J.P. Morgan Chase & Co. has weighed in on a legal dispute between Wachovia Corp. and a long-defunct mortgage company, saying it has serious implications for lending in Pennsylvania.
The New York banking company filed a friend-of-the-court brief Thursday with the Pennsylvania Supreme Court in the case of Pioneer Commercial Funding Corp. et al. v. American Financial Mortgage Corp., Thomas F. Flatley, Norwest Funding Inc., and CoreStates Bank NA.
At stake, according to J.P. Morgan Chase, is the ability of warehouse lenders to use so-called bailee letters to protect their interests.
A bailee letter says that though the prospective buyer of a mortgage may look at the note, it does not own it and cannot do anything with it until it pays the warehouse lender, which then applies the payment to a mortgage bank’s warehouse line of credit.
Warehouse lenders, whose lines of credit allow smaller firms to fund loans, hold the notes once loans are made and send out the bailee letters.
The case arose from a dispute in the late 1990s between Pioneer, a defunct warehouse lender, and CoreStates, a Wachovia predecessor.
Pioneer’s attorney, Maurice M. Mitts of the Philadelphia firm Frey, Petrakis, Deeb, Blum, Briggs & Mitts PC, alleges that CoreStates wrongfully withheld a $1.7 million loan purchase payment to Pioneer from the Wells Fargo & Co. predecessor Norwest Funding Corp.
Instead of wiring the money to Pioneer’s account at Bank One Corp., Norwest allegedly violated Pioneer’s bailee letter by mistakenly wiring the money to an account at CoreStates belonging to American Financial Mortgage Corp. (American was acting as a guarantor of the loans for RNG Mortgage Services Inc., the bankrupt firm that originated the loans with a warehouse line from Pioneer and which American intended to buy. American needed to guarantee the sale to keep RNG operating.) CoreStates froze the account because one of American’s principals owed it $4.5 million after an alleged check-kiting scheme, Mr. Mitts said.
Pioneer won an earlier verdict in the case for more than $300 million, but in August the state’s highest court came down in favor of Wachovia, saying that the circumstances of the case overrode the bailee letter.
Pioneer’s lawyers have requested a rehearing, so JPM Chase saw fit to opine on the issue to protect what it considers an important part of doing business in the state.
“If lenders cannot depend on the courts to enforce contracts that explicitly create a bailment relationship, there will be no easy way for the lenders to ensure that they will retain their security interest while prospective purchasers review mortgage notes,” the company wrote in its brief.
Wachovia spokeswoman Christy Phillips said, "We believe that the Supreme Court decided this case correctly."
JPM Chase painted a bleak picture of what the secondary market would be like without the documents.
First of all, there would be “significant delay and material cost to the hundreds of thousands (if not millions)” of dollars in secondary market transactions because sellers and buyers would have to come up with new ways to exchange the documents safely.
“It seems likely that the only way that a mortgage company and lender could be sure that the mortgage company will not lose title is to insist that the Pennsylvania purchaser leave the state and examine the documents in person” or “the seller could hire agents to personally take the documents to the Pennsylvania purchasers.”
JPM Chase’s lawyers warned in the brief that a weakening of bailee letters could force lenders to leave the state’s market altogether.
The brief also discloses that Bank One, which JPM Chase acquired this year, was owed $5 million by Pioneer.
