A federal judge ruled that the Federal Deposit Insurance Corp has to face a $10 billion lawsuit tied to the failure of Washington Mutual Bank.
The judge refused the FDIC's request to dismiss the lawsuit brought by Deutsche Bank National Trust Co over bad mortgages that were securitized by Washington Mutual.
Washington Mutual, or WaMu, was seized by the Office of Thrift Supervision in September 2008 in the biggest bank failure in U.S. history.
The FDIC was appointed receiver and immediately sold the bank to JPMorgan Chase & Co for $1.9 billion.
The Deutsche Bank unit filed its lawsuit in 2009 arguing that loans that were pooled into mortgage bonds did not meet the underwriting standards that had been promised by WaMu, causing investors to lose billions of dollars.
A Senate committee report this year said WaMu's mortgage securitization was polluting the financial system with bad home loans and partly to blame for the 2008 financial crisis.
The FDIC argued it should be dismissed from the lawsuit and Deutsche Bank should bring its claims against JPMorgan, which assumed WaMu's liabilities as well as assets.
JPMorgan has denied it assumed any WaMu liabilities.
Judge Rosemary Collyer of the U.S. District Court denied the government agency's request last week. She said it would be improvident and premature to dismiss the FDIC from the lawsuit after refusing a similar request by JPMorgan.
A spokesman for the FDIC did not immediately respond to a request for comment.
The case is Deutsche Bank National Trust Co v Federal Deposit Insurance Corp et al; U.S. District Court for the District of Columbia, No. 09-1656.
(Reporting by Tom Hals, editing by Matthew Lewis)