By Richard A. Roth, J.D.
The Washington Mutual Bank failure, and JPMorgan Chase Bank’s purchase of much of WaMu’s assets, has resulted in a series of suits across the country over whether property owners could recover rent for planned WaMu branches that never opened. The Supreme Court’s Feb. 23, 2015, denial of a landlord’s request that it review the rejection of the landlord’s rent suit could signal that Chase and the Federal Deposit Insurance Corporation, as WaMu’s receiver, will continue to win these suits; however, a contrary decision by the U.S. Court of Appeals for the Fifth Circuit still could offer hope for landlords.
The issue arises from the interplay of the terms of the purchase and assumption agreement used by the FDIC and the agency’s authority as receiver, under the Financial Institutions Reform, Recovery, and Enforcement Act, to repudiate leases. The P&As divided WaMu’s real estate interests into two categories: general real estate and bank premises. The general real estate was assigned outright to Chase, while Chase was given a 90 days to evaluate the bank premises and decide which to accept. Bank premises Chase did not want were rejected and returned to the FDIC for disposition as part of the receivership.
In the litigated cases, the FDIC and Chase decided between themselves that the uncompleted branches constituted bank premises, not general real estate, under the P&A. This permitted Chase to reject the property, and that rejection permitted the FDIC to disaffirm the leases that WaMu had signed. The landlords’ only option appeared to be to file claims in the receivership.
Some of the landlords didn’t agree with that procedure and sued Chase for unpaid rent. They asserted two different theories of recovery: first, that the P&A obligated Chase to pay; second, that they were in privity of estate with Chase, making the bank obligated to pay. The FDIC defended the suits on behalf of Chase. Different U.S. appellate courts considered the issues in Interface Kanner, LLC v. JPMorgan Chase Bank (11th Cir.), Excel Willowbrook, LLC v. JPMorgan Chase Bank (5th Cir.), and Hillside Metro Assoc., LLC v. JPMorgan Chase Bank (2nd Cir.). A fourth related case, GECCMC v. JPMorgan Chase Bank (9th Cir.), presented a somewhat different situation in that the leases apparently were for operational branches. Also, the landlord filed an unsuccessful receivership claim before suing Chase.
Standing v. privity. All four Circuit Courts agreed that landlords do not have standing to raise any claims that would require a court to interpret the P&A. The landlords were not parties to the P&A, and the agreement included a clause that explicitly disclaimed any intent to benefit third parties. However, in the Excel Willowbrook opinion, the Fifth Circuit made clear that it did not like that result; it was only going along with the other circuits in the interest of preserving a uniform national interpretation of the P&A.
The Fifth Circuit then diverged from the other appellate courts by accepting a privity of estate theory of recovery that no other appellate court accepted. When a lease is assigned by a tenant, the question of whether the assignee and the landlord are in privity depends on just what the tenant has conveyed, the court explained. If the tenant assigns only part of his rights under the lease, creating a sublease, the landlord and assignee are not in privity. However, if the tenant conveys his entire interest, the assignee and landlord are in privity and either can enforce the central parts of the lease against the other, the court said.
The P&A clearly was a complete assignment of the lease, the court continued. Regardless of what the FDIC and Chase now said the P&A intended, it was clear that the lease was encompassed in the P&A’s treatment of general real estate, the court said. Since the FDIC had assigned to Chase all of its interest in WaMu’s general real estate, there was privity of estate between the landlord and Chase. Chase was liable for the unpaid rent, the Fifth Circuit decided.
The FDIC’s argument that the landlord had no standing to seek an interpretation of the P&A to establish privity of estate “ignores eight centuries of legal history” and would return property law to its state in twelfth-century England, the court asserted.
Effect of review denial. The Hillside Metro petition for certiorari asked only that the Supreme Court consider the Second Circuit’s rejection of the privity of estate theory. The landlord’s review petition in Interface Kanner also raised the privity of estate theory, which had been rejected by the Eleventh Circuit. Both petitions were rejected. However, as is always said, rejecting a request for review is not the same as affirming the decision, so the Supreme Court has not definitively rejected rent claims under privity of estate.
Since the FDIC decided not to appeal the Fifth Circuit’s decision, it must be assumed that the privity of estate theory retains some viability, at least in that circuit. However, the Fifth Circuit did note that the FDIC had changed its P&A in a way that might clarify the ability to disaffirm leases in future receiverships.
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