motion of appeal by aurelius capital

8/4/2019 Motion of Appeal by Aurelius Capital

http://slidepdf.com/reader/full/motion-of-appeal-by-aurelius-capital 1/328

IN THE UNITED STATES BANKRUPTCY COURT

FOR THE DISTRICT OF DELAWARE

In re:

WASHINGTON MUTUAL, INC., et al.,

Debtors.

Chapter 11

Case No. 08-12229 (MFW)

Jointly Administered

MOTION OF AURELIUS CAPITAL MANAGEMENT, LP

FOR LEAVE TO APPEAL UNDER 28 U.S.C. § 158(a)

Dated: September 27, 2011

BLANK ROME LLP

Michael DeBaecke (DE No. 3186) Victoria Guilfoyle (DE No. 5183) 1201 Market Street, Suite 800Wilmington, Delaware 19801Telephone: (302) 425-6400Facsimile: (302) 425-6464

KRAMER LEVIN NAFTALIS &

FRANKEL LLP

Kenneth H. EcksteinAlan R. FriedmanJeffrey S. TrachtmanDaniel M. Eggermann1177 Avenue of AmericasNew York, New York 10036Telephone: (212) 715-9100

Facsimile: (212) 715-8000

Attorneys for Aurelius Capital Management, LP and certain of its managed entities



i

TABLE OF CONTENTS

PAGE

TABLE OF AUTHORITIES ......................................................................................................... iii

PRELIMINARY STATEMENT .....................................................................................................1

STATEMENT OF PERTINENT FACTS .......................................................................................9

A. General Background ............................................................................................................9

B. The Global Settlement and First Confirmation Hearing ....................................................10

C. The Equity Committee Investigation .................................................................................10

D. The Second Confirmation Hearing and Cybergenics Standing Motion ............................11

E. The Standing Order and Confirmation Order ....................................................................14

ARGUMENT .................................................................................................................................17

I. LEAVE TO APPEAL THE STANDING ORDER SHOULD BE GRANTED,IF NECESSARY, TO PREVENT A WASTEFUL AND DESTRUCTIVEQUAGMIRE AND PUT THESE CASES BACK ON TRACK TOWARDSRESOLUTION ..................................................................................................................17

A. The Appeal Presents Controlling Questions of Law on Which There areSubstantial Grounds for a Difference of Opinion ..................................................20

1. The Finding that Aurelius Helped Rather Than Harmed the EstatesBars Any Claim for Equitable Disallowance .............................................21

2. The Bankruptcy Court Erred by Granting Standing to PursueInsider Trading Claims that the Debtors Themselves Would Lack Standing to Pursue .....................................................................................23

3. The Bankruptcy Court Erred in Sustaining a Claim for EquitableDisallowance Because Such a Remedy Is Not Recognized Underthe Bankruptcy Code..................................................................................24

4. The Bankruptcy Court Distorted and Misapplied the LawGoverning Each Element of an Insider Trading Claim .............................27

a) The Bankruptcy Court ignored settled law in holding thatAurelius could be found to be an “insider” of the Debtorssubject to potential insider trading liability under the“classical theory” ...........................................................................27



TABLE OF CONTENTS

PAGE

ii

b) The Bankruptcy Court ignored the strict requirement thatan insider trading claim include allegations of facts giving

rise to a compelling inference of scienter ......................................31

c) The Bankruptcy Court changed the law of materiality tocreate a new per-se no-trading rule that accorded with itspolicy preferences ..........................................................................36

5. The Bankruptcy Court Failed to Determine whether the Debtorswere in Fact Reasonable in Refusing to Pursue the Insider TradingClaims ........................................................................................................38

B. Immediate Appeal of the Standing Order Would Materially Advance the

Termination of the Litigation and Conserve Resources ........................................41

II. LEAVE TO APPEAL THE CONFIRMATION ORDER SHOULD BEGRANTED, IF NECESSARY, TO ENSURE THAT UNSECUREDCREDITORS RECEIVE THEIR CONTRACTUAL ENTITLEMENTSUNDER ANY PLAN OF REORGANIZATION ..............................................................42



TABLE OF AUTHORITIES

PAGE

iii

CASES

Adelphia Commc’ns Corp. v. Bank of Am., N.A. (In re Adelphia Commc’ns Corp.) ,365 B.R. 24 (Bankr. S.D.N.Y. 2007) .......................................................................................26

In re Amatex Corp.,755 F.2d 1034 (3d Cir. 1985)...............................................................................................1, 17

American Cigar Co. v. MNC Commercial Corp. (In re M. Paolella & Sons, Inc.), Adv.Pro. No. 87-1007F, 1991 Bankr. LEXIS 1181 (Bankr. E.D. Pa. Apr. 15, 1991) ....................24

In re Armstrong World Indus., Inc.,

432 F.3d 507 (3d Cir. 2005).....................................................................................................42

Baker v. MBNA Corp.,No. 05-272, 2007 WL 2009673 (D. Del. July 6, 2007) ...........................................................34

Basic, Inc. v. Levinson,485 U.S. 224 (1988) .................................................................................................................36

Bateman Eichler, Hill Richards, Inc. v. Berner ,472 U.S. 299 (1985) .................................................................................................................24

In re Beck ,

128 B.R. 571 (Bankr. E.D. Okla. 1991) ...................................................................................43

Benjamin v. Diamond (In re Mobile Steel Co.),563 F.2d 692 (5th Cir. 1977) ...................................................................................................24

In re BH&P, Inc.,949 F.2d 1300 (3d Cir. 1991)...................................................................................................18

Blue Chip Stamps v. Manor Drug Stores,421 U.S. 723 (1975) .................................................................................................................23

In re Burlington Coat Factory Sec. Litig.,114 F.3d 1410 (3d Cir. 1997)...................................................................................................34

Caplin v. Marine Midland Grace Trust Co. of N.Y.,406 U.S. 416 (1972) .................................................................................................................21

Cheney v. United States Dist. Ct. for the Dist. of Columbia,542 U.S. 367 (2004) .................................................................................................................41




PAGE

iv

Citicorp Venture Capital, Ltd. v. Comm. of Creditors Holding Unsecured Claims,160 F.3d 982 (3d Cir. 1998)...............................................................................................21, 25

Cohen v. KB Mezzanine Fund II, LP (In re Submicron Sys. Corp.) ,432 F.3d 448 (3d Cir. 2006).....................................................................................................22

In re Combustion Eng’g, Inc.,391 F.3d 190 (3d Cir. 2004)...............................................................................................19, 25

In re Coram Healthcare Corp.,315 B.R. 321 (Bankr. D. Del. 2004) ........................................................................................43

Dirks v. S.E.C.,

463 U.S. 646 (1983) ...........................................................................................................27, 29

Dixon v. Am. Cmty. Bank & Trust (In re Gluth Bros. Constr.),424 B.R. 379 (Bankr. N.D. Ill. 2009) ......................................................................................28

In re Drexel Burnham Lambert Grp.,123 B.R. 702 (Bankr. S.D.N.Y. 1991) .....................................................................................28

Dura Pharm., Inc. v. Broudo,544 U.S. 336 (2005) .................................................................................................................38

E.F. Hutton & Co. v. Hadley,

901 F.2d 979 (11th Cir. 1990) .................................................................................................21

In re F/S Airlease II Inc. v. Simon,844 F.2d 99 (3d Cir. 1988).................................................................................................17, 18

First Am. Bank of N.Y. v. Sw. Gloves & Safety Equip., Inc.,64 B.R. 963 (D. Del. 1986) ......................................................................................................19

First Fid. Bank, N.A. v. Hooker Invs., Inc. (In re Hooker Invs., Inc.),937 F.2d 833 (2d Cir. 1991).....................................................................................................41

FSLIC v. Moneymaker (In re A&L Props.),96 B.R. 287 (C.D. Cal. 1988) ..................................................................................................42

G-I Holdings, Inc. v. Those Parties Listed on Exhibit A (In re G-I Holdings, Inc.) ,313 B.R. 612 (Bankr. D.N.J. 2004) .........................................................................................20

Hirsch v. Arthur Andersen & Co.,72 F.3d 1085 (2d Cir. 1995).....................................................................................................21




PAGE

v

Infinity Investors Ltd. v. Kingsborough (In re Yes! Entm’t Corp.),316 B.R. 141 (D. Del. 2004) ....................................................................................................19

Interface Group-Nevada, Inc. v. Trans World Airlines, Inc.

(In re Trans World Airlines, Inc.),145 F.3d 124 (3d Cir. 1998).....................................................................................................20

Kalnit v. Eichler ,264 F.3d 131 (2d Cir. 2001).....................................................................................................33

Kane v. Johns-Manville Corp.,843 F.2d 636 (2d Cir. 1988).....................................................................................................19

L.L. Capital Partners, L.P. v. Rockefeller Ctr. Props., Inc. ,939 F. Supp. 294 (S.D.N.Y. 1996)...........................................................................................33

LFD Operating, Inc. v. Ames Dep’t Stores, Inc. (In re Ames Dep’t Stores, Inc.) ,274 B.R. 600 (Bankr. S.D.N.Y. 2002) .....................................................................................28

Licensing by Paolo, Inc. v. Sinatra (In re Gucci), 126 F.3d 380 (2d Cir. 1997).....................................................................................................19

Manus Corp. v. NRG Energy, Inc. (In re O’Brien Envtl. Energy, Inc.),188 F.3d 116 (3d Cir. 1999).....................................................................................................20

In re Market Square Inn, Inc.,978 F.2d 116 (3d Cir. 1992).....................................................................................................17

In re Marvel Entm’t Group, Inc.,140 F.3d 463 (3d Cir. 1998)...............................................................................................17, 18

McLean v. Alexander ,599 F.2d 1190 (3d Cir. 1979)...................................................................................................33

In re Mid-American Waste Sys., Inc.,284 B.R. 53 (Bankr. D. Del. 2002) (Walsh, J.) ........................................................................24

Nat’l Cable Television Coop., Inc. v. Broadstripe, LLC (In re Broadstripe, LLC) ,No. 09-39, 2009 U.S. Dist. LEXIS 25690 (D. Del. Mar. 25, 2009) ............................19, 20, 41

Norwest Bank Worthington v. Ahlers,485 U.S. 197 (1988) .................................................................................................................25

Official Comm. of Unsecured Creditors of Cybergenics Corp. v. Chinery,330 F.3d 548 (3d Cir. 2003)............................................................................................. passim




PAGE

vi

Official Comm. of Unsecured Creditors of Sunbeam Corp. v. Morgan Stanley & Co.

(In re Sunbeam Corp.),

284 B.R. 355 (Bankr. S.D.N.Y. 2002) .....................................................................................23

Official Comm. of Unsecured Creditors v. Dow Corning Corp.

(In re Dow Corning Corp.),456 F.3d 668 (6th Cir. 2006) ...................................................................................................42

Official Comm. of Unsecured Creditors v. Foss (In re Felt Mfg. Co.),No. 06-1171, 2007 Bankr. LEXIS 2569 (Bankr. D.N.H. July 27, 2007) ................................21

Official Comm. of Unsecured Creditors v. Halifax Fund L.P.

(In re AppliedTheory Corp.),

493 F.3d 82 (2d Cir. 2007).......................................................................................................21

Official Comm. of Unsecured Creditors v. R.F. Lafferty & Co.,267 F.3d 340 (3d Cir. 2001).....................................................................................................24

Official Unsecured Creditors Comm. of Broadstripe, LLC v. Highland Capital Mgmt., LP

(In re Broadstripe, LLC),444 B.R. 51 (Bankr. D. Del. 2010) ..........................................................................................30

OHC Liquidation Trust v. Credit Suisse (In re Oakwood Homes Corp.),356 F. App’x 622 (3d Cir. 2009) .............................................................................................24

Ruskin v. Griffiths,269 F.2d 827 (2d Cir. 1959).....................................................................................................42

S.E.C. v. Cavanagh,445 F.3d 105 (2d Cir. 2006).....................................................................................................38

In re Schoenberg,156 B.R. 963 (Bankr. W.D. Tex. 1993) ...................................................................................43

Schubert v. Lucent Techs. Inc. (In re Winstar Commc’ns, Inc.),554 F.3d 382 (3d Cir. 2009).....................................................................................................30

SG Cowen Sec. Corp. v. U.S. Dist. Court for the N. Dist. of Cal.,189 F.3d 909 (9th Cir. 1999) ...................................................................................................36

In re Smith,Case No. 03-10666, 2008 Bankr. LEXIS 7 (Bankr. W.D. Ky. Jan. 7, 2008) ..........................43

Se. Sprinkler Co. v. Meyertech Corp. (In re Meyertech Corp.),831 F.2d 410 (3d Cir. 1987)...............................................................................................17, 18




PAGE

vii

Stanziale v. Sun Nat’l Bank (In re Dwek),No. 09-5046 2010 U.S. Dist. LEXIS 3203 (D.N.J. Jan. 15, 2010) ....................................20, 41

In re Suprema Specialties, Inc. Sec. Lit.,438 F.3d 256 (3d Cir. 2006).....................................................................................................34

Tellabs, Inc. v. Makor Issues & Rights, Ltd.,551 U.S. 308 (2007) ...........................................................................................................31, 34

Travelers Cas. & Sur. Co. of Am. v. PG&E ,549 U.S. 443 (2007) .................................................................................................................25

United States v. Brunson,

416 F. App’x 212 (3d Cir. 2011) .............................................................................................41

United States v. O’Hagan,521 U.S. 642 (1997) .................................................................................................................27

Unsecured Creditors Comm. of Debtor STN Enters. v. Noyes (In re STN Enters.) ,779 F.2d 901 (2d Cir. 1985).....................................................................................................20

Viking Assocs., L.L.C. v. Drewes (In re Olson),120 F.3d 98 (8th Cir. 1997) .....................................................................................................22

Walton v. Morgan Stanley & Co.,

623 F.2d 796 (2d Cir. 1980).....................................................................................................28

In re Wash. Mut., Inc.,442 B.R. 314 (Bankr. D. Del. 2011) ............................................................................10, 31, 43

Wilson v. Comtech Telecomm. Corp.,648 F.2d 88 (2d Cir. 1981).......................................................................................................23

Winer Family Trust v. Queen,503 F.3d 319 (3d Cir. 2007).....................................................................................................31

Zumpano v. Juniper Networks, Inc. (In re Juniper Networks, Inc.),158 F. App’x 899 (9th Cir. 2005) ............................................................................................34

STATUTES & RULES

11 U.S.C. § 502(b) .........................................................................................................................25

11 U.S.C. § 510 ..................................................................................................................14, 22, 25




PAGE

viii

11 U.S.C. § 1126 ............................................................................................................................29

11 U.S.C. § 1129 ............................................................................................................................29

28 U.S.C. § 158 ...................................................................................................................... passim

28 U.S.C. § 1292 ......................................................................................................................19, 41

Fed. R. Bankr. P. 8003 .....................................................................................................................1

OTHER AUTHORITIES

Joint Explanatory Statement of the Committee of Conference, H.R. Rep. No. 104-369(1995) (Conf. Rep.), reprinted in 1995 U.S.C.C.A.N. 730 ......................................................35



Aurelius Capital Management, LP, on behalf of certain of its managed entities

(collectively, “Aurelius”) that are creditors of the above-captioned debtors and debtors in

possession (collectively, the “Debtors”), hereby submits this motion (the “Motion”) pursuant to

28 U.S.C. § 158(a) and Rule 8003 of the Federal Rules of Bankruptcy Procedure (the

“Bankruptcy Rules”) for an order granting leave to appeal the order (the “Order”) and related

opinion (the “Opinion”) (copies of which are attached hereto as Exhibits A and B, respectively)

entered by the United States Bankruptcy Court for the District of Delaware (the “Bankruptcy

Court”) on September 13, 2011 denying confirmation of the Debtors’ modified sixth amended

plan of reorganization (the “Modified Sixth Amended Plan” or the “Plan”) and authorizing the

Official Committee of Equity Security Holders of Washington Mutual, Inc. (the “Equity

Committee”) to commence and prosecute an action against Aurelius and certain other creditors

on behalf of the Debtors’ estates, and in support thereof respectfully states as follows:1

PRELIMINARY STATEMENT

1. Aurelius, one of the largest creditors in these bankruptcy cases, appeals from both

the Confirmation Order and the Standing Order. The Standing Order radically distorts securities

and bankruptcy law and inflicts a gross injustice. It authorizes the Equity Committee, in the

name of the Debtors, to bring unprecedented causes of action for alleged insider trading against

Aurelius and the other Settlement Noteholders where the trial court found that the estates

themselves suffered no harm, where the estates lack standing to bring these claims, and where

1 While entered as a single order, the Order actually is comprised of two separate orders that resolve two separateand distinct contested matters: (i) an order granting in part a motion filed by the Equity Committee for derivativestanding (the “Standing Motion”) to pursue certain causes of action on behalf of the Debtors’ estates (the “StandingOrder”) and (ii) an order denying confirmation of the Debtors’ Plan (the “Confirmation Order”). As set forth belowat ¶¶ 28-31 and ¶ 79, Aurelius asserts that both the Standing Order and the Confirmation Order are final ordersunder the Third Circuit’s “pragmatic” approach to finality in bankruptcy proceedings. See In re Amatex Corp., 755F.2d 1034, 1039 (3d Cir. 1985). Aurelius nevertheless submits this Motion out of an abundance of caution.



2

the basic elements of these claims are missing.2 The Equity Committee represents the general

interests of the Debtors’ stockholders, who are greatly out of the money, rather than any

individual parties that may have traded in the Debtors’ securities with Aurelius. The Standing

Order inexplicably overrides the judgment of the Debtors and the Official Committee of

Unsecured Creditors (the “Creditors’ Committee”) that these causes of action are meritless and

uneconomic to pursue and subjects all creditors (including Aurelius) to yet more delay and

expense in these three-year-old bankruptcy cases. Moreover, the Standing Order wreaks havoc

with well-established securities law precedent and practice and will, until overturned, invite a

substantial expansion of securities litigation (whether or not bankruptcy-related); turn bankruptcy

courts into common forums for bringing securities strike suits and (thanks to liberal discovery

procedures) conducting pre-suit fishing expeditions, and severely inhibit the negotiation by

major stakeholders of consensual reorganization plans in virtually every major corporate

bankruptcy.

2. Aurelius also appeals from the final ruling embodied in the Confirmation Order

mandating that postpetition interest in any plan must be paid at the federal judgment rate rather

than the contract rates bargained for by the parties – a ruling that disregards governing law,

blocked confirmation of the Debtors’ Plan, and would deprive creditors in these cases of more

than $810 million in postpetition interest claims by the time any new plan can be confirmed.

3. Aurelius submits that both of these aspects of the Order are final and appealable

as of right, but in the event the Court disagrees, discretionary appellate review under 28 U.S.C.

§ 158(a)(3) is appropriate here because the appeal presents several disputed legal issues as to

2 In addition to Aurelius, the “Settlement Noteholders” are Centerbridge Partners, L.P. (“Centerbridge”), OwlCreek Asset Management, L.P. (“Owl Creek”), and Appaloosa Management L.P. (“Appaloosa”), each of which hasappeared in these cases on behalf of its own managed entities that also are substantial creditors of the estates.



3

which there is at least fair ground for disagreement and hearing the appeal would materially

advance resolution of the underlying disputes. Aurelius respectfully requests expedited

consideration of this Appeal in light of the severe burden and harm that otherwise will be

inflicted by the decision below on the estates, the parties, and the bankruptcy process generally.

4. In the September 13 Opinion, the Bankruptcy Court explained its reasons for

granting the Equity Committee’s motion under Official Comm. of Unsecured Creditors of

Cybergenics Corp. v. Chinery, 330 F.3d 548 (3d Cir. 2003), for leave to file an adversary

complaint (the “Complaint”) on behalf of the estates. The Bankruptcy Court held that the

Complaint stated a “colorable” claim that Aurelius and others violated the federal securities laws

by trading while allegedly in possession of material nonpublic information obtained from the

Debtors, and authorized the Equity Committee to seek equitable disallowance of the purported

defendants’ multi-hundred-million dollar holdings in the Debtors’ debt securities. The Opinion

has already set off shock-waves because (among other things) it premises potential insider

trading liability on facts mirroring settlement negotiation procedures relied on and used in

virtually all large bankruptcy cases:

Aurelius participated in settlement negotiations only during two brief periods – one

nearly a year and the other more than three months before an agreement in principle

was announced. On both occasions, Aurelius (and other creditors) entered into

customary confidentiality agreements with the Debtors under which they were

temporarily restricted from trading in the Debtors’ securities while privy to

confidential information.

These agreements required the Debtors, at the conclusion of each confidentiality

period, to publicly disclose any material nonpublic information shared with Aurelius,



4

for the express purpose of allowing Aurelius to resume unrestricted trading.

Accordingly, at the end of each of these two periods, the Debtors made material

public disclosures regarding the multi-billion dollar tax refunds that the Debtors

expected to receive, and the Debtors certified to Aurelius that it was free to resume

trading. The Debtors correctly determined at the time, with the advice of experienced

securities law counsel, that the stale details of unsuccessful settlement negotiations

were not material and did not need to be disclosed.

It was undisputed that Aurelius did not engage in any improper trading during the

confidentiality periods.

This approach was modeled on procedures that have been widely accepted and successfully

employed for decades to facilitate consensual resolutions in large bankruptcies, as well as in

other settings. Until now, it would have been unthinkable that parties carefully following such

procedures in good faith could be exposed to a lawsuit for insider trading. But the Opinion

rewrote the rules for these cases retroactively – invoking a series of new legal standards that

would radically remake federal securities and bankruptcy law. The court essentially declared

that (1) any creditor privy to confidential settlement negotiations at any time during a bankruptcy

case must remain permanently restricted or maintain an ethical wall for the duration of the case;

(2) any creditor receiving confidential information by participating in consensual plan

negotiations may thereby be treated as a “temporary insider” with fiduciary duties to the estate;

and (3) any creditor that holds, or is part of an ad hoc creditor group holding, more than one third

of a class of securities (referred to in the Opinion as a “blocking position”) may without more be

deemed a fiduciary for all creditors in the class and a “non-statutory insider” of the estates.



5

5. The Bankruptcy Court used the questionable doctrine of equitable disallowance to

transform any insider trading violation (and presumably any violation of any law by any creditor)

into a bankruptcy matter, despite well-established mechanisms for such violations to be rectified

by the Securities and Exchange Commission (the “SEC”) or the injured parties. The Opinion

effectively declares open season for creative and aggressive bankruptcy litigation by allowing a

deeply out-of-the-money constituency to bring a derivative suit found meritless by both the

Debtors and the Creditors’ Committee, despite the court expressly finding that the putative

defendants had not harmed the estates, but rather actually helped the Debtors increase the size of

the estates to the benefit of all stakeholders. Opinion at 71, 73.

6. This remarkable new paradigm, if sustained, would radically change modern

bankruptcy practice – turning the members of every ad hoc group in these and other cases into

fiduciaries with potentially wide-ranging duties and legal exposure, and making it prohibitively

burdensome for major economic stakeholders to participate in plan negotiations. This would in

turn not just chill but freeze out from plan negotiations the very institutional creditors whose

votes will be needed to accept a plan, leaving debtors to propose plans that lack creditor support

and may be doomed to rejection, and inviting reorganizations to be resolved through litigation

rather than negotiation. This effect is already being felt, as law firm publications have been

issued warning clients of the new open-ended duties they may be assuming simply by stepping

forward constructively to participate in arm’s-length negotiations.3 The Bankruptcy Court’s

suggestion that multi-year trading restrictions would not be burdensome since official creditors’

committees are already subject to such restrictions (Opinion at 137-38) in fact proves the

3 For example, attached hereto as Exhibits G, H, I and J are client alerts released in the past two weeks by DavisPolk & Wardwell LLP, Bracewell & Giuliani LLP, Ropes & Gray LLP and Willkie Farr & Gallagher LLP,respectively.



6

opposite: it is precisely because of such prolonged restrictions that major bondholders in most

cases do not sit on official creditors committees, as is so in these cases. That is why the practice

evolved of a non-fiduciary ad hoc creditor group; but the Opinion, if not reversed, may destroy

this useful and important mechanism for fostering consensual resolution of complex

reorganizations.

7. Aurelius will demonstrate upon full briefing that the Standing Order represents an

abuse of discretion as a matter of law because it is based on multiple legal errors, any one of

which would warrant discretionary appellate review under 28 U.S.C. § 158(a)(3):

The Bankruptcy Court’s finding that Aurelius (and the other Settlement Noteholders)did not harm but actually helped the estates extinguishes any potential claim forequitable disallowance. Regardless of the availability of any particular remedy, theDebtors (and the Equity Committee standing in their shoes) have standing only toseek redress for harm to the estates. None has been articulated here.

Similarly, the Debtors (and therefore the Equity Committee) have no standing to suefor alleged insider trading in their own securities. That claim (to the extent oneexists) belongs to the parties with whom Aurelius traded, who would not benefit fromthe proposed action. The Bankruptcy Court’s suggestion that the Debtors would havea defense outside of bankruptcy to the payment of their debt obligations based oninsider trading by the claimant with third parties is a radical concept with no legalsupport.

In any event, the entire adversary proceeding is barred because the supposed remedyof “equitable disallowance” is unavailable under modern bankruptcy jurisprudence.While the Third Circuit has reserved judgment on the existence of the remedy, it is atminimum a highly contested, dispositive threshold issue warranting immediatereview. Moreover, even if the remedy were theoretically available, the BankruptcyCourt itself recognized that it should be invoked only “in those extreme instances –perhaps very rare – where it is necessary as a remedy.” Opinion at 115. Leavingaside the absence of any harm to the estates, the highly developed mechanisms forrectifying insider trading violations belie any suggestion that equitable disallowancecould be “necessary as a remedy” here.

8. In addition, the Opinion contains a series of fundamental errors under federal

securities law:



7

The Bankruptcy Court ignored settled law in holding that Aurelius could be found tobe a “temporary insider” subject to liability under the “classical theory” of insidertrading merely because it received confidential information pursuant to an arm’s-length confidentiality agreement and advanced its own economic interests innegotiations that had the shared goal of reaching a settlement among economically

adverse parties.

The Bankruptcy Court similarly erred in holding that Aurelius could be found both tohave fiduciary duties to other creditors and to be a “non-statutory insider” of theDebtors merely because it joined an informal creditor group that collectively mayhave held more than one third of the securities within a particular class of securities.

The Bankruptcy Court disregarded the strict standard mandated by Congress forpleading the scienter element of an insider trading claim, which requiresparticularized facts giving rise to a cogent and compelling inference – at least aspowerful as any non-culpable inference – that a defendant knew or recklessly ignoredthat it was trading improperly while in possession of material nonpublic information.The court eviscerated that requirement by giving no weight to the Debtors’materiality determinations, the good faith of which was unchallenged; by ignoringundisputed testimony regarding Aurelius’s own good-faith determinations of materiality; and by sustaining the pleading even though no inference of knowledge(much less a powerful or cogent one) could be drawn from the allegations regardingAurelius’s pattern of trades.

The Bankruptcy Court further unduly expanded the concept of materiality, essentiallycreating a new per se rule that any creditor participating in confidential settlementnegotiations must permanently halt all trading in the debtors’ securities – or establishan ethical wall – for the duration of the case regardless of the state of the negotiationsat the conclusion of the confidential period. Like the court’s “insider” holdings, thisnew, retroactively imposed legal rule has no precedent and, if not promptly reversed,will cast a pall over settlement negotiations in virtually every major corporatebankruptcy.

9. Finally, the Bankruptcy Court further erred as a matter of law by granting

standing without making the necessary finding that the Debtors unreasonably refused to pursue

the alleged insider trading claims – a judgment endorsed by the Creditors’ Committee. Although

it acknowledged that its decision could precipitate a “litigation morass” (Opinion at 138), the

Bankruptcy Court never actually weighed the benefits and burdens facing the estates: the remote

chance of success and relatively modest upside (potential disgorgement of the limited profits that

could conceivably be traced to use of the alleged material nonpublic information) versus the



8

crushing expense and extended delay that would be associated with litigating the claims to

conclusion. All creditors (including Aurelius) have a strong interest in avoiding the harm to the

estates of incurring many tens of millions of dollars in legal fees to litigate these disputes to

conclusion while further complicating the already troubled effort to promulgate a confirmable

plan of reorganization. This costly quagmire (and further financial and reputational harm to

innocent parties resulting from the mere pendency of these grave but reckless accusations) can be

avoided only by entertaining this appeal and reversing the decision after full briefing.

10. Immediate and expedited review of the Opinion is necessary to halt the adverse

impact this decision will have on the bankruptcy process, and also to avoid significant harm in

these cases to the estates and their constituents. Over the last year, two plans supported by the

overwhelming majority of creditors, and embodying a settlement with JP Morgan and the FDIC

twice found to be reasonable and proposed in good faith, have both failed. During this period,

because of accrued interest that must be turned over to senior classes at the contract rate and

mounting administrative expenses, the Debtors’ most junior noteholder class (the “PIERS”), of

which Aurelius is a significant holder, has gone from a projected near full recovery after

subordination on account of their $789 million in claims for prepetition principal and accreted

interest to a recovery approaching zero under any eventual plan. Upon release of the Opinion,

the market price of the PIERS dropped from $14.50 per share to $4.08 per share. The Order

promises only to create more delay, by directing the parties to mediate both outstanding Plan

issues and the merits of the insider trading allegations, even after a week-long trial and the

Bankruptcy Court’s ruling. This mediation has little chance of success, because the equity

holders are massively out of the money and could not benefit from any realistic settlement (or,

for that matter, from the proposed litigation). Even assuming (contrary to all experience to date)



9

that the Debtors could exit Chapter 11 by the end of February 2012, the common equity would

be out of the money by more than $7.6 billion, and the preferred equity by more than $165

million. For each month of delay beyond February 2012, these deficits would grow by more

than $20 million on account of postpetition interest and administrative expenses. And if the

Bankruptcy Court’s erroneous ruling on postpetition interest is reversed, the above deficits

would increase by more than $810 million (so the preferred holders would be nearly $1 billion

out of the money) and would grow by more than $42 million per month of delay beyond

February 2012. Finally, complications generated by this pending dispute may well hamper a

third attempt to confirm a plan of reorganization. Immediate appellate review to correct the

errors below provides the surest path to a speedy, just, and comprehensive resolution of these

cases.

STATEMENT OF PERTINENT FACTS

A. General Background

11. Founded in 2006, Aurelius Capital Management, LP is a limited partnership that

acts as an investment manager for three separate and independent investment funds (collectively,

the “Aurelius Funds”).4 Throughout these cases, the Aurelius Funds collectively have, along

with the other Settlement Noteholders, been among the largest creditors of the Debtors’ estates,

holding claims throughout the Debtors’ multi-tiered debt structure. As a result, they have had a

strong interest in maximizing the value of the Debtors’ estates for all stakeholders while

minimizing costs and expenses.

12. In the wake of the seizure and sale of certain subsidiaries of Debtor Washington

Mutual Inc. (“WMI”) by the Federal Deposit Insurance Corporation (the “FDIC”) and the

4 Each Aurelius Fund has its own trading history, and one did not even commence operations until February2010.



10

commencement of these bankruptcy cases, myriad disputes involving billions of dollars arose

among the Debtors, JPMorgan Chase (“JPMC”), which purchased certain assets and assumed

certain liabilities of WMI, and the FDIC (both in its corporate capacity and as receiver for

Washington Mutual Bank (“WMB”)). Opinion at 2. For example, the parties disputed

ownership of such assets as (i) approximately $4 billion that the Debtors had on deposit in

accounts held by JPMC and (ii) approximately $5.5 to $5.8 billion in tax refunds.

B. The Global Settlement and First Confirmation Hearing

13. On March 12, 2010, the Debtors announced the material terms of a global

settlement resolving the various claims among the Debtors, JPMC, and the FDIC, eventually

memorialized, following further negotiations, in an agreement (as subsequently modified, the

“Global Settlement Agreement” or “GSA”) filed with the Bankruptcy Court on May 21, 2010.

Opinion at 3. The settlement was embodied in a plan of reorganization projected to pay

unsecured creditors in full but provide no recovery for the Debtors’ equity holders. The

Bankruptcy Court held an evidentiary hearing on confirmation of the Debtors’ Sixth Amended

Plan in early December 2010, ruling a month later that the GSA was fair and provided a

“reasonable return in light of the possible results of litigation,” even though it provided no

recovery for equity. In re Wash. Mut., Inc., 442 B.R. 314, 345 (Bankr. D. Del. 2011). The

Bankruptcy Court nevertheless concluded that the Sixth Amended Plan could not be confirmed

because of several legal deficiencies unrelated to the proposed litigation. Id . at 322.

C. The Equity Committee Investigation

14. Following denial of confirmation, and seeking leverage to derail a new plan, the

Equity Committee sought – nearly two and one-half years into the case – authority to conduct

discovery of the Settlement Noteholders under Bankruptcy Rule 2004 with respect to accusations



11

about their trading activity that had been raised (with no admissible evidence) by a pro se

security holder in connection with one of his objections to confirmation at the first confirmation

hearing – an objection that the Bankruptcy Court denied for complete lack of admissible

evidence. Washington Mut., 442 B.R. at 349. The Equity Committee neither joined in that

objection nor sought discovery regarding those accusations at that time. The Bankruptcy Court

nonetheless granted the Equity Committee’s discovery request, and the Settlement Noteholders

produced tens of thousands of pages of documents and a representative of each sat for a full-day

deposition.

D.

The Second Confirmation Hearing and Cybergenics Standing Motion

15. While the Equity Committee was conducting its investigation, the Debtors filed

and solicited votes on its Modified Sixth Amended Plan, which attempted to correct the

deficiencies identified by the Bankruptcy Court in the prior plan. Shifting their tactics, the

Equity Committee again objected to confirmation, this time contending that the Plan was the

product of a flawed process dominated by the Settlement Noteholders and favoring their interests

over those of other constituents – in particular, the Debtors’ equity holders – and that the Debtors

had intentionally facilitated improper trading by the Settlement Noteholders. The Equity

Committee then filed the Standing Motion seeking authority to commence and prosecute claims

for equitable subordination and equitable disallowance on behalf of the Debtors’ estates based on

the same claims of domination and insider trading under the federal securities laws.5

The Equity

Committee specifically requested the Bankruptcy Court to assess the colorability of its claims

based on the evidence to be presented at the confirmation hearing on the Modified Sixth

Amended Plan (the “Second Confirmation Hearing”). Ex. C at ¶ 13.

5 A copy of the Standing Motion and Complaint are attached hereto as Exhibit C.



12

16. The Second Confirmation Hearing was held over seven days in July 2011.6

During the hearing, the Bankruptcy Court heard extensive, consistent, unrefuted testimony from

each of the Settlement Noteholders, confirmed by the testimony of the Debtors’ chief

restructuring officer, William Kosturos, comprehensively refuting the unsupported allegations of

improper domination and insider trading.

17. The evidence overwhelmingly demonstrated that Aurelius and the other

Settlement Noteholders in no way dominated or controlled the Debtors during the course of these

cases, but rather were relegated to discrete and intermittent roles in settlement negotiations and

the plan process. Ex. D at 48, 78, 116-17; Ex. F at 137. Aurelius was included in confidential

settlement negotiations only twice, for limited periods in these nearly three year old cases (the

“Confidentiality Periods”), with each period governed by a formal written agreement (the

“Confidentiality Agreements”). Opinion at 66. The first Confidentiality Period lasted for only

60 days, from March 9 through May 8, 2009. Id . The second Confidentiality Period occurred

six months later and lasted for only 45 days, from November 16 through December 30, 2009. Id .

at 67. Outside of these two periods (and at times even during these two periods), Aurelius was

not included in the Debtors’ settlement negotiations with JPMC, the FDIC, and other parties.

The Debtors reached a first, tentative settlement in March 2010, some ten months after the first

Confidentiality Period, and three months after the second. Even that agreement required months

of additional negotiation and significant further modifications to result in a plan definite enough

to take to confirmation.

18. The evidence established that Aurelius received material nonpublic information

from the Debtors prior to the announcement of the March 2010 settlement only during the two

6 Relevant excerpts from the transcripts of the proceedings on July 18, 19, and 21 are attached hereto as ExhibitsD, E and F, respectively.



13

Confidentiality Periods and subject to the terms of the applicable Confidentiality Agreements.

The Confidentiality Agreements required Aurelius either to refrain from trading in the Debtors’

securities during the Confidentiality Period or to erect an ethical wall between the employee

receiving any material nonpublic information and all Aurelius employees trading in the Debtors’

securities. Opinion at 66. Aurelius chose to erect an ethical wall during the first period and to

shut down trading during the second period. Id . at 66-67. There has been no allegation, much

less evidence, that Aurelius breached either obligation. To ensure that Aurelius and other

creditors that signed similar agreements would be permitted to resume unrestricted trading in the

Debtors’ securities at the termination of each Confidentiality Period, both Confidentiality

Agreements required the Debtors to disclose “within the meaning of Rule 101 of Regulation

FD . . . a fair summary, as reasonably determined by the Debtors, of any Confidential

Information that constitutes material nonpublic information under U.S. federal securities law.”

19. During each Confidentiality Period, Aurelius and the other Settlement

Noteholders learned certain material nonpublic business information, including the estimated

ranges of the Debtors’ tax refunds. Ex. D at 65, 105. This information was publicly disclosed

through the Debtors’ monthly operating reports published at the end of each Confidentiality

Period. Id . at 79; Ex. F at 127-28. The Debtors determined, in consultation with their securities

law counsel, that the details of settlement negotiations, which ended each time with the parties

billions of dollars apart, were not material and therefore did not have to be disclosed. Ex. F. at

127-28, 153. The Debtors explicitly confirmed orally and in writing to the Settlement

Noteholders in May and December 2009 that their disclosures satisfied the Debtors’ obligations



14

under the Confidentiality Agreements and that the Settlement Noteholders were free to resume

unrestricted trading.7

E. The Standing Order and Confirmation Order

20. In its September 13, 2011 Opinion, the Bankruptcy Court recognized that the

basic facts regarding Aurelius’s conduct during the two confidentiality periods – as recited in the

Complaint and presented in court – were largely undisputed. However, the court disregarded the

clear legal consequences of these facts, distorting, misapplying, or simply ignoring the law

governing federal insider trading claims.

21. Significantly, the Bankruptcy Court rejected the Equity Committee’s allegations

that Aurelius and the other Settlement Noteholders dominated or controlled the Debtors, dictated

the course of settlement negotiations, or inflicted any harm on the estates:

Despite the allegations of insider trading by the SettlementNoteholders, the Court is unconvinced that their actions had anegative impact on the Plan or tainted the GSA.

Rather, the actions of the Settlement Noteholders appear to have

helped increase the Debtors’ estates. During the First

Confidentiality Period, the Settlement Noteholders, together withother creditors persuaded the Debtors to submit a term sheet toJPMC that was more “aggressive” than the one the Debtors hadinitially contemplated.

Opinion at 71 (emphasis added). The Bankruptcy Court went on to note that “[i]f the Settlement

Noteholders had improperly dominated the case . . . , the Modified Plan would have elevated the

treatment of the PIERS class (in which they hold the bulk of their claims); instead the PIERS are

receiving the treatment warranted by their subordinated status.” Id. at 73.

7 Other creditors beyond the Settlement Noteholders similarly relied upon this type of temporary restriction to

participate in many of the same settlement negotiations and later resume trading following termination of theconfidentiality periods – and indeed an even wider circle of creditors (including the large number of seniornoteholders represented by White & Case LLP) were aware that negotiations were occurring. Ex. D at 64-65, 79,81, 114; Ex. E at 137; Ex. F at 152-53.



15

22. The Bankruptcy Court further concluded that one of the two remedies sought in

the Complaint – equitable subordination pursuant to 11 U.S.C. § 510(c) – “is not a remedy

available to (or of much help in redressing any injury to) the shareholders” because the plain

language of the statute “only permits a creditor’s claim to be subordinated to another claim and

not to equity.” Id. at 111. However, the Bankruptcy Court upheld the Equity Committee’s

alternative proposed remedy – equitable disallowance (see id. at 115) – even though most cases

hold that it is not even available under the Bankruptcy Code and the few that recognize the

doctrine stress that it must be reserved for the most extreme misconduct.

23.

The Bankruptcy Court then held that the Equity Committee stated a colorable

claim for insider trading under the federal securities laws based on the Settlement Noteholders’

knowledge of unsuccessful settlement offers, upholding the pleading of materiality by

substituting its hindsight judgment for the Debtors’ and the parties’ own informed and good faith

contemporaneous assessments. Id. at 118-28. The court further held that Aurelius could be

regarded as an “insider” subject to insider trading liability under the “classical theory” based

solely on having received confidential information pursuant to an arm’s-length confidentiality

agreement with the Debtors in order to participate in negotiations aimed at reaching a consensual

resolution of the cases, and its membership in an ad hoc group with a “blocking position” in one

or more classes of the Debtors’ securities. Id. at 128-32. And the court held that the scienter

requirement of an insider trading claim was satisfied despite uncontroverted evidence of the

Settlement Noteholders’ good faith reliance on the Debtors’ own materiality determinations and

the inconclusive inferences to be drawn from their trading patterns. Id. at 132-34.8

8 In addition to liability under the “classical theory” of insider trading discussed above, the Bankruptcy Courtsustained an allegation that a single noteholder may have violated the “misappropriation” theory by trading afterreceiving a chart from counsel that included stale details of settlement negotiations from months earlier. Opinion at136. The Bankruptcy Court appears to have extended that holding to the other Settlement Noteholders based solely



16

24. Ultimately, the Bankruptcy Court left little doubt of its own policy preference to

tighten the restrictions on claims trading during bankruptcy cases by retroactively imposing on

all creditors participating, even fleetingly, in negotiations restrictions previously applied only to

members of official creditors committees:

[C]reditors who want to participate in settlement discussions inwhich they receive material nonpublic information about thedebtor must either restrict their trading or establish an ethical wallbetween traders and participants in the bankruptcy case. . . . TheCourt does not believe that a requirement to restrict trading orcreate an ethical wall in exchange for a seat at the negotiating tableplaces an undue burden on creditors who wish to receiveconfidential information and give their input.

Id. at 137-38 (emphasis added).

25. Finally, the Bankruptcy Court acknowledged that it was “required . . . to balance

the probability of success on the claim against the burden on the estate that would result from its

prosecution.” Id. at 138. However, the court inexplicably granted the Cybergenics Standing

Motion without even attempting to quantify any potential benefits for the estates, providing no

basis to question the reasonableness of the Debtors’ refusal to embroil the estates in what even

the court recognized would be “a litigation morass” that would threaten existing creditor

recoveries. Id. The Bankruptcy Court stayed the Equity Committee’s action pending mediation.

See Ex. A.

26. In addition, although it reaffirmed the fairness of the GSA, the Bankruptcy Court

again denied confirmation of the Plan, principally because it concluded that the Plan improperly

contemplated the payment of postpetition interest to unsecured creditors at the applicable

contract rate. The court held that the plain language of the Bankruptcy Code mandated interest

on the Equity Committee’s unspecified and unsubstantiated allegation – contradicted by all the evidence in therecord, including the testimony of every witness – that counsel may have shared material nonpublic informationabout negotiations with the Settlement Noteholders after the conclusion of the second Confidentiality Period. Id. at137.



17

at the federal judgment rate, despite recognizing and validating subordination agreements that

mandate turnover from subordinated to senior creditors of the Debtors at the contract rate.

Opinion at 81, 83.

ARGUMENT

I.

LEAVE TO APPEAL THE STANDING ORDER SHOULD BE GRANTED, IF

NECESSARY, TO PREVENT A WASTEFUL AND DESTRUCTIVE QUAGMIRE

AND PUT THESE CASES BACK ON TRACK TOWARDS RESOLUTION

27. Leave to appeal should be granted here, if necessary, to prevent the delay,

expense, and injustice of protracted litigation over facially invalid claims that are barred by

decades of settled governing law.

28. At the outset, Aurelius submits that the Standing Order is final and appealable as

of right under 28 U.S.C. § 158(a). Appellate courts take a more “pragmatic and less technical”

approach to finality in bankruptcy cases “[t]o avoid the waste of time and resources that might

result from reviewing discrete portions of the action only after a plan of reorganization is

approved.” In re Amatex Corp., 755 F.2d 1034, 1039 (3d Cir. 1985). This approach is informed

by such factors as the impact of the matter on the assets of the estate, the necessity for further

fact-finding on remand, the preclusive effect of a decision on the merits, and the interests of

judicial economy. See, e.g., Se. Sprinkler Co. v. Meyertech Corp. (In re Meyertech Corp.), 831

F.2d 410, 414 (3d Cir. 1987); In re F/S Airlease II Inc. v. Simon, 844 F.2d 99, 104 (3d Cir.

1988); In re Marvel Entm’t Group, Inc., 140 F.3d 463, 470 (3d Cir. 1998).

29. All these factors favor a finding of finality here. The Standing Order will most

certainly have an impact on the assets of the Debtors’ estates since, absent reversal, the parties

will plunge into what even the Bankruptcy Court has acknowledged would be a “litigation



18

morass” that will deplete the assets of the estates and dilute creditor recoveries. Opinion at 138;

see also below at ¶ 76. An order that will have the effect of increasing administrative expenses

or otherwise depleting estate assets is more likely to be treated as final. See In re Market Square

Inn, Inc., 978 F.2d 116, 120-21 (3d Cir. 1992) (order finding lease was not terminated was final

because of impact on debtor’s estate); In re BH&P, Inc., 949 F.2d 1300, 1307 (3d Cir. 1991)

(order removing trustee and counsel was final where court’s ruling had “the more remote but no

less real effect of increasing the estate’s administrative costs”); F/S Airlease, 844 F.2d at 104

(order authorizing estates’ retention of broker was final where broker’s fee would impact assets

available to creditors).

30. Moreover, immediate appellate review of the Standing Order will further the

interests of judicial economy and protect both the estates and the parties from irretrievable loss.

The Standing Order is premised upon legal errors that, if reversed, will end the Equity

Committee’s proposed litigation. This factor weighs heavily in favor of finality. See BH&P,

949 F.2d at 1307 (order final where “[r]esolution of the issues raised on appeal will eliminate the

need for further consideration of conflict of interest issues, freeing the bankruptcy court to

adjudicate the more substantive issues relating to the estates in question.”); F/S Airlease, 844

F.2d at 104 (order final where “[a] resolution of this discrete dispute at this time would further

the goal of judicial economy because it could obviate the need for further action by the

bankruptcy court.”); Meyertech, 931 F.2d at 414 (order final where “[a] decision now will . . .

preclude the necessity of further activity by the fact-finding tribunal, will obliterate the need for

more litigation and serves the ever-prevailing interest of judicial economy”).

31. Finally, immediate appellate review of the Standing Order is the only meaningful

way in which that order can be reviewed by an appellate court. Review of the Bankruptcy



19

Court’s legal errors after discovery and trial would simply be too late to protect the estates from

massive expense and delay. See Marvel, 140 F.3d at 470 (treating order as final and noting that

“[w]ere we not to take jurisdiction at this juncture, no meaningful review of the order . . . could

ever take place as a practical matter”).

32. If the Court determines that the Standing Order is not a final order, Aurelius

respectfully seeks leave to appeal, which the Court may grant in its discretion under 28 U.S.C.

§ 158(a)(3). Courts generally grant leave to appeal decisions of a bankruptcy court where the

criteria of 28 U.S.C. § 1292(b) are present – i.e., where (i) a controlling question of law is

involved; (ii) the question is one as to which there is a substantial ground for difference of

opinion; and (iii) an immediate appeal would materially advance the ultimate termination of the

litigation. See, e.g., Nat’l Cable Television Coop., Inc. v. Broadstripe, LLC (In re Broadstripe,

LLC), No. 09-39, 2009 U.S. Dist. LEXIS 25690, at *5 (D. Del. Mar. 25, 2009). Immediate

appeal from an interlocutory order is further appropriate to avoid “‘harm to a party pendente lite

from a possibly erroneous interlocutory order and the avoidance of possible wasted trial time and

litigation expense.’” First Am. Bank of N.Y. v. Sw. Gloves & Safety Equip., Inc., 64 B.R. 963,

967 (D. Del. 1986) (quoting Katz v. Carte Blanche Corp., 496 F.2d 747, 755 (3d Cir. 1974)); see

also Broadstripe, 2009 U.S. Dist LEXIS 25690, at *6.9

33. With respect to the merits, while the Bankruptcy Code contains no explicit

authority for a committee or other party-in-interest to prosecute a derivative suit on behalf of a

9 Moreover, there can be no doubt that Aurelius qualifies as a “person aggrieved” by the Order with standing toappeal it under In re Combustion Eng’g, Inc., 391 F.3d 190, 214 (3d Cir. 2004). A party is aggrieved by abankruptcy court order that “diminishes their property, increases their burdens, or impairs their rights.” Id. (internalquotation marks omitted). Here, Aurelius (along with all creditors) will suffer significant pecuniary harm if theestates are required to pay tens of millions of dollars in attorneys fees to fund the “litigation morass” predicted bythe Bankruptcy Court and if related delay causes further diminution in the value of its claims. See Licensing by

Paolo, Inc. v. Sinatra (In re Gucci), 126 F.3d 380, 388 (2d Cir. 1997) (creditors have standing to appeal orders thataffect assets available to pay claims); Kane v. Johns-Manville Corp., 843 F.2d 636, 642 (2d Cir. 1988) (same).



20

debtor’s estate, the Third Circuit has recognized a qualified right to derivative standing where

(i) the claim that the party is seeking to prosecute is “colorable” and (2) the debtor has

unjustifiably refused to prosecute it. See Official Comm. of Unsecured Creditors of Cybergenics

Corp. v. Chinery, 330 F.3d 548, 566-67 (3d Cir. 2003); Infinity Investors Ltd. v. Kingsborough

(In re Yes! Entm’t Corp.), 316 B.R. 141, 145 (D. Del. 2004); see also Unsecured Creditors

Comm. of Debtor STN Enters. v. Noyes (In re STN Enters.), 779 F.2d 901, 905 (2d Cir. 1985).

The party seeking standing (here, the Equity Committee) bears the burden of showing that it has

met these derivative standing requirements. G-I Holdings, Inc. v. Those Parties Listed on

Exhibit A (In re G-I Holdings, Inc.), 313 B.R. 612, 629 (Bankr. D.N.J. 2004).

34. The determination by a bankruptcy court to grant standing to pursue a derivative

cause of action on behalf of a debtor’s estate is an exercise of its equitable powers, Cybergenics,

330 F.3d at 568, reviewable for abuse of discretion, see Interface Group-Nevada, Inc. v. Trans

World Airlines, Inc. (In re Trans World Airlines, Inc.), 145 F.3d 124, 131 (3d Cir. 1998).

However, as was the case here, “[a] bankruptcy court abuses its discretion when its ruling is

founded on an error of law or a misapplication of law to the facts.” Manus Corp. v. NRG

Energy, Inc. (In re O’Brien Envtl. Energy, Inc.), 188 F.3d 116, 122 (3d Cir. 1999).

A. The Appeal Presents Controlling Questions of Law on Which

There are Substantial Grounds for a Difference of Opinion

35. A “question of law” is “controlling” when, if decided erroneously, it would lead

to reversal upon appeal. See Broadstripe, 2009 U.S. Dist. LEXIS 25690, at *5 n.3; Stanziale v.

Sun Nat’l Bank (In re Dwek), No. 09-5046 2010 U.S. Dist. LEXIS 3203, at *4-5 (D.N.J. Jan. 15,

2010). This appeal presents several such questions, any one of which would warrant granting

leave to appeal.



21

1. The Finding that Aurelius Helped Rather Than Harmed

the Estates Bars Any Claim for Equitable Disallowance

36. For several different reasons, the Debtors would lack standing to bring the claims

that the Equity Committee seeks to bring on their behalf, and each of these grounds turns on

threshold legal issues that satisfy the standard for interlocutory review. Most basically, the

Bankruptcy Court’s finding that Aurelius and the other Settlement Noteholders helped rather

than harmed the estates is an absolute bar to the proposed Complaint.

37. It is well-settled that a debtor in bankruptcy lacks standing to pursue claims based

on harm to individual creditors or equity holders, but rather can only pursue claims based on

harm to the debtor’s estate. See Caplin v. Marine Midland Grace Trust Co. of N.Y., 406 U.S.

416, 434 (1972) (bankruptcy trustees lack standing to pursue claims of individual creditors);

Hirsch v. Arthur Andersen & Co., 72 F.3d 1085, 1093-94 (2d Cir. 1995) (same); E.F. Hutton &

Co. v. Hadley, 901 F.2d 979, 986-87 (11th Cir. 1990) (same); see also Citicorp Venture Capital,

Ltd. v. Comm. of Creditors Holding Unsecured Claims, 160 F.3d 982, 991 (3d Cir. 1998)

(holding that injury caused to creditors who sold claims to insider “must play no role in

determining the extent of any [equitable] subordination”).

38. Official committees, similarly, can only bring claims based on general harm to the

estate – not based on particularized harm to specific individuals. Official Comm. of Unsecured

Creditors v. Halifax Fund L.P. (In re AppliedTheory Corp.), 493 F.3d 82, 87 (2d Cir. 2007)

(committee lacks standing to pursue equitable subordination based on injury to particular

creditors); Official Comm. of Unsecured Creditors v. Foss (In re Felt Mfg. Co.), No. 06-1171,

2007 Bankr. LEXIS 2569, at *24 (Bankr. D.N.H. July 27, 2007) (committee has no standing to

bring claims belonging to individual creditors) (citing Caplin, 406 U.S. at 434).



22

39. The Complaint alleges only two injuries – neither of which can give rise to Equity

Committee standing: (i) injury caused by the Settlement Noteholders’ participation in a

settlement with the Debtors and JPMC that did not provide for a return to equity investors

(Complaint ¶ 56) and (ii) injury caused by their alleged insider trading (id. at ¶ 60). The

Bankruptcy Court’s reaffirmation of the fairness of the Global Settlement Agreement, and its

related conclusion that the Settlement Noteholders did not harm the estates and actually helped

improve the JPMC settlement, conclusively defeats the first allegation – the only one that even

attempted to link the Settlement Noteholders’ conduct to any actual harm to the estates.

40.

With respect to the alleged “insider trading,” the Complaint does not plead any

plausible basis upon which a court could conclude that the Debtors’ estates were harmed – even

assuming that Aurelius violated the federal securities laws (which it most assuredly did not).

The Settlement Noteholders traded with other individual securities holders, not with the Debtors.

Even if individual trading counter-parties were harmed by any such trading, the Debtors

themselves (and by extension, the Equity Committee as an estate representative) lack standing to

seek redress of those harms. Any individual parties that believe they were injured by Aurelius’s

trading may pursue their non-bankruptcy remedies in an appropriate forum. See Viking Assocs.,

L.L.C. v. Drewes (In re Olson), 120 F.3d 98, 102 & n.4 (8th Cir. 1997) (debtor lacked standing to

challenge transfer of claims despite evidence that fiduciary had bought claims by misleading

sellers for purpose of gaining control of estate’s primary asset; parties who considered

themselves wronged could individually object or pursue non-bankruptcy remedies ). The Plan

proposed in these cases would not release such claims.

41. Invocation of equitable remedies does not change the basic rule that a derivative

action may only be based on actual harm to the estates. For instance, it is well-settled that the



23

remedy of equitable subordination under 11 U.S.C. § 510(b) (which the Bankruptcy Court held is

unavailable here) is remedial, not penal, and may be invoked even by individual creditors “only

to the extent necessary to offset specific harm that creditors have suffered on account of the

inequitable conduct .” Cohen v. KB Mezzanine Fund II, LP (In re Submicron Sys. Corp.), 432

F.3d 448, 462 (3d Cir. 2006) (emphasis added; citation omitted). The same must be true for a

claim for equitable disallowance – assuming such a claim is even legally cognizable. Official

Comm. of Unsecured Creditors of Sunbeam Corp. v. Morgan Stanley & Co. (In re Sunbeam

Corp.), 284 B.R. 355, 364, 369 n.3 (Bankr. S.D.N.Y. 2002) (equitable disallowance, if still

viable, “would be based on the same principles as equitable subordination”). Since the Debtors,

and therefore the Equity Committee, have standing to sue only for harm to the estates and not

harm to individual creditors, the rejection of allegations that Aurelius harmed the estates required

denial of the Cybergenics motion as a matter of law – presenting a threshold legal issue for

review as to which there is at least a good faith basis for a difference of opinion.

2. The Bankruptcy Court Erred by Granting Standing

to Pursue Insider Trading Claims that the Debtors

Themselves Would Lack Standing to Pursue

42. A closely related threshold legal issue requiring reversal is the clear rule that the

Debtors, who were not contemporaneous traders in the securities, would lack standing to sue

Aurelius for violating the federal insider trading laws with respect to the Debtors’ own securities.

It is well-settled that only parties to the relevant trades have standing to bring private suits for

federal securities fraud. See Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723, 732-33

(1975) (only purchasers or sellers have standing); Wilson v. Comtech Telecomm. Corp., 648 F.2d

88, 94-95 (2d Cir. 1981) (only parties trading contemporaneously with defendant have standing



24

to sue for insider trading). As a result, the Equity Committee lacks standing to bring these

claims on behalf of the Debtors.

43. The Bankruptcy Court ignored this authority, which dooms the entire Complaint.

The court stated only that “[b]ecause the Equity Committee seeks to disallow the claims of the

Settlement Noteholders under facts that suggest they violated the securities laws, the Court

believes that the Debtors would have a defense to those claims outside of the bankruptcy context

as well.” Opinion at 116. But the Bankruptcy Court’s speculation that an issuer has a defense to

paying a debt claim if it can show that a portion of the claim was acquired from a third party

through insider trading is utterly unsupported in the law. The authorities cited by the Bankruptcy

Court – which discuss the remedies of disgorgement, interest, and civil penalties available in an

SEC enforcement action (Opinion at 116-17) – are obviously irrelevant to the putative standing

of an issuer either to bring an insider trading claim or to invoke securities law violations as a

defense to paying a debt. The Debtors simply lack standing to sue Aurelius for insider trading;

and as a result, so does the Equity Committee.10

3. The Bankruptcy Court Erred in Sustaining a Claimfor Equitable Disallowance Because Such a RemedyIs Not Recognized Under the Bankruptcy Code

44. A third independent threshold legal issue is whether equitable disallowance is

even available as a remedy under the Bankruptcy Code. If it is not, the Complaint as limited by

10 Even if such a defense were theoretically available, it could never be enforced by the Debtors here, because theDebtors themselves were contractually obligated to publicly disclose all material nonpublic information that theyprovided to Aurelius during the Confidentiality Periods. If the Debtors breached that obligation by failing topublicly disclose material information and, as a result, the Settlement Noteholders traded while in possession of material nonpublic information, equitable principles of unclean hands and/or in pari delicto would preclude theDebtors from refusing to pay the underlying debt claims of the Settlement Noteholders on the basis of such trading.See, e.g., Bateman Eichler, Hill Richards, Inc. v. Berner , 472 U.S. 299, 310-11 (1985) (private right of action undersecurities law may be barred based on plaintiff’s own culpable conduct); OHC Liquidation Trust v. Credit Suisse (In

re Oakwood Homes Corp.), 356 F. App’x 622, 627 (3d Cir. 2009) ( pari delicto bars claims by equally culpableplaintiffs) (unpublished); Official Comm. of Unsecured Creditors v. R.F. Lafferty & Co. , 267 F.3d 340, 358-60 (3dCir. 2001) ( pari delicto barred committee from prosecuting claims on debtor’s behalf). Indeed, if the SettlementNoteholders suffer any harm as a result of any breach by the Debtors’ of their obligations under the ConfidentialityAgreements, the Settlement Noteholders will have administrative claims against the Debtors’ estates.



25

the Bankruptcy Court, does not state a colorable claim for relief.

45. Most courts that have addressed the issue have found that equitable disallowance

simply does not exist as a remedy. See, e.g., Benjamin v. Diamond (In re Mobile Steel Co.), 563

F.2d 692, 699 (5th Cir. 1977) (“Equitable considerations can justify only the subordination of

claims, not their disallowance.”); see also In re Mid-American Waste Sys., Inc., 284 B.R. 53, 68

(Bankr. D. Del. 2002) (Walsh, J.) (quoting Mobile Steel for proposition that equitable

considerations cannot justify claim disallowance); American Cigar Co. v. MNC Commercial

Corp. (In re M. Paolella & Sons, Inc.), Adv. Pro. No. 87-1007F, 1991 Bankr. LEXIS 1181, at

*38 (Bankr. E.D. Pa. April 15, 1991) (same).

46. This conclusion is mandated by limitations on the power of the bankruptcy courts

to create new remedies through the exercise of equitable discretion. As the Third Circuit held in

In re Combustion Engineering, Inc., 391 F.3d 190, 236 (3d Cir. 2004), “[t]he general grant of

equitable power contained in § 105(a) cannot trump specific provisions of the Bankruptcy Code,

and must be exercised within the parameters of the Code itself.” See also Norwest Bank

Worthington v. Ahlers, 485 U.S. 197, 206 (1988) (“[W]hatever equitable powers remain in the

bankruptcy courts must and can only be exercised within the confines of the Bankruptcy Code.”).

Here, Section 510(c) of the Bankruptcy Code expressly creates an equitable remedy – equitable

subordination – that addresses creditor misconduct, and neither that section nor any other in the

Bankruptcy Code contemplates the use of the court’s equitable powers to disallow a claim.

Indeed, Section 502(b) of the Bankruptcy Code enumerates the nine grounds upon which a claim

may be subject to disallowance. Notably, those grounds do not include any equitable

considerations. The Supreme Court has confirmed that these constitute the only permissible



26

grounds on which a court may disallow a claim. Travelers Cas. & Sur. Co. of Am. v. PG&E , 549

U.S. 443, 449 (2007).

47. Despite the absence of a single reported case applying the doctrine of equitable

disallowance, the Bankruptcy Court nevertheless upheld the potential availability of the doctrine,

citing a footnote in Citicorp Venture Capital, Ltd. v. Comm. of Creditors Holding Unsecured

Claims, 160 F.3d 982 (3d Cir. 1998), in which the Third Circuit declined to address the issue.

Opinion at 112. The Bankruptcy Court also relied on decisions in the Adelphia bankruptcy

upholding the theoretical availability of equitable disallowance. See id. at 112-15. While the

Travelers case appears to close the door left open in Citicorp, that debate may await full briefing.

It suffices for present purposes to note that this is yet another dispositive threshold legal issue as

to which there is at the very least substantial ground for difference of opinion – warranting

immediate review by an appellate court.

48. A closely related question is whether this remedy, even if theoretically available,

could ever be imposed based on the facts alleged in these cases. The Bankruptcy Court noted

Judge Gerber’s observation in Adelphia that the severe step of actually disallowing, rather than

merely subordinating, a claim on equitable grounds could be taken only “in those extreme

instances – perhaps very rare – where it is necessary as a remedy.” See Adelphia Commc’ns

Corp. v. Bank of Am., N.A. (In re Adelphia Commc’ns Corp.), 365 B.R. 24, 73 (Bankr. S.D.N.Y.

2007) (emphasis added); see also Opinion at 115.

49. Here, the Bankruptcy Court has already found that Aurelius did not harm but

actually helped the estates by urging the Debtors to seek and obtain a larger settlement from

JPMC, which redounded to the benefit of all stakeholders in the cases. Opinion at 71. The only

remaining “injury” even theoretically requiring a “remedy” is the supposed harm to creditors that



27

sold securities to Aurelius based on Aurelius’s supposed possession of material nonpublic

information. Even assuming that any such harm could be established (along with all of the other

elements of an insider trading claim), the federal securities laws provide a well-developed set of

standards and potential remedies that may be pursued by the parties actually claiming injury, as

well as by the SEC. The draconian remedy of equitable disallowance clearly is not appropriate,

much less necessary, in such circumstances.

50. Accordingly, there is substantial ground for difference of opinion both as to the

existence of equitable disallowance as a remedy and whether, as a matter of law, it could ever be

imposed in this context. Immediate appellate review is warranted to answer these questions.

4. The Bankruptcy Court Distorted and Misapplied the

Law Governing Each Element of an Insider Trading Claim

51. The Bankruptcy Court misstated or ignored well-settled legal principles

governing each of the elements of an insider trading claim. Again, any one of these legal issues,

properly decided, would mandate reversal of the Cybergenics ruling.

a) The Bankruptcy Court ignored settled law in

holding that Aurelius could be found to be an

“insider” of the Debtors subject to potential

insider trading liability under the “classical theory”

52. First, the Bankruptcy Court erred in upholding the allegations that Aurelius was

an “insider” of the Debtors, a necessary step in alleging a breach of duty since there is no

allegation that Aurelius breached any contractual duty. For an individual or entity to become

liable for insider trading under Section 10(b) of the Securities Exchange Act of 1934 and SEC

Rule 10b-5, it must trade on material, nonpublic information in violation of a fiduciary duty and

while employing “manipulation or deception.” See Dirks v. S.E.C., 463 U.S. 646, 653-54 (1983).

Trading by a non-fiduciary does not violate the securities laws unless done in breach of a duty to



28

the source of the information. See id. at 657. The need for a breach of duty flows from the

requirement of deception or manipulation as an element of securities fraud. The party

misappropriating inside information must be guilty of “deception of those who entrusted him

with access to confidential information.” United States v. O’Hagan, 521 U.S. 642, 652 (1997).

It is well settled that where the recipient of information discloses to the source that he plans to

trade on it, “there is no ‘deceptive device’ and thus no section 10(b) violation.” Id. at 655.

53. A straightforward application of this threshold breach of duty requirement bars

insider trading liability here. Neither Aurelius nor the other Settlement Noteholders were

fiduciaries; they acted solely on behalf of themselves. See In re Drexel Burnham Lambert Grp.,

123 B.R. 702, 706 (Bankr. S.D.N.Y. 1991) (ad hoc groups, “unlike members of officially

appointed committees, have no fiduciary obligations under the Bankruptcy Code”); see also

Dixon v. Am. Cmty. Bank & Trust (In re Gluth Bros. Constr.), 424 B.R. 379, 390 (Bankr. N.D.

Ill. 2009) (“[C]reditors have no fiduciary duty to debtors or other creditors.”). Aurelius’s

obligations to the Debtors were assumed contractually, through the Confidentiality Agreements.

Under New York law, the existence of an arm’s-length contract bars any inference of an

additional fiduciary duty. See LFD Operating, Inc. v. Ames Dep’t Stores, Inc. (In re Ames Dep’t

Stores, Inc.), 274 B.R. 600, 626 (Bankr. S.D.N.Y. 2002). Moreover, receipt of confidential

information does not by itself create a fiduciary duty, particularly where parties operate under an

arm’s-length agreement. See Walton v. Morgan Stanley & Co., 623 F.2d 796, 799 (2d Cir.

1980).

54. Aurelius indisputably satisfied all of its contractual duties to the Debtors, and any

obligations it had under the Confidentiality Agreements with respect to trading terminated with

those agreements. The very structure of the Confidentiality Agreements, requiring the Debtors at



29

the end of the Confidentiality Periods to publicly disclose any material nonpublic information

provided, reflects that the parties understood and expected that the Settlement Noteholders would

resume unrestricted trading once those agreements terminated. This understanding was

confirmed in undisputed testimony at the Second Confirmation Hearing. Ex. F at 152-53.

Aurelius cannot be liable for insider trading based on misappropriation where it breached no duty

and deceived no one.

55. Notwithstanding the fundamental failure of this critical element, the Bankruptcy

Court remarkably determined that Aurelius could be considered an “insider” of the Debtors with

fiduciary duties to shareholders and the estates, making it subject to liability under the “classical

theory” of insider trading. Opinion at 128-32. The court illogically held that Aurelius may have

assumed fiduciary duties that overrode its expressly limited contractual obligations simply

because it was provided with confidential information pursuant to those very contracts to

facilitate negotiations with the common goal of reaching a consensual resolution. See id. at 130.

This unprecedented holding stretches beyond recognition the “temporary insider” doctrine under

Dirks, 463 U.S. at 655 n.14 – which applies only to those who actually become insiders of a

debtor on a temporary basis, such as accountants, lawyers, and consultants – and ignores the

authority cited above (at ¶ 53) holding that receipt of confidential information pursuant to an

arm’s-length contract does not create fiduciary duties. On this theory, anyone negotiating

anything confidentially with an issuer would become a temporary insider simply because they

share a common goal of reaching a deal, and would retain that status following failed

negotiations so long as there was any prospect that negotiations might resume months or even

years later.



30

56. The Bankruptcy Court further held that, based on their mere “status” as alleged

“holders of blocking positions in two classes of the Debtors’ debt structure,” the Settlement

Noteholders could be found to have assumed fiduciary duties to all other members of those

classes. Opinion at 132. 11 This holding by itself would impose fiduciary duties on most ad hoc

creditor groups – a radical concept that would render even the formation of such a group self-

defeating and unviable, and thereby disrupt and chill the settlement negotiation process in

countless in-court bankruptcy cases and out-of-court restructurings.12

57. But the Opinion goes further. The Bankruptcy Court held that based solely on

this purported duty to other creditors, Aurelius and the other Settlement Noteholders could be

viewed as “non-statutory insiders” with even broader fiduciary duties. Id. at 132. This holding

again completely ignores the governing legal standards; it is well-settled (even in the cases cited

by the Bankruptcy Court) that “non-statutory insider” status requires a non-arm’s-length

relationship and some ability to dominate a debtor or dictate its business decisions. See, e.g.,

Schubert v. Lucent Techs. Inc. (In re Winstar Commc’ns, Inc.), 554 F.3d 382, 396-97 (3d Cir.

2009) (“non-statutory insider” status found where party controlled important business decisions

of debtor and had ability to coerce it into unfavorable contracts and involve its employees in

improper transactions); Official Unsecured Creditors Comm. of Broadstripe, LLC v. Highland

11 The phrase “blocking position” is something of a misnomer. It merely refers to the ability to cause one class of creditors to be considered a “rejecting class” under 11 U.S.C. § 1126(c). But being a rejecting class does not“block” a plan of reorganization, or anything else for that matter. Section 1129(b) of the Bankruptcy Code permits acourt to confirm a plan of reorganization over the objection of a rejecting class so long as the plan does notdiscriminate unfairly and is fair and equitable with respect to that rejecting class. Ex. D at 164-65. In any event,none of the Settlement Noteholders individually held a blocking position in any class, and the undisputed testimonywas that there were no voting agreements among the four separate noteholders. See Ex. D at 50.

12 If, as the Bankruptcy Court appears to contemplate, members of ad hoc groups would assume all the duties andrestrictions that apply to members of official creditors’ committees, this would preclude group members frompursuing their own economic interests and bar them from trading for the duration of the case even if they were not in

possession of material nonpublic information. But these restrictions are precisely what deters most largebondholders from sitting on official committees, as is the case here. Expanding these restrictions to all groupsholding a potential blocking position would functionally eliminate ad hoc groups as an important tool in bankruptcyand out-of-court restructuring negotiations.



31

Capital Mgmt., LP (In re Broadstripe, LLC), 444 B.R. 51, 80 (Bankr. D. Del. 2010) (listing

customary indicia of non-statutory insider status, including ability to select management for

debtor, control over management decisions, and pre-existing relationship stemming from other

than arm’s-length transaction).

58. The facts alleged by the Equity Committee fell far short of establishing “insider”

status under either of these doctrines. But the Bankruptcy Court’s own findings that Aurelius

and the other Settlement Noteholders helped the estate and did not improperly dominate or skew

the Plan process (Opinion at 71-73) rendered the court’s “insider” holdings truly inexplicable –

particularly since the Bankruptcy Court earlier held that the Settlement Noteholders could not

obtain a release under the Sixth Amended Plan because they “were not acting in this case in any

fiduciary capacity; their actions were taken solely on their own behalf; not others.” Wash. Mut.,

442 B.R. at 349. On information and belief, the Bankruptcy Court’s “insider” rulings are already

having an impact on the willingness of parties in major bankruptcies and out of court to

participate in ad hoc groups and engage in confidential negotiations. Immediate appellate review

is necessary to prevent these rulings from causing even more widespread damage.

b) The Bankruptcy Court ignored the strict requirement

that an insider trading claim include allegations of

facts giving rise to a compelling inference of scienter

59. The Bankruptcy Court further compounded its error by ignoring the strict

standard for the pleading of scienter in a securities fraud complaint, failing to require that the

Equity Committee plead facts giving rise to a “strong inference” that Aurelius acted with

fraudulent intent and “knew or recklessly disregarded” that it was trading while in possession of

material nonpublic information. The Private Securities Litigation Reform Act of 1995 (PSLRA)

set forth stringent new pleading requirements that the Supreme Court construed in Tellabs, Inc.



32

v. Makor Issues & Rights, Ltd., 551 U.S. 308 (2007). Tellabs requires that a plaintiff plead with

particularity facts showing not just that an inference of knowledge or recklessness “rationally

could be drawn,” but rather facts giving rise to a “powerful or cogent” inference. Id. at 323.

And a court also “must consider plausible nonculpable explanations for the defendant’s

conduct,” such that a complaint will not be sustained unless “a reasonable person would deem

the inference of scienter cogent and at least as compelling as any opposing inference one could

draw from the facts alleged.” Id. at 324; see also Winer Family Trust v. Queen, 503 F.3d 319,

328-29 (3d Cir. 2007) (affirming dismissal of scienter pleading under Tellabs standard).

60.

The Equity Committee’s proposed Complaint certainly fails to (and could not

even be amended to) satisfy Congress’s stringent standard, which the Bankruptcy Court failed

even to acknowledge while giving no weight to the plausible, indeed overwhelming, non-

culpable explanations for the defendants’ conduct. It is undisputed that Aurelius and the Debtors

specifically agreed in the confidentiality agreements that the Debtors would disclose any material

nonpublic information at the end of each Confidentiality Period. It is also factually undisputed

that the Debtors, in consultation with their experienced securities counsel, Weil, Gotshal &

Manges LLP, actually made informed, good faith judgments about what information did and did

not have to be disclosed. Ex. F at 127-28, 153. Aurelius’s reasonable, good faith reliance on the

Debtors’ contractual duties and the Debtors’ actual judgments in performing those duties

undercuts any reasonable inference of scienter, let alone a cogent or compelling one, particularly

given the undisputed testimony that Aurelius independently confirmed the Debtors’ conclusions

based on its own understanding and experience. Ex. D at 113-14.

61. The Bankruptcy Court did not question any of these facts, but merely stated that

good faith reliance does not constitute an “exception to the scienter element of insider trading”



33

(Opinion at 134) – as if the burden were on Aurelius to disprove scienter rather than on the

Equity Committee to plead scienter with particularity. The Bankruptcy Court circularly

suggested that Aurelius cannot use its good faith reliance on the Debtors and their professionals

as a “shield” if it violated its own internal insider trading policies ( id. at 135) – failing to explain

how Aurelius’s careful conduct (which included its own good-faith judgments that information in

its possession about settlement negotiations was not material) in any way violated those polices

in the first place, much less why the policies themselves could somehow alter Aurelius’s legal

duties.

62.

The Bankruptcy Court’s holding comes dangerously close to equating a finding of

materiality with a showing of scienter. But as one court aptly observed:

[I]t would be folly to hold . . . that the knowing failure to disclose amaterial fact in and of itself necessarily gives rise to a stronginference of fraud. There are far too many circumstances in whicha material omission would evidence no such mental state. Theperson or entity responsible might have held a perfectly reasonableand good faith, if ultimately mistaken, belief that the fact omittedwas not material, to name but one.

L.L. Capital Partners, L.P. v. Rockefeller Ctr. Props., Inc., 939 F. Supp. 294, 299 (S.D.N.Y.

1996). Where, as here, a complaint “does not present facts indicating a clear duty to disclose” –

in light of Aurelius’s reasonable reliance on the scope of its contractual duties – “plaintiff’s

scienter allegations do not provide strong evidence of conscious misbehavior or recklessness.”

Kalnit v. Eichler , 264 F.3d 131, 144 (2d Cir. 2001) (emphasis added). Moreover, contrary to the

Bankruptcy Court’s statement that “the statute only requires that the Settlement Noteholders

have knowledge that they were in possession of material nonpublic information” (Opinion at

134), the scienter element further requires knowing deception. See McLean v. Alexander , 599

F.2d 1190, 1197 (3d Cir. 1979) (scienter element requires “‘conscious deception or . . . a



34

misrepresentation so recklessly made that the culpability attaching to such reckless conduct

closely approaches that which attaches to conscious deception.’”) (internal citation omitted).

63. In any event, the dubious materiality of the information in Aurelius’s possession

itself further undercuts the strength of any inference of scienter. Even the Bankruptcy Court

implicitly recognized that the fitful, frustrating, and inconclusive settlement negotiations

(established through detailed and uncontradicted testimony) were not material throughout, but

only “may have shifted towards the material end of the spectrum” at some unspecified point.

Opinion at 128. The undisputed facts simply do not support a strong inference that Aurelius –

which participated in those negotiations only during two brief periods that were ten and three

months prior to a first, tentative settlement being reached – knew or recklessly ignored that it

was improperly trading while in possession of material nonpublic information.

64. The Bankruptcy Court further erred in failing to scrutinize the Equity

Committee’s allegations regarding Aurelius’s trading patterns to ensure that they could support a

cogent and compelling inference of guilty knowledge – absent which, allegations regarding

trading cannot support a pleading of scienter. See In re Burlington Coat Factory Sec. Litig., 114

F.3d 1410, 1424 (3d Cir. 1997) (declining to infer fraudulent intent from trading “in the normal

course of events”); see also Zumpano v. Juniper Networks, Inc. (In re Juniper Networks, Inc.),

158 F. App’x 899, 901 (9th Cir. 2005) (granting motion to dismiss based on failure to allege that

defendants’ stock sales were “inconsistent with prior trading histories”). Here, the Complaint

alleges only that Aurelius bought certain of the Debtors’ securities at the conclusion of the

Confidentiality Periods, but offers no reason to infer that this trading was unusual or driven by

knowledge of stale settlement offers rather than the contemporaneous public disclosure of

material new information about the company (e.g., the size of expected tax refunds) – and thus



35

no basis to conclude, as Tellabs requires, that the facts could support a “powerful or cogent”

inference of scienter that is “at least as compelling” as the non-culpable inferences. See Tellabs,

551 U.S. at 323-24; see also Baker v. MBNA Corp., No. 05-272, 2007 WL 2009673, at *7 (D.

Del. July 6, 2007) (strong inference of scienter may not be based on sale of relatively small

proportion of holdings, adopting “30 percent” figure as “useful guide” based on In re Suprema

Specialties, Inc. Sec. Lit., 438 F.3d 256, 278 (3d Cir. 2006)).

65. The Bankruptcy Court was unable to draw any conclusions itself from the trading

patterns with respect to materiality (see Opinion at 127-28), and with respect to scienter, merely

recited the Equity Committee’s conclusory allegations about the general volume of trades

without explaining (in light of the highly material information that was disclosed at the

conclusion of each Confidentiality Period and undisputed evidence that the trading was

consistent with pre-existing patterns) what facts actually gave rise to a compelling inference of

scienter (id. at 133-34).

66. In this connection, the Bankruptcy Court simply brushed aside as irrelevant many

other undisputed facts highly inferential of nonculpability, e.g., that certain Aurelius Funds sold

securities – to their substantial detriment – just days before the settlement was publicly

announced; that the Aurelius Funds’ purchases and sales of PIERS closely corresponded to the

Debtors’ public announcements regarding billions of dollars of tax refunds, as well as the ebbs

and flows of important tax legislation bearing on that issue; that the Settlement Noteholders were

frequently trading in opposite directions to each other; and that there were important

transcendent factors (such as the tumultuous markets of 2009 and the inflows of capital into the

Aurelius Funds) that could plausibly explain why the Aurelius Funds made the purchases they

did. Moreover, the trading records that the Bankruptcy Court reviewed plainly reveal that a



36

significant part of the supposed “buying spree” (Opinion at 126) by two of the Aurelius Funds in

May 2009 (the third fund did not yet exist) consisted of simply rotating from low coupon to high

coupon bonds of the same class.

67. In essence, the court “punted” on scienter, leaving the issue to be developed

through discovery – but that is precisely what the stringent facial pleading requirements of the

PSLRA are meant to prevent. The entire point of the PSLRA is to protect defendants from

“abusive practices committed in private securities litigation,”13

by requiring a heightened and

particularized pleading of scienter before a plaintiff is permitted to proceed with discovery.

Indeed, granting discovery to permit a plaintiff to try to meet this standard – as the Bankruptcy

Court appears to have done here – is grounds for mandamus. See SG Cowen Sec. Corp. v. U.S.

Dist. Court for the N. Dist. of Cal., 189 F.3d 909, 912-19 (9th Cir. 1999) (granting mandamus to

restore discovery stay in insider trading case where district court had rejected pleadings for

insufficient particularity, but nonetheless authorized limited discovery). This distortion of

Congress’s intent requires immediate reversal.

c) The Bankruptcy Court changed the law of

materiality to create a new per-se no-trading

rule that accorded with its policy preferences

68. The Bankruptcy Court’s discussion of materiality focused largely on case law

drawn from the merger context, e.g., Basic, Inc. v. Levinson, 485 U.S. 224 (1988), where the

mere existence, or early progress, of negotiations not known or suspected by the marketplace

may be material. See Opinion at 119-20. The Bankruptcy Court ignored the reality that brief,

intermittent negotiations – often occurring months apart and ultimately spanning a year or more,

as was the case here – are part and parcel of the bankruptcy process; that the existence of

13 Joint Explanatory Statement of the Committee of Conference, H.R. Rep. No. 104-369, at 41 (1995) (Conf.Rep.), reprinted in 1995 U.S.C.C.A.N. 730.



37

negotiations itself is rarely surprising or material; and that all parties in large, complex

bankruptcies understand that until a deal takes shape, intermediate, non-binding bargaining

positions of the parties are simply not material. In any event, the record overwhelmingly

established that the settlement discussions to which Aurelius was privy during 2009 left the

parties billions of dollars apart and could not be used to predict the contours of the multi-party

settlement that ultimately emerged, and that the pendency of negotiations was widely known.14

69. While the details of that record are beyond the scope of this Motion,15

what is

relevant is that the Bankruptcy Court – despite devoting ten pages of its Opinion to discussing

materiality (Opinion at 118-28) – ultimately made clear that it believed the situation should be

governed by a per se rule that parties participating in confidential settlement negotiations by

definition become permanently restricted. Such parties, the court declared, are required to adopt

permanent trading restrictions (either shutting down trading or maintaining an ethical wall for the

duration of the case) – a requirement previously imposed only upon members of official

bankruptcy committees and other fiduciaries. See id. at 137-38.

70. The retroactive imposition of this extreme, per se rule is unfair to the parties in

this case, who relied upon customary practice and acted scrupulously and with a high level of

care, and will have a destructive effect on the bankruptcy process in other cases, where parties

that are not in a position to assume ongoing trading restrictions or the burdens of maintaining an

14 Ex. D at 69, 118-19; Ex. E at 129-30, 165. 15

However, some of the inferences credited by the Bankruptcy Court are facially unreasonable. For example, thecourt seemed to accept an argument that the Settlement Noteholders’ request to terminate the Second ConfidentialityPeriod one day early, on December 30, 2009, is evidence that they wanted to trade based on the details of unsuccessful settlement negotiations from November (Opinion at 126), even though (1) trading was obviouslydriven at the end of December by highly material tax refund information then being publicly disclosed, and (2)undisputed testimony established that the reason for the request was not to facilitate trading but to allow the marketto absorb the tax refund information before year end, so that audited financial statements (which are prepared as of December 31 for the Aurelius Funds and many other institutions) could be valued using the normal marked-to-market method. See Ex. E at 52-53.



38

ethical wall are likely to eschew participation in settlement negotiations – to the detriment of the

core purpose of chapter 11 of fostering consensual reorganizations. For this reason as well,

immediate appellate review of the Standing Order is warranted.

5. The Bankruptcy Court Failed to Determine

whether the Debtors were in Fact Reasonable

in Refusing to Pursue the Insider Trading Claims

71. Both the Debtors and the Creditors’ Committee reviewed the discovery record

promulgated by the Equity Committee and determined that the insider trading charges were

wholly without merit and should not be prosecuted. Implicit in that judgment was the conclusion

that, even if the claims could be shown to have any merit, the scant likelihood of success was

outweighed by the significant costs and burdens of financing and participating in the litigation.

72. Having concluded, contrary to the responsible fiduciaries, that the Equity

Committee alleged colorable claims against the Settlement Noteholders, the Bankruptcy Court

acknowledged that it was “required . . . to balance the probability of success on the claim against

the burden on the estate that would result from its prosecution.” Opinion at 138. While

recognizing that these cases would likely “devolve into a litigation morass” (id.), the Bankruptcy

Court inexplicably granted the Standing Motion without engaging in the required analysis. If it

had, the conclusion would have been inescapable that the Debtors could and did reasonably

decide that the litigation simply was not worth pursuing.

73. On the “benefit” side of the ledger would have to be weighed, first, the highly

unlikely prospect (in light of the Complaint’s multiple infirmities) that the claims could survive a

formal motion to dismiss, summary judgment, or trial. And even if the Equity Committee were

to prevail, the damages that it could recover from the Aurelius Funds on behalf of the estates

would be quite modest – limited to disgorgement of profits directly resulting from use of the



39

wrongfully acquired material nonpublic information. See, e.g., S.E.C. v. Cavanagh, 445 F.3d

105, 116 n.25 (2d Cir. 2006) (“Because the remedy is remedial rather than punitive, the court

may not order disgorgement above [the] amount [of money acquired through wrongdoing

. . . plus interest.]”). Moreover, the damage calculation would have to exclude increases in the

value of securities purchased attributable to factors other than the alleged material nonpublic

information. See Dura Pharm., Inc. v. Broudo, 544 U.S. 336, 343 (2005) (civil securities fraud

damage calculation must consider the “tangle of factors affecting price”).

74. Here, if a trial court were to find liability, it would be required to calculate the

portion of the profits of each of the Aurelius Funds relating only to purchases after Aurelius was

provided with material nonpublic information but before it was publicly disclosed (at most, a

period of ten months) and directly attributable to trading on particular material nonpublic

information – eliminating, for starters value attributable to (1) the passage of legislation in

November 2009 that added billions of dollars of value to the estates by expanding the Debtors’

eligibility for NOL carry-back tax deductions; (2) the Debtors’ public disclosures in April and

December 2009 of the likely size of its tax refunds; and (3) the continued accrual of postpetition

interest. Moreover, to the extent it is shown that the Aurelius Funds’ trades were with other

Settlement Noteholders (as appears likely from a comparison of trading records in evidence) or

other sophisticated institutional investors, many of which participated in or knew of settlement

negotiations, the trial court will have to determine whether, in fact, the Aurelius Funds had a

material advantage over its seller in knowledge about the state of settlement negotiations. This

inquiry would lead to very limited damages, if any. Regardless, the Equity Committee made no

showing on the issue, and the court made no finding on it.



40

75. Moreover, even if the estates could overcome all of these hurdles and recover

something on these putative claims, it is virtually impossible for any benefit from such recovery

to flow down to the parties on whose ultimate behalf the Equity Committee purports to labor.

Common stockholders are more than $7.6 billion out of the money. Even preferred stockholders

will be at least $165 million out of the money by February 2012, an extremely optimistic target

for the effective date of a new plan. Any delay thereafter pushes equity further out of the money

by $20 million per month – or $42 million per month if the Bankruptcy Court’s interest rate

ruling is reversed (an event that would itself add more than $810 million in postpetition interest

claims to be paid before equity holders can receive a recovery).

76. Against this remote and (at most) modest upside, the Debtors could reasonably

weigh the grave costs and harms that would flow from full litigation of the insider trading

charges. First, the attorneys’ fees of this enterprise alone are likely to exceed the ultimate

potential damages. The Debtors would be responsible at minimum for the fees and expenses of

the Equity Committee in prosecuting the action; their own fees in defending it (since the

Debtors’ own conduct is at issue and they will be liable to the Settlement Noteholders if it is

determined that the Debtors breached the Confidentiality Agreements); the fees of the Creditors’

Committee, which participated in the settlement negotiations; and potentially the fees of other

parties receiving fee reimbursements that ultimately are required to participate in the litigation.

Moreover, the scope of the litigation in which all these parties would have to participate would

be massive. Many creditors other than the Settlement Noteholders (including, for example,

certain senior noteholders represented by White & Case LLP and holders of Trust Preferred

Securities, Litigation Tracking Warrants, and WMB bonds) participated in or have been made

privy to the existence and details of confidential negotiations of one type or another and then



41

resumed unrestricted trading in the Debtors’ securities – conduct that may be relevant to many

issues touching on liability and damages. Under the Bankruptcy Court’s Opinion, many of these

parties would be considered estate fiduciaries that should have restricted their trading. Any

differential treatment in the bankruptcy between such parties and the Settlement Noteholders

would obviously be hotly litigated. The aggregate cost to the estates to litigate all of these

intertwined matters to conclusion will be at least many tens of millions of dollars. Beyond that,

pendency of the litigation is likely to complicate efforts to confirm a reorganization plan in these

cases, imposing further cost and delay on the estates and their creditors.

77.

In short, even if it were not so obvious that the Complaint fails to state a colorable

claim, the Debtors were entirely reasonable in refusing to pursue claims that could only mire the

estates in endless, pointless, fruitless litigation. Immediate, expedited appeal is necessary to

prevent these harms and burdens from being imposed on the estates and the parties.

B. Immediate Appeal of the Standing Order Would Materially Advance

the Termination of the Litigation and Conserve Resources

78. The final prong of the interlocutory appeal standard under 28 U.S.C. § 1292 is

easily satisfied here. An immediate appeal of the Standing Order will lead to reversal and put an

end to this baseless, harassing litigation, freeing the Debtors to proceed expeditiously with

another revised plan of reorganization. See Stanziale v. Sun Nat’l Bank (In re Dwek), No. 09-

5046, 2010 U.S. Dist. LEXIS 3203, at *7 (D.N.J. Jan. 15, 2010) (granting leave to appeal ruling

on motion to dismiss where reversal would alleviate need to litigate certain claims). This would

avoid a waste of the limited resources of the parties, and more importantly, the judiciary. See



42

Broadstripe, 2009 U.S. Dist. LEXIS 25690, at *7 (granting leave to appeal interlocutory order to

“avoid wasted trial time and litigation expense”).16

II.

LEAVE TO APPEAL THE CONFIRMATION ORDER SHOULD BE GRANTED, IF

NECESSARY, TO ENSURE THAT UNSECURED CREDITORS RECEIVE THEIR

CONTRACTUAL ENTITLEMENTS UNDER ANY PLAN OF REORGANIZATION

79. Aurelius asserts that the Confirmation Order is a final order appealable as of right

under the “pragmatic and less technical” approach to finality in bankruptcy cases. See

authorities cited above at ¶¶ 28-31. Indeed, in In re Armstrong World Indus., Inc., 432 F.3d 507

(3d Cir. 2005), the Third Circuit held that an order denying confirmation of a plan of

reorganization was “final” where (i) the distribution of assets between different creditor classes

was affected; (ii) no additional fact-finding was required; (iii) discrete questions of law were

presented and (iv) practical considerations of judicial economy were present. Id . at 511. So too

here. The Bankruptcy Court’s denial of confirmation was premised on an erroneous legal

conclusion – that a creditor’s entitlement to postpetition interest in a solvent estate is limited as a

matter of law to the federal judgment rate. See Opinion at 81.

16 In the event the Court determines that review on appeal is unavailable here, Aurelius respectfully requests in thealternative that the Court exercise its power to treat this application as a petition for a writ of mandamus and issue awrit reversing the Standing Order. See, e.g., First Fid. Bank, N.A. v. Hooker Invs., Inc. (In re Hooker Invs., Inc.),937 F.2d 833, 837 (2d Cir. 1991) (“Although we do not have jurisdiction over the Bank’s attempted appeal as amatter of right from the non-final bar order, we may in appropriate circumstances treat an unsuccessful attempt toappeal as a petition for a writ of mandamus.”). Mandamus may be appropriate where (i) the petitioning party has noother means to obtain relief, (ii) the lower court committed clear and indisputable error, and (iii) issuance of the writis appropriate in the circumstances. See Cheney v. United States Dist. Ct. for the Dist. of Columbia, 542 U.S. 367,380-81 (2004); United States v. Brunson, 416 F. App’x 212, 221 (3d Cir. 2011) (unpublished).

Here, absent reversal of the Standing Order, Aurelius will have no other means to prevent the Equity Committee’swasteful and vexatious litigation campaign from inflicting upon Aurelius, the estates, and other parties the massivecosts and expenses of this “litigation morass.” The pendency of these accusations does not just exact a dollar cost –it leaves a cloud over Aurelius, its honorable and hard-working professionals, and the other Settlement Noteholders.The toll of this reputational damage is likely to be significant even if, as is overwhelmingly likely, the claims areeventually dismissed. As set forth in detail above, the Bankruptcy Court’s Standing Order is based on multiple clearerrors of law, such that a writ of mandamus would be entirely appropriate in the circumstances of these cases.



43

80. That conclusion is in direct conflict with case law holding that the contract rate is

presumptively required . See, e.g., Official Comm. of Unsecured Creditors v. Dow Corning

Corp. (In re Dow Corning Corp.), 456 F.3d 668, 679 (6th Cir. 2006) (holding that absent

compelling equitable considerations, the bankruptcy court’s role is to enforce contractual rights

of parties with respect to postpetition interest); Ruskin v. Griffiths, 269 F.2d 827, 832 (2d Cir.

1959) (awarding post-petition interest at contract rate and noting that “where there is no showing

that the creditor entitled to the increased interest caused any unjust delay in the proceedings, it

seems to us the opposite of equity to allow the debtor to escape the expressly-bargained-for

result of its act”); see also FSLIC v. Moneymaker (In re A&L Props.), 96 B.R. 287, 290 (C.D.

Cal. 1988) (awarding post-petition interest at contract rate); In re Smith, Case No. 03-10666,

2008 Bankr. LEXIS 7, at *2 (Bankr. W.D. Ky. Jan. 7, 2008) (same); In re Schoenberg, 156 B.R.

963, 972 (Bankr. W.D. Tex. 1993) (same); In re Beck , 128 B.R. 571, 573 (Bankr. E.D. Okla.

1991) (same).

81. Indeed, the Bankruptcy Court twice recognized that enforcement of bargained-for

contract rates was permissible under the Bankruptcy Code and appropriate if supported by the

equities in a particular case – first in In re Coram Healthcare Corp., 315 B.R. 321, 346 (Bankr.

D. Del. 2004) (holding that contract rate may be payable depending on specific facts dictating

which rate is “fair and equitable”), and more recently in its January opinion in these cases, Wash.

Mut., 442 B.R. at 358-59. The Bankruptcy Court departed sharply from these prior holdings in

concluding now that the federal judgment rate is legally mandated . That conclusion could have a

significant impact on the distribution of estate assets as it results in the improper elimination of

more than $810 million of postpetition interest claims. Resolution of this discrete legal issue

requires no further fact-finding and will expedite resolution of these cases as it will obviate the



44

need for further appeals in connection with any alternative plan that does not respect creditors’

contractual rights to postpetition interest.

82. In the event the Court concludes that the Confirmation Order is not final, the

Court should nevertheless grant leave to appeal as the appeal would undoubtedly involve a

controlling question of law for which there is a substantial ground for difference of opinion –

namely, whether the Debtors’ creditors are entitled to postpetition interest at the applicable

contract rate. Resolution of this issue now will expedite the resolution of these cases by

correcting a legal error that will otherwise render any subsequently confirmed plan subject to

reversal on appeal.



45

WHEREFORE, Aurelius respectfully requests that the Court enter an Order

substantially in the form attached hereto as Exhibit K or in the alternative grant vacatur through

the issuance of a writ of mandamus; set an expedited schedule for the briefing of this appeal; and

grant such further and other relief as the Court deems appropriate.

Dated: Wilmington, DelawareSeptember 27, 2011

BLANK ROME LLP

/s/ Michael D. DeBaecke

Michael D. DeBaecke (No. 3186)Victoria Guilfoyle (No. 5183)1201 Market Street, Suite 800Wilmington, Delaware 19801

Telephone: (302) 425-6400Facsimile: (302) 425-6464E-mail: [email protected]

[email protected]

-and-

Kenneth H. EcksteinAlan R. FriedmanJeffrey S. TrachtmanDaniel M. EggermannKRAMER LEVIN NAFTALIS & FRANKEL LLP1177 Avenue of AmericasNew York, New York 10036Telephone: (212) 715-9100Facsimile: (212) 715-8000E-mail: [email protected]

[email protected] [email protected]@kramerlevin.com

Attorneys for Aurelius Capital Management, LP

and certain of its managed entities



EXHIBIT A





In re : Chapter 11

WASHINGTON MUTUAL, INC., e t a l . , Case No. 08-12229 {MFW}

Debtors . Jo ly Adminis tered

o R D E R

AND NOW t h i s 13th day of SEPTEMBER, 2011, upon cons ide ra t ion

of the Modified Six th Amended Jo in t Plan of A f f i l Debtors

Pursuant to Chapter 11 of the United Sta t e s Bankruptcy Code,

f i l ed on March 16, 2011, as modif ied on March 25, 2011 {the

"Modified Plan"} , fo r the reasons a r t i c u l a t e d in the accompanying

Opinion, it i s hereby

ORDERED t h a t conf i rmat ion o f th e Modified Plan i s DENIED;

and it i s fu r th e r

ORDERED t h a t the motion of the Equity Committee fo r s tand ing

to prosecu te claim fo r equ i t ab le disal lowance i s GRANTED bu t

STAYED PENDING MEDIATION; and it i s fu r th e r..



ORDERED t ha t a s t a t u s hear ing w i l l be he ld on October 7,

2011, a t 11:30 a.m. to cons ider the i s sues to be re fe r red to a

media tor in t h i s case .

BY THE COURT:

Mary F. Walrath

United Sta tes Bankruptcy Judge

cc: Mark D. Col l ins , Esquire 1

1 Counsel s h a l l serve a copy of the Order and the

accompanying Opinion on a l l i n t e r e s t ed p a r t i e s and f i l e a

Cer t i f i ca t e of Service with the Cour t .



SERVICE LIST

Mark D. Col l i n s , Esqui re

Chun I . Jang, Esqui re

Lee E. Kaufman, EsquireRICHARDS, LAYTON & FINGER, P.A.

920 North King St ree t

Wilmington, DE 19801

Counsel fo r the Debtors

Brian S. Rosen, EsquireMarcia L. Golds te in , EsquireMichael F. Walsh, EsquireWElL GOTSHAL & MANGES, LLP

76 7 Fi f th Avenue

New York, NY 10153

Counsel for the Debtors

Rafae l X. Zahralddin-Aravena, EsquireNei l R. Lapinsk i , Esqui re

She l ley A. Kinse l l a , EsquireELLIOTT GREENLEAF

1105 North Market St ree t , Sui te 1700


Spec ia l Li t iga t ion and Conf l i c t s


Pete r E. Calamari , EsquireMichael B. Car l insky, Esqui re

Susheel Kirpa lan i , EsquireDavid Elsberg , EsquireQUINN EMANUEL URQUHART &

SULLIVAN, LLP

51 Madison Avenue, 22nd FloorNew York, NY 10010

Spec ia l Li t iga t ion and Conf l i c t s


Rober t S. Brady, i r e

M. Blake Cleary , Esqui re

Jaime N. Luton, Esquire

YOUNG CONAWAY STARGATT & TAYLOR, LLPThe Brandywine Bui ld ing

1000 West St ree t , 17th FloorWilmington, DE 19801

Counsel fo r FDIC-Receiver



Thomas R. Cal i f ano , EsquireJohn J . Clark , J r . , EsquireDLA PIPER LLP

1251 Avenue of the Americas

New York, NY 10020

Counsel fo r FDIC-Receiver

Je f f r ey M. Schler f , EsquireEric M. Sut ty , EsquireFOX ROTHSCHILD LLP

919 North Market St ree t

Sui te 1600


Counsel fo r Washington Mutual, Inc .

Noteholders ' Group

David S. Rosner, Esquire

Adam L. Sh i f f , EsquirePaul M. O'Connor, EsquireSeth A. Moskowitz, Esqu

KASOWITZ, BENSON, TORRES & FRIEDMAN LLP

1633 Broadway

New York, NY 10019

Counsel fo r Washington Mutual, Inc .

Noteholders ' Group

David B. St ra t ton , EsquireEvelyn J . Meltzer , EsquirePEPPER HAMILTON LLP

Hercules Plaza , Sui te 5100

1313 Market St ree t


Coun fo r Off i c i a l Committee of

Unsecured Credi to r s

Fred S. Hodara, EsquireRobert A. Johnson, EsquireAKIN GUMP STRAUSS HAUER & FELD LLP

One Bryant Park

New York, NY 10036

Counsel fo r Off ic i a l Committee of

Unsecured Credi to r s



Jane M. Leamy, EsquireOFFICE OF THE UNITED STATES TRUSTEE

J . Caleb Boggs Building844 King St ree t , Sui te 2207

Lockbox 35


Adam G. Landis, EsquireMatthew B. McGuire, Esquire

LANDIS, RATH & COBB, LLP



Counsel JP Morgan Chase Bank, N.A.

Robert A. Sacks, EsquireStacey R. Friedman, EsquireBrian D. kste in , Esquire

SULLIVAN & CROMWELL LLP125 Broad St ree t

New York, NY 10004

Counsel fo r JP Morgan Chase Bank, N.A.

Brent J . McIntosh, EsquireSULLIVAN & CROMWELL LLP

1701 Pennsylvan Avenue, NW

Washington, DC 20006

Counsel JP Morgan Chase Bank, N.A.

Bernard G. Conoway, EsquireMarla Rosoff Eskin, Esquire

Kathleen Campbell Davis, EsquireCAMPBELL & LEVINE LLC

800 North King St ree t , Sui te 30 0


Counsel fo r TPS Holders

Sigmund S. Wissner-Gross , EsquireRobert J . , EsquireKather ine S. Bromberg, EsquireBROWN RUDNICK LLP

Seven Times Square

New York, NY 10036

Counsel TPS Holders



James W. S t o l l , Esquire

Jeremy B. Coffey, EsquireJen n i fe r M. Recht, EsquireRyan S. Moore, EsquireDaniel J. Brown Esquire

BROWN RUDNICK LLPOne Financia l CenterBoston, MA 02111

Counsel fo r TPS Holders

Mark E. Felger , EsquireCOZEN O'CONNOR

1201 N. Market St ree t , Sui te 1400


Co-Counsel for Broadbi l l Investment Corp.

Paul N. Sivers te in , Esquire

Jeremy B. Reckmeyer, Esquire ANDREWS KURTH LLP

450 Lexington Avenue

New York, NY 10017

Coun fo r Broadbi l l Investment Corp.

Scot t J . Leonhardt , Esquire Freder ick B. Rosner, Esquire

THE ROSNER LAW GROUP LLC

1000 N. West St ree t , Sui te 1200


Counsel fo r Nantahala Cap i ta l

Pa r tne rs LP and Blackwel l Capi ta l

Pa r tne rs LLC

Arthur Steinberg, Esquire KING & SPALDING

1185 Avenue of the Americas

New York, NY 10036

Counsel fo r Nantahala Capi ta l


Pa r tne rs LLC

Jonathan Hochman, EsquireSCHINDLER COHEN & HOCHMAN LLP

10 0 Wall S t r e e tNew York, NY 10005

Counsel fo r Nantahala Capi ta l


Pa r tne rs LLC



David P. Primack, Esquire

DRINKER BIDDLE & REATH LLP



Counsel fo r WMB Noteholders

Je f f rey M. Schwartz, Esquire

191 N. Wacker Drive , Sui te 3700

Chicago, IL 60606

Counsel fo r WMB Noteholders

Jay W. Eisenhofer , Esqui re

Geoff rey C. Ja rv i s , EsquireChr i s t M. Mackintosh

GRANT & EISENHOFFER P.A.



Counsel fo rWMB

Noteholders

Michael P. Migliore , EsquireSMITH, KATZENSTEIN & JENKINS LLP

800 Delaware Avenue

Sui te 1000, P.O. Bo x 410


Counsel to North America Nat ional

Insurance Company, American Nat ional

Proper ty and Casua l ty Company,

Farm Family Life Insurance Company,

Farm Family Casual ty Insurance Company,

and, Nat ional Western Life InsuranceCompany

Andrew J . Mytelka, EsquireFreder ick E. Black, Esquire

Tara B. Annweiler , EsquireJames M. Roquemore, EsquireOne Moody Plaza, 18 th FloorGalves ton , Texas 77550

Counsel to North America Nat iona l

Insurance Company, American Nat ional

Proper ty and Casual ty Company,

Farm Family fe Insurance Company,

Farm Family Casual ty Insurance Company,and, Nat iona l Western fe Insurance

Company



Ph i l i p Schnabel (Pro se)

St e i n s t r a sse 6

01454 Radeberg

Germany

Objec to r to Conf i rmat ion

Ronald S. G e l l e r t , Esqui re

Byra M. Kei lson , Esqui re ECKERT SEAMANS CHERIN & MELLOTT, LLC

300 Delaware Avenue

Sui te 1210


Counsel fo r Truck Insurance Company

and Fi re Insurance Company

Matthew Feldman, Esquire Robin Spige l , Esqui re

WILLKIE FARR & GALLAGHER LLP 787 Seventh Avenue

New York, New York 10019-6099

Counsel fo r Truck Insurance Company

and Fi re Insurance Company

Edward W. Ciolko , Esqui re

Joshua C. Schumacher, EsquireBARROWAY TOPAZ KESSLER MELTZER & CHECK, LLP

280 King of Pruss ia Road

Radnor, Pennsylvania 19087

Counsel fo r Objectors to Conf i rmat ion ,

Rober t Alexander & James Lee Reed

Will iam P. Bowden, Esqui re

Gregory A. Taylor , Esqui re S tacy L. Newman, Esquire

'ASHBY & GEDDES, P.A.

500 Delaware Avenue, 8 th FloorP.O. Box 1150


Counsel fo r the O ff i c i a l Committee

of Equi ty Secur i ty Holders of Washington

Mutual, Inc . e t a l .



Stephen D. Susman, EsquireSeth D. Ard, EsquireSUSMAN GODFREY, L.L.P.654 Madison Avenue, 5 th FloorNew York, NY 10065

Counsel for the Off i c i a l Committeeof Equity Secur i ty Holders of Washington

Mutual, Inc . e t a l .

Parker C. Foise, EsquireEdgar Sargent , Esquire

Jus t in A. Nelson, re

SUSMAN GODFREY, L.L.P .•

1201 Third Avenue, Su 3800

Sea t t l e , Washington 98101

Counsel for the Off ic I Committee

of Equity Secur i ty Holders of Washington

Mutual , Inc. e t a l .

Je f f rey S. Schul tz (Pro se)

Vice Pres iden t /Trus t Investment Off icer

American National Bank

2732 Midwestern Parkway

Wichi ta Fal l s , TX 76308

Objector to Confirmation

Nate Thoma (Pro se)105 South Jef fe rson St ree t

Wenonah, New Jer sey 08090

Objector to Confirmation

Donna L. Harr i s , Esquire

PINCKNEY, HARRIS & WEIDINGER, LLC



Counsel to Sonter ra Capi ta l Par tners

and Sonter ra Capi ta l LLC

Robert T. Sco t t , EsquireAXICON PARTNERS, LLC

1325 Avenue of the Americas, 27th FloorNew York, New York 10019

Counsel to Sonter ra Cap i t a l Partnersand Son t e r r a Capi ta l LLC



EXHIBITB



THE UNITED STATES BANKRUPTCY COURT


In re : Chapter 11

WASHINGTON MUTUAL, INC., e t a l . , Case No. 08-12229 (MFW)

Debtors. Jo i n t l y Administered

OPINION1

Before the Court i s the request of Washington Mutual, Inc .

("WMI") and WMI Investment Corp. (co l l ec t ive ly the "Debtors") fo r

confi rmat ion of the Modified Sixth Amended Jo i n t Plan o f

Aff i l i a t ed Debtors (the "Modif ied Plan") . For the reasons s ta ted

below, the Court w i l l deny confi rmat ion of the Modified Plan .

I . BACKGROUND

WMI i s a bank holding company t ha t former ly owned Washington

Mutual Bank ("WMB"). WMB was the n a t i o n ' s l a rges t sav ings and

loan associa t ion , having over 2,200 branches and holding $188.3

b i l l i o n in depos i t s . Beginning in 2007, revenues and earnings

decreased a t WMB, causing WMI's asse t p o r t fo l i o t o dec l ine in

value . By September 2008, in the midst of a global c red i t

c r i s i s , th e ra t ings agencies had s ign i f i can t ly downgraded WMI's

and WMB's c re d i t r a t i n g s . A bank run ensued; over $16 b i l l i o n in

This Opinion co n s t i t u t e s the f indings of f ac t andconclus ions o f law of the Court pursuant to Rule 7052 of the

Federa l Rules of Bankruptcy Procedure, which i s made app l icab le

to contested mat ters by Rule 9014 of the Federa l Rules ofBankruptcy Procedure.



depos i t s were withdrawn from WMB in a t en-day per iod beginning

September 15, 2008.

On September 25, 2008, WMB's pr imary regu la to r , the Off ice

o f T h r i f t Superv is ion ( the "OTSH) , se ized WMB and appoin ted the

Federa l Depos i t Insurance Corporat ion ( the "FDICH) as r e c e i ve r .

Th e FDIC's t akeover of WMB marked th e l a rg es t bank f a i l u re in the

n a t i o n ' s h i s to ry . On the same day, th e FDIC so ld su b s t an t i a l l y

a l l of WMB's a s s e t s , inc lud ing the s tock of WMB's subs id ia ry , WMB

f sb , to JPMorgan Chase Bank, N.A. (\\JPMCH) through a Purchase &

Assumption Agreement ( the "P&A Agreement") . Under the P&A

Agreement, JPMC obta ined su b s t an t i a l l y a l l of the asse t s o f WMB

fo r $1.88 b i l l i o n plus the assumption of more than $145 b i l l i o n

in de pos i t and o the r l i a b i l i t i e s of WMB. The FDIC, as the

r e c e i ve r of WMB, re t a ined cla ims t h a t WMB held a ga i n s t o t he r s .

On September 26, 2008, the Debtors f i l ed p e t i t i o n s under

chapte r 11 of the Bankruptcy Code. Ear ly in the bankruptcy case

di spu tes arose among th e Debtors , th e FDIC, and JPMC r egard ing

ownership of ce r t a i n as se t s and var ious c la ims t h a t th e p a r t i e s

as se r t ed a ga i n s t each o t he r . Those d i s pu t e s (and di spu tes

between the Debtors and o t he r cla imants) were the sub j e c t of

l i t i g a t i o n in t h i s Court ,2 as well as in the United Sta t e s

2 See, e . g . , <Black Horse C a p i t a l LP , e t a l . v . JPMorcran

Chase Bank, N.A., Bankr. No. 08-12229, Adv. No. 10-51387 (Bankr.D. Del . Ju ly 6, 2010) ( the "TPS AdversaryH) i Broadbi l l Inves tmentCorp. v . Wash. Mut. , In c . , Bankr. No. 08-12229, Adv. No. 10-50911(Bankr. D. Del . Apr. 12, 2010) ( the "LTW AdversaryH) i Wash. Mut. ,

2



D i s t r i c t Cour t fo r the D i s t r i c t of Columbia ( the "DC Court") ,3

and in the Federa l Cour t of Claims.4

On March 12, 2010, the p a r t i e s announced t h a t they had

reached a globa l se t t l ement agreement ( the "GSA"). The GSA

r eso lved i s sues among the Debtors , JPMC, the FDIC in i t s

corpora te capaci ty and as rece ive r fo r WMB, ce r t a i n l a rge

c red i t o r s ( the "Set t lement Noteholders") ,5 cer ta in WMB Senior

Noteholders , and the Cred i to rs ' Committee. The GSA was

incorpora ted in to the S ix th Amended Plan which was o r i g i n a l l y

f i l e d on March 26, 2010, and modif ied on May 21 and October 6,

2010.

Hearings on conf i rmat ion of the S ixth Amended Plan , as wel l

as argument on summary judgment motions in the r e l a t ed LTW and

TPS Adversar ies , were held on December 1-3 and 6-7, 2010. Th e

Inc . v. JPMorgan Chase Bank, N.A., Bankr. No. 08-12229, Adv. No.

09-50934 (Bankr. D. Del. Apr. 27, 2009); JPMorgan Chase Bank,

N.A. v . Wash. Mut. , Inc . , Bankr . No. 08-12229, Adv. No. 09-50551

(Bankr. D. Del. Mar. 24, 2009) .

3 Am. Nat. Ins . Co. v . JPMoraan Chase & Co. , 70 5 F. Supp.

2d 1 7 , 2 1 (D.D.C. 2010) ( the "ANICO L i t i g a t i o n " ) ; Wash. Mut. ,Inc . v . F.D. I .C . , No . 1:09-cv-00533 (D.D.C. January 7, 2010) .

4 Anchor Savings Bank FSB v . Uni ted Sta t e s , No. 95-039C

(Fed. C l. 1995) (h e re in a f t e r the "Anchor L i t i g a t i o n " ) ; American

Savings Bank, F.A. v . United Sta t e s , No. 92-872C (Fed. Cl. 1992)

(here inaf te r the "American Savings L i t i g a t i o n " ) .

5 The Set t lement Noteholders are Appaloosa Management, L.P.("Appaloosa") , Aurel ius Capi ta l Management LP ( "Aure l ius" ) ,

Centerbr idge Par tne rs , LP ("Centerbr idge") , and Owl Creek AssetManagement, L.P. ("Owl Creek") , and se ve r a l of t h e i r re spec t ive

a f f i l i a t e s .

3



mat te r was taken under advisement . In an Opinion and Order dated

January 7, 2011, the Court concluded t h a t the GSA was f a i r and

reasonable , but decl ined to confi rm the Debtors ' Six th Amended

Plan because of cer ta in def ic ienc ies . In re Wash. Mut. , Inc . ,

44 2 B.R. 314, 344-45, 365 (Bankr. D. Del. 2011) ( the "January 7

Opinion") . By separa te Opinion and Order, the Cour t found t h a t

ce r t a i n purpo r ted holders of the Trus t Pre fe r red Secur i t i es ( the

"TPS") no longer had any i n t e r e s t in the TPS because t h e i r

i n t e r e s t s had been conver ted to i n t e r e s t s in p re fe r red s tock of

WMI. In re Wash. Mut. , In c . , 442 B.R. 297, 304 (Bankr. D. Del.

2011) . In another Opinion and Order i ssued t h a t day, the Cour t

he ld t h a t it was unable to gr a n t WMI's motion fo r summary

judgment in the LTW Adversary, because there are genuine i s sues

of mate r i a l f ac t in di spu te . In re Wash. Mut. , Inc . , 442 B.R.

308, 313-14 (Bankr. D. Del. 2011). T r i a l on the LTW Adversary

has been scheduled fo r September 12-14, 2011.

The Six th Amended Plan and the GSA were modif ied on March 16

and 25, 2011, in an at tempt to address the Cour t ' s concerns

expressed in the January 7 Opinion. (D 255i D 253.)6 The

Modified Plan i s suppor ted by th e Debtors , JPMC, the FDIC, the

6 References to plead ings on the Docket a t "D. l . t i " theTransc r ip t s of the hear ings a re "Tr . d a t e i ~ the Debtors ' t r i a lex h ib i t s are "D t i " the Debtors ' demonst ra t ive ex h ib i t s a re "D

Demo ti" the Equity Commit tee 's ex h ib i t s a re "EC ti" Aure l ius '

ex h ib i t s a re "Au # i" the TPS Consor t ium's ex h ib i t s are "TPS # i"

the Appaloosa/Owl Creek exh ib i t s a re "AOC t i " and the WMl SeniorNoteholders ' Group ex h ib i t s a re "WMI NG #."

4



Cred i to r s ' Committee, the WMI Senior Noteholders ' Group, the

P la in t i f f s in th e ANICO L i t ig a t io n , and the Indenture Trus tees o f

the Senior , the Senior Subordina ted , and the PIERS?

( co l l ec t iv e ly , the "Plan Suppor ters" ) .8 The Modified Plan i s

still opposed by th e Equity Committee, th e p u ta t iv e holder s of

the TPS,9 holder s o f Li t iga t ion Tracking Warrants ( the "LTW

Holders") , cer ta in WMB Noteholders , Normandy H i l l Capi ta l L.P. ,

and severa l ind iv idua l shareholders and c red i t o r s 10

( co l l ec t iv e ly , the "Plan Objec tors" ) . Hear ings were held on July

13-15 and 18-21, 2011, to cons ider conf i rmat ion of the Modified

Plan . Post-hear ing b r i e f s were f i l ed by i n t e r e s t ed p a r t i e s on

August 10, 2011, and o r a l argument was heard on August 24, 2011.

The mat te r i s now r ipe fo r dec i s ion .

7 The PIERS are Pre fe r red Income Equi ty Redeemable

Secu r i t i e s i s sued by th e Washington Mutual Capi ta l Trus t 2001

("WMCT 2001") . Th e proceeds received by WMCT 2001 were used to

purchase jun io r subordinated defe r rab le i n t e r e s t debenturesi s sued by WMI. (See WMI NG 7.)

g Many of the Plan Suppor ters do, however, r eques t ce r t a i n

changes to the Modified Plan, some of which c o n f l i c t with othe r

reques ted changes.

9 The TPS holder s have now div ided in to tw o groups, wi thsepara te counsel , making separa te arguments . They are r e fe r red

to here in as the TPS Group and the TPS Consort ium.

W The i nd iv idua l Plan Objectors inc lude Phi l ipp Schnabel ,

Will iam Duke, James Berg, Kermit Kubitz , Char les McCurry, and

Be t t i na M. Haper.

5



I I . JURISDICTION

Congress has l eg i s l a t ed t h a t the Bankruptcy Court has core

sub j e c t mat te r j u r i sd i c t i o n over approval of se t t l ement s o f

c la ims and countercla ims and conf i rmat ion of plans of

reorgan iza t ion . 28 U.S .C. § § 1334 & 157 (b) (2 ) (A), (B), (C), (K),

(L ) , (M), (N) , & ( 0 ) .

The TPS Consortium contends , however, t h a t the Court cannot

e n t e r a f i n a l order on conf i rmat ion fo r tw o reasons . r s t , th e

TPS Consortium argues t h a t th e Bankruptcy Court l acks

j u r i sd i c t ion to confirm the Modified Plan because to do so th e

Court must decide the e s t a t e ' s c la ims aga ins t JPMC and the FDIC,

over which only an Art ic le I I I cour t has j u r i s d i c t i o n . Stern v.

Marshal l , 131 S. C t. 2594, 2609 (2011) . At the commencement of

the conf i rmat ion hear ings , th e TPS holders acknowledged t h a t the

Bankruptcy Cour t had au th o r i t y to conduct th e conf i rmat ion

hear ing bu t asser ted t h a t the Court could not en te r a f i n a l

order . Ins tead, the TPS Consortium contended t h a t the Bankruptcy

Cour t must presen t proposed f ind ings of f ac t and conclus ions of

law to the D i s t r i c t Court , fo r considera t ion de novo. 28 U.S.C.

§ 157 (c) (1) .

Second, th e TPS Consortium argues t h a t th e Bankruptcy Court

has been dives ted of j u r i sd i c t ion over the d i spu ted TPS because

th e TPS Consortium has appealed the Cour t ' s ru l ing in the TPS

Adversary t h a t they no longer have any i n t e r e s t in th e TPS bu t

6



only have an i n t e r e s t in WMI p re fe r red s tock. Wash. Mut., 442

B.R. a t 304. I t contends t ha t , as a re su l t , the Court must order

t ha t theTPS

be escrowed (and no t t r an s fe r r ed toJPMC

pur suan t to

the GSA and the Modified Plan) u n t i l the D i s t r i c t Court ru les on

the pending appeal .

A. Effec t of Stern v. Marshal l

The TPS Consortium argues t h a t under the Supreme Cour t ' s

recent dec is ion in Stern v. Marshal l , the Bankruptcy Court does

not have j u r i sd i c t ion over the claims the es t a t e has agains t JPMC

or the FDIC (and does not have j u r i sd i c t ion to approve any

se t t l ement of those claims) because the under lying claims are

~ t h e s tu f f of the t r ad i t i o n a l ac t ions a t common law t r i e d by the

cour t s a t Westminster" and must be decided by an A r t i c l e I I I

cour t . 131 S. Ct. a t 2609 (quoting N. Pipe l ine Constr . Co. v.

Marathon Pipe Line Co. , 458 U.S. 50, 90 (1982)) . The TPS

Consortium argues t h a t Stern v. Marshal l i s di rec t ly appl i cab le

in t h i s case because the under lying di spu tes with JPMC and the

FDIC a re typ ica l of causes of act ion which only A r t i c l e I I I

cour t s can ad jud ica te , invo lv ing s t a t e corpora te law, t o r t law,

f raudulent conveyance law, as well as fede ra l i n t e l l e c tu a l

proper ty and t o r t cla ims. The TPS Consortium argues t h a t t h i s i s

not a mat te r wi th in the ~ p a r t i c u l a r i z e d area of law" with which

bankruptcy cour ts t y p i ca l l y deal and a re cons idered exper t s a t

re so lv ing . Id . a t 2615. It contends t h a t th i s i s so even though

7



Congress has express ly gran ted core j u r i sd i c t ion to t h i s Court

pur suan t to sec t ion 157 (b) (2) . Id . a t 2608 (holding t h a t

bankruptcy cour t d id not have j u r i sd i c t ion over s t a t e law

counterc la im to a f i l ed proo f of claim desp i t e core j u r i sd i c t i o n

des igna t ion in 28 U.S.C. § 157 (b) (2) (C)) .

The Plan Suppor ters disagree with the TPS Consor t ium's

reading o f the S tern v. Marshal l dec i s ion . They note t h a t the

Supreme Cour t i t s e l f recognized the narrowness of its ru l ing .

131 S. C t. a t 2620 ( f inding t h a t Congress had exceeded Art i c l e

Ill's l imi ta t ion " in one i so l a t ed re spec t " and f ind ing only t h a t

the bankruptcy cour t l acked au th o r i t y to en te r a f i n a l judgment

on a countercla im a r i s i n g under s t a t e law which d id not need to

be resolved in order to ru le on th e proo f of c la im) . See a l so

Salander O'Re i l ly Gal l e r i e s , No. 07-30005, 2011 WL 2837494, a t *6

(Bankr. S.D.N.Y. Ju ly 18, 2011) (concluding t h a t the Supreme

Cour t ' s opin ion in Ste rn v . Marshal l emphasizes t h a t it i s

l im i t ed to the pa r t i cu la r ci rcumstances surrounding the e s t a t e ' s

counterc la im in t h a t case ) .

In Stern v. Marshal l , the Supreme Cour t held t h a t to f ind

bankruptcy cour t j u r i sd i c t ion the cour t must cons ide r "whether

the ac t ion a t i s sue stems from the bankruptcy i t s e l f or would

n eces sa r i l y be resolved i n the claims al lowance pr oc e s s . " 131 S.

C t. a t 2618. Th e concurr ing op in ion also suggested t h a t in

i ns t ances where there i s "a f i rmly es tab l i shed h i s t o r i c a l

8



prac t i ce" a l lowing non-Art ic le I I I judges to make a

de te rmina t ion , they should be permi t ted to cont inue doing so .

Id . a t 2621 (concurring opinion) .

The Court concludes t h a t the Stern v. Marshal l decis ion does

not suppor t the TPS Consort ium's content ion t ha t the Court lacks

j u r i sd i c t ion over the GSA or conf irmat ion of the Modified Plan

fo r seve ra l reasons .

1. Histo r ica l context

Approval of se t t l ement s by bankruptcy cour ts i s "a f i rmly

es t ab l i sh ed h i s to r i ca l prac t i ce" t ha t s t re tches back before the

enactment of the Bankruptcy Code to the Bankruptcy Act and,

t h e re fo re , the bankruptcy cour t may cont inue to exerc i se t ha t

j u r i s d i c t i o n . Id .

Cur ren t ly , Rule 9019 provides t he cour t with the au th o r i t y

to "approve a compromise or se t t l ement . " Fed. R. Bankr. P.

9019(a). Bankruptcy Rule 9019 i s the successor to Bankruptcy

Rule 919, which provided "on app l ica t ion by the t rus t ee or

rece iver and a f t e r hear ing on not i ce to the cred i to rs . the

cour t may approve a compromise or se t t l ement ." Fed. R. Bankr. P.

919 (a) (1982) ( repealed) . See Magil l v. Spr ingf ie ld Marine Bank

(In re Heiss inger Res. Ltd . ) , 67 B.R. 378, 382 (C.D. Ill. 1986)

(not ing t h a t Bankruptcy Rule 9019 i s s imi l a r to Rule 919, "which

had been in te rp re ted to give the bankruptcy cour t broad au thor i ty

to approve comprom ises"). Rule 919 was based on sec t ion 27 of

9



the Bankruptcy Act which s t a t ed t h a t ~ t h e rece iver or t r u s t ee

may, with approval of the cour t , compromise any controversy

a r i s i n gin the admin i s t ra t ion

ofthe

es t a t e upon such terms as he

may deem for the b es t i n t e r e s t of the es t a t e . " 11 U.S.C. § 50

(1976) ( repealed 1978) .

Compromises were rou t ine ly approved under the Bankruptcy Act

and cont inue to be approved by bankruptcy cour t s in the contex t

of almost every bankruptcy case . See, e . g . , Pro tec t ive Comm. fo r

Indep. Stockholders of TMT T ra i l e r Ferry , Inc . v. Anderson, 39 0

U.S. 414, 424 (1968) (holding t h a t ~ [ c ] o m p r o m i s e s a re 'a normal

p a r t of the process of r eo rg an iza t io n . ' ") (quot ing Case v. L.A.

Lumber Prods. Co., 308 U.S. 106, 130 (1939)) ; Myers v. Mart in (In

re Mart in) , 91 F. 3d 389, 393 (3d Cir . 1996) ( ~ T o minimize

l i t i g a t i o n and expedi te the admin i s t ra t ion of a bankruptcy

es t a t e , ' [c]ompromises are favored in bankruptcy . ' ... Indeed,

it i s an unusual case in which there i s not some l i t i g a t i o n t h a t

i s s e t t l ed between the represen ta t ive of the es t a t e and an

adverse p ar ty . " ) (quot ing 9 Col l i e r on Bankruptcy 9019.03[1]

(15th ed. 1993)); In re Okwonna-Felix, No. 10-31443-H4-13, 2011

WL 3421561, a t *4 (Bankr. S.D. Tex. Aug. 3, 2011) (holding t h a t

Stern v. Marshal l does not preclude a bankruptcy cour t from

exerc i s ing j u r i sd i c t ion to cons ide r a se t t l ement which is based

~ e n t i r e l y on fede ra l bankruptcy law (both [Rule 9019] and the

case law ins t ruc t ing how to apply the Rule ) " ) ; In re Drexel

10



Burnham Lambert Grp. , In c . , 138 B.R. 723, 758 (Bankr. S.D.N.Y.

1992) ("Compromises a re favored by the Courts because they al low

the es t a t e to avoid the expenses and burdens assoc ia ted with

l i t i g a t i n g contes ted c la ims . " ) (c i t a t ions omi t ted) . See

genera l ly Reynaldo Anaya Valencia , Th e Sanc t i ty o f Set t lements

and the Sign i f i cance of Court Approval: Discern ing Cl a r i t y from

Bankruptcy Rule 9019, 78 Or. L. Rev. 425, 431-32 (1999) ("The

glue t h a t of ten holds the bankruptcy process t oge the r i s the

a b i l i t y of p a i t i e s to r eso lve di spu tes by se t t l ement ins tead of

l i t i g a t i o n . I f bankruptcy judges had to t r y a much l a rg e r

percen tage of mat te r s than they cu r ren t ly do, the system would

sure ly bog down. Thus, the san c t i t y of se t t l ement s can hard ly be

overemphasized.") ( foo tno tes omi t ted) .

Set t lements a re o f t en inc luded in a plan of reorgan iza t ion .

Valencia , The Sanc t i ty of Set t lements , 78 Or. L. Rev. a t 447.

Indeed, sec t ion 1123(b) (3 ) (A) of the Bankruptcy Code express ly

s t a t e s t h a t "a plan may provide fo r the se t t l ement o r

adjus tment o f any claim or i n t e r e s t belonging to the debtor or to

the es t a t e . " 11 U.S.C. § 1123(b) (3) (A). Confirmat ion of a plan

of reorganiza t ion i s within the bankruptcy cour t ' s co re

j u r i sd i c t ion . 28 U. S. C. § 157 (b) (2) (L). See a lso In re AOV

Indus . , In c . , 79 2 F.2d 1140, 1145-46 (D.C. Cir . 1986) ("The

approval of a d i sc l o su r e s ta tement and the conf i rmat ion of a

reorganiza t ion plan a re c l ea r l y proceedings a t the core of

11



bankruptcy law. . . . Accordingly, we f ind t h a t the bankruptcy

cour t had j u r i sd i c t ion to approve [them] . f f ) .

2. Nature of se t t l ement approval

Second, t he re i s a fundamental di f fe rence between approval

of a se t t l ement of claims (which the Cour t i s being asked to do

here) and a ru l ing on the mer i t s o f the cla ims. See, e .g . ,

Matsush i ta Elec . Indus . Co. , Ltd . v. Eps te in , 516 U.S. 367, 382

(1996) (holding t h a t a Delaware Chancery Cour t judgment s e t t l i n g

sha reho lde rs ' s t a t e and fede ra l c la ims was e n t i t l e d to prec lus ive

e f f ec t i v e because U[w]hile it i s t rue t h a t the s t a t e cour t

assessed the genera l worth o f the federa l c la ims in determin ing

the fa i rness of the se t t l ement , such assessment does not amount

to a judgment on t he mer i t s of the c l a ims . " ) .

As an i n i t i a l mat te r , a cour t does no t have to have

j u r i sd i c t ion over the under ly ing cla ims in order to approve a

compromise of them. See, e . g . , Matsush i ta Elec . , 516 U.S. a t 381

(holding t h a t U[w]hile § 27 p ro h ib i t s s t a t e cour t s from

ad jud ica t ing cla ims a r i s i n g under the Exchange Act, it does not

p ro h i b i t s t a t e cour t s from approving the r e l ease of Exchange Act

c la ims in the se t t l ement o f su i t s over which they have proper ly

exerc i sed j u r i sd i c t ion , i.e., s u i t s a r i s i n g under s t a t e la w or

under fede ra l law fo r which there i s concurrent j u r i s d i c t i o n . " ) ;

Grimes v. Vita l ink Commc'ns Corp . , 17 F.3d 1553, 1563 (3 d Cir .

1994) ( s t a t i n g t h a t " [w]h i l e t h i s ru le of law may seem anomalous

12



a t f i r s t glance, it i s widely recognized t h a t cour t s without

j u r i sd i c t ion to hear ce r t a i n cla ims have the power to re lease

thoseclaims as p a r t of

a

judgment" approvinga

se t t l ement

inc lud ing " fed e ra l cour t s en te r ing judgments t h a t r e l ease s t a t e

cla ims t h a t they would not have j u r i sd i c t iona l competency to

en t e r t a i n in the f i r s t i ns t ance" because " [ t ] h i s ru le of law

serves the impor tant pol i cy i n t e r e s t of j u d i c i a l economy by

permi t t ing pa r t i e s to en te r i n to comprehensive se t t l ements" )

(c i t a t ions omi t ted) . Cf. Musich v. Graham (In re Graham), Adv.

No . 11-01073, 2011 WL 2694146, a t *3 n.27 (Bankr. D. Colo. July

11, 2011) (analyz ing Stern v. Marshal l dec is ion and concluding

t h a t bankruptcy cour t had s t a t u t o ry and co n s t i t u t i o n a l

j u r i sd i c t i o n to determine d i sch a rg eab i l i t y of a c r i mi n a l / t o r t

claim over which it d id not have j u r i sd i c t i o n ) .

The s tandards which a cour t must apply in cons ide r ing a

se t t lement es t ab l i sh t h a t the cour t i s no t render ing a f i n a l

dec is ion on the mer i t s of the under ly ing cla ims be ing

compromised. See, e . g . , TMT T r a i l e r Ferry , 390 U.S. a t 424

( f inding t h a t a bankruptcy judge should form "an educated

es t ima te of the complexi ty, expense , and l i k e l y dura t ion of such

l i t i g a t i o n , the poss ib le d i f f i c u l t i e s of co l l ec t in g on any

judgment which might be obta ined , and a l l othe r f ac to r s r e l e va n t

to a fu l l and f a i r assessment of the wisdom of the proposed

compromise.") (emphasis added); In re W.T. Grant Co. , 699 F.2d

13



599, 608 (7th Cir . 1989) ( in approving a se t t l ement , the

r e sp o n s i b i l i t y of the bankruptcy cour t " i s not to decide the

numerous ques t ions of law and f ac t r a i s ed . . . but r a th e r to

canvass the i s sues and see whether the se t t l ement ' f a l l [ s ] below

the lowest poin t in the range of reasonableness . 'H) (c i t a t ions

omi t ted) ; In re Mart in , 212 B.R. 316, 319 (B.A.P. 8th Cir . 1997)

( s t a t i n g t h a t "it i s not necessary fo r a bankruptcy cour t to

conc lus ive ly determine c la ims sub jec t to a compromise, nor must

the c ou r t have a l l o f the in format ion necessary to r eso lve the

f ac tu a l dispute , for by so doing, t he re would be no need of

se t t l ement . H) .

The " lowest po i n t in the range of reasonableness" i s f a r

from the s tandard r equ i r ed fo r an Art i c l e I I I cour t to en te r a

f i n a l determinat ion on the mer i t s of the cla ims. The Cour t ' s

conclus ion in the January 7 Opinion was not a decis ion on the

mer i t s of the under ly ing cla ims but merely a determinat ion t h a t

the se t t l ement of those cla ims by the Debtors on the terms of the

GSA was reasonable . Wash. Mut. , 442 B.R. a t 345.

3. Nature of cla ims compromised

Thi rd , the approval of the GSA in t h i s case i s pa r t i cu la r ly

with in the core j u r i s d i c t i o n of the Bankruptcy Court because it

dea ls with a determinat ion o f what i s proper ty o f the e s t a t e .

See 11 U.S.C. § 541(a) ( s t a t ing t h a t " [ t ]h e commencement of a

case under ... t h i s title c rea t e s an es t a t e [which] i s

14



comprised of a l l the fol lowing proper ty , wherever l oca ted and by

whomever held . . . [ includ ing] a l l l eg a l or equ i t ab le i n t e r e s t s

of the debtor in p ro p e r t y . " ) .

In t h i s case , the c la ims which are resolved by the GSA

l a rg e ly re l a t e to who owned sp ec i f i c proper ty : the bank depos i t s

in the name of WMI a t WMB and WMB, f sb; the tax refunds due fo r

the con so l ida ted tax group which included WMI and WMBi the TPSi

i n t e l l e c t u a l proper ty ' ; employee r e l a t ed as se t s ( including pens ion

plans and insurance p o l i c i e s ) i the goodwil l l i t i g a t i o n t h a t was

the sub jec t of the Li t iga t ion Tracking Warrants ( the "LTWs"); and

var ious o t he r miscel laneous asse t s . Wash. Mut. , 44 2 B.R. a t 330

44.

It i s without ques on t h a t bankruptcy cour t s have exc lus ive

j u r i sd i c t ion over proper ty of the e s t a t e . See 28 U.S.C. §

1334(e) ( s t a t ing t h a t the cour t in which a case under title 11 i s

commenced or i s pending " s h a l l have exc lus ive j u r i sd i c t ion - (1 )

of a l l the proper ty , wherever loca ted , of the deb tor as of the

commencement of such case , and of proper ty of the es t a t e " ) . See

a l so , Cent. Va. Cmty. ColI . v . Katz, 546 U.S. 356, 363-64 (2006)

( s t a t i n g t h a t " [ c ] r i t i c a l fea tu res of every bankruptcy proceeding

are the exerc i se o f exc lus ive j u r i sd i c t i o n over a l l of the

d eb to r ' s proper ty

...." ) .

That j u r i sd i c t ion inc ludes j u r i sd i c t i o n to decide whether

dispu ted proper ty i s , in f ac t , proper ty of the e s t a t e . See,

15



Salander O'Re i l ly Gal l e r i e s , 2011 WL 2837494, a t *12-13

(concluding t h a t the bankruptcy cour t had core j u r i sd i c t i o n to

decide p r i o r i t y of e s t a t e ' s and c re d i t o r ' s asser ted i n t e r e s t s in

a piece of a r t and denying r eques t fo r a rb i t ra t ion of i s su e ) ;

Mata v. Ecl ipse Aerospace, Inc . (In re AE Liguida t ion , Inc . ) , 43 5

B.R. 894, 904-05 (Bankr. D. Del. 2010) (holding t h a t the

bankruptcy cour t had exc lus ive j u r i sd i c t i o n to determine whether

o r not d i spu ted a i r c r a f t was proper ty of the es t a t e a t the t ime

o f its sa l e ) ; Will iams v. McGreevey (In re Touch Am. Holdings ,

In c . ) , 40 1 B.R. 107, 117 (Bankr. D. Del. 2009) ( s t a t i n g

approvingly t h a t ~ [ v ] a r i o u s cour ts have concluded t h a t mat te r s

requ i r ing a dec la ra t ion of whether cer ta in proper ty comes within

the def in i t ion of ' p roper ty o f the e s t a t e ' as s e t fo r th in

Bankruptcy Code § 541 a re core proceed ings . " ) .

For a l l the above reasons , th e Cour t concludes t h a t it has

j u r i sd i c t i o n to decide conf i rmat ion of the Modified Plan which

incorpora tes the GSA re so lv ing the d i spu ted claims to pu ta t ive

proper ty of the Debtors ' e s t a t e .

B. Effec t of Appeal of TPS Ruling

Th e TPS Consortium argues fu r th e r t h a t the Court i s

precluded from confi rming the Modified Plan by the Di ve s t i t u r e

Rule which provides t h a t an appea l dives t s the lower cour t o f any

fu r th e r j u r i sd i c t i o n over the sub jec t of the appea l . See, e . g . ,

Griggs v. Provident Consumer Disc . Co. , 45 9 U.S. 56, 58 (1982)

16



("The f i l i n g of a not i ce of appea l i s an event o f j u r i s d i c t i o n a l

s ign i f icance - it confers j u r i sd i c t i o n on the cour t o f appeals

and dives t s the d i s t r i c t cour t of i t s cont ro l over those aspec t s

of the case involved in the appeal . H) ; Venen v . Sweet , 758 F.2d

117, 120-21 (3d Cir . 1985) ( ' ' 'Dives t ' means what it says - the

power to ac t , in a l l but a l imi ted number of ci rcumstances , has

been taken away and placed elsewhere . H) ; Bia lac v. Harsh Inv .

Corp. (In re Bia lac ) , 69 4 F.2d 625, 627 (9th Cir . 1982) ("Even

though a bankruptcy cour t has wide l a t i t ude to r econs ide r and

vaca te i t s own p r i o r dec i s ions , not even a bankruptcy cour t may

vacate or modify an order whi le on appea l . H) ; In re Whispering

Pines E s t a t e s , 369 B.R. 752, 75 7 (B.A.P. 1 s t Cir . 2007) ( " I t i s

wel l es t ab l i sh ed t h a t the f i l i n g of a not i ce of appea l i s an

event of j u r i sd i c t iona l s ign i f icance in which a lower cour t loses

j u r i sd i c t i o n over th e sub jec t mat te r involved in the appeal . The

purpose of the genera l ru l e i s to avoid the confusion of plac ing

the same mat te r be fore tw o cour t s a t the same. t ime and prese rve

the i n t e g r i t y of the appeal process .H

) (c i t a t ions omi t ted) ; In re

DeMarco, 258 B.R. 30, 32 (Bankr. M.D. Fla . 2000) ("The p a r t i e s

appear to agree t h a t the Cour t does not have j u r i sd i c t ion to

cons ide r mat te r s which would i n t e r fe re with the appea l and the

j u r i sd i c t i o n of the ap p e l l a t e cour t , bu t t h a t th e Cour t does have

j u r i sd i c t i o n over , and should proceed with, othe r aspec t s o f th e

case.H); In re St rawber ry Square Assocs . , 15 2 B.R. 699, 701

17



(Bankr. E. D. N. Y. 1993) (not ing t h a t " the bankruptcy c ou r t [may

not] exerc i se j u r i sd i c t i o n over those i s sues which, a l though not

themselves on appeal , never the les s so impact t hose on appea l as

to e f f ec t i v e l y ci rcumvent the appea l p r o c e s s . " ) .

The TPS Consortium sp ec i f i ca l l y objec t s to the prov is ions

of the Modified Plan t h a t au thor ize th e t r an s fe r of the TPS from

the Debtors to JPMC l l because ownership of the TPS i s the sub j e c t

of t he appea l . The TPS Consortium argues t h a t the Modified Plan

must recognize the l i mi t s of t h i s Cour t ' s a b i l i t y to dea l with

the TPS by provid ing t h a t the TPS w i l l be held in escrow u n t i l

the appea l i s r eso lved .

The Plan Suppor ters disagree with t he T P S Consor t ium's

a r t i cu la t ion of the Dives t i tu re Rule as appl ied in bankruptcy

cases . They note t h a t in the bankruptcy contex t the appea l o f

one ru l ing does not mean t h a t the en t i r e bankruptcy case i s

s tayed . Th e Bankruptcy Rules make t h i s c l ea r by provid ing t h a t

dur ing an appeal , " the bankruptcy judge may suspend or order the

c on t inua t i on o f othe r proceedings in the case under the Code o r

make any other appropr ia te order dur ing the pendency of an appea l

11 Sp ec i f i ca l ly , th e TPS Consortium argues t h a t th e Modified

Plan provides t h a t th e TPS w i l l be t r an s fe r red pursuan t to

sec t ion 363 to JPMC, which wi l l be a good fa i th purchaser ande n t i t l e d to the p ro tec t io n s of sec t ion 363(m). (D 255 a t §§

2.1 (c) (i) & 38.1 (a ) (10) .) The Modified Plan a l so provides t h a t

the Debtors , JPMC, and the FDIC w i l l be re l eased from any c la ims

r e l a t ed to the TPS which a re held by any t h i rd p ar ty cla iming

through the Debtors . ( Id. a t §§ 2 . I ( c ) , 23.2 , 43 .2 , 43 .6 , 43 .7 ,

43.9 & 43.12; D 255H a t §§ 2 .3 , 3 .2 . )

18



on such terms as wi l l p ro t ec t the r igh t s of a l l p a r t i e s in

i n t e r e s t . " Fed. R. Bankr. P. 8005. See a l so In re Haael , 184

B.R. 793, 798-99 (B.A.P. 9 thCir .

1995) (holding t h a t Rule 8005

"does not provide t h a t the bankruptcy cour t must s t ay a l l

proceedings" bu t t h a t it has d i sc re t io n t o s t ay any proceedings) .

Th e Plan Suppor ters argue t h a t contrary to the suggest ion of

the TPS Consortium, absent a s t ay pending appeal,12 the lower

cour t may t ake a l l ac t ions necessary to implement or enforce the

order from which an appea l has been t aken . See, e .g . , Hope v.

Gen. Fin . Corp. of Ga. (In re Kahih ikolo) , 80 7 F.2d 1540, 1542-43

(11th Cir . 1987) (d ismiss ing appea l as moot because, absent s tay

pending appeal , the secured l ender was f ree to t r e a t order

gran t ing r e l i e f from s tay as f i n a l and s e l l the c o l l a t e r a l ) ; In

re VII Holdings Co. , 362 B.R. 663, 666 n .3 (Bankr. D. Del. 2007)

(holding t h a t "absent a s tay pending appeal , [ the lower cour t ]

may r e t a i n j u r i sd i c t ion ' t o decide i s sues and proceedings

d i f f e r e n t from and c o l l a t e r a l to those involved in the appea l

. . [and] may also ' en force the order or judgment appea led . ' " )

12 Th e Plan Suppor ters argue t h a t the l o g i ca l extens ion of

the TPS Consor t ium's argument would e f f ec t i v e l y be t o e l imina te

the need to ask fo r (o r to comply with the requi rements of) a

s t ay pending appea l . They contend t h a t t o ge t a s t ay pending

appeal of the order en te red in the TPS Adversary , the TPSConsortium would have to pos t a supersedeas bond. Fed. R. Bankr.

P. 7062. 10 Co l l i e r on Bankruptcy 8005.03 (2011) {"the

procedure mandates t h a t an appe l l an t des i r ing the s tay of a

(judgment] determin ing an i n t e r e s t in proper ty should presen t to

the bankruptcy cour t a supersedeas bond in an amount adequate to

p r o t e c t the appel lee" ) .

19



(c i t a t ions omi t ted) ; In re Bd. of Dir . of Hopewell Int'l Ins .

L td . , 25 8 B.R. 580, 583 (Bankr. S.D.N.Y. 2001) (holding t h a t "a

bankruptcy cour t r e t a i n s j u r i sd i c t ion , while an appea l i s pending

and in the absence o f a s t ay , to enforce the [appealed] order o r

judgment") .

The Court agrees with the Plan Suppor ters . Th e TPS

Consor t ium's argument t h a t the Di ve s t i t u r e Rule provides t h a t an

appeal dives t s the bankruptcy c ou r t of a l l j u r i sd i c t ion over the

mat te r i s too broad . As expla ined by the Cour t in Whispering

Pines:

As cour t s have noted, however, a bankruptcy case

t y p i ca l l y r a i se s a myriad of i s sues , many t o t a l l y

unre la ted and unconnected with the i s sues involved in

any given appeal . The appl i ca t ion of a broad ru le t h a t

a bankruptcy cour t may not cons ide r any r eques t f i l ed

while an appea l i s pending has the p o t en t i a l to

severe ly hamper a bankruptcy co u r t ' s a b i l i t y to

adminis te r i t s cases in a t imely manner.

369 B.R. a t 758.

Th e co r rec t s ta tement of the Dives t i tu re Rule i s t h a t so

long as the lower c ou r t i s no t a l t e r ing the appea led order , the

lower cour t r e t a i n s j u r i sd i c t ion to enforce it. See, e . g . , In re

Dadasht i , No . CC-07-1311, 2008 WL 8444787, a t *6 (B.A.P. 9th Cir .

Feb. 12, 2008) ( s t a t i n g t h a t "when t he re i s no s tay pending

appeal , the bankruptcy cour t r e t a i n s j u r i sd i c t i o n to en fo rce an

order t h a t i s on appeal , on condi t ion t h a t in doing so , the

bankruptcy cour t does no t s i g n i f i can t l y a l t e r or expand upon the

terms of t h a t order .H) ; Hagel , 184 B.R. a t 798 ("cour ts have

20



recognized a di s t inc t ion between ac ts undertaken to enforce the

judgment which are permiss ib le , and ac t s which expand upon o r

a l t e r it, which a re p ro h i b i t ed . " ) .

The cases on which th e TPS Consortium r e l i e s do not change

t h i s genera l ru le and a re eas i l y dis t ingu ishab le . 13 In

Whispering Pines , fo r example, the lower cour t modif ied the order

t h a t was on appea l (conf i rmat ion of the l en d e r ' s plan t h a t gave

the t r u s t ee t ime to s e l l the proper ty before the l e nde r could

fo rec lose on i t ) by gran t ing the l ender immediate r e l i e f from the

s tay t o fo rec lose . 369 B.R. a t 759. In Bia lac , the bankruptcy

cour t enjoined the secured l ender from fo rec los ing while the

order g ran t ing the l end er r e l i e f from the s t ay to fo rec lose was

on appeal . 694 F.2d a t 627. In both i ns t ances , the bankruptcy

cour t was not merely enforc ing the appea led order bu t was

13 Most of the cases c i t ed by the TPS Consort ium merely

s tand for t he p ropos i t ion t h a t approval of a se t t l ement i s a

f ina l order for purposes of appea l or has re s j u d i ca t a e f f e c t .

See, e .g . , United Sta t e s v. Kellogg (In re West Tex. Mktg.

Corp . ) , 12 F.3d 497, 501 (5th Cir . 1994) (concluding t h a t whi le

bankruptcy cour t approval of se t t l ement was not a f i n a l order

because no separa te order was entered on th e docket o t he r than a

dismissa l of the adversary , th e ru l ing was en t i t l ed to res

jud ica ta e f f e c t ) ; SEC v . Drexel Burnham Lambert Grp. , Inc . (In reDrexel Burnham Lambert Grp. , In c . ) , 960 F.2d 285, 289 (2d Cir .

1992) ( f inding t h a t order approving se t t l ement agreement, which

was cont ingent on l a t e r conf i rmat ion of a plan , was f i n a l fo r

purposes of appea l ) ; In re Beaulac, 294 B.R. 815, 818 (B.A.P. 1 s t

Cir . 2003) (consider ing order approving se t t l ement as f i n a l fo r

purposes of appeal ) .

21



modifying i t .14 In DeMarco, the bankruptcy cour t acknowledged

t h a t it should cons ider conf i rmat ion of the d eb to r ' s chapte r 13

plan if it did not i n t e r f e r e with the appea l but dec l ined to do

so because it found t h a t conf i rmat ion might render the appeal

moot. 25 8 B.R. a t 36.

Unlike the Cour t in DeMarco, the Court dec l ines to exerc ise

i t s discre t ion under Rule 8005 not to cons ide r the Modified Plan

simply because it might render moot the TPS Consort ium's appeal

of the decis ion in the TPS Adversary. Th e TPS Consortium could

have avoided t h i s by seeking a s tay pending appeal . To do as the

TPS Consortium requests would preclude the Court from dea l ing

with conf i rmat ion of any plan of reorgan iza t ion t h a t impl ica tes

the TPS and poss ib ly s t a l l these bankruptcy cases i n d e f i n i t e l y .

Fur ther , in cons ide r ing conf i rmat ion o f the Modified Plan,

the Court i s not being asked to modify the o rder t h a t i s on

appeal (which held t h a t the Debtors own the TPS). Wash. Mut.,

442 B.R. a t 305-06. Rather , the Cour t i s being asked to enforce

i t s order by approving the Modified Plan t h a t provides for the

t r ans fe r or sa l e of the TPS by the Debtors to JPMC as p a r t of the

GSA. Therefore , the Court concludes t h a t it has j u r i sd i c t ion to

14 Th e othe r cases c i t ed by the TPS Consortium are a l so

inapp l icab le . See, e .g . , Grigas , 45 9 U.S. a t 61 (holding t h a t

not i ce of appeal f i l ed while motion to a l t e r judgment was pending

was a n u l l i t y ) ; Venen, 758 F.2d a t 120, 123 (holding t h a t t r i a lc ou r t d id not have j u r i sd i c t ion to gran t motion fo r

recons ide ra t ion and vaca te order t h a t was on appeal) .

22



cons ide r conf i rmat ion of the Modified Plan, inc lud ing the

t r a n s f e r of the TPS, notwiths tanding the pendency of an appea l

from i t s p r i o r order determin ing t h a t the Debtors own them. See,

Kahihikolo, 807 F.2d a t 1542-43; VII Holdings , 36 2 B.R. a t

666 n .3 ; Bd. o f Dir . of Hopewell I n t ' l , 258 B.R. a t 583.

I I I . DISCUSSION

A. Modif icat ions Made per January 7 Opinion

Th e Plan Suppor ters a s s e r t t h a t the Debtors have made

cor rec t ions to the Modified Plan to f ix a l l o f , t h e d ef i c i en c i e s

i den t i f i ed by the Cour t in i t s January 7 Opinion. Sp ec i f i ca l ly ,

they contend t h a t (1 ) the r e l ease , i n junc t ion , and exculpa t ion

provis ions o f the Modified Plan now a re l imi ted to r e l eases by

the Debtors, (2 ) the r e l ease and exculpa t ion language and pa r t i e s

have been changed to r e f l e c t only those the Court f e l t were

en t i t l ed to be re l eased or exculpated , and (3 ) the ac t i v i t i e s

r e l a t ed to the LTWs have been excluded from the excu lpa t ion

prov i s ion . Compare Wash. Mut. , 442 B.R. a t 348-56 with D 25 5 a t

§§ 28.15, 43.5, 43.7, 43.8, 43.9, 43.12.

Th e Modified Plan a lso conta ins p rov is ions fo r Cour t

approval of fees to be paid by the Debtors . Compare 442 B.R. a t

365 with D 255 a t §§ 3.2, 32.12 & 43.18 . Th e LTW Holders

complain, however, t h a t the fees of some of the p a r t i e s (no tab ly

the WMB Noteholders and the Liquida t ing Trustee) a re being paid

23



without Court approval . (D 255 a t § § 21.1 , 28.11.) The Court

agrees t ha t Court approval of those fees i s also r equ i red . 11

U.S.C. § 1129(a}(4) .

In add i t ion , th e Modif ied Plan provides t h a t l a t e - f i l e d

c la ims wi l l be paid before p o s t - p e t i t i o n i n t e r e s t i s paid on

unsecured cla ims . Compare 442 B.R. a t 357 with D 255 a t § 16.2 &

Ex. G. In th e Modified Plan , th e Debtors also r ev i sed th e

de f in i t ion o f unsecured cla ims and provided t ha t if th e LTW

Holders a re determined to hold al lowed unsecured claims t h a t a re

not subordina ted under sec t ion 510, then they w i l l be t r e a ted in

Class 12. Compare 442 B.R. a t 357 with D 255 a t §§ 1.209 & 25.1 .

Th e Debtors a l so so l i c i t e d s tock e l ec t i o n s from th e LTW Holders

and o ther d i spu ted cla ims , so t h a t those c red i to r s would have the

same r igh t s as o ther s in the event t h e i r claims are al lowed.

Compare 442 B.R. a t 36 2 with D.I . 7081.

The Debtors d id not , however, inc lude in th e Modif ied Plan

t ha t sma l le r PIERS holde rs would have th e same r i g h t to

par t i c ipa t e in the r igh t s offe r ing as th e l a rge r PIERS ho lder s .

442 B.R. a t 360-61. Ins t ead th e r igh t s o f fe r in g was e l imina ted .

Th e Debtors expla ined t h a t th i s was done because to expand th e

r igh t s offe r ing to inc lude a l l PIERS would have r e su l t ed in th e

Reorganized Debtor being a pub l i c company, requ i r ing th e Debtors

to update t h e i r f i l i n g s with th e SEC a t the co s t o f m i l l i o n s .

24



(See Tr. 2/18/2011 a t 80-81.}ls

Fi n a l l y , the Modified Plan provides t h a t the Equi ty

Committee wi l l have a rep resen ta t ive on the L iqu ida t ing Trus t

board and t h a t t here w i l l be a mechanism fo r removal o f the

Liqu ida t ing Trus tee . Compare 44 2 B.R. a t 364-65 with 0 255 a t §§

8 .2 & 35 .2 . However, th e Modified Plan provides only fo r removal

o f th e Liquida t ing Trus tee fo r f raud, misconduct , o r breach o f

f iduc iary duty . (0 255 a t § 8 .2 . ) Th e Cour t b e l i ev es t h a t th e

Liqu ida t ing Trus tee must be removable a t th e d i s c re t i o n of a

major i ty o f the Trus t Advisory Board. In add i t ion , th e

composi t ion of th e Trus t Advisory Board must r e f l e c t th e

co n s t i t u en t s who hold Liqu ida t ing Trus t I n t e r e s t s . When

c red i to r s a re pa id in f u l l , t h e i r Liquida t ing Trus t I n t e r e s t s

w i l l be canceled and p re fe r r ed sha reho lde rs w i l l be i s sued

Liqu ida t ing Trus t I n t e r e s t s . (Tr. 7/13/2011 a t 98; 0 255 a t §§

6.3 , 7 .3 , 16 .3 , 18.3 , 19 .3 , 20.3 , 22.1 , 22.2 , 23.1 & 24 .1 . )

Consequent ly , the Trus t must prov ide t h a t when c red i to r s l o s t

t h e i r Liqu ida t ing Trus t I n t e r e s t s , th e c r e d i t o r s ' rep resen ta t ives

on th e Board w i l l be rep laced by r ep re s en t a t i v e s s e l ec t ed by

eq u i t y .

IS It appears , none the le s s , t h a t because s tock i s being

i s sued to c red i to r s under th e Modified Plan , th e Reorganized

Debtor may be a pub l i c company. Th e Debtors have now changed

t h e i r pos i t ion and contend t h a t they w i l l no t be requ i red to

update t h e i r f i l i n g s with th e SEC. See i n f ra Par t F.

25



B. Reasonableness of the GSA

In the January 7 Opinion, the Cour t concluded t h a t the GSA

was reasonable . 442 B.R. a t 345. Af te r reviewing a l l of the

claims being resolved i n the GSA, the Court was not convinced

t h a t the Debtors had a probab i l i ty of achieving a s ign i f i can t ly

b e t t e r re su l t if they were to cont inue to l i t i ga t e than they wil l

rece ive under the GSA cons ide r ing the claims separa te ly or

h o l i s t i c a l l y . Id . a t 344. Th e Cour t fu r ther concluded t h a t it

i s not poss ib le to say t h a t any judgment a ga i n s t JPMC or the FDIC

would not face d i f f i cu l t y in co l lec t ion , esp ec i a l l y if it i s in

the bi l l i ons of dol la rs as the Plan Objectors contend. Id . In

pa r t i cu la r , the Cour t found t h a t the s i g n i f i can t counterc la ims

r a i s ed by JPMC and the FDIC a ga i n s t the Debtors ( in excess of $54

b i l l i o n ) added to the d i f f i c u l t i e s of co l lec t ing from them. Id .

Th e Court also concluded t h a t the complexi ty of the va r ious

l i t i ga t ion and i t s i n t e r r e l a t ed n ess , favored a se t t l ement . Id .

a t 345.

The Plan Supporters contend t ha t the January 7 Opinion i s

the law of the case and may not be a l t e r ed in the absence of an

in tervening change in the law or new evidence. See, e . g . , Hayman

Cash Register Co. v. Sarokin, 66 9 F.2d 162, 169 (3d Ci r . 1982);

In re Ameriserve Food Dist r ib . ( Inc . , 315 B.R. 24, 36 (Bankr. D.

Del. 2004). They contend t h a t no new evidence or i n t e rven ing

change in th e la w has been presented which mer i t s r econs ide r ing

26



the Cour t ' s conclus ion t h a t the GSA i s reasonable .

The TPS Consortium disagrees . I t contends t h a t t he Cour t ' s

January 7 Opinion was not a f ina l order on t h i s i s sue because the

Court denied conf i rmat ion r a t h e r than grant ing it. See, e . g . ,

Gander Mountain Co. v . Cabe la ' s , Inc . , 540 F.3d 827, 830 (8th

Cir . 2008) (holding t h a t ~ [ a ] d i s t r i c t cour t ' s comments dur ing

o ra l argument do no t co n s t i t u t e a f i n a l order sub jec t to the law

of- the-case d o c t r in e" ) ; Cable v. Millennium Dig i t a l Media Sys . ,

L.L.C. (In re Broadst r ipe , L.L.C. ) , 435 B.R. 245, 256 (Bankr. D.

Del. 2010) (holding t h a t ru l ing by s t a t e cour t on motion to

expedi te proceeding was not la w of the case on the meri t s of the

claim) .

Th e Court f inds th e TPS Consort ium's cases dis t ingu ishab le

and agrees with the Plan Suppor ters t ha t i t s ru l ing on the

reasonableness of the GSA rendered as p a r t of the January 7

Opinion i s la w of the case because decided a disputed i s sue .

Cf. Drexel Burnham, 960 F.2d a t 289 ( f inding t h a t order approving

se t t l ement agreement, which was cont ingent on l a t e r conf i rmat ion

of a plan , was f ina l fo r purposes of appeal ) . Th e Equity

Committee agreed t ha t the January 7 Opinion 's ru l ing on

reasonableness of the GSA would not be r e t r i e d . (Tr. 1/20/11 a t

51-52.) The Equity Committee does argue, however, t h a t

in tervening events have occur red which requ i re recons idera t ion of

t h i s Cour t ' s dec i s ion t ha t the GSA i s reasonable .

27



1 . Business t o r t claims

On February 16, 2009, cer ta in holders o f WMI common s tock

and debt secur i t i e s i ssued by WMI and WMB16 f i l ed the ANICO

L i t ig a t io n a ga i n s t JPMC in s t a t e cour t in Galveston County,

Texas, a l leg ing misconduct by JPMC in connec t ion with the se izure

o f WMB and the P&A Agreement. (0 .1 . 6083 a t 23.) On March 25,

2009, the ANICO L i t ig a t io n was removed and t r an s fe r r ed to the DC

Cour t on motion o f JPMC and the FDIC Receiver as in tervening

defendant . (Id . a t 24.) On Apr i l 13, 2010, the DC Court

dismissed the ANICO L i t ig a t io n f inding t h a t under the F inanc ia l

In s t i t u t i o n s Reform Recovery and Enforcement Act of 1989

("FIRREA"), the rece ive rsh ip was the exc lus ive c la ims process fo r

c la ims r e l a t i n g to the sa le o f WMB. Am. Nat. Ins . Co. v.

JPMorgan Chase & Co. , 70 5 F. SUppa 2d 17, 21 (D.D.C. 2010) .

That order was recen t ly reversed on June 24, 2011, by the

Court of Appeals fo r the D.C. Ci rcu i t . Am. N a t ' l I n s . Co. v.

FDIC, 642 F.3d 1137, 1142 (D.C. Cir . 2011) (holding t h a t because

the " s u i t i s aga ins t a t h i rd -p a r t y bank fo r i t s own wrongdoing,

no t aga ins t the depos i to ry i n s t i t u t i o n fo r which the FDIC i s

r e c e i ve r ( i . e . , Washington Mutual) , t h e i r s u i t i s no t a claim

within the meaning of [FIRREA] and thus i s no t barred") (c i t ing

16 Since the su i t w a s f i l ed , a l l claims based on WMI s tock

or debt have been v o lu n ta r i l y dismissed and the ANICO P l a i n t i f f s

cu r ren t ly asse r t r i g h t s only as WMB bondholders. Am. N a t ' l Ins .

Co . v. FDIC, 642 F.3d 1137, 1140 (D.C. Cir . 2011) .

28



Rosa v. Reso lu t ion Trus t Corp. , 938 F.2d 383, 394 (3d Cir . 1991)

(holding t h a t cla ims fo r damages aga ins t assuming bank fo r i t s

own ac t s d id no t f a l l with in j u r i sd i c t i o n a l bar because they d id

no t seek payment from as se t s o f the r e c e i v e r » . As a r e s u l t , the

Plan Objectors contend t h a t the business t o r t claims which the

Debtors have aga ins t JPMC are not bar red and a re p o t en t i a l l y

va luab le as se t s which are being re l eased fo r no cons ide ra t ion

under the GSA.

The Court di sagrees . Despi te the r ecen t ANICO dec is ion , the

l i ke l ihood of success on the Debtors ' business t o r t cla ims, the

delay and c os t of pursu ing them, t h e i r complexi ty, and the

poss ib le d i f f i c u l t i e s o f co l l ec t in g a l l mi l i t a t e in favor o f

approval of the GSA. See, e . g . , TMT T r a i l e r Ferry , 390 U.S. a t

424; In re RFE Indus . , I n c . , 283 F.3d 159, 165 (3d Cir . 2002);

Mart in , 91 F.3d a t 393.

With r e s pe c t to the f i r s t f ac to r , even the D.C. Ci rcu i t

acknowledged t h a t t he re were "knot ty ques t ions" l e f t to be

decided in the case , inc lud ing whether the c la ims belonged

exc lus ive ly to the FDIC as the rece ive r o f WMB.17 Am. N at ' l

17 JPMC and the FDIC Receiver contend t h a t any de r i va t i ve

claim t h a tWMI

may have fo r a l l eged harm toWMB

i s now owned bythe FDIC. 12 U.S.C. § 1821(d) (2 ) (A) (i) (providing t h a t the FDIC

as rece ive r "succeeds to a l l r i g h t s , t i t l e s , powers , and

p r iv i l eg es of . . . any s tockholder H of the bank) . See also

Pare to v . F.D. I .C . , 139 F.3d 696, 700 (9th Cir . 1998) (holdingt h a t § 1821(d) (2) (A) (i) ve s t s in the FDIC a l l r i g h t s and powers

of a s tockho lder o f a bank to br ing a de r i va t i ve ac t io n ) .

29



In s . , 642 F.3d a t 1145. Th e FDIC Receiver fu r th e r argues t h a t

the Debtors d id not f i l e any claim i n the Receiversh ip ac t ion

based on the a l l eged business t o r t c la ims and those claims a re ,

therefore , t ime-bar r ed . C f. 12 U.S.C. § 1464(d} (2 ) (B) (any

c la ims cha l leng ing the appointment of the FDIC as Receiver must

be brought a ga i n s t the OTS with in 30 days of the appointment) .

Even if the Debtors do have an independent business t o r t

cla im aga ins t JPMC, however, they still face s i g n i f i c a n t

obs tac les in success fu l ly prosecu t ing Any claim fo r damages

would requ i re t h a t the Debtors prove t h a t they were so lven t 18 a t

the t ime of the s zure o f WMB, a p o s i t i o n d i amet r i ca l ly opposed

to as se r t i o n s they would need to prove in the pre fe rence and

f r audulen t conveyance c la ims which a re a l so waived as p a r t of the

GSA. The Debtors would a l so have to es t ab l i sh the f ac t s

necessary to win those c la ims, namely t h a t JPMC f raudulen t ly

caused the dec l ine in value of WMB in order to buy it a t a

discount p r i c e .

18 The TPS Consortium asks the Cour t to cons ide r a summary

of and excerp t s from the Senate Report i s sued a f t e r an

i n v es t ig a t io n in to the WMB co l l apse , which it contends shows t h a t

the Debtors have viab le cla ims a ga i n s t t h e i r d i r ec t o r s ando f f i c e r s . That Report , however, a l so noted t ha t the market value

of the Debtors was based on misinformat ion , sugges t ing t h a t the

Debtors might have been i n so l ve n t . (D.I . 8312 a t Ex. A p. 4 .)This would defea t any claim t h a t the Debtors might have on the

bus iness t o r t cla ims, because the Debtors would have suf fe red no

damages.

30



Fur ther , the d i f f i c u l t i e s in co l l ec t in g any judgment a ga i n s t

JPMC have no t changed s ince the Cour t ' s January 7 Opinion. The

GSAr eso lves not only the Debtors ' business t o r t c la ims but the

many dispu ted c la ims which involve a mu l t i p l i c i t y of i s sues

r a i s in g complex arguments about the in te rsec t ion of bankruptcy

law and the regu la t ion o f banks . The Supreme Cour t ' s r ecen t

dec i s ion in S tern v . Marsha l l also makes it l i ke ly tha t , in the

absence of a globa l se t t l ement , the var ious c la ims would have to

be l i t i g a t ed in numerous s t a t e and fede ra l cour t s , which might

r e s u l t in conf l i c t ing de c i s i ons . Continuing the l i t i g a t i o n on

the d i spu ted c la ims wi l l cause a t l e a s t a 3-4 year delay in any

d i s t r i b u t i o n to c red i t o r s , i nc rease post-pe t ion i n t e r e s t and

profess iona l fees (which are curren t ly running a t the monthly

ra te of $30 mil l ion and $10 mil l ion , r e sp ec t iv e ly ) , and involve

complex i s sues inc lud ing sovereign immunity (a f fec t ing even

whether discovery could be t aken of the government agen t s ) ,

pre-empt ion , and j u r i s d i c t i o n .

Given a l l these f ac to r s , the f ac t t h a t one p a r t of the GSA

i s now more u n se t t l ed than it was does no t change the Cour t ' s

mind about the o v era l l reasonableness of the GSA. In f ac t , it

re in forces the Cour t ' s b e l i e f t h a t t h i s i s p rec i s e ly the type of

mul t i - face ted , m u l t i - d i s t r i c t l i t i g a t i o n t h a t c a l l s fo r a globa l

se t t l ement . The Court , t h e re fo re , r ea f f i rms i t s conclus ion t h a t

the GSA provides a reasonable re so lu t ion in l i g h t of the poss ib le

31



re su l t s of the mul t ip le complex l i t i g a t i o n , the l i ke ly

d i f f i c u l t i e s in co l lec t ion , the expense i nhe ren t in any fu r ther

delay, and the paramount i n t e r e s t s of the s t akeholde rs . 442 B.R.

a t 345.

2. Other o b ~ e c t i o n s to reasonableness

Many of the i nd iv idua l shareholders who objec t to

conf i rmat ion of the Modified Plan do so based on the as se r t i o n

t h a t the GSA should not be approved. Some of the objec t ions a re

based on a l leged fac t s fo r which no evidence was presented a t the

conf i rmat ion hear ings . 19 Those objec t ions must f a i l fo r lack of

suppor t in the record.

Many of the i nd iv idua l ob jec to rs a l so repea t arguments

presen ted a t the conf i rmat ion hear ing in December which the Court

al ready addressed in i t s January 7 Opinion. Absent changed f ac t s

or law, the Court wil l not r econs ide r t h a t dec i s ion . See, e . g . ,

Hayman, 669 F.2d a t 169; Ameriserve, 315 B.R. a t 36.

Th e i nd iv idua l ob jec to rs do, however, re fe r to some i s sues

t h a t the Court can consider . Sp ec i f i ca l ly , they reference some

recen t dec i s iona l la w t h a t they say the Court should cons ide r in

determining r easonableness .

19 These inc lude a l l eg a t io n s about the value t h a t JPMC

received in acquir ing WMB. (D. l . 8407, 8408.)

32



a . Colonia l BancGroup decis ion

The f i r s t was a dec i s ion in the Colonia l BancGroup case in

which the C o u r ~ f o u n d t ha t the FDIC did not have the r i g h t to s e t

o f f cla ims it had agains t depos i t s t ha t the debtor had in i t s

former subs id ia ry bank t ha t had been se ized and sold to another

bank. In re The Colonial BancGroup, Inc . , Bankr. No. 09-32303,

2011 WL 239201, a t *9 (Bankr. M.D. Ala. Jan . 24, 2011). This ,

they argue, means t ha t the Debtors would have won the f i g h t over

who had title to the depos i t accounts in WMI's name a t WMB.

The Court does not f ind, however, t ha t the Colonial

BancGroup decis ion a l t e r s i t s conclusion on the reasonableness of

the GSA fo r tw o r easons . F i r s t , t ha t decis ion did not dea l with

the claim by the acqui r ing bank to the deposi t accounts but only

d ea l t with the FDIC c la im. Id . Second, the Court al ready

concluded in the January 7 Opinion t ha t the Debtors had a s t rong

l ike l ihood of success on the meri t s on t h e i r claim of ownership

to the depos i t accounts . 442 B.R. a t 331. The Colonia l

BancGroup decis ion merely re in forces t h a t conc lus ion .

b . Team Financia l dec is ion

The i nd iv idua l objec to rs a l so r e f e r the Court to the

dec i s ion in Team Financ ia l in which the Bankruptcy Court held

t h a t the debtor , not the FDIC, owned a tax refund rece ived by the

debtor fo r i t s consol ida ted tax group which inc luded a bank fo r

which the FDIC was the r ece iv e r . In re Team Fin . , Inc . , Bankr.

33



No. 09-10925, 2010 WL 1730681, a t *10 (Bankr. D. Kan. Apr. 27,

2010) . The Team Financ ia l Court he ld t ha t the FDIC was l imi ted

to a p re -p e t i t i o n breach of co n t rac t claim under the group 's tax

shar ing agreement. Id . a t *11.

Again, the Court f inds t h a t decis ion i s i n s u f f i c i e n t to

change i t s mind about the reasonableness of the GSA. In the

January 7 Opinion the Court concluded t ha t the Debtors had a f a i r

l ike l ihood of prevai l ing on the i s sue of who owned the tax

refunds . 442 B.R. a t 333. Th e Court noted, however, t h a t the

FDIC asser ted a claim under the Tax Sharing Agreement between WMI

and WMB to the por t ion of the tax refund which re la ted to WMB's

opera t ing l o s ses . Id . Because the es t a t e i s so lven t and

unsecured cred i to rs a re l i ke ly t o ge t paid in fu l l , the Court

found t h a t the FDIC's claim would e n t i t l e it to a su b s t an t i a l

recovery and, therefore , the Debtors were not l i ke ly to obta in a

net recovery which i s su b s t an t i a l l y be t t e r than the GSA by

l i t i ga t ing t h a t i ssue .

c . Deutsche Bank National Trus t Co. decis ion

The Court i s a lso aware t ha t the DC Court r ecen t ly denied a

motion of the FDIC to dismiss a complaint agains t it which ra i sed

bus iness t o r t cla ims arguably s imi l a r to the ANICO cla ims.

Deutsche Bank Nat ' l Trus t Co. v. FDIC, 1:09-cv-01656 (D.D.C. Aug.

17, 2011). The Court does not cons ider t h i s re levan t to i t s

cons ide ra t ion of the mer i t s o f any claims t h a t the es ta te may

34



have aga ins t the FDIC in t h i s case , however, as the order was not

a decis ion on the mer i t s .

For a l l the above reasons , the Court concludes t h a t there i s

not any i n t e rven ing change in the la w or fac t s to cause it to

reconsider i t s conclus ion in the January 7 Opinion t ha t the GSA

i s reasonable .

C. Value Dis t r ibu ted Under the Modified Plan

Pursuant to t ~ e Modified Plan, s tock in WMI wi l l be canceled

and s tock in reorganized WMI (the "Reorganized Debtor") wil l be

i ssued to c red i t o r s who e l ec t to rece ive s tock in l i eu of cash

payments or i n t e r e s t s in the Liquidat ing Trust , as wel l as to

PIERS fo r t ha t por t ion of t h e i r claims t ha t a re not paid in cash

or Liquidat ing Trus t In t e r e s t s . (Tr. 7/13/2011 a t 97-98; D 25 5

a t § § 6 . 2 , 7 . 2 , 1 6 . 2 , 1 8 . 2 , 1 9 . 2 , 2 0 . 2 & 22.2 . ) The Reorganized

Debtor wi l l be vested with miscel laneous asse t s , the most

valuable of which i s the s tock of a subs id ia ry of WMI, WM

Mortgage Reinsurance Company ("WMMRC"). (Tr. 7/13/2011 a t 97-98,

248.) The value of the Reorganized Debtor also inc ludes ce r t a i n

tax a t t r ibu tes , namely net opera t ing losses ("NOLs"). The

Debtors ' NOLs ( inc luding WMB in i t s tax group) amount to an

es t imated $17.7 b i l l ion in face value fo r pre-2011 losses ,

assuming an Effec t ive Date of the Plan of August 31, 2011. (D

Demo I i Tr. 7/13/2011 a t 102-03.) The use of the NOLs, however,

i s sub jec t to the l imi ta t ions of sec t ion 382 of the In t e rna l

35



Revenue Code ( the "Tax Code") .

The Reorganized Debtor wi l l n o t be ves ted with any c la ims

( includ ing c la ims a ga i n s t d i rec to r s and o f f i ce r s ) o f th e Debtors .

I n s t e a d , t hose c la ims are ves ted in the Liqu ida t ing Trus t ,

i n t e r e s t s in which a re being d i s t r i b u t e d to c e r t a i n c r e d i t o r

c l a s s e s . (0 255 a t § § 6.1 , 7 .1 , 16 .1 , 18 .1 , 19 .1 , 20 .1 , 21 .1 ,

28.3 & 32.1 (b ) . )

According to t he s tock e l e c t i on r e s u l t s , s tock in th e

Reorgan ized Debtor w i l l be he ld as fo l lows : 24 mil l ion shares by

Senior Noteholders , 13 m i l l i on shares by Senior Subord ina ted

Noteholders , and 123 mil l ion shares by PIERS ho lde r s . (0 .1 . 8108

a t 32; Tr. 7/13/2011 a t 101. ) The shares w i l l be i s sued a t a

r a t e of one share fo r each d o l l a r of claim exchanged. (D 255 a t

§ 1.167 .) Based on the Debtors ' va lua t i on o f th e Reorgan ized

Debtor , the s tock , cash , and i n t e r e s t s in t he L iqu ida t ing Tr us t

to be d i s t r i b u t e d to c r e d i t o r s w i l l r e s u l t in a l l c r e d i t o r

c l a s se s being pa id in f u l l , with th e excep t ion of th e lowes t

c l a s s , the PIERS. Therefore , th e Modif ied Plan a n t i c i p a t e s t h a t

t he r e w i l l be no d i s t r i b u t i o n to any shareho lder s and t h e i r

i n t e r e s t s w i l l be cance led . (D 255 a t § § 23.2 , 24 .2 , 25. 1 &

26 .1 . ) In the event t h a t a l l th e c r e d i t o r s do g e t pa id in f u l l ,

however , Liqu ida t ing Trus t In t e r e s t s w i l l be r e d i s t r i b u t e d to th e

pr e f e r r e d shareholde r s . (Tr. 7/13/2011 a t 98; D 255 a t § § 6.3 ,

7 .3 , 16.3 , 18 .3 , 19 .3 , 20.3 , 22 .1 , 22 .2 , 23.1 & 24 .1 . )

36



The Plan Objectors contend, however, t h a t the Reorganized

Debtor has subs tan t 1 value in excess of the claims of the

c red i t o r s t h a t are rece iving i t s s tock . The s tock in the

Reorganized Debtor i s not be ing d i s t r i b u t ed to anyone othe r than

the c red i t o r s . (Tr. 7/13/2011 a t 101.) Therefore , the Plan

Objec to r s argue t h a t those c red i t o r s a re g e t t i n g more than th e

amount of t h e i r cla ims in v io l a t i o n of sec t ion 1129(b) . See,

In re Exide Techs . , 303 B.R. 48, 61 (Bankr. D. Del. 2003)

(holding t h a t sec t ion 1129(b) p ro h ib i t s c red i t o r s from r ece iv ing

more than th e fu l l va lue o f t h e i r cla ims before j un ior c l a s ses

r ece ive a d i s t r i b u t i o n ) . Ins tead , the Plan Objectors argue t h a t

the excess value should be given t o the o the r s t akeholde rs ,

notably the p re fe r red and common shareholder s .

The Plan Suppor ters and the Plan Objectors each presen ted

va lua t ion exper t s in suppor t of t h e i r p o s i t i o n s .

1 . Daubert Motion

Th e Debtors f i l ed a motion to exclude the t es t imony of both

of the Equi ty Committee 's exper t s : Pe te r Maxwell, t he va lua t ion

exper t , and Kevin Anderson, the t ax exper t . Th e Debtors argue

t h a t Maxwell 's opin ion i s not based on accepted methodologies and

i s based on hypothe t i ca l scenar ios t h a t have no re levance to t h i s

case (namely, t h a t the Reorganized Debtor w i l l r a i se su b s t an t i a l

amounts of deb t and equi ty to develop or acqui r e add i t ional

bus iness in o rder to u t i l i z e more of the NOLs). See, e . g . , Neb.

37



Pl as t i c s , Inc . v . Holland Colors Ams., In c . , 40 8 F.3d 410, 416-17

(8th Cir . 2005) (al though fac tua l bas i s of exper t opin ion

genera l ly goes to c re d i b i l i t y , if the opin ion i s "so

fundamental ly unsupported" because it f a i l s to cons ide r re l evan t

f ac t s , then it can o f fe r no ass i s tance to the t r i e r of f ac t and

must be excluded) ; Gui l lo ry v . Domtar Indus . , In c . , 95 F.3d 1320,

1331 (5th Cir . 1996) (exper t tes t imony was proper ly excluded

where it was not based upon f ac t s in the record but on a l t e r ed

f ac t s and specu la t ion designed to b o l s t e r a p a r t y ' s p o s i t i o n ) ;

Boucher v. U.S. Suzuki Motor Corp. , 73 F.3d 18, 21 (2 d Cir . 1996)

(exper t t es t imony should be excluded " i f it i s specu la t ive o r

c on j e c t u r a l or if it i s based on assumpt ions t h a t a re so

unrea l i s t i c and cont rad ic to ry as to suggest bad f a i t h " ) ; McMillan

v . Weeks Marine, In c . , 47 4 F. S upp. 2d 651, 657-59 (D. Del. 2007)

(excluding exper t tes t imony as specu la t ive because it was based

on unrea l i s t i c assumpt ions) ; In re Nellson Nut raceu t i ca l , In c . ,

356 B.R. 364, 37 3 (Bankr. D. Del. 2006) ( " [ I J f the fac tua l bas i s

of an ex p e r t ' s opinion i s so fundamental ly unsupported because

the exper t fu l ly r e l i e s on a l t e r ed fac t s and specu la t ion , or

f a i l s to cons re levan t fac t s in reach ing a conclus ion , the

ex p e r t ' s opin ion can o f fe r no ass i s tance to the t r i e r of f ac t ,

and i s no t admiss ible on re levance grounds . " ) ; In re Gretz ,

Bankr. No. 09-10069, 2011 WL 1048635, a t *4 (Bankr. D. Del. Mar.

38



18, 2011) ( re jec t ing a va lua t ion hypothes iz ing t h a t an un

renovated proper ty with no r e n t a l income was a fu l ly - renova ted

income-producing proper ty because it was ~ s i m p l y too fa r removed

from th e f ac t s on the ground fo r th e Court to be ab le to

conf iden t ly re ly upon it.").

The Equity Committee responded t h a t even the Debtor ' s own

exper t , Steven Zel in , considered and valued th e Reorganized

Debtor ' s ~ c o r p o r a t e oppor tun i ty" to acquire or develop new

bus iness . It argues t h a t t h i s type of disagreement does not

warran t exclud ing one ex p e r t ' s opin ion but merely goes to the

c re d i b i l i t y of the wi tnesses . The Equi ty Committee contends t h a t

the Cour t ' s ga tekeeper funct ion under Rule 702 of the Federal

Rules of Evidence and Daubert i s ~ n o t a su b s t i t u t e fo r t e s t i n g

the assumpt ions under ly ing the exper t wi tness ' t es t imony on

cross -examina t ion . " Lich tens te in v . Anderson (In re Eas te rn

Continuous Forms, Inc . ) , No . Civ. A. 04-629, 2004 WL 2418285, a t

*4 (E.D. Pa. Oct. 28, 2004). par ty confronted with an adverse

exper t wi tness who has s u f f i c i e n t , though perhaps not

overwhelming, f ac t s and assumpt ions as th e bas is fo r h is opin ion

can high l igh t those weaknesses through e f f ec t i v e c ro s s

examinat ion ." Stecyk v . Bel l He l icop te r Textron, In c . , 295 F.3d

408, 41 4 (3d Cir . 2004) . The Equi ty Committee argues t h a t Rule

702 es t ab l i sh es a ~ l i b e r a l pol i cy of admit t ing e xpe r t t es t imony

which wi l l ' p robably a i d ' the t r i e r of fac t . " Knight v . Otis

39



Eleva tor Co. , 596 F.2d 84, 87 (3 d Cir . 1979) (quot ing Universal

Ath le t i c Sales Co. v. Am. Gym, Recrea t iona l & Ath le t i c Eguip.

Co. , 546 F.2d 530, 537 (3d Cir . 1 9 7 6 » . Accordingly, the Equity

Committee a s s e r t s t h a t ndoubts about whether an e x p e r t ' s

tes t imony w i l l be use fu l should genera l ly be resolved in favor of

admiss ib i l i ty .H In re Japanese Elec . Prods . , 723 F.2d 238, 27 8

(3d Cir . 1983) , r ev ' d on othe r grounds , 47 5 U.S. 574 (1986).

To admit an expe r t ' s t es t imony under Rule 702 of the Federal

Rules of Evidence , cour t s must focus on nthe t r i l ogy of

r e s t r i c t i o n s on exper t tes t imony: qua l i f i ca t i on , r e l i a b i l i t y and

f i t .H Calhoun v. Yamaha Motor Corp. , 350 F.3d 316, 321 (3 d Cir .

2003) . Th e f i r s t element cons iders the qua l i f i ca t i ons of the

proposed exper t in th e f ie ld in which he i s to t e s t i f y , i.e., h is

nknowledge, sk i l l s , and t r a i n i ng . H In re Paol i R.R. Yard PCB

Li t i g . , 35 F.3d 717, 741 (3 d Cir . 1994) . The second element

cons ide r s seve ra l fac to rs :

(1) whether a method cons is t s of a t e s t ab l e hypothes i s ;

(2 ) whether th e method has been sub jec t to peer review;

(3) the known or pot en t i a l r a t e of e r r o r i (4 ) the

ex i s t ence and maintenance of s tandards co n t ro l l i n g the

t echn ique ' s ope ra t ion ; (5) whether th e method i s

genera l ly accep ted ; (6 ) the r e l a t i o n sh ip of the

technique to methods which have been es tab l i shed to be

re l i ab le i (7 ) the qua l i f i ca t i ons of th e exper t witness

t e s t i fy ing based on the methodologYi and (8 ) the non

j u d i c i a l uses to which th e method has been put .

Id . a t 742 n .8 . The t h i rd element requi res t h a t th e nevidence

must f i r s t be re l evan t to be admiss ible . Relevant evidence i s

evidence t h a t helps th e t r i e r o f f ac t to unders tand th e evidence

40



or to determine a f a c t in i s su e . " Oddi v. Ford Motor Co. , 234

F.3d 136, 145 n.12 (3d Ci r . 2000) .

Th e Court heard argument and reserved judgment on the

Daubert motion u n t i l the test imony was presen ted and c r os s

examinat ion completed, in orde.r to have a b e t t e r idea of the

bases fo r the ex p er t s ' qual i f i ca t ions and opin ions . Afte r

cons ider ing t h a t tes t imony, the Court concludes t h a t the

test imony of Maxwell should not be excluded because , al though he

d id no t fol low normal methodologies fo r valuing a bus iness , h is

r e po r t was not a va lua t ion of the Reorganized Debtor but simply a

c r i t i que of the va lua t ion done by the Debtors ' exper t . To t h a t

e x t e n t it i s he lpfu l to the Cour t . With re spec t to the argument

t h a t Maxwell 's opinion i s based on hypothe t i ca l scenar ios t h a t

have no ba s i s in the record, the Court i s ab le to evaluate and

cons ider the l ike l ihood of the occur rence o f the va r ious

scenar ios on which Maxwell r e l i e s in cons ider ing the c re d i b i l i t y

of h is t es t imony about the va lue of the Reorganized Debtor .

The Debtors a lso argue t h a t Anderson i s not an exper t in the

f i e ld on which he i s asked to opine, namely the l ike l ihood t h a t

the IRS w i l l use sec t ion 26 9 of the Tax Code to disa l low some or

a l l of the NOLs. Th e Debtors sp ec i f i ca l l y note t h a t Anderson had

no exper ience with cases in which sec t ion 26 9 was a major

cons ide ra t ion . (Tr. 7/13/2011 a t 132-35.) In a dd i t i on , the

Debtors seek to exclude Anderson's opinion as an impermiss ib le

41



l eg a l opinion. See, e .g . , Berckeley Inv. G rp. , Ltd. v. C o lk i t t ,

455 F.3d 195, 217 (3d Cir . 2006) ("Although Federa l Rule of

Evidence 704 permi t s an exper t witness to give exper t tes t imony

t h a t ' embraces an u l t imate i s sue to be decided by th e t r i e r of

f a c t , ' an ex p e r t witness i s proh ib i ted from render ing a l eg a l

opin ion . " ) .

With r e sp ec t to th e f i r s t i s sue , th e Cour t found Anderson to

be an exper t in t ax i s sues re levan t t o the acq u i s i t i o n and merger

of co rpora t ions , p a r t i c u l a r l y t roubled companies. (Tr. 7/13/2011

a t 127-29, 135.) Although th e Debtors contend t h a t he i s not an

exper t on sec t ion 269 of the Tax Code, the Cour t f inds t h a t too

narrow of an area o f ex p e r t i s e to expect . Anderson t e s t i f i e d

t h a t in render ing advice on mergers and acq u i s i t i o n s involving

NOLs, he cons idered sec t ion 269, as wel l as sec t ion 382, because

th e two were both impl icated . (Id . a t 128-29, 132 5 .) Thus,

al though he never i ssued a "pure" sec t ion 269 opinion, he always

cons idered i t s e f f e c t . ( Id . ) Consequently, the Cour t f inds t h a t

Anderson had s u f f i c i e n t exper ience with the app l i cab i l i t y of

sec t ion 269 of the Tax Code to r ender an opinion.

With respec t to the second fac to r , th e Court i s not being

asked to render a deci s ion on the l eg a l i s su e o f whether the use

o f the NOLs by the Reorganized Debtor wi l l be chal lenged (and if

chal lenged, w i l l be disal lowed) . Ins tead , th e i s sue before the

Court i s what i s th e value o f the NOLs to the Reorganized Debtor

42



and i t s s t akeholde rs . This requ i res not simply a determinat ion

of the l eg a l e f f e c t of sec t ion 269 but also the p o s s ib i l i t y t h a t

it

would be invoked under var ious scenar ios which may occur in

the fu tu re . The Court f inds t h a t Anderson 's opinion on t h i s

i s sue i s helpfu l to i t s ul t ima te determinat ion o f those

p o ss i b i l i t i e s and t h e i r e f f e c t on the value of the NOLs.

Therefore , the Court wi l l not exclude Anderson 's tes t imony.

2. Value of WMMRC

a . Value of ex i s t ing bus iness

WMMRC i s a capt ive re insurance company which wrote pol ic ies

on mortgage loans i ssued by WMB and othe r a f f i l i a t e s of the

Debtors. (Tr. 7/13/2011 a t 97-98, 252.) Since the se izure of

WMB, WMMRC has been in run-off : it has not i ssued any new

p o l i c i e s and i s s imply co l lec t ing premiums and paying claims on

the ex i s t ing pol i c i e s . (Id. a t 97-98, 251-52.) WMMRC has no

independent management, no independent sa l e s force , and no

employees. ( Id . a t 251.)

The Debtors ' va lua t ion exper t , Ze1in, t e s t i f i e d t h a t in h i s

opinion the value of WMMRC was between $115 and $140 mil l ion .

(Id. a t 260; D 341 a t 8 .) This was based on the Debtors '

bus iness and ac tua r i a l pro jec t ions for the run-off of WMMRC's

curren t p o l i c i e s through 2019 (when they wi l l exp i re ) . (Tr.

7/13/2011 a t 251-59, 262, 277-82; D 340.) Zel in assumed t ha t th e

Reorganized Debtor would have no othe r bus iness and t h a t the

43



income genera ted from the run-of f o f WMMRC's bus iness would be

paid in div idends t o inves to rs r a th e r than used to make

acq u i s i t i o n s ' o r bui ld new bus iness . (Tr. 7/13/2011 a t 308-09.)

The Equity Committee does not disagree with the Debtors '

va lua t ion of the ex i s t ing WMMRC run-of f bus iness . In fac t , i t s

exper t , Maxwell, opined t h a t the value of WMMRC in run-of f was in

the same range as Zel in ' s , $129 to $135 mil l ion . (Tr. 7/15/2011

a t 68-70, 120.)

Th e only va lua t ion of WMMRC which was done using accep ted

va lua t ion methodologies was t h a t done by Zel in . Th e Court

recognizes , however, the inc l ina t ions of debtors to undervalue

themselves and plan objec tors to overvalue the company to suppor t

t h e i r arguments . See, e .g . , Exide, 303 B.R. a t 61 ( ~ T h e

Credi tors Committee argues t h a t the Debtor ' s exper t has

undervalued the company and t h a t the Plan wil l r e s u l t in paying

the Prep e t i t i o n Lenders more than 100% of t h e i r cla ims to the

detr iment of the unsecured c red i t o r s . The Debtor , on the othe r

hand, argues t h a t the Credi tors Commit tee 's exper t has overvalued

the company and t h a t the Plan i s f a i r and equi t ab le in i t s

t rea tment of unsecured c re d i t o r s . " ) . In addi t ion , the Court

agrees t h a t there are some f laws in Ze1in ' s an a ly s i s . 20 Th e

20 Maxwell high l igh ted some i n t e rn a l incons is tenc ies and

problems with Zel in ' s analys i s : Zel in used the weighted averagecos t o f cap i t a l ( ~ W A C C " ) f igure from h is December 2010 repor t ,

al though t h a t number has f a l l en s ince then by 5 to 10 percentagepoin ts , which would have increased the value (Tr. 7/13/2011 a t

44



Court , there fo re , f inds t h a t th e value o f th e ex i s t ing bus iness

of WMMRC (assuming no new bus iness i s genera ted or acqu i s ons

a re made) i s a t the high end of Ze l in ' s range of va lue , or $140

mil l ion .

b. Value of th e NOLs

Although th e face amount of th e Debtors ' NOLs i s es t ima ted

to be $17.7 b i l l i o n fo r pre-2011 lo sses , th e value of the NOLs i s

l imi ted by sev e r a l f ac to r s . (D Demo 1; Tr. 7/13/2011 a t 102-03.)

Fi r s t , sec t ion 382 of th e Tax Code wi l l l i m i t the Reorganized

Debtor ' s a b i l i t y to use th e NOLs, because under th e terms of the

Modified Plan t h e re w i l l be a change in ownership of WMI (from

th e cur ren t sha reho lde rs to th e cred i to r s ) . (Tr. 7/13/2011 a t

102-03, 141-42, 162; D 36 7 a t 4-5. )

A l a rge p a r t of t ha t NOLs wi l l a lso be l o s t once WMB ceases

to be a member of the tax group, because the bulk of th e lo sses

were a t t r i bu t ab l e to WMB's opera t ions . (Tr. 7/13/2011 a t 102-03,

162-63.) WMB w i l l cease being a member of th e Debtors ' tax group

upon conclus ion of th e FDIC's rece iversh ip . ( Id . a t 104-05.)

Therefore , th e Debtors have f i l ed a motion fo r au th o r i t y to

abandon the s tock of WMB before the Effec t ive Date of the

314-17; T r. 7/15/2011 a t 58); he used a WACC of 13-15% al thoughh i s t o r i c a l re tu rns on equ i ty fo r s im i l a r bus ines ses a re 8 to

12.5% and cur ren t re tu rns fo r insurance companies are 6 to 10%

(Tr. 7/13/2011 a t 324-32); he gave little weight to the value of

precedent t r an s ac t i o n s (which yie lded a value of $145 to $205

mil l ion) and accorded most weight to the d iscounted cash flow

ana lys i s ( id . a t 310-11; D 341 a t 13, 23) .

45



Modified Plan, which w i l l r e s u l t a $6 b i l l i o n NOL fo r 2011 if

th e Modified Plan i s confi rmed. 21 ( Id . a t 106, 164-65; D 368 a t

4-5 . ) The por t ion o f the tax loss for 2011 which occurs before

the Effec t ive Date i s subject to th e l im i ta t ions of sec t ion 382

of the Tax Code; the port ion a f t e r the Effec t ive Date i s no t .

(Tr. 7/13/2011 a t lOS, 108.) Assuming an Effec t ive Date of

August 31, 2011, th e Debtors pro jec ted a l imi ted NOL of $4

bi l l i on and an unl imi ted NOL of approximately $2 b i l l i o n fo r the

2011 10sses . 22 ( Id . a t 109-10, 163-64; D 36 8 a t 4-5. ) The

Equity Commit tee 's expert , Anderson, agreed with th e Debtors '

deci s ion to t ake a worthless s tock deduct ion for the WMB s tock.

(Tr. 7/13/2011 a t 164-65.)

i . NOLs used by run-o f f bus iness

Zel in d id at tempt to determine the ne t presen t value of the

NOLs in tw o components. The f i r s t was the value of the NOLs to

21 The Debtors f i l ed a c e r t i f i c a t e of no object ion to the

motion, causing the Court t o g ran t it by order dated July 8,

2011. (D.l . 8104.) At a s t a tus hear ing he ld on August 12, 2011,

the Debtors advised t ha t they had withdrawn the c e r t i ca te of no

object ion l a t e on the evening of July 5, 2011, when they were

advised by the Equi ty Committee t ha t ind iv idua l shareholdersobjected to the motion. (Tr. 8/12/2011 a t 15.) However, a f t e r

reviewing th e docket the Debtors were unable to i den t i fy anyobject ion to the motion. At the s ta tus hear ing the EquityCommittee advised t ha t it had no object ion to the motion, so long

as the Debtors d id not abandon the s tock u n t i l a f t e r a plan wasconfi rmed. The Debtors agreed and a form of o rder to t ha t e f fec t

wa s to be f i l ed with the Court . ( ld. a t 21.)

22 The l a t e r in the year t ha t the Effec t ive Date occurs , the

smal ler the amount of th e unl imi ted NOL. (Tr. 7/13/2011 a t 10710, 161; D Demo 2 .)

46

http://slidepdf.com/reader/full/10sses.22





ex i s t i n g WMMRC if it s imply remains in r un - o f f . Based on h is

va lua t ion of the Reorganized Debtor , Zel in t e s t i f i e d t h a t under

sec t ion 382 the por t ion of the NOLs which could be used by WMMRC

dur ing run-of f was approximate ly $7 mil l ion per yea r . (0 Demo 1;

Tr. 7/13/2011 a t 103-04.) According to Zel in , the presen t value

of the NOLs t h a t could be used by WMMRC i s $10 to $20 m i l l i on .

(Tr. 7/13/2011 a t 260-61, 275-78, 284 85; 0 341 a t 8 .)

Th e Plan Objectors do no t r ea l l y di spu te t h i s va lue ; they

contend only t h a t it i s based on WMMRC's c u r r e n t opera t ions and

does not t ake i n to account the poss ib le fu tu re revenues t h a t

could be genera ted . See, e . g . , Consolo Rock Prods. CO. V . Du

Bois , 312 U.S. 510, 526 (1941) ( in va lu ing company cour t must

cons ider I f ac t s re l evan t to fu tu re earning capac i ty and hence

t o p resen t worth") .

Because Maxwell d id not do a va lua t ion of the ex i s t i n g

bus iness with i t s NOLs, th e Court accep t s t h a t the value of the

NOLs to the ex i s t i n g WMMRC bus iness i s t h a t determined by Zel in

or $20 m i l l i on . (Tr. 7/15/2011 a t 36-37.)

ii. NOLs used by fu tu re bus iness

Zel in a l so at tempted to value the NOLs t h a t might be able to

be used in the event of a fu tu re acq u i s i t i o n of a p ro f i t ab l e

bus iness by WMMRC, which he valued a t an a dd i t i ona l $10 to $25

mil l ion . (Tr. 7/13/2011 a t 260-61, 275-78, 284-85; 0 341 a t 8.)

47



The Plan Objectors argue t h a t the p r i n c i p a l de f e c t 23 in

Z el i n ' s va lua t ion i s t h a t he values the Reorganized Debtor as a

l iqu ida t ing company ( ra ther than as a going concern) and f a i l s to

a t t r i b u t e s u f f i c i e n t value to the a b i l i t y of the Reorganized

Debtor to genera te new bus iness i t s e l f or to use th e NOLs through

the acq u i s i t i o n of p ro f i t ab l e bus inesses . (Tr. 7/15/2011 a t 38.)

The Equi ty Committee 's exper t , Maxwell, opined t h a t , assuming an

i n i t i a l c a p i t a l i n fus ion of $140 mil l ion , debt of $200 mil l ion ,

and a subsequent second t r anche of debt of $160 mil l ion , the

Reorganized Debtor could have a value (based on a ne t p resen t

value ca lcu la t ion) of $275 mil l ion . ( Id. a t 3 50; EC 15 4 a t 7

8, 11.) He also opined t h a t the value could i nc rease with

subsequent equi ty r a i se s o r othe r merger / acqu i s i tion

oppor tun i t ies .24 (Tr. 7/15/2011 a t 50-51.)

23 The Equity Committee also had more t e c hn i c a l c r i t i c i sms

of t h i s p a r t of the Ze l in r ep o r t : Zel in used a WACC fo r the

fu tu re acq u i s i t i o n of 25 to 35%, because it was an unknown, but

then d id an ad d i t i o n a l downward adjus tment of 33% to r e f l e c t the

p ro b ab i l i t y t h a t the acq u i s i t i o n wi l l not be e f f ec t i v e on day one

but w i l l t ake t ime to occur . (Tr. 7/13/2011 a t 332-34; D 341 a t

37.) Maxwell charac te r i zed t h i s as double-discount ing resu l t ing

in an e f f ec t i v e r a t e of 38 to 52% when the co r rec t r a t e should be15.8 to 20%. (Tr. 7/15/2011 a t 55-56.)

Maxwell opined t h a tit

i s poss ib le t h a t the ReorganizedDebtor could have ad d i t i o n a l value of $240 to $420 mil l ion but

t h a t i s premised on r a i s in g b i l l i o n s of d o l l a r s in add i t ional

equi ty to genera te hundreds of mil l ions o f d o l l a r s i n add i t iona l

income to use the NOLs. (Tr. 7/15/2011 a t 84-86; EC 154 a t 8 .)

Th e Court f inds t h a t assumpt ion purely specu la t ive andu n re a l i s t i c .

48

24



Th e Plan Suppor ters disagree with Maxwell 's conclus ion and

asse r t t h a t t he re are many f laws in h i s an a ly s i s . 25 Thei r

primary c r i t i c i sm i s t h a t Maxwell d id not use t y p i c a l

methodologies to do a convent ional va lua t ion of the Reorganized

Debtor . ( rd . a t 71-73.) Maxwell admit ted t h i s bu t s t a t ed t h a t

he was j u s t showing what the poss ib le values a re t h a t could be

achieved by the Reorganized Debtor if new money was inves ted or

borrowed. The Equi ty Committee argues t h a t t h i s i s no t j u s t

specu la t ion bu t was, in f ac t , what the Set t l emen t Noteholders

were expec t ing to do as evidenced by numerous analyses they

performed. (EC 132 & 138. )

The Plan Suppor ters a l so contend t h a t Maxwell 's assumption

t h a t WMMRC w i l l opera te as a going concern i s f a u l t y . It i s not

based on the c u r r e n t Modif ied Plan, any ex i s t i n g bus iness p lan ,

or the known i n t en t io n s of the fu ture shareholder s . (Tr.

7/15/2011 a t 74-75, 119.) The Plan Objectors argue t h a t the

Debtors have i n t en t i o n a l l y no t done a bus iness p lan for WMMRC so

t h a t the t ru e va lue of the Reorganized Debtor as a going concern

25 The Debtors ' t e c hn i c a l c r i t i c i sms of the Maxwell r e po r t

included: Maxwell 's comparables fo r th e debt to e qu i ty r a t i o s

were not r e insurance companies (Tr. 7/15/2011 a t 91); Maxwell 's

c os t of debt was based on double B ra t ed secur i t i e s though noneof th e re insurance comparables have t h a t good a r a t i n g ( id . ) i h is

r a t e of re tu rn i s based on going-concern r e insurance companies,

not s t a r tu p s or run-of f s ( id . a t 92); Maxwell gave 40% weight to

preceden t t r an sac t io n s , because he er roneous ly thought Zel in d id ,

al though he normal ly would not give t h a t much weight to them ( id .

a t 131-32) .

49



could no t be eva lua ted . The Plan Suppor ters respond t h a t it

would be presumptuous of th e Debtors to prepare a bus iness plan

fo r the Reorganized Debtor and t h a t it wi l l be up to th e new

owners to decide how w i l l be run .

Maxwell admit ted t h a t to achieve h is going concern value,

the Reorganized Debtor would have to ge t new management, h i re

employees, develop a business plan, ge t cus tomers and vendors ,

and acquire hard asse t s , none of which it cu r ren t ly has . (Id . a t

75-79, 118.) Maxwell could not give an opin ion on whether the

Reorganized Debtor could r a i se the equi ty or debt needed to

r ea l i ze the values he a t t r i b u t e s to the Reorganized Debtor .

a t 98.) He admit ted he d id no t know of anyone wi l l i n g to l end or

i n v es t in the Reorganized Debtor and s t a t e d t h a t h is r e po r t was

j u s t one of a number of poss ib le fu tu re scenar ios . (Id. a t 82

84, 88-89; EC 135.) He was also aware t h a t only one t h i rd of the

r igh t s offer ing had been subscr ibed in the Sixth Amended Plan and

the Modified Plan does not even have a r i g h t s o f fe r in g . (Tr.

7/15/2011 a t 90.) Fur the r , Maxwell does not account fo r any

c os t s o r r i sks assoc ia ted with the scenar ios he p o s i t s . (Tr.

7/13/2011 a t 297.) Although Maxwell s t a t ed t h a t the c os t of

equi ty and debt t akes in to account some o f those r i s k s , he

admit ted t h a t it d id no t inc lude the cos t s and r i sk s of

conver t ing a l iqu ida t ing company with no employees or business

in to a going concern . (Tr. 7/15/2011 a t 149-52.) In addi t ion ,

50



Maxwell assumed t h a t the future acquis ion w i l l be fu l ly

implemented on day one (genera t ing $3 7 mil l ion in income, ne t of

i n t e r e s t expense) but admit ted t h a t i s not r e a l i s t i c and t he re

would necessar i ly be t ime delays before any ad d i t i o n a l revenue

could be genera ted . (Id . a t 79-81, 100-01, 124, 126.)

Th e Cour t agrees with the Plan Suppor ters t h a t these are a l l

se r ious f laws in Maxwell 's analys i s , which precludes th e Cour t

from concluding (as Maxwell opines) t h a t th e Reorganized Debtor

could have a value in excess of $275 mil l ion . However, the Cour t

agrees with Maxwell 's c r i t i q u e of Zel in ' s r e po r t t h a t it gives

too little value to the poss ib le fu tu re earn ing capaci ty of the

Reorganized Debtor t h a t could be achieved simply by opera t ing as

a going concern or merging with a viab company. See, e . g . ,

Consolo Rock, 312 U.S. a t 526.

(1) Risk of Loss

The p a r t i e s so di sagree about the e f f e c t of the Tax Code

on the ab i l i t y of the Reorganized Debtor to use th e NOLs. The

Plan Suppor ters contend t h a t Maxwell does not account a t a l l fo r

any tax r i s k . (Tr. 7/13/2011 a t 297; Tr. 7/15/2011 a t 52-53,

107, 119.) They argue t h a t he ignores th e p o s s i b i l i t y t h a t the

IRS w i l l disa l low a l l NOLs under sec t ion 269 of the Tax Code.

The Plan Objectors , in co n t ra s t , contend t h a t Zel in a r t i f i c i a l l y

undervalued the Reorganized Debtor because of imaginary tax

r e s t r i c t i o n s .

51



In va lu ing NOLs, bankruptcy cour ts must take in to account

the sk t h a t the NOLs w i l l be d i sa l lowed . See, e . g . , In re

Ja r t r an , In c . , 44 B.R. 331, 380 (Bankr. N.D. Ill. 1984) (holding

t h a t ~ t h e r ea l i za t i o n of the t ax sav ings [from use of NOLs] i s

sub jec t to a number of cont ingenc ies , inc lud ing cont inua t ion in

e f f e c t of r e l e va n t t ax p rov i s ions , p o t en t i a l cha l lenge under

sec t ion 269 of the In t e rn a l Revenue Code, and poss i b l e r ecap ture

of the b en ef i t s u t i l i z ed . Ac c or d i ng l y . . . a su b s t an t i a l

discount would be r eq u i r ed . " ) . See genera l ly , Chaim J . Fortgang

& Thomas M. Mayer, Valuat ion in Bankruptcy, 32 UCLA L. Rev. 1061,

1130 (1985) ("Uncer ta int ies in prese rv ing the NOL i nc rease the

di scount . " ) .

Sect ion 269 of the Tax Code s t a t e s i n re l evan t p a r t t h a t :

" I f any person or persons acquire . cont ro l o f a corpora t ion ,

. and th e p r i n c i p a l purpose fo r which such acq u i s i t i o n was

made i s evasion or avoidance of Federal income tax . then the

Secre ta ry may d is lo w such deduction, c red i t , or o t he r

al lowance." 26 U.S.C. § 269(a) (1) . For the p r i n c i p a l purpose of

a t ransac t ion to be tax avoidance, the purpose of tax evasion or

avoidance has to be more s i g n i f i can t , more impor tan t , or more

prominent than any o t he r purpose; it can be one of the purposes

bu t not the p r in c ip a l purpose. See, e . g . , Scro l l , Inc . v .

Comm'r, 44 7 F.2d 612, 61 8 (5th Cir . 1971) (not ing t h a t the

"burden of proof on the t axpayer i s not an easy one, and when the

52



dispu ted tax b en e f i t s are so di spropor t iona te to th e va lue of the

othe r a s se r t e d advantages , t h a t burden may be p r a c t i c a l l y

imposs ib le t o sus ta in"} ; U.S. She l t e r Corp. v. Uni ted St a t e s , 13

Cl. Ct . 606, 62 0 (Cl. C t. 1987) ( in cons ider ing what i s the

pr imary purpose , the cour t should aggregate 1 ta x avoidance

purposes and compare them to the aggregate bus iness purposes)

( c i t i n g Bobsee Corp. v . United St a t e s , 41 1 F.2d 231, 239 (5th

C i r . 1 9 6 9 » .

Th e Cour t in U.S. Sh e l t e r concluded t h a t ta x evas ion was no t

the primary purpose of the a c q u i s i t i o n even though the acqu i ror

was aware o f and i n t e r e s t e d in us ing the NOLs, because it found

per suas ive the t es t imony t h a t th e p r in c ip a l mot iva t ions fo r doing

the d e a l were the bus iness reasons of acqu i r ing a pub l i c company

and the sp ec i f i c a s se t s of th e acqui red company. 13 C l. C t. a t

622-28. In co n t ra s t , the Cour t i n Sc ro l l found the p r i n c i p a l

purpose was tax avoidance where the acqui red company was no t

i n t e g r a t e d i n t o th e acq u i ro r ' s bus iness and the t ax a t t r i b u t e s

and va lue of the t ang ib le as se t s were s i gn i f i can t l y more than the

p r i ce pa id . 447 F.2d a t 615 n .4 , 618. A f ind ing of ta x

avoidance can be made even if th e change i n con t ro l was through a

fo rec losure by a c r e d i t o r . See, e . g . , The Swiss Colony, Inc . v .

Comm'r, 42 8 F.2d 49, 54 (7th Cir . 1970) (upholding Tax Court

conclus ion t h a t pr imary purpose of a c q u i s i t i o n was tax avoidance

even though t axpayer argued t h a t a c q u i s i t i o n was accompl ished

53



through foreclosure on s tock to pro tec t i t s pos i t ion as a

cred i to r ) .

Th e Plan Suppor ters presented a t ax exper t , Richard

Reinhold, a tax p a r tn e r a t Wilkie Fa r r & Gallagher , who t e s t i f i e d

t h a t th e t r a n s f e r of s tock under th e Modified Plan to th e

c red i to r s was a change of con t ro l t h a t could t r i g g e r sec t ion 269

disal lowance of the NOLs. (Tr. 7/13/2011 a t 113.) Reinhold

opined t ha t in cons ide r ing t he i s sue o f what th e pr inc ipa l

purpose of th e c r e d i t o r s ' e lec t ion to t ake s tock in l i eu of cash

under the Modified Plan was, the IR S and cour t s wi l l cons ide r

fu ture events t h a t may shed l i g h t on th e i n t e n t of th e c red i to r s .

(Id . a t 200; D 404 a t 7 n.15. ) Those fu ture events would inc lude

any add i t iona l acqu is i t ions of o ther companies by th e Reorganized

Debtor . (Tr. 7/13/2011 a t 197.) Reinhold did no t t e s t i f y t h a t

th e IR S or cour t s would be more l i ke ly to f ind t ha t tax avoidance

was th e pr inc ipa l purpose if th e amount of c a p i t a l ra ised

exceeded the non- tax a s s e t s ' value ; he only sa id t h a t he could

not give an opinion t ha t they would no t . ( Id . a t 200-01, 224; D

404 a t 4-6. ) Reinhold opined, however, t h a t if the amount of

c a p i t a l ra i sed i s not more than the value of th e non- tax as s e t s

of the Reorganized Debtor then " the company has qu i te a good

argument t h a t Sect ion 269 w i l l not be brought in to p lay because

th e pr inc ipa l purpose fo r the acqu is i t ion o f shares would no t be

cons idered tax avoidance . ff (Tr. 7/13/2011 a t 200; D 404 a t 7-9. )

54



The Equity Committee 's exper t , Anderson, opined t h a t it was

un l ike ly t ha t sec t ion 269 of th e Tax Code would apply ( resu l t ing

in lo ss of th e NOLs)if

th e Reorganized Debtor acqu i red

add i t iona l bus inesses , because to disal low the NOLs t h a t fu ture

acqu is i t ion would have to be fo r th e "pr imary purpose" of tax

avoidance . (Tr. 7/13/2011 a t 138; D 367 a t 15-20; D 370 a t 2-5. )

He s t a t ed t ha t sec t ion 269 i s r a r e ly used by the IRS because th e

newer sec t ion 382 i s more spec i f i c in descr ib ing ins t ances where

NOLs should be disa l lowed . (Tr. 7/13/2011 a t 184.)

Anderson spec i f i ca l l y disagreed with Reinho ld ' s opin ion t ha t

th e Reorganized Debtor could not acqu i re a company whose value

was more than the va lue of Reorganized Debtor (exc luding th e

NOLs) without running a fou l o f sec t ion 269. ( Id . a t 146-47; D

369 a t 3 .) Ins t ead , Anderson s t a t ed t ha t as long as th e acquired

bus ines s had l eg i t im a te subs tan t i a l opera t ions , i t s acq u i s i t i o n

would not r e s u l t in a l o ss o f th e NOLs. (Tr. 7/13/2011 a t 142

47; D 367 a t 15-17; D 369 a t 3-4. ) In add i t ion , Anderson opined

t h a t there were spec i f i c ways in which th e Reorganized Debtor

could acqu i re asse ts and/or s tock in th e fu tu re t h a t would not

impl icate sec t ion 269. (Tr. 7/13/2011 a t 149; D 367 a t 15-17; D

369 a t 3-4. )

The Debtor ' s exper t , Reinhold , d id no t d i sagree with

Anderson's conclus ion t h a t a subsequent acqu i s i t ion by th e

Reorganized Debtor was not l i ke ly to cause a problem under

55



sec t ion 269 or 382. (Tr. 7/13/2011 a t 208-11.) However, he

noted t h a t h is opin ion was not address ing the r i s k t h a t the IRS

w i l l chal lenge any fu tu re t r an s fe r of ownership under 269 (as

Anderson's was), but whether it wi l l chal lenge the cur ren t

t r a n s f e r of ownership to the c red i to r s under the Modified Plan .

(Id . a t 193, 20 2 03, 208-11; D 404 a t 7-9, D 341 a t 36.)

Anderson admit ted t h a t sec t ion 269 could apply to the

t r a n s f e r of s tock under the Modified Plan to the c red i to r s and

t h a t in determin ing "p r in c ip a l purpose" cour t s look a t fu ture

ac t ions to di sce rn presen t i n t en t io n . (Tr. 7/13/2011 a t 166-67.)

Anderson still f e l t , however, t h a t was unl ike ly t h a t the IRS

(or cour ts ) would f ind t h a t the p r in c ip a l purpose of the t r an s fe r

of s tock in the Reorganized Debtor under the Modified Plan was

ta x avoidance or evas ion . (Id . a t 147-48, 151-53.)

In evaluat ing the two co n f l i c t i n g opinions , the Court f inds

the opin ion of Anderson more convinc ing . The cases t h a t apply

sec t ion 26 9 a re fundamenta l ly d i f f e r en t from the case a t bench.

Those cases dea l with t axpayers who acquire a company which has a

s i g n i f i can t NOL and then merge it with t h e i r own business in

order to she l t e r t h e i r income. See, e .g . , Scro l l , 447 F.2d a t

615 (not ing t h a t "[o]ne of the most obvious advantages accru ing

to [ the acquiror ] as a r e s u l t o f the merger was the p o s s i b i l i t y

. . of o f f se t t i n g [ the acquired company's] su b s t an t i a l pr e

acqu is i t ion ne t opera t ing loss car ryover aga ins t [ the acqu i ro r ' s ]

56



even more su b s t an t i a l p o s t -acq u i s i t i o n p r o f i t s " ) ; The Swiss

Colony, 428 F.2d a t 52 ( tax cour t had found t h a t ~ T a x p a y e r

acquired cont ro l of [ l iqu ida t ing company] ' f o r the p r in c ip a l

purpose of evading o r avoid ing Federal income taxes by secur ing

the b e n e f i t of net opera t ing l o s s deduct ions which it would not

otherwise have enjoyed 'H) ; U.S. Shel te r , 13 C l. C t. a t 609-10

(not ing t h a t sec t ion 26 9 was passed to prevent ~ t h e recen t ly

developed prac t i ce of corpora t ions with l a rge excess p ro f i t s

. acqui r ing corpora t ions with cur ren t p as t , or p rospec t ive l osses

or deduct ions , ... fo r the purpose of reducing [ the acqu i ro r ' s ]

income and excess p ro f i t s t axes . " ) ( c i t i n g S. Rep. No. 627, 78th

Cong., 1 s t S e s s . 58 (1943)) .

In t h i s case , the cred i to rs are acqui r ing the Reorganized

Debtor under the Modified Plan not to sh e l t e r t h e i r own income or

to merge it with a company they own. Ins tead , they a re r ece iv ing

s tock in the Reorganized Debtor simply in repayment of debt owed

them. Even the s i t u a t i o n in The Swiss Colony case i s

dis t ingu ishab le . In t h a t case , a l though the Taxpayer had

acquired t he loss company's s tock through fo rec losure , it then

at tempted to use t h a t company's NOL to s h e l t e r its own p r o f i t s .

428 F.2d a t 52. That i s not be ing done by the acqui r ing

cred i to rs in t h i s case .

In addi t ion , most of the new shareholders w i l l r ece ive t h e i r

s tock in the Reorganized Debtor not by e l ec t io n bu t by d efau l t .

57



(Tr. 7/14/2011 a t 96-97; D 255 a t §§ 20.1 & 20.2. ) In f ac t , the

bulk of the s tock i s being d i s t r i b u t ed to the PIERS, no t because

they e lec ted to r ece ive it bu t because they a re thelowes t

c red i t o r c l a s s . 26 (D 255 a t §§ 20.1 & 20 .2 . ) Thus, the Court

concludes t h a t the IRS i s unl ike ly to f ind t h a t the p r in c ip a l

reason t h a t the c red i t o r s in t h i s case are rece iving s tock under

the Modified Plan i s fo r ta x evas ion purposes .

The f ac t t h a t the Set t l emen t Noteholders (who as holders of

PIERS w i l l r ece ive the bulk of the s tock under the Modified Plan)

performed analyses of th e va lue of the NOLs does not a lone

sugges t t h a t tax evasion was t h e i r reason fo r accep t ing s tock

i ns t ead of a cash d i s t r i b u t i o n . See, e . g . , In re Federated Dep ' t

Stores , In c . , 135 B.R. 962, 970 (S.D. Ohio 1992) ( ~ C o n s i d e r a t i o n

by corpora te o f f i c i a l s o f the tax rami f i ca t ions of an acqu is i t ion

i s not , by i t s e l f , i n d i ca t iv e of tax avoidance but i s ' s imply

i n t e l l i g e n t business plann ing . ' " ) (c i t a t ion omi t ted) ; VGS Corp.

v. Cornrn'r, 68 T.C. 563, 596 (1977) ("Complicated bus iness

26 Under the Debtors ' va lua t ion of the Reorganized Debtor ,

t he re i s noth ing avai lab le fo r equi ty shareholder s , so the f a c t

t ha t s tock in the Reorganized Debtor i s being given to the

c red i to r s i s in la rge p a r t mandated by the abso lu te p r i o r i t y

r u l e . See, e . g . , Case, 308 U.S. a t 115-16 (s ta t ing t h a t abso lu te

p r io r i t y ru l e requ i res t h a t shareholders not r ece ive any

d i s t r i b u t i o n under a plan u n t i l c red i to r s are pa id in fu l l ) .While the Debtors could have simply l iqu ida ted WMMRC and

disbursed the proceeds to the c red i to r s r a th e r than the s tock,

the Debtors s t a t ed t h a t the o f fe r s they received fo r WMMRC were

too low and t h a t they , t he r e f o r e , concluded t h a t the cred i to rs

would ge t a higher recovery by al lowing WMMRC to f i n i sh i t s run

o f f . (Tr. 7/14/2011 a t 45-47; D 391.)

58



t ransac t ions do not take place in a vacuum and we f ind t h i s

[ cons ide ra t ion of loss car ryovers or othe r tax benef i t s ] to be

noth ing more than prudent bus iness p l a n n i n g . " ] i U.S. She l t e r , 13

Cl. Ct . a t 625 (holding t ha t ~ t h e p r in c ip a l purpose of a

t r an sac t io n does not become tax avoidance merely because the

p a r t i e s were cogn izan t of and considered the ta x consequences ." ) .

Fur ther , desp i te doing those analyzes , th ree of the Set t l emen t

Noteholders t e s t i f i e d t h a t they did no t e l e c t to take ex t ra s tock

in l i eu of cash d i s t r ibu t ions . (Tr. 7/18/2011 a t 123i Tr.

7/19/2011 a t 112-13; T r. 7/20/2011 a t 81.)

In t h i s case given the conse rva t ive va lua t ion done by Zel in

(which assumes t h a t WMMRC w i l l genera te no new bus iness ) , th e

Court a l so f inds t h a t the e l ec t in g c red i t o r s ' decis ions to t ake

s tock was l i ke ly in f luenced by a b e l i e f t h a t the Debtors

undervalued the Reorganized Debtor by viewing it as a l i q u id a t in g

company r a th e r than as a going concern. (Tr. 7/14/2011 a t 39

40.) See, e .g . , Exide Techs . , 303 B.R. a t 48, 61 (not ing th e

i nc l i na t i on of debtor to undervalue th e reorganized en t i t y ) .

Given the va r ious reasons fo r di s t r i bu t i on of s tock to

c red i to r s under the Modified Plan, the Court concludes t h a t the

p r in c ip a l purpose of the t r a n s f e r of ownership of th e Reorganized

Debtor under the Modified Plan i s not the avoidance of t axes .

The Court i s cogn izan t of the f ac t t h a t i t s opinion on t h i s po in t

i s not bind ing on th e IRS. 26 C.F.R. § 1 .269-3(e) ( ~ I n

59



determining fo r purposes of sec t ion 269 . . . whether an

acqu is i t ion pursuant to a plan of reorgan iza t ion in a case under

[ the Bankruptcy Code] was made fo r the p r i n c i p a l purpose of

evas ion or avoidance of Federa l income tax , . . . any

determinat ion by a cour t under 11 U.S.C. § l129(d) t h a t the

p r in c ip a l purpose of the plan i s no t avoidance of t axes i s no t

c o n t r o l l i n g . " ) . See also In re Hartman Mater ia l Handling Sys . ,

Inc . , 141 B.R. 802, 811-12 (Bankr. S.D.N.Y. 1992) (holding t h a t

"[a] conf i rmat ion ru l ing t h a t the p r in c ip a l purpose of a plan i s

no t tax avoidance s i g n i f i can t l y d i f f e r en t from a § 269 ru l ing

because the tw o ru l ings a re made pur suan t to d i f f e r en t ' f ac t u a l

frames of r e fe ren ce ' " and not ing t h a t the bankruptcy cour t can

only cons ide r f ac t s up to the t ime of i t s ru l ing on conf i rmat ion

whi le the IRS can cons ide r f ac t s a f t e r conf i rmat ion u n t i l th e

deduct ion i s t aken) . Nonetheless , the Court cons ide r s it

s i g n i f i can t t h a t the IRS has not objec ted to conf i rmat ion of the

Modified Plan on the bas is t h a t i t s p r in c ip a l purpose i s tax

avoidance al though it c l ea r l y could have. 11 U.S.C. § 1129(d) .2 7

For purposes of es t ima t ing the value of the NOLs, therefore ,

the Court cannot accep t the Debtors ' as se r t i o n t h a t the

27

I fa

governmental u n i t objec ted and the Court found t h a tth e p r in c ip a l purpose was to avoid t axes , the Modified Plan couldno t be confirmed. 11 U.S.C. § 1129(d) ("Notwithstanding any

othe r provis ion of t h i s sec t ion , on r eques t of a par ty in

i n t e r e s t t h a t i s a governmental u n i t , the cour t may not confirm a

plan if the p r in c ip a l purpose of the plan i s the avoidance of

taxes . . . . " ) .

60



Reorganized Debtor could not obta in future inves tments t h a t are

more than the value of i t s non- tax asse t s without having the IRS

conclude t h a t the acq u i s i t i o n of s tock by cred i to rs under the

Modified Plan runs a fou l of sec t ion 269 of the Tax Code.

(2) Value adjusted fo r loss

In determin ing the value of the NOLs resu l t ing from any

fu tu re acq u i s i t i o n , Zel in assumed t h a t any c a p i t a l r a i s ed would

be no more than the value of the c u r r e n t WMMRC non- tax asse t s

based on sec t ion 269. (Tr. 7/13/2011 a t 260-61, 275-78, 284; D

341 a t 8 .) As a re su l t , he concluded t h a t the value of the NOLs

r e su l t i n g from any add i t ional acqu is i t ions was no more than $10

to $2 5 m i l l i on . (Tr. 7/13/2011 a t 260-61, 275-78, 284.)

The Court f inds t h a t Z el in ' s va lua t ion i s too low, because

it was based on the er roneous assumption t h a t th e Reorganized

Debtor would be r e s t r i c t e d by sec t ion 269 of th e Tax Code in what

c a p i t a l could r a i se in the fu tu re . However, as noted above,

the Court f inds t h a t Maxwel l ' s determinat ions of value a re

f r aught with problems, inc lud ing the assumption t h a t th e

Reorganized Debtor w i l l be ab le to r a i se debt and equi ty

i n s t an t l y , even though the Debtors have not obta ined e x i t

f inancing o r any new debt or equi ty commitments. Maxwel l ' s

pr e se n t va lue of the NOLs a l so assumes t h a t the Reorganized

Debtor w i l l be able to genera te i n s t a n t cash flow from the new

debt and equi ty t h a t has no t even been committed y e t . As a

61



r e s u l t , the Court cannot accep t Maxwell 's determinat ion t h a t the

value of the Reorganized Debtor i s $275 m i l l i o n .

Based on the tw o e xpe r t opin ions , one of which i s too

conse rva t ive and the o the r o f which i s too aggress ive , the Cour t

concludes t h a t the presen t value o f the NOLs to the Reorganized

Debtor i s $50 m i l l i o n . This i s based on the Cour t ' s conclus ion

t h a t th e Reorganized Debtor should be ab le to r a i s e a d d i t i o n a l

c a p i t a l and debt over the next twerity years equal to twice the

value o f i t s c u r r e n t as se t s which w i l l be inves ted in r e s t a r t i ng

the r e insurance bus iness o f WMMRC o r acqui r ing othe r r e l a t ed

bus inesses . Th e Court accep ts as c red ib le Maxwell 's opin ion t h a t

the re insurance market i s a prime area fo r ne w investment given

the recen t t u rmo i l in the r ea l e s t a t e market . 28

Based on a l l of th e above, the Cour t concludes t h a t the

value of the Reorganized Debtor and i t s NOLs i s $210 mil l ion .

3 . Value of L iqu ida t ing Trust I n t e r e s t s

In addi t ion to di s t r i bu t i ons of cash, ce r t a in c red i to r s are

rece iv ing i n t e r e s t s in the Liquida t ing Trus t . (D 255 a t §§ 6 .1 ,

7 .1 , 16 .1 , 18 .1 , 19 .1 , 20 .1 , 21.1 & 32 . l (b ) . ) The Debtors are

t r ans fe r r i ng to the L iqu ida t ing Trus t I of t h e i r i n t e r e s t s in

any causes of act ion the e s t a t e s have, inc lud ing p o t e n t i a l s u i t s

28 Maxwell t e s t i f i e d t h a t t he re would be i n t e r e s t in

i nves t ing in WMMRC because o f the cur ren t oppor tun i t i e s in the

home insurance i ndus t ry ; he c i t ed as an example t h a t Goldman

p a r t n e r s had recen t ly ra i sed $600 mil l ion to s t a r t a new

re insurance bus iness . (Tr. 7/15/2011 a t 38, 67, 122. )

62



against the Debtors' directors and off icers . (Id. a t §§ 28.3 &

43.5.)

The LTW Holders contend, however, that th is major component

of value tha t is being dis t r ibuted to the credi tors has been

ignored by the Debtors and must be valued in order for the Court

to determine whether the Modified Plan meets the bes t in teres ts

of credi tors t e s t under sect ion 1129 (a) (7) .

The Plan Supporters contend tha t i s not necessary to

value the Liquidating Trust In teres ts because under the Modified

Plan ' s water fa l l provis ions, once credi tors have received payment

in fu l l of the i r claims, with in teres t , the i r Liquidating Trust

In teres ts wil l be canceled and a l l fur ther recover ies real ized by

the Liquidating Trust wil l flow to the prefer red shareholders .

(Id. a t § § 6.3, 7.3, 16.3, 18.3, 19.3, 20.3, 22.1, 22.2, 23.1 &

24.1; Tr. 7/13/2011 a t 98.)

The Court agrees with the Plan Supporters tha t it is not

necessary to determine the precise value of the Liquidating Trust

assets because whatever they are worth will be dis t r ibu ted to

credi tors and then to shareholders in accordance with the

p r io r i t i e s of the Code. 29

29 The Court therefore finds it unnecessary to determinewhat i f any value the su i t s against the Debtors' directors andoff icers have. (D.l . 8312 a t Ex. A pp. 2-4; Tr. 7/21/2011 a t

204-05.)

63



D. Good Fai th

Severa l Plan Objectors , led by the Equi ty Committee,

complain t ha t the Plan cannot be confirmed because it has not

been proposed in good fa i th as a r e s u l t of the improper conduct

of the Set t lement Noteholders . They argue t h a t any p r i o r f ind ing

of good fa i th in the January 7 Opinion should be recons idered by

the Court , based on the newly discovered evidence of the Debtors '

and Set t lement Noteholders ' misconduct . Fed. R. Bankr. P.

9024 (b) .

1. Conduct of the Set t lement Noteholders

The conduct of the Set t lement Noteholders was f i r s t ra i sed

by a pro se PIERS holder , Mr. Thoma, a t the conf irmat ion hear ings

held in December, 2010. Although Mr. Thoma sought to in t roduce

what he descr ibed as evidence of improper t rades by the

Set t lement Noteholders, the Court refused t ha t reques t as it was

hearsay . In i t s January 7 Opinion denying conf irmat ion , however,

the Court s t a t ed tha t it was ~ r e l u c t a n t to approve any re leases

of the Set t lement Noteholders" as requi red by the GSA and Sixth

Amended Plan in l i g h t of Mr. Thoma's a l l eg a t io n s of ins ider

t rad ing by the Set t lement Noteholders . Wash. Mut. , 442 B.R. a t

349. Following denia l of conf i rmat ion , both the Set t lement

Noteholders and the Equity Committee engaged in discovery , which

the Court l imi ted to what informat ion the Set t lement Noteholders

64



At t imes dur ing t h a t per iod , the Set t lement Noteholders also

p a r t i c i p a t ed di rec t ly in the negot ia t ions . (Tr. 7/18/2011 a t 55;

Tr. 7/21/2011 a t 101.) As a condi t ion to t h e i r p a r t i c i p a t i o n ,

the Set t lement Noteholders entered in to conf iden t i a l i t y

agreements with the Debtors. (Tr. 7/20/2011 a t 198.) During the

two formal conf iden t i a l i t y per iods, the Set t lement Noteholders

were requi red to r e s t r i c t t rad ing of the Debtors ' secur i t i e s or

to es t ab l i sh an e th ica l wall (precluding any conf iden t i a l

informat ion from being used by t h e i r t raders ) . ( Id . )

Th e F i r s t Co n f id en t i a l i t y Per iod ran from March 9 to May 8,

2009. (EC 24.) Only Aurel ius es tab l i shed an e th ica l wal l dur ing

the F i r s t Co n f id en t i a l i t y Per iod ; the others r e s t r i c t ed t h e i r

t rad ing . (Tr. 7/18/2011 a t 55.) Immediately a f t e r th e Fi r s t

Co n f id en t i a l i t y Per iod , the Set t lement Noteholders shared a l l

co n f id en t i a l informat ion they had received from the Debtors with

t h e i r t raders and ac t ive ly t r aded in the Debtors ' secur i t i e s .

(AOC 18; AOC 54; AOC 62; Au 8.) That informat ion inc luded the

amount of a tax refund the Debtors est imated they would rece ive

( in excess of $2 b i l l i o n ) , which informat ion the Debtors also

made publ ic . (D. l . 970; D 427; Tr. 7/18/2011 a t 65, 79, 144; Tr.

7/20/2011 a t 232-33.) The Debtors d id not , however, make pub c

any of the se t t l ement term sheets or even the f ac t t h a t

se t t l ement negot ia t ions were occurr ing.

66



Af te r the conclus ion of the F i r s t Co n f id en t i a l i t y Per iod ,

tw o of the Se t t l ement Noteholders (Appaloosa and Centerbr idge)

independent ly approached JPMC i n Ju ly and August 2009 in an

e f f o r t to fu r th e r ne go t i a t i ons . (Tr. 7/20/2011 a t 54-55 . ) Term

sheets were exchanged. (EC 14; EC 115; Tr. 7/20/2011 a t 57-58,

243; Tr. 7/21/2011 a t 32-33.) Appaloosa r e s t r i c t e d i t s t r ad ing

dur ing these ne go t i a t i ons , while Centerbr idge r e s t r i c t ed t r ad ing

only upon r ece ip t of a counter -proposal from JPMC on August 18,

2009. (Tr. 7/20/2011 a t 58-59, 130, 244-45.) JPMC withdrew i t s

counter -proposal in ea r l y September 2009. ( rd . a t 58-59, 244

45. )

Negot ia t ions did no t resume again u n t i l the Second

Conf iden t ia l i ty Per iod , which ran from November 16 to December

31, 2009 (the "Second Co n f id en t i a l i t y Per iod" ) . (EC 37; EC 117;

EC 148; Tr. 7/18/2011 a t 105; Tr. 7/19/2011 a t 139-40; Tr.

7/21/2011 a t 128-29.) During the Second Co n f id en t i a l i t y Per iod ,

a l l the Set t lement Noteholders r e s t r i c t e d t rad ing . (Tr.

7/18/2011 a t 104-05; Tr. 7/19/2011 a t 140; Tr. 7/20/2011 a t 71

72, 246.) Near th e end of the Second Co n f id en t i a l i t y Per iod ,

Aurel ius asked the Debtors to te rminate the co n f i d en t i a l i t y

per iod a day ea r l y . (Tr. 7/18/2011 a t 111.) The Debtors agreed

and aga in re l eased to the publ ic the Debtors ' es t ima te o f an

add i t ional tax refund ( in excess of $2 b i l l i o n ) which the Debtors

an t i c ip a t ed rece iv ing because of a r ecen t change in the tax laws .

67



(D. I . 2077; D 428; Tr. 7/18/2011 a t 105; Tr. 7/19/2011 a t 141;

Tr. 7/21/2011 a t 127-28. ) Once again , immedia te ly a f t e r the

Second Co n f id en t i a l i t y Per iod , the Set t l emen t Noteholders

ac t iv e ly t r aded i n the Debtors ' secu r i t i e s using in format ion they

had received from th e Debtors , inc lud ing the s t a t u s of se t t l ement

ne go t i a t i ons . (AOC 18; AOC 54; AOC 62; Au 8 .)

Following the Second Conf i de n t i a l i t y Per iod , the Set t l emen t

Noteholders ' involvement i n negot i a t ions was l imi ted to a meeting

with the Debtors in January and a meeting with the Debtors , JPMC,

the FDIC, and the WMB Noteholders in February 2010 to discuss a

proposed plan of r eorgan iza t ion , how the Debtors ' as se t s would be

d i s t r i b u t ed under a plan ( the "Wate r fa l l " ) , and updates on

l i t i g a t i o n . (Tr. 7/19/2011 a t 62-63, 70; Tr. 7/21/2011 a t 130.)

One of the Set t l emen t Noteholders , Appaloosa, a l so p a r t i c i p a t e d

in a meeting with the Debtors and JPMC on March 1 and t h e rea f t e r

r e s t r i c t e d i t s t r ad ing u n t i l the terms of the GSA were announced

on March 12, 2010. (Tr. 7/20/2011 a t 76-77, 96.) Af te r the

announcement of the GSA, the Debtors sen t the Set t l emen t

Noteholders advance d ra f t s of the p lan of reorgan iza t ion ,

d i sc losure s ta tement , and Water fa l l ana lyses . (EC 42; EC 34; Tr.

7/20/2011 a t 77, 220, 262.) Upon r ece ip t of t hose d ra f t s , the

Set t l emen t Noteholders r e s t r i c t e d t r ad ing u n t i l the documents

were publ ly l ed . (AOC 18; Tr. 7/19/2011 a t 77-78; Tr.

7/20/2011 a t 77, 262.)

68



2. Applica t ion of sec t ion 1129 (a) (3 )

Th e Bankruptcy Code r equ i res t ha t , to be conf i rmed, a plan

of reorgan iza t ion must be "proposed in good f a i th and not by any

means forb idden by law." 11 U.S.C. § 1129(a) (3) . To meet t h i s

s tanda rd , th e Thi rd Circu i t has s t a t ed t h a t a plan must " f a i r l y

achieve a r e s u l t cons i s ten t with th e ob jec t ives and purposes of

th e Bankruptcy Code." In re PWS Holding Corp. , 228 F.3d 224, 242

(3 d Cir . 2000) . See a l so In re Abbot ts Dai r i es o f Pa . , Inc . , 788

F.2d 143, 150 n .5 (3 d Cir . 1986); In re Madison Hote l Assocs . ,

749 F.2d 410, 424-25 (7th Cir . 1984) . To meet t h i s s tandard , th e

plan proponent must es tab l i sh t ha t " ( 1 ) [ the plan] fos te r s a

r e su l t cons i s ten t with th e Code's ob jec t ives ... , (2 ) the plan

has been proposed with hones ty and good i n t en t i o n s and with a

b as i s fo r expect ing t h a t r eo rgan iza t ion can be e f fec t ed . . . ,

and (3 ) there was fundamental f a i rn es s in dea l ing with the

cred i to r s . " In re Genesis Heal th Ventures , Inc . , 266 B.R. 591,

609 (Bankr. D. Del. 2001) . Accord In re Fras ce l l a En te r s . , I n c . ,

360 B.R. 435, 446 (Bankr. E.D. Pa. 2007).

The Set t lement Noteholders , and th e Debtors contend t h a t th e

conduct of th e Set t lement Noteholders was in accordance with th e

terms of the p a r t i e s ' wri t t en c o n f i d e n t i a l i t y agreements and did

not v io la te any law or duty t ha t th e Se t t l ement Noteholders might

have had. They contend t h a t the Modified Plan i s proposed in

good f a i t h and conf i rmable under sec t ion 1129(a) (3) .

69



Th e Equi ty Committee objec t s to conf i rmat ion of the Modified

Plan 31 as se r t i n g t h a t it has not been proposed in good f a i t h

becauseth e Set t lement

Noteholders "dominated"o r "h i jacked" the

se t t l ement negot i a t ions and engaged i n inequ i t ab le conduct ,

inc lud ing t rad ing in the Debtors ' secu r i t i e s while in possess ion

of ma te r i a l nonpubl ic informat ion. The Plan Objectors

sp ec i f i ca l l y contend t h a t the Set t lement Noteholders used

mate r i a l nonpubl ic in format ion to acqui r e a blocking pos i t ion in

the va r ious c red i t o r c l a s ses to ge t a sea t a t the negot i a t ing

t ab l e and assure t h a t t h e i r claims got paid whi le noth ing was

given to the sha reholder s . See, e .g . , In re ACandS, In c . , 311

B. R. 36, 43 (Bankr. D. Del. 2004) ( f inding a l ack of good fa i th

where p re -p e t i t i o n c red i t o r s committee dominated th e d eb to r ' s

a f f a i r s r e su l t i n g in "obvious se l f -d ea l in g " ) ; In re Coram

Heal thcare Corp. , 271 B.R. 228, 23 4 (Bankr. D. Del. 2001)

(denying conf i rmat ion fo r l ack of good fa i th where d eb t o r ' s CEO

had an undisc losed mil l ion d o l l a r consu l t ing agreement with a

c red i t o r ) ; In re Unichem Corp . , 72 B.R. 95, 100 (Bankr. N.D. Ill.

1987) ( f inding lack of good fa i th where plan proponent breached

31 Th e Equi ty Committee has a l so f i l ed a motion seeking

au th o r i t y to prosecu te an ac t ion aga ins t the Se t t l ement

Noteholders fo r equ i t ab le disal lowance of t h e i r cla ims. Althoughthe Motion only sought disal lowance of the claims of Aurel ius and

Centerbr idge, the Equity Committee 's objec t ion to conf i rmat ion

a s s e r t s t h a t equi t ab le disal lowance of the claims of a l l the

Set t lement Noteholders i s warran ted . At o ra l argument, th e

Equity Committee c l a r i ed t h a t it seeks au thor i ty to bring such

a claim aga ins t a l l four Set t lement Noteholders .

70



f iduc ia ry d u t i e s to debtor because ~ C o n g r e s s d id no t in tend the

objec t ives and purposes of th e Bankruptcy Code to inc lude

rewarding an i nd iv idua l fo r breaching h is f iduc ia ry duty") .

Based on the record developed, the Court f inds t h a t the

conduct of the Set t l emen t Noteholders does not mean t h a t th e Plan

was proposed in bad fa i th . Despi te the a l l eg a t io n s of i n s id e r

t r ad ing by the Set t l emen t Noteholders , th e Cour t i s unconvinced

t h a t t h e i r ac t ions had a nega t ive impact on th e Plan or t a in ted

the GSA.

Rather , th e ac t ions of the Set t l emen t Noteholders appear to

have helped i nc rease the Debtors ' es t a t e s . During the F i r s t

Conf iden t ia l i ty Per iod , the Set t l emen t Noteholders , t oge the r with

othe r c red i t o r s , persuaded the Debtors to submit a term shee t to

JPMC t h a t was more "aggress ive" than the one the Debtors had

i n i t i a l l y contempla ted . (Tr. 7/20/2011 a t 50.) In addi t ion ,

during the July negot i a t ions t h a t Appaloosa and Centerbr idge had

alone with JPMC, they persuaded JPMC to submit a counter -proposal

t h a t inc reased the share of the tax refunds t h a t JPMC was wi l l ing

to a l loca te to the Debtors . (EC 115; Tr. 7/20/2011 a t 243.)

The cases c i t ed by th e Plan Objectors are d i s t i ngu i sha b l e

from the pr e se n t f ac t s . Both Coram and Unichern involved

i nequ i t ab le conduct of an execut ive o f the deb tor t h a t l ead to

the conclus ion t h a t the d eb to r ' s plan was of fe red in bad fa i th .

Coram, 271 B.R. a t 234-35; Unichem, 72 B.R. a t 99-100.

71



While ACandS i s c lo se r , the Court f inds di s t ingu i shab le

in impor tant r e sp ec t s . In t h a t case , the Court found t h a t the

p re -p e t i t i o n c re d i t o r s ' commit tee gained cont ro l of the debtor to

the po i n t where the commit tee alone made a l l the impor tant

dec i s ions , inc lud ing tak ing over the process of reviewing and

s e t t l i n g a l l asbes tos c la ims . 311 B.R. a t 40. 32 In addi t ion , th e

plan and se t t l ement draf ted by the committee and proposed by the

debtor placed c red i t o r s in d i f f e r en t c lasses fo r no d i sce rn ib l e

reason , othe r than the f ac t t h a t c r ed i t o r s r epresen ted by the law

f i rms on the committee were t rea ted as secured c red i t o r s e n t i t l e d

to payment in f u l l while o t he r c red i to r s (with the same i l l n e s s

and mani fes ta t ions ) were t r ea t ed as unsecured cred i to rs e n t i t l e d

to little or noth ing . Id . a t 43.

While the evidence in t h i s case shows t h a t the Set t l emen t

Noteholders p a r t i c i p a t ed in the se t t l ement negot i a t ions and plan

d ra f t i n g and rev iew, the Court f inds t h a t it f a l l s sh o r t of the

almost t o t a l cont ro l exe rc i sed by th e committee in ACandS. The

Set t lement Noteholders were only one of severa l groups of

c red i to r s involved in t h i s case , inc lud ing the WMI Noteholders

and the WMB Noteholders . Nor does the Modified Plan have the

32

The Court in ACandS was pa r t i cu la r ly concerned to learnt h a t while counsel fo r the deb tor was purpor ted ly reviewing and

s e t t l i n g c la ims , in f ac t t h a t t a sk was subcont r ac ted to a company

whose so le p r in c ip a l was a para lega l from the law f i rm t h a t

served as ch a i r of the p re -p e t i t i o n c re d i t o r s ' commit tee . 311

B.R. a t 40. The se t t l ement o f claims by t h a t firm appeared to

f avor cred i to rs represen ted by the members of the commit tee . Id .

72



f a t a l flaw of improper c l a s s i f i c a t i o n and t r ea tment o f claims

t h a t the ACandS plan had. In t h i s case , the c red i t o r c lasses are

t r ea t ed in accordance with the p r i o r i t i e s of the Bankruptcy Code

and t h e i r c on t r a c t ua l subord ina t ion r i g h t s . I f the Set t lement

Noteholders had improper ly dominated the case as in ACandS, the

Modified Plan would have e leva ted the t r ea tment of the PIERS

c l a ss ( in which they hold the bulk o f t h e i r c la ims) ; i ns t ead the

PIERS are rece iving the t r ea tment warranted by t h e i r subordinated

s t a t u s .

While the Court i s no t sugges t ing t h a t the Set t lement

Noteholders be commended fo r t h e i r ac t ions , the record shows

t h e i r ac t ions do not suppor t a conclus ion t h a t the Modified Plan

cannot be confirmed because it has been proposed in bad f a i t h .

The harm caused by the Se t t l ement Noteholders has or can be

remedied by othe r means. 33 See i n f r a Par t H.

E. Best In t e r e s t s of Credi to r s

The Plan Objectors cont inue t o p ress t h e i r arguments t h a t

the Modified Plan v i o l a t e s the be s t i n t e r e s t s of cred i to rs t e s t

a r t i cu l a t ed in sec t ion l129(a) (7) . That sec t ion requ i res t h a t a

plan o f reorgan iza t ion provide non-consent ing impai red c red i t o r s

33 The Court in its January 7 Opinion held t h a t theSet t l emen t Noteholders were no t e n t i t l e d to r e l eases . 442 B.R.

a t 349. In addi t ion , the Court held t h a t the Se t t l ement

Noteholders ' almost exc lus ive r i g h t to p a r t i c i p a t e in the r i g h t s

offer ing di sc r imina ted aga ins t o the r c red i to r s in the same c l a ss .

Id. a t 361. The r i g h t s o f fe r in g has subsequent ly been removed.

(Tr. 2/18/2011 a t 80-81.)

73



(and shareholders ) with a t l e a s t as much as they would receive i f

the debtor was l i qu ida t ing in chapter 7. 11 U.S.C. § 1129(a) (7) .

See, e . g . , In re U.S. Wireless Data, Inc . , 54 7 F.3d 484, 495 (2d

Cir . 2008). The Plan Objectors ra i se many reasons why th e

Modif ied Plan does not comply with t ha t sec t ion .

1. Contrac t v. federa l judgment r a te

a . Plan Objectors

The Plan Objectors contend t h a t the Modif ied Plan f a i l s to

comply with the bes t in te res t s of c red i to r s t e s t because it

provides for the payment of pos t -pe t i t i on i n t e r e s t on cred i to r s '

claims a t t h e i r con t rac t r a t e of i n t e r e s t r a the r than a t th e

federa l judgment r a te . This r esu l t s , they argue, in the

c red i to r s r ece iv ing more (and the shareholders accordingly

r ece iv ing l es s ) than they would under a chap ter 7 l i qu ida t ion . 34

The genera l ru le i s t h a t unsecured c red i to r s are not

e n t i t l e d to recover pos t -pe t i t i on i n t e r e s t . United Sav. Ass'n v.

Timbers of Inwood Fores t Assocs . , Ltd. , 484 U.S. 365, 372-73

(1988) (holding t h a t only over -secured c red i to r s are e n t i t l e d to

r ece ive pos t -pe t i t i on i n t e r e s t under sec t ion 506(b)) . There i s

34 This could also c o n f l i c t with the requirements of the

fa i r and equ i tab le t e s t under sect ion 1129(b). Although t ha tsec t ion embodies the absolute p r i o r i t y ru le , which forbids jun io r

c lasses of cred i to r s or equi ty from r ece iv ing any d i s t r i bu t ion

u n t i l sen io r c red i to r s are paid in fu l l , it so mandates t ha t

senior c red i to r s not receive more than 100% of t h e i r claim before

jun io r c lasses receive a d i s t r i bu t ion . See, e . g . , Exide Techs . ,303 B.R. a t 61 (Bankr. D. Del. 2003).

74



an except ion to th e genera l ru l e , however, when the debtor i s

so lven t . Onink v . Cardelucci (In r e Carde lucc i ) , 285 F.3d

1231, 1234 (9th Cir . 2002) ( f inding t h a t when a deb to r i s

so lven t , unsecured c red i to r s are e n t i t l e d to p o s t -p e t i t i o n

i n t e r e s t a t th e " l eg a l r a t e " ) . This i s so because under a

chapte r 7 l i q u id a t io n , where the deb to r so lven t , unsecured

c r e d i t o r s a re en t i t l ed to p o s t -p e t i t i o n i n t e r e s t on t h e i r claims

before shareho lder s r ece ive any d i s t r i b u t i o n . 11 U.S.C. §

726(a) (5 ) & (6) ( s t a t i n g t h a t in a chapte r 7 case unsecured

c red i to r s a re e n t i t l e d to i n t e r e s t a t the l eg a l ra te from the

da te o f the f i l i n g of the p e t i t i o n before any payment can be made

to the debtor or eq u i ty ) . See, e . g . , Ki t r o s se r v . Th e CIT

Grp. /Fac tor ing , I n c . , 177 B.R. 458, 469 (S.D.N.Y. 1995)

("Although the requi rements of Chapter 7 a re in genera l no t

appl i cab le to Chapter 11 proceedings . . . Sect ion 726 does apply

through the requi rements of Sect ion 1129 . " ) ; In re Premier Entm' t

B i lox i LLC, 445 B.R. 582, 644 (Bankr. S.D. Miss. 2010) ("Sect ion

726 a pp l i e s i n d i r ec t l y to chapte r 11 cases by v i r t u e of the ' b e s t

i n t e r e s t s of c r e d i t o r s ' t e s t in § 1129, under which d i s t r i b u t i o n s

proposed under a plan of r eorgan iza t ion under chapte r 11 must a t

l e a s t equal the amount t h a t would have been pa id in a l i q u id a t io n

under chapte r 7 . " ) .

The Plan Objectors contend t h a t the major i ty of cour t s to

address t h i s i s sue conclude t h a t " the l eg a l ra t e" due under

75



sec t ion 726(a) (5 ) i s th e f ed e r a l judgment r a t e . See, e . g . ,

Cardelucc i , 285 F.3d a t 1234 (concluding t h a t f ed e r a l judgment

r a t e , r a the r than s t a t e judgment r a t eor

con t rac t r a t e , was due

on unsecured claims under sec t ion 726(a) (5 ) fo r purposes of b es t

i n t e r e s t s of c red i to r s t e s t ) ; In re Garr iock , 373 B.R. 814, 816

(E.D. Va. 2007) ("Having reviewed each l i ne of cases , th e Court

i s persuaded t ha t ' t he l eg a l r a t e ' r e f e r s to the federa l judgment

r a t e , and does no t encompass any lawful pre -pe t i t ion

con t rac t r a t e . " ) ; In re Adelphia Commc'ns Corp. , 368 B.R. 140,

257 (Bankr. S.D.N.Y. 2007) (concluding t h a t " [ i ] t i s by fa r the

b e t t e r view, in my opinion, t ha t ' l ega l r a te ' i s t he f edera l

judgment r a t e and no t th e same as t h a t au thor ized under sec t ion

506(b) , which i s the con t rac t r a t e . " ) ; In re Best , 36 5 B.R. 725,

727 (Bankr. W.D. Ky. 2007) ("The more r ecen t cases hold t ha t th e

f ed e r a l judgment r a t e i s the proper r a t e o f i n t e r e s t under 11

U.S.C. § 726(a) (5)") ; In re Dow Corning Corp. , 237 B.R. 380, 412

(Bankr. E.D. Mich. 1999) (determining t h a t th e phrase " i n t e r e s t

a t th e l eg a l r a t e " means th e f edera l judgment r a t e ) ; In re

Chiape t ta , 159 B.R. 152, 161 (Bankr. E.D. Pa. 1993) ("[W]e

fu r the r conclude t ha t , s ince a claim i s l i ke a judgment en tered

a t th e t ime of the bankruptcy f i l i n g , the app l i cab le r a t e should

be th e federa l judgment r a t e

...." ) ; In re Melenyzer, 143

B.R. 829, 832-33 (Bankr. W.D. Tex. 1992) (concluding t ha t th e

appropr i a t e r a t e of i n t e r e s t payable to unsecured c red i to r s

76



pursuant to sec t ion 726(a) (5 ) i s the fede ra l judgment r a t e ) .

The Plan Suppor ters argue, however, t h a t the Cour t has

a l r eady decided t h i s i s sue in the January 7 Opinion and concluded

t h a t the c on t r a c t r a t e was the presumed ra te under sec t ion

726(a) (5) unless the equ i t i es of the case mandate otherwise .

They contend t h a t ru l ing i s the law of the case and cannot be

reargued .

The Court di sagrees with the Plan Suppor ters on t h i s p o in t .

In the January 7 Opinion, the Cour t d id not conclude t h a t the

co n t rac t r a t e was the presumed r a t e , it merely c i t ed a l i n e of

cases t h a t so hold . 44 2 B.R. a t 358. At the same t ime, however,

the Court noted t h a t t he re i s a l ine of cases t h a t hold t h a t the

fede ra l judgment r a t e i s the appropr ia te ra te under sec t ion

726(a) (5) . Id . a t 357-58. The Court also noted t h a t it had

prev ious ly "concluded t h a t the fede ra l judgment ra te was the

minimum t h a t must be pa id to unsecured c red i to r s in a so lven t

debtor case under a plan to meet the b es t i n t e r e s t of c r e d i t o r s '

t e s t , bu t t h a t the Cour t had d i sc re t io n to a l t e r it." Id . a t 358

(emphasis added) ( c i t i n g Coram, 315 B.R. a t 346) . The Court ,

however, d id not decide the ques t ion in t h i s case , because the

Cour t be l ieved it needed to cons ider the equ i t i es of the case .

Now t h a t a l l i s sue s have been presen ted to the Court , the

Cour t concludes t h a t the b e t t e r view i s t h a t the f e de r a l judgment

r a t e i s the appropr ia te ra te to be appl ied under sec t ion

77



726 (a) (5) , r a th e r than the c on t r a c t r a t e . 35 The Cour t ' s

conclus ion i s suppor ted by many f ac to r s .

F i r s t , sec t ion 726(a) (5) s t a t e s t h a t i n t e r e s t on unsecured

c la ims s h a l l be pa id a t "the l ega l ra te" as opposed to "a" l eg a l

r a t e or the cont rac t r a t e . As the LTW Holders note , where

Congress in tended t h a t the co n t rac t r a t e of i n t e r e s t apply, it so

s t a t ed . See 11 U.S.C. § 506(b) (s ta t ing t h a t if a secured

c red i t o r i s over -secured, the c red i t o r s h a l l be en t i t l ed to

" i n t e r e s t on such claim . provided fo r under the agreement or

Sta t e s t a tu t e under which such claim a rose . " ) (emphasis added) .

See a l so Adelphia Commc'ns, 368 B.R. a t 257; DOw, 237 B.R. a t

405-06 (holding t h a t use of term " l eg a l " as opposed t o "con t rac t "

r a t e mandated conclus ion t h a t Congress meant "a ra te f ixed by

s ta tu te") .

Second, th e payment of pos t - judgment i n t e r e s t i s procedura l

by nature and dic ta ted by fede ra l law r a th e r than s t a t e law,

fu r th e r suppor t ing use of the fede ra l judgment r a t e . Cardelucci ,

285 F.3d a t 1235 (c i t ing Hanna v . Plumer, 380 U.S. 460, 473-74

(1965» .

Third, the use of the fede ra l judgment r a t e promotes tw o

impor tan t bankruptcy goa ls : " fa i rn es s among c red i t o r s and

" To the ex ten t I suggested in Coram t h a t the fede ra l

judgment ra te was not r equ i r ed by sec t ion 726(a) (5) , I was wrong.

315 B.R. a t 346 (applying fede ra l judgment ra te none the les s

because of the equ i t i es of the c a se ) .

78



admin i s t ra t ive e f f i c i en cy . " Carde lucc i , 285 F.3d a t 1236. See

a l so Best , 365 B.R. a t 727 ( federa l judgment ra t e provides "an

e f f i c i e n t and inexpensive means of cu la t ing the amount of

i n t e r e s t to be pa id to each c red i t o r " ) ; Dow, 23 7 B.R. a t 407

(providing a uniform ra te "keeps the bankruptcy es t a t e from being

saddled with p o t en t i a l l y d i f f i c u l t and t ime-consuming

admin i s t ra t ive burdens" of determining what r a t e i s appl i cab le to

each c r ed i t o r ' s c la im) ; Melenyzer, 143 B.R. a t 833 ( federa l

judgment r a t e provides cour t with an "eas i l y asce r t a in ab le ,

n a t io n a l ly uniform r a t e" and i nc reases p re d i c t a b i l i t y in the

process) .

The Cour t f inds t h a t the l ine of cases ho ld ing t he re i s a

presumption the co n t rac t ra t e appl i e s are dis t ingu ishab le and/or

unpersuas ive . See, e .g . , Dow, 456 F.3d a t 676-79 (remanding to

bankruptcy cour t to determine if eq u i t i e s of case permi t ted

al lowance of d efau l t i n t e r e s t to c red i t o r s r a th e r than the

co n t rac t r a t e ) ; In re Southland Corp. , 160 F.3d 1054, 1059-60

(5th Cir . 1998) (determining ra te of i n t e r e s t fo r an over -secured

c red i to r ) ; In r e Chi . , Milwaukee, S t. Paul & Pac. R.R. Co., 791

F.2d 524, 529-30 (7th Ci r . 1986) ( in case under r a i l ro ad

reorganiza t ion chapte r o f Bankruptcy Act , cour t held t h a t

c red i to r s were e n t i t l e d only to c on t r a c t d efau l t r a t e , not higher

market r a t e , without di scuss ing fede ra l judgment r a t e ) .

79



The Indenture Trus tee fo r the PIERS urges the Court not to

be swayed by arguments t h a t equi ty w i l l r ece ive a recovery if the

fede ra l judgment ra te i s used r a th e r than the c on t r a c t r a t e ,

because t h a t i s no t a fac to r which cour t s should cons ide r . See,

Urban Communicators PCS LP v. Gabrie l Capi ta l , L .P . , 394

B.R. 325, 340 (S.D.N.Y. 2008) (holding t h a t "it i s not

i nequ i t ab le to cu t down the i n t e r e s t of Debtors ' shareholders by

i n t e r e s t payments a t a d efau l t r a t e to which the Debtors

co n t rac tu a l ly agreed H) ; In re I n t ' l Hydro-Elec. Sys . , 101 F.

Supp. 222, 22 4 (D. Mass. 1951) (holding t h a t " [ t ]h e burden of

. payment [o f p o s t -p e t i t i o n i n t e r e s t on i n t e r e s t ] w i l l f a l l

e n t i r e l y on the i n t e r e s t of the s tockholders . . . [who] cannot

complain t h a t they are t r ea t ed i nequ i t ab ly when t h e i r i n t e r e s t i s

cu t down by the payment of a sum to which the debenture holders

a re c l ea r l y e n t i t l e d by the express provis ions of the t r u s t

inden ture . H) •

The cases c i t ed by th e Indenture Trus tee a re not on po i n t .

The Urban Communicators Court was cons ider ing what was due to an

over -secured c red i t o r under sec t ion 506(b) r a th e r than what p o s t

pe t i t i on i n t e r e s t i s due to unsecured c red i to r s under sec t ion

726(a) (5) . 394 B.R. a t 333-34. Th e I n t ' l Hydro-Elec. Court was

dea l ing with the rear rangement of a publ i c u t i l i t y company under

title 15, not a reorgan iza t ion under title 11. 101 F. Supp. a t

223. Nonethe less , the Court agrees t h a t the e f f e c t on equi ty i s

80



no t an appropr ia t e f ac to r to be considered , and the Cour t wi l l

no t cons ider t h a t . In applying the pla in language of the

s t a t u t e , however, the Cour t concludes t h a t the fede ra l judgment

ra t e i s the proper measure fo r p o s t -p e t i t i o n i n t e r e s t due to the

unsecured c red i t o r s .

Even if a cons ide ra t ion of th e eq u i t i e s was appropr ia t e ,

a f t e r cons ide r ing the evidence in t h i s case , the Cour t does no t

f ind t h a t the eq u i t i e s suppor t the use of anyth ing o t he r than the

fede ra l judgment r a t e . Cf. Carde lucc i , 285 F.3d a t 1236

( r e j ec t in g argument t h a t in cases where a l l c red i t o r s could ge t

pa id cont rac t ra te of i n t e r e s t , debtor would be g e t t i n g a

windfa l l if c re d i t o r s ' i n t e r e s t claims are l imi ted by the fede ra l

judgment ra te because n ' i n t e r e s t a t the l eg a l r a t e ' i s a

s t a t u t o ry term with a d e f i n i t i v e meaning t h a t cannot s h i f t

depending on the i n t e r e s t s invoked by the sp ec i f i c fac tua l

ci rcumstances before the cour t . " ) .

Th e Plan Suppor ters argue, however, t h a t payment of the

var ious co n t rac t r a t e s of i n t e r e s t as provided in the Modified

Plan i s warran ted because the d i s t r i b u t i o n scheme i s simply a

funct ion of th e subord ina t ion provis ions in the var ious

c r e d i t o r s ' con t rac t s ( the Senior Subordina ted Indenture , the CCB

1 Guarantee Agreements, th e CCB-2 Guarantee Agreements, the

Junior Subordina ted Notes Indenture , and the PIERS Guarantee

Agreement) which they say mandate t h a t the subordinated cred i to rs

81



pay the sen ior cred i to rs t h e i r claims in f u l l , inc lud ing cont rac t

i n t e r e s t . (See WMI NG 1-7 . )

The TPS Consortium di spu tes t h i s c on te n t i on . I t argues t h a t

the Debtors a re only obl iga ted to pay to each c red i t o r c lass

t h e i r al lowed claims and i n t e r e s t a t the r a t e requi red by the

Code. To the e x t e n t t h a t the c red i to r s have agreements among

themselves - fo r one c l a s s to pay over i t s d i s t r i b u t i o n to

another c l a s s - it does not impact the obl iga t ions of the

Debtors . Bank of Am. N.A. v. N. LaSal le S t. Ltd.

P' sh ip (In re 203 N. LaSal le S t. P ' sh ip ) , 246 B.R. 325, 33 0

(Bankr. N.D. Ill. 2000) (holding t h a t sen ior c red i t o r could

a s s e r t i t s unsecured def ic i ency claim aga ins t subordinated

c red i t o r even though it was a non-recourse obl iga t ion and could

not be co l l ec t ed from the debtor ) ; F i r s t Fi d e l i t y Bank, N.A. v.

Midlant ic N a t ' l Bank (In re Ionosphere Clubs, In c . ) , 134 B.R.

528, 532 (Bankr. S.D.N.Y. 1991) (concluding t h a t because

cred i to rs were under-secured , sen ior c red i to r s were e n t i t l e d to

i n t e r e s t only from the d i s t r i b u t i o n s due to subordinated

c red i t o r s ) ; In re Smith , 77 B.R. 624, 627 (Bankr. N.D. Ohio 1987)

(holding t h a t subord ina t ion agreements betweeh c red i t o r s may not

impai r the r i g h t s of the othe r c red i to r s " and t h a t Uthe amount of

claims a ga i n s t the Debtor , and the d i s t r i b u t i o n to uninvolved

c red i t o r s , remain unaf fec ted") . See also Pat r ick Darby,

Southeas t and New England Mean New York: The Rule of Expl ic i tness

82



and Post-Bankruptcy I n t e r e s t on Senior Unsecured Indebtedness , 38

Cum. L. Rev. 467, 47 7 (where i n t e r e s t claim i s no t al lowed under

Bankruptcy Code, the sen ior c red i t o r must seek to c o l l e c t t h a t

i n t e r e s t from subord inated c red i to r s ) .

Th e Court agrees with th e TPS Consor t ium's argument . The

f a c t t h a t some of the c red i to r s have co n t rac tu a l ly agreed to pay

t h e i r d i s t r i b u t i o n to othe r c red i to r s does no t mean t h a t the

Debtors a re requi r ed to make payments to the sen ior c red i to r s

t h a t are more than th e Bankruptcy Code al lows, whi le preserving

the subord ina ted c r e d i t o r s ' claims aga ins t the e s t a t e . While the

Debtors can, through a plan of reorgan iza t ion , e f f e c t u a t e the

subord ina t ion agreements by d i ve r t i ng payments from subord inated

c red i to r s t o sen ior c r e d i t o r s , t h a t cannot a f f e c t the t o t a l

claims aga ins t th e e s t a t e , which do no t inc lude p o s t -p e t i t i o n

i n t e r e s t on any unsecured cla im a t more than the f e de r a l judgment

r a t e . See, e . g . , F i r s t Fi d e l i t y , 13 4 B.R. a t 532; Smith, 77 B.R.

a t 627.

b. WMI Senior Noteholders ' Group

The WMI Senior Noteholders ' Group argues t h a t the be s t

i n t e r e s t of c red i to r s t e s t mandates t h a t the Cour t award them the

h igher of the fede ra l judgment r a t e and the c on t r a c t r a t e on

t h e i r f l o a t in g i n t e r e s t r a t e bonds. During ce r t a in per iods

th roughout th e case , the c on t r a c t r a t e on the f l o a t in g i n t e r e s t

bonds was ac tu a l ly l e s s than the fede ra l judgment r a t e .

83



Consequent ly , the WMI Senior Noteholders ' Group argues t h a t if

they a re awarded only t h e i r c on t r a c t r a t e o f i n t e r e s t , it would

l ead to the absurd r e s u l t of j un i o r c red i to r s g e t t i n g paid p o s t

p e t i t i o n i n t e r e s t a t a higher ra te than sen ior c red i t o r s .

This argument i s moot because the Cour t i s no t awarding

anyone p o s t -p e t i t i o n i n t e r e s t a t the cont rac t ra t e . The WMI

Senior Noteholders are en t i t l ed under sec t ion 726(a) (5 ) only to

the fede ra l judgment ra te of i n t e r e s t from the Debtors , the same

as a l l other unsecured c red i t o r s . To the ex ten t t h a t t h i s

r e s u l t s in them g e t t i n g more o r l e s s than t h e i r c on t r a c t ra te of

i n t e r e s t , it may be a mat te r between them and the o t he r c red i to r s

who are p a r t i e s to a subordinat ion agreement, bu t it i s

i r r e l ev an t to the Debtors ' ob l i ga t i ons under the Bankruptcy Code.

c . General unsecured cred i to rs

The Cred i to rs ' Committee argues t h a t app l ica t ion of the

fede ra l judgment r a t e i s i nequ i t ab le in t h i s case because the

only c l a s s t h a t i s adver se ly a f fec t ed by doing so i s the c l a s s of

genera l unsecured c red i t o r s . I t c i t e s the Debtors ' updated

l i q u id a t io n ana lys i s which shows t h a t , a f t e r app l ica t ion of the

subord ina t ion p r o v i s i o n s ~ the genera l unsecured c red i t o r s are the

only ones who wi l l r ece ive l e s s by appl i ca t ion of the federa l

judgment r a t e than by appl i ca t ion o f the c on t r a c t r a t e . (D 375;

Tr. 7/14/2011 a t 61-62, 82, 170.)

84



This i s , of course , t ru e in t o t a l d o l l a r s because none of

the genera l unsecured c red i to r s wi l l be g e t t i n g a c on t r a c t ra te

of i n t e r e s t . (D 375.) However, they w i l l be get t ing a higher

percen tage of the p o s t -p e t i t i o n i n t e r e s t to which they are

en t i t l ed under the fede ra l judgment r a t e (76%) than under the

co n t rac t ra te (29%), because of the l imi ta t ion on payment of

i n t e r e s t to sen ior c red i t o r s . ( Id . ) Fur ther , i s i r r e l ev an t

t h a t genera l unsecured c red i to r s would ge t more in d o l l a r s if the

Cour t were to award c on t r a c t r a t e s of i n t e r e s t , because they are

s imply not en t i t l ed t o rece ive t h a t ra te under sec t ions 726(a) (5 )

and 1129 (a) (7 ) .

The Cr e d i t o r s ' Committee a l so contends t h a t fu r th e r delay

wi l l be caused by the Court denying conf i rmat ion of the Modified

Plan because of the need to make fu r th e r r e v i s i ons and perhaps

r e - s o l i c i t , which wi l l fu r th e r erode r ecover ies fo r the lower

c red i t o r c l a s ses . (0 254, 0 375; Tr. 7/14/2011 a t 43-44, 71-72.)

This of course does not j u s t i f y ignor ing the requi rements of

the Bankruptcy Code. As the LTW Holders note , fu r th e r delay

might have been avoided by the Debtors if the Modif ied Plan had

s imply provided t h a t p o s t -p e t i t i o n i n t e r e s t would be pa id to

unsecured c red i t o r s a t whatever ra te the Court determined was

appropr ia t e .

2. Date of computat ion of fede ra l judgment ra te

The Plan Objec to r s contend t h a t if the fede ra l judgment ra te

85



of i n t e r e s t i s pa id on c r e d i t o r s ' cla ims, it should not be the

r a t e as of the pe t i t i on da te . They propose ca l cu l a t i n g it as of

d i f f e r e n t da tes l a rge ly because sh o r t l y a f t e r t h i s case was

f i l ed , the fede ra l judgment ra te f e l l p rec ip i to u s ly from 1.95% to

as low as .18% as of June 16, 2011. (EC 301.)

The Equity Committee argues t h a t th e p o s t -p e t i t i o n i n t e r e s t

r a t e should be e i t h e r the ra te as of th e Effec t ive Date o f any

conf i rmed plan or a f l o a t in g monthly r a t e . The Equity Committee

argues t h a t t h i s i s appropr ia t e because the purpose of pos t

p e t i t i o n i n t e r e s t i s to compensate the c red i to r s fo r th e t ime

value of t h e i r money and should r e f l e c t the d i f f e r en t r a t e s

appl i cab le during the pendency of the case . See, e . g . ,

Melenyzer , 143 B.R. a t 833.

Th e Cour t r e j ec t s t h i s argument, however, because s imi lar

arguments have been made to j u s t i using market or cont rac t

r a t e s but were r e j ec t ed . Id . a t 832-33.

The TPS Consortium argues t h a t the conf i rmat ion da te i s the

appropr ia t e date to use because the fede ra l judgment ra te

der ived from sec t ion 1961(a} of title 28 which s t a t e s t h a t

i n t e r e s t s h a l l be pa id "from the da te of the en t ry of the

judgment ." The TPS Consortium argues t h a t none of the claims a t

i s sue der ive from any judgment and t h a t the most analogous order

to a judgment i s the conf i rmat ion order because it es t ab l i sh es

the p a r t i e s ' r i g h t s . See, e . g . , In re Am. Pre fe r red

86



Presc r ip t io n , In c . , 255 F.3d 87, 92 (2 d Cir . 2001) ("The

conf i rmat ion o f a plan a Chapter 11 proceeding i s an even t

comparable to the en t ry of a f ina l judgment in an ord inary c i v i l

l i t i g a t i o n . " ) ; Johnson v. Stemple (In re Stemple) , 361 B.R. 778,

796 (Bankr. E.D. Va. 2007) (holding t h a t "orders of conf i rmat ion,

l i ke myriad order s en te red by t h i s Court , are considered f i n a l

judgments, thus t r i g g e r in g the doc t r ines of re s jud ica ta and/or

c o l l a t e r a l es t o p p e l . " ) .

Th e Plan Suppor ters disagree arguing t ha t , in the event the

Cour t f inds t h a t the fede ra l judgment r a t e i s the appropr ia t e

r a t e to be pa id fo r p o s t -p e t i t i o n i n t e r e s t , it should be the ra te

t h a t was appl i cab le as of th e pe t i t i on da te , because it i s from

t h a t da te t h a t the cred i to rs a re measuring the loss of the use of

t h e i r money. See, e . g . , In re Evans, Bankr. No. 10-80446C, 2010

WL 2976165, a t *2 (Bankr. M.D.N.C. Ju ly 28, 2010) (holding t h a t

the "da te on which the appl i cab le fede ra l judgment r a t e i s to be

determined fo r purposes of sec t ion 726(a) (5) i s the fede ra l

judgment ra te in e f f e c t on the pe t i t i on d a te" ) ; In re Gulfpor t

Pi l o t s Ass 'n , In c . , 434 B.R. 380, 392-93 (Bankr. S.D. Miss. 2010)

( s t a t i n g t h a t if the debtor were so lven t , c red i t o r would be

en t i t l ed to p o s t -p e t i t i o n i n t e r e s t a t the f e de r a l judgment r a t e

in e f f e c t on the pe t i t i on d a te ) ; Best , 365 B.R. a t 727 (holding

t h a t the l eg a l r a t e "mean[s] the fede ra l judgment i n t e r e s t r a t e

a t the date the pe t i t i on i s f i l e d " ) ; Chiape t ta , 159 B.R. a t 161

87



(holding t h a t "s ince a claim i s l i ke a judgment en tered a t the

t ime o f th e bankruptcy f i l i n g , the app l i cab le r a t e should be th e

f edera l judgment ra te in e f f e c t a t the t ime of the bankruptcy

f i l ing") ; Melenyzer , 143 B.R. a t 833 (holding t h a t " fo r purposes

of [ s ec t ion] 726(a) (5) , th e federa l judgment ra te se lec ted should

be t h a t in e f f e c t as of the da te of f i l ing , as opposed to the

date of d i s t r i bu t ion . . Set t ing th e l eg a l r a t e of i n t e r e s t

as o f the da te of d i s t r i bu t ion makes little sense . " ) .

Th e Cour t agrees with th e Plan Suppor ters on t h i s p o in t .

Th e s t a t u t e express ly provides t h a t such i n t e r e s t s h a l l be pa id

" a t th e l eg a l ra te from th e date of th e f i l ing of the p e t i t i o n "

sugges t ing t h a t it i s the i n t e r e s t r a t e e f f ec t ive on th e pe t i t i on

date t ha t should be used . 11 U.S.C. § 726(a) (5) . The case la w

i s uniform in holding t h a t it i s th e pe t i t i on date a t which the

f ed e r a l judgment r a t e i s determined fo r purposes of awarding

i n t e r e s t under sec t ion 726(a) (5) . See, e .g . , Evans, 2010 WL

2976165, a t *2; Gulfpor t Pi lo t s Ass 'n , 434 B.R. a t 393; Bes t , 365

B.R. a t 727; Chiape t ta , 159 B.R. a t 161; Melenyzer , 143 B.R. a t

833.

3. Compounding o f i n t e r e s t

The Modified Plan provides t h a t " i n t e r e s t s h a l l cont inue to

accrue only on th e then outs tand ing and unpaid ob l iga t ion or

l i a b i l i t y , inc lud ing any Pos t -pe t i t ion I n t e r e s t Claim thereon,

t h a t i s the su b j ec t o f an Allowed Claim." (0 255 a t § 1.151. )

88



The Equi ty Committee contends t h a t t h i s compounding o f i n t e r e s t

i s n o t permiss ib l e . See, e .g . , Vanston Bondholders Pro tec t ive

Comm. v . Green, 329 U.S. 156, 165-66 (1946) (ho ld ing t h a t

i n t e r e s t on i n t e r e s t i s not a l lowable on equ i t ab le pr inc ip le s ) ;

Chi . , Milwaukee, S t. Paul & Pac. R.R. , 791 F.2d a t 532 (denying

compounding o f i n t e r e s t because it would r e s u l t in a windfa l l fo r

th e debenture h o l d e r s ) ; In re Anderson, 69 B.R. 105, 109 (B.A.P.

9th Cir . 1986) (a ff i rming bankruptcy c o u r t ' s den ia l o f i n t e r e s t

on i n t e r e s t ) ; In re The N.Y. , New Haven and Har t fo rd R.R. Co., 4

B.R. 758, 799 (D. Conn. 1980) (denying i n t e r e s t on i n t e r e s t under

th e p r in c ip l e s a r t i c u l a t e d in Vanston) .

The Debtors respond t h a t compound i n t e r e s t i s being pa id

because t h a t i s ex ac t l y what the Debtors a re o b l i g a t ed to pay

under th e i n d e n t u re s . (See, e .g . , WMI NG 1 a t § 5 . 3 . )

The Cour t r e j e c t s th e Debtors ' argument . Once aga in , in

awarding p o s t - p e t i t i o n i n t e r e s t to c red i t o r s in t h i s case , the

Cour t i s doing so no t because o f any co n t r ac t u a l r i g h t they may

have to it. Thei r co n t r ac t u a l r i g h t to compound i n t e r e s t has

been e l imina ted (as not "a l lowed") by sec t ion 50 2 (b) (2) . The i r

en t i t l emen t to p o s t - p e t i t i o n i n t e r e s t i s being gran ted only as

requ i red by th e terms o f sec t ion 726(a) (5) , which th e Court

determines i s th e f edera l judgment r a t e . The l a t t e r permi t s only

annual compounding o f i n t e r e s t . 28 U.S.C. § 1961(b) (providing

t h a t " [ i J n t e r e s t s h a l l be computed d a i ly to the da te o f payment

89



· . and s h a l l be compounded annua l ly . ") . See also Curry v. Am.

Int'l Grp. , In c . , Plan No. 502, 579 F. Supp . 2d 424, 426 (not ing

t h a t t he fede ra l judgment r a t e i s "compounded annua l ly" ) .

Because the Cour t concludes t h a t c red i to rs are only e n t i t l e d

to the payment of i n t e r e s t from the Debtors a t the fede ra l

judgment i n t e r e s t r a t e in e f fec t on th e pe t i t i on da te , compounded

annual ly , the Court f inds t h a t the Modified Plan which provides

fo r payment of the co n t rac t r a t e v i o l a t e s the be s t i n t e re s t s of

cred i to rs t e s t . 11 U.S.C. §§ 726(a) (5) & 1129(a) (7) .

4. Payment of subord inated claims

Th e WMB Noteholders ob j e c t to the Modified Plan because it

provides t h a t sen ior unsecured c red i t o r s w i l l r ece ive p o s t

pe t i t i on i n t e r e s t on t h e i r claims before th e WMB Noteholders '

subordinated c la ims are pa id . They contend t ha t t h i s v io l a t e s

the b es t i n t e r e s t s of c red i to r s t e s t because they w i l l not

rece ive a t l e a s t as much as they would r ece ive under chapte r 7

accord ing to the prov is ions o f sec t ion 726.

The WMB Noteholders have s t i p u l a t ed t h a t t h e i r claims are

subordinated to genera l unsecured claims because they hold c la ims

a r i s i n g from r e sc i s s io n of a purchase or sa le of a secur i ty of

WMB, an a f f i l i a t e of the Debtors . 11 U.S.C. § 510 (b ) . Although

the d i s t r i b u t i o n scheme i n sec t ion 726 express ly provides t h a t it

i s sub jec t to sec t ion 510, the WMB Noteholders contend t h a t

sec t ion 510 (b) only subordinates them to "a l l claims or i n t e r e s t s

90



t h a t are sen ior to or equal the claim or i n t e r e s t r epresen ted by

such secur i t y . " Id . They argue t h a t because t h e i r secur i t i e s

were bonds i s sued by WMB, i . e . debt , t h a t t h e i r c la ims a re only

subordinated to the genera l unsecured claims of the Debtors and

not t o equ i ty . Although case law i s sparse on t h i s i s sue , they

contend t h a t it suppor ts t h e i r theory . See, e .g . , In re El Paso

Refinery , L.P. , 244 B.R. 613, 624-25 (Bankr. W.D. Tex. 2000)

(holding t h a t a subordinated claim i s subord inated only to o t h e r

genera l unsecured claims o f the same type but no t to i n t e r e s t

unless the subordinated claim i s i t s e l f a claim fo r i n t e r e s t ) .

The Indenture Trus tee fo r the PIERS responds t h a t the

Modified Plan proper ly provides fo r pos t -pe t i t i on i n t e r e s t on

unsecured c la ims before any di s t r i bu t i on i s due to subord inated

c red i t o r s such as th e WMB Noteholders . Th e Indenture Trus tee fo r

the PIERS notes t h a t sec t ion 72 6 i s express ly sub jec t to sec t ion

510. 11 U.S.C. § 726(a) . See a l so , In re Vir tu a l Network,

Servs . Corp. , 902 F.2d 1246, 1249 (7th Cir . 1990) ; Wash. Mut. ,

442 B.R. a t 357; In re Rago, 149 B.R. 882, 88 9 (Bankr. N.D. Ill.

1992) .

At o ra l argument, the Indenture Trus tee fo r th e PIERS argued

t h a t sec t ion 510(b) subord ina tes the WMB Noteholders ' claims to

a l l "c la ims ." 11 U.S.C. § 510(b) . (Tr. 8/24/2011 a t 185-87.)

Th e de f i n i t i on of "cla im" inc ludes a l l " r i g h t to payment, whether

or not such r i g h t i s reduced to judgment, l iqu ida ted ,

91



unl iquidated, f ixed , con t ingent , matured, unmatured, dispu ted ,

undisputed, l eg a l , e qu i t a b l e , secured , or unsecured ." Id . a t §

101 (5) (emphasis added) . The Indenture Trus tee fo r the PIERS

contends t h a t t h i s d e f i n i t i o n inc ludes unmatured ( i . e . , pos t -

p e t i t i o n ) i n t e r e s t . Although sec t ion 502{b) (2 ) provides t h a t

"al lowed" claims do not inc lude unmatured i n t e r e s t , the

subord ina t ion in sec t ion 510(b) i s to "cla ims" no t "al lowed

c la ims ." Id . a t § 510(b) . In co n t ra s t , sec t ion 510{c) provides

fo r equi t ab le subord ina t ion to "al lowed cla ims" only . Id . a t §

510 (c) (1 ) .

The Cour t agrees with the argument of the Indenture Trus tee

fo r the PIERS. According to the pla in language of sec t ions 510

and 726, the WMB Noteholders a re subord inated to a l l "c la ims ,"

the def in i t ion of which inc ludes unmatured i n t e r e s t on those

cla ims. Therefore , th e Cour t concludes t h a t unsecured c red i to r s

are e n t i t l e d to p o s t -p e t i t i o n i n t e r e s t on t h e i r cla ims before any

d i s t r i b u t i o n to th e WMB Noteholders .

5. E f f e c t on subord ina t ion r i g h t s

The PIERS Holders 36 argue t h a t if the Cour t determines t h a t

the Debtors are only obl iga ted to pay c red i to r s a t th e fede ra l

judgment r a t e of i n t e r e s t , then t h a t i s a l l t he sen ior c red i to r s

are e n t i t l e d to r ece ive and the subordinated c red i t o r s are not

The PIERS Holders inc lude Normandy Hi l l Capi ta l L.P. (an

i nd iv idua l PIERS holder) and Wells Fargo Bank, NA, the Indenture

Trus tee fo r the PIERS.

92



...- - - - ... - - - - - ~ ~ ~ ~ ~ - - - ~ ~ - - - -

ob l iga ted to pay them th e d i f fe rence between what th e Debtors pay

and t h e i r co n t r ac t r a t e o f i n t e r e s t .

The WMI Senior Noteholders ' Group and WMI Senior

Noteholders ' Indenture Trus tee d i sagree . They contend t h a t th e

subord ina t ion prov i s ions in the va r ious c r e d i t o r s ' co n t r ac t s ( the

Senior Subordina ted Indenture , th e CCB-1 Guarantee Agreements ,

the CCB-2 Guarantee Agreements , th e Jun io r Subordina ted Notes

Indenture , and th e PIERS Guarantee Agreement) mandate t h a t the

subordina ted c red i to r s pay th e sen io r c red i to r s t h e i r claims in

f u l l , inc lud ing co n t r ac t i n t e r e s t . (WMI NG 1 a t § 15.3; WMI NG 2

a t § 15 .3 ; WMI NG 3 a t § 3(a) & (b) ; WMI NG 4 a t § 15.01; WMI NG

5 a t § 3(a) & (b) ; WMI NG 6 a t § 12.2; WMI NG 7 a t § 6.1 . )

The PIERS Holders contend t h a t the subo rd ina t ion p rov i s ions

do not r equ i re t h a t they pay th e sen io r c red i to r s t h e i r f u l l

co n t r ac t r a t e of i n t e r e s t because it does not e x p l i c i t l y r e f e r to

the r a t e o f p o s t - p e t i t i o n i n t e r e s t to which they a re subord ina te .

Therefore , th e PIERS Holders contend t h a t th e i n t e r e s t they are

subordina ted to i s only th e r a t e the Cour t determines i s

appropr i a t e . They re ly on th e Rule o f Expl ic i tness , which

prov ides t h a t in orde r to subordina te j un io r c red i to r s th e

inden tu re must e x p l i c i t l y provide fo r t h a t outcome. See, e .g . ,

In re King Res. Co. , 528 F.2d 789, 791 (10th Cir . 1976) (adopt ing

holdings in Kingsboro and Time Sa les t h a t "where th e

subord ina t ing prov i s ions a re unc lea r o r ambiguous as to whether

93



p o s t -p e t i t i o n i n t e r e s t i s to be al lowed a sen ior c red i t o r , the

genera l ru l e t h a t i n t e r e s t s tops on the date of f i l ing of the

p e t i t i o n in bankruptcy i s to be fo l lowed") ; In re Kingsboro Mort.

Corp. , 51 4 F.2d 400, 40 1 (2d Cir . 1975) (holding t h a t language of

subord ina t ion agreement requ i r ing payment in f u l l of " a l l

p r in c ip a l and i n t e r e s t on a l l Senior Debt" was i n su f f i c i en t ly

express to apply to p o s t -p e t i t i o n i n t e r e s t ) ; In re Time Sales

Fin . Corp. , 491 F.2d 841, 844 (3d Cir . 1974) (a rming denia l of

enforcement of subord ina t ion agreement fo r payment of p o s t

pe t i t i on i n t e r e s t because the agreement "did not appropr ia t e ly

appr i se the debenture note holder s t h a t t h e i r claims aga ins t the

bankrupt would be subordinated to [ the sen ior c re d i t o r ' s ] demand

fo r p o s t -p e t i t i o n i n t e r e s t " ) .

Th e WMI Senior Noteholders ' Group responds t h a t the Rule of

Expl ic i tness no longer appl s s ince passage of the Bankruptcy

Code and the enactment sec t ion 510. See, e . g . , In re Bank of

New England Corp. , 364 F.3d 355, 362, 365 (1s t Cir . 2004)

(concluding t h a t " the enactment of sec t ion 510(a) [of th e

Bankruptcy Code] means t h a t the enforcement of subord ina t ion

provis ions i s no longer a mat te r committed to the bankruptcy

co u r t s ' not ions of "what may (or may not) be equi t ab le" and

t he re fore the Rule of Expl i c i tness i s no longer appl i cab le ) ;

Chern. Bank v . F i r s t Trus t of N.Y. (In re Southeas t Banking

Corp. ) , 156 F.3d 1114, 1124 (11th . 1998) ( s t a t i n g t h a t "w e

94



conclude t h a t Congress, by enact ing sec t ion 5l0(a) of th e

Bankruptcy Code, abrogated the pre-Code Rule of Expl ic i tness . As

a necessary consequence of t h i s change in bankruptcy law, th e

Rule of Expl i c i tness can no longer survive as th e progeny of th e

bankruptcy cour t s ' equ i ty powers or as a f ed e r a l canon o f

co n t r ac t cons t ruc t ion . " ) .

Th e Court d i sagrees with the argument of th e WMI Senior

Noteholders ' Group t h a t th e Rule of Exp l i c i tness i s no longer

app l icab le . While sec t ion 5l0(a) provides t h a t subord ina t ion

agreements are en fo rceab le , it s t a t e s t h a t they a re only

enforceab le " to the same ex ten t t ha t such agreement i s

enforceab le under app l i cab le law." 11 U.S.C. § 5 l0 (a ) . In the

Southeas t Banking Corp. case , the Eleventh Circu i t c e r t i f i e d to

th e New York Cour t of Appeals the ques t ion th e app l i cab i l i t y

of the Rule of Expl ic i tness under New York law. 37 156 F.3d a t

1126. The New York Court of Appeals answered th e ques t ion in th e

af f i rmat ive , s t a t i ng tha t " [ i ] n accordance with th e Rule of

Expl ic i tness , New York la w would r equ i re spec i f i c language in a

subord ina t ion agreement to a l e r t a jun io r c red i to r to its

assumption of th e r i sk and burden o f al lowing th e payment of a

sen i o r c r e d i t o r ' s p o s t - p e t i t i o n i n t e r e s t demand." Chern. Bank v .

n The Indentures are governed by New York law. (WMI NG 1

a t § 1.12; WMI NG 2 a t § 1.12; WMI NG 3 a t § 6(a) ; WMI NG 4 a t §

14.05; WMI NG 5 a t § 6(a) ; WMI NG 6 a t § 1.11; WMI NG 7 a t §

9.4 . )

95



F i r s t Trus t of N.Y. (In re Southeas t Banking Corp . ) , 93 N.Y. 2d

178, 186 (N.Y. 1999) . As a r e s u l t , the Eleventh Ci rcu i t held

t ha t the language of the subord ina t ion provis ion was

i nsuf c ien t ly p rec i s e on the i s sue of pos t -pe t i t i on i n t e r e s t to

sa t i s fy the Rule of Expl ic i tness under New York law. Chem. Bank

v. F i r s t Trus t of N.Y. (In re Southeas t Banking Corp . ) , 179 F.3d

1307, 1310 (11th Cir . 1999) . See a lso , Fi r s t Fide l i ty Bank, N.A.

v. Midlant ic Nat ' l Bank (In re Ionosphere Clubs, Inc . ) , 134 B.R.

528, 534-35 (Bankr. S.D.N.Y. 1991) (concluding t h a t the Rule of

Expl i t ness a r t i cu la t ed in ~ K i n g s b o r o r e t a i n s i t s v i t a l i t y and

remains the con t ro l l ing law in the Second Ci rcu i t " under the

Bankruptcy Code and re fus ing to enforce subord ina t ion agreement

t ha t would pay p o s t -p e t i on i n t e r e s t to sen ior cred i to rs because

of lack o f spec i ty in the indenture) .

The WMI Senior Noteholders ' Indenture Trus tee fu r th e r

argues , however, t ha t Normandy Hi l l i s re ly ing on a pr io r version

of the Indenture Agreement and does not r e f e r to c r i t i c a l

language from the subordinat ion provis ion. The Indenture Trus tee

contends t ha t the co r rec t version of the subo rdinat ion provis ion

requ i res subordinat ion to Senior Indebtedness , which i s def ined

as ~ p r i n c i p a l of , premium, if any, i n t e r e s t ( including a l l

i n t e r e s t accruing subsequent to the commencement of any

bankruptcy or s imi la r proceeding , whether or no t a claim fo r

pos t -pe t i t i on i n t e r e s t i s al lowable as a claim in any such

96



are no t vi o l a t i ve of the Bankruptcy Code. 40

6. Releases fo r di s t r i bu t i ons

The Equity Committee a l so ob jec t s to conf i rmat ion o f the

Modified Plan because it condi t ions di s t r i bu t i ons t o c r ed i t o r s

and othe r s takeholder s on grant ing a d i r e c t r e l ease to JPMC and

othe r non-debtors . (D 255 a t § § 43.2 & 43.6 . ) The Equity

Committee contends t ha t t h i s v io l a t e s the b es t i n t e r e s t s o f

c red i to r s t e s t under sec t ion 1129(a) (7 ) . See, e .g . , AOV Indus . ,

792 F.2d a t 1151 (holding t h a t plan which requi red a c red i t o r who

had a unique d i r e c t claim a g a i n s t plan funder to provide a

re l ease of plan funder t o ge t a di s t r i bu t i on u n fa i r l y

discr iminated a g a i n s t because major i ty o f c red i t o r s had no

such cla im) ; In re Conseco, 301 B.R. 525, 528 (Bankr. N.D. Ill.

2003) (holding t ha t plan prov is ion pred ica t ing r ece ip t of

di s t r i bu t i on on gran t ing t h i r d par ty re l eases v io l a t ed b e s t

i n t e r e s t o f c red i t o r s t e s t because c red i to r s could no t be he ld to

have v o lu n ta r i l y agreed to a re lease simply by accept ing a

d i s t r i b u t io n ) .

The Equity Committee argues t h a t under chap te r 7, even

though p re fe r red shareholders are no t pro jec ted by th e Debtors to

r ece ive any d i s t r i b u t i o n , they would still re ta in t h e i r claims

40 While the PIERS may r ece ive payment in fu l l o f t h e i r

claims from th e Debtors , they may be required to give a p a r t of

t h e i r di s t r i bu t i on to sen ior c red i t o r s . This , however, i s simply

a r e s u l t of the te rms they accepted when i nves t ing in a

subord inated note .

98



agains t t h i rd p a r t i e s inc lud ing JPMC. Therefore , because the

p re fe r red shareholder s a r e no t g e t t i n g any cons ide ra t ion under

th e Plan fo r t h e i r agreement to r e l ease JPMC and the o t he r s , they

should be ab le to r ece ive a d i s t r i b u t i o n without gran t ing a

r e l ease to JPMC and the FDIC.

The Plan Suppor ters di sagree . They contend t h a t the

re leases a re a condi t ion to th e GSA imposed by JPMC and the FDIC.

They argue t h a t the $7 b i l l i o n in as se t s which a re being used to

provide a recovery fo r c red i t o r s i s only avai lab le because JPMC

and the FDIC have agreed to waive t h e i r claims o f ownership of

ce r t a i n a sse t s and to waive in excess o f $54 b i l l i o n in c la ims

they hold aga ins t the e s t a t e s . They argue t h a t without the GSA,

c red i t o r s (and shareholders ) would ge t no recovery .

The Cour t f inds t h a t the condi t ion requ i r ing a re lease in

order to r ece ive a d i s t r i b u t i o n does no t v i o l a t e th e b es t

i n t e r e s t of c red i t o r s t e s t . Any p o t en t i a l recovery which

shareholders may rece ive , even from the L iqu ida t ing Trus t , i s

l a rg e ly due to the GSA which i s funding the payments to c red i to r s

who a re sen ior in p r io r i t y to the shareholders and who, in th e

absence of the GSA, would have f i r s t p r i o r i t y to the proceeds of

the as se t s in the L iqu ida t ing Trus t . In addi t ion , grant ing a

r e l ease i s pure ly vo lun ta ry . A p re fe r red shareholder who does

not wish to give a r e l ease does not have to , but w i l l be forgoing

any d i s t r i b u t i o n . The cases c i t ed by the Equity Committee do not

99



compel a d i f f e r e n t r e s u l t because the re lease prov i s ion in t h i s

case i s volun ta ry and i s appl i cab le equa l ly to a l l c red i to r s and

shareholder s , r a th e r than appl i cab le only to a c red i t o r or

shareholder t h a t has a unique d i r e c t claim a ga i n s t the re leased

p a r t i e s . See, e . g . , AOV Indus . , 792 F.2d a t 1151 ( f inding

unequal t r ea tment because one c red i t o r asser ted it was being

requ i red to re lease a d i r ec t , r a th e r than an i n d i r ec t , claim

a ga i n s t plan funder ) ; Conseco, 301 B.R. a t 528 ( f inding re leases

which were consensua l did no t vio la te the Bankruptcy Code) .

7. Use of Liguidat ing Trus t s t ru c t u re

The LTW Holders argue t h a t the Modified Plan a l so vio la tes

the b es t i n t e r e s t s of cred i to rs t e s t because it provides fo r the

assignment of the e s t a t e s ' causes o f ac t ion to a Liquida t ing

Trus t and the i s suance to c red i t o r s o f i n t e r e s t s in the Trus t .

They contend t h a t by us ing t h i s mechanism, cred i to rs wi l l be

r equ i r ed to pay cap i t a l ga ins tax now on the value of the

i n t e r e s t s i n the Trus t t h a t are d i s t r i b u t ed to them, without any

concomitant payment to them of any value fo r many years u n t i l the

claims of the es t a t e are l i t i g a t e d to judgment or s e t t l e d . The

LTW Holders argue t h a t in a chapte r 7 case they would no t have

any tax obl iga t ions u n t i l they ac tu a l ly received a d i s t r i b u t i o n

from the e s t a t e .

Because the Cour t i s denying conf i rmat ion for o ther reasons ,

and d i rec t in g the p a r t i e s to mediat ion , the Court sugges t s t h a t

100



the pa r t i e s cons ider a means to avoid negat ive tax consequences

to c red i t o r s . See i n f r a Par t H.

8. Dis t r ibu t ion toWMB

Senior Noteholders

Th e Equi ty Committee objec t s to the d i s t r i b u t i o n of $335

mil l ion of es t a t e as se t s to WMB Senior Noteholders (Class 17A)

because it asse r t s t h a t they a re no t c red i t o r s of t h i s e s t a t e .

It contends t h a t such a d i s t r i b u t i o n provides no b en ef i t to the

es t a t e and merely d iv e r t s a s se t s t h a t could be used to provide a

d i s t r i b u t i o n to leg i t imate c red i to r s (or shareholders ) of the

Debtors .

The WMB Noteholders have asser ted t h a t they have claims

a ga i n s t the Debtors fo r mis represen ta t ions made by the Debtors in

connect ion wi th the sa le of the WMB Senior Notes . While they

admit t h a t such a claim would be subord inated under sec t ion

510(b) , they contend t h a t it i s nonetheless a l eg i t imate claim

a ga i n s t the Debtors . Rather than l i t i g a t e t h i s i s sue , the

Debtors have agreed (apparent ly with the urging of the FDIC) to

th e payment of $335 mil l ion from the tax refunds fo r t h i s c l a s s

of c red i t o r s .

The Cour t f inds t h a t t h i s reso lu t ion i s a reasonable

se t t l ement of the di spu te because it w i l l avoid conten t ious and

expens ive secur i t i e s t i g a t i o n which could r e s u l t in a

s i g n i f i can t l y l a rg e r judgment a ga i n s t the Debtors . See, e . g . ,

TMT T ra i l e r Ferry , 390 u .S . a t 424; In re RFE Indus . , In c . , 283

101



F.3d a t 165; Mart in , 91 F.3d a t 393.

F. Feas i b i l i t y

Th e Equity Committee argues t h a t if more than 300 cred i to rs

e l e c t to r ece ive s tock in the Reorganized Debtor,41 then th e

Modified Plan wi l l not be f eas ib l e . It contends t h a t if the

Reorganized Debtor has more than 30 0 shareholder s , it w i l l be

requi red to comply with t he repor t ing requi rements of the

Secu r i t i e s Exchange Act of 1934. Because the Debtors have not

been complying with those requi rements dur ing the pendency of the

bankruptcy case , the Equity Committee asse r t s t h a t the

Reorganized Debtor would be unable to f i l e the de l inquent repor t s

and audi ted f inanc 1 r ep o r t s .

The Debtors do not di spu te t h a t it would be c os t p ro h ib i t i v e

to f i l e the miss ing f i n an c i a l s ta tements . Th e Debtors argue ,

however, t h a t an e n t i t y t h a t complies with SEC St a f f Legal

Bu l l e t i n N o . 2 (Apr. 15, 1997, § I I . c . ) i s not requi red to f i l e

any 10-Ks or 10-Qs while in chapte r 11 nor to f i l e any "missed"

10-Ks or 10-Qs upon emergence. They contend t h a t they have

complied with the requi rements in the Bu l l e t i n . Th e Debtors note

t h a t th e SEC has not i n i t i a t e d any enforcement i nqu i ry or

41

The pebtors ' claims agent could not t e s t i fy as to theexac t number of c red i t o r s who wi l l hold s tock in th e Reorganized

Debtor , e i t h e r by e l ec t io n or d efau l t . (Tr. 7/13/2011 a t 90-91.)In addi t ion , the Modified Plan provides the holder s of Disputed

Claims, inc lud ing the LTW Holders , the r i g h t to e l e c t s tock if

t h e i r claims are al lowed, which may not be known fo r some t ime.

(0 25 5 a t § 27 .3 . )

10 2



suggested t h a t the Debtors ' f i n an c i a l repor t ing was de f i c i en t .

Th e Cour t f inds t h a t the Debtors have presen ted s u f f i c i e n t

evidence t h a t the Modified Plan could be f eas ib l e even if the

Reorganized Debtor has more than 300 shareho lde r s . Feas i b i l i t y

does not requ i re t h a t success be guaran teed b u t r a th e r only a

"reasonable assurance o f compliance with plan te rms . " In re

Orlando Inves to rs LP, 103 B.R. 593, 600 (Bankr. E.D. Pa. 1989) .

See also In re Briscoe E n te r s . , Ltd . , I I , 994 F.2d 1160, 1166

(5th Cir . 1993) ( " [ I ] t i s c l ea r t ha t t he re i s a re l a t ive ly lo w

t h resho ld of proof necessary to s a t i s fy the f ea s ib i l i t y

requ i rement . " ) . Based on the foregoing, the Cour t f inds t h a t the

Modified Plan meets the f ea s ib i l i t y t e s t under sec t ion

1129 (a) (11) .

G. Misce l laneous Other Object ions

1 . WMI Senior Noteholders ' Group

The Modified Plan provides t h a t WMI Senior Noteholders w i l l

r ece ive t h e i r pro ra t a share o f Cred i to r Cash and Liquida t ing

Trus t In t e r e s t s t o t a l ing the i r aggregate claims plus p o s t

pe t i t i on i n t e r e s t . (D 255 a t § 6 .1 . ) In add i t ion , to the ex ten t

t h a t WMI Senior Noteholders do not ge t paid in fu l l in cash on

the Effec t ive Date, WMI Senior Noteholders were en t i t l ed to e l e c t

to r ece ive s tock in the Reorganized Debtor in l i eu of a

di s t r i bu t i on o f cash or Liquida t ing Trus t In t e r e s t s . (Id. a t §

6 .2 . ) Approximately $24 mil l ion in WMI Senior Noteholders d id

103



e l e c t to receive s tock in l i eu of cash or Liquidat ing Trus t

In te res t s . ( 0 .1 . 8108 a t 32.)

The WMI Senior Noteholders ' Group and the WMI Senior

Noteholders ' Indenture Trus tee object to the Modified Plan

contending it v io la te s the absolute pr ior i ty ru le by providing

fo r a d i s t r i bu t ion (of cash , s tock and i n t e r e s t s in th e

Liquidat ing Trust) to jun io r c red i to r s before the Senior Notes

a re paid in fu l l in cash, as mandated by the subordinat ion

prov i s ions of the Indentures . (WMI NG 1 a t § 15.2; WMI NG 2 a t §

15.2; WMI NG 4 a t § 15.03; WMI NG 6 a t § 12.2(b) ; WMI NG 7 a t §

6 . 1 (c ) . ) See also In re Westpoint Stevens , Inc . , 600 F.3d 231,

255-56 (2 d Cir . 2010) (holding t h a t under terms of subordinat ion

agreement, senior c red i to r s were ent i t l ed to be paid in fu l l in

cash before subordinated c red i to r s could r ece ive d i s t r i bu t ion

under plan) .

The Court r e jec t s the argument of the WMI Senior

Noteholders ' Group and the WMI Senior Noteholders ' Indenture

Trus tee . Fi r s t , the language of the Indentures do not suppor t

t h e i r argument. For example, sect ion 15.2 of the Fi r s t

Supplemental Indenture for the Senior Debt Secur i provides in

re levan t par t t ha t " [ i ]n the event of ... bankruptcy ... such

Senior Debt sha l l be f i r s t paid and sa t i s f i ed in f u l l before any

payment or d i s t r i bu t ion of any kind or charac te r , whether in

cash , proper ty or secu r i t i e s . . . s h a l l be made upon the

104



[Junior] Secur i t i e s " (WMI NG 1 a t § 15 .2 . See a l so , WMI

NG 2 a t § 15 .2 ; WMI NG 4 a t § 15.03; WMI NG 6 a t § 12 .2 (b ) . )

Those sec t ions merely r equ i re t h a t the WMI Senior Noteholders '

cla ims be "paid and sa t i s f i e d in fu l l " not t h a t they be paid in

cash. ( Id . ) The WMI Senior Noteholders are, in f ac t , being

"paid and sa t i s f i e d in fu l l " under th e Modified Plan by th e

payment to them o f a combinat ion of cash and Liqu ida t ing Trus t

In t e res t s and /o r , if they so e lec ted , s tock in th e Reorganized

Debtor . They a re e n t i t l e d to no more under t he p rov i s ions of th e

Indentures .

Sect ion 6 .1(e) (1 ) of th e Fi r s t Supplemental Indenture

r e l a t i ng to th e PIERS contains d i f f e r e n t language bu t the r e s u l t

i s the same. (WMI NG 7 a t § 6 . 1 (e ) (1 ) . ) I t provides t h a t " [ i Jn

th e event o f and during the cont inuance o f any event s p ec i f i ed in

Sect ion 6 .1 (a ) [which includes a bankruptcy case] unles s a l l

Senior Indebtedness i s paid in f u l l in cash , or provis ion s h a l l

be made there fo r" payments made by th e Debtors t o the PIERS s h a l l

be segregated for the b e n e f i t of the Senior Noteholders . ( Id . )

Under th e Modified Plan , provis ion has been made for the payment

of the Senior Noteholders from th e cash t h a t th e Debtors have on

hand or from cash d i s t r i b u t i o n s from the L iqu ida t ing Trus t . To

th e ex t en t t h a t th e Senior Noteholders have e l ec t ed to rece ive

s tock in l i eu o f cash , they have consented to th e "provis ion" fo r

the payment o f t h e i r cla ims in t h a t manner.

10 5



Second, the Senior Noteholders have accepted t h e i r t r ea tment

under the Modified plan overwhelmingly , by more than 99% in

amount and in number. (0 .1 . 8113 a t 9; Tr. 7/13/2011 a t 65.)

Therefore , even if the Modified Plan did not comply with the

requi rements of the subordinat ion agreements , the Cour t f inds

t h a t the Senior Noteholders have waived t h a t f a i l u r e . See, e . g . ,

Bar t l e v. Markson Bros . , In c . , 31 4 F.2d 303, 305 (2 d Ci r . 1963)

( r e fus ing to r ever se bankruptcy r e f e r e e ' s f inding t h a t plan was

in b es t i n t e r e s t s of cred i to rs al though it vio la ted subord ina t ion

agreement because sen ior c red i t o r s had knowingly voted to accep t

plan t h a t waived t h e i r r i g h t s ) . See a l so 4 Co l l i e r on Bankruptcy

<][ 510.03[3] (Alan N. Resnick & Henry Sommer ed s . , 16th ed . 2011)

( " I f subordinat ion agreements were not waivable under a plan of

reorganiza t ion accep tab le to the sen ior c red i t o r , t he sec t ion

would prevent j u s t what Congress envis ioned: t h a t se n i o r

c red i to r s may compromise with j un i o r c red i to r s in order to

confi rm a plan . " ) .

Thi rd , the Bankruptcy Code does not requ i re t h a t the WMI

Senior Noteholders be pa id in cash before j un i o r c red i t o r s

r ece ive a d i s t r i b u t i o n . See, e . g . , Case, 308 U.S. a t 117 ("In

appl i ca t ion of t h i s ru le of f u l l or abso lu te p r io r i t y t h i s Court

recognized ce r t a i n p ra c t i c a l considera t ions and made it c l ea r

t h a t such ru le d id not ' r equ i re the imposs ib le , and make it

necessa ry to pay an unsecured c red i t o r in cash as a condi t ion of

106



s tockholders re ta in ing an i n t e r e s t in the reorganized company.

His i n t e r e s t can be preserved by the issuance, on equi

terms, of income bonds or prefer red s tock . ' " ) (quot ing N. Pac.

Ry. Co. v. Boyd, 228 U.S. 482, 50 8 (1913)) . The payment under

the Modi Plan of cash , Liquida t ing Trus t In t e re s t s , or s tock

of a value equal to t h e i r cla ims sa t i s the absolute p r io r i t y

ru le and provides the Senior Noteholders with payment in f u l l of

t h e i r cla ims.

2. LTW Holders

The LTW Holders objec t to conf i rmat ion of the Modified Plan

because they contend t h a t the PIERS a re improperly t r ea t ed as

c red i t o r s r a t h e r than as equi ty . They argue t ha t p a r t of the

PIERS claims a re based on the accre t ion of an or ig ina l i s sue

discount t ha t the claims had because of the value of war rants

t ha t were i s sued in connect ion with the PIERS.

The Court re j ec t s th i s argument. The same argument was

sed by the LTW Holders in connect ion with the Six th Amended

Plan. In the January 7 Opinion, the Court found t ha t the PIERS

hold p re fe r red s tock i ssued by WMCT 2001 and t ha t WMCT 2001 holds

debt of the Debtors. 44 2 B.R. a t 361. Therefore , the Court

concluded t ha t unles s WMCT 2001 had been merged in to the Debtors

(as had severa l o ther a f f i l i a t e s ) , the PIERS claims were debt .

a t 362.

107



At the conf i rmat ion hear ings held in connect ion with the

Modif ied Plan , the Debtors presen ted evidence t h a t WMCT 2001 d id

no t merge with the Debtors and remains a separa te ent i ty_ (Tr.

7/14/2011 a t 20-33; D 401.) Consequent ly , it i s c l ea r t h a t the

PIERS are debt , no t equi ty .

H. Eguity Committee Standina Motion

The Equi ty Committee has recen t ly f i l ed a motion fo r

au thor i ty to prosecute an act ion to equi t ab ly subordinate or

sal low the Set t l emen t Noteholders ' cla ims. ( D 1 . 81 7 9 . ) The

p a r t i e s agreed to presen t evidence , b r i e f and argue those i s sues

in conjunct ion with conf i rmat ion of the Modified Plan .

In order for the Court t o g ran t the Equi ty Committee 's

motion, the Court must f ind t h a t it has s t a t ed a "colorable"

claim which the Debtors have u n j u s t i f i ab l y refused to prosecu te .

See O ff i c i a l Comm. of Unsecured Credi to r s o f Cybergenics Corp. v .

Chinery , 330 F.3d 548, 566-67 (3d Cir . 2003). The p ar ty seeking

s tanding bear s the burden of p roof . G-1 Holdinas , Inc . v. Those

Par t i e s Lis ted on Exhib i t A (In re G-1 Holdings, In c . ) , 313 B.R.

612 , 62 9 (Ban kr . D N . J . 2004) .

The Court f inds , through the Debtors ' suppor t of the

Set t l emen t Noteholders ' oppos i t ion to the Equity Committee 's

motion, t h a t the Debtors have r e fused to pursue the equi t ab le

subordinat ion or d isa l lowance cla im. Whether t h a t was j u s t i f i ed

depends on whether the claim i s co lorab le and the c os t s of

108



pursu ing t h a t cla im. See, e . g . , In re STN Enters . , 779 F.2d 901,

905 (2 d Cir . 1985) (not ing t h a t in o rder to determine whether the

r e f u s a l to prosecute the claim was u n j u s t i f i ed the cour t must

balance the p ro b ab i l i t y of success a ga i n s t the f i n an c i a l burden

the s u i t would have on the es t a t e ) .

The threshold fo r s t a t i n g a co lorab le claim i s low and

mirrors the s tandard appl icable to a motion to dismiss fo r

f a i l u re to s t a t e a claim.42 See, e .g . , In re Centaur , LLC, No.

10-10799, 2010 WL 4624910, a t *4 (Bankr. D. Del. Nov. 5, 2010)

( ~ I n deciding whether t he re i s a co lorab le claim, th e cour t

should under take the same ana lys i s as when a defendant moves to

dismiss a complaint fo r f a i l u re to s t a t e a c l a im ." ) ; In re

Adelphia Commc'n Corp. , 330 B.R. 364, 376 (Bankr. S.D.N.Y. 2005)

(not ing t h a t th e burden of showing a co lorab le claim i s a

~ r e l a t i v e l y easy one") .

1. Claim fo r egui t ab le subord ina t ion

In i t s objec t ion to conf i rmat ion, the Equity Committee

contends t h a t t he re i s a viab le claim fo r equi t ab le subord ina t ion

of the Set t lement Noteholders ' cla ims. An i nd iv idua l shareholder

ra i sed the same objec t ion . The Set t l emen t Noteholders argued

42 While the Set t lement Noteholders a s s e r t t h a t the Cour t

should apply a summary judgment s tandard because it has

considered the ex tens ive evidence presen ted a t the conf i rmat ion

hear ings , the Cour t dec l ines to do so because it su b s t an t i a l l y

r e s t r i c t e d the discovery which the Equi ty Committee could t ake on

t h i s i s sue .

109

http://slidepdf.com/reader/full/claim.42

http://slidepdf.com/reader/full/claim.42



p re l imin a r i l y t h a t the objec t ion i s procedura l ly d efec t iv e . See,

Protarga v. Webb (In r e Pro ta rga ) , Adv. No. 04-53374, 2004

WL 1906145, a t *3 (Bankr. D. Del. Aug. 25, 2004) ("Claims fo r

equi t ab le subord ina t ion must be brought as a separa te adversary

proceeding pursuant to Rule 7001(8) . " ) . Th e Equity

Committee 's motion fo r au th o r i t y to br ing an adversary ac t ion

solves t h a t procedural requi rement .

Th e Set t l emen t Noteho1ders and the Cred i to r s ' Committee

contend, however, t h a t the Equi ty Committee and shareholder s do

no t have s tanding to br ing an equi t ab le subord ina t ion claim based

on the requi rements of the Const i tu t ion because they have

suf fe red no damages which could be remedied by equ i tab le

subord ina t ion . See Lujan v. Defenders of Wild l i fe , 50 4 U.S. 555,

560 (1992) (d i scuss ing the th ree elements needed fo r s tand ing :

(1 ) an in ju ry i n f ac t , which i s concre te , p a r t i cu l a r i zed and

ac tu a l or imminent; (2 ) a causa l connect ion between the in ju ry

and the conduct ; and (3) a l i ke l ihood t h a t the i n ju ry wi l l be

r edres sed by a favorable de c i s i on ) . They argue t h a t even i f the

Set t lement Noteholders ' cla ims a re sub jec t to equi t ab le

subordinat ion,43 they would simply be subordinated t o o the r

43 In order to show a v a l id claim fo r e qu i t a b l e

subord ina t ion t h ree elements a re r equ i r ed : (1) engagement in some

type of i nequ i t ab le conduct ; (2 ) th e misconduct r e su l t ed in

in ju ry to the c red i t o r s or c rea ted an u n fa i r advantage to the

defendant ; and (3 ) the equ i tab le subordinat ion of the claim must

be co n s i s t en t with the p rov is ions of the Bankruptcy Code. See,

United Sta t e s v. Noland, 517 U.S. 535, 538-39 (1996);

110



c re d i t o r s ' c la ims and still be pa id ahead of equ i ty . See, e . g . ,

Adelphia Recovery Trus t v . Bank of Am., N.A., 390 B.R. 80, 99

(S.D.N.Y. 2008) (grant ing motion to dismiss equi t ab le

subord ina t ion claim by cred i to rs of paren t aga ins t l ender s of

subs id ia ry because "lilt fol lows reasonably from the j u d i c i a l and

l e g i s l a t i v e i n t e rp re t a t i o n s of the s t a tu t e t h a t the ' o t h e r

c r e d i t o r s ' whose welfare i s the primary focus of equi t ab le

subord ina t ion law must be c red i to r s of the same debtor , as a

given claim may not be subordinated to an equi ty i n t e r e s t , bu t

only to another c la im.") .

Th e Court agrees with the Set t lement Noteholders and the

Cred i to rs ' Committee t h a t under the p la in language of the s t a tu t e

equi t ab le subordinat ion only permi ts a c re d i t o r ' s claim to be

subordinated to another claim and not to equi ty . See 11 U.S.C. §

510(c) (providing fo r equ i t ab le subordinat ion of " a l l or p a r t of

an al lowed claim to a l l or p a r t of another al lowed claim") .

Equi table subordinat ion i s not a remedy avai lab le to (or of much

help in r edres s ing any i n ju ry to) the shareholders fo r the

Set t lement Noteholders ' ac t io n s . Therefore , the Cour t f inds t h a t

th e Equi ty Committee has f a i l ed to s t a t e a colorable claim fo r

equ i t ab le subord ina t ion of the Set t lement Noteholders ' c la ims.

Ci t i corp Venture Cap. Ltd. v . Comm. of Credi to r s Holding

Unsecured Claims, 16 0 F.3d 982, 986-87 (3 d Cir . 1998); In re

Mobile Stee l Co. , 56 3 F.2d 692, 699-700 (5th Ci r . 1977) .

111



B.R. 64, 74-75 (S.D.N.Y. 2008).

The Equity Committee argues t h a t equ i tab le disa l lowance of

the Set t lement Noteholders ' claims i s warran ted in t h i s case

because they t r aded on i n s i d e r informat ion obta ined while they

p a r t i c i p a t ed i n se t t l ement negot ia t ions with the Debtor and JPMC.

See Pepper v. Li t ton , 308 U.S. 295, 311 (1939) {holding t h a t

claim of ins ider who t raded on ide informat ion was proper ly

subordinated on equ i tab le princ iples} .

The Equity Committee contends t h a t the i n s t an t case i s the

"paradigm case of inequ i tab le conduct by a f iduc ia ry . " Cit icorp ,

16 0 F.3d a t 987. Like the cred i to r in Cit icorp , the Equi ty

Committee contends t h a t the Set t lement Noteholders purchased (and

sold) the Debtors ' secur i t i e s with " the benef i t of non-publ ic

informat ion acquired as a f iduc ia ry" for the "dual purpose of

making a p r o f i t and inf luenc[ ing ] the reorganiza t ion in [ the i r ]

own se l f - i n t e r e s t . " rd . See also Wolf v . Weinstein , 372 U.S.

633, 642 (1962) ("Access to ins ide informat ion or s t ra t eg ic

pos i t ion in a corpora te reorganiza t ion renders the tempta t ion to

p r o f i t by t rading in the Debtor ' s s tock pa r t i cu la r ly

pern ic ious ." ) .

The Set t lement Noteholders contend i n i t i a l l y t h a t equ i tab le

disal lowance i s not a val id remedy under the Bankruptcy Code,

because it i s not one of the spec i f i c except ions to al lowance of

a claim a r t i cu la t ed in sec t ion 502(b). See, e . g . , Travelers

113



Casual ty & Surety Co. o f Am. v . Pac. Gas & Elec . Co., 549 U.S.

443, 449-50 (2007) (holding t h a t Bankruptcy Code does not ba r

co n t r ac t u a l claim fo r a t t o rn ey s ' fees incur red dur ing bankruptcy

case because it was not disa l lowable under one o f th e nine

excep t ions to disa l lowance under sec t ion 502(b) ) . See also

Mobile Stee l , 563 F.2d a t 69 9 (concluding t h a t " eq u i t ab l e

cons ide ra t ions can j u s t i f y only the subord ina t ion o f cla ims, not

t h e i r disa l lowance") . The Se t t l ement Noteholders argue t h a t th e

l e g i s l a t i v e h i s to ry o f the Code suppor t s t h i s argument, c i t i ng a

vers ion of the Senate b i l l t h a t d id n ot ge t i nc luded in th e

Bankruptcy Code, which would have prov ided t h a t " the c o u r t may

disa l low, in p a r t o r in whole, any claim o r i n t e r e s t in

accordance wi th th e eq u i t o f the cas e . " S. 2266, 95th Congo §

510 (c ) (3 ) (1977) .

The Equi ty Committee responds t h a t both arguments were

r e j ec t ed in the Adelphia case . 365 B.R. a t 71, a f f ' d in r e l ev an t

p a r t , 39 0 B.R. a t 74-75. The Bankruptcy Court in Adelphia noted

t h a t t h e r e i s o ther 1 s l a t i v e h i s to ry t h a t expres s ly s t a t e s

t h a t sec t ion 510 " i s i n t ended to cod i fy case law, such as Pepper

V. L i t t o n . and i s no t i n t ended to l i m i t th e c o u r t ' s power in

any way. ' " 365 B.R. a t 71 (c i t ing Kenneth N. Klee, Leg i s l a t i v e

His to ry o f th e New Bankruptcy Law, 28 DePaul L. Rev. 941 (1979),

r ep r in t ed i n C o l l i e r on Bankruptcy, App. P t. 4-1495) ) . As a

r e s u l t , th e D i s t r i c t Court in Adelphia concluded t h a t " the Court

114



cannot give any weight to the omiss ion of Sect ion 510(c) (3 ) of S.

2266 from the Bankruptcy Code, Congress could have decided to do

away with e qu i t a b l e disal lowance, or it could have thought

sp ec i f i c r e f e rence to it was super f luous . " 39 0 B.R. a t 76.

In addi t ion , the s t r i c t Court in Adelphia held t h a t the

Trave le r s dec i s ion d id not over turn the Pepper v. Li t ton dec is ion

which n fa i r l y read , ce r t a i n l y endorses th e p rac t i ce ( in

appropr ia t e c i rcumstances) of th e equi t ab le disal lowance of

c la ims , not on the ba s i s of any s t a t u t o ry language , bu t as within

t he equ i t ab le powers of a bankruptcy co u r t . "

Here, the Court agrees with the wel l - reasoned dec is ions o f

th e Bankruptcy and D i s t r i c t Cour ts in Adelphia and concludes t h a t

it does have the au thor i ty to disa l low a claim on e qu i t a b l e

grounds ~ i n those extreme i ns t ances - perhaps very ra re - where

it i s necessa ry as a remedy." Adelphia , 36 5 B.R. a t 73. See

a lso , Ci t i corp , 160 F.3d a t 991 n.7 (disagreeing with d i s t r i c t

c o u r t ' s conclus ion t h a t equi t ab le subord ina t ion was the exc lus ive

remedy avai lab le fo r inequ i tab le conduct and not ing t h a t Pepper

v. Li t ton express ly upheld the bankruptcy c o u r t ' s power to

disa l low or subord ina te a claim based on equi t ab le grounds) .

The cases c i t ed by th e Set t lement Noteholders do not

fo rec lose t he equ i t ab le disal lowance of claims a l b e i t under a

d i f f e r e n t an a ly s i s . Trave le r s , 549 U.S. a t 449-50 (holding

t h a t nSect ion 502(b) (1 ) disa l lows any claim t h a t i s

11 5



' unenforceable a ga i n s t the deb tor . . . under any agreement or

appl i cab le law' [which i s ] most n a tu ra l ly understood to

provide t h a t , with l imi ted except ions , any defense to a c l

t h a t i s ava i l ab le ou t s ide of the bankruptcy contex t i s a l so

avai lab le in bankruptcy . " ) ; Mobile Stee l , 563 F.2d a t 699 n.10

(concluding t h a t equi t ab le disal lowance of c la ims i s no t

avai lab le because "would add nothing to the pro tec t ion aga ins t

unfa i rness a l r eady a f forded the bankrupt and s c red i t o r s . .

I f th e misconduct di rec ted aga ins t the bankrupt i s so extreme

t h a t disal lowance might appear to be warran ted , then sure ly the

claim i s e i t h e r i n v a l id or the bankrupt possesses a c l ea r defense

a ga i n s t it."). Because the Equity Committee seeks to disa l low

the claims of the Set t lement Noteholders under f ac t s t h a t suggest

they v io l a t ed the secu r i t i e s laws, the Court be l i eves t h a t the

Debtors would have a defense to those c la ims out s ide o f th e

bankruptcy contex t as we l l . See, e .g . , SEC v. Universal Express ,

In c . , 646 F. Supp. 2d 552, (S.D.N.Y. 2009) ("In addi t ion to i t s

d i sc re t io n to order disgorgement , a c ou r t has the d i sc re t io n to

award prejudgment i n t e r e s t on the amount of disgorgement and to

determine the r a t e a t which such i n t e r e s t should be ca l cu l a t ed .

Awarding prejudgment i n t e r e s t , ' l i ke the remedy of disgorgement

i t s e l f , i s meant to depr ive wrongdoers of the f r u i t s of t h e i r

i l l - g o t t en ga ins from vio la t ing s e c u r i t i e s l aws . ' ' ' ) (quot ing SEC

v. Lorin, 877 F. Supp. 192, 201 (S.D.N.Y. 1995), a f f ' d in p a r t

116



and vacated in pa r t , 76 F.3d 458 (2 d Cir . 1 9 9 6 » ; SEC v.

Halic- iannis , 470 F. Supp. 2d 373, 385-86 (S.D.N.Y. 2009) (holding

t ha t c i v i l monetary penal t i es can be awarded fo r secur i t i e s

vi o l a t i ons , which ~ a r e designed to punish the i nd iv idua l vi o l a t o r

and d e te r fu tu re viola t ions of the secur ie s laws," and awarding

c i v i l monetary penal t i es o f $15 mil l ion , roughly the amount of

the defendan t ' s i l l - g o t t en g a in s ) .

b. Meri ts of claim

In Pepper v. Li t ton , th e Supreme Court upheld the equ i tab le

disa l lowance of the claim of an i ns i de r who t raded on mate r i a l

ins ide informat ion, concluding t ha t :

He who i s in . a f iduc iary pos i t ion . . . . cannotu t i l i z e his ins ide informat ion and h is s t r a t e g i c

pos i t ion fo r h is own preferment . He cannot vi o l a t e

ru les of r play by doing i nd i rec t ly through the

corpora t ion what he could no t do d i rec t ly . He cannotuse h is power fo r h is per sona l advantage and to th e

de t r iment of the s tockholders and c red i t o r s no matter

howabsolute in terms t ha t power may be and no matterhow meticulous he i s to sa t i s fy t echn ica l requirements .

308 U.S. a t 311.

The TPS Group contends t ha t , al though the Court need not

decide t ha t the Set t lement Noteholders have viola ted th e

secur i t i e s laws, reference to i ns i de r t r ad ing cases i l l u s t r a t e s

the magnitude of the Set t lement Noteholders ' inequ i tab le conduct .

Supreme Court has recognized two t h eo r i e s of i ns i de r

t rad ing under sec t ion 10(b) : the ~ c l a s s i c a l theory" and th e

~ m i s a p p r o p r i a t i o n theory ." See SEC v. Cuban, 620 F.3d 551, 553

117



(5th . 2010) . Under the c la s s i ca l theory, sec t ion 10(b) and

Rule 10b-5 are vio la ted when a corpora te ins ider ( i) t r ades in

the secur i t i e s of h is corpora t ion ( i i ) on the bas is of ( i i i )

mate nonpublic informat ion (iv) in vio la t ion of the f iduciary

duty owed to h is shareholders . See, e .g . , U.S. v. 0 ' Haqan, 521

U.S. 642, 651-52 (1997) ("Trading on such informat ion qual i

as a 'decept ive device ' under § 10(b) . because ' a

re la t ionsh ip of t r u s t and confidence [exis ts] between the

shareholders of a corpora t ion and those ins iders who have

obta ined co n f id en t i a l informat ion by reason of t h e i r pos i t ion

with t ha t corpora t ion . ' ' ' ) (c i t a t ion omit ted) . Under the

misappropr ia t ion theory , by co n t ra s t , a corpora te "ou ts ider"

v i o l a t e s sec t ion 10(b) and Rule 10b-5 "when he misappropr ia tes

co n f id en t i a l informat ion fo r secur i t i e s t rad ing purposes , in

breach of a duty owed to the source of the informat ion" ra ther

than a duty owed to the persons with whom he t r ad es . Id . a t 652.

The Equi ty Committee and the TPS Group both a s s e r t tha t the

Set t lement Noteholders ' conduct v io l a t ed the c l a s s i c a l theory of

i n s i d e r t r ad in g . In add i t ion , the TPS Group asse r t s t ha t

Centerbr idge vio la ted the misappropr ia t ion theory.

i . Clas s i ca l theory

(1) Mater ia l nonpublic informat ion

The Set t lement Noteholders argue t h a t they did not t rade on

any mate r i a l nonpublic informat ion. Ins tead, they contend t ha t

118



th e only mate r i a l nonpubl in format ion which they received from

the Debtors dur ing the co n f id en t i a l per iods were the es t imated

amounts of the Debtors ' tax refunds , which were di sc losed by the

Debtors to the publ ic be fore the Set t lement Noteholders began to

t rade again.

Th e Equi ty Committee and th e TPS Group asse r t t h a t th e

Set t lement Noteholders r ece ived add i t ional nonpubl ic in format ion

inc lud ing the knowledge t h a t a se t t l ement was being discussed and

the re l a t ive s tances the p a r t were t ak ing in those

negot ia t ions . In pa r t i cu la r , the Equi ty Committee and the TPS

Group focus on th e term sheets exchanged by the p a r t i e s .

According t o the Equity Committee, the p a r t i e s were conceding

i s sues a t a t ime when t he pub l i c knew only t h a t the Debtors,

JPMC, and the FDIC were engaged in conten t ious l i t i g a t i o n .

M ate r i a l i t y of nonpubl ic in format ion i s determined by an

ob j e c t i ve , "reasonable i nves to r" t e s t : "[T]he law def ines

'mater i a l ' in format ion as in format ion t h a t would be impor tan t to

a reasonable inves to r in making h is or her inves tment decis ion ."

In re Burl ing ton Coat Factory Sec. Li t i g . , 114 F.3d 1410, 1425

(3 d Cir . 1997) . With regard to in format ion on events l ike a

p o t en t i a l merger, cour t s determine mat e r i a l i t y based on a

balancing of both the " ind ica ted p ro b ab i l i t y t h a t the even t w i l l

occur and the an t i c ip a t ed magnitude of the event l i g h t of the

t o t a l i t y of the company ac t i v i t y . " Basic , Inc . v . Levinson, 48 5

119



U.S. 224, 238 (1988) (emphasis added) .

The p a r t i e s l a rg e ly do no t dispu te t h a t the magnitude of a

globa l se t t l ement with JPMC and the FDIC would be g rea t in t h i s

case .45 See, e .g . , SEC v. Geon Indus . , In c . , 531 F.2d 39, 47-48

(2d Cir . 1976) (s ta t ing t h a t " [ s ] in ce a merger which [a

company] i s bought ou t i s the most impor tan t event t h a t can occur

a smal l co rp o ra t io n ' s l i f e , to wi t , i t s death , we t h ink t h a t

ins ide informat ion, as regards a merger of t h i s s o r t , can become

mate r i a l a t an e a r l i e r s tage than would be the case as regards

l e s se r t ransac t ions - and t h i s even though the mo r ta l i t y ra te of

mergers in such format ive s t ages i s doubt les s h i g h . " ) . The i s sue

the p a r t i e s in t h i s case di spu te i s the p ro b ab i l i t y t h a t a

se t t l ement would occur , sp ec i f i ca l l y whether the negot i a t ions

were too t en t a t i v e and the p a r t i e s were too f a r a p a r t .

Th e Debtors and the Set t lement Noteholders contend t h a t

n e i th e r the knowledge of negot i a t ions nor the p a r t i e s ' re l a t ive

s tances during the negot i a t ions were mate r i a l non-pub I

in format ion because of the extreme di s t ance between the p a r t s '

45 Owl Creek alone argues t h a t the magnitude f ac to r i s not

met here because, unl ike a merger, se t t l ement proposals are a

common and necessa ry component of bankruptcy cases . The Courtag rees t h a t se t t l ement proposals a re common, bu t also notes t h a t

s ta tements of i n t e r e s t and merger proposals a re j u s t as common

and y e t may be mate r i a l . Bas ic , 48 5 U.S. a t 238-39. What the

magnitude f ac to r measures i s not th e f ac t t h a t a proposal was

made, bu t what the r e s u l t of the proposal would be if accepted( i . e . the ac tu a l merger or se t t l ement were consummated).

Geon Indus . , In c . , 531 F.2d 39, 47-48 (2 d Cir . 1976) .

120



s tances and the ebbs and f lows of the negot i a t ion p rocess . See,

Taylor v. F i r s t Union Corp. of S.C. , 85 7 F.2d 240, 244-45

(4th Cir . 1988) (holding t h a t "pre l iminary , con t ingent , and

specu la t ive" negot i a t ions were immater ia l because t he re was "no

agreement as to th e p r i ce or s t ru c t u re of the deal" ) ; F i l ing v.

Phipps , No. 5:07CV1712, 2010 WL 3789539, a t *5-6 (N.D. Ohio Sept .

24, 2010) ( f inding t h a t merger t a l k s were not mate r i a l where

pa r t i e s had a "ge t acquain ted" meet ing and discussed execut ing a

co n f i d en t i a l i t y agreement ) ; Levie v. Sears Roebuck & Co. , 676 F.

Supp. 2d 680, 688 (N.D. Ill. 2009) ( f inding merger discuss ions

no t mate r i a l where they were pre l iminary in nature) .

According to the Set t lement Noteholders , it would have been

sheer specula t ion t h a t JPMC's pos i t ion on one or more p o t en t i a l

se t t l ement terms in March or November 2009 could have provided

assurance t h a t JPMC would t ake t h a t same pos i t ion in fu tu re

complex, mul t i -pa r ty , mu l t i - i s su e negot i a t ions . In th e contex t

of such a complex negot i a t ion , th e Set t l emen t Noteholders argue

t h a t the discuss ions could only be mate r i a l once a l l the p a r t i e s

reached an agreement i n p r in c ip a l or a t l e a s t came ext remely

c lose to a de a l . (D.I . 8429 a t 10. )

The Court di sagrees with t h i s s ta tement of mat e r i a l i t y . Th e

Supreme Cour t has e x p l i c i t l y r e j ec t ed the argument t h a t t he re i s

no mat e r i a l i t y to di scuss ions u n t i l an agreement- in-pr inc iple has

been reached. Basic , 48 5 U.S. a t 237. In addi t ion , the cases

121



c i t ed by the Plan Suppor ters are dis t ingu ishab le as they dea l

only with pre l iminary di scuss ions . Unlike the cases c i t ed , here

the p a r t i e s executed co n f i d en t i a l i t y agreements , exchanged a

s i g n i f i can t amount of informat ion, and engaged in mul t i -par ty

negot i a t ions fo r over a year . The discuss ions went fa r beyond a

mere "ge t acquain ted meet ing." Fi l in g , 2010 WL 3789539, a t *5-6.

The Set t lement Noteholders contend t h a t whether a se t t l ement

was l i ke ly to occur should be eva lua ted in l i g h t of the f ac t s as

they ex is ted a t th e t ime, not with the b e n e f i t of hinds igh t .

See, e .g . , In re Genera l Motors Class E Stock Buyout Sec. Li t i g . ,

694 F. Supp. 1119, 1127 (D. Del. 1988) ("The p ro b ab i l i t y of a

t ransac t ion occur r ing must be considered in l i g h t of the f ac t s as

they then ex is ted , not with the hinds igh t knowledge t h a t the

t ransac t ion was or was not completed." ) . According to the

Set t l emen t Noteholders , in t h i s case a t th e conclus ion of both

co n f i d en t i a l i t y per iods , th e p a r t i e s f e l t t h a t the negot i a t ions

were dead and, therefore , they were not mate r i a l .

Th e Court i s not convinced, however, by t h i s conten t ion .

See, e . g . , SEC v. Gaspar , 83 Civ. 3037, 1985 WL 521, a t *1 4

(S.D.N.Y. Apr. 16, 1985) ("The ul t ima te success of the

negot i a t ions i s only one f ac to r to cons ider" in determin ing

m a t e r i a l i t y ) . The f i r s t s e t of negot i a t ions ended in March, with

the Set t lement Noteholders cla iming they were a " d i s a s t e r , " ye t

the Debtors cont inued to negot i a t e with JPMC in Apr i l . (Tr.

122



refunds would have to be reached between the Debtors and JPMC.

See Elkind v. Ligge t t & Myers, In c . , 635 F.2d 156, 166 (2d Cir .

1980) ( f inding t h a t the conf i rmat ion of fac t s t h a t "were f a i r ly

obvious to a l l who fol lowed the s tock . . cannot be deemed

' r easonably ce r t a i n to have a su b s t an t i a l e f f e c t on the market

p r i ce of the s e c u r i t y . ' " ) .

Again, th e Cour t di sagrees . There i s no evidence in the

record t h a t the market knew t h a t the Debtors would p r e v a i l on th e

d ispu ted bank depos i t s or t h a t t he re would be a se t t l ement on th e

tax refunds . A ll the publ ic knew was t h a t the Debtors , JPMC, and

the FDIC were l i t i g a t i n g those i s su es . In f ac t , the Court was

prepared t o i s sue a dec is ion on the summary judgment motions

f i l ed by the p a r t i e s on the bank depos i t i s sue when the GSA was

announced.

Th e Set t l emen t Noteholders argue fu r th e r t h a t th e

p ro b ab i l i t y of a se t t l ement cannot be eva lua ted based on

agreement on a fe w terms but must be viewed as a whole. Despi te

the f ac t t h a t some terms d id not change, the Se t t l ement

Noteholders note t h a t many terms were cons tan t ly changing as

l a t e r term shee t s were exchanged. (Tr. 7/21/2011 a t 109.) At

one poin t , JPMC changed i t s s tance in the negot i a t ions so

dras t i ca l ly t h a t the Debtors viewed it as essen t i a l ly

" r e s e t [ t ing] the bookends" of any p o t en t i a l dea l . (EC 16; Tr.

7/18/2011 a t 108.) Th e Set t lement Noteholders warn t h a t if

124



disc losure of the cons tan t ly changing se t t l ement terms was

requi red, it ~ w o u l d r e s u l t in endless bewilder ing guesses as to

the need fo r d i sc lo su re , opera te as a deter ren t to the l eg i t imate

conduct of corpora te opera t ions , and th rea ten to ' bury the

shareholders in an avalanche of t r i v i a l informat ion. ' f f Taylor,

857 F.2d a t 245.

This same argument was denounced by the Supreme Court when

it r e j ec t ed the ~ a g r e e m e n t - i n - p r i n c i p l e f f s tandard for eva lua t ing

mat e r i a l i t y of merger discussions and appl equal ly here .

Three ra t iona les have been offered in suppor t of the~ a g r e e m e n t - i n - p r i n c i p l e " t e s t . The f i r s t der ives from

the concern expressed in TSC Indus t r ies t ha t an

inves to r not be overwhelmed by excess ive ly deta i l ed and

t r i v i a l informat ion, and focuses on the su b s t an t i a l

r i sk t h a t pre l iminary merger discussions may co l lapse :

because such di scuss ions are inheren t ly t en ta t ive ,

disc losure of t h e i r exis tence i t s e l f could misleadinves to rs and fos te r fa l se optimism. The f i r s tra t iona le , and the only one connected to the concernsexpressed in TSC In d u s t r i e s , s tands soundly r e j ec t ed ,

even by a Court of Appeals t ha t otherwise has acceptedthe wisdom of the agreement- in-pr inc iple t e s t . ~ I t assumes t ha t inves to rs a re n i t w i t s , unable to

apprec ia te - even when to ld - t ha t mergers a re r i sky

propos i t ions up u n t i l the c lo s in g . " Disclosure , and

not p a t e r n a l i s t i c withhold ing of accura te informat ion,i s the pol icy chosen and expres by Congress .

Basic , 485 U.S. a t 237 (quoting Flamm v. Ebers tad t , 814 F.2d

1169, 1175 (7th Cir . 1987).

The Plan Objectors disagree with the Set t lement Noteholders '

content ion t h a t the se t t l ement negot i a t ions were too t en ta t ive to

be mate r i a l . The TPS Group asse r t s t h a t over the course of

negot ia t ions it became c l ea r t h a t a se t t l ement was more probable

125



(as i s sues were resolved) and t h a t the funds avai lab le to the

e s t a t e were i nc reas ing . Th e Plan Objectors argue t h a t the

mat e r i a l i t y of the informat ion i s ev iden t from the f ac t t h a t as

soon as th e Set t lement Noteholders were f ree t o t r ade on t h a t

in format ion they did : engaging in what the Equity Committee

ch a rac t e r i zes as a "buying spree" concent r a t ing on acqui r ing ( a t

a discount ) j un ior claims because the Set t l emen t Noteholders knew

(al though the publ i c did not) t h a t the j un ior c red i t o r s were

l i ke ly to r ece ive a recovery . (AOC 18; AOC 54; AOC 62; Au 8 .)

Th e Equi ty Committee a l so asse r t s t h a t a mat e r i a l i t y

in f e rence can be drawn from the f ac t t h a t the Set t l emen t

Noteholders reques ted (and the Debtors granted) a t e rmina t ion of

th e Second Co n f id en t i a l i t y Per iod a day ea r ly , on December 30,

2009, in order to permi t them t o t r ade before the end of the

year . (Tr. 7/18/2011 a t 111. ) See, e . g . , Basic , 485 U.S. a t 240

n.18 ("We recognize t h a t t rad ing (and p r o f i t making) by s id e r s

can serve as an ind ica t ion of mate r i a l i t y . " ) ; United Sta t e s v .

Vic tor Teicher & Co. , No. 88 CR. 796, 1990 WL 29697, a t *2

(S.D.N.Y. Mar. 9, 1990) ( c i t i n g the "very f a c t of [de fendant ' s ]

t r ad ing" as "evidence of the mat e r i a l i t y of th e in format ion") .

The Set t l emen t Noteholders respond t h a t ma t e r i a l i t y cannot

be gleaned from the t r ades in ques t ion , however, because some of

the Set t l emen t Noteholders were se l l i n g whi le othe rs were buying

or not t r ad ing a t a l l . (AOC 18; AOC 54; AOC 62; Au 8 .) I f the

126



se t t l ement d i scuss ions had any m ate r i a l i ty , th e Se t t l ement

Noteholders argue t h a t they would have a l l t r aded in th e same

fa sh ion . They po in t t o Appaloosa and Centerbr idge as an example.

Both rece ived a summary of th e Debtors ' Apr i l nego t i a t ions and

JPMC's August coun ter -o f fe r during t h e i r own separa t e

nego t ia t ions , yet they engaged in oppos i t e t r ades a f t e r r ece iv ing

t h a t informat ion. {AOC 54; AOC 62.} In another i n s t ance ,

Aurel ius so ld PIERS on March 8, 2010, four days before the

announcement of the GSA, a f t e r which th e p r i ce o f th e PIERS

skyrocketed . {Au 8.} According to the Set t lement Noteholders ,

if Aurel ius possessed mater ia l nonpubl ic format ion regarding

t he se t t l ement , it would not have made such an unwise t r ad e .

The f ac t t h a t th e Set t lement Noteholders made unwise o r

con t ra ry t rades , however, does not provide a defense to an

i n s ide r t rad ing ac t ion . See, e . g . , SEC v . Thrasher , 152 F. SUpp.

2d 291, 301 (S.D.N.Y. 2001) (concluding t h a t a t i ppee i s

po ten t i a l l y l i ab l e fo r i n s i d e r t r ad ing even if it lo ses money by

t rad ing on f a l se informat ion) {ci t ing Bateman Eich ler , Hi l l

Richards , Inc . v. Berner , 472 U.S. 299, 318 ( 1 9 8 5 » .

The Court does f ind d i f f i c u l t to draw any conclus ions

from th e Set t lement Noteholders ' t r ad es . The Se t t l ement

Noteholders ac t i v e ly t r aded in the Debtors ' s e c u r i t i e s p r i o r to ,

and a f t e r , the c o n f i d e n t i a l i t y per iods . I t i s poss ib le t h a t

t h e i r t r ades were based on th e p u b l i ca l l y d i sc losed informat ion

127



regarding the tax refunds , but because f u l l discovery on

Set t lement Noteholders ' i n t e rna l t rad ing dec i s ions has not been

permi t ted to date , the Court i s unable to reach any conclus ion

based on the t rades a lone .

Based on the evidence presented thus fa r , however, it

appears t h a t the negot ia t ions may have sh i f t ed towards the

mater ia l end of the spectrum and t h a t the Set t lement Noteholders

t raded on t h a t informat ion which was not known to the publ ic .

Consequent ly, the Court f inds t h a t the Equity Committee has

s ta ted a co lorab le claim t h a t the Set t lement Noteholders rece ived

mater ia l nonpublic informat ion. Fur ther discovery would help

shed l i g h t on how the Set t lement Noteholders i n t e rna l ly t r ea t ed

the se t t l ement d i scuss ions and if they cons idered them mater ia l

to t h e i r t rad ing dec is ions .

(2) Ins ider s t a t u s

(a ) Temporary In s id e r

Ins iders of a corpora t ion are not l imi ted to of f i ce r s and

d i r ec t o r s , but may inc lude "temporary ins iders" who have "entered

in to a spec i co n f id en t i a l re la t ionsh ip in the conduct of the

bus iness o f the en t e rp r i se and are given access to informat ion

so l e ly fo r corpora te purposes ." D i r ~ s v. SEC, 463 u.S. 646, 655

n.14 (1983). See a lso In re Krehl , 86 F.3d 737, 743 (7th Cir .

1996) (holding that" [aJ ccess to in s informat ion can be

s u f f i c i e n t to confer i n s i d e r s t a t u s even where there i s no l eg a l

128



r i g h t or ab i l i t y t o exe rc i se con t ro l over a corpora te en t i t y " ) .

Th e Equity Committee and the TPS Group contend t h a t the

Set t lement Noteholders became temporary i n s id e r s when they were

given mate r i a l non-publ ic in format ion crea t ing a f iduc ia ry duty

on t h e i r p a r t towards othe r c red i t o r s and shareholder s .

The Set t lement Noteholders a s s e r t t h a t temporary i n s i d e r

s t a t u s under the secu r i t i e s law i s i napp l i cab le to s i t u a t i o n s

where the corpora t ion and the outs ider work t oge the r toward a

goal in which they each have diverse i n t e r e s t s and only appl i e s

if they are working towards a common goa l . Dirks , 463 U.S. a t

655 n.14 . According to the Set t lement Noteholders , the Supreme

Cour t ' s use of the phrase ~ s o l e l y fo r corporate purposes" in

Dirks was meant to exclude i ns t ances where a corporate purpose

may be one or even the "pr imary reason" among o th e r s . Id .

Fur the r , the Set t lement Noteholders asse r t t h a t the Debtors have

always been aware t h a t the Set t lement Noteholders ' purpose fo r

p a r t i c i p a t i n g in the negot i a t ions was to fu r th e r t h e i r own

economic s e l f i n t e r e s t . (Tr. 7/21/2011 a t 185, 202.)

The Equi ty Committee responds t h a t the Debtors y gave the

Set t lement Noteholders access to the se t t lement term shee t s to

fu r th e r the Debtors ' e f fo r t s to e f fec tu a t e a consensua l plan of

reorgan iza t ion , which was the common goal of both the Debtors and

the Set t lement Noteholders . This , it argues , s a t i s f i e s the

common corporate goal requi red by Dirks . 463 U.S. a t 655 n.14 .

129



In addi t ion , the Equity Committee argues tha t the Set t lement

Noteholders only obtained the information because they had

acquired blocking posi t ions in two subordinated c lasses of

credi tors (the senior subordinated notes and the PIERS). I t

contends tha t th i s i s su f f ic ien t to create a f iduciary duty on

t he i r pa r t to those two c lasses of c red i to r s . Rickel &

Assocs. , Inc. v. Smith (In re Rickel & Assocs. , Inc . ) , 272 B.R.

74, 100 (Bankr. S.D.N.Y. 2002) (holding tha t cred i to r s ' committee

member could not use his pos i t ion on committee to advance h is own

personal i n t e res t a t the expense of the unsecured cred i to rs) .

The Court f inds tha t the Equity Committee has s ta ted a

colorable claim tha t the Set t lement Noteholders became temporary

ins iders of the Debtors when the Debtors gave them conf iden t i a l

information and allowed them to par t i c ipa te in negot ia t ions with

JPMC for the shared goal of reaching a se t t lement tha t would form

the bas i s of a consensual plan of reorganizat ion.

(b) Non-statutory ins ider

Alternat ively! the Equity Committee and TPS Group as se r t

tha t the Sett lement Noteholders owed dut ies as non-sta tu tory

ins iders under bankruptcy law. See, e . g . , Luedke v. Delta Air

Lines, Inc . , 159 B.R. 385 (S.D.N.Y. 1993) (holding tha t p la in t i f f

s ta ted a claim tha t credi tors ! committee assumed a duty to a l l

par t i es by becoming a j o in t sponsor and proponent of plan) ; In re

Wash. Mut., Inc . , 419 B.R. 271, 278 (Bankr. D. Del. 2009) (noting

130



not fit the Bankruptcy Code d e f i n i t i o n of an i n s i d e r may

nonetheless be i n s id e r s if they have a s u f f i c i e n t l y c lose

re la t ionsh ip with the debtor to sugges t t h a t t h e i r t ransac t ions

were not conducted a t arm's l eng th) .

The Equi ty Committee has a l l eged and presen ted some evidence

t h a t the Set t lement Noteholders could be considered i n s id e r s of

th e Debtors because of t h e i r s t a t u s as holders of b locking

pos i t ions in two c l a s ses of the Debtors ' debt s t ru c t u re . As

such , it could be found t h a t they owed a duty to the o t he r

members of those c lasses to a c t fo r t h e i r b en e f i t . Therefore ,

the Court f inds t h a t the Equi ty Committee has s t a t ed a co lorab le

claim t h a t th e Set t lement Noteholders are temporary i n s id e r s of

the Debtors .

(3) Knowledge

The Set t lement Noteholders a s s e r t t h a t t he re i s no evidence

t h a t they knowingly or r eck les s ly t raded whi le in possess ion of

mate r i a l nonpubl ic in format ion , and, t h e re fo re , the r equ i r ed

sc i en t e r e lement of an i n s i d e r t r ad ing claim i s lacking. See(

Bur l inc ton Coat Factory Sec. Li t i g . , 114 F.3d a t 1422

( f inding t h a t sc i en t e r requ i res a nst rong in f e rence" t h a t when

t r ad ing the defendant nknew or reck less ly dis r egarded" the f ac t

t h a t in format ion in h is possess ion was m a t e r i a l ) . Because the

Debtors e x p l i c i t l y agreed to d i sc lose any mate r i a l nonpubl ic

in format ion a t th e end of each co n f i d en t i a l i t y per iod , the

132



Set t lement Noteholders contend t h a t they had no knowledge t h a t

the publ i c did no t know a l l mate r i a l informat ion. The Set t l emen t

Noteholders note t h a t the burden was on the Debtors to a s sure

t h a t t he d i sc losures were appropr ia t e . (Au 16; Au 27; EC 24; EC

37; EC 111; EC 117; EC 141; EC 148. ) See a l so Richard H. Walker,

Div. of Enforcement, Sec. Exch. Comm'n, Regulat ion FD - An

Enforcement Per spec t ive (Nov. 1, 2000), 2000 WL 1635668, a t *2

( s t a t ing t h a t the regu la t ion "places the r e sp o n s i b i l i t y fo r

avoid ing se l ec t i v e disc losure , and the sks of engaging in it,

square ly on the i s su e r" of the informat ion) .

The Equity Committee responds t h a t good f a i t h re l iance on

assurances of a t h i rd pa r t y , such as the source of the

informat ion, to d i sc l o se a l l mate r i a l in format ion t o the publ ic

cannot be a defense . Such a ru le would v i t i a t e the i n s id e r

t r ad ing laws if a t h i rd p a r t y ' s assurances , with no fu r th e r duty

of i nqu i ry , automat ica l ly i n su l a t ed a par ty from i n s id e r t rad ing

l i a b i l i t y . Fur ther , the Equity Committee asse r t s t h a t t he re i s

c l ea r c i rcumstan t i a l evidence ( the volume of t r ades immediately

a f t e r the co n f i d en t i a l i t y per iods ended) which show t h a t the

Se t t l emen t Noteholders knowingly t raded on the bas is of the

mate r i a l , nonpubl ic informat ion. See, e . g . , SEC v. Heider , 90

Civ. 4636, 1990 WL 200673, a t *4 (S.D.N.Y. Dec. 4, 1990)

{al legat ions t h a t volume of c a l l opt ion purchases sp iked p r i o r to

merger and t h a t defendants were r espons ib le fo r a s i g n i f i c a n t

133



por t ion of t h a t volume supported a "st rong inference" of

defendan t ' s sc i en te r ) .

The Set t lement Noteholders disagree , asser t ing t h a t the

evidence of t h e i r t rad ing does no t suppor t an inference of

sc i en t e r . Bur l ington Coat Factory Sec. Li t i g . , 114 F.3d a t 1424

(decl ining to i n f e r f raudulent i n t en t from " t rad ing in the normal

course of even ts" ) . They argue t h a t the t rad ing volume can be

a t t r ibu ted t o o the r f ac t s of publ ic record such as the momentum

of the tax b i l l through Congress and the Debtors ' est imates of

t h e i r tax refunds .

While t r ades may provide c i rcumstan t i a l evidence of i n t en t

or reck lessness , the s t a tu t e only requ i res t h a t the Set t lement

Noteholders have knowledge t h a t they were in possess ion of

mate r i a l nonpubl ic informat ion. Whether or no t they prof i t ed

from such knowledge or ac tua l ly appl ied such knowledge in t r ad ing

i s no t a requi red element . United Sta tes v. Teicher , 987 F.2d

112, 120 (2 d Cir . 1993) ( s t a t ing tha t " [u ]n l ik e a loaded weapon

which may s tand ready bu t unused, mate r i a l informat ion can no t

lay id le in the human bra in") .

In addi t ion the Court does not agree with the Set t lement

Noteholders ' r e l i an ce except ion to the sc i en t e r element of

i n s i d e r t rad ing . The Set t lement Noteholders each had s t r i c t

i n t e rn a l po l i c ies proh ib i t ing ins ider t rad ing . (EC 3; EC 19; EC

103; AOC 16.) Th e Equi ty Committee contends t ha t notwiths tanding

134



those in te rna l po l i c ,the Set t lement Noteholders knowingly

t r aded with knowledge t h a t the Debtors were engaged in global

se t t l ement negot ia t ions with JPMC of which the t rad ing publ ic was

unaware. The Set t lement Noteholders cannot use the Debtor or

t h e i r own counsel as a sh ie ld if they vio la ted those pol i c i e s .

The Court f inds t ha t the Equity Committee has made

su f f i c i en t a l l ega t ions and presented enough evidence to s ta te a

co lorab le claim t h a t the Set t lement Noteholders acted reck less ly

in t h e i r use of mater ia l nonpublic informat ion. Goldman v.

McMahan, Brafman, Morgan & Co., 706 F. Supp. 256, 259 (S.D.N.Y.

1989) ("An egregious r e fu sa l to see the obvious, or to

inves t iga te the doubtful , may in some cases . . . be the

funct ional equivalent of reck lessness . " ) ; Rolf v. Blyth, Eastman

Dil lon & Co., In c . , 570 F.2d 38, 47 (2 d Cir . 1978) ("Reckless

conduct i s . . . 'an extreme depar ture from the s tandards o f

ordinary care . . . to the ex ten t t ha t the danger was e i t h e r

known t o the defendant or so obvious t ha t the defendant must have

been aware of it.'") (c i ta t ion omit ted) .

ii. Misappropr ia t ion theory

The TPS Group a lso a l leges t ha t Centerbr idge i s l i ab le under

the misappropr ia t ion theory which provides t h a t i n s i d e r t rad ing

can be found where "(1) . the defendant possessed mater ia l ,

nonpubl ic informat ion; (2 ) which he had a duty to keep

conf iden t i a l ; and (3) . . . the defendant breached h is duty by

135



ac t ing on or reveal ing the informat ion in ques t ion ." SEC v.

Lyon, 605 F. Supp. 2d 531, 54 1 (S.D.N.Y. 2009) . Liab i l i t y

a t taches where ~ t h e t i ppee t raded on the misappropr ia ted

informat ion when [ i t ] knew or should have known it was

misappropr ia ted." SEC v. Wil l i s , 777 F. Supp. 1165, 1169

(S.D.N.Y. 1991) .

According to the TPS Group, the Debtors shared informat ion

about the Apr i l 2009 negot ia t ions with Fried Frank which was

under a wri t ten conf iden t i a l i t y agreement barr ing it from shar ing

informat ion with i t s c l i en t s , unless they were sub jec t to

conf iden t i a l i t y agreements of t h e i r own. (EC 10; D 408.)

Nonetheless , on July 1, 2009, Fried Frank shared summaries of the

Apr i l negot i a t ions with both Centerbr idge and Appaloosa, who were

not a t the t ime sub jec t to a conf iden t i a l i t y agreement with the

Debtors. (EC 215.) Centerbr idge cont inued t o t r ad e , while

Appaloosa volun tar i ly r e s t cted i t s t rad ing . The TPS Group

asse r t s t h a t , as a r esu l t , Fried Frank breached i t s duty of

conf iden t i a l i t y to the Debtors and Centerbr idge misappropr ia ted

co n f id en t i a l in format ion .

The TPS Group asse r t s t h a t Centerbr idge knew or should have

known t ha t the informat ion was r e s t r i c t ed and sub jec t to Fr ied

Frank 's conf iden t i a l i t y obl iga t ions to the Debtors. (Tr.

7/21/2011 a t 30-31.) SEC v. Musel la , 578 F. Supp. 425, 442

(S.D.N.Y. 1984) ( f inding knowledge where the ind iv idual was a

136



~ s o p h i s t i c a t e d . market profess ional" who should have

i nqu i red about the ~ u n d e r l y i n g ci rcumstances of the t ip

received") .

In addi t ion , the Equity Committee contends t h a t fol lowing

the Second Conf iden t ia l i ty Per iod , mater ia l informat ion was

shared with the Set t lement Noteholders by Fried Frank. The

Set t lement Noteholders contend, however, t ha t al though they had

discussions and meet ings with Fr ied Frank about the plan o f

reorgan iza t ion , they rece ived no mater ia l informat ion from Fried

Frank about the subs tance of the negot i a t ions dur ing th i s per iod .

(Tr. 7/18/2011 a t 116, 119; Tr. 7/19/2011 a t 144; Tr. 7/20/2011

a t 75; Tr. 7/21/2011 a t 136.) The Court has su b s t an t i a l doubts

about these asse r t i o n s . Further discovery on th i s i s sue would

fy t h i s p o in t .

For a l l the above reasons , the Court f inds t ha t the Equi ty

Committee and the TPS Group have s ta ted a colorable claim t h a t

the Set t lement Noteholders engaged in i n s i d e r t rad ing under the

c l a s s i c a l and misappropr ia t ion theor ies .

The Set t lement Noteholders warn t ha t any f inding of i n s i d e r

t rad ing wil l c h i l l the pa r t i c ipa t ion of cred i to rs in se t t l ement

d i scuss ions in bankruptcy cases of publ i c companies. The Court

disagrees . There i s an easy so lu t ion : c red i t o r s who want to

pa r t i c ipa t e i n se t t l ement d i scuss ions in which they rece ive

mate r i a l nonpublic informat ion about the debtor must ther

13 7



r e s t r i c t t h e i r t r ad ing o r es t ab l i sh an e t h i c a l wal l between

t r ad e r s and p a r t i c i p an t s in the bankruptcy case . These types of

r e s t r i c t i o n s a re common in bankruptcy cases . Members of

c r e d i t o r s ' committees and equi ty committees are always sub jec t to

these r e s t r i c t i o n s . See e . g . , Adelphia , 368 B.R. a t 15 2 n .11 .

The Cour t does no t be l i eve t h a t a requi rement to r e s t r i c t t r ad ing

o r c rea te an e th ica l wal l in exchange fo r a sea t a t the

negot i a t ing t ab l e places an undue burden on c red i t o r s who wish to

r ece ive co n f id en t i a l in format ion and give t h e i r i npu t .

c . Burden on es t a t e

The Court i s r equ i r ed , however, to balance the probab i l i ty

of success on the claim a ga i n s t the burden on the es t a t e t h a t

would r e s u l t from i t s prosecu t ion . Judging from the v igo r with

which the Set t lement Noteholders have opposed the Equi ty

Committee 's s tand ing motion, the Court i s concerned t h a t the case

w i l l devolve in to a l i t i g a t i o n morass. In addi t ion , the Cour t

notes t h a t as the case cont inues , the p o t en t i a l r ecover ies fo r

a l l p a r t i e s in the case dwindles . Regardless of which pa r t i e s

p rev a i l , they may be disappoin ted to f ind t h e i r recovery

s i g n i f i can t l y l e s s than expected .

Therefore , before the Equi ty Committee proceeds wi th i t s

claim any fu r th e r , the Court w i l l d i r ec t t h a t the p a r t i e s go to

mediat ion on t h i s i s sue , as wel l as the i s sues t h a t remain an

impediment to conf i rmat ion of any plan of reorgan iza t ion in t h i s

138



case . A s t a t u s hear ing to d i scuss th i s wi l l be held a t the

omnibus hear ing cur ren t ly scheduled fo r October 7, 2011, 11:30

am.

IV. CONCLUSION

For the foregoing reasons, the Court wi l l deny conf irmat ion

of the Plan, gran t bu t s tay the Equity Committee 's s tanding

motion, and d i r e c t the pa r t i e s to proceed to media t ion .

An appropr ia te Order i s a t t ached .

DATED: September 13, 2011 BY THE COURT:

Mary F. Walrath

United Sta tes Bankruptcy Judge

139



EXHIBITC





In re: ) Chapter 11

)

WASHINGTON MUTUAL, INC., et al., 1 ) Case No. 08-12229 (MFW))

Debtors. ) Jointly Administered) Hearing date: July 28,20 II at II :30 a.m. (Requested)

) Objection deadline: July 22,2011 at 5:00 p.m. (Requested)

MOTION FOR AN ORDER AUTHORIZING THE

OFFICIAL COMMITTEE OF EQUITY SECURITY HOLDERS TO COMMENCE

AND PROSECUTE CERTAIN CLAIMS OF DEBTORS' ESTATES

The Official Conunittee of Equity Security Holders (the "Equity Conunittee") of the

above-captioned debtors and debtors in possession (the "Debtors"), by and through its

undersigned counsel, hereby files this motion (the "Motion") for entry of an order pursuant to

Sections 105, 1103 and 1109 of title 11 of the United States Code (as amended, the "Bankruptcy

Code") authorizing the Equity Conunittee to conunence and prosecute certain claims and causes

of action (the "Claims") against Centerbridge Partners, L.P. and certain of its managed funds

("Centerbridge") and Aurelius Capital Management, LP and certain of its managed funds

("Aurelius") on behalf of the Debtors' Chapter 11 estates. In support of this Motion, the Equity

Conunittee respectfully states as follows:

PRELIMINARY STATEMENT

1. In this motion, the Equity Conunittee seeks standing to conunence and pursue an

action for equitable disallowance of the claims held by Aurelius and Centerbridge, two hedge

funds that are major creditors of the WMI Estate. As two members of the ad hoc creditors group

I The Debtors in these chapter II cases, along with the last four digits of each Debtor's federal tax

identification number, are: Washington Mutual, Inc. (3725) and WMI Investment Corp. (5396). The Debtors 'principal offices are located at 1301 Second Avenue, Seattle, Washington 98101.{00535688;vl}



known as the Settlement Note Holders,2 Aurelius and Centerbridge engaged in a campaign to

obtain confidential infonnation about the Estate's most valuable assets, including its claims

against JPMorgan Chase Bank, N.A. ("JPMC',). and then used that infonnation to infonn the

management of their WMI securities portfolio. This conduct violates federal securities laws,

cheats other less-well-connected creditors, and undermines public confidence in the bankruptcy

system. The factual basis for these claims is set forth in the proposed Complaint, attached hereto

as Exhibit A.

2. Rather than take steps to protect other, smaller creditors and stakeholders from

these hedge funds' predatory trading, the Debtors actually enabled that trading by feeding the

Settlement Note Holders confidential infonnation, then enabling trading based on a flimsy

determination that all 'material" confidential infonnation had been disclosed. The Debtors have

taken steps to block the Equity Committee's investigation into this conduct and have publicly

stated that the allegations are merit1ess. As a result, the Equity Committee seeks standing to

pursue these claims on the Debtors' estates' behalf.

3. At the hearing on confinnation of the Debtors' Modified Sixth Amended Plan, the

Equity Committee will proffer evidence of Aurelius' and Centerbridge's inequitable and

unlawful trading activities. The Equity Committee asks the Court to consider that evidence in

determining whether the claims against Aurelius and Centerbridge are colorable and should be

pursued.

The "Settlement Note Holders" as the term is used herein means Appaloosa Management L.P. and certainof its funds ("Appaloosa"), Owl Creek Asset Management, L.P. and certain of its funds ("Owl Creek"),Centerbridge and Aurelius.

{00535688;vl} 2

2



JURISDICTION

4. This Court has jurisdiction to consider this matter pursuant to 28 U.S.C. §§ 157

and 1334. This is a core proceeding pursuant to 28 U.S.C. § 157(b). Venue is proper before this

Court pursuant to 28 U.S.C. §§ 1408 and 1409. The statutory predicates for this Motion are

Bankruptcy Code Sections 105, 11 03 and 11 09.

BACKGROUND

5. On September 26, 2008 (the "Petition Date"), each of the Debtors filed a

voluntary petition for relief under chapter 11 of the Bankruptcy Code.

6. The Debtors continue to operate their businesses and manage their properties as

debtors in possession pursuant to Sections 1107(a) and 1108 of the Bankruptcy Code.

7. On January 11, 2010, the United States Trustee for the District of Delaware

appointed the Equity Committee.

8. On February 11, 2011, the Court granted the Equity Committee's motion to take

limited discovery from the Settlement Note Holders under Fed. R. Bank. P. 2004 [Docket No.

6725]. The Equity Committee subsequently obtained some documents, including trading

records, from each of the four funds and took one deposition of a representative of each fund.

RELffiF REQUESTED

9. By this Motion, the Equity Committee seeks entry of an order authorizing the

Equity Committee to initiate an adversary proceeding against Aurelius and Centerbridge for the

purpose ofprosecuting the Claims, and if appropriate, exclusive authority to propose one or more

settlements in respect of all or a portion of the Claims on behalfof the Debtors' estates.

{OOS3S688;v I} 3



BASIS FOR RELIEF

10. The Bankruptcy Code does not expressly confer power on an official committee

to pursue claims on behalf of a debtor's estate. Notwithstanding, courts have held that official

committees have an "implied, but qualified right . . . to initiate adversary proceedings in the

name of the debtor in possession under 11 U.S.C. §§ 1l03(c)(5) and 1l09(b)." In re STN

Enters., 779 F.2d 901, 904 (2d Cir. 1985). In fact, the Third Circuit Court of Appeals has held

that a bankruptcy court may authorize a party-in-interest, such as an official committee, to pursue

litigation on behalfof the estate when the debtor fails or refuses to do so. See In re Cybergenics

Com., 330 F.3d 548, 566 (3d Cir. 2003) ("(W]e are satisfied that the most natural reading of the

Code is that Congress recognized and approved of derivative standing for creditors' committees.

Sections 1109(b) and 1103 (c)(5), taken together, evince a Congressional intent for committees to

playa robust and flexible role in representing the bankruptcy estate, even in adversarial

proceedings."); In re Yes! Entm't Corp., 316 B.R. 141, 145 (D. Del. 2003) ("[Bankruptcy Court

has] the power to authorize a creditors' committee to sue derivatively to recover property for the

benefit of the estate."); see also In re Adelphia Commnc'ns, 330 B.R. 364, 372-73 n.l6 (Bankr.

S.D.N.Y. 2005) ("[T]he provisions of the Bankruptcy Code imply a qualified right for creditors'

committees to sue on behalf of an estate with bankruptcy court approval."); In re Adelphia

Commnc'ns Corp., 285 B.R. 848, 855 (Bankr. S.D.N.Y.) ("[I]t is permissible, not uncommon,

and often desirable for official committees to seek and obtain the right to assert [a] claim on

behalfof the estate . . . when there is doubt as to the debtor's ability or inclination to prosecute

the claim vigorously...."). Even if the Bankruptcy Code did not confer standing on statutory

committee's directly, the Third Circuit opined that such standing could be conferred through the

bankruptcy court's equitable powers. In re Cybergenics Corp., 330 F.3d 548 at 568 ("[T]he

{OOS3S688;vl) 4



ability to confer derivative standing upon creditors' committees is a straightforward application

ofbankruptcy courts' equitable powers").

11. Derivative standing should be conferred where: (1) a colorable estate claim exists

that (2) the debtor unjustifiably refused to pursue and (3) the bankruptcy court has permitted the

committee to initiate the action. See In re Yes! Entm't Corp., 316 B.R. at 145 (citing 0-1

Holdings, 313 B.R. 612, 628 (Bankr. D.N.J. 2004»; In re Valley Media, Inc., 2003 WL

21956410, at *2 (Bankr. D. Del. 2003).

A. The Complaint Presents Colorable Claims.

12. The requirement that a claim be "colorable" presents a low bar. See Adelphia at

376 (stating that the required showing for colorable is "a relatively easy one to make"). It only

requires the Court to decide whether the movant has asserted "claims for relief that on

appropriate proof would support a recovery." In re STN Enters., 779 F.2d at 905. That is, it

must be merely ''plausible'' or "not without some merit." In re Colfor, Inc., 1998 WL 70718, at

*2 (Bankr. N.D. Ohio 1998).

13. The proposed Complaint attached as Exhibit A sets out the factual basis for the

Claims and demonstrates that they are colorable. In addition, the Equity Committee will submit

evidence relevant to the Claims at the hearing on confirmation of the Debtors' Modified Sixth

Amended Plan of Reorganization, which is scheduled to beginon July 13, 2011. The Equity

Committee asks that the Court consider this evidence in conjunction with this motion for

standing and that the Court determine whether the claims are colorable based on that evidence.

B. The Debtors Will Not Prosecute The Claims.

14. Where the debtor-in-possession unreasonably fails to pursue an estate claim or

cannot do so effectively because of conflicts-of-interest. an official committee may step into the

{OOS3S688;vl} 5



debtor's shoes and prosecute the claim as the representative of the estate. See In re Cybergenics

Corp., 330 F.3d at 577.

15. The Debtors have made it abundantly clear in multiple filings that they will not

pursue the Claims. They have stated that the allegations that form the basis for the Claims are

meritless and represent nothing more than a delay tactic by the Equity Committee. (See, e.g.,

Debtors' Supplemental Response to the Objection of the Official Committee of Equity Security

Holders to Confirmation of the Modified Sixth Amended Plan of Reorganization, July 11, 2011,

[Docket No. 8131] at pp. 14-27). The Debtors' own involvement in the unlawful trading

activities, including the blessing of the Settlement Note Holders' trading while the funds were in

possession of confidential information about settlement negotiations with JPMC, renders the

Debtors incapable of acting in the Estate's best interest with respect to the Claims.

16. If successful, the Claims will benefit the estate. Aurelius and Centerbridge have

undertaken an inequitable and unlawful scheme to garner enormous profits on WMI's debt

instruments. The hedge funds stand to gain tens or even hundreds of millions in ill-gotten gains

if their claims against the Estate are paid in full. Disallowance of these tainted claims will allow

the Estate instead to distribute the funds to innocent stakeholders.

17. Authorization of the Equity Committee to pursue this adversary proceeding

against Aurelius and Centerbridge need not delay plan confirmation. If the Court determines that

the Debtors' Modified Sixth Amended Plan should be confirmed based on the evidence

submitted at the July 13, 2011 hearing, the Court can do so but order any distribution to Aurelius

or Centerbridge be reserved pending resolution ofthis action.

{OO535688;vl} 6



C. The Equity Committee Seeks Prior Court Approval To Prosecute The Claims.

18. The final question regarding derivative standing is whether the movant has

obtained Court approval prior to asserting claims on behalf of the estate. This factor is easily

met as that is precisely the relief requested in the Motion. For the reasons stated above, the

Equity Committee respectfully submits that it should be granted.

RESERVATION OF RIGHTS

19. The Equity Committee reserves its rights to pursue additional claims against the

Settlement Note Holders and other defendants not currently named in the Complaint.

NOTICE

20. Notice of this Motion has been provided to (i) the Office of the United States

Trustee; (U) counsel to the Debtors; (iii) counsel to the Official Committee of Unsecured

Creditors; (iv) counsel to each of the Settlement Note Holders; and (v) those parties entitled to

notice pursuant to Bankruptcy Rule 2002, in accordance with Local Rule 2002-1(b). In light of

the nature of the relief requested herein, the Equity Committee submits that no other or further

notice is necessary.

NO PRIOR REOUEST

21. No prior request for the relief sought herein has been made to this Court or any

other courts.

CONCLUSION

WHEREFORE, the Equity Committee respectfully requests that this Court enter an

Order, substantially in the form annexed hereto as Exhibit B (a) granting the Equity Committee

leave, standing and authority to commence and prosecute the Claims on behalf of the Debtors'

estates; (b) granting the Equity Committee authority to propose settlements of the Claims,

{OO535688jvl} 7



subject to Court approval; and (iii) providing the Equity Committee such other and further relief

as the Court may deem just, proper and equitable.

Dated: July 12,2011 ASHBY & GEDDES, P.A.

Wilmington, Delaware/s/ Gregory A. Taylor

William P. Bowden (DE BarNo. 2553)GregoryA. Taylor (DE BarNo. 4008)Stacy L. Newman (DE BarNo. 5044)500 DelawareAvenue, 8th FloorP.O. Box 1150Wilmington, DE 19899

Telephone: (302) 654-1888Facsimile: (302) 654-2067

[email protected] [email protected] [email protected]

Delaware Counsel to the Official Committee of

Equity Security Holders ofWashington Mutual,

Inc., et al., and with respect to the Settlement Note

Holders, only as to Centerbridge Partners, L.P.,

Appaloosa Management L.P., and Owl Creek Asset

Management, L.P.

-and-

SUSMAN GODFREY, L.L.P.

Stephen D. Susman (NY BarNo. 3041712)Seth D. Ard (NY BarNo. 4773982)654 Madison Avenue, 5th FloorNew York, NY 10065

[email protected] [email protected] [email protected]

{00535688;vl} 8

mailto:[email protected]














Parker C. Folse, III (WA Bar No. 24895)

Edgar Sargent (WA Bar No. 28283)

Justin A. Nelson (WA BarNo. 31864)

Daniel J. WaIker(WA BarNo. 38876)

1201 Third Ave., Suite 3800

Seattle, WA 98101Telephone: (206) 516-3880

Facsimile: (206) 516-3883

[email protected]

[email protected]

[email protected]

[email protected]

Co-Counsel to the Official Committee ojEquity

Security Holders oj Washington Mutual, Inc. et al.

-and-

SULLIVAN HAZELTINE ALLINSON LLC

/s / William D. Sullivan

William D. Sullivan (DE Bar No. 2820)

901 N. Market St., Suite 1300


Telephone: (302) 428-8191

Facsimile: (302) 428-8195

[email protected]

Conflicts Co-CounselJor the Official Committee oj

Equity Security Holders oJWashington Mutual,

Inc., et al., as to Aurelius Capital Management.

L.P.

{OOS3S68S;v I} 9













Exhibit A

(Complaint)

{00535688;vl}



---------------------------



Chapter 11)Inre: )

Case No. 08-12229 (MFW))WASHINGTON MUTUAL, INC., et al., t )

(Jointly Administered))Debtors. )

---------------------------)OFFICIAL COMMITTEE OF EQUITY )

SECURITY HOLDERS ON BEHALF OF )THE ESTATE OF WASHINGTON

MUTUAL, INC.,) Adv. Pro. No. -___ (MFW)

)

Plaintiff,)

)

v.)

)

)CENTERBRIDGE PAR1NERS, L.P.,

CENTERBRIDGE CREDIT PAR1NERS, )

L.P., CENTERBRIDGE CREDIT )PAR1NERS MASTER, L.P., AURELIUS

)CAPITAL MANAGEMENT, LP,

)AURELIUS CAPITAL MASTER, LTD.,

AURELIUS CONVERGENCE MASTER, )

LTD., AND ACP MASTER, LTD., )

)

Defendants, )

)

and )

)WASHINGTON MUTUAL, INC., )

)

Nominal Defendant. )

COMPLAINT

The Debtors in these chapter 11 cases, along with the last four digits of each Debtor's federal tax

identification number, are: Washington Mutual, Inc. (3725) and WMI Investment Corp. (5396). The Debtors'principal offices are located at 1301 Second Avenue, Seattle, Washington 98101.



Plaintiff, the Official Committee ofEquity Security Holders (the "Equity Committee" or

"Plaintiff'), representing shareholders of Debtor, Washington Mutual, Inc. ("Debtor" or

"WMI"), for their complaint against Defendants pursuant to Sections 105 and 510 of the

Bankruptcy Code, and Rules 7001 and 3007 of the Federal Rules of Bankruptcy Procedure,

allege, upon infonnation and belief, as follows:

NATURE OFACTION

1. This action seeks to redress the Defendants' abuse of the bankruptcy process by

inserting themselves into the Debtors' management of the Estate and then using confidential

infonnation that they learned as part of that process to unlawfully reap profits on their

investments in the Debtors' securities.

2. Both of the Defendants acquired material, n o n ~ p u b l i c infonnation about the

Debtors' assets and liabilities during the course of the bankruptcy. This non-public infonnation

included the tenns of settlement negotiations that the Debtors exchanged with JPMorgan Chase,

N.A. ("JPMC") in which JPMC offered the Estate billions ofdollars in exchange for a release of

claims. As far as the public was aware, at the time these negotiations were occurring, these

claims were still very much in dispute.

3. In addition to learning the terms of settlement negotiations, the Defendants were

given access to the Debtors' lawyers and advisors, including litigation counsel who provided

assessments of the Debtors' litigation claims. None of this infonnation was disclosed to the

public.

4. While in possession of this material, non-public infonnation about the value of

the Debtors' estate, both of the Defendants continued to trade in the Debtors' securities. Both

acquired tens of millions of dollars worth of the Debtors' bonds after learning about JPMC's



settlement offers and before the tenns of the final settlement with JPMC were announced to the

public. In addition, because both Defendants refused to restrict their ability to trade except

during limited periods, their management of the investment portfolio, including their decisions to

hold hundreds of millions in the Debtors distressed debt, is tainted by their knowledge of non

public information.

5. The Defendants stand to collect tens of millions of ill-gotten profits on their

investments in WMI securities. If the Debtors' Modified Sixth Amended Plan is approved, all of

the Debtors' senior and senior subordinated bonds will be paid in full, including post-petition

interest. The Defendants acquired most of these bonds at steep discounts, often at times when

the Defendants were aware of JPMC's offers to contribute billions of value to the Estate. This

profiteering from confidential information nominally obtained to further the interests of the

Estate caused injury to other creditors and claimants and also to the Estate itself. The

Defendants should not be pennitted to benefit from their inequitable conduct and their claims

should be disallowed.

JURISDICTION AND VENUE

6. This Court's jurisdiction is founded upon sections 157 and 1334 of title 28 of the

United States Code, in that this proceeding arises under title 11 of the United States Code (the

"Bankruptcy Code"), or arises in or is related to the above-captioned jointly administered chapter

11 cases under the Bankruptcy Code, which are pending in the United States Bankruptcy Court

for the District ofDelaware.

7. This civil proceeding is a core proceeding under sections 157(b)(2)(A), (B), (C),

(0), (H), (K) and (0) of title 28 of the United States Code.



8. Venue in this Court is appropriate under section 1409(a) of tide 28 of the United

States Code.

9. On ____ ,' 2011, the Court entered an Order [Docket No. --.J granting the

Equity Committee standing to commence this action.

TH E PARTIES AND OTHER KEY PARTICIPANTS

10. The Equity Committee is the statutory committee of equity holders duly

appointed on January 11, 2010 in the Debtors' chapter 11 proceedings by the Office of the

United States Trustee for the District ofDelaware.

11. Aurelius Capital Management, LP is a limited partnership engaged in the business

of, among other things, managing funds that acquire distressed debt and equity, with its principal

place ofbusiness in New York, New York. Aurelius Capital Master, Ltd., Aurelius Convergence

Master, Ltd., and ACP Master, Ltd are funds managed by Aurelius Capital Management, LP.

This Complaint refers to the funds and the management entity collectively as "Aurelius."

12. Centerbridge Partners, L.P. is a limited partnership engaged in the business of,

among other things, managing funds that acquire distressed debt and equity, with its principal

place of business in New York, New York. Centerbridge Credit Partners, L.P. and Centerbridge

Credit Partners Master, L.P. are funds managed by Centerbridge Partners, L.P. This Complaint

refers to the funds and the management entity collectively as "Centerbridge."

13. Upon information and belief, Owl Creek Asset Management, L.P. ("Owl Creek")

is a limited partnership engaged in the business of, among other things, managing funds that

acquire distressed debt and equity, with its principal place ofbusiness in New York.



14. Upon infonnation and belief, Appaloosa Management, L.P. ("Appaloosa") is a

limited partnership engaged in the business of, among other things, managing funds that acquire

distressed debt and equity, with its principal place ofbusiness in New Jersey.

15. The "Settlement Note Holders" comprise four hedge fund management entities,

Aurelius, Centerbridge, Appaloosa, and Owl Creek, and their affiliates and the funds that they

manage. Funds managed by each of these entities hold significant claims against the Estate in

various classes.

FACTS

History ofthe Settlement Note Holders Group.

16. The Settlement Note Holders started as two groups. The first group, Appaloosa

and Centerbridge, retained the same counsel to represent their joint interests in this bankruptcy

on or about September 2008. These two entities filed a single notice of appearance, a single

Rule 2019 statement and have always acted in concert in these proceedings.

17. The second group, Owl Creek and Aurelius, also began as one: they originally

belonged to a different ad hoc group, which has been referred to as the "WMI Note Holders,"

and which collectively held the other largest portion of the Debtors' estate and also acted in

concert to try to influence these proceedings.

18. In or around October 2009 Owl Creek and Aurelius left the WMI Note Holder

Group because of conflicts with senior noteholders. Shortly thereafter, Owl Creek and Aurelius

joined Appaloosa and Centerbridge to fonn the Settlement Note Holders. From that time until

very recently, these four entities have acted through the same counsel as a single group to jointly

advocate for their interests in this bankruptcy.



19. Beginning no later than January 2009, the Defendants and the other Settlement

Note Holders, in conjunction with other significant investors in the Debtors' securities, entered

into talks with counsel for the Debtors in efforts to obtain infonnation and exert influence over

the management of the Estate.

The Estate's Largest Assets Are Claims Against JPMorgan Chase.

20. From the beginning, the Settlement Note Holders' discussions with the Debtors

were focused in large part on the resolution of claims by the Estate against JPMC, which had

acquired the assets of WMI's subsidiary Washington Mutual Bank ("WMB'') the day before

WMI filed for bankruptcy protection.

21. The Estate's claims against JPMC represented by far the largest source of

potential recovery for WMI's creditors. Assets in dispute included a number of individual items

worth billions of dollars each: (1) over $4 billion that the Estate claimed WMI had on deposit at

WMB but over which JPMC maintained control and asserted a competing claim to ownership on

various grounds; (2) over $10 billion in collateral for certain WMI securities known as the Trust

Preferred Securities (''TPS''), the ownership of which was claimed by JPMC, WMI, and the

holders of the securities; (3) $2.6 billion in tax refunds due from the IRS, an amount that grew to

over $5 billion in November 2009 when the United States Congress extended the carry-back

period for tax losses.

22. The face amount of WMI's debt securities outstanding at the time of the

bankruptcy was approximately $6.65 billion. Each of the multi-billion dollar assets in dispute

with J P M C ~ t h e deposits, the TPS collateral, and the tax refunds-is individually material in the

context of the Estate as a whole, as were.a number of other assets in dispute between JPMC and

WMI.



27. On or around March 18,2009, JPMC responded to the White & Case settlement

offer with an offer of its own. JPMC's counter-offer reflected agreement that the $4 billion in

deposits would be turned over to the Debtors, less an amount representing a portion of the tax

refund claim, and that JPMC would receive the TPS collateral. It also reflected agreement on the

majority of the other items in dispute.

28. The terms of JPMC's counter-offer constituted material, non-public information

at all times at least through March 12,2010 when the terms of a global settlement between JPMC

and the Debtors were publicly announced

.!fqri[ Exchange ofSettlement Proqosals Between JPMC and the Debtors.

29. In mid-April, 2009, the Debtors and JPMC again exchanged settlement offers.

The terms of the April proposals were based on the part ies' March terms. Proposed resolution of

the deposits, the TPS collateral, and many other items remained essentially unchanged from the

proposals made in March. Each party agreed to compromises with regard to other terms and

JPMC offered the Estate a portion of the tax refund claim, which JPMC had claimed entirely for

itself in its March offer.

30. The April term sheets from the Debtors and from JPMC were shared with

attorneys for the Settlement Note Holders who told their clients that additional term sheets had

been exchanged.

Mav 6. 2009 Meeting Between the Sett lement Note Holders and the Debtors.

31. On learning that additional negotiations had taken place without its involvement,

Aurelius informed the Debtors that settlement proposals must not be made without the prior

approval of the Settlement Note Holders. In response, the Debtors agreed to hold a meeting with

the Settlement Note Holders on May 6, 2009 at which the Debtors would discuss the current



state of negotiations with JPMC and at which the Debtors' litigation counsel would make a

presentation on the Debtors' litigation claims. This meeting was held at the offices of Weil

Gotshal and Manges, counsel for the Debtors.

32. The contents of the April tenn sheets from the Debtors and from JPMC, and the

information about the JPMC negotiations and the presentation by the Debtors' litigation counsel

at the May 6, 2009 meeting constituted material, non-public information at all times at least until

March 12, 2010 when the terms of a global settlement between JPMC and the Debtors was

publicly announced.

March 2009 ConfidentialityApeement and Trading Restrictions.

33. Before March 2009, none of the Settlement Note Holders had restricted their

ability to trade in WMI securities. Nor had any of them established internal ethical screens

between employees who were involved with the work on the Estate and employees who were

analyzing WMI securities or making trading decisions with respect to those securities.

34. The Debtors and the Settlement Note Holders understood that participation in

settlement discussions with JPMC would expose the Settlement Note Holders to material, non

public information related to WMl's securities. The Debtors required the Settlement Note

Holders to enter into confidentiality agreements that would protect this information from

disclosure (temporarily, as explained below) and would also supposedly guard against trading

based on the information.

35. In order to avoid trading based on material, non-public information, the

confidentiality agreements required the Settlement Note Holders either to refrain entirely from

trading in the Debtors' securities during the pendency of the agreement or to establish an internal

ethical wall between individuals who were exposed to the confidential information and others at



the finn who might be making or influencing trading decisions. Centerbridge claims to have

refrained from trading during the pendency of the March 9, 2009 confidentiality agreement.

Aurelius claims to have established an internal ethical wall.

36. The term of the confidentiality agreements was sixty days, though it could be

shortened by agreement of the parties or in certain other circumstances. The confidentiality

agreements were entered into effective March 9, 2009 and ran for their entire sixty day term,

expiring on May 8,2009.

37. At the insistence of Aurelius and other Settlement Note Holders, the

confidentiality agreements contained a clause requiring the Debtors to publicly disclose any

confidential infonnation that was shared with the Settlement Note Holders during the pendency

of the agreement. The purpose of this clause was to permit the Settlement Note Holders, after

the expiration of the agreement, to freely trade in WMI securities based on all infonnation they

learned during the pendency of the agreement.

Aurelius and Centerbridge Traded Despite Knowing Material Information That Was NotDisclosed to the Public.

38. On April 30, 2009, the Debtors disclosed certain financial infonnation about

WMI, including the estimated size of the tax refund that would be available to the estate under

the then-applicable tax laws. The Debtors did not disclose the terms of the March or April offers

made by White & Case, the Debtors, or JPMC. Nor did they ever disclose the infonnation

shared with the Settlement Note Holders on May 6, 2009 about the state of negotiations with

JPMC or about the Debtors' litigation claims.

39. Both Aurelius and Centerbridge traded in the Debtors' securities in the three

weeks following the May 8, 2009 expiration of the confidentiality agreement. Aurelius acquired

$12 million in subordinated debt within the first three trading days after the agreement expired.



Centerbridge increased its holdings of WMI bonds by a net amount in excess of $20 million

within two weeks of the expiration of the confidentiality agreement.

Centerbridge andAppaloosa Exchanged Settlement otrers With JPMC In July and August.

40. In late June, 2009, Fried Frank, counsel for Centerbridge and Appaloosa,

provided its clients with a copy of the terms of the April offers that had been exchanged by the

Debtors and JPMC. Centerbridge and Appaloosa drafted a term sheet for another offer for global

settlement by modifying the Debtors' April term sheet. In July, Appaloosa and Centerbridge

provided their revised term sheet to JPMC, without the knowledge or involvement of the

Debtors. In August, JPMC provided another counter-offer. The majority of the items in dispute

remained unchanged from the April offers, including the agreements on the $4 billion deposit

claim and the TPS collateral. Both parties made additional concessions to the other with respect

to the claims for the tax refunds and the parties moved closer to reaching a global settlement.

41. The terms of the July and August offers exchanged by Centerbridge, Appaloosa,

and JPMC were material, non-pubHc information with respect to WMI's securities at all times at

least until the terms of a global settlement between JPMC and the Debtors was publicly

announced on March 12,2010.

42. Appaloosa voluntarily restricted itself from trading in WMI's securities while it

was engaged in the July and August negotiations with JPMC. Centerbridge did not restrict itself

and acquired a substantial number of the Debtors' securities during this period, increasing the

face amount of its net holdings of WMI securities by $85 million in the two week period

between August 4th and August 17th and an additional $50 million in between August 17th and

September 16th.

The Settlement Note Holders Again Entered Confidential Negotiations With JPMC and the

Debtors In November 2009.



43. In November 2009, the Debtors and the Settlement Note Holders again

collaborated on a global settlement offer to JPMC. The Debtors had obtained a copy of the

August AppaloosaiCenterbridge and JPMC tenn sheets. The November offer was drafted by the

Debtors and the Settlement Note Holders based on the August offers. Many provisions in the

offer remained unchanged from the March, April, and August tenn sheets, including the

agreement on the ownership of the deposits and the TPS collateral.

44. The Debtors provided the revised tenn sheet to JPMC on November 23,2009. On

November 30, 2009, JPMC responded with another counter-offer. This JPMC counter-offer

again expressed agreement on a majority of tenns, including the deposits and TPS collateral, and

offered the Debtors the full amount of the tax refund created by newly passed legislation that

extended the tax loss carry-back period. This refund attributable to the new law was estimated

by the Debtors to be worth at least $2.6 billion.

45. The tenns of the Debtors' November 23, 2009 settlement offer to JPMC and of

JPMC's November 30, 2009 settlement offer to the Debtors were material, non-public

information with respect to WMI's securities at all times at least until the tenns of a global

settlement between the Debtors and JPMC were publicly announced on March 12, 2010.

46. In order to participate in the November negotiations with JPMC, the Settlement

Note Holders again entered into confidentiality agreements with the Debtors. These agreements

were substantially the same as the agreements entered into in March 2009, including provisions

requiring the Settlement Note Holders to refrain from trading or to establish an ethical wall and

the provision requiring the Debtors, on the expiration of the agreement, to disclose all material,

confidential information that had been shared with the Settlement Note Holders.



47. The Settlement Note Holders entered into these confidentiality agreements on

November 16,2009 and they were tenninated early at the request of the Settlement Note Holders

on December 30, 2009.

48. The only confidential infonnation that the Debtors disclosed pursuant to their

obligations under the November 16, 2009 confidentiality agreements was an estimate of the size

of the tax refund attributable to the extended carry-back created by the new legislation. The

Debtors did not disclose any of the terms of their November 23, 2009 offer to JPMC or any of

the tenns of JPMC's November 30, 2009 c o u n t e r ~ o f f e r . Nor did they disclose any infonnation

about any subsequent negotiations with JPMC or discussions between the Debtors and any of the

Settlement Note Holders about further settlement offers.

Aurelius and Centerbridge Traded Based on Information Learned During the November

Negotiations.

49. All four Settlement Note Holders claim to have restricted themselves from trading

during the pendency of the November 16, 2009 confidentiality agreements.

50. Defendants Aurelius and Centerbridge engaged in significant trading activity

immediately after the expiration of the November 16, 2009 confidentiality agreements. On

December 31, 2009, the day after the confidentiality agreement expired, Aurelius acquired over

five-hundred thousand PIERS, the debt security that is last to recover under WMI's priority

scheme. Centerbridge also acquired a substantial volume of PIERS in the t h i r t y ~ d a y period

following the expiration of the confidentiality agreem,ent.

51. Negotiations between the Debtors and JPMC continued in January and February

2010. A final settlement was reached in early March and the tenns of that settlement were

announced in open court on March 12, 2010. Under that settlement agreement, the Debtors

received the $4 billion in deposits, JPMC received the TPS collateral free of any claim by the



Debtors, and the tax refunds were divided approximately $2.160 billion to JPMC, $2.196 billion

to the Debtors, $850 million to the FDIC, and $335 million to bondholders ofWMB.

FIRST CLAIM FOR RELIEF

(Equitable Disallowance ofDefendants' Claims or, Alternatively, EquitableSubordination Under 11 U.S.C. § SlO(c) Against All Defendants)

52. Plaintiff realleges the paragraphs above as if fully set forth herein.

53. As alleged herein, Aurelius and Centerbridge engaged in wrongful conduct that

injured the Debtors, other creditors, and the Debtors' equity owners.

54. As alleged above, with respect to the wrongful conduct directed at the Debtors

and equity, each of the named Settlement Note Holders acted as a single unit. Indeed, these

entities held themselves out to the Debtors and this Court as one unit on many occasions and all

acted under the same counsel.

55. Aurelius' and Centerbridge's conduct was inequitable because both funds

breached fiduciary duties for their own gain. Aurelius and Centerbridge assumed fiduciary

obligations to the Debtors, to other creditors and to equity in several ways: (1) by buying up

large quantities of WMI debt securities in order to obtain a blocking position and asserting

control over key decisions in the bankruptcy; (2) by undertaking settlement negotiations with

JPMC on behalf of the entire Estate; (3) by becoming temporary insiders who were made privy

to confidential information concerning the Debtors.

56. The Defendants violated these fiduciary duties by, inter alia, purchasing the

Debtors' securities both for their own profit and to wield further control over the course of

settlement negotiations. They used their control to benefit themselves at the expense of other

claimants, including equity and certain impaired creditors. For example, they used their control

to negotiate a settlement that paid them out nearly in full - and far above the post-petition prices



they paid for the securities - without attempting to pursue a recovery for equity or certain

impaired creditors.

57. Aurelius' and Centerbridge's conduct was also inequitable because it violated

federal securities laws. Both funds traded in the Debtors' securities while in possession of

material, non-public information. As discussed more fully above, material non-public

information in the possession of Aurelius and Centerbridge at the time they engaged in trades of

WMI securities included: (1) the terms of the January 22,2009 settlement term sheet that a group

of creditors including the Settlement Note Holders provided to the Debtors; (2) the terms of the

March 2009 settlement proposals by the clients of White & Case on behalf of the Estate and by

JPMC; (3) the terms of the April settlement proposals by the Debtors and JPMC; (4) information

presented by the Debtors and the Debtors' litigation counsel at a meeting on May 6,2009; (5) the

terms of settlement proposals made by Appaloosa and Centerbridge and by JPMC in July and

August 2009; (6) the terms of settlement proposals made by the Debtors in conjunction with the

Settlement Note Holders and by JPMC in November 2009.

58. Aurelius and Centerbridge obtained this material, non-pUblic information while

serving as temporary insiders of the Debtors and Aurelius' and Centerbridge's use of this

information for their individual profit violates their duties as temporary insiders.

59. Aurelius and Centerbridge also obtained the material, non-public information

identified in categories (2), (3), (4), and (6) set forth in paragraph 57 above while bound by

confidentiality agreements that required Aurelius and Centerbridge to use the information only

for the Debtors' corporate purpose of advancing settlement negotiations with JPMC. Aurelius'

and Centerbridge's use of this information to inform trading for their individual profit constitutes

misappropriation of the information.



60. Aurelius and Centerbridge engaged numerous trades of the Debtors' securities

while in possession of this infonnation and their decisions to execute those trades were based, in

whole or in part, on this infonnation.

WHEREFORE, Plaintiff respectfully requests that the Court enter judgment in favor of

Plaintiff equitably disallowing Defendants' claims in whole or in part and providing any other

equitable or legal relief that the Court deems appropriate.

Dated: Ju ly 12, 2011 ASHBY & GEDDES, P.A.Wilmington, Delaware

/s / Gregory A. Taylor

William P.Bowden

(DEBar

No. 2553)Gregory A. Taylor (DE Bar No. 4008)

Stacy L. Newman (DE Bar No. 5044)

500 Delaware A venue, 8th Floor

P.O. Box 1150


Telephone: (302) 654-1888

Facsimile: (302) 654-2067

[email protected]

[email protected]

[email protected]

Delaware Counsel to the Official Committee o fEquity Security Holders ofWashington Mutual,

Inc., et al., and with respect to the Settlement Note

Holders, only as to Centerbridge Partners, L.P.,

Appaloosa Management L.P., and Owl Creek Asset

Management, L.P.

-and-

SUSMAN GODFREY, L.L.P.

Stephen D. Susman (NY BarNo. 3041712)

Seth D. Ard (NY Bar No. 4773982)

654 Madison A venue, 5th Floor

New York, NY 10065

[email protected]

dwalker@susmangod:&ey.com

sard@susmangod:&ey.com





http://slidepdf.com/reader/full/dwalker@susmangod:&ey.com

http://slidepdf.com/reader/full/sard@susmangod:&ey.com





http://slidepdf.com/reader/full/dwalker@susmangod:&ey.com

http://slidepdf.com/reader/full/sard@susmangod:&ey.com





In re: ) Chapter 11

)

WASHINGTON MUTUAL, INC., et ai., ) Case No. 08-12229 (MFW))

Debtors. ) Jointly Administered

)) Related Docket No.__ _

ORDER GRANTING TH E OFFICIAL COMMITTEE OF EQUITY

SECURITY HOLDERS STANDING TO COMMENCE AND PROSECUTE CERTAIN CLAIMS OF DEBTORS' ESTATES

Upon the motion (the "Motion") of the Official Committee of Equity Security Holders

(the "Equity Committee") of the above-captioned debtors and debtors in possession (the

"Debtors") for entry of an order pursuant to Sections 105, 1103 and 1109 of title 11 of the United

States Code (as amended, the "Bankruptcy Code") authorizing the Equity Committee to

commence and prosecute certain claims and causes of action (the "Claims") against Centerbridge

Partners, L.P. and certain of its managed funds ("Centerbridge") and Aurelius Capital

Management, LP and certain of its management funds ("Aurelius") on behalf of the Debtors'

Chapter 11 estates; and the Court having considered the Motion and the Complaint; and the

Court having jurisdiction to considering the Motion and the relief requested therein pursuant to

28 U.S.C. § 1334; and this being a core proceeding pursuant to 28 U.S.C. § 157(b); and venue

being proper before this Curt pursuant to 28 U S.C. §§ 1408 and 1409; and due and proper notice

of the Motion having been provided, and it appearing that no other or further notice need be

provided; and the Court having determined that the legal and factual bases set forth in the Motion

establish just cause for the relief granted herein; and upon all of the proceedings had before the

Court, and after due deliberation and sufficient cause appearing therefore, IT IS HEREBY

ORDERED as follows:

{OOS3S688;vl}



1. The Motion is granted.

2. The Equity Committee is authorized to file a complaint. substantially in the fonn

attached to the Motion as Exhibit A, and pursue the causes of action stated therein against

Centerbridge and Aurelius.

3. The Equity Committee is granted sole authority to propose settlements of the

Claims, subject to Court approval.

4. This Court shall retain jurisdiction with respect to all matters and disputes arising

out ofor relating to this Order.

Dated: Wilmington, Delaware______ -7 . 2011

THE HONORABLE MARY F. WALRATH

UNITED STATES BANKRUPTCY COURT

{00535688;vl} 2



EXHIBITD



12

3

4

5

6

78

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

Page 1


DISTRICT OF DELAWARE

- - - - x

In the Matter of:

WASHINGTON MUTUAL, INC., e t a l . , Case No. 08-12229 (MFW)

Debtors. (Joint ly Administered)

x

- x

NANTAHALA CAPITAL PARTNERS, LP,

BLACKWELL CAPITAL PARTNERS, LLC,

AXICON PARTNERS, LLC,

BRENNUS FUND LIMITED,

COSTA BRAVA PARTNERSHIP I I I , LLP,

SONTERRA CAPITAL MASTER FUND, LTD.

Pla in t i f f s , Adv. Proc. 10-50911 (MFW)

v.

WASHINGTON MUTUAL, INC.,

MICHAEL MURPHY,

WILLIAM REED, JR.

THOMAS LEPPERT,

STEPHEN CHAZEN,

STEPHEN FRANK,

REGINA MONTOYA,

PHILLIP MATTEWS,

ORIN SMITH,

MARGARET OSMER MCQUADE,

JAMES STEVER,

FRANCIS BAIER,

DAVID BONDERMAN,

CHARLES LILLIS

Defendants.

- - - - - - - - - - - - - - - - x

VERITEXT REPORTING COMPANY

212-267-6868 www.veritext.com 516-608-2400

http://slidepdf.com/reader/full/www.veritext.com




5

10

15

20

25

Page 2

1 - - - - - - - - - - - - - - - - -x

MICHAEL WILLINGHAM and ESOPUS

2 CREEK VALUE LP,

3 Pla in t i f f s ,

v. Adv. Proc. 10-51297 (MFW)

4WASHINGTON MUTUAL, INC.,

Defendant .

6 - - - - - - - - - - - - - - - - -x

-x

7 WASHINGTON MUTUAL, INC. and

WMI INVESTMENT CORP.

8

P l a i n t i f f ,

9

v. Adv. Proc. 10-53420 (MFW)

PETER J . AND CANDANCE R. ZAK

11 LIVING TRUST OF 2001 U/D/O

AUGUST 31, 2001, ET AL.

12

Defendant .

13 - - - - - - - - - - - - - - - - -x

- - - - - - - - - - - - - - - - -x

14 OFFICIAL COMMITTEE OF UNSECURED

CREDITORS OF WASHINGTON MUTUAL,

INC., ET AL., ON BEHALF OF CHAPTER11 ESTATES OF WASHINGTON MUTUAL,

16 INC., ET AL.

P l a i n t i f f ,

17 v. Adv. Proc. 10-53149 (MFW)

18 ALEXANDER SASHA KIPKALOV,

- - - -x

19

AMY DRIVER ANDERSON, Adv. Proc. 10-53135 (MFW)

- -x

ANTHONY BOZZUTI, Adv. Proc. 10-53131 (MFW)

21- - -x

CHANDAN SHARMA, Adv. Proc. 10-53147 (MFW)

22 - -x

DAVID M. SCHWARTZ, Adv. Proc. 10-53144 (MFW)

23 - -x

EDWARD F. BACH, Adv. Proc. 10-53132 (MFW)

24 - - - - - - - - - - - - - -x

GREGORY H. WOOD, Adv. Proc . 10-53137 (MFW)i - - - - - - - - - - - - - -x


212-267-6868 www.veritext.com 516-608-2400





1

2

3

4

5 5

6

7

8

9

10 10

11

12

13

14

15 15

16

17

18

19

20 20

21

22

23

25 24

1

2

3

4

6

7

8

9

11

12

13

14

16

17

18

19

21

22

23

24

- - - - - - - - - - - - - -x

HENRY J . BERENS,

- - - - - - - - - - - - - -x

HOWARD MATTHEWS,

- - - - - - - - - - - - - -x

JAMES CORCORAN,

- - - - - - - - - - - - - - - - -x

JIANGUO ZHONG,

- - - - - - - - - - - - - - - - -x

JOHN M. BROWNING,

- - - - - - - - - - - -x

JON I WYCKOFF,

- - - - - - - - - - - - - -x

KEITH O. FUKUI,

- - - - - - - - - - - - - - - - -x

MARC MALONE,

- - - - - - - - - - - - - - - - -x

MATTHEW WAJNER,

- - - - - - - - - - - - - - - - -x

MICHAEL R. ZARRO,

- - - - - - - - - - - - - - -x

NIRMAL BAlD,- - - - - - - - - - - - - -x

PETER GERRALD,

- - - - - - - - - - - - - -x

PETER HELLER,

- - - - - - - - - - - - - -xRACHEL M. MILEUR a /k /a

RACHELLE M. MILEUR,

- - - - - - - - - - - - - - - - -x

RICHARD BLUNCK,

- - - - - - - - - - - - - -x

ROBERT C. HILL,- - - - - - - - - - - - - -x

STEPHEN E. WHITTAKER,

- - - - - - - - - - - - - -x

STEVEN HERUTY,-- - - - - - -

- -- - - -x

THOMAS E. MORGAN,- - - - - - - - - - - - - - - - -x

WILLIAM K. GLASBY,

Defendants.- - - - - - - - - - - - - - - - -x

Adv.

Adv.

Adv.

Adv.

Adv.

Adv.

Adv.

Adv.

Adv.

Adv.

Adv.

Adv.

Adv.

Adv.

Adv.

Adv.

Adv.

Adv.

Adv.

Adv.

Proc.

Proc.

Proc.

Proc.

Proc.

Proc.

Proc.

Proc .

Proc .

Proc.

Proc.

Proc.

Proc.

Proc.

Proc.

Proc.

Proc.

Proc.

Proc.

Proc.

Page 3

10-53134 (MFW)

10-53134 (MFW)

10-53134 (MFW)

10-53148 (MFW)

10-53156 (MFW)

10-53151 (MFW)

10-53139 (MFW)

10-53152 (MFW)

10-53136 (MFW)

10-53143 (MFW)

10-53145 (MFW)

10-53138 (MFW)

10-53146 (MFW)

10-53133 (MFW)

10-53157 (MFW)

10-53153 (MFW)

10-53150 (MFW)

10-53141 (MFW)

10-53154 (MFW)

10-53142 (MFW)


212-267-6868 www.veritext.com 516-608-2400





5

10

15

20

25

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

1

2

3

4

6

7

8

9

11

12

13

14

16

17

18

19

21

22

23

24

Page 4

4

United Sta tes Bankruptcy Cour t

824 North Market S t r e e t

Wilmington, Delaware

Ju ly 18,

1:00 AM

2011

B E FO R E:

HON. MARY F. WALRATH

U.S. BANKRUPTCY JUDGE

ECR OPERATOR: BRANDON MCCARTHY


212-267-6868 www.veritext.com 516-608-2400





1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

WASHINGTON MUTUAL INC., ET AL.

Page 47

debtors . This wa s prepared in connect ion with responding to

the discovery reques ts o f the equi ty committee, and it l ays ou t

a l l of our t r ades from the incep t ion of the pos i t ion through

October the 6th . You ' l l see the l a s t t r ade here i s on the

30th . That ' s the l a s t t rade ins ide t h a t window, the 30th of

September, 2010.

BY MR. ECKSTEIN:

Q. And fo r purposes of j u s t fol lowing along t h i s e xh ib i t ,

because we're going to come back to it a couple of t imes, am I

cor rec t , Mr. Gropper, t ha t the l a s t t rade i s on the f i r s t page

a t the top and th e f i r s t t r ade i s on the l a s t page a t the

bottom?

A. Correc t . It's in reverse chronologica l order .

Q. Thank you. Did you a s s i s t with the creat ion of t h i s

document?

A. Yes.

Q. Now, I 'd l i ke to walk you through some of -

MR. ECKSTEIN: Your Honor, I guess cons i s ten t with

what I had sa id or ig ina l ly , I 'd l i ke to move Aurel ius Exh ib i t 8

in to evidence.

MR. FOLSE: No object ion , Your Honor.

THE COURT: A ll r i gh t . It's admit ted.

(Aurel ius Exh ib i t 8, Chronological Trade His tory , was hereby

rece ived in to evidence . )

Q. Now, Mr. Gropper, I 'd l i ke to walk you through some of the


212-267-6868 www.veritext.com 516-608-2400





1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25


Page 48

key events in th i s case , and I 'm going to break them down in to

severa l t ime per iods . Th e f i r s t per iod I want to walk you

through i s between your f i r s t purchase of Washington Mutual

secu r i t i e s in October 2008 and the beginning o f - - and March

2009. I s t h a t okay?

A. Yes.

Q. Okay. Pr ior to March 2009, d id Aurel ius have any

involvement in set t lement negot ia t ions in t h i s case?

A.We

d idnot .

Q. Pr ior to March 2009, did Aurel ius have any con tac t with

the debtors?

A. Yes.

Q. Can you expla in?

A. Yes. At the beginning o f the case we thought t h a t it wa s

very impor tant fo r the debtors to commence l i t i g a t i o n in order

to recover - - turn over l i t i g a t i o n in order to recover the

depos i t from JPMorgan. I mentioned e a r l i e r t h a t we thought the

depos i t r i g h t fu l ly belonged to the holding company. And we

thought t h a t it crea ted not the r i gh t incen t ives to se t t l e the

case i f , i n f a c t , JPMorgan was s i t t i ng on the depos i t and

lending it ou t and earnings i t s i n t e r e s t spread and paying the

e s t a t e , you know, somewhere between th ree and twenty bas i s

po in t s depending on which month you go by. So we thought it

was very impor tant fo r the debtors to ass iduous ly pursue t ha t

l i t i g a t i o n as and aga ins t JPMorgan. We had no r e la t ionsh ip

VERlTEXT REPORTING COMPANY

212-267-6868www.veritext.com 516-608-2400





1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25


Page 50

Q. So you had no agreement governing t rad ing in the

Washington Mutual secur i t i e s?

A. No, we never discussed t rad ing .

Q. And was there an agreement governing how th e members of

the group would vote se c u r i t i e s in connect ion with a plan?

A. No.

Q. Can you expla in what was the reason fo r Aurel ius decid ing

to jo in the White & Case group in January 2009?

A. Well , by t ha t t ime the pos i t ion had grown in s i ze , and as

i s typ ica l fo r us in cases , we wanted to become involved in the

r es t ruc tur ing process . Oftentimes, we do t h a t by jo in ing with

o ther cred i to r s who are a lready represented by counsel in orde r

to save cos t and economize and so the cour t won' t have, you

know, a whole bunch of c red i to r s showing up f i l ing d i f f e r e n t

pleadings . So we jo ined t h a t ad hoc group of cred i to r s

represented by White & Case.

Q. Okay. Now, pr i o r to March 2009 d id you or anyone a t

Aurel ius par t i c ipa te in any meetings with the debtor or

JPMorgan Chase?

A. No.

Q. And pr i o r to March of 2009 d id you or anyone from Aurel ius

receive mater ia l nonpublic informat ion about the debtors?

A. We did not .

Q. And l e t me tu rn your a t t en t ion to the second per iod , which

i s beginning in March 2009. Did t he re come a t ime when


212-267-6868 www.veritext.com 516-608-2400





1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25


Page 51

Aurel ius became more ac t ive ly involved in set t lement

negot ia t ions in t h i s case?

A. Yes. In March 2009 the debtors reached ou t to White &

Case and asked t ha t some members of t h a t group g e t r e s t r i c t ed

fo r the l im i t ed purpose of a t tempt ing to negot ia te a set t lement

with JPMorgan and poten t i a l ly the FDIC. Debtors reached ou t

and made the same reques t to the fo lks in the Fr ied Frank

group.

Q. Now, in connect ion with t h a t r eques t d id you come to en te r

in to a conf iden t i a l i ty agreement in t h i s case?

A. We did . We have of ten in cases ente red in to

conf iden t i a l i ty agreements t ha t would r e s t r i c t us fo r a l im i t ed

pe r iod o f t ime, a f t e r which any information t ha t we l ea rn would

be disclosed by the debtors . It ac tua l ly represen ts kind of

the be s t p r a c t i c e way to en te r in to set t lement negot ia t ions in

Chapter 11s , r a the r than j u s t doing them on an ad hoc bas i s and

saying gee , l e t ' s have a meet ing. This wa s ac tua l ly a way

where we formal ized our agreement, we formal ized the per iod

during which we would be r e s t r i c t ed , and we formal ized the

requirement by which the debtors had to d i sc lo se any

information t ha t we had obta ined dur ing the c on f ide n t i a l i t y

per iod . So it rea l ly l a id out the metes and bounds of how the

negot ia t ions would work with prec i s ion .

Q. Mr. Gropper, l e t me turn your a t t en t ion to what i s marked

Aurel ius Exh ib i t 16 and ask you if you can i de n t i f y t ha t


212-267-6868 www.veritext.com 516-608-2400





1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25


Paqe 63

MR . ECKSTEIN: Thank you.

Q. Mr. Gropper , s i m i l a r l y , Aurel ius Exh ib i t 38, I'll ask you

to i de n t i f y t ha t document.

A. It's the c on f ide n t i a l i t y aqreement t h a t Weil Gotshal used

j u s t a month aqo to help f a c i l i t a t e a consensual neqo t ia ted

r eso lu t ion of th e Lehman Brothers cases .

Q. Did Aurel ius s iqn t h i s c on f ide n t i a l i t y aqreement?

A. Yes, we did .

Q.And d id

yous iqn it

onbeha l f

o fAurel ius?

A. Yes.

Q. And d id you neqo t ia te t h i s document on Aure l iu s ' s beha l f ?

A. Yes.

Q. And a re you f ami l i a r with its te rms?

A. I am.

Q. And d id t h i s a l so con ta in a provis ion t h a t ob l iqa ted

Lehman to d i sc lo se mate r ia l nonpubl ic in format ion provided to

th e s iqna to r i es a t th e exp i ra t ion of t he aqreement?

A. Yes.

MR. ECKSTEIN: Your Honor, I 'd l i ke to move Exh ib i t 38

i n to evidence .

MR. FOLSE: Same ob jec t ions , Your Honor.

THE COURT: Well

MR. ECKSTEIN: And f i na l l y

THE COURT: Overruled, and then the ex h i b i t i s


212-267-6868 www.veritext.com 516-608-2400





1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25


Page 64

(Aurel ius Exh ib i t 38, Lehman Brothers Conf iden t i a l i t y

Agreement, was hereby rece ived in to evidence . )

MR. ECKSTEIN: Thank you, Your Honor.

Q. And f i na l l y , Mr. Gropper, I 'd l i ke to - - you to do th e

same th ing with Exh ib i t 39.

A. It's the c on f ide n t i a l i t y agreement we en te r ed in to in

Capmark. It's an agreement t h a t I negot ia ted and s igned , and

it conta ined a s i m i l a r c leans ing provis ion .

MR. ECKSTEIN: Your Honor, if I may, I 'd l i ke to move

t ha t e xh ib i t in to evidence as wel l .

MR. FOLSE: Objec t ion , hearsay and re levance , Your

Honor.

THE COURT: Overruled. It's admi t ted .

(Aurel ius Exh ib i t 39, Capmark Conf iden t i a l i t y Agreement, was

hereby rece ived in to evidence . )

Q. Thank you, Mr. Gropper . L et me tu rn back to the March

c on f ide n t i a l i t y agreement in t h i s case t ha t was ente red in to

with the debtors . Ca n you expla in to the Cour t what happened

a f t e r Aurel ius s igned the c on f ide n t i a l i t y agreement on

March 9th , 2009?

A. Yes. Again, there were f ive members o f th e White & Case

group and two members o f the Fr ied Frank group t h a t s igned t h i s

agreement , and a l l seven o f us were inv i ted to a meeting a t

Su l l ivan and Cromwell 's midtown of f i c e . They were

Q. Who i s Sul l ivan and Cromwell in t h i s case?


212-267-6868 www.veritext.com 516-608-2400





1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25


Page 65

A. They were counsel to JPMorgan. And the c r e d i t o r s were pu t

in one room. JPMorgan was in one room. The FDIC was in

another . And the - - bu t the deb tors helped to organize t h i s

meet ing to he lp fac i l i t a t e a negot ia ted r eso lu t ion .

Q. And what was discussed a t t h i s meeting?

A. Well , when we f i r s t ar r ived a t the meet ing Mike Walsh from

Weil Gotshal and Brian Rosen came in to the c red i to r room and

l a id ou t fo r us a - - what t h e i r suggestion o f what th e debtor ' s

proposal should beto JPMorgan as an

opening proposalto

a t tempt to reso lve these cases . In order to unders tand t h i s

proposal we asked Mr. Rosen and Mr. Walsh a c tua l l y ,

Mr. Kostoros was t he re as we l l - - we asked mainly Mr. Kostoros

a number of ques t ions about the a s s e t s o f the debtors .

He provided to us a very impor tant piece o f information,

which wa s t h a t the ta x refunds t h a t Washington Mutual cou ld

expec t were in the range of 2.6 to th ree bi l l i on dol l a r s . That

wa s no t something t h a t was known to us p r i o r t h a t meet ing. It

was obviously a very mater i a l i npu t fo r us, because we could

only go o f f th e GAAP f i na nc i a l s . There were some other

ques t ions we asked Mr. Kostoros about the e s t a t e , some of which

he answered b u t f rankly , most of which he sa id he would no t

answer because he d i d n ' t want to be - - he, Mr. Kostoros , d i d n ' t

want to be in a pos i t ion where he had to d i sc lo se the answer to

those ques t ions a t the end of the conf iden t i a l i ty per iod . So

he wa s qui te c a r e f u l about what he d id and d id not say to us a t


212-267-6868 www.veritext.com 516-608-2400





1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25


Page 67

proposa l a t t h a t meet ing, so the meet ing ended shor t ly

the r e a f t e r . It was sometime in the middle o f the day.

Q. Now, l e t me tu rn your a t t e n t i on to Aurel ius Exh ib i t 18 and

ask you if you can i de n t i f y th e document.

A. This i s an e-mai l from Mike Walsh of Weil Gotshal l ay ing

out the terms t ha t were provided to JPMorgan ora l ly a t t ha t

meet ing. It ac tua l ly was, I lea rned t he r e a f t e r , reduced to

wri t ing and then submit ted by Mr. Walsh to JPMorgan,

s imul taneous ly copying th e c r e d i t o r s . So we received the

wri t t en form a t the same t ime JPMorgan d id .

Q. NOw, can you summarize what you unders tood to be the main

e lements , the main bus iness elements o f t h i s proposa l?

A. Yes. I th ink one element was, o f course , t ha t the depos i t

was l i be r a t e d to WHI. I spent some t ime e a r l i e r expla in ing why

we thought t ha t was the r i g h t r e s u l t in the case . And then

bu t the r e a l , I would say, meat of t h i s proposa l was rea l ly

under the box - - I see it's highl igh ted - - ca l led tax i s sues .

And t h i s was a sp l i t t i n g , if you wi l l , of the tax refund

between the e s t a t e and JPMorgan, which served to reso lve both

th e ownership i ssue associa ted with the tax re fund as wel l as

the f raudulen t conveyance claims I r e f e r r ed to e a r l i e r and the

preference c la ims . So there was a l o t being resolved in t h i s

one heading.

And the way t h i s proposa l worked i s t h a t the f i r s t 500

mil l ion do l l a r s of taxes rece ived went to WHI, and then the


212-267-6868 www.veritext.com 516-608-2400





1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25


Page 68

remainder was s p l i t s i x t y - f o r t y , excuse me, in favor of WMI.

And then there was a b i l l t ha t had been pending in Congress

e a r l i e r t h a t year t ha t had subsequent ly dropped out o f

considerat ion , bu t it provided t ha t companies could extend the

look back fo r n e t opera t ing losses to rece ive a tax refund from

th ree years to f ive years . And so t h a t addi t iona l amount due

to 2008 extended f ive -year car ry back , t ha t r e f e r s to t ha t ,

which i s r ea l ly th e tax refunds a l locab le to years four and

year f ive . An d t ha t was to be s p l i t eigh ty percen t to WMI,

with the remainder going to JPMorgan.

And then there were a number of o ther terms, a number o f

o ther a s se t s , and I c e r t a in l y d on ' t want to minimize them by

no t going in to them because f rankly , t he y ' r e s i gn i f i c a n t from a

dol l a r perspect ive . But t hey ' re l a t e r on in the term shee t .

MR. ECKSTEIN: Your Honor, I 'd l i ke to move Aurel ius

Exh ib i t 18 in to evidence.

MR. FOLSE: No object ion .

THE COURT: It's admit ted .

(Aurel ius Exh ib i t 18, E-mai l from Weil Gotshal , was hereby


MR. ECKSTEIN: Thank you.

Q. NOw, Mr . Gropper, do you know whether JPMorgan Chase

responded to t h i s proposal?

A. Well , I th ink a t the t ime I r e f e r r ed to t h e i r response as

the non-response response . What they ac tua l ly d id was they put


212-267-6868 www.veritext.com 516-608-2400





1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25


Page 70

give over the depos i t was, you know, not news, because they had

al ready ta lked about doing it kind of in exchange fo r nothing

e lse very ear ly on in the case .

But other than t h a t , JPMorgan effec t ive ly sa id , we win on

every other l ega l dispute , which I f rankly found to be no t a t

a l l commensurate with the legal r igh ts of the par t i es . I mean,

take the ownership i s sue of the tax refund. The purchase and

sa le agreement provided - - it sa id nothing about whether or not

the tax asse t s were t ransferred to JPMorgan, and it was a

pre t ty big as se t so , you know, one would th ink t h a t there may

be a mention of it.

But the only claim the subs idiary had to the tax asse t s of

the holding company were pursuant to a tax sharing agreement.

That ' s the tax sharing agreement t h a t we had reviewed. It was

publ ic ly f i l ed as an exhib i t t o the 10-K. And so the only way

the subSidiary could ge t a t the tax as se t was to exerc ise i t s

r i g h t under the tax sharing agreement. Well, t h a t ' s an

intercompany claim, and the purchase and sa le agreement

spec i f ica l ly carved out intercompany claims. So from our

perspect ive , speaking j u s t from Aure l ius ' s , our approach to

analyzing t h a t dispute , we sa id wel l , gee, it's pre t ty c lea r

t h a t in our view JPMorgan d i d n ' t , in f ac t , buy the tax asse t .

Addi t ional ly , there were s ix -and-a -ha l f bi l l i on dol l a r s of

downstream t r ansfe r s t h a t were made within one year of the

f i l i ng , two-and-a-half bi l l ion of which were made within ninety


212-267-6868 www.veritext.com 516-608-2400




1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25


Page 77

Q. And can you descr ibe what took place a t t h a t meeting?

A. Yes.

Q. I guess f i r s t , who a t tended the meeting, do you reca l l ?

A. Sure . I a t tended with counsel from Kramer Levin. E l l i o t t

a t tended with t h e i r counsel a t Stut tman Tre i s t e r . Owl Creek

a t tended . Mr. Uzzi was there as wel l . And then fo lks from

Weil Gotshal , Quinn Emanuel and Mr. Kostoros -

Q. Okay.

A. were there as wel l . The f i r s t p a r t of the meet ing we

c lea red the a i r from a process perspect ive . Again, we had

known t h a t the debtors had made another proposa l to JPMorgan.

I don ' t ac tua l ly r e c a l l whether we lea rned the te rms of t ha t

proposa l or no t . We know t ha t JPMorgan had responded to t ha t

proposa l . I do know t ha t we did not rece ive t ha t response from

JPMorgan.

So f rankly , we spent a very s ho r t amount o f t ime a t the

beginning o f the meet ing kind o f c lea r ing the a i r from a

process perspec t ive , as we thought t ha t it would not be

const ruct ive to spend more t ime on it. And then , f rankly , we

spent a l o t of t ime expla in ing our view of the case , rea l ly to

Quinn Emanuel. I mean, they were new to the case. They

were - - you know, had been in the case fo r a l l of two weeks.

And t hey ' re gr e a t lawyers , b u t they were ge t t i ng up to speed in

a very, very complex case where t he re were ac tua l ly l i t i g a t i o n

deadl ines t h a t needed to be responded to . We'd been working on


212-267-6868 www.veritext.com 516-608-2400





1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25


J?age 78

the case now fo r seven months and had spent a tremendous amount

of money and t ime understanding the var ious cla ims of WMI. So

the debtors were r ea l ly in a l i s t en ing mode a t th i s meeting and

al lowing us to t ransmi t to them our view of the var ious causes

of ac t ion and how to maximize value on behal f o f the es t a t e .

Again, we had - - we a t Aurel ius had pushed the debtors to

assiduously pursue l i t i g a t i o n aga ins t JJ?Morgan from very ear ly

on in the case . Th e debtors had no t heeded t h a t advice . The

debtors chose to take a d i f fe ren t tack . It's t h e i r case . And

so we a t Aurel ius had expressed a view t h a t had no t been

fol lowed, bu t we wanted to continue to express our opinion, as

d id the o ther c red i to r s who were presen t the re .

Q. Did the debtor communicate to you any mater i a l nonpublic

informat ion a t the May 6 meeting?

MR. FOLSE: Object ion , Your Honor. This phrasing of

the ques t ion c a l l s fo r a l e ga l conclus ion. He can ask

fac tua l ly what information they rece ived or d i d n ' t r ece ive , bu t

to s t i ck a l a be l on it doe s n ' t help .

THE COURT: A ll r igh t .

MR. ECKSTEIN: I 'm happy to rephrase , Your Honor.

THE COURT: A ll r igh t .

Q. Can you explain what informat ion, if any, the debtor

communicated to you a t the May 6 meeting?

A. Well , I wi l l say t h a t the May 6 meet ing s t a r t ed by

Mr. Rosen saying t h a t he wasn ' t going to provide any mater i a l


212-267-6868 www.veritext.com 516-608-2400





1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25


Paqe 79

nonpublic informat ion to us a t the meet inq. Mr. Rosen a l so

sa id a t t ha t meet inq t h a t based on d i sc lo su res t ha t had been

made in the monthly opera t inq r epor t o r t h a t had been f i l ed

pr i o r to t ha t meetinq t ha t everyone a t the meet inq was f ree to

t r ade . Those were the words t ha t he used . It turned ou t we

ac tua l ly had another day o r so on the c on f ide n t i a l i t y

aqreement, so we d id n ' t . But it was made very c l e a r t ha t the

debtor wasn ' t qoinq to provide us mater i a l nonpubl ic

in format ion . We confi rmed t h a t we d id no t want any mater i a l

nonpubl ic in format ion .

Q. Okay. At t h i s meet inq d id the debtors commit to inc lude

Aurel ius in a l l fu ture plan neqot ia t ions?

A. They ac tua l ly af f i rmat ive ly d id no t commit.

Q. NOW, d id there come a t ime when the conf iden t i a l i ty per iod

t h a t beqan on March 9th expi red?

A. Yes. It expired on May the 8 th .

Q. And in connect ion with the exp i ra t ion o f the

conf iden t i a l i ty pe r iod , d id the debtors t ake any act ion

cons i s ten t with the conf iden t i a l i ty aqreement , and in

pa r t i c u l a r paraqraph t h i r t een t ha t you spoke about ea r l i e r?

A. Yes. The debtors made disclosure in the March monthly

opera t inq r epor t t h a t was f i l ed on Apr i l 30 th , 2009, in which

they d i sc lo sed the mater i a l nonpubl ic informat ion t h a t we had

received dur inq the pendency o f the conf iden t i a l i ty aqreement.

Q. Ca n I ask you to tu rn your a t t en t ion to Aurel ius Exh ib i t


212-267 -6868 www. veritext.eom 516-608-2400



1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25


Page 80

24 and ask you to i de n t i f y the document?

A. That ' s the monthly opera t ing r epor t to which I j u s t

r e f e r r ed .

Q. This i s the monthly opera t ing r e po r t f i l e d by the debtors

fo r the month ending March 2009; i s t h a t co r rec t?

A. That ' s cor rec t .

Q. And d id t h i s document, in fac t , conta in the d i sc lo su res

t h a t you j u s t r e f e r r ed to?

A. Yes.

Q. Can you po in t the Cour t to where those d i sc lo su res were

made?

A. Yes. There were some minor d i sc lo su res in some of the

o ther notes , b u t the main disclosure was in note 5, which i s on

th e screen .

Q. That ' s the note t i t l ed " taxes"?

A. "Taxes" , r i g h t . And it says in the second- to - Ias t

sentence of the f i r s t paragraph, the "cu r ren t es t ima te fo r the

t o t a l expected re funds , n e t of po te n t i a l payments, i s in the

range of approximately 2 .6 to 3.0 bi l l i on d o l l a r s . " That

sentence was no t presen t in the monthly opera t ing r epo r t f i l ed

in the p r i o r month.

Q. And was there any o the r in format ion t h a t the debtors

disclosed in t h i s monthly opera t ing repor t?

A. Yeah. There were some o ther p ieces o f in format ion t h a t

were descr ibed in some o f the o the r no te s , I j u s t d o n ' t r e c a l l


212-267-6868 www.veritext.com 516-608-2400





1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25


Page 82

Addi t ional ly , we d id our own analys is to determine t h a t we

were not in possession of mater i a l nonpublic informat ion . We

are abso lu te ly compulsive about t h i s s t u f f , the consequence of

ge t t ing it wrong i s qui te severe , so we spent a lo t of t ime

making sure t h a t we fu l ly comply with the federa l secur i t i es

laws.

So, in t h i s i n s t ance , the only informat ion t h a t we had

t h a t wasn ' t d i sc losed in the monthly operat ing r epor t was the

back and for th with JPMorgan, in which the p ar t i e s were very,

very fa r apar t . So it was inconceivable , in our view, t h a t

th a t represen ted mater ia l nonpubl ic informat ion, and we

concluded t h a t we were f ree to t rade .

Q. Mr. Gropper, without reveal ing the conten t of any

discuss ions or advice, did Aurel ius consu l t with i t s secur i t i es

counsel in connection with making t h i s determinat ion?

MR. FOLSE: Your Honor, I 'm going to objec t to

test imony about t h i s . You c a n ' t ra i se as a bas i s fo r

at tempting to claim good fa i th - - I 'm sor ry , Your Honor.

Parker Folse on behal f o f the equi ty committee. I do

objec t to t h i s test imony. It seems improper to r a i s e advice of

counsel , in e f f e c t , as the bas i s fo r a claim of good f a i t h , and

ye t a t the same t ime, as se r t a pr iv i l ege which Aurel ius has

done to prevent the disc losure of the analys is t h a t t h e i r

secu r i t i e s counsel d id and gave them and the d iscuss ions they

had about the of fe r s t h a t had been disclosed to Aurelius during


212-267-6868 www.veritext.com 516-608-2400





1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25


Page 104

BY MR. ECKSTEIN:

Q. Mr. Gropper, does t h i s conf iden t i a l i ty agreement conta in

provis ions s imi la r to the agreement t h a t you entered in to in

March 2009?

A. Yes.

Q. And, in pa r t i c u l a r , does t h i s agreement also conta in the

d i sc lo su re provis ion in Sect ion 13 t h a t you descr ibed e a r l i e r

in your test imony?

A. Yes.

Q. And i s it the same bas ic provis ion as you agreed to in the

March 2009 agreement?

A. Yes, it i s .

Q. And what was the term o f t h i s conf iden t i a l i ty agreement?

A. For ty- f ive days.

Q. And d id t h i s agreement requi re Aurel ius to e i th e r r e s t r i c t

t rad ing or e r e c t an e t h i c a l wall?

A. Yes, it did .

Q. And d id Aurel ius e i th e r r e s t r i c t t r ad ing o r e r e c t an

e t h i c a l wall?

A. We chose in t h i s ins tance to r e s t r i c t our t rad ing .

Q. And do you know why Aurel ius chose to r e s t r i c t t rad ing in

th i s case?

A. By t h i s t ime in the case , we had a much fu l l e r pos i t ion ,

and we j u s t thought t ha t we wanted to b r ing to bear on the

negot ia t ions a l l of the a na ly t i c a l horsepower t h a t ex i s t ed .


212-267-6868 www.veritext.com 516-608-2400





1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25


Page 105

ins ide the f i rm, so a l l , Mr. Brodsky and Ms. Chan, and mysel f

par t i c ipa ted in those discuss ions .

Q. And d id Aurel ius engage in any t rad ing in the de b to r ' s

se c u r i t i e s dur ing the dura t ion o f t h i s conf iden t i a l i ty per iod?

A. We d id not .

Q. And do you know whether any o ther p a r t i e s involved in th i s

case en tered in to s imi la r conf iden t i a l i ty agreements a t th i s

t ime?

A. Appaloosa , Centerbr idge and Owl Creek s igned the same

form.

Q. Now, can you expla in what took p lace in the case a f t e r you

en tered in to t h i s conf iden t i a l i ty per iod?

A. We a t tended a meet ing, we meaning the four Fried Frank

c l i en t s a t tended a meet ing along with Fried Frank a t Wei1

Gotsha1 the day t h i s was s igned with Brian Rosen and B i l l

Kostoros .

At t h a t meet ing, the deb tors t o ld us the add i t iona l NOL

t h a t would be ava i l ab le by vi r tue of the passage of the

Homeowner's Act, and we lea rned t h a t t h a t was an amount of 2 .6

b i l l i o n dol l a r s . That was a b ig surpr i se to us .

Our analys is previous to t h a t had only i nd ica ted t h a t we

thought the NOLs were worth, you know, probably more than a

bi l l i on l e ss than t h a t . So t h a t was a very , very mater i a l

input learn ing the amount of t h a t tax d i sc lo su re .

Q. That was nonpub1ic a t the t ime; am I co r rec t?


212-267-6868 www.veritext.com 516-608-2400





1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25


Page 106

A. Yes, it was. And then we reso lved to ba s i c a l l y process

t ha t in format ion and come back and meet a t a l a t e r p o i n t in

t ime to a t tempt to formulate a proposa l to give to JPMorgan.

Q. And so what happened a f t e r the i n i t i a l meeting?

A. We came back to Weil about a week l a t e r , j u s t before

Thanksgiving on th e 23rd , and the debtors passed ou t a proposa l

and s a id , okay, t h i s i s what we'd l i ke to propose to JPMorgan,

you know, what do you th ink .

Q. And I 'm going to ask you to tu rn your a t t e n t i on to

Aurel ius Exh ib i t 28, and ask you to i de n t i f y the document.

A. That ' s the - - th a t ' s what was passed o u t a t t h a t meeting

on the 23rd.

Q. And were you in a t tendance a t t h a t meeting?

A. I was.

MR. ECKSTEIN: And, Your Honor, can we - - we would

l i ke to move Aurel ius Exh ib i t 28 in to evidence.

THE COURT: Any objec t ion?

MR. FOLSE: No ob jec t ion .

THE COURT: It's admi t ted .

(Aurel ius Exh ib i t 28, Debtor ' s Proposal to JPMorgan Chase, was

hereby rece ived in to evidence . )


BY MR. ECKSTEIN:

Q. Ca n you walk the Court through the bus iness h igh l igh t s of

t h i s proposa l?


212-267-6868 www.veritext.com 516-608-2400





1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25


Page 112

A. Yes. Th e debtors in t h e i r monthly operat ing r epor t fo r

November, which was f i l ed on December 30th , 2009 disclosed t h a t

the amount of the addi t iona l NOL tax refund was going to be in

the amount of 2 .6 bi l l i on dol l a r s . Therefore , d i sc lo s ing a l l

of the mater i a l and nonpubl ic informat ion t h a t we had been

exposed to dur ing t ha t conf iden t i a l i ty per iod .

Q. And can I tu rn your a t t en t ion to Aurel ius 32, and ask you

to i den t i fy the document.

A. That ' s the monthly operat ing r epor t to which I j u s t

r e f e r r ed , and if I can d i rec t the Court to note 5. In the

second paragraph, the l a s t sentence, it says , "WMI es t imates

such an elec t ion could r e s u l t in to" - - so r ry " in addi t iona l

refunds of up to approximately 2 .6 bi l l i on d o l l a r s , as to which

they are competing cla ims of ownership ."

Q. And was t h a t the informat ion t h a t the deb tor had provided

to you a f t e r you signed the conf iden t i a l i ty agreement on

November 16th?

A. That ' s cor rec t , and t h a t was no t presen t in the p r io r

monthly operat ing r epor t .

Q. And had Aurel ius l earned any o ther mate r i a l nonpubl ic

informat ion dur ing t h i s t ime?

A. We had not .

MR. ECKSTEIN: Your Honor, we'd l ike to move Aurel ius

Exhib i t 32 in to evidence.



212-267-6868 www.veritext.com 516-608-2400





1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25


Page 113

THE COURT: It's admit ted.

(Aurel ius Exhib i t 32, November Monthly Operat ing Report , was

hereby received in to evidence . )

BY MR. ECKSTEIN:

Q. So, Mr. Gropper, d id you conclude t h a t the publ ica t ion of

the November monthly operat ing r epor t pu t in to the publ ic

domain the mate r i a l nonpubl ic informat ion t h a t you had received

dur ing the conf iden t i a l i ty per iod?

A. Yes.

Q. And what did you bel ieve was your r igh t s with respect to

resuming t rading in the debtor ' s secur i t i e s?

A. Well , we rea l ly based it on a number of d i f fe ren t fac tors .

F i r s t of a l l again , j u s t as in the p r io r per iod , the debtors

had an obl igat ion under the conf iden t i a l i ty per iod to - - under

the conf iden t i a l i ty agreement to disc lose a l l mater i a l

nonpublic informat ion t h a t had been provided to us .

During the per iod of the conf i the debtors were obviously

in the be s t pos i t ion to make the determinat ion as to what

information was mater i a l nonpubl ic informat ion.

Addi t ional ly , we requested and rece ived an e-mai l from Mr.

Rosen a t Weil Gotshal confirming t h a t once the debtors had

disclosed the information in the monthly operat ing r epor t , the

debtor ' s disc losure obl igat ions under the conf iden t i a l i ty

agreement would be sa t i s f i ed .

And l a s t l y , we did our own ana lys i s . I mean, again, the


212-267-6868 www.veritext.com 516-608-2400

i





1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25


Page 114

only i ~ f o r m a t i o n we had was a fa i l ed back and fo r th with

JPMorgan in which the pa r t i e s were extremely fa r apar t . There

was no semblance o f a deal . JPMorgan had quote , r e s e t the

bookends in the words of Mr. Kostoros , and in the words of Don

McCree were very fa r apar t . No one thought t h a t a dea l was

eminent , so we concluded independen t ly t h a t we were not in

possess ion of mate r i a l nonpubl ic in format ion .

Q. Mr. Gropper, l e t me tu rn your a t t e n t i on to Aurel ius

Exh ib i t 31, and ask you if you can i de n t i f y t h a t document.

A. That ' s the e-mai l t ha t Mr. Rosen sen t to Matt Roose a t

Fr ied Frank a t our reques t .

Q. And was t ha t e-mai l provided to you?

A. It was. In the banner up above, you can see the tw o l i nes

says , "WAMU-Aurelius" which meant it went to a l l of the

Aurel ius f o lk s working on Washington Mutual , andI'll

note also

t ha t Karl Groskaufmanis who i s a Fr ied Frank se c u r i t i e s law

sen io r p a r t n e r in Washington, D.C. was a l so copied on t h i s .

Q. And who i s Matthew Roose?

A. He's an assoc ia t e of Fr ied Frank.

Q. And what d id the - - what d id Exh ib i t 31 provide?

A. We11, it sa id t h a t a f t e r the monthly opera t ing r epo r t was

f i l ed , WMI wi11 cons ider a l l necessary d i sc lo su res

d i sc lo su re ob l iga t ions to have been s a t i s f i e d , and the

c on f ide n t i a l i t y agreement may be deemed t e rmina ted .

MR. ECKSTEIN: Your Honor, I 'd l i ke to move


212-267-6868 www.veritext.com 516-608-2400





1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25


Page 115

Exh ib i t 31 in to evidence.



THE COURT: It's admit ted .

(Aurel ius Exh ib i t 31, E-mail from Rosen to Roose, was hereby



BY MR. ECKSTEIN:

Q. So, Mr. Gropper , a t the end of the conf iden t i a l i ty pe r iod ,

d id Aurel ius resume t rad ing of the debtor ' s secur i t i e s?

A. We d id .

Q. Okay. And can you tu rn your a t t en t ion back to Aurel ius

Exhib i t 8, which i s the t rad ing records , and i den t i fy what

t r ansac t ions the debtor entered - - Aure l ius entered i n t o , what

t rades the debtor entered in to fol lowing the te rmina t ion of the

conf iden t i a l i ty per iod?

A. We so ld about t h i r t y - f iv e mil l ion do l l a r s worth of

subordinated bonds, t h i r t een mil l ion do l l a r s worth or so r ry ,

f i f t een mil l ion dol la r s worth of sen io r bonds, and we purchased

about t en mi l l ion do l l a r s worth of peers . I'll no te , though,

t ha t the purchase of peers t h a t we t r ansac ted on December 31st

was a t a pr i c e of tw o and a ha l f t imes t ha t of our l a s t pe e r s '

purchase before the r e s t r i c t ed per iod went in to e f f e c t .

So our pr i o r purchase had been a t e igh t do l l a r s , bu t we

cont inued our purchase - - purchasing e f f o r t s , bu t as


212-267-6868www.veritext.com 516-608-2400





1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25


Page 116

you can see from th e records , they were over twenty do l l a r s a

share .

Q. An d p r i o r to those t r ansac t ions , had the debtor d isc losed

any new mate r ia l in format ion in to the pub l ic r ecord?

A. Well , the debtors had d isc lo sed the t ax in format ion t ha t 1

re fe renced i n the monthly opera t ing r ep o r t we j u s t looked a t .

Q. That ' s th e t ax , the add i t iona l NOL look-back?

A. Yes.

Q. NOw, let me ask you to focus your a t t e n t i on on the per iod

fol lowing the t e rmina t ion o f the second c on f ide n t i a l i t y per iod .

This i s the pe r iod between December 31, 2009 and March 12,

2010.

You unders tand the per iod?

A. 1 do.

Q. Now, can you expla in what r o l e ,if

any, Aurel ius p layed in

se t t l emen t nego t ia t ions during t ha t per iod?

A. We d id no t have a r o l e .

Q. And dur ing t h i s pe r iod , what views d id Aurel ius have about

the most e f f e c t i ve way fo r the case to proceed?

A. Well , and 1 d o n ' t want to seem l i ke a broken record , bu t

we sa id what we have sa id many t imes before , t ha t we t hought

the most e f f i c ac i o u s wa y to push these cases to a r eso lu t ion ,

was fo r the debtor to pursue its l i t i g a t i o n aga ins t JPMorgan

Chase. Tha t was advice the debtors had chosen no t to fol low

e a r l i e r , and again , it was t h e i r case . But having gone t h r o u g ~


212-267-6868 www.veritext.com 516-608-2400





1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25


Page 117

now a second fa i l ed a t tempt a t negot ia t ing a consensua l

r eso lu t ion , we thought the key to reso lv ing these cases was fo r

l i t i g a t i o n aga ins t JPMorgan to be ass iduous ly pursued, and we

communicated t ha t view.

Q. What o the r i s sues were you and th e o the r s e t t l emen t

noteholders focused on during t h i s t ime per iod?

A. We s t a r t e d to examine whether or not it would be poss ib le

to use the NOL carry forward and whether or no t any value could

be c r ea ted by u t i l i z i n g t ha t NOL carry forward. That ' s

ac tua l ly a ques t ion we'd asked, what ' s th e amount o f it, during

the r e s t r i c t ed pe r iod , and Mr. Kostoros dec l ined to answer t ha t

ques t ion . So we d i d n ' t know how b ig it was, b u t you could t e l l

again from looking a t the GAAP f i na nc i a l s , t h a t it was a b ig

number.

So we s t a r t e d doing some work to determine whether or no t

t ha t could be u t i l i zed in an e f f i c i e n t manner with the fo lks

ins ide the tax group a t Fr ied Frank. We also s t a r t e d to noodle

on s t ruc tures of a plan . We d id n ' t want to be in a pos i t ion

where in the even t a dea l was cu t with JPMorgan, whatever t ha t

dea l might be , there would then be a tw o month per iod where

people f igured out how to a c tua l ly ge t the money out . So we

s t a r t e d noodl ing over hypo the t i ca l manners to d i s t r i bu t e

proceeds under a p lan , and p a r t of what wa s rea l ly tak ing up a

lo t o f e f f o r t a t t ha t t ime, was okay, what would happen if you

had a dea l with JPMorgan b u t not the FDIC. How could you


212-267-6868 www.veritext.com 516-608-2400





1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25


Page 118

dis t r ibu te money to the c r e d i t o r s of WMI when the FDIC was

put t ing in a twenty b i l l i o n do l l a r unsecured c la im. So we j u s t

s t a r t ed th ink ing through some of those s t ru c tu ra l i s sues .

Q. What s teps , if any, d id you take during t h i s t ime per iod

to ensure t h a t you d id not rece ive mater i a l nonpubl ic

information?

A. Well , we gave s t r i c t ins t ruc t ions to our counsel a t Fried

Frank no t to communicate any such informat ion to us, whenever

we met with the debtors we were compulsive to make c lea r t h a t

we d id no t want to discuss any mater i a l nonpublic informat ion ,

and f rankly , the debtors were very care fu l in t h i s regard.

They knew t h a t we were unr e s t r i c t e d , they knew we were t r ad ing

in the secu r i t i e s , and we went out of our way to make sure t ha t

nothing go t t r ipped up and we d i d n ' t i nadver t en t ly or

i n t en t iona l ly g e t any mater i a l nonpubl ic informat ion .

Q. And d id you bel ieve during t h i s t ime per iod t h a t you

rece ived any mater i a l nonpubl ic information?

A. We d id not .

Q. And d id you know during t h i s t ime per iod whether or not

set t lement negot ia t ions were ongoing?

A. I th ink it was widely known in the marketplace t h a t

set t lement negot ia t ions were going on. There was a research

r epor t t h a t came ou t in the beginning of January 2010 t ha t

quoted t ha t , you know, in tense se t t leme nt negot ia t ions are

going on or some such l i k e t ha t . So it was widely known in the


212-267-6868 www.veritext.com 516-608-2400

I





1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25


Page 119

marketplace t h a t t he re were set t lement negot ia t ions going on.

We c e r t a in ly d id no t know the conten t o f those nego t i a t ions .

Q. And dur ing t h i s t ime per iod , d id Aurel ius pa r t i c i pa t e in

any se t t l emen t nego t ia t ions?

A. No.

Q. And d id Aurel ius l ea rn th e subs tance o f any negot ia t ions

t h a t were tak ing p lace dur ing t h i s t ime per iod?

A. We d id no t .

Q. And d id you u l t imate ly l ea rn t h a t a set t lement had been

reached in th e case?

A. We lea rned - - wel l , f i r s t we heard in the beginning of

March because Mr. Rosen announced it on the record in t h i s

cour t t h a t the pa r t i e s were c lose to an agreement . Af te r t ha t

happened, I ac tua l ly reached ou t to Fr ied Frank to see if we

could become involved in se t t l emen t nego t i a t ions . I never

heard back on t h a t inqu i r y , and t h a t was a c tua l l y a t a t ime

when I was working l i t e r a l l y around the c lock to s e t t l e one of

our hold ings in the Lyondel l case . I then worked till, you

know, I went away on vaca t ion t ha t Thursday morning, and then a

dea l was announced when I was on vaca t ion t h a t Fr iday morning,

and I lea rned about it th e same t ime the r e s t of the market

d id .

Q. So d id you l ea rn the te rms of a po t e n t i a l dea l on March

4th?

A. No.


212-267-6868 www.veritext.com 516-608-2400





1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25


Page 120

Q. Did the debtor - - d id Aurel ius cont inue to t r ade in the

debtor ' s se c u r i t i e s dur ing t h i s t ime per iod?

A. We d id . And, i n f a c t , our t r ad ing , I th ink i s

i l l u s t r a t i v e in t h i s per iod , because we ac tua l ly so ld qu i t e a

l o t of pee r s on March 8 th , 2010, which was a mere tw o or th ree

days be fo re the dea l was announced. Tha t t r ade was unwise in

h inds igh t , because a f t e r the dea l was announced, the peers

t r aded up seve r a l do l l a r s . So I th ink it c l e a r ly shows we

c e r t a in ly d i d n ' t know what was going on. We so ld pee r s t ha t

went up seve r a l do l l a r s tw o days l a t e r .

Addi t iona l ly , I'll j u s t say about the dea l t ha t was

announced i t s e l f t ha t had I been involved in the nego t ia t ions

a t t h a t t ime, and r ea l ized because , o f course , the u l t ima te

dea l inc luded the FDIC, b u t had I r ea l ized t h a t JPMorgan was

wi l l ing to p a r t wi th , you know, t ha t massive p a r t of the tax

r efund as was announced in the dea l t ha t was announced on the

record on March the 11th , I would 've objec ted to t ha t . I mean,

I d o n ' t th ink the FDIC or th e bank bondholders had good c la ims

i n t h i s case a t a l l . So the f a c t t ha t JPMorgan was wi l l ing to

give up t h a t value f rankly I would 've pushed to see t ha t value

come in to th e e s t a t e .

Q. Was Aurel ius or the o the r s e t t l emen t noteholders a par ty

to the agreement t h a t was announced in cour t on March 12th ,

2010?

A. No.


212-267-6868 www.veritext.com 516-608-2400





1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25


Page 163

THE COURT: A ll r i gh t .

MR. FOLSE: I used the wrong da te .

THE COURT: Re-ask your ques t ion .

MR. FOLSE: Yes.

Q. It's c o r r e c t , i s n ' t it, t h a t once Gerry Uzzi found out

about t h i s back and fo r th t h a t he was on the phone with Mr.

Roseni i s t h a t co r rec t? And the next day, you were on the

phone to B i l l Kostoros to p r o t e s t what the debtor had done.

A. I don ' t know t h a t t h a t ' s cor rec t a t a l l . I don ' t know

whether Mr. Uzzi c a l l e d Mr. Rosen. I d id c a l l Mr. Kostoros in

the end of Apr i l a f t e r I lea rned the debtors had made a

proposa l . But aga in , I don ' t know whether I lea rned I j u s t

don ' t r e c a l l whether I lea rned the sUbstance o f t h a t proposal .

And my object ion to Mr. Kostoros was one of process i n t ha t I

had j u s t agreed to pu t up a wal l and become engaged in

set t lement negot ia t ions to a t tempt to reso lve the c a s ~ , and

t he re fo re I thought as a mat te r of process it was no t r i g h t fo r

the debtors to negot ia te without inc luding us or informing us,

which they had done.

Q. Well , let's look a t your e-mai l o f Apr i l 29, 2009. It's

EC Exh ib i t 12. It's a lready been admit ted as AU Exh ib i t 22.

This i s your e-mai l to B i l l Kostoros on Apr i l 29th, correct?

A. Yes.

Q. And you had found ou t t h a t the debtor had made a fu r the r

proposal to JPMC. Your tes t imony i s t h a t you didn ' . t have any


212-267-6868 www.veritext.com 516-608-2400





1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25


Page 16 4

idea about th e substance o f t h a t proposa l?

A. No . My tes t imony i s I j u s t d o n ' t r e c a l l whether I lea rned

the subs tance of t ha t proposa l .

Q. The f i r s t th ing you do in t h i s e-mai l i s to show Mr.

Kostoros t ha t Aurel ius and Owl Creek had near ly a blocking

pos i t ion in th e subordina ted bonds and the j un io r subordina ted

bonds, co r rec t?

A. That ' s incor r ec t .

Q. Well , let's see . It says p lease note - - it se t s ou t a

list of hold ings . It says , "p lease note t ha t th e above

hold ings r ep resen t near ly a blocking pos i t ion in both the

subordina ted bonds and jun ior subordina ted bonds." Do you see

t ha t ?

A. I do. But j u s t to be c l e a r , you r e f e r r ed to Aurel ius and

Owl Creek, and t h i s e-mai l was s en t on beha l f o f Aure l ius , Owl

Creek and E l l i o t t .

Q. E l l i o t t , a l l r i gh t . So what i s a blocking posi t ion?

A. It i s a hold ings of more than a t h i r d o f a pa r t i c u l a r

c l a s s o f a secur i ty with in a debtor .

Q. And what does it al low the ho lde r to block?

A. Well , sometimes nothing because if a plan i s crammed down

it doe s n ' t allow you to block anyth ing .

Q. Well , what d id you mean when you sa id blocking pos i t ion

here?

A. I meant t h a t we owned near ly t h i r t y - t h r e e pe r cen t . It's


212-267-6868 www.veritext.com 516-608-2400





1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25


Page 165

j u s t a term o f a r t used in bankruptc ies to ind ica te t ha t a

c r e d i t o r group owns more than a t h i r d of a pa r t i c u l a r pOSit ion,

recogniz ing t h a t an af f i rmat ive vote of a c l a s s under a

bankruptcy plan would requi re two- th i r d s .

Q. In the next paragraph you wrote:

"We unders tand from Brian Rosen 's conversa t ion o f

Monday evening with Gerry Uzzi t h a t withou t any pr i o r

consu l t a t ion with White & Case the debtor rev ised the

pr i o r proposa l to Morgan author ized by th e White &

Case Group."

Do you see tha t?

A. I do.

Q. So you had become aware o f a conversa t ion t h a t your

counsel had had with Brian Rosen on Monday, Apr i l 27th ,

correct?

A. Yes.

Q. Because he t o ld you about it, your lawyer.

A. Correc t .

Q. And you say, "We do no t agree with t h a t course of ac t ion

and would have s t rongly ob jec ted to it if we had been consul ted

p r i o r to the of f e r being made."

You wrote t ha t ?

A. I d id wr i t e t ha t . This was one o f a number o f t imes when

we had suggested to the debtor a pa r t i c u l a r course of act ion or

I guess we had no t been given the oppor tuni ty to sugges t to the


212-267-6868 www.veritext.com 516-608-2400





1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25


Page 166

deb to r a course of ac t ion when they had gone o f f and done it

because it's th e debtor ' s case and the debtors ran the case .

There were a number of t imes we made sugges t ions in f a c t when

th e debtors d id n ' t take them. There were a number of t imes

when the debtors d id th ings without seeking any advice or

i npu t , and t h i s was one of those i n s t ances .

Q. I only asked whether t h i s i s what you wrote , and then you

and your answer i s yes , co r r ec t?

A. This is what I wrote.

Q. An d you had made it c l e a r to the deb to r s ear ly in the

nego t ia t ing process t h a t you wanted to be involved in the

nego t ia t ion o f mate r ia l t e rms, and i n s t ead they went o f f and

nego t ia t ing and negot ia ted without doing t ha t . And you

thought t ha t was wrong, co r r ec t?

A. I t hought it was wrong in th e contex t where we had s igned

a c on f ide n t i a l i t y agreement fo r purposes o f being involved in

nego t i a t ions , and the debtors h ad n ' t involved us in

nego t ia t ions dur ing t h a t pe r iod .

Q. An d if you had been consul ted in advance abou t the of f e r

the deb to r s in tended to make you would have objec ted to it;

isn't t h a t what t h i s says?

A. Tha t i s what it says and t h a t i s cor rec t .

Q. How d id you know the debtor h ad n ' t increased the value o f

its se t t l emen t demand in t h i s offer?

A. I j u s t don ' t r e c a l l th e t e rms .


212-267-6868 www.veritext.com 516-608-2400





EXHIBITE



1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

Page 1


DISTRICT OFD E ~ A W A R E

Case No. 08-12229(MFW)

- - - - - - - - - - - -x

In th e M a t t e r o f :

WASHINGTON MUTUAL, INC. I et al.,

D e b t o r s .

- - - - - - - - - - - - - - - - - - - - -x

U.S . B a n k r u p t c y C o u r t

824 N o r t h M a r k e t S t r e e t

W i l m i n g t o n , De la wa re

J u l y 1 9 , 2011

9:33 AM

B E FOR E:


U.S . BANKRUPTCY JUDGE



212-267-6868 www.veritext.com 516-608-2400





1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

WASHINGTON MUTUAL, INC., ET AL.

Page 51

f r ee to resume t r ad ing , cor r ec t ?

A. Yes.

Q. And so the very f i r s t day they could do t h a t , which

happened to be th e l a s t day of the year , t h i s ind ica te s t h a t

Aure l ius sold roughly f i f t een mi l l ion d o l l a r s worth of sen io r

notes , cor rec t?

A. Well , th e funds managed by Aure l ius did , cor rec t .

Q. Say t h a t aga in , p lease?

A. Th e funds managed by Aure l ius sold the no tes .

Q. Yes. And it looks l i k e they were so ld a t 97.25 percen t o f

face value?

A. Correc t .

Q. So those - - those no tes were - - I dont t know whether t h i s

i s the r i g h t term o f a r t , c lose to par?

A. They were.

Q. Not much upside l e f t in them?

A. Well , t he re was pos t -pe t i t i on i n t e r e s t t h a t those notes

could receive . So I d o n ' t r eca l l what th e f u l l pre-pe t i t i on

plus pos t -pe t i t i on cla im was fo r those no tes . It was cer t a in ly

nor th o f par .

Q. And t he re were - - th i s began, v e r i fy t h a t Itm read ing t h i s

c o r r e c t l y , t he re were add i t i ona l sa le s o f sen io r no tes , f i f t een

mi l l ion d o l l a r s on January th e 5th , y o u t l l have to go over to

th e preced ing page to fol low me, I t h ink . And then another

f i ve mi l l i on dol la r s on January 7th , i s t h a t cor rec t ?


212-267-6868 www.veritext.com 516-608-2400





1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25


Page 52

A. Yes.

Q. Also on December 31s t , Aurel ius so ld s en io r subordina ted

notes with a face amount o f about t h i r t y - f ou r mil l ion do l l a r s

a t n ine ty - th ree percent o f par?

A. Cor rec t .

Q. Did the sa le by th e way, d id Aurel ius r ep o r t i t s

f i n an c i a l r e su l t s on a ca l enda r year bas i s ?

A. Yes.

Q. Did the s a l e s on December 31 e s t a b l i s h a pr ice t h a t

Aurel ius used to mark its por t f o l i o to marke t fo r f inanc ia l

repor t ing purposes?

A. I 'm no t sure . The marking o f our por t f o l i o i s independent

o f t r ades t ha t can occur in the middle of the day.

Q. Well they occurred before the l a s t day of the yea r , r igh t?

A. Yes.

Q. And i n f a c t th e r eason t h a t Aurel ius and the o the r

se t t l emen t noteholders asked the debtors to t e rmina te the

agreement ear ly was so you could do t rades before the ca l enda r

yea r ended, isn't t ha t t rue?

A. That ' s i nco r rec t .

Q. Why d i d n ' t you j u s t l e t it expire on December 31s t?

A. We wanted to make sure t h a t fo r purposes of marking the

por t f o l i o , t h a t the in format ion in the monthly opera t ing r ep o r t

was o u t and t h a t the market pr i ces would r e f l e c t it. We d id n ' t

want to be in a s i tua t ion where a f t e r the marke t c losed on the


212-267-6868 www.veritext.com 516-608-2400





1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25


Page 53

31s t , the monthly opera t ing r ep o r t came ou t , which would be a

pos i t i ve piece of in format ion , and then when the aud i to r s went

to determine what should be th e year -end mark t hey 'd say , okay,

we know t he re was a bond t h a t t r aded a t X bu t then t h i s b ig

p iece o f in format ion came ou t a f t e r market hours , we're no t

sure how to mark the por t fo l io . And we wanted to avoid t ha t

ambigui ty .

Q. Also on December 31s t , am I reading t h i s c o r r e c t l y , t h a t

Aurel ius began buying PIERS, about 590,000 shares fo r a t o t a l

o f 12.625 mil l ion?

A. Well , I 'm no t sure what you mean by began buying because

we've so ld PIERS a f t e r t h a t da te , bu t we bought PIERS on

December 31s t and I d o n ' t know if the quant i ty t ha t you quoted

i s cor rec t b u t I 'm happy to f igure it ou t .

Q. You mean in terms o f the do l l a r amount?

A. Correc t .

Q. The 590,000 shares i s cor rec t , r igh t?

A. Yes.

Q. And t o g e t the pr ice you would mul t ip ly , on each of those

two l i ne s , the quant i ty t imes the pr i ce?

A. Yes.

Q. A ll r i gh t . Also in January - - by the way, the acqu i s i t i on

o f PIERS on beha l f o f the Aurel ius funds , t h a t cont inued

fu r the r in to January, d id it not?

A. Well , we bought a very , very smal l amount of PIERS on


212-267-6868 www.veritext.com 516-608-2400





1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25


Page 54

January 4th . We bought another very , very smal l amount of

PIERS, I mean these are t iny t rades in the contex t of the

pos i t ion and the fund, you ' re t a lk ing about 50,000 dol l a r

t rades in the contex t of a mul t i -b i l l ion do l l a r fund. We

purchased, aga in , in other ins tances in January.

Q. Are the t rades shown beginning January 7th where it says

WMPFD a l l the way up to the end of January, are those PIERS

acquis i t ions?

A. t hey ' re very smal l PIERS acquis i t ions , yes .

Q. Something l i ke 70, 80,000 shares? I 'm j u s t guess ing.

A. That sounds high. I mean, I can - - aga in , I can f igure it

o u t if we

Q. I f you want to add them up, t h a t ' s what we would do?

A. Yes.

Q. You mult ip ly them by the l i ne i tems , the pr ices shown on

the l i n es nex t to them?

A. Correc t .

Q. And in January Aurel ius a l so began buying s i gn i f i c a n t

amounts of t r u s t prefer red secu r i t i e s , co r rec t?

A. Well , we bought t r u s t prefer red secu r i t i e s and we so ld

t r u s t pre fe r r ed secu r i t i e s .

Q. Well on January 4 and January 5, co l l ec t ive ly , Aurel ius

bought almost f i f ty mil l ion dol l a r s worth of t r u s t prefer red

secu r i t i e s , d i d n ' t i t ?

A. Not f i f ty mil l ion dol l a r s worth.


212-267-6868 www.veritext.com 516-608-2400





5

10

15

20

25


1

2

3

4

6

7

S

9

11

12

13

14

16

17

lS

19

21

22

23

24

Paqe

A. Yes.

Q. Do you be l i eve t ha t th i s was a l so executed on beha l f o f

Washinqton Mutual , Inc. and WMI Investment Corp.?

A. Yes, it was.

Q. And do you be l i eve t h a t t h i s aqreement was executed on or

about March 9th o f 2009, the da te on the f i r s t paqe?

A. Yes.

Q. Did Owl Creek p u t WMI on i t s r e s t r i c t e d list when it

entered in to th i s conf iden t i a l i ty aqreement?

A. Yes, we did .

Q. Did you unders tand t h i s aqreement to have a te rmina t ion

poin t?

A. Yes.

Q. What was your unders tandinq o f what t h a t te rmina t ion po in t

was?

A. Paraqraph 13 of t h i s aqreement t a lks about the outs ide

da te , the l a t e s t date a t which t h i s aqreement would ex i s t , as

beinq s ix ty days fol lowinq the da te o f execut ion of t h i s

aqreement. So we knew it would expire on t h a t da te , if no t

e a r l i e r .

Q. And i s it cons i s t en t with your understandinq t h a t t h i s

aqreement in fac t terminated on o r about May S, 2009?

A. Sometime around then , yes .

Q. Okay. Did Owl Creek t rade in WMI se c u r i t i e s durinq the

term o f t h i s aqreement?


212-267-6868 www.veritext.com 516-608-2400





1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25


Page 129

A. No.

Q. Did you unders tand the debtors to have any ob l iga t ion

under t h i s agreement?

A. Yes, they did . There in paragraph 13, t h e re ' s a provis ion

t h a t descr ibes how upon te rmina t ion o f t h i s agreement , t h a t the

debtors must d i sc lo se any informat ion t h a t they deem mater i a l

and nonpubl ic .

MR. GLICKMAN: Your Honor, I would ask t h a t EC-141 be

admit ted in to evidence.


MR. WALKER: No object ion , Your Honor.

THE COURT: It's admit ted.

(Conf iden t ia l i ty agreement with Owl Creek wa s hereby received

in evidence as Equi ty Committee's Exh ib i t 141, as of t h i s

da te . )

MR. GLICKMAN: Thank you.

Q. L e t ' s go back to the March meet ing t h a t you mentioned.

Tel l us what you r eca l l about the events a t t ha t meeting?

A. It was a l arge meet ing. There were a l o t of people the re ,

I r eca l l . There were a number of d i f f e r e n t bondholders . At

t h a t po in t in t ime, we were being represented - - Owl Creek was

being represented by White & Case along with , you know, twenty

or so other noteholders . A number of us were the re , maybe four

or f ive White & Case members. Fr ied Frank wa s there with t h e i r

two c l i en t s a t the t ime. The day - - the way the day eVOlved, I


212-267-6868 www.veritext.com 516-608-2400





1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

I


Page 13 0

remember, the debtor and deb to r ' s counsel were kind o f

shu t t l i ng between d i f f e r en t rooms.

Th e bondholders , as I sa id , were a l l in t h i s l a rge

conference room. The debtors would per iod ica l ly come in and

t a lk to us about th e i s sues a t hand and then leave . And my

unders tanding was t h a t they were t a lk ing to othe r pa r t i e s . My

unders tanding was t h a t JPMorgan was t he re with t h e i r counsel .

bel ieve th e FDIC, th e c r ed i t o r s ' committee, were there with

t h e i r counsel as wel l . But I never s a t in with any o f those

othe r pa r t i e s . But t h a t ' s my unders tanding.

Q. Did Owl Creek rece ive a proposed term shee t a t the

meeting?

A. Yes, we did.

Q. Would you take a look a t tab 5, please , which i s another

document t h a t Owl Creek produced in connect ion with these

proceedings , and it's been marked EC-140. I s t h i s th e term

shee t t h a t Owl Creek rece ived a t th e meeting?

A. Yes.

Q. Did Owl Creek prepare t h i s?

A. No.

Q. What was your unders tanding as to who prepared t h i s?

A. Well , my unders tanding a t the t ime, and looking a t t h i s

header , I be l i eve Weil prepared it.

Q. Do you see a date the re , March 5th , 2009. Is t h a t when

you received t h i s draf t ?


212-267-6868 www.veritext.com 516-608-2400





1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25


Page 13 1

A. No. I know t h a t the meeting was on a l a t e r date than

t h a t . It was a f t e r I signed the conf i , so it - - you know, no.

That wasn ' t the date t h a t I received th i s document.

Q. You rece ived it on the date o f the meeting, as f a r as you

reca l l ?

A. Yeah. This was handed out in hard copy format , which i s

why it has my handwrit ten notes on it.

Q. Okay. And a l l of these notes t h a t we see here in the

document, those are your handwri t ten notes?

A. Yes.

Q. When d id you take them?

A. At some pOint dur ing the day.

MR. GLICKMAN: Your Honor, I would ask t h a t EC-140 be

admit ted i n to evidence.

MR. WALKER: Noobject ion .

THE COORT: It's admit ted.

(Term shee t fo r Owl Creek was hereby rece ived in to evidence as

Equity Committee's Exhib i t 140, as of th i s da te . )

Q. You ' l l no te , fo r example, on the second page, t h a t there

are var ious blanks in th i s term sheet . Can you t e l l us your

unders tanding of what was done with the term shee t a t the

meeting?

A. My r eco l lec t ion of t h a t meeting i s t h a t , you know, the

debtor and debtor ' s counsel were t r y ing to use th i s as a

s ta r t ing po in t to k ick - s t a r t set t lement d iscuss ions , bas ica l ly .


212-267-6868 www.veritext.com 516-608-2400





1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25


Page 138

Gerry Uzzi i s hearsay, and so we don ' t want it admit ted fo r the

t ru th of t h a t poin t .

THE COURT: A ll r igh t . But j u s t fo r the f ac t t h a t he

received i t ?

MR. WALKER: Yes, ma'am.

THE COURT: A ll r igh t . It's admit ted.

(E-mail from White , Case forwarding an e-mai l from Weil to Owl

Creek was hereby received in to evidence as Equity Committee 's

Exhib i t146, as

ofth i s date . )

Q. We've looked a t some term sheets during the course of your

test imony thus f a r . Did you cons ider them to be mater ia l

nonpublic informat ion when you made the determinat ion to take

WMI o f f the r e s t r i c t ed l i s t ?

A. No, we d id not consider them mater ia l nonpublic

informat ion.

Q. Why not?

A. Well, no agreement had been reached. You know, the

p ar t i e s a t t h a t po in t in t ime were extremely fa r apa r t . And,

you know, with those fac ts along with other s , we knew t h a t

those term sheets could no t be considered mater ia l nonpublic

informat ion.

Q. Okay. Let me go to the November meeting t h a t you

t e s t i f i ed was your next recol lec t ion of involvement in

se t t lement negot ia t ions . Was Owl Creek being represen ted by

W h i t e ' Case a t the t ime of t h a t


212-267-6868 www.veritext.com 516-608-2400





1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

WASHINGTON MUTUAL, INC., ET AL. , - - - ---_ .._--_._------------

Page 164

during t ha t t ime, co r rec t?

A. 241 through 259, correct?

Q. And the ones , fo r example, on l i nes 247 and 250 are PIERS,

i s t h a t correct?

A. Yeah, l e t me j u s t quick ly glance a t these . From scanning

t h i s , it looks l i ke the purchases are o f subordinated bonds and

PIERS.

Q. And d id you cons ider th e January 2009 set t lement of f e r p u t

toge the r by the l a rge group of c r e d i t o r s represented by the

White & Case group, to be mater i a l information?

A. No.

Q. And why no t , Mr. Krueger?

A. For to me, the f i r s t obvious reason t h a t jumps ou t , i s

t ha t it was prepared by everybody who i s on the same s ide , so ,

you know, everybody always wants a l o t , and to no t - - to j u s t

have an agreement amongst people who a l l own the same bonds, to

me, i s no t mater i a l .

Q. Mr. Krueger, you - - I bel ieve you t e s t i f i e d e a r l i e r t ha t

you a l so a t tended a set t lement meet ing with th e debtor and

JPMorgan, and some of the o ther c r e d i t o r s on March 10, 2009,

co r rec t?


Q. Okay. And do you r eca l l t e s t i fy in g in your depos i t ion

t ha t the purpose of t ha t b ig hands-on meet ing was to t r y and

s t a r t the process fo r a globa l se t t lement?


212-267-6868 www.veritext.com 516-608-2400





1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25


Page 165

A. That - - I don ' t remember those exac t words in my

depos i t ion , b u t if you ' re asking me the purpose o f t h a t

meet ing, I th ink t h a t ' s a f a i r charac te r i za t ion o f the purpose ,

yeah.

Q. And th e f a c t t h a t the debtor and JPMorgan Chase and the

FDIC and a number o f powerful hedge funds managing a lo t o f

money, were par t i c ipa t ing in a se t t l emen t meet ing t h a t wasn ' t

publ ic informat ion as o f March, 2009, was i t ?

MR. GLICKMAN: Your Honor, I 'm going t o ob jec t t o the

charac te r i za t ion of the ques t ions .

THE COURT: Sus ta ined .

MR. WALKER: I'll re -ask the ques t ion , t ry ing no t to

charac te r i ze anything in t he re .

Q. The f a c t t ha t the debtor and JPMC and th e FDIC and a

number of hedge funds were par t i c ipa t ing in a se t t l emen t

meet ing was no t publ ic in format ion in March, 2009, was i t ?

A. I don ' t th ink it was pub l ic in th e sense t h a t you ' re

t a lk ing about .

Q. In what sense was it publ ic?

A. Well , as I - - my memory o f th e White & Case group was t h a t

there were a number of bond holders in t ha t group - - I th ink it

was more twenty - - my memory i s those o ther bond holders knew

t h a t we were becoming r e s t r i c t e d ; I ac tua l ly d o n ' t know if they

knew about th e meet ing or no t , but to answer your ques t ion was

it pr in ted in the Wall St r e e t Journa l o r made pub l ic in t h a t


212-267-6868 www.veritext.com 516-608-2400





1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25


Page 166

s o r t o f way, no.

Q. Well , even if the o t h e r members o f the White & Case group

knew about the meet ing, would t h a t be your de f in i t i on of pub l ic

in format ion?

A. No.

Q. Okay. And d id you cons ider it m a t e r i a l in format ion t h a t

a l l o f th e i n t e r e s t e d pa r t i e s were s t a r t i ng the proces s fo r a

g loba l se t t l emen t of b i l l i o n s o f do l l a r s of d i spu ted asse t s?

A. Did I cons ider t h a tmeeting

mater i a l in its ex i s t ence?

I 'm so r r y , can you r epea t th e ques t ion , p lease?

Q. The in format ion - - the knowledge t h a t a l l o f the

pa r t i e s - - a l l of t he i n t e r e s t e d pa r t i e s , r e a l l y - - were

s t a r t i n g the process f o r , in your words, a g loba l se t t l emen t o f

b i l l i o n s o f d o l l a r s o f d i spu ted as s e t s to Washington Mutual ,

Incorpora ted ; in your mind, would t h a t be m a t e r i a l in format ion?

A. No.

Q. You t e s t i f i e d e a r l i e r abou t having s igned a

c on f ide n t i a l i t y agreement as a condi t ion to pa r t i c ipa t i ng i n

the meet ing , i s t h a t accura te?

A. Well , I 'm no t sure I'd use the word ' c ond i t i on ' , I r e c a l l

t h a t we s igned a c on f ide n t i a l i t y agreement around the t ime

o f - - sho r t ly be fo re - - a t t end ing t h a t meet ing.

Q. Um-hum. And th e purpose fo r s ign ing the c on f ide n t i a l i t y

agreement was so you could a t t end t h a t meet ing, co r r ec t?

L_A_.__w_e_l___,_t_h_e_c_o_n_f_i_d_e_n_t_i_a_l_i_t_y_a_g_r_e_e_m_e_n_t_w_a_s_s_o_m_e_t_h_i_n_g_t_h_a_t__---'


212-267-6868 www.veritext.com 516-608-2400





EXHIBITF



12

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

Page 1


DISTRICT OF DELAWARE

Case No. 08-12229(MFW)

- - - - - - - - - - - -x

In t h e M a t t e r o f :

WASHINGTON MUTUAL, INC. , e t a 1 . ,

D e b t o r s .

- - - - - - - - - - - - - - - - - - - - - x

U n i t e d S t a t e s Ba nkrup t c y Cour t

824 N o r t h M a r k e t S t r e e t

Wilm ing ton , D el aw ar e

J u l y 21 , 2011

9 : 33 AM

B E FOR E:


U.S . BANKRUPTCY COURT, CHIEF JUDGE



212-267-6868 www.veritext.com 516-608-2400





1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

WASHINGTON MUTUAL, INC., et al.

Page 126

c e r t a in ty to th e e s t a t e wi th in those c la ims and then be able to

p r o j e c t what the r e tu rn would be back to c r e d i t o r s . So we

found t h i s pr oposa l to be r e a l l y nonrespons ive and r e a l l y had

changed the whole dynamics and cons t r uc t s o f what we had been

t a lk ing about prev ious ly .

Q. I s it f a i r to say a t t h i s p o i n t it was your view t h a t th e

pa r t i e s were very f a r apar t i n r eaching a se t t l emen t?

A. Very f a r apar t .

Q. Now a f t e r the exchange o f term s h e e t s , what f u r t h e r

nego t ia t ions d id you have with JPMorgan dur ing t h i s November

c on f ide n t i a l i t y per i od?

A. I had cont inued to d i scuss g e t t i n g th e term shee t s and

process back on t r ack with Mr. McCree. And we had cont inued to

have d i r e c t dia logue between M• . McCree and mysel f .

Q. D id the r e come a t ime where t he deb to r s e n t an ac t u a l term

shee t dur ing December?

A. Yes.

Q. And if you 'd t ake a look a t th e nex t t a b , which i s EC-305,

aga in , which I a l so be l ieve has been admi t t ed a l r eady , does

t h i s r e f l e c t the of f e r t h a t was made by th e deb to r dur ing t h i s

per i od?

A. It does .

Q. To your r eco l l e c t i o n , was t h i s of f e r t h a t was de l ive r ed to

th e - - to JPMorgan eve r d isc lo sed to the se t t l emen t noteholders

a t t h i s


212-267-6868 www.veritext.com 516-608-2400





1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25


Page 127

A. I c a n ' t be sure b u t no t to my r eco l l e c t i o n d id we sha r e

t h i s with any of t he se t t l emen t noteholders .

Q. Now once aga i n , a t the end o f th e c on f ide n t i a l i t y pe r iod

t h a t ended a t the end of t he yea r , d id t he deb to r make a

determina t ion whether it had shared mate r ia l nonpubl ic

in format ion with the se t t l emen t noteholder s?

A. Yes.

Q. And what determina t ion d id it make?

A. We de te rmined t h a t we had mate r ia l nonpubl ic in format ion

and we d isc lo sed it in our November 2009 MOR which was f i l e d on

December 30 t h , 2009.

Q. I f you could t ake a look a t the n e x t tab in your b inde r ,

which i s AU-32 - - I 'm sor ry - - which i s - - I apologize - - which

i s Debtor s ' Exh ib i t 428, do you r ecognize t h i s document?

A. Yes.

Q. And what i s i t ?

A. This i s the 8K we f i l e d on December 30 th wi th th e SEC

which f i l e d our November 2009 MOR.

Q. An d in the November monthly ope ra t ing r ep o r t t h a t was

f i l e d with t h i s cour t and the SEC, was the r e a d isc lo su r e o f

th e in format ion t h a t th e debtor had provided to the se t t l emen t

noteholder s?

A. Yes.

Q. And what in format ion was s e t fo r th in the monthly

ope ra t ing r epor t ?


212-267-6868 www.veritext.com 516-608-2400





1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25


Page 128

A. Under note 5 , under "Taxes" , the second paragraph , we had

f i l ed - - we d isc lo sed t h a t we es t imated under the Workers '

Homeowner and Business Ass is tance Act o f 2009 t h a t our

p o t e n t i a l NOL could r e s u l t in tax refunds o f up to 2 .6 b i l l i o n

do l l a r s o f which we a l so d i sc lo sed t h a t there could be

competing cla ims of ownership.

MR. SLACK: Your Honor, I would move the admission o f

Debtors ' Exh ib i t 428.

MR.SARGENT: No ob jec t ion , Your Honor.

THE COURT: It's admi t ted .

(Debtors ' Exh ib i t 428, 8K f i l ed by the debtors on 12/30/09 with

the SEC and the Court which f i l e d the November 2009 monthly

opera t ing r epor t , was hereby rece ived in to evidence as of t h i s

da te . )

Q. Was there a determina t ion made by the debtor with r espec t

to the m a te r i a l i t y o f in format ion per t a in ing to the back and

fo r th o f nego t i a t ions between the deb tor and JPMorgan dur ing

t h i s per iod?

A. Yes.

Q. And what wa s the de te rmina t ion t h a t wa s made by the

debtor?

A. The deb to r , in connect ion with its advisors and lawyers ,

determined t h a t t he re was no t any mater i a l nonpubl ic

in format ion t h a t needed to be disclosed .

Q. Now when d id the November 2009 c on f ide n t i a l i t y agreements


212-267-6868www.veritext.com 516-608-2400




1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

WASHINGTON MUTUAL, INC., et at.

Page 129

with the set t lement noteholders i n f a c t terminate?

A. December 30th .

Q. And t ha t was a day e a r l i e r than s e t for th in the

conf iden t i a l i ty agreements , co r rec t?


Q. How d id it come t h a t the te rmina t ion o f the

conf iden t i a l i ty agreements occurred on December 30th r a the r

than December 31st?

A. I bel ieve t h a t Fr ied Frank had reques ted t h a t we terminate

the conf iden t i a l i ty agreement a day e a r l i e r on beha l f o f one of

i t s noteholders .

Q. And why d id the debtor agree to do t ha t ?

A. We had a lready pu t in to the publ ic the required

d i sc lo su res t ha t we needed to make. And we agreed with t h e i r

reques t o f reducing the conf iden t i a l i ty per iod t h a t day.

Q. So on December 30th , the debtor had a lready f i l ed i t s MOR,

co r rec t?


Q. Now a t the end of t h i s conf iden t i a l i ty per iod , can you, in

your own words, descr ibe how fa r apar t in do l l a r s or otherwise

you be l i eve the debtor was from reaching agreement with

JPMorgan?

A. Well , I would say t h a t it was not j u s t JPMorgan t ha t we

needed to reach agreement with . The p r i o r term shee t had a

c lause in there t h a t we had to reach agreement a l so with the


212-267-6868 www.veritext.com 516-608-2400





1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25


Page 136

up?

A. Yes. The morning of March 12th , in a conference no t too

fa r from here , we wrapped up the remaining i tems o f which we

thought , and then Mr. Rosen came in to cour t and read those

te rms in to the record .

Q. And was t h i s agreement the f i na l agreement?

A. No. There were -

Q. There were changes , co r rec t?

A. There would be changes .

Q. NOw, in reaching t h i s agreement t h a t you j u s t desc r ibed up

through March 12 th , what was the involvement o f the se t t l emen t

noteholders in those nego t ia t ions dur ing t h i s per iod?

A. The se t t l emen t noteholders had no involvement in the

nego t i a t ions . There was one meeting when one of the s e t t l emen t

noteholders i n Fr ied Frank a t tended with JPMorgan. I be l ieve

t h a t meet ing was on March 1 s t . But exc lus ive o f t ha t one

meet ing the r e was no involvement with them.

Q. And why wer en ' t they involved in t h i s process dur ing t h i s

per iod?

A. There wasn ' t any need to involve them. We're the debtor .

We have - - we're - - it i s our r e s pons ib i l i t y to determine what

we be l ieve i s in the b es t i n t e r e s t of the debtor , and t h a t ' s

what we did .

Q. And who in f a c t made th e dec i s ion to en te r in to the f i na l

se t t l emen t agreement t h a t was reached?


212-267-6868 www.veritext.com 516-608-2400





1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25


Paqe 137

A. I d id , and it was l a t e r r a t i f i e d by the board.

Q. NOw, a re you aware t h a t in th i s proceedinq the equi ty

committee has contended t ha t the debtor was con t ro l l ed and

dominated by ce r t a in of the noteholders?

A. I 'm aware of t ha t .

Q. And what i s your r eac t ion to t h a t a11eqat ion?

A. It's complete ly fa l se .

Q. And why i s t ha t ?

A. Well , I th ink t he r e ' s been numerous ins tances here t h a t we

have t a lked about in th i s discuss ion as wel l as others o f where

the set t lement noteholders wanted the debtor to do somethinq

and we r e jec ted t h e i r ideas and d id what we thouqht was be s t

fo r the es t a t e . We led the neqo t i a t ions ; the se t t l emen t

noteholders d id not . The unsecured c r e d i t o r s ' committee

par t i c ipa ted with us throuqhout t h i s case . And u l t imate ly the

debtor exerc ised i t s judqment, i t s so le judqment in en te r inq

in to the q loba l se t t l emen t aqreement.

MR. SLACK: Thank you very much, Mr. Kosturos. I have

no more ques t ions .

THE COURT: A ll r i qh t . I th ink t h i s i s a qood t ime to

take a lunch break. L e t ' s q e t back a t 1 . Well , l e t me ask how

lonq the p ar t i e s th ink t h e y ' l l need fo r cross .

MR. SARGENT: I expect my cross to be between an

hour - - ce r t a in ly no more than an hour and a h a l f , Your Honor.

MR. COFFEY: Y o u r -


212-267-6868 www.veritext.com 516-608-2400





1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25


Page 138

THE COURT: L et me hear from o ther s .

MR. COFFEY: Your Honor, Jeremy Coffey with Brown

Rudnick. I can rea l ly t ry to pare it back, working with Mr .

Sargent . I th ink we can ge t it done in fo r ty - f ive minutes . A

l a rge p ar t of our cross i s going to be dea l ing with a

p ar t i cu l a r s e t of documents we th ink should be inc luded in the

record . So if we're able to s t i p u l a t e to the inclus ion of

those I th ink I can cu t my cross back s ign i f i can t ly .

THE COURT: A ll r i g h t . Why don ' t you t a lk during

lunch? Do we want to make it a ha l f an hour fo r lunch and the

p ar t i e s j u s t s tay and t a lk about exh ib i t s?

MR. COFFEY: I 'm happy to do t h a t , Your Honor.

THE COURT: A ll r i g h t . Well , let's come back a t 1:30

then .

MR. SLACK: Your Honor, one c l a r i f i c a t i o n , s ince the

witness has n o t y e t s t a r t ed cross , I want to make it - - I want

to make sure t ha t we can in fac t t a lk to the witness .

THE COURT: You may.

MR. SLACK: Thank you.

THE COURT: And j u s t fo r counse l ' s e d i f i c a t i on , I

be l ieve , in looking a t my ca lendar fo r nex t week, t h a t t he re

may be t ime next Thursday. Th e debtor has an omnibus on

Thursday, i s t ha t r igh t?

MR. ROSEN: There i s an omnibus hear ing , Your Honor.

know t h a t t h a t ' s a l so the t ime t h a t the equi ty committee has


212-267-6868 www.veritext.com 516-608-2400

I





1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25


Page 151

Q. I 'm going to ask you t h a t ques t ion today and see if your

answer has go t ten any more s pe c i f i c , Mr. Kosturos. Does th e

deb to r be l ieve t h a t th e c on f ide n t i a l i t y agreements with th e

se t t l emen t noteholders r equ i r e the funds to main ta in

c on f ide n t i a l i t y a f t e r th e s ix ty - day term exp i r e s?

A. Well , aga in , I am no t a lawyer and I 'm a f a c t witness

here , bu t my unders tanding i s , first o f a l l , th e document does

speak fo r i t s e l f so I won ' t change t ha t p a r t of it, b u t my

unders tanding i s t h a t a t the conclus ion of th e c on f ide n t i a l i t y

agreements t h a t the pa r t i e s a r e r e lea sed from whatever

agreement t h a t we have .

Q. So the debtor would n o t have cons idered it a breach if one

o f the se t t l emen t noteholders had a t tached the s e t t l emen t te rms

to a f i l i n g in cour t or had po l i shed it in The Wall S t r e e t

Journa l? Tha t would have no t been a breach o f th e

c on f ide n t i a l i t y agreement from th e deb to r s ' pe r spec t ive , i s

t h a t your tes t imony?

MR. SLACK: Your Honor, I o b j ec t to the ex t en t t h a t

t ha t pa r t i c u l a r ques t ion c a l l s fo r a l eg a l conclus ion .

THE COURT: Well , I'll - - ove r ru l ed and he can answer

h is unders tanding .

A. Mr . Sargent , can you j u s t r epea t th e ques t ion? I want to

make sure I g e t t h i s exac t ly r i gh t .

Q. Sure . I j u s t want to - - I 'm t ry ing to g e t th e deb to r s '

unders tanding whether it would have been a breach , in th e


212-267-6868 www.veritext.com 516-608-2400





1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25


Page 152

deb to r s ' view, of the c on f ide n t i a l i t y agreements fo r one o f the

hedge funds to pub l i c ly d i sc lo se the se t t l emen t te rms a f t e r the

c on f ide n t i a l i t y agreement expired , a f t e r May 8 th , in o ther

words, when we're speaking o f the March c on f ide n t i a l i t y

agreement .

A. I be l i eve t h a t would no t be a breach o f th e agreement .

Q. At the same depos i t ion des igna ted on the same t o p i c s , I

asked you if the deb to r be l ieved it would be a breach of t h i s

agreementif the

set t lementnoteholders t r aded

based on

in format ion t h a t they obta ined in these set t lement proposa ls .

Do you r e c a l l t ha t ques t ion?

A. I do.

Q. An d your tes t imony then was you d i d n ' t - - the deb to r d id

no t have an opinion one way o r the o ther whether t ha t would be

a breach . Do you r e c a l l tha t?

MR. SLACK: Your Honor, I bel ieve t ha t he can ' t -

mean, t h a t ' s a d i f f e r e n t ques t ion and I be l i eve he c a n ' t

impeach the witness withou t asking the same ques t ion .

THE COURT: I agree . You've go t to ask him a

ques t ion - - a re you impeaching you c a n ' t j u s t - - what are

you of fe r ing the depos i t ion for? To impeach him you have to

ask him the same ques t ion f i r s t .

MR. SARGENT: I 'm so r ry , Your Honor, I wi l l . Let me

rephrase .

Q. Do you have an opinion - - does the deb to r have an opin ion


212-267-6868 www.veritext.com 516-608-2400

I





1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25


Page 153

whether or no t it would be a breach o f the c on f ide n t i a l i t y

agreement fo r the hedge funds to have t r aded based on th e

informat ion t ha t they lea rned dur ing the pendency of the

agreement?

A. I be l ieve t ha t a t the conclus ion o f the conf iden t i a l

pe r iod in agreements th e pa r t i e s are f r ee to do whatever they

want to do, t ha t the agreement i s no longer in p lace .

Q. The deb to r made a determina t ion , made a consc ious

determina t ion , d id it no t , about whether o r no t the terms being

exchanged between i t s e l f and JPMorgan were mater i a l . An d it

made t h a t determina t ion in conjunct ion with its disclosure

ob l iga t ions under th e c on f ide n t i a l i t y agreement , i s t h a t r igh t?

A. The deb to r , with advise from counse l , made t h a t

determina t ion , yes .

Q. And so when you cons idered t h a t i s sue you knew, you

unders tood th e p o s s i b i l i ty t h a t the hedge funds might t r ade on

t h i s in format ion , d id n ' t you? The deb to r unders tood t ha t ?

A. Well , again , the c on f ide n t i a l i t y per iod extends fo r as

long as th e c on f ide n t i a l i t y pe r iod extends . And then a f t e r it

exp i res , we have a duty to d i sc lo se mate r i a l nonpubl ic

in format ion , and then a t the conclus ion o f the c on f ide n t i a l i t y

agreement , the agreement i s no longer in p lace .

Q. And t h e re ' s some conf iden t i a l in format ion , the informat ion

t h a t was conf iden t i a l a t l e a s t dur ing th e pendency of the

agreement , t ha t you determined was no t m at e r i a l , isn't t ha t


212-267-6868 www.veritext.com 516-608-2400





1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25


Paqe 154

r iqh t?

A. Yes.

Q. And one example o f t ha t were the se t t l emen t te rms t h a t

were beinq exchanqed, isn't t ha t r iqh t?

A. I th ink the f ac t s a ~ e on the record t ha t we thouqht t ha t

t h a t was t ha t we d id not need t o d i sc lo se t ha t .

Q. And so the debtor unders tood - - when the debtor made th e

de termina t ion it d id not need t o d i sc lo se t h a t , the debtor

unders tood t h a t the hedqe funds miqht t r ade on t h a t

in format ion , d i d n ' t the debtor know tha t?

A. Th e hedqe funds miqht have done a l o t of th inqs a f t e r the

conclusion o f the c on f ide n t i a l i t y aqreement , and qui te f rankly ,

t he y ' r e qoinq to do what t he y ' r e qoinq to do.

Q. The March neqo t ia t ions were not the only t ime t h a t the

set t lement noteholders were al lowed to pa r t i c i pa t e in

se t t l emen t neqot ia t ions with JPMC, were they?


Q. The debtor a l so en te r ed i n to c on f ide n t i a l i t y aqreements

with those four funds for the same purpose in November of 2009.

You t e s t i f i e d about t ha t on d i rec t , co r rec t?

A. Yes.

Q. And th e debtor also souqht the set t lement noteholders '

views on o ther i s sues r e l evan t to the bankruptcy a t o the r

t imes , i s t h a t t rue?

A. I th ink t ha t ou ts ide of the c on f ide n t i a l i t y aqreement


212-267-6868 www.veritext.com 516-608-2400





EXHIBITG



Davis Polk September 20, 2011

CLIENT NEWSLETTER

Insolvency and Restructuring Update

Second Washington Mutual Plan Confirmation DenialMay Have Significant Impact on Claims Trading and Plan Negotiation

On September 13, 2011, Judge Mary Walrath of the United States Bankruptcy Court for the District of

Delaware surprised many parties in interest and observers of the case by issuing an opinion denying

confirmation of the modified proposed plan of reorganization of Washington Mutual, Inc. (UWMI") and its

affiliated debtors. The modified plan incorporated certain changes Judge Walrath had indicated were

necessary in a January 2011 opinion denying confirmation of a prior version of the plan, and many

expected that these changes would be sufficient to ensure confirmation of the modified plan. Although

the decision turned primarily on the rate of post-petition interest awarded to certain creditors of WMI, theCourt's extensive discussion of allegations of "insider trading" raised against certain claims purchasers is

likely to attract the most attention. Judge Walrath's findings on these allegations may have a significant

impact on claims trading and negotiation dynamics in complex chapter 11 cases going forward.

Case Background

In order to best understand the opinion, it is helpful to have a basic understanding of the primary events

that have taken place in the Washington Mutual cases. WMI, the lead debtor in the case, is the former

parent of Washington Mutual Bank ("WMB"), frequently referred to as WaMu. During the financial crisis

of 2008, after a steady decline in revenues at WMB culminated in credit rating downgrades for WMI and

WMB and a "run on the bank," WMB was taken over by the Office of Thrift Supervision, and the Federal

Deposit Insurance Corporation (the "FDIC") was appointed as receiver. In an FDIC assisted transaction

conducted on the same day as the regulatory takeover of WMB, JPMorgan Chase Bank, NA ("JPMCB")acquired substantially all of the assets of WMB for an aggregate purchase price of $1.88 billion, plus

assumption of over $145 billion in deposit and general liabilities of WMB.

After the takeover of WMB by JPMCB, WMI and its affiliated debtors commenced bankruptcy proceedings

in Delaware on September 26, 2008. Because WMI was left with minimal assets following the collapse of

WMB, initial recovery expectations for WMI's creditors were low, claims against WMI traded at very low

prices, and many of the claims were purchased by professional distressed debt investors. Although WMI

had few assets of its own and no material ongoing business, it became clear early in the case that WMI

would assert several potential causes of action against JPMCB arising from the takeover of WMB, and

that recoveries of WMI creditors would be primarily driven by any value that could be obtained for WMI

from litigation or settlement of those claims. Described very generally, the claims asserted were for

turnover of assets - the ownership of which was disputed as between JPMCB, WMI and the FDIC

receivership for WMB - and miscellaneous other claims the parties to the transaction asserted againstone another. Chief in importance among the disputed assets were (i) roughly $4 billion in cash held in

accounts at WMB in the name of WMI (the "Deposited Funds") and (ii) various large tax refund claims

and tax assets ariSing from prior losses of WMB.

The claims arising from the takeover of WMB were partially litigated in bankruptcy court, federal district

court and the federal court of claims. As is common, however, settlement negotiations were ongoing

during this preliminary litigation. A "global settlement" (the "GSA") of all issues relating to the WMB

takeover was first announced on March 12, 2010, and this GSA formed the foundation of (and primary

source of value for distributions under) WMl's Sixth Amended Plan. A confirmation hearing for the Sixth

Davis Polk & Wardwell LLP davispolk.com

http://slidepdf.com/reader/full/davispolk.com




Davis Polk

Amended Plan was held in December 2010. At this hearing, allegations of improper trading in public WMI

debt by a group of four hedge funds (the so-called "Settlement Noteholders") that had participated, to

varying degrees, in settlement discussions, were raised for the first time by an individual investor that held

subordinated WMI securities and believed that the GSA had been improperly structured to benefit the

Settlement Noteholders at the expense of other creditors. Generally, the investor alleged that theSettlement Noteholders had strategically bought and sold public debt in different parts of WMl's capital

structure while in possession of material nonpublic information ("MNPlh

) gained through their participation

in confidential settlement negotiations with JPMCB, which informed their expectations as to recoveries of

the different classes.

In an opinion issued in January 2011, the Court approved the GSA, but denied confirmation of the plan

for other reasons, primarily deficiencies in the release, indemnity and exculpation provisions. Although

the allegations of insider trading did not playa rote in the Court's decision to deny confirmation (as no

evidence had been presented at that time), Judge Walrath noted in her opinion that plan releases for the

Settlement Noteholders would not be appropriate in light of the allegations and that further discovery

would be helpful.

After the January 2011 opinion was issued, negotiations began around a modified plan remedying the

cited deficiencies. At this time. a committee of equity security holders of WMI (the "Equity Committee"),that were expected to receive no recovery under the plan and had been one of the main objectors to the

GSA at the first confirmation hearing, sought and obtained discovery from the Settlement Noteholders

relating to the insider trading allegations. Efforts of the plan supporters to reach a consensual settlement

with the Equity Committee ultimately failed. In its objection to plan confirmation, the Equity Committee

focused on the insider trading allegations, and then presented extensive argument and testimony on the

insider trading allegations at the confirmation hearing on the modified plan in July 2011. In early July, the

Equity Committee also moved for standing to pursue claims against the Settlement Noteholders for

equitable subordination or equitable disallowance based on the insider trading allegations.

Involvement of the Settlement Noteholders in the Case

Certain basic facts of the role that the Settlement Noteholders played in the case and in negotiations

between WMI and .IPMCB are not in dispute. The negotiation process between WMI and JPMCB began

in early March 2009 and continued intermittently until the announcement of the GSA in March 2010.

During this period of intermittent negotiations, the Settlement Noteholders were parties to confidentiality

agreements with WMI, and were subject to two formal "lockup periods" in which the Settlement

Noteholders were required either to restrict trading of the Debtors' securities or to establish an ethical wall

screening their traders from any confidential information. At the end of each lockup period, WMI was

required to publicly disclose any MNPI that had been given to the Settlement Noteholders during the

lockup period and to confirm that they had done so. After the Settlement Noteholders were thus

"cleansed: they would resume active trading in the Debtors' securities. Information to which the

Settlement Noteholders were exposed during the lockup periods included the size and amount of a tax

refund the Debtors believed they would receive (which the Debtors made public at the end of the lockup

period) and terms and offers in settlement term sheets that were exchanged and discussed (which were

not made public at the end of the lockup period). It is not in dispute that outside of the lockup periods,when the Settlement Noteholders were actively trading, they did have some involvement in settlement

negotiations with JPMCB either directly or through conversations with WMI; the Settlement Noteholders

take the position however, that any such involvement did not expose them to information that was

material, even if non public.

2Davis Polk & Wardwell LIP



DavisPolk

Analysis of Insider Trading Allegations and the Settlement Noteholders' Asserted

Defenses

It is important to note that the Court did not reach any final judgment on the merits of the insider trading

allegations against the Settlement Noteholders. Rather, Judge Walrath's analysis was limited to whether

those allegations gave rise to "colorable" claims sufficient to confer standing on the Equity Committee to

pursue claims for equitable disallowance against the Settlement Noteholders based on their allegedly

improper trading. In undertaking this analysis, Judge Walrath described the relevant standard as an

exceedingly low one, commensurate with "the standard applicable to a motion to dismiss for failure to

state a claim." 1

Elements of Insider Trading

Under section 10(b) of the 1934 Act, two theories of insider trading are recognized: the classical theory

and the misappropriation theory. Under the classical theory, insider trading occurs when a corporate

insider (i) trades in the securities of his corporation (ii) on the basis of (iii) MNPI (iv) in violation of a

fiduciary duty owed to shareholders. Under the misappropriation theory, insider trading occurs when a

corporate outsider "misappropriates confidential information for securities trading purposes, in breach of a

duty owed to the source of the information" rather than a duty owed to the shareholders of the securities. 2

The Settlement Noteholders argued that the only MNPI they received during the lockup periods were the

estimated amounts of the Debtors' tax refunds, which were disclosed to the public before the Settlement

Noteholders actually resumed trading, and that any other nonpublic information on which they traded was

not material.

Classical Insider Trading Analysis

Materiality of Nonpublic Information. As to nonpublic information that was either provided to the

Settlement Noteholders outside of lockup periods or not disclosed at the end of lockup periods - primarily

the existence and substance of settlement discussions with JPMCB - the Settlement Noteholders argued

that such information failed to meet the materiality threshold because of the speculative nature of the

settlement discussions and the uncertainty inherent in any fluid negotiation. Materiality of nonpublic

information is generally determined by an objective "reasonable investor" test that asks whether the

information in question ·would be important to a reasonable investor in making his or her investment

decision.'" With regard to information on transformative corporate events like a potential merger, courts

use a balancing test that looks to the "indicated probability that the event will occur and the anticipated

magnitude of the event in light of the totality of the company activity: ' The parties did not dispute the

potential magnitude of a settlement with JPMCB, but rather focused on the probability that such a

settlement would occur. The Settlement Noteholders argued that settlement negotiations were too

tentative, the parties' positions too far apart, and the core terms of the settlement proposals too fluid for

the settlement that was uHimately struck to be sufficiently probable to constitute material information. The

Settlement Noteholders contended that settlement discussions in the context of complex, multi-party,

multi-issue negotiations such as those that occurred between the parties became material only after an

agreement-in-principle had been reached or when the parties had become sufficiently close to reaching a

deal as to suggest a high probability that the deal would be consummated.

I In re Washington Mutual, Inc., Case No. 08-12229 (MFWJ, slip op at p. 109 (Bankr. D. Del. 2011).

2 U.S. v. O'Hagan, 521 U.S. 642, 652 (1997).

3 1n re Burlington Coat Factory Sec. Litig., 114 F.3d 1410, 1425 (3d. Cir. 1997).

4 Basic, Inc. v. Levinson, 485 U.S. 224, 238 (1988) (emphasis added).

3

Davis Polk & Wardwell UP



DavisPolk

The Court rejected this argument. It is again important to note that the Court did not definitively hold that

any of the relevant settlement discussions were material, only that some of those discussions may have

gone to the "material end of the spectrum" and that several rules for determining materiality proposed by

the Settlement Noteholders were not correct. Addressing certain specific issues, Judge Walrath found

the fact that the parties executed confidentiality agreements, exchanged significant amounts ofinformation and engaged in multi-party discussions for more than a year to be indicative of materiality and

evidence that the parties to the agreements regarded the information as material. In rejecting arguments

by the Settlement Noteholders that they reasonably believed after each confidentiality period had ended

without a definitive agreement that the deals were "dead,· and therefore, that past discussions were not

material, Judge Walrath pOinted to other facts, such as the Debtors' continued negotiations with several

key parties outside of the confidentiality periods and the unhappy reaction of other parties that were

excluded from those discussions, as evidence that the discussions were potentially material. Judge

Walrath also suggested that the actions of certain of the Settlement Noteholders in restricting their own

trading during separate negotiations with the Debtors outside of the formal confidentiality periods belied

any notion that such Settlement Noteholders believed the negotiations to be over.

Importantly, the Court also discussed the relevance of trading activity in determining materiality, and

whether materiality in this case could be adduced from the trading patterns of the Settlement Noteholdersimmediately following each confidentiality period. The Equity Committee asserted that the trading

patterns of the parties was suggestive of such a finding because the Settlement Noteholders engaged in

what amounted to a "buying spree" in junior claims, which the Equity Committee contended was based on

knowledge that the settlement was likely to yield enough value to generate a recovery for the junior

claims in excess of their trading prices. In response, the Settlement Noteholders argued that such a

conclusion was not supported by the evidence because many of the Settlement Noteholders took

different and even opposite trading positions. The Settlement Noteholders argued that had such

information been material, all parties would have had economically similar trading patterns.

The Court again sided with the Equity Committee and found the evidence of contrary or random trading

unpersuasive. Although the Court found it difficult to draw any conclusions based on the Settlement

Noteholders' trading activity, the Court went on to state that it believed that (1) the "negotiations may have

shifted towards the material end of the spectrum," and (2) the Settlement Noteholders "traded on thatinformation, which was not known to the public." Consequently, the Court concluded that a colorable

claim existed that the Settlement Noteholders possessed MNPI while trading.

Insider Status. In support of its argument that the actions of the Settlement Noteholders constituted

insider trading under the classical theory, the Equity Committee argued that although the Settlement

Noteholders were not insiders of WM I in the typical sense of directors or officers, they were "temporary

insiders" of the Debtors and thus assumed a duty not to trade. Recognized case law suggests that

"insiders" for purposes of classical insider trading are not limited solely to officers and directors of a

corporation but also include in certain instances "temporary insiders" who have "entered into a special

confidential relationship in the conduct of the business of the enterprise and are given access to

information solely for corporate purposes."s The Equity Committee argued that such a relationship was

created between the Debtors and the Settlement Noteholders when the Settlement Noteholders were

given MNPI, triggering a fiduciary dutyon

their part to other creditors and shareholders. Additionally, the

Equity Committee asserted that the Settlement Noteholders' blocking positions in two subordinated

classes of creditors potentially conferred fiduciary obligations on the Settlement Noteholders with respect

to those two classes of creditors. The Settlement Noteholders countered that temporary insider status

5 Dirks v. SEC, 463 U.S. 646, 655 n.14 (1983).

4Davis Polk & Wardwell LLP



DavisPolk

was not conferred where. as here, the Debtors and the Settlement Noteholders were working toward a

goal in which each had diverse interests.

The Court did not wholly adopt the Equity Committee's first argument - that insider status should be

imputed to the Settlement Noteholders purely on account of their possession of MNPI - but, nonetheless,

found that there was a colorable claim that such status existed because the Debtors (i) gave theSettlement Noteholders confidential information and (ii) allowed the Settlement Noteholders to participate

in negotiations with JPMCB for the shared goal of reaching a settlement that would form the basis of a

consensual plan of reorganization. The Court agreed with the Equity Committee's second assertion

that the Settlement Noteholders could be considered "insiders· as a consequence of their status as

holders of blocking positions in two classes of the Debtors' debt structure - because such significant

holdings could create a duty to other members of those classes to act for their benefit. Interestingly,

although the Equity Committee couched this second argument as conferring a potential fiduciary duty on

the Settlement Noteholders as to other members of the two classes in which the Settlement Noteholders

owned blocking positions, Judge Walrath's analysis is unclear and could be interpreted to mean that such

duties also ran to other classes. including the equity class to which standing was granted.

Knowledge. In order to meet the scienter requirement for classical insider trading. it must be shown that,

at the time of trading, the defendant "knew or recklessly disregarded" that it possessed MNPI. In supportof their position that this requirement was not satisfied. the Settlement Noteholders argued that (1) their

confidentiality agreements explicitly required the Debtors to disclose any MNPI at the end of each

confidentiality period, (2) the Debtors certified that they had disclosed all MNPI, and (3) the Settlement

Noteholders independently confirmed that such disclosure had occurred. The Settlement Noteholders

also argued that the inconsistent trading patterns exhibited by different Settlement Noteholders

throughout the periods in question further supported the notion that any information received during

settlement talks that was not subsequently made public was not material.

The Court disagreed with the Settlement Noteholders on all counts, finding that the Settlement

Noteholders' reliance on the Debtors for proper disclosure of any applicable MNPI did not provide a safe

harbor with respect to the Settlement Noteholders' trading activity. Further, notwithstanding each

Settlement Noteholder's own internal policies, the Court found that the Settlement Noteholders traded

while in possession of the knowledge that the Debtors were engaged in discussions with JPMCB relatingto issues of which the trading public was unaware. Based on these findings, the Court concluded that

there was a colorable claim that the Settlement Noteholders were at least reckless as to their use of MNPI.

In response to the additional assertion by the Settlement Noteholders that their inconsistent trading

patterns undercut any argument that they traded based on MNPI, Judge Walrath stated that the statute

only required that the Settlement Noteholders have knowledge that they were in possession of MNPI

while trading. not that they profited from such knowledge or actually applied such knowledge in their

trading.

Misappropriation Theory Insider Trading Analysis

The misappropriation theory of insider trading examines whether (i) the defendant possessed MNPI (ii)

which he had a duty to keep confidential and (iii) breached that duty by acting on or revealing the

information in question: S Liability attaches when the person who received MNPI trades on the

misappropriated information under circumstances in which that person knew or should have known theMNPI was misappropriated. 7 Here. the evidence presented suggested that the Debtors shared

information with counsel to certain of the Settlement Noteholders pursuant to a strict confidentiality

a SEC v. Lyon, 605 F. Supp. 2d 531, 541 (S.D.N.Y. 2009).

7 SEC v. WifliS, 777 F. Supp. 1165,1169 (S.D. N.Y. 1991).

5

Davis Polk & Wardwell LLP



Davis Polk

agreement restricting any further distribution of such shared information to the law firm's clients unless the

receiving party had entered into a separate confidentiality agreement directly with the Debtors.

Notwithstanding such restrictions, the law firm allegedly shared summaries of April negotiations with two

of its clients who were freely trading at the time and who had not entered into the required confidentiality

agreements. After receipt of this information, one client continued to trade, while the other voluntarilyrestricted its trading. In light of the foregoing, the Court found that there was a colorable claim against the

fund that had continued trading on a misappropriation theory, because the fund "knew or should have

known" that the information was restricted and subject to the law firm's confidentiality obligation to the

Debtors (it was also alleged that the law firm breached its confidentiality agreement with the Debtors in

sharing the MNPI with its clients). The Court also concluded that a colorable claim of insider trading

under the misappropriation theory existed with respect to whether the same attorneys had similarly

breached their confidentiality agreement by allegedly sharing protected MNPI with the Settlement

Noteholders.

Possible Effects of the Decision

As noted above, although Judge Walrath discusses the law of insider trading in significant detail, the

Court did not reach any final conclusion as to the merits of the specific allegations at issue. The Court'sultimate finding is only that the allegations meet the low bar of being "colorable" claims, justifying a grant

of standing to the Equity Committee to pursue the claims further. In spite of this, however, the Court's

analysis of the application of insider trading laws to claims traders in the bankruptcy process may have a

significant impact on the way claims traders do business and on the way settlement and restructuring

negotiations are conducted in bankruptcy. In concluding its analysis of the insider trading allegations, the

Court addressed this issue, noting that the Settlement Noteholders and others had warned that a finding

of insider trading would chill the partiCipation of creditors in settlement discussions in bankruptcy cases of

public companies. On this point the Court displayed little sympathy, contending that "[t]here is an easy

solution: creditors who want to participate in settlement discussions in which they receive material

non public information about the debtor must either restrict their trading or establish an ethical wall

between traders and participants in the bankruptcy case."8

Judge Walrath found these restrictions

appropriate and not unduly burdensome because these creditors were doing so in exchange "for a seat at

the negotiating table," which would not only allow them to receive confidential information in return but

would also give them the opportunity to influence the reorganization process.

Judge Walrath's decision seems to propose a bright line rule for the conservative investor: if you wish to

participate in non public negotiations, you should not make trading decisions at any time after beginning

such negotiations. Institutions involved in negotiations would refrain from trading entirely or implement an

"ethical wall" between those engaged in negotiations and those making trading decisions for the duration

of the case. For investors that are willing and able to adopt one of these approaches, Walrath's decision

will not be problematic. For some investors, however, these approaches will be either difficult or

impossible, and these investors will not be willing to take the risk of becoming restricted indefinitely by

engaging in settlement discussions.

Investors unwilling to be indefinitely restricted have typically used confidentiality arrangements similar to

those used by the Settlement Noteholders, providing for intermittent restricted periods during which theyhalted trading or walled off traders, followed by a publication of MNPI to which they were exposed at the

end of the restricted period, thus "cleansing" them before they resumed trading or removed the ethical

wall. The full impact of Judge Walrath's decision on market practice will not fully be known for some time.

In the wake of this opinion, however, confidentiality agreements that allow investors to move back and

8 In re Washington Mutual, Inc., Case No. 08-12229 (MFW). slip op at p. 138 (Bankr. D. Del. 2011).

6

Davis Polk & WardwellLl..p



Davis Polk

forth between restricted and unrestricted status through a "cleansing" of MNPI would seem to carry with

them either a burden on the debtor to disclose enormous amounts of information at the end of lockup

periods (some of which could be problematic for evolving negotiations), or a risk that determinations as to

materiality would later be vulnerable to attack. This could impact both claims trading and plan negotiation

dynamics. From the investor's perspective, inability to use these arrangements could discourage activeparticipation in negotiations by funds that are not able or willing to establish ethical walls for the duration

of a case, and thus limit such investors' ability to protect their interests. From the debtor's perspective,

this shrinking of the universe of negotiation participants could make it difficult to craft a plan the debtor

could be confident would succeed due to an inability to find a critical mass of creditors with whom to

negotiate. Needless to say, it is preferable for a debtor to be able to know with some certainty that its

proposed plan structure will succeed, and having to guess at what creditors will vote to support could lead

to an inefficient and drawn out plan process, prolonging case duration and expense.

If you have any questions regarding the matters covered in this publication, please contact any of the

lawyers listed below or your regular Davis Polk contact.

Donald S. Bernstein 2124504092 [email protected]

Timothy Graulich 2124504639 timothy. 9 [email protected]

Marshall S. Huebner 2124504099 [email protected]

Benjamin S. Kaminetzky 2124504259 [email protected]

Elliot Moskowitz 2124504241 [email protected]

Brian M. Resnick 2124504213 [email protected]

Damian S. Schaible 2124504580 [email protected]

Karen E. Wagner 212450 4404 karen. [email protected]

Eli James Vonnegut 2124504331 [email protected]

©2011 Davis Polk &Wardwell l lP

Notice: This is a summary that we believe may be of interest to you for general information. It is not a full analysis of the matterspresented and should not be relied upon as legal advice. If you would rather not receive these memoranda, please respond to thisemail and indicate that you would like to be removed from our distribution list. If you have any questions about the matters coveredin this publication, the names and office locations of all of our partners appear on our website, davispolk.com.

7

Davis Polk & Wardwell !..t.P





EXHIBITH



Ad Hoc Committees Owe Fiduciary Duties? WaMu Threatens to Tum a Molehill Into a... Page lof2

News & Publications

Ad Hoc Committees Owe Fiduciary Duties? WaMu Threatens

to Turn a Molehill Into a Mountain

September 19, 2011

Much has already been written about the "insider trading" aspects of Judge Walrath's September 13 Opinion

denying confirmation of WaMu's Chapter 11 plan of reorganization (the Opinion can be found hererlil ). In a

nutshell, Judge Walrath expressed the view that a person in possession of MNPI (material non-pUblic information)

could be considered to be engaged in insider trading even after the MNPI restriction period ends.

While that part of the Opinion is certainly a blockbuster, we are focusing here on a different aspect of the Opinion,

namely Judge Walrath's view that members o f an ad hoc committee can be considered to owe fiduciary duties to

other creditors holding the same class of securities. Yikes! The first time she said this, we noted her comments in

. "The WaMu Double Whammy," which can be found here. We repeat now what we said then, which is that this is a

frightening conclusion. Except then, Judge Walrath's comments were more speculative. In her latest Opinion,

although still dicta, all speculation is laid to rest.

Citing to the Supreme Court decision in Dirks v. SEC, 463 U.S. 646 (1983), Judge Walrath found two independent

bases for concluding that that a "colorable claim" existed for concluding that the "Settling Noteholders" owed

fiduciary duties to other noteholders in the same class. First, because the Settling Noteholders received MNPI in

the course of settlement discussions with the Debtors, they became "temporary insiders" of the Debtors and owed

the same fiduciary duties as other corporate insiders. Second, the Settling Noteholders (in Judge Walrath's view)

held themselves out as representing the entire class of noteholders, and therefore assumed fiduciary duties to act

in the best interests of the enti re class.

Judge Walrath does not simply rely on the Dirks case or her own views, she also refers to several other decisions

(including her own earlier WaMu decision) and a law review article to reach the conclusion that ad hoc

committees in posseSSion of MNPI can owe fiduciary duties. Even so, the comments about fiduciary duties would

appear to be dicta, as Judge Walrath rests her decision on insider trading considerations rather than potential

breach of fiduciary duties.

So what is a large bondholder to do?

The primary reasons for forming ad hoc committees are self-evident. First, "size matters," and debtors are far

more willing to negotiate with a group of creditors who hold substantial claims in the aggregate rather than with a

series of individual creditors. Indeed, prepetition borrowers and issuers often encourage bondholders to form ad

hoc committees precisely for this purpose. While there are certainly no guarantees that a settlement negotiated by

an ad hoc committee will be accepted by the requisite bondholders generally in a consent solicitation or exchange

offer (if out-of-court) or a plan vote (if in-court), it is certainly beneficial to know whether a critical mass o f

bondholders is willing to support a proposed solution. Second, teaming up with other bondholders enables cost

sharing of legal and financial advisor fees.

Judge Walrath's answer to the above question is simple. If you are an ad hoc committee and in possession of

MNPI, e ither don't trade in the securities or establish an internal wall between the private and public sides of your

shop, and further don't assume you are free to trade just because the agreed "restricted period" has terminated.

http://www.bracewellgiuliani.com/index.cfm/falnews.advisory/item/c95181 bc-db61-4bee-... 9/26/20 II

http://www.bracewellgiuliani.com/index.cfm/falnews.advisory/item/c95181

http://www.bracewellgiuliani.com/index.cfm/falnews.advisory/item/c95181



Ad Hoc Committees Owe Fiduciary Duties? WaMu Threatens to Turn a Molehill Into a ... Page 2 of 2

Fair enough, although whether the WaMu Settling Noteholders actually crossed the line rather than merely

presenting a "colorable claim" is left open for another day. But why does the concept of fiduciary duties need to be

brought into the discussion? There are plenty of remedies for improper trading while in the possession of MNPI,

but adding the burden of fiduciary duties opens up an entirely new category of risks that, potentially, expose ad

hoc committee members to legal claims having nothing to do with insider trading.

It is not difficult to imagine situations in which the foregoing scenario could play out. Suppose, for example, an ad

hoc committee consists of large bondholders interested in a debt-equity conversion. Some smaller non-committeebondholders, however, may have no interest in holding equity, either because it is not part of their investment

. strategy or because the ir fund is precluded from holding equity securities. In a debt-equity conversion plan,

therefore, these latter bondholders could be compelled to sell their equity (or their right to receive equity) quickly,

and potentially at a low price given urgent timing considerations. Could these bondholders sue the ad hoc

committee members for not acting in the best interests of bondholders who did not want to, or could not, hold

equity in the reorganized company?

Or how about the very common scenario in which the debtors agree to reimburse the fees of the ad hoc

committee's professionals. Can non-committee bondholders sue the committee members because they did not

also negotiate for the reimbursement of professional fees incurred by non-committee members?

In fact, the WaMu dicta begs an even more basis question: if ad hoc committee members have fiduciary duties

like official committees, are they restricted from trading even i f not in possession of MNPI unless they set up a strict internal wall?

Whether the WaMu Settling Noteholders did, in fact, engage in improper insider trading is an issue that mayor

may not be resolved in the long run and is, of course, highly dependent on the unusual facts of the WaMu

situation. But whether ad hoc committee members owe fiduciary duties to non-committee members is, we fear, an

issue that may play out repeatedly in the years to come, whether simply through behind-the-scenes threats or

eventually through live litigation. That's too bad, because there are already ample remedies (such as insider

trading laws) for the rare abuse of an ad hoc committee position without layering on top of those remedies a

fiduciary duty construct that could turn a molehill into a mountain.

Evan D. Flaschen

Phone: 860.256.8537

Email: [email protected]

Kurt A. Mayr

Phone: 860.256.8534


David L. Lawton

Phone: 860.256.8544


http://www.bracewellgiuliani.com/index.cfm/falnews.advisorylit emlc95181bc-db61-4bee-... 9/26/2011




http://www.bracewellgiuliani.com/index.cfm/falnews.advisorylitemlc95181








EXHIBIT I



WaMu Court Allows Equity Committee to Pursue"Equitable Disallowance" of Noteholder Claims Based on

Allegations of Insider TradingOn September 13,2011, Judge Mary F. Walrath of the United States Bankruptcy Court for the District of

Delaware granted standing for an equity committee in In re Washington Mutua/, Inc. ("WaMu") to seek

"equitable disallowance" of daims held by noteholders that had traded claims after engaging in negotiations

with WaMu over the terms of a global restructuring. The decision highlights the question of whether

creditors may engage in restructuring negotiations with a debtor and continue to trade in claims without

establishing an ethical wall restricting traders from access to information related to the negotiations.

In WaMu, the equity committee argued that "equitable disallowance" of the claims held by certain hedge

funds that held Washington Mutual notes (the "Noteholders") was warranted because the Noteholders had

allegedly traded securities of the Debtors while in possession of material, non-public information concerning

plan-related setdement negotiations. The Noteholders had signed confidentiality agreements with WaMu that

required them either to establish an ethical wall or to refrain from trading during two specified limited

duration confidentiality periods. In exchange for the Noteholders submitting to those restrictions, WaMu

agreed to make cleansing disclosures of material, non-public information at the conclusion of the specified

confidentiality periods, so as to permit the Noteholders to resume trading without an ethical wall. Following

the confidentiality periods and cleansing disclosures by WaMu, certain of the Noteholders traded in WaMu

debt. WaMu did not include in its cleansing disclosures the fact that negotiations were ongoing or the

content of the various settlement term sheets that had been exchanged among the parties to the negotiations.

Despite the fact that the discussions and term sheets had not resulted in any agreement in principle, the

equity committee argued that the fact of the ongoing negotiations and the setdement terms under discussion

constituted material, non-public information.

The Bankruptcy Court made several notable statements in the course of concluding that the equity

committee had stated "colorable claims" relating to insider trading that could provide a basis for "equitabledisallowance" of the Noteholders' bankruptcy daims. The Court, in light of these rulings, granted the equity

committee standing to pursue these allegations and to seek "equitable disallowance."

Court's Discussion of Insider Trading Allegations

For a party to be held liable for insider trading, it must have traded while in possession ofmaterial, non

public information in breach of a duty of trust or confidence owed either to the issuer of the securities or to

the source of the information.

Materiality

The Bankruptcy Court held that the equity committee had stated colorable claims that the Noteholders

received material, non-public information during the specified confidentiality periods, even though the

parties did not reach any agreement. The Court rejected arguments that the content of plan negotiations

could only be material once an agreement in principle had been reached, and found unconvincing the

Noteholders' appeals to the impracticality of mandating disclosure of constandy changing settlement

proposals. The Court also dismissed the Noteholders' arguments that the information could not have been

material because the various Noteholders did not trade consistently after the specified confidentiality

periods-some of the Noteholders were selling while others were buying or not trading at all. In this regard,

ATTORNEY ADVERTISING



the Court commented that the fact that certain Noteholders may have made unwise or contrary trades does

no t provide a defense to an insider trading action.

Insider Status

Under the "classical theory" of insider trading, the defendant must be a "corporate insider," which mayinclude "temporary insiders" as well as officers and directors. The WaMu Court held that the equity

committee had stated a colorable claim that the Noteholders became temporary insiders when they were

given material, non-public information during negotiations toward a shared goal of a consensual

reorganization, and that that insider status gave rise to a fiduciary duty on their part to other creditors in the

classes in which the Noteholders held blocking positions. In so holding, the Court relied on an observation

made by the United States Supreme Court in a footnote in the seminal case ofDirks v. SEC, which observed

in relevant part:

Under certain circumstances, such as where corporate information is revealed legitimately to

an underwriter, accountant, lawyer, or consultant working for the corporation, these outsiders

may become fiduciaries of the shareholders. The basis for recognizing this fiduciary duty is

not simply that such persons acquired nonpublic corporate information, but rather that they

have entered into a special confidential relationship in the conduct of the business of the

enterprise and are given access to information solely for corporate purposes.

Thus, the WaMu Court appears to have extended the scope of the Dirks decision from contractual agents of

a corporation to a corporation's adversaries in a restructuring negotiation, solely because the parties have a

common purpose in achieving a reorganization.

The WaMu Court also held that the equity committee presented evidence that the Noteholders could be

considered "non-statutory insiders" because of their status as holders of blocking positions in two classes of

the Debtors' securities. The Court observed that the Noteholders with blocking positions could be found to

have owed a fiduciary duty to the other members of those classes to act for their benefit and, for this reason,

also found that the equity committee had stated colorable claims that the Noteholders were temporary

insiders for purposes of securities laws.

Scienter

As a defense to the insider trading allegations, the Noteholders asserted that the necessary element of scienter

was lacking. Specifically, they argued that they could not have engaged in insider trading knowingly or

recklessly because the Debtors had explicidy agreed to disclose any material, non-public information at the

expiration of the confidentiality periods and had, in fact, made cleansing disclosures, which the Noteholders

believed had included any material, non-pUblic information. Therefore, the Noteholders argued, they could

not have known that they still possessed material, non-public information. The Court rejected this defense,

noting that each Noteholder had explicit policies prohibiting insider trading and could not use the Debtor as

a shield if these policies were violated.

"Equitable Disallowance" Permitted as a Remedy to Benefit Equity Holders

Bankruptcy Code section 510(c) permits a Bankruptcy Court, under appropriate circumstances, to

subordinate all or a part of an allowed claim to all or part of another allowed claim, or to subordinate all or

part of an allowed equity interest to all or part of another allowed equity interest. It does not authorize the

subordination of claims to equity interests. This alone, the Noteholders argued, should have defeated the

?"''''-___mNMlATTORNEY ADVERTISINGl ! ~ s g r a y . c o m J

http://slidepdf.com/reader/full/l!~sgray.com

http://slidepdf.com/reader/full/l!~sgray.com



claims of the equity committee-since what the equity holders were seeking was to subordinate the recovery

of the Noteholders to permit value to flow to the equity. The Court acknowledged that equitable

subordination was no t an available remedy for the equity committee, but nevertheless approved the equity

committee's novel pursuit of the "equitable disallowance" of the Noteholders' claims, citing the decisions of

the Bankruptcy and District Courts in Adelphia as precedent for its authority to disallow a claim on equitablegrounds in "extreme" cases.

Implications of the WaMu Decision

Creditors holding substantial positions in bankruptcy cases, particularly in cases pending in Delaware, may be

concerned about the implications of the WaMu decision on a number of grounds.

First, creditors seeking to engage in plan negotiations with a debtor or creditors' committee must now

consider whether doing so results in a potentially indefinite restriction on trading, even where such creditors

take care to include protections and "cleansing" provisions in confidentiality agreements. The Court

dismissed concerns that its findings would chill the participation of creditors in restructuring discussions,

stating: "[TJhere is an easy solution: creditors who want to participate in settlement discussions in which theyreceive material, non-public information about the debtor must either restrict their trading or establish an

ethical wall between traders and participants in the bankruptcy case." This choice will be unattractive to many

market participants.

Second, significant creditors and creditor groups may be concerned about suggestions in the decision that

participants in the restructuring process may become fiduciaries for the classes in which they hold claims,

despite the fact that they are not members of the official creditors' committee.

Third, creditors and investors may be concerned that the emergence of a novel doctrine permitting

"equitable disallowance" could undermine the structural seniority of claims to equity.

The WaMu Court's order granting standing to the equity committee has been stayed pending mediation, andtherefore, the likelihood of an appeal is uncertain. I f no appeal is taken from the decision, there will be no

direct opportunity for the Noteholders, or other parties with an interest in these issues, to test the Court's

conclusions regarding the legal validity of the equity committee's claims of insider trading or the availability

of the remedy of "equitable disallowance." I t should be noted that the WaMu decision is the view of one

Bankruptcy Court, albeit an important and potentially influential one, and that as a technical matter, the

decision does not have binding effect either on other Delaware Bankruptcy Courts or in Districts outside of

Delaware. Nonetheless, creditors seeking to participate in a restructuring process or considering investing in

securities that are, or may become, subject to such a process, will need to consider carefully the implications

of this decision.

For further information, please contact Air-son Allen, . = . : . = ! " " " ' - = : . . . ~ ~ , D. Ross Martin, or Keith H. Woft<)f(1.

This alert should not be construed • • egal advice or a legal opinion on any specific fads or cin:umatance•. This alert is not inlendad to ClHte. and ATIORNEY ADVERTISINGreceipt of it does not constHute, a lawyer-client relationship. The contents are intended for general informational purposes only. and you are urged to

consuK your aHomey conceming any particular situation and any speCifIC legal question you mayhave. @2011 Rope. 8. Gray ll P



EXHIBIT J



WILLKIErARR &GALLAGHERUP ILIENT

MEMORANDUM

KEY RULINGS FROM DELAWARE BANKRUPTCY COURT'S REJECTION OF

WASHINGTON MUTUAL'S PLAN OF REORGANIZATION

In a recent 139-page decision (the "Decision") with far-reaching implications for partiesinvolved in chapter 11 proceedings, Judge Mary F. Walrath of the Bankruptcy Court for the

District of Delaware denied, for the second time, confirmation of Washington Mutual, Inc.'s

("WMI") and WMI Investment Corp.'s (collectively, the "Debtors") plan of reorganization (the

"Plan").) Judge Walrath found several deficiencies in the Plan that violated the best interests of

creditors test articulated in section 1129(a)(7) of title 11 of the United States Code (the"Bankruptcy Code,,).2

In addition to denying confirmation of the Plan, the Court also granted (and then stayed) amotion by the Official Committee of Equity Security Holders (the "Equity Committee") to

prosecute an action to equitably subordinate or disallow the claims of certain

noteholders (the "Settlement Noteholders")? While denying standing to bring a claim for

equitable subordination, the Court held that the Equity Committee had standing to bring a claim

for equitable disallowance based on allegations of insider trading by the Settlement Noteholders.

In so ruling, Judge Walrath found that the Equity Committee stated a colorable claim for

equitable disallowance, and ordered the parties to mediate to avoid a litigation morass which

would further drain the estates' resources.

While the Decision analyzed numerous objections to the Plan asserted by various creditors andshareholders, certain of Judge Walrath's rulings are significant for practitioners and participants

in chapter 11 cases, namely, the rulings on: (i) jurisdiction; (ii) post-petition interest;(iii) equitable disallowance; and (iv) non-statutory insider status under applicable law. These

key rulings are discussed in further detail below:

• In rejecting the argument that the Court lacked jurisdiction over modification of the Plan,

Judge Walrath interpreted and applied the Supreme Court's recent decision in Stern v.

Marshall, which has generated much commentary and uncertainty regarding a bankruptcy

court's constitutional authority to enter a final judgment under certain circumstances.

In re Washington Mutual. Inc., Case No. 08-12229 (MFW) (Bankr. D. Del. Sept. 13,2011) [Docket No.8612].

II U.S.C. § I I 29(a)(7}.

Motion for an Order Authorizing the Official Committee of Equity Security Holders to Commence and

Prosecute Certain Claims ofDebtors' Estates, In re Washington Mutual. Inc., Case No. 08-12229 (MFW)

(Bankr. D. Del. July 12, 2011) [Docket No. 8179].

131 S. Ct. 2594 (2011).

NEW YORK WASHiNGTON PARIS loNDON MILAN ROME FRANKFURT BRUSSELS

in alliance with Dickson J\finto W.s., London and Edinburgh

2



WII.tKIE l ~ \ R R &GALI.AGllERu.l'

• In detennining what constitutes the "legal rate" for payment of post-petition interest onunsecured creditors' claims under section 726(a)(5) of the Bankruptcy Code, Judge

Walrath concluded that the federal judgment rate, rather than the contract rate, is

applicable.5 This was surprising as many believed that Judge Walrath's decision in In re

Coram Healthcare Corp. provided support for the proposition that an unsecured creditormay be entitled to its contract rate of interest.6

• The Court granted the Equity Committee's motion for standing to prosecute a claim forequitable disallowance, even though the Settlement Noteholders argued that no suchcause of action exists as a matter of law.

• The Court found that the "Settlement Noteholders owed duties as non-statutory insidersunder bankruptcy law" due to their blocking position in two classes of the Debtors' debtstructure.7 The imposition of fiduciary duties on creditors with blocking positions goesfurther than a previous decision in which Judge Walrath suggested that "members of aclass of creditors may, in fact, owe fiduciary duties to other members of the class" whenholding themselves out in a representative capacity.8

Background

During the global credit crisis in the Fall of 2008, the rating agencies significantly downgradedthe credit rating of Washington Mutual Bank ("WMB") and its holding company, WMI. A bankrun followed, resulting in $16 billion ofwithdrawals from WMB in a 10-day period.

On September 25, 2008, the Office of Thrift Supervision closed WMB and appointed the Federal

Deposit Insurance Corporation (the "FDIC")as

receiver for WMB. Immediately after itsappointment as receiver, the FDIC sold substantially all of WMB's assets to JPMorgan ChaseBank, N.A. ("JPMC"). On September 26, 2008, the Debtors filed petitions under chapter 11 of

the Bankruptcy Code.

The seizure and sale of WMB's assets gave rise to disputes among the Debtors, the FDIC andJPMC "regarding ownership of certain assets and various claims that the parties asserted againsteach other.,,9 Nearly three years into the contentious chapter 11 cases, negotiations led to a

global settlement agreement (the "GSA") that resolved issues among the Debtors, JPMC, the

Section 726(a){5) of the Bankruptcy Code provides that, after aU other priority claims, unsecured claims

(including certain tardily filed claims) and claims for fines, penalties or forfeitures are paid in full,distributions will be made in "payment of interest [on such claims] at the legal rate from the date of thefiling of the petition." 11 U.S.c. § 726(a)(5) (emphasis added).

315 B.R. 321, 346 (Bankr. D. Del. 2004).

Decision at 130, 132.

8 In re Washington Mutual. Inc., 419 B.R. 271,280 (Bankr. D. Del. 2009).

9 Decision at 2.

-2



FDIC and certain creditors, including the Settlement Noteholders. The GSA served as the

cornerstone of the Plan, and, although there were a myriad of objections, Judge Walrath found it

to be fair and reasonable in an initial January 7, 2011 opinion (the "January 7 Opinion") denyingconfirmation. 10

Despite modifications to the Plan to address the deficiencies identified in the January 7 Opinion,

certain creditors and shareholders opposed the amended Plan. Following the July 2011

confirmation hearings and submission of post-hearing briefs, Judge Walrath issued the Decision

but once again denied confirmation of the Plan and reaffirmed the conclusion in the January 7

Opinion that the GSA was fair and reasonable. I I

Jurisdictional Analysis

As an objection to confirmation of the Plan, certain creditors asserted that the Court could not

enter a final order to confirm the Plan in light of the Supreme Court's ruling in Stem, because thePlan incorporated the GSA, and thus confirmation would require the Court to decide the estates'

claims against JPMC and the FDIC, for which the Court lacked jurisdiction.12

These objecting

creditors further contended that the claims of the estate against JPMC and the FDIC were

traditional actions at common law (i.e., state corporate law, tort law and fraudulent conveyance

law, as well as federal intellectual property and tort claims) and, therefore, had to be decided by

an Article III court in accordance with Stern.13

Proponents of the Plan disagreed for several

reasons, principally that the Stem Court characterized its ruling as narrow.14

Judge Walrath concluded that Stem did not support the objecting creditors' argument.1S

First,

Judge Walrath noted that bankruptcy court approval of settlements is a firmly established

historical practice, currently recognized by Federal Bankruptcy Rule 9019, whichis

based on asimilar provision of the Bankruptcy Act.16

Judge Walrath then cited section 1123(b)(3)(A) of the

Bankruptcy Code, which states that a plan may provide for the settlement of any claim or

interest, and further explained that confirmation of such a plan is within the Court's corejurisdiction.17

JO In re Washington Mutual, Inc., 442 B.R. 314, 347 (Bankr. D. Del 2011).

IJ Decision at 31-32.

12 Decision at 6.

13 Decision at 7.

14 Decision at 8.

J5 Stem held that a bankruptcy court, as a non-Article III court, "lacked the constitutional authority to enter a

final judgment on a state law counterclaim that is not resolved in the process of ruling on a creditor's proof

of claim." 131 S. Ct. at 2620. Although the Supreme Court viewed the issue before it as narrow, the Stem

decision has nonetheless been an area of uncertainty for many bankruptcy judges and litigants.

16 , , - - . , ~ , - . - at 9.

J7Decision at 11.

- 3

http://slidepdf.com/reader/full/jurisdiction.12


http://slidepdf.com/reader/full/argument.1S






WII.l.KIE J<i\HR &GAIl.AGIIER UJ'

Second, Judge Walrath distinguished approval of a settlement of claims from a ruling on the

merits of such claims, stating that a court does not need jurisdiction over the underlying claims to

approve a resulting compromise. IS Judge Walrath explained: "the January 7 Opinion was not adecision on the merits of the underlying claims but merely a determination that the settlement of

those claims by the Debtors on the terms of the [settlement] was reasonable.,,19

Finally, Judge Walrath found that the approval of the GSA was particularly within the "core

jurisdiction" of the Court because approval includes a determination of what is property of the

estate. And, Judge Walrath held, "[i]t is without question that bankruptcy courts have exclusive

jurisdiction over property of the estate," including whether disputed property is property of the

estate.20

As Stern is a recent decision being interpreted by the courts, the Decision provides insight into

how it could potentially affect numerous previously undisputed aspects of a bankruptcy court's

jurisdiction.

Post-Petition Interest

Certain creditors alleged that the Plan failed to comply with the best interests of creditors test

because it provided for the payment of post-petition interest on certain creditors' claims at their

contract rate of interest, as opposed to the federal judgment rate. The Court held the "legal rate"

for payment of post-petition interest on creditors' unsecured claims under section 726(a)(5) of

the Bankruptcy Code is the federal judgment rate?1

In support of this holding, Judge Walrath first observed that "section 726(a)(5) states that interest

on unsecured claims shall be paid at 'the legal rate' as opposed to 'a ' legal rate or the contract

rate.'.22 Judge Walrath reasoned that since Congress specifically provided for the contract rate in

section 506(b) of the Bankruptcy Code, it would have been specific in section 726 as well had it

intended the contract rate to apply. Second, Judge Walrath reasoned that the payment of post

petition interest is procedural in nature, and as such is governed by federal law rather than state

law. From a policy standpoint, Judge Walrath added that the federal judgment rate promotes

"fairness among creditors and administrative efficiency.'.23

Judge Walrath relied heavily on In re Cardelucci in her post-petition interest analysis, especially

with respect to the lack of specific language in section 726(a)(5) suggesting that Congress

18 Decision at 12.

19 Decision at 14.

20 Decision at 14-15.

2L Decision at 77-78.

22 Decision at 78.

23 Decision at 78-79.

- 4

http://slidepdf.com/reader/full/estate.20


http://slidepdf.com/reader/full/rate.'.22

http://slidepdf.com/reader/full/efficiency.'.23


http://slidepdf.com/reader/full/rate.'.22

http://slidepdf.com/reader/full/efficiency.'.23



WILLKJE T ~ \ R R &G,,\U.AGHER IW

intended the contract rate to apply.24 There, the Ninth Circuit ruled that the legal rate meant the

federal judgment rate due to principles of statutory interpretation and policy considerations.25

This aspect of the Decision was surprising given Judge Walrath's previous decision in Coram

"that the specific facts of each case will determine what rate of interest is 'fair and equitable.",26

Indeed, Judge Walrath acknowledged as much in a footnote stating, "[t]o the extent I suggestedin Coram that the federal judgment rate was not required by section 726(a)(5), I was wrong.'.27

Judge Walrath, however, identified some circumstances where creditors might receive interest at

the contract rate. For example, the Court found that oversecured creditors are entitled to interest

at the contract rate.28

In addition, the Court recognized an entitlement to interest at the contractrate where contractual subordination provisions explicitly require junior creditors to make

payments to senior creditors. Specifically, Judge Walrath addressed the argument of certain

subordinated creditors that if the federal judgment rate were found to be applicable, then they are

not obligated to pay the senior creditors the difference between what the Debtors pay under the

federal judgment rate and the contract rate of interest. In accordance with the Rule of

Explicitness that the Court held was applicable under New York law,29 Judge Walrath found that

the relevant indentures contained subordination provisions that "adequately apprised the

subordinated creditors that their payments were subordinate to all contractual post-petitioninterest, even if the Court allowed none.,,30 Thus, the Court held that the Plan provisions "that

give effect to the subordination provisions in the indentures . . . are not violative of theBankruptcy Code.,,3l With the exception of these limited circumstances, the Decision establishes

that creditors are not entitled to their contract rate of interest in the Third Circuit.

Equity Committee Standing Motion

In addition to its objection to the Plan, the Equity Committee also sought standing to bring a

claim for equitable subordination or equitable disallowance against the Settlement Noteholders.

Not only did the Settlement Noteholders contend that the Equity Committee failed to allege a

colorable claim, they also vigorously argued that no such cause of action exists as a matter of

law.32

24 285 F.3d 1231 (9th Cir. 2002).

25 at 1234-35.

26 315 B.R. at 346.

27

Decision at 78 n.35.28 Decision at 80.

29The relevant indentures containing the subordination provisions were governed by New York law. In

determining whether the Rule of Explicitness was valid under New York law, Judge Walrath relied on a

decision by the New York Court of Appeals that answered the question in the affirmative. Chern. Bank v.

First Trust of N.Y., 93 N.Y.2d 178, 186 (N.Y. 1999).

30Decision at 97 (emphasis in original).

31Decision at 97-98.

32 Decision at 113.

- 5

http://slidepdf.com/reader/full/apply.24

http://slidepdf.com/reader/full/considerations.25



http://slidepdf.com/reader/full/wrong.'.27

http://slidepdf.com/reader/full/apply.24


http://slidepdf.com/reader/full/wrong.'.27



WIU,KJErARR &GALI.AGHERu.

While Judge Walrath found it unnecessary to determine the extent of fiduciary duties owed by

creditor groups in the 2019 Opinion, the Decision reasoned that due to the Settlement

Noteholders' "status as holders of blocking positions in two classes of the Debtors' debt structure. . . , it could be found that they owed a duty to the other members of the classes to act for their

benefit.'.40 This goes further than the 2019 Opinion, which focused on actions rather than debt

holdings. Whether imposing fiduciary duties on a creditor group with blocking positions chills

the participation of similarly situated creditors in bankruptcy negotiations remains to be seen, but

the Decision will likely lead many such creditors to reassess the costs versus benefits of

maintaining or acquiring a blocking position.

The Decision is significant both because of the large number of chapter 11 cases filed in

Delaware, and because courts outside of the Third Circuit tend to view decisions from Delaware

bankruptcy courts as influential. Accordingly, all parties involved in chapter 11 cases must be

aware of the Decision's key holdings.

***************

If you have any questions regarding this memorandum, please contact Marc Abrams ( 2 1 2 ~ 728

8200, [email protected]), Joseph G. Minias (212-728-8202, [email protected]), or the

WiIlkie attorney with whom you regularly work.

Willkie FaIT & Gallagher LLP is headquartered at 787 Seventh Avenue, New York, NY 10019

6099. Our telephone number is (212) 728-8000 and our facsimile number is (212) 728-8111.

Our website is located at www.willkie.com.

September 20,2011

Copyright © 2011 by Willkie Farr & Gallagher LLP.

All Rights Reserved. This memorandum may not be reproduced or disseminated in any form without the express permission of

Willkie Farr & Gallagher LLP. This memorandum is provided for news and information purposes only and does not constitute

legal advice or an invitat ion to an attorney-client relationship. While every effort has been made to ensure the accuracy of the

information contained herein, Willkie Farr & Gallagher LLP does not guarantee such accuracy and cannot be held liable for any

errors in or any reliance upon this information. Under New York's Code of Professional Responsibility, this material may

constitute attorney advertising. Prior results do not guarantee a similar outcome.

Decision at 132.

-7

40



http://slidepdf.com/reader/full/www.willkie.com

http://slidepdf.com/reader/full/benefit.'.40



http://slidepdf.com/reader/full/www.willkie.com



EXHIBITK

motion of appeal by aurelius capital

Documents