The second day of the trial on confirmation of the Washington Mutual Inc. reorganization plan was like watching Odysseus navigate between Scylla and Charybdis.
In June 2009, a bankruptcy judge in Delaware, Kevin J. Carey, refused to approve a settlement between Samsung Electronics Co. and Spansion Technology Inc., a manufacturer of flash-memory semiconductors that filed under Chapter 11 earlier that year.
Carey concluded that Spansion’s chief restructuring officer “incredibly” didn’t rely on advice from patent counsel in deciding to settle. Cary concluded that the proposed settlement was “based less on an evaluation of the merits” of the lawsuits than on a “desire to negotiate a quick settlement.”
Where the Spansion doctrine is like Scylla, the rules of evidence are WaMu’s Charybdis. In Greek mythology, Scylla and Charybdis were on opposite sides of a narrow strait. By avoiding Scylla, a six-headed monster, ships were lost to Charybdis, a whirlpool.
In the WaMu trial before U.S. Bankruptcy Judge Mary F. Walrath on Dec. 3, the bankrupt holding company was trying to shield its lawyers from having to testify by presenting evidence showing that company officers were able to divine the merits of settlement without relying on the advice of lawyers. The centerpiece of WaMu’s plan is a settlement with the Federal Deposit Insurance Corp. and JPMorgan Chase & Co.
By not relying on the advice of counsel, WaMu is exposing itself to the argument that led to the defeat of the Spansion settlement.
If WaMu were to say that the opinions of counsel played a role in the decision to settle, rules of evidence would come into play. If a company executive were to testify in substance, “The settlement is good because my lawyer says so,” the statement would be barred from evidence because it would violate the rule against hearsay evidence. To put the conclusion into evidence, WaMu might be forced call the company’s lawyer to the witness stand to testify about the merits of settlement.
If a WaMu lawyer were to take the witness stand, opposing parties could be given the right in advance to review written communications and memoranda from the lawyer to the company about the settlement. If WaMu chose to raise the attorney-client privilege as reason for not producing the lawyer’s documents, then the lawyer might be barred from testifying.
To enable a lawyer to testify, WaMu therefore might be required to waive the attorney-client privilege and produce the lawyer’s legal memoranda.
The dangers for WaMu don’t end there.
If a WaMu lawyer were to testify, and if the testimony or the lawyer’s documents turned out to be adverse to WaMu, the lawyer and his or her firm in turn might be disqualified from representing WaMu in the confirmation trial.
Given these considerations, WaMu is taking the position that the merits of the settlement are self-evident even without advice of counsel. Also, lawyers will be able to give the judge their views about the legal merits of settlement when they file post-trial briefs. For Bloomberg coverage of the Dec. 3 hearing, click here.
The confirmation hearing continues today.
If Walrath confirms WaMu’s revised plan, it will distribute more than $7 billion to creditors. For a summary of changes WaMu made to its plan in October, click here for the Oct. 7 Bloomberg bankruptcy report. To read about the settlement before it was modified, click here for the May 24 Bloomberg bankruptcy report. Click here to read the May 18 Bloomberg bankruptcy report for a summary of WaMu’s plan.
The WaMu holding company filed under Chapter 11 in September 2008, one day after the bank subsidiary was taken over. The unit, which had been the sixth-largest depository and credit-card issuer in the U.S., was the largest bank failure in the country’s history. The holding company filed formal lists of assets and debt showing property with a total value of $4.49 billion against liabilities of $7.83 billion.
The holding company Chapter 11 case is In re Washington Mutual Inc., 08-12229, U.S. Bankruptcy Court, District of Delaware (Wilmington).
http://www.bloomberg.com/news/2010-12-06/...-update1-.html?cmpid=yhoo
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