www.bloomberg.com/news/2011-01-10/...uptcy.html?cmpid=msnmoney
Washington Mutual Inc.’s Chapter 11 plan promised releases to third parties that exceed what bankruptcy law permits, U.S. Bankruptcy Judge Mary F. Walrath ruled on Jan. 7 in refusing to confirm the reorganization for the bank holding company.
Walrath, while saying WaMu’s global settlement is acceptable, found multiple defects in the plan beyond the over- broad releases. It is unclear whether the plan can be amended, some creditors given the opportunity to opt out of granting releases, and the plan confirmed by the Jan. 31 deadline contained in a global settlement. It is therefore possible the settlement may unravel.
Some third parties that would no longer receive releases also might withdraw their support for the settlement, unwinding compromises that underlie the reorganization more than two years in the making.
Walrath didn’t say in her 109-page opinion whether the changes she demands will require another vote by any creditor classes. She also didn’t rule on whether a revised plan will satisfy all requirements for confirmation. Her opinion did make enough findings to suggest that the plan can be confirmed using the so-called cramdown process, even though six classes voted “no” on the reorganization. Four creditor classes voted in favor of the plan.
Four-Day Hearing
Walrath held a four-day confirmation hearing concluding Dec. 7. She devoted the first 60 pages of her opinion to explaining why it is proper to approve the global settlement cobbled together by numerous parties including the Federal Deposit Insurance Corp. and JPMorgan Chase & Co. She concluded that the settlement is “fair and reasonable.”
WaMu said the settlement will enable distribution of about $7.5 billion to creditors. According to Walrath, proponents of the settlement believe it will bring full payment, plus interest, on “all creditors’ claims, except the lowest class of creditors, which are expected to receive approximately 74 percent of their claims plus the right to participate in an offering of stock in the reorganized debtor.”
With regard to most of the claims that WaMu agreed to compromise, the judge said the holding company was unlikely to achieve a better result through continued litigation.
Legal Arguments
One point of contention was whether WaMu could win approval of the settlement without revealing advice received from company lawyers. Walrath said it was “sufficient” to present legal arguments on both sides along with the relevant facts. Walrath said she could then “evaluate the likelihood” of success through continued litigation.
Walrath reasoned that the settlement properly grants releases to JPMorgan, the FDIC and the bank subsidiary. She found the settlement and plan defective in giving blanket releases to the creditors’ committee and its members, noteholders who negotiated the settlement, indenture trustees, the liquidating trust, and the liquidating trustee.
Walrath noted that the liquidating trust hasn’t even come into existence and hasn’t yet done anything to merit a release. For the creditors’ committee and its members, she said it is only appropriate to give them exculpation for the “role they played in the bankruptcy process.” They also won’t be released from claims for willful misconduct or gross negligence.
‘No Basis’
The judge found “no basis whatsoever” for giving releases to current or former WaMu directors, officers or professionals. She nonetheless said it was proper under case law from the U.S. Court of Appeals in Philadelphia to release those who “served during the Chapter 11 case.”
Walrath said that the plan must be revised so that the plan, not the settlement agreement, controls who receives releases.
The judge agreed with an objection from the U.S. Trustee and said WaMu made material changes in the plan in November, one week before the confirmation hearing began. Walrath said it was improper to change the plan so that a creditor not granting a release to third parties wouldn’t receive a distribution under the plan.
Walrath said it is acceptable under bankruptcy law for a creditor to receive no distribution under the plan if the creditor is unwilling to grant releases to third parties. Creditors must be given an opportunity to elect whether to give releases to third parties in return for receiving a distribution, Walrath said.
Improper Discrimination
It was an improper discrimination for the plan to deny the right to participate in a $100 million rights offering to a holder of a so-called Piers claim if the creditor has a claim for less than $2 million, Walrath said. She said that administrative convenience in not having small holdings isn’t permissible in bankruptcy law, even though it may require reorganized WaMu to be a reporting company with the Securities and Exchange Commission.
The ruling in this respect may be important in other cases where the right to participate in a rights offering is limited to creditors with larger claims.
Walrath ruled that all unsecured creditors must be paid in full before interest can be paid on any unsecured claims. Even late-filed claims must be paid fully before unsecured creditors can receive interest.
The judge said further hearings must be held before she can determine whether holders of the Piers securities are entitled to classification as a class of creditors ahead of equity security holders.
Unsecured Claims
Holder of notes issued by the bank subsidiary have unsecured claims, although the claims are subordinated under bankruptcy law to all other unsecured claims, Walrath said. She said classification in Class 17 was correct.
Walrath left open the rate of interest that unsecured creditors are entitled to receive.
Walrath issued a separate 20-page opinion on Jan. 7 concluding that alleged holders of trust-preferred securities no longer have any interest in the securities because they were automatically converted into preferred stock of the holding company when the bank subsidiary was taken over by regulators.
Walrath said the record wasn’t yet complete enough for her to rule on whether the holders should be treated as creditors or equity holders.
Disputed Facts
With regard to the lawsuit brought by holders of so-called litigation tracking warrants, Walrath said there are disputed issues of fact precluding her from ruling. So long as $347 million is set aside to abide the outcome of the litigation, she said the property at issue can be sold because there is a dispute about ownership.
Click here to read the May 18 Bloomberg bankruptcy report for a summary of WaMu’s original plan. To read about the settlement before it was modified, click here for the May 24 Bloomberg bankruptcy report. For a summary of changes WaMu made to its plan in October, click here for the Oct. 7 Bloomberg bankruptcy report.
The WaMu holding company filed under Chapter 11 in September 2008, one day after the bank subsidiary was taken over. The bank, once 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).
Analysis
The Implications of Walrath’s Opinion
Walrath’s opinion is a lengthy and lucid summary of all parties’ arguments for and against the plan. It is also a dissection of numerous inconsistencies and ambiguities in proposed releases and other provisions in the plan that could have resulted in later disputes even if the plan were confirmed.
For those who believe bankruptcy judges in Delaware and New York will approve any major initiative by a large company in reorganization, the opinion shows Walrath’s independence and willingness to rule against a debtor even at the risk of upsetting the underpinnings of a reorganization.
In this writer’s judgment, Walrath’s opinion is a turning point in the history of Chapter 11. It reflects a growing tendency on the part of bankruptcy judges to push back against increasing control of Chapter 11 cases by investors who purchased debt at discount.