Agreement to exclude such liabilities. Instead, Chase has adopted the litigation position that if it

did assume WaMu’s repurchase liabilities, it did so only to the extent of the stated book value of

the recorded reserves on WaMu’s balance sheet at the time of its closing. There is no evidence

supporting this view beyond Chase’s own skewed reading of Section 2.1 and Chase’s witnesses’


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unsupported assertions. Such “bare assertions, standing alone, are insufficient to create a

material issue of fact and defeat a motion for summary judgment.”37

A. Chase Acknowledged Assuming WaMu’s Ongoing Contractual Obligations Irrespective Of A Book Value Cap.

Chase has acknowledged assuming without any cap or limitation WaMu’s ongoing

contractual obligations, which include the repurchase liabilities at issue here. Charlie Scharf,

CEO of Chase’s Retail Financial Services Division in September 2008 and lead executive on the

WaMu transaction, understood at the time of the transaction that if there was a liability with a

book value on WaMu’s balance sheet, Chase would be responsible for it, “no matter what the

ultimate liability turned out to be.”38 Scharf Dep. 70:25-71:9 (emphasis added). Scharf also

“believed at the time” that Chase was acquiring “the ongoing business obligations that would

come from acquiring the entity that we were acquiring,” including “contractual obligations that

the business promised.” Id. at 73:12-20. Contractual obligations that WaMu had promised in

connection with its business would certainly include ongoing repurchase obligations arising from

WaMu’s residential mortgage securitization activities. See Carr Dep. 39:13-22 (Chase “had

liabilities arising from obligations to repurchase loans because of rep[s] and warranties . . .

arising out of WaMu.”).

37. Muldrow v. EMC Mortg. Corp., 766 F. Supp. 2d 230, 236 (D.D.C. 2011) (citation omitted).

38. Charlie Scharf was regarded internally as the driving force behind the proposed WaMu transaction from its inception to its completion, and as such this admission alone should dispose of Chase’s contention that the assumed liabilities were capped by their book value.See, e.g., Bessey Dep. 28:7-10 (“Charlie Scharf was obviously the champion, so to speak, the internal owner of the transaction.”), 295:21-23 (Scharf “was the most engaged person on the operating committee with this transaction”); Rivas Dep. 50:12-14 (Scharf “had overall responsibility for the transaction”); Cavanagh Dep. 47:12-14; Shankar Dep. 37:6-9.


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Other Chase personnel who were involved in the transaction also have acknowledged that

Chase assumed WaMu’s ongoing business and contractual obligations irrespective of a “book

value” cap. See Dep. Ex. 66 (contractual liabilities assumed by Chase under Section 2.1).

Corrine Burger, Senior Controller of Chase’s Retail Administration Division at the time of the

transaction stated that “[f]or ongoing operations, we would take on the liabilities associated with

ongoing operations of the bank.” Burger Dep. 54:12-14. Burger added that those “ongoing

operations weren’t limited by what the liabilities were recorded on September 25th,” because

“those liabilities came as a result of running the business.” Id. at 55:25-56:7 (emphasis added).

Moreover, when discussing its accounting for the WaMu transaction in its 2008 Form 10-K,

Chase noted that the liabilities it had assumed included WaMu’s “executory contracts and other

commitments.” Dep. Ex. 540, Chase 2008 Form 10-K (3/2/09) at 136.

B. Chase’s Actions Are Inconsistent With Chase’s Position That The Assumed Liabilities Were Capped At Book Value.

Chase has produced no evidence contemporaneous with the WaMu transaction that

supports its litigation position that Section 2.1 contained a book value cap on liabilities assumed.

Chase has produced no documents, whether internal or external, suggesting that Chase

interpreted the P&A Agreement to impose a book value cap at the time of the transaction, let

alone any evidence that Chase communicated such an understanding to the FDIC-Receiver or

anyone else prior to its bid.39 Chase did not mention any kind of cap or book value limitation on

39. The uncontradicted testimony of the FDIC-Receiver’s witnesses is that the “Book Value” phrase used in Sections 2.1 and 3.1 has nothing to do with limiting the liabilities assumed by the acquirer. See Wigand Dep. 167:18-168:11. Rather, the “Book Value” phrase determines the pricing of “assets and liabilities from the failed institution to an acquirer and to the receivership estate.” Wigand Dep. 162:3-16; see also Held Dep. 80:13-18 (“Book

(Footnote continued on next page)


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its assumption of “substantially all” WaMu liabilities when describing the scope of the

transaction to its Board of Directors or the rating agencies. See Dep. Ex. 62 at 20; Dep. Ex. 63 at

20. Nor is there any reference to a book value cap during Chase’s discussion with investors

immediately following the transaction. See Dep. Ex. 483 at 3. Chase simply gave no indication

at the time of the transaction that it interpreted Section 2.1 in the manner that it now claims.

Chase’s actions after the transaction also are inconsistent with a belief that any mortgage

repurchase liability it assumed was capped at book value. Charlie Scharf’s representation to

Chase’s Audit Committee in December 2008 that Chase had “essentially assumed all pre-closing

liabilities” of WaMu makes no reference to a book value cap on liabilities assumed, Dep. Ex.

343 at 31, and Scharf testified that liabilities recorded on WaMu’s balance sheet at the time of

the transaction were assumed by Chase without any cap, see Scharf Dep. 70:25-71:9. Chase’s

public filings with the SEC contain no disclosures regarding any kind of book value cap on

Chase’s assumption of WaMu liabilities, nor do any internal documents produced by Chase offer

any discussion of the existence of such a cap. Chase did not inform the FDIC-Receiver of its

position that the liabilities it assumed ostensibly were capped at the book value amount at

WaMu’s closing until years after the transaction, after it was added as a defendant in this

litigation. Charlie Scharf testified that he did not “remember differentiating between Chase or

(Footnote continued from previous page)

Value” is used “to compute the initial payment” to the FDIC). In this P&A Agreement, that pricing is relevant to the FDIC-Receiver’s ability under Section 3.6 to re-acquire from Chase particular assets, and their related liabilities, and thus how much money the FDIC-Receiver must pay Chase for such returned assets. See Dep. Ex. 1 § 3.6; Gearin Dep. 127:19-128:2.


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Washington Mutual” when “focusing on repurchase liabilities . . . at JPMorgan” in the years

following the transaction, which would not have been the case had Chase been treating the

repurchase liabilities it inherited from WaMu (“heritage WaMu” or “hWaMu”) as subject to a

book value cap. Scharf Dep. 40:19-22. John Barren, Chase’s Rule 30(b)(6) witness, testified

that Chase did not calculate any caps for WaMu private label repurchase liability, nor were there

any discussions among Chase accountants regarding such a cap. See Barren Dep. 136:12-18,

186:20-21, 245:12-24.

Moreover, post-transaction documents consistently describe Chase’s overall WaMu

private label repurchase exposure as being the unpaid principal balance of the securitized loans,

rather than the line item book value of WaMu’s repurchase reserves at the time of closure. An

October 2, 2008 email to Ravi Shankar regarding “[r]epurchase questions” reflects an unpaid

principal balance of in private WaMu securitized loans as of the end of August

2008. Dep. Ex. 574. A February 2010 Chase presentation on Repurchase Exposure Overview

shows that for all years through 2008 there was in “Chase Mortgage Exposure” for

WaMu-related private label securitizations. Dep. Ex. 179 at 2. Charlie Scharf’s November 2010

presentation to the Bancanalysts Association of Boston Conference includes a page entitled

“Private label – Repurchase risk exposure,” which has a line item for WaMu that indicates $277

billion in total private label securities issued through 2008. Dep. Ex. 485 at 24 of attachment.

Chase’s witnesses could not provide a coherent explanation of how such a book value cap

on repurchase obligations worked in practice and how it was accounted for. For example, Chase

concedes that it is responsible for all repurchase liabilities arising from securitizations sponsored

by Defendant Washington Mutual Mortgage Securities Corporation (“WMMSC”), without any

cap or limitation. See Dep. Ex. 498 at 7; Barren Dep. 73:3-6. Yet Chase’s Rule 30(b)(6) witness


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testified that Chase never did anything to calculate the portion of the heritage WaMu non-agency

reserve that related to WMMSC, which it would have done had its non-WMMSC liability been

capped, Barren Dep. 90:9-12, and that there was no “distinction between how [Chase] accounted

for [WMMSC] obligations and how [Chase] accounted for other WaMu repurchase obligations,

id. at 73:7-10.

IV. CHASE WAS AWARE OF THE NATURE AND SCOPE OF THE WAMU MORTGAGE REPURCHASE LIABILITIES PRIOR TO THE TRANSACTION.

The P&A Agreement should be interpreted in light of the circumstances surrounding the

creation of that contract, including the facts known by the parties at the time.40 When Chase

entered into the P&A Agreement, it was fully aware of the nature and scope of WaMu’s

repurchase liabilities for the securitization trusts at issue. Chase nevertheless bid because it

concluded that the benefits of the transaction outweighed the risks.

A. WaMu Repeatedly Disclosed The Mortgage Repurchase Liabilities.

Public disclosures made by WaMu and its holding company, WMI, in 2008 repeatedly

made clear the nature and scope of WaMu’s ongoing repurchase obligations as the seller of

securitized mortgage loans. See, e.g., Ex. 801, WMI 2007 Form 10-K (2/29/08) at 117, 152.

WaMu stated that “[i]n the event of a breach of [the] representations and warranties . . . the Bank

bears the risk of any loss on the loans.” Ex. 804, WaMu 2007 Form 10-K (3/21/08) at 77.

40. See Restatement (Second) of Contracts § 202(1) (“Words and other conduct are interpreted in the light of all the circumstances”); id. § 202 cmt. b (“When the parties have adopted a writing as a final expression of their agreement, interpretation is directed to the meaning of that writing in the light of the circumstances. . . . includ[ing] the entire situation, as it appeared to the parties, and . . . facts known to one party of which the other had reason to know.”); see also Kanu, 695 F.3d at 78 (“contracts . . . must be interpreted in light of the circumstances under which the agreement was made”).


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WaMu further cautioned that the reserves established for its repurchase liabilities were based on

estimates subject to ongoing adjustment, and as a result the reserve amount did not represent the

maximum risk exposure “[t]hroughout the life of these repurchase . . . liabilities.” Id. at 15.

WaMu made it clear that “the Bank may learn of additional information that can affect the

assessment of loss probability or the estimation of the amounts involved” in the repurchase

reserves and that “[c]hanges in these assessments can lead to significant changes in the recorded

reserves.” Id.; see also Ex. 801, WMI 2007 Form 10-K (2/29/08) at 22.

It was widely known that WaMu faced sharply increasing liabilities arising from its

repurchase obligations in the months prior to its closing. See, e.g., Minier Dep. 79:17-22. With

the financial crisis worsening, WaMu’s public filings throughout 2008 detail the deteriorating

conditions in the residential mortgage market and warn repeatedly of the effect of increased

delinquencies and defaults on its mortgage business. See, e.g., Ex. 801, WMI 2007 Form 10-K

(2/29/08) at 52 (“an increasing number of borrowers . . . have defaulted on their loans thereby

contributing to an increase in delinquency rates”), 85 (“significant increases in loan

delinquencies and credit losses”); Dep. Ex. 522, WMI Form 10-Q (8/11/08) at 58 (“[h]igher

delinquencies drove increased repurchase requests from investors resulting in an increase in the

provision for repurchase reserves”).

B. Chase Was Familiar With The Mortgage Repurchase Liabilities.

As a sophisticated participant in the mortgage banking industry prior to the WaMu

transaction, Chase was familiar with the obligations and liabilities arising from representations

and warranties made in connection with residential mortgage loan securitizations, including

repurchase liabilities. See Durdan Dep. 39:3-15; Carr Dep. 191:9-12 (loan repurchases were “an

emerging issue for the industry”). Indeed, Chase made similar representations and warranties,


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and bore similar repurchase liabilities, as part of its own securitization activities. See, e.g., Dep.

Ex. 525, Chase 2007 Form 10-K (2/29/08) at 172.

Chase also understood that the maximum repurchase exposure to these liabilities was not

limited to the amount recorded in WaMu’s reserves. See Carr Dep. 50:7-10 (recorded reserve

amount is an estimate that does not limit what a bank might ultimately pay from its repurchase

liability); Scharf Dep. 163:8-12. Chase knew and disclosed that the unpaid principal balance of

all loans subject to repurchase, and not the recorded reserves, was the amount used “to quantify

the credit loss component that [WaMu] would be exposed to if they had a rep and warrant

violation.” Barren Dep. 57:14-23 (Chase Rule 30(b)(6) witness); see also, e.g., Dep. Ex. 525,

Chase 2007 Form 10-K (2/29/08) at 172; Dep. Ex. 540, Chase 2008 Form 10-K (3/2/09) at 221;

Dep. Ex. 542, Chase 2009 Form 10-K (2/24/10) at 241. In its 2010 Form 10-K, Chase disclosed

that with respect to such repurchase exposure, “the estimate of the range of reasonably possible

losses, in excess of the reserves established, for its repurchase liability is from $0 to

approximately $2 billion” and that “actual repurchase losses could vary significantly from the

Firm’s recorded repurchase liability or this estimate of reasonably possible additional losses.”

Dep. Ex. 773, Chase 2010 Form 10-K (2/28/11) at 279.

C. Chase Long Sought To Acquire WaMu And Conducted Exhaustive Due Diligence Prior To Submitting Its Bid.

Since at least the spring of 2007, Chase had shown a strong desire to acquire WaMu’s

business. An internal Chase case study on WaMu indicated that “[i]n March 2007, the [Chase]

Operating Committee conducted a broad review of potential acquisition targets, including large

domestic banks. . . . From a strategic standpoint, Washington Mutual (WaMu) was clearly a

preferred target.” Dep. Ex. 327 at 1; see also Durdan Dep. 33:11-13, 40:5-13. Chase performed

extensive due diligence on WaMu in March 2008, continued to model a potential WaMu


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transaction in July and August 2008, and updated its due diligence in September 2008.41 See

Carr Dep. 123:9-11 (the updated due diligence in September began three weeks before the deal

closed). Thus, Chase had ample time to conduct a thorough review of WaMu’s banking

operations before deciding to bid on WaMu.

As a result of these efforts, Chase ultimately “concluded that all appropriate due diligence

has been completed in order to proceed with the proposed transaction.” Dep. Ex. 40 at 1.42 In an

investor call immediately after the WaMu transaction, Mike Cavanagh stated that “it was

probably one of the most thorough things we’ve ever done,” while Charlie Scharf added that “it

was not a rushed analysis.”43 Dep. Ex. 483 at 10. Chase’s internal case study on the WaMu

transaction characterized its Spring 2008 due diligence process as “exhaustive” and stated that

Chase’s overall due diligence was “incredibly thorough.”44 Dep. Ex. 327 at 1, 8.

Chase’s due diligence included examination of WaMu’s securitizations, contingent and

off-balance sheet liabilities, and repurchase obligations. Indeed, Chase added repurchase items

41. Chase was modeling a potential acquisition of WaMu from an FDIC receivership as early as July 2008, even though the FDIC did not approach Chase about such a transaction until mid-September. Durdan Dep. 103:14-104:14; see also, e.g., Dep. Ex. 293 at 19.

42. Although Chase was evaluating multiple options for a WaMu transaction in 2008, its “due diligence procedures were conducted without regard to any particular transaction form.” Carr Dep. 181:14-15; see also Gordon Dep. 122:23-123:4. When the possibility of an FDIC transaction arose, the only change to Chase’s due diligence was to segregate the bank’s financial statements from those of the holding company. Durdan Dep. 326:19-25.

43. Cavanagh also stated during this call that Chase used its “full resources” on the WaMu due diligence process. Dep. Ex. 483 at 10. Scharf has been identified as “the lead businessperson involved in the due diligence effort.” McInerney Dep. 20:19-20; see alsoDep. Ex. 491 (Scharf, Cavanagh, and Jamie Dimon reviewed due diligence findings).

44. See also Durdan Dep. 66:10-20 (WaMu due diligence was “incredibly thorough”); Scharf Dep. 85:13-17 (“[I]t was important in connection with the Washington Mutual transaction for JPMorgan to be extremely thorough and painstaking in [its] work.”).


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to its September 2008 due diligence because it was aware of increased repurchase activity on its

own securitizations and “wanted to know what the situation was at Washington Mutual.”

Durdan Dep. 169:16-25; see Dep. Ex. 114 (updating due diligence list “for hot current topics like

mortgage repurchases”). The most comprehensive Chase due diligence list includes items such

as “[r]epurchase trends – monthly data for the last 12 months,” “[r]epurchases, by product, by

investor,” and a “[l]ist of loans purchased due to rep/warrant breach (monthly 2007 and YTD

2008).” Dep. Ex. 49 at 2, 7.45 The WaMu data room of documents for Chase’s due diligence

included memoranda on “Repurchase Activity and Repurchase Reserving,” information on off-

balance sheet commitments, and a sample of representative prospectuses from securitizations.

Dep. Ex. 51 at 12, 14, 27; see also, e.g., Dep. Ex. 52 (document on “Securitization and Whole

Loan Sales”). Chase reviewed WaMu’s process for addressing repurchase demands in

documents showing that those demands had been consistently increasing from January 2007

through September 2008. See Dep. Ex. 230 at 17-19.

Chase understood in September 2008 that WaMu’s repurchase risk was increasing and

concluded that WaMu’s repurchase reserves were not enough to cover expected future exposure.

See Dep. Ex. 637; Shankar Dep. 29:4-6. On September 16, 2008, Ravi Shankar (then Chief

Financial Officer of Home Lending) recommended that Ryan McInerney (then Chief Risk

Officer of Branch Banking) review WaMu’s repurchase exposure, stating that “[i]f you don’t

45. The due diligence list also included items on “[r]epurchase reserve methodology” and “[t]rend in repurchase reserve balance,” a “[d]etailed list of contingent funding obligations (on and off-balance sheet),” “[d]etailed listing of all securitizations,” “[d]etailed breakout of Other Liabilities,” and “[s]ecuritization trusts – [r]ecourse provision in all trust arrangements including servicer discretion.” Dep. Ex. 49 at 2, 6, 7.


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have time to review then provide for another 400 mm.” Dep. Ex. 226. On September 18, 2008,

WaMu’s home lending team told Shankar that WaMu had in outstanding

repurchase requests. Dep. Ex. 118. Shankar then requested a follow-up discussion on WaMu’s

repurchase liabilities, including “[h]ow much reserve they hold for the repurchases and what they

think would happen in the future in this space.” Id. After additional discussions, Shankar

concluded that WaMu’s repurchase reserve was too low and suggested adding another

into Chase’s projections of WaMu’s repurchase liability when evaluating a prospective

WaMu transaction. Dep. Ex. 229 (“[T]heir securities are now old and sub prime is a past issue.

. . . We have to bake in Deal economics that we could loose [sic] another ”).

D. Chase Concluded The Benefits Of The Deal Outweighed The Risks.

Chase expected to profit massively from the WaMu transaction and believed that the risk

of significant repurchase exposure was not material. Prior to the deal, Chase estimated that it

would earn over from the WaMu transaction from the end of 2008 to 2012.

Cavanagh Dep. 85:3-7; see also Dep. Ex. 63 at 26. Chase bid on WaMu because it concluded

that the significant benefits of a WaMu transaction outweighed the risk that WaMu’s mortgage

business presented. See Scharf Dep. 61:11-18 (one of the key issues for evaluating a potential

WaMu transaction was “whether the downside risk of taking over Washington Mutual’s

mortgage business outweighed the upside potential of taking over their banking business”); see

also, e.g., Rivas Dep. 78:16-23.

As a result of the transaction, Chase acquired WaMu’s ongoing banking operations,

which “consisted of a retail bank network of 2,244 branches, a nationwide credit card lending

business, a multi-family and commercial real estate lending business, and nationwide mortgage

banking activities.” Dep. Ex. 542, Chase 2009 Form 10-K (2/24/10) at 66. Chase reported that


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“the Washington Mutual transaction . . . contributed to increases in net interest income, lending-

and deposit-related fees, and mortgage fees and related income.” Id. at 53. Indeed, Chase

ultimately recorded a $2 billion “extraordinary gain” for this transaction in 2008 and 2009,

reflecting the extent to which it profited from the acquisition even after purchase accounting

adjustments. See id. at 57, 151; Dep. Ex. 540, Chase 2008 Form 10-K (3/2/09) at 135.

Chase also was very interested in the “unique opportunity to expand [Chase’s] retail

banking franchise” to the West Coast. Dep. Ex. 63 at 4. Jamie Dimon called WaMu’s California

branch network the “crown jewel” of the transaction and stated that Chase “[had] been anxious

to get into California.” Ex. 812, JPMC_DBNTC_0004931217; see Durdan Dep. 34:9-12. All

told, “[t]he [WaMu] transaction expanded [Chase’s] U.S. consumer branch network in

California, Florida, Washington, Georgia, Nevada and Oregon and created the nation’s third-

largest branch network.” Dep. Ex. 542, Chase 2009 Form 10-K (2/24/10) at 66.

Chase knew that an acquisition of WaMu’s assets and liabilities would bring with it

valuable mortgage servicing rights, which Chase viewed as “absolutely critical to operating the

business.” Dep. Ex. 68. As of December 31, 2007, WaMu’s financial statements reflected $6.3

billion in recorded assets for the projected “excess” cash flow of the bank’s mortgage servicing

rights. Ex. 801, WMI 2007 Form 10-K (2/29/08) at 104, 116. During Chase’s September 2008

due diligence, Ravi Shankar informed Charlie Scharf that WaMu’s mortgage servicing rights had

an estimated value of Dep. Ex. 378. Chase ultimately valued the projected future

cash flow for WaMu’s mortgage servicing rights as an asset worth $5.87 billion on Chase’s

balance sheets. Dep. Ex. 542, Chase 2009 Form 10-K (2/24/10) at 152.

As a Chase internal case study following the WaMu transaction made clear, Chase

understood that “[e]stablishing a range of risk and its consequences” is a necessary part of any


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deal evaluation. Dep. Ex. 327 at 8. Chase recognized that “no matter how thorough [its] due

diligence was,” there would be risks associated with the WaMu transaction, but it was “willing to

accept those risks” for the price it paid. Durdan Dep. 67:18-68:12. Charlie Scharf’s team

“talked to the board about the risk in the transaction and the fact that we could be wrong, . . .

because we are well aware that we can’t predict the future with certainty.” Scharf Dep. 114:21-

25. Chase also recognized that distressed institutions like WaMu “tend to have a lot more risk

and unknowns than other institutions do.” Rivas Dep. 92:11-13.

In particular, Chase was fully aware of WaMu’s private label mortgage repurchase

exposure – through its due diligence, through WaMu’s public disclosures, and by virtue of Chase

being a sophisticated and experienced actor in the mortgage securitization industry – but

ultimately viewed the range of risk for that exposure as likely immaterial. See Carr Dep. 126:15-

22 (Chase “didn’t view there as being a significant amount of exposure” for WaMu’s private

label repurchase liabilities), 127:11-17; Durdan Dep. 328:2-6 (other concerns “dwarfed [Chase’s]

sense of what [WaMu’s] repurchase liabilities might be”). Thus, Chase bid on WaMu despite its

knowledge that it would be assuming WaMu’s ongoing contractual repurchase liabilities,

because it concluded that the risk of significant future exposure was low and because WaMu was

such an attractive acquisition. See Carr Dep. 128:10-23 (Chase knew that private label

repurchase obligations were “a potential liability” prior to the transaction, but felt that “there was

less risk in that area”).

Ultimately, Chase concluded that the benefits of the deal outweighed its risks for the

price it was bidding. Charlie Scharf would not have proceeded with the deal unless he believed

that Chase “had a handle on the risks associated with the mortgage business or that the deal was

sufficiently profitable that it could handle any downside exposure.” Scharf Dep. 62:16-63:5.


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Scharf stated that “when [Chase] did the September transaction, we were comfortable in the

tradeoffs that you make between the risks and the opportunities in deciding to go forward with

the transaction.” Id. at 87:4-9; see also Rivas Dep. 87:10-16.

Chase entered into this deal well aware that there would be some amount of uncertainty

to what it was assuming. If Chase did not have sufficient time or information to evaluate the

terms of the transaction, or if it believed the risks were too great, it was free not to bid. See

Hartheimer Dep. 83:4-22; Held Dep. 174:1-7 (transaction was structured so that bidders “were

free to formulate a bid that they felt would properly . . . compensate them for the risks and

rewards of the transaction in a competitive bidding atmosphere”). Chase decided to bid on

WaMu voluntarily and out of interest for its shareholders, and not because it was forced to do so

by the FDIC-Receiver. See Cavanagh Dep. 80:3-25.

Moreover, far from treating WaMu’s repurchase liabilities as unknown and

unquantifiable, Chase had assessed the liabilities during its due diligence and made an estimate

of future exposure. See supra at 39-41. Once the FDIC-Receiver rebuffed Chase’s attempt to

change Section 2.5, Chase elected to take the risk and knowingly assumed all of WaMu’s

repurchase liabilities when it bid. Chase cannot expect now to retroactively change the terms of

the deal.

CONCLUSION

The language of the P&A Agreement and the extrinsic evidence both before and after the

agreement lead to the inescapable conclusion that Chase expressly assumed and agreed to pay,

perform and discharge all of WaMu’s mortgage repurchase liabilities without limitation. This

conclusion is the only reasonable interpretation of Section 2.1 of the P&A Agreement, and


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therefore Chase is the only proper defendant in this case. Summary judgment should be granted

in favor of the FDIC-Receiver.

Dated: June 20, 2014

Of Counsel:

Kathryn R. Norcross, D.C. Bar No. 398120 Senior Counsel Kaye A. Allison, Counsel Anne M. Devens, CounselFEDERAL DEPOSIT INSURANCE CORPORATION 3501 Fairfax Drive, Room VS-D-7092 Arlington, Virginia 22226 Telephone: (703) 562-2676 Facsimile: (703) 562-2475 Email: [email protected] Email: [email protected] Email: [email protected]

Respectfully submitted,

/s/ William R. Stein William R. Stein, D.C. Bar No. 304048 Scott H. Christensen, D.C. Bar No. 476439 Jason S. Cohen, D.C. Bar No. 501834 HUGHES HUBBARD & REED LLP 1775 I Street, N.W., Suite 600 Washington, D.C. 20006-2401 Telephone: (202) 721-4600Facsimile: (202) 721-4646 Email: [email protected] Email: [email protected] Email: [email protected]

Attorneys for Federal Deposit Insurance Corporation in its capacity as Receiver for Washington Mutual Bank


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