Lawtalkers: Juicy case for bankruptcy buffs

[citizen k]

http://amlawdaily.typepad.com/amlawdaily/2010/01/wamumotion.html

January 29, 2010 5:27 PM
S&C Can Breathe Easier in WaMu Case...for Now

Posted by Zach Lowe

A quick update from the ever-interesting Washington Mutual bankruptcy case in Delaware: A federal judge denied the WaMu estate's motion to compel discovery from about 20 different entities associated with WaMu's collapse and sale to JPMorgan Chase in 2008, according to Bloomberg.

Among those entities: Sullivan & Cromwell, the law firm that advised JPMorgan in its deal to acquire WaMu for about $1.9 billion after the FDIC seized the ailing Seattle-based bank during the height of the financial crisis in the fall of 2008. The WaMu estate, represented by Quinn Emanuel Urquhart Oliver & Hedges, has filed papers claiming that JPMorgan engaged in all sorts of allegedly nefarious behavior to discourage potential competing bids for WaMu and lower the price of the bank before the FDIC seized it, according to our prior reporting. The estate alleges that higher-ups at JPMorgan, including Jamie Dimon, leaked confidential WaMu data and e-mailed potential bidders with warnings that WaMu's losses were higher than public estimates.

The estate wanted to investigate these charges further, and asked Judge Mary Walrath to compel discovery from JPMorgan. The judge granted that motion, and the Quinn team followed it up with a similar motion asking to compel discovery from S&C, the FDIC, other federal regulators, and a host of rating agencies--all entities that could have been complicit in allegedly devaluing WaMu and pushing it JPMorgan's way, court records show. As the judge mulled that motion, a few entities, including the Treasury Department and the Federal Reserve, voluntarily turned over documents. Others refused and filed papers objecting to the motion; that group includes the FDIC (represented by DLA Piper) and PricewaterhouseCoopers, court records show.

In between: A third group that neither objected to the motion nor cooperated with it by turning over documents. That group includes S&C, according to two sources familiar with the matter. (Lawyers on the S&C team on the case, headed by H. Rodgin Cohen, have not returned our messages seeking comment on this matter.)

That group's strategy of waiting out the judge has apparently paid off, since Judge Walrath late Thursday denied the WaMu motion to compel discovery from all entities other than JPMorgan, according to Bloomberg and the Business Insider. The judge ruled that the information Quinn has already gleaned from JPMorgan (and those entities which coughed up documents voluntarily) gives the firm enough documentation to choose whether or not to pursue a claim against JPMorgan. (A similar case against JPMorgan over its conduct during the WaMu affair is already proceeding in federal court in Texas, and the WaMu estate is suing the FDIC in federal court in Washington, D.C.) Should WaMu file such a claim, they would able to conduct discovery under normal procedures, the judge said.

http://www.reuters.com/article/idCNN2813570420100129?rpc=44

UPDATE 2-WaMu shareholders get their voice in bankruptcy
Thu, Jan 28 2010

* Shareholders to get unified role in bankruptcy

* Culminates year-long campaign by shareholders

(Adds judge refuses to expand investigation against JPMorgan)

By Tom Hals

WILMINGTON, Del, Jan 28 (Reuters) - Shareholders of Washington Mutual Inc will have a voice in the company's bankruptcy after a judge refused on Thursday to disband their committee, which Washington Mutual said would complicate the case.

The U.S. Trustee, who plays an oversight role in bankruptcy, appointed the committee earlier this month after being petitioned by 3,500 shareholders. The company immediately asked the court to disband it.

The committee will be able to speak with a unified voice and hire professionals, who would be paid by the company.

Washington Mutual has said since it filed for bankruptcy in 2008 that it is hopelessly insolvent, and therefore there is no need for an official committees of shareholders.

"Evidence that debt and equity are still trading ... establishes that at least the market thinks the debt is not hopelessly insolvent," said Judge Mary Walrath.

She also denied a request to cap the committee's expenses at $250,000.

Much of the value of the company depends on the outcome of various legal disputes surrounding the government's seizure of the company's banking operations during the depth of the financial crisis in 2008.

Brian Rosen of Weil, Gotshal & Manges, which represents Washington Mutual, said there was little need for an equity committee until the outstanding lawsuits are settled. "That's when the equity committee should come into being."

Gregory Cross of Venable, which represents the equity committee, pointed out that the additional cost for the equity committee would be minimal for the company, which already pays for the work of 19 sets of professionals. "But one more is the straw that breaks the camels back?"

The hearing attracted an overflow crowd, drawing shareholders -- from as far away as California and Seattle, where Washington Mutual is based -- who have organized themselves over the past year through message boards and websites.

"There's no settlement or outcome that will have validity for the people in this courtroom, or the 3,500 who wrote to the Trustee, without a committee," said Cross.

Walrath also denied a request by Washington Mutual to expand an investigation of claims it may have against JPMorgan Chase & Co <JPM.N>.

The company wanted to subpoena the Federal Deposit Insurance Corp, the Securities and Exchange Commission, Standard & Poor's rating agency and several others for information regarding the events leading to the seizure of Washington Mutual's banking operations.

Walrath has already compelled JPMorgan, which bought the seized bank for $1.9 billion, to provide documents.

"Issuing subpoenas against dozens of other parties just goes too far," she said.

A separate agenda item about the return of a deposit was postponed to Feb. 5.

The case is In re Washington Mutual Inc, U.S. Bankruptcy Court, District of Delaware, No. 08-12229.

(Reporting by Tom Hals; Editing by Phil Berlowitz)

[citizen k]

DealBook - A Financial News Service of The New York Times
February 5, 2010, 5:00 am
Hedge Funds Fight Judges on Disclosure

Hedge funds will defend their coveted secrecy against bankruptcy judges who want more information about their economic interests before granting them an active role in Chapter 11 reorganizations.

The two sides will make their case on Friday before a regularly scheduled federal rule-making panel that will try to bring consistency to an increasingly unsettled issue that has divided normally like-minded judges, Reuters reported.

The body, which includes bankruptcy judges and legal professionals, has proposed expanding the amount of disclosure required by parties in a bankruptcy.

The proposal will mostly affect hedge funds, and the hearing follows recent rulings that exposed a sharp judicial split on the issue.

Proponents of added disclosure want more information about all positions of a group, particularly when financial instruments such as credit default swaps muddy the issue of the group's economic interests. This might reveal, for example, that an ad hoc committee fighting against a reorganization plan could actually benefit if the company liquidates.

Hedge funds are particularly protective of prices paid for a claim. Such information could reveal their investment strategy and might give others an upper hand in a reorganization if they know what return a hedge fund is making on its claim.

"Today, because of derivatives and the other sorts of financial technology it is increasingly the case that someone who owns the claim doesn't bear the risks or burdens associated with it, or doesn't need to," Richard Hahh, a bankruptcy attorney with Debevoise & Plimpton, told Reuters.

It recently burst into the open in Delaware's bankruptcy court, where judges have broken from their usual unity and issued very different rulings on the matter.

Judge Mary Walrath required broad disclosure from a group of holders of Washington Mutual bonds, noting in particular the role of complex financial instruments. She also cited the proposed rule change in support of requiring disclosure.

Delaware Judge Christopher Sontchi denied a request to compel disclosure by an ad hoc group of Six Flags bondholders a few weeks later, focusing his attention on the definitions of a committee. He noted taking into consideration the price paid for a claim went against 600 years of common contract law.

Stephen Lubben, a law professor at Seton Hall Law School in Newark, New Jersey, said Judge Walrath tried to address larger issues.

"Over the last decade there has been such a growth of financial products and other investment strategies that reduce transparency in the bankruptcy process," Mr. Lubben said.

The rule governing disclosure, known as 2019, requires every group representing more than one creditor to provide information about the value of their holdings, when those holdings were acquired and the amount paid, among other things. Few parties regularly comply in full.

The rule was drafted more than 30 years ago when it was assumed that creditors to a bankrupt company would hold their claims through the case and would benefit from a successful reorganization.

That has changed dramatically in recent years.

The original creditors in large cases now often have sold their claims to investors in distressed debt who have experience with the bankruptcy process. They buy these claims at deep discounts and may be able to a profit even with very limited recoveries of pennies on the dollar.

Robert Gerber, a bankruptcy judge for the Southern District of New York, recommended in a letter to the panel that rule 2019 require disclosure of holdings that would benefit from a fall in price of a claim or failure of a reorganization. The rule should also require the information from each participant in the group, he said.

Most importantly, Mr. Gerber said if those changes were made the rule could drop the controversial requirements for price disclosure.

The panel will consider the comments before issuing a final recommendation. That will eventually go to the U.S. Supreme Court for approval and a review by Congress before taking effect.

Opponents of wider disclosure tend to focus on prices.

"It's a bedrock principle of bankruptcy law that the price a creditor paid for a claim is legally irrelevant to that creditor's rights," wrote Abid Qureshi, a lawyer with Akin Gump Strauss Hauer & Feld, which often represents ad hoc groups, in testimony submitted to the panel.

Mr. Gerber said in his letter to the panel that if investors do not want to disclose their holdings, they can simply participate passively, rather than actively appearing in court with a group, and no disclosure is required.

[citizen k]

Hipster Battles Funds

The 33-year-old Washington Mutual investor, with no legal experience, delivered what people in the courtroom called an unusually eloquent speech, helping persuade the judge to investigate trading by some of the nation's biggest hedge funds and to reject a plan for the bank's exit from bankruptcy.

http://online.wsj.com/article/SB10001424052702304778304576377880810167382.html

[citizen k]

Anyone like to read objections? Here's a doozy.

http://www.kccllc.net/documents/0812229/0812229110712000000000032.pdf

[citizen k]

Post-Hearing Brief of the Official Committee  of Equity Security Holders in Opposition to Confirmation of the  Debtors' Modified Sixth Amended Plan of Reorganization 

http://www.kccllc.net/documents/0812229/0812229110815000000000021.pdf

[The Minsky Moment]

CK - probably not a lot of takers on languish for reading a 100+ page brief submitted by an equity committee in a bankruptcy case.

[DontSayBanana]

Just started on it.  Just to get some footing, since I'm quickly falling out of practice with respect to legalese- from what I'm reading, the objection is that the four hedge funds did insider trading with information from the settlement negotiations, and that the settlement committee pushed through a crap deal just to make sure that it would make it through; am I on the right track?

[citizen k]

Just started on it.  Just to get some footing, since I'm quickly falling out of practice with respect to legalese- from what I'm reading, the objection is that the four hedge funds did insider trading with information from the settlement negotiations, and that the settlement committee pushed through a crap deal just to make sure that it would make it through; am I on the right track?

Insider trading, bankruptcy fraud, that's why it's such a juicy case. Legal shenanigans of the highest order. Stay tuned, oral closing arguments scheduled Aug. 24.

[Barrister]

CK - probably not a lot of takers on languish for reading a 100+ page brief submitted by an equity committee in a bankruptcy case.

Maybe I'm just an ADHD-addled criminal lawyer, but it utterly escapes me why K thinks this case is interesting...

[citizen k]

CK - probably not a lot of takers on languish for reading a 100+ page brief submitted by an equity committee in a bankruptcy case.

Maybe I'm just an ADHD-addled criminal lawyer, but it utterly escapes me why K thinks this case is interesting...

I can't help myself.

[citizen k]

WMI Reorganization Produces Potentially Disruptive Bankruptcy Decision
Oct 19th, 2011

By Christopher Faille

Shrapnel from the explosion of the subprime market may yet produce a significant change in the way investors and their managers with a distressed-assets strategy maneuver for advantage in the context of chapter 11 proceedings. Specifically, a Bankruptcy Court's refusal to confirm a plan in the Washington Mutual Inc. (WMI) reorganization proceedings may herald the rise of a new weapon – the "colorable claim" that a party with an interest prior to one's own has engaged in insider trading – in the in-fighting among interested parties.

All is fair in love and war but it is impossible to avoid the impression that Judge Mary Walrath's opinion could do a lot of mischief.

Background

WMI was a big part of the madness that we all fondly remember from the years 2007-2008. It was the holding company of Washington Mutual Bank (WaMu) back when WaMu was the country's largest savings-and-loan association. As the subprime crisis became a more general banking crisis, depositors decided WaMu was a bad bet, and then withdrew more than $16 billion from their accounts in a ten-day period in the middle of September 2008.

On September 25, WaMu's regulator, the Office of Thrift Supervision, seized the bank and appointed the FDIC as receiver. The FDIC immediately sold the bank to JPMorgan Chase through a hasty and, it turns out, rather sloppily drafted purchase and assumption agreement. It remained very unclear which assets belonged to the holding company, WMI, and which had passed through this seizure-and-sale into the hands of JPM. WMI filed a chapter 11 petition on September 26, and the resulting litigation has been even more-than- usually hard fought.

Refusal to Confirm

But we'll fast forward three years, to September 13, 2011, when Judge Mary Walrath of the Delaware bankruptcy court refused to confirm the reorganization plan, because the holders of equity in WMI argued that four hedge funds, collectively referred to as the Settlement Noteholders, had engaged in insider trading, in other words that they had become insiders under the law when the Debtor provided them with confidential information during the course of negotiations toward such a settlement, and that there is at least circumstantial evidence that the Settlement Noteholders knowingly traded on the basis of this information.

How exactly are the two issues (insider trading and plan confirmation) related? The equity holders noted that bankruptcy law requires that a plan, to be confirmed, must be "proposed in good faith and not by any means forbidden by law," 11 U.S.C. §1129(a)(3).  They cited the alleged insider trades as a reason why the proposed settlement should be regarded as failing the good faith test. Strikingly, Walrath makes a point of rejecting this particular contention: "While the Court is not suggesting that the Settlement Noteholders be commended for their actions, the record shows their actions do not support a conclusion that the Modified Plan cannot be confirmed because it has been proposed in bad faith."

The allegations of insider trading arise again much later in Walrath's opinion, though, in the context of "equitable disallowance," the authority of the bankruptcy court to disallow the claims of a wrongdoer, thereby expanding the size of the estate available to other claimants. Judge Walrath made no finding on the question whether there had been insider trading, and thus no finding disallowing the Settlement Noteholders' claims. She did find, though, that the equity committee had made a "colorable claim" to that effect under both the "classical and misappropriation theories" of insider trading. She granted the committee permission to bring an adversary proceeding on that basis, but stayed any such proceeding pending efforts at mediation.

Scarce Precedent

Precedents for disallowance on the ground of insider trading would seem to be scarce – though Walrath cites a U.S. Supreme Court decision in its support, the decision is an old one, preceding the existing statutory language. It is the 1939 case of Pepper v. Litton, where the high court said that one who is in a fiduciary position with regard to a corporation "cannot utilize his inside information and his strategic position for his own preferment." That was one of a list of principles such a person cannot violate. When these principles are violated, the Pepper court continued, "equity will undo the wrong or intervene to prevent its consummation."

Walrath expressed her view that there will only be "extreme instances – perhaps very rare" when it will be necessary and thus appropriate for a bankruptcy court to invoke equitable disallowance. But evoke it (as the potential outcome of  those "colorable claims") she did, and if her assertion of this power holds up it will provide a new piece of munitions, of indeterminate charge, for use in future reorganizations.

The Settlement Noteholders have appealed to the District Court, contending that there are "fundamental errors of securities and bankruptcy law and violations of due process" inherent in Walrath's opinion and order. They make the case for example that when Congress was debating the bill that became the existing bankruptcy statute, in 1978, it "considered – and then ultimately rejected – the inclusion of equitable disallowance as a remedy."

[Razgovory]

Does any of mean that Camper will come back?  That's all I want.