JPMorgan Must Face Wells Fargo Lawsuit Over $481 Million Real Estate Loan

A federal judge in New York has refused to dismiss a lawsuit accusing JPMorgan Chase of breaching contractual obligations tied to a $481 million commercial real estate loan, allowing the case to move forward.

In a decision issued March 30, U.S. District Judge Dale Ho said the lawsuit can proceed, finding that Wells Fargo’s complaint supports claims JPMorgan knew about potential issues with the loan before it was issued and sold to investors.

The case centers on a 2019 loan issued to the Chetrit Group to finance the purchase of 43 multifamily properties across 10 states, totaling more than 8,600 apartment units. Wells Fargo is acting as trustee, representing investors who purchased interests in the loan through a commercial mortgage-backed securities structure.

According to the complaint, the borrower defaulted in 2022. Wells Fargo claims JPMorgan had earlier received information suggesting the seller overstated the properties’ historical net operating income, a key measure of income after expenses used to assess a property’s value and loan risk. The filing alleges that despite being told of these concerns months before the transaction closed, JPMorgan proceeded with the loan and marketed it to investors without disclosing the issue.

JPMorgan argued the case should be dismissed, stating that Wells Fargo failed to show how the alleged overstatement affected the loan’s value or caused measurable losses. The bank contended the complaint did not establish a clear link between the alleged conduct and investor harm.

Judge Ho rejected that argument, writing that a claim may proceed where alleged conduct materially increases the risk of loss, even if the full extent of damages is not yet determined.

Wells Fargo accuses JPMorgan of ignoring red flags in order to collect fees associated with originating and securitizing the loan. It seeks to require JPMorgan to either repurchase the loan after accounting for proceeds already recovered from property sales or pay damages tied to investor losses.

The dispute arises from agreements that govern commercial mortgage-backed securities, often referred to as CMBS. In these transactions, a bank originates a loan and sells it into a trust, which then issues securities to investors. The originating bank typically makes contractual promises, known as representations and warranties, about the accuracy of key information used to evaluate the loan, and investors rely on those assurances when deciding whether to invest.

When those promises are alleged to be false or incomplete, the trustee may seek to enforce a remedy requiring the bank to repurchase the loan or to compensate investors. Courts focus on whether the alleged conduct increased the risk that the loan would fail, rather than requiring proof of losses at the earliest stage.

The ruling allows the case to move into further litigation, including discovery.