JPMorgan sues California for indemnity in canceled $457 mln COVID mask deal

A sign outside JP Morgan Chase & Co. offices is seen in New York City, U.S., March 29, 2021. REUTERS/Brendan McDermid

(Reuters) - JPMorgan Chase Bank N.A. has just filed a case that will go down in history as one of the twistiest bits of litigation spawned by the COVID-19 pandemic.

The bank sued the state of California and California’s office of the treasury on Thursday, seeking indemnity in connection with a deal for 100 million N95 masks that California struck – and then rescinded -- in the dark and frantic early days of the pandemic.

JPMorgan was arguably the state’s savior, raising red flags about the newly formed company that claimed to be able to supply the masks, then canceling a $457 million wire transfer from the state to the supplier. But JPMorgan’s actions have landed it in litigation with the supplier’s bank, even though both banks had grave concerns about the wire transfer. So now JPMorgan wants to be sure that California has its back.

This strange tale begins in March 2020, when California, like every other state, was scrambling to find enough masks to outfit its frontline workers. The state’s controller got word about a pair of political consultants who had abruptly pivoted to sourcing and selling protective equipment. They claimed to have 100 million masks sitting at the port in Long Beach.

Within days, California officials struck a $609 million deal with the ex-lobbyists, who incorporated their company, Blue Flame Medical LLC, just two days before California signed the contract. (The director of California’s Department of General Services would later testify that he wasn’t aware of Blue Flame’s extremely short history when he agreed to the deal.) Blue Flame promised that its Chinese suppliers could come up with 100 million masks in a matter of weeks. California agreed to wire 75% of the purchase price, $457 million, to the upstart company on March 26.

Blue Flame opened an account at Chain Bridge Bank, N.A. on March 23, and told bank officials on March 25 that it was imminently expecting “an unbelievably large wire transfer” from California, according to a summary judgment ruling issued by U.S. District Judge Leonie Brinkema of Alexandria, Virginia, in September 2021.

Chain Bridge bankers were concerned, according to Brinkema. A $450 million deposit would create balance-sheet problems for the bank, but, more fundamentally, Chain Bridge officials said in internal conversations that it seemed “unbelievable” for a two-day-old business to have a $450 million contract with California.

Minutes after the transfer came through on March 26, Chain Bridge put a hold on the funds.

JPMorgan, meanwhile, had its own suspicions, according to Brinkema’s decision. A JPMorgan banker called Chain Bridge and learned that Blue Flame was a brand-new company whose founders were lobbyists, not medical equipment suppliers. After a series of consultations between California officials and bankers from JPMorgan and Chain Bridge, California asked JPMorgan to recall the wire transfer. JPMorgan issued a recall to Chain Bridge, and Chain Bridge returned the $457 million.

Blue Flame sued Chain Bridge over the “stolen” money in federal court in Virginia, alleging that the bank essentially destroyed the company's nascent business in order to protect its own balance sheet. Chain Bridge, in turn, sued JPMorgan, citing a provision of the Uniform Commercial Code that requires a bank that cancels a wire transfer to indemnify the bank that received the transfer.

In her summary judgment ruling last September, Brinkema concluded that Blue Flame did not have a viable claim against Chain Bridge because its California deal was bound to collapse: Blue Flame, she said, offered no solid evidence that it could actually have come up with 100 million masks.

The judge also held, however, that JPMorgan was on the hook to Chain Bridge. JPMorgan had argued that the indemnity provision didn’t apply because the two banks agreed the wire transfer would have to be canceled. But Brinkema held that Chain Bridge never explicitly agreed to override the default indemnity clause.

The judge said her ruling was not meant to punish JPMorgan, whose “quick and thorough investigation of potential fraud is commendable,” she wrote. “The bank went above and beyond for its customer, California, by bringing to the customer's attention several problems with the underlying contract.” The bank and California, she suggested, could figure out how to allocate any losses from the Chain Bridge case.

Both Blue Flame and JPMorgan have challenged Brinkema’s rulings at the 4th U.S. Circuit Court of Appeals. If Blue Flame, which contends that Brinkema disregarded evidence that it fulfilled smaller orders for masks, manages to revive its case against Chain Bridge and if JPMorgan cannot reverse Brinkema’s indemnity ruling, the bank could face big exposure.

Thus, JPMorgan’s new suit against California.

The bank’s complaint recounted the thanks and praise it received from California after canceling the wire transfer to Blue Flame. In the various state investigations that followed the aborted Blue Flame deal, the complaint said, California officials repeatedly noted that JPMorgan had acted to protect the state’s money. And now, the complaint said, California is bound under the terms of its contracts with its banker, to protect JPMorgan from any liability that arises from the cancellation of the wire transfer.

That presumably includes $5.9 million that JPMorgan has already agreed to pay Chain Bridge to resolve Chain Bridge’s claim for fees and costs in the litigation before Brinkema. The complaint also calls for indemnification of JPMorgan’s fees and costs.

If Blue Flame loses its appeal at the 4th Circuit, those fees and costs – for both JPMorgan and Chain Bridge – will be the only liability arising from California's Blue Flame fiasco. If Blue Flame wins, things get more interesting.

I emailed the California Attorney General’s office for comment on the complaint but didn’t hear back. JPMorgan’s lawyers at Wilmer Cutler Pickering Hale and Dorr referred my query to the bank, which declined to provide a statement. Chain Bridge counsel Donald Burke of Robbins, Russell, Englert, Orseck & Untereiner declined to comment.

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Alison Frankel has covered high-stakes commercial litigation as a columnist for Reuters since 2011. A Dartmouth college graduate, she has worked as a journalist in New York covering the legal industry and the law for more than three decades. Before joining Reuters, she was a writer and editor at The American Lawyer. Frankel is the author of Double Eagle: The Epic Story of the World’s Most Valuable Coin.