A federal judge in Manhattan on Monday refused to throw out Wells Fargo's breach of contract lawsuit seeking to recover investor losses tied to a defaulted $481 million commercial real estate loan. The litigation, filed by Wells Fargo as trustee for the investors, centers on whether JPMorgan Chase knew of an event of default by borrower Chetrit Group and nonetheless continued to market and maintain the loan.
U.S. District Judge Dale Ho concluded that Wells Fargo had sufficiently alleged facts suggesting JPMorgan was aware of a default by Chetrit, a New York real estate development firm that obtained the loan in 2019 to acquire 43 multifamily properties. Those assets total 8,671 apartments spread across 10 U.S. states.
Wells Fargo's complaint says the borrower defaulted in 2022 and, at the time the complaint was filed last March, still owed more than $285 million on the debt. The complaint further states that investors sustained losses described as tens of millions of dollars.
According to Wells Fargo, Chetrit informed JPMorgan more than five months before the closing of the $522 million acquisition that the seller had overstated the properties' historical net operating income - a central metric for evaluating commercial real estate cash flow. The trustee alleges JPMorgan disregarded that information and acted as if "nothing unusual had happened" while making and marketing the loan.
JPMorgan had sought dismissal, arguing that Wells Fargo failed to demonstrate how the alleged overstatement reduced the value of either the loan or the underlying properties. In rejecting the motion, the judge noted that a plaintiff can plead a material breach if the breach materially increases a loan's risk of loss, allowing the case to move forward.
Wells Fargo contends JPMorgan turned a blind eye to the alleged misstatement while pursuing millions of dollars in fees. The trustee is asking the court to require JPMorgan to repurchase the loan - less amounts the trust recovered from sales of the underlying properties - or, alternatively, to pay damages.
JPMorgan did not immediately respond to requests for comment.
This dispute implicates the handling of underwriting and disclosure in syndicated commercial real estate financings, and it raises questions about trustee duties, loan marketing practices, and the remedies available when borrowers default on large, multi-asset loans.