Friday, August 3, 2012

GJN-Wells Fargo/More on When Does A Capital Treatment Event Occur

This is my second post for today.

I understand that some lawyers may be interested in representing the former owners of GJN. I have already been contacted by one. By clicking the profile button, a reader is taken to a page where an email can be sent to me. 

I am retired with a lot of free time on my hands, one reason for this blog. 

I am not going to become involved in any lawsuit.  My involvement so far has been solely due to my outrage about how the GJN owners were treated by WFC. 

I generally do not like most lawyers. I still have an active license just in case a family member is in need of free legal assistance.  

I would hope that this case does not end up with lawyers who just want to make a fee and settle the case for an amount significantly less than $12+ million while doing as little as possible. Some class action lawyers have a tendency to focus on harvesting compensation for themselves based on a percentage of the settlement. 

I would go after the entire amount and would not let up until the clients corralled me. 

Where available, I would ask for pre-judgment interest at the statutory rate on the entire amount. In Tennessee, that could be up to 10% per annum as an element of damages. This kind of award could be appropriate in contract actions involving a liquidated sum.  

Some of the legal theories, which I have advanced so far, are based on contract law, including the implied obligation of good faith and fair dealing, cases relating to third party beneficiaries of trusts (particularly those involving the creator of a Grantor Trust taking the beneficiaries money & fiduciary duty obligations), and contract construction. The last area involves tying the make whole provision to the swap termination fee, as I explained in GJN-Wells Fargo-New York Times.  I have no expertise in securities law, but that would be an obvious area for research and further investigation. 

I also believe that lawyers wishing to investigate claims will need to focus on whether J P Morgan correctly invoked the capital treatment exception in order to avoid a make whole payment. As the beneficial owners of $27.7 billion in J P Morgan TPs, the owners of GJN should have standing to complain about the amount of JPM's payment into the trust. To understand this issue, rules of contract construction would come into play. The issue is when can JPM claim a capital treatment event when the TPs could still count as Tier 1 equity capital. (section 171 ‎ pdf)

So, if I was involved in such a lawsuit, which is not going to happen, I would seek as my ultimate objectives the following: (1) the termination of all WFC's rights in the prospectus due to securities act violations and/or material breach(es) of agreement, etc. and so on; (2) the return of the entire amount paid to WFC by the Trustee; (3) pre-judgement interest at the statutory rate on that amount; (4) a make whole payment by JPM to the owners of GJN to the extent it is in excess of the payment already made by it; and (5) attorneys fee if available by statute or under the American Rule for the award of attorneys fees. 

A make whole payment is calculated as follows:

Page A-5 of the GJN Prospectus:

"JPMorgan Chase & Co. will have the right to redeem some or all of the
Junior Subordinated Debentures at a redemption price equal to the greater of:

     o    100% of the principal amount of the Junior Subordinated Debentures
          being redeemed; or

     o    the present value of scheduled payments of principal and interest from
          the prepayment date to August 1, 2035, on the Junior Subordinated
          Debentures being prepaid, discounted to the prepayment date on a
          semi-annual basis (assuming a 360-day year consisting of twelve 30-day
          months) at a discount rate equal to the treasury rate plus a spread of
          0.25%, as determined by The Bank of New York or any successor
          calculation agent that JPMorgan Chase & Co. may appoint;

in each case plus accumulated but unpaid distributions to the date of payment.

          JPMorgan Chase & Co. may elect to redeem Junior Subordinated
Debentures at one or more times in this manner. The Underlying Securities
Property Trustee will give holders of the Underlying Securities not less than 30
days' nor more than 60 days' notice prior to the date of any redemption of the
Underlying Securities.

          In addition, at any time within 90 days after a Tax Event or Capital
Treatment Event, JPMorgan Chase & Co. may elect to redeem all, but not less than
all, of the Junior Subordinated Debentures for a price equal to their principal
amount (plus accrued and unpaid interest)."

End of Quote from Prospectus (emphasis and coloring added)


If it is possible for the capital treatment event to occur before the phase out period even starts,  which is JPM's position, then why did it not occur when the President signed the Dodd Frank law?

I took a snapshot of the pertinent prospectus language relating to the capital treatment event:

Please note how the language keys off the "reasonable determination" of JPM. If that reasonable determination could have been made when the President signed the Dodd-Frank bill, then the ninety day period expired long before JPM actually made the redemption. Would a Court give them a second chance, a third chance, etc to start the ninety days running?

While the GJN Trust owned $27.7 million of the J. P. Morgan Chase Capital XVII securities, the total principal amount of this TP was $500 million. J.P. Morgan Chase Announces Redemption of Approximately $9.0 Billion in Aggregate Amount of Outstanding Trust Preferred Capital Securities So a lot of money is involved in the make whole payment on that entire principal amount. 

There is most likely a number of cases dealing with the standard for making that "reasonable determination". I am not going to research the matter. Since the capital treatment event relevant to this issue is a new event, I doubt that any cases will be found dealing with that specific topic. Instead, a lawyer will have to draw analogies from cases in other topic areas.  

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