JPMorgan, Citi Lawsuits: Collateral Damage

NEW YORK (TheStreet -- Before JPMorgan Chase(JPM Quote) shareholders get too happy about the bank's blowout third-quarter earnings, they may want to consider a court case involving the bank and newspaper publisher Freedom Communications.

Freedom recently won the right to sue JPMorgan over $770 million in loans made to the newspaper publisher, which Freedom's attorneys say played a role in the company's decision to file for bankruptcy protection last month, according to a report from Bloomberg News.

If Freedom wins the case, its victory might encourage countless similar lawsuits. And indeed, as Bloomberg reports, just this week, another group of lenders including Citigroup(C Quote) lost a decision involving more than $600 million for loans they made to a company called Tousa Inc . The Florida judge in the case ruled that Tousa was already insolvent at the time it received the loan.

Another company that would seem to have a good chance at finding a sympathetic judge is Simmons Bedding, which is also on the verge of filing for bankruptcy protection. A recent front page article in The New York Times stated that Simmons had seven owners in 20 years, as private equity firms made $750 million on Simmons by loading it up with debt to juice their returns.

With no shortage of bankrupt companies these days, and no shortage of aggressive lending in the years leading up to the Great Financial Meltdown of 2008, plaintiffs' lawyers could have a field day with these cases.

And lenders that fueled the buyout boom, including Citi and JPMorgan but also Deutsche Bank(DB Quote), Goldman Sachs(GS Quote), Morgan Stanley(MS Quote) and Bank of America(BAC Quote), look vulnerable.

Written by Dan Freed in New York.