More than a year after it was filed, a breach-of-contract lawsuit from Wells Fargo against JPMorgan Chase over a multifamily acquisition loan can now proceed.
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U.S. District Judge Dale Ho in Manhattan on Monday rejected JPMorgan's bid to dismiss the suit, ruling that Wells Fargo has adequately supported its allegations for proceedings to continue. The ruling was first reported by Reuters.
Wells Fargo is seeking to recoup its investors' losses after a $481M commercial real estate loan originated in 2019 went into default about three years later. Chetrit Group principal Meyer Chetrit is also listed as a defendant in the lawsuit. His firm used the funds to help buy 43 multifamily properties across 10 states for $522M.
The lawsuit says Chetrit informed JPMorgan that the seller, ROCO Real Estate LLC, disclosed that it had “dramatically overstated” the portfolio’s historic net operating income and trailing 12-month financial statements ahead of the sale.
JPMorgan allegedly acted as though nothing unusual had happened when structuring and marketing the loan.
The bank sold the loan to affiliate J.P. Morgan Chase Commercial Mortgage Securities Corp., which went on to deposit it in a CMBS trust, according to the suit.
“JPM immediately offloaded any risk it had on the Mortgage Loan to the Trust, taking home millions of dollars of fees in the process,” the suit says. “The value of the Properties backing the Mortgage Loan then collapsed — leaving the Trust with tens of millions of dollars in losses.”
JPMorgan argued that Wells Fargo didn't demonstrate how the overstatement reduced the value of the loan or the properties tied to it, but the judge didn't agree.
“A plaintiff may plead material breach where the breach materially increases a loan’s risk of loss,” Ho wrote in the Monday decision.
Wells Fargo wants JPMorgan to repurchase the loan, minus the amount it and its investors got from the sale of the underlying properties, or pay damages for the alleged breach of contract.
JPMorgan declined Bisnow’s request for comment. Wells Fargo didn't immediately respond to a request for comment.
