In their recent suits against JPMorgan Chase, the New York attorney general and the Securities and Exchange Commission borrowed liberally from the record established by the bond insurers Ambac, Assured Guaranty and Syncora in their long-running cases against the bank, Bear Stearns and its erstwhile mortgage arm, EMC. On Tuesday, Chancellor Leo Strine of Delaware Chancery Court ruled that a Bear Stearns mortgage-backed securities trustee, acting at the direction of the hedge fund Baupost, may also quote emails and testimony from those monoline cases in its breach-of-contract complaint against EMC.

Strine's nine-page decision said that in Delaware, plaintiffs can't merely crib allegations from other complaints but can make use of borrowed material as long as it's relevant to their claims and they've conducted their own investigation. The trustee's complaint in this case, he said, satisfied those requirements. Its lawyers at Ropes & Gray and Abrams & Bayliss quoted specific discovery from bond insurer complaints to support their allegations that EMC routinely ignored underwriting standards, Strine said.

The ruling will help other trustees who have brought MBS breach-of-contract cases in Delaware Chancery Court -- including trustees in at least three other cases against JPMorgan in Strine's courtroom -- since it means they too can borrow from the voluminous record in the bond insurer suits. But that's not the only implication of Strine's opinion. The decision suggests that the chancellor's view of MBS put-back cases may have shifted as he considered evidence that comes from the bond insurer litigation. When this case was first filed, Strine seemed to regard it as a straightforward contract dispute, ordering the two sides to get together and talk about which underlying loans really breached EMC's representations and warranties. His ruling Tuesday, though, pays heed to the subtleties of the trustee's argument that EMC systematically disregarded underwriting standards and applied different sets of rules in asserting its own put-back claims against mortgage originators while denying similar claims by MBS investors.

"The (trustee's) allegations are obviously connected to (its) claim that EMC breached the representations and warranties in the purchase agreement, because, among other reasons, they provide a basis for the trustee's contention that EMC did not adhere to accepted underwriting standards and that EMC's own understanding of relevant commercial terms in the agreements, as shown by its course of dealing in analogous circumstances, was different from what it now contends," Strine wrote.

Those are arguments the trustee can use to counter the bank's assertion that defaults in the underlying loan pool were caused by the housing crisis, not by underwriting deficiencies. "What the emails and documents (from other cases) show is a pattern or practice of failing to follow guidelines that was fairly widespread," said trustee counsel Harvey Wolkoff of Ropes. "The judge thinks it's relevant."

It was JPMorgan's own motion that focused Strine's attention on the trustee's lax underwriting and double-standard allegations. After the trustee filed an amended complaint in September, asserting that negotiations over more than 1,100 supposedly deficient mortgages had broken down, the bank filed a motion to strike "certain immaterial, impertinent and scandalous allegations" from the amended complaint. Without conducting an independent investigation, the bank argued, the trustee had improperly cribbed the allegations in question from other complaints for the sole purpose of casting the bank in a bad light. "Because these allegations are not related to the trust or loans at issue, they can only serve to prejudice EMC and distract from the issues that require this court's adjudication," the motion said.

In its response to the bank motion, the trustee explained how its allegation that "EMC was a securitization machine" directly related to its assertion that more than 80 percent of the underlying loans in the trust breached EMC's representations and warranties; and it told the judge that evidence of the bank's put-back demands to originators contradicted what the bank told the trustee about the standard for repurchase. The trustee also took the opportunity to quote juicy allegations that it had not included in its complaint, ostensibly to show its discretion. Those quotes -- including one by a former EMC vice president who allegedly said, "Virtually everybody was frankly slow in recognizing that we were on the cusp of a really draconian crisis because we were having too much fun waiving shit in and getting loaded on Miller Lite" -- could hardly fail to catch Strine's eye.

The chancellor didn't mention specifics in his ruling Tuesday, but he waved away the bank's concerns about scandal. "For a court to strike allegations on the ground that they are scandalous," he wrote, "it is not enough that they may put the moving party in an unflattering light, as here. Therefore, I deny the motion to strike."

The bank did succeed in persuading Strine to dismiss the trustee's claim for indemnification and legal fees. The chancellor said that under New York law, the purchasing agreement's indemnification clause covers only claims against the trustee by a third party (presumably a noteholder), not the trustee's claims against the MBS sponsor.

Strine has previously said that the trustee cannot rely on sampling in this case, so assuming the trustee gets past any summary judgment motions by the bank, he is expected to preside over a trial on whether a select group of loans breach EMC's reps and warranties. His ruling will presumably inform talks on the rest of the allegedly deficient loans but will not specifically apply to the entire pool.

The bank is represented in the Delaware trustee case by Sullivan & Cromwell and Landis Rath & Cobb. Robert Sacks of Sullivan declined to comment. I also emailed two JPMorgan representatives for comment but did not hear back.

(Reporting by Alison Frankel)

Follow us on Twitter: @AlisonFrankel, @ReutersLegal  | Like us on Facebook