JPMorgan Must Face Dexia's Mortgage Suit, Judge Rules

A federal judge has revived a lawsuit that charges JPMorgan Chase (JPM) with misrepresenting the quality of loans that backed securities sold to a Belgian bank.

The nation's biggest bank will have to face allegations by Dexia, which says it lost hundreds of millions of dollars after buying $1.6 billion in residential mortgage-backed securities from JPMorgan Chase, Judge Jed Rakoff of the U.S. District Court in Manhattan ruled Friday.

Rakoff in April narrowed the lawsuit significantly, but a ruling two weeks later by the U.S. Court of Appeals for the 2nd Circuit persuaded him he lacked jurisdiction over the case. Though 18 of the loans that underpinned the securities at issue were on properties in the Virgin Islands, two domestic subsidiaries of JPMorgan Chase handled the deals at issue - a circumstance that limited the court's jurisdiction under a U.S. law that governs offshore transactions, Rakoff ruled.

"Accordingly, because JPMorgan Chase Bank did not itself engage in the foreign banking transactions on the basis of which the defendants sought removal, the court cannot exercise jurisdiction over this issue under" U.S. law, Rakoff wrote in his opinion Friday, which vacated his April ruling that would have gutted the suit.

The lawsuit will return to a New York State trial court, where it initially was filed last year.

Dexia charges that JPMorgan Chase and two firms it bought during the mortgage meltdown - Bear Stearns and Washington Mutual - took shortcuts in the origination and securitization of mortgages that underpinned 51 securities offerings between 2005 and 2007.

JPMorgan Chase, which has denied the allegations, won permission last June to move the case to federal from state court.

A spokesman for JPMorgan Chase and a spokeswoman for Dexia both declined to comment on the ruling, which was first reported by Reuters.