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1. The Releases Issue Reconsidered
When we think of the ramification of releases issue, we should think about it outside the bankruptcy court and in a broader context. As I said in “What’s Next” right after the confirmation hearing, our presentation against the debtors are “jury trial ready, common sense understandable as well as ordinary citizens (jury) easy-to-see-through type materials. Our claims against JPMC and FDIC are even more so.” I’ll not list again categorically our claims (deposit, tax refund, BOLI/COLI, NOLs, bid-rigging, to name just a few) and the reasons why we have a great chance to prevail on if not all but most of those issues in a jury trial with a bigger audience. In fact, the debtors themselves once demanded a jury trial but they gave up later, in my view, in exchange for their so-called compromise. As I said, “[t]hese (open litigations) are the prospects JPMC and FDIC are really afraid of. These are the reasons they tried to bribe the creditors, with the help of their long time business connections WGM and A&M, and to kill the equity within the BK process. So far, they have been protected behind the debtors/WGM/A&M shield. This is what EC objection motion pointed out ‘… As any litigator knows, JPMC's willingness to offer this amount [to make creditors whole] at the very beginning of the case, before meaningful discovery has begun, suggests strongly that the merits of the claim may justify an even larger recovery.’
In the past, the Releases issue was just a bargaining chip with litigation potential. Since the court has agreed with us that no third party releases can be forced upon the unsettled parties such as equity holders (at least the court acknowledges that she has no authority to force the unsettled parties to do so), the ramifications of the Releases issue can very much become a litigation reality, or living nightmares for GSA parties. This is especially true for individuals such as debtors’ BOD, officers, professionals, as well as creditors committee members. Sure, JPMC has tremendous resources to fight or pay (if it loses). But which individuals want to put their professional careers, their personal and family fortunes on the line and in grave danger? Someone has to buy them out.
I said in that same post that the court will show us the door or at least not shut the door out at equities by not forcing third party releases from us. There are still time for all parties to cut deals, and the Releases is certainly one of our stronger leverages. Debtors, JPMC, FDIC, and hedge funds should have already learned that WMI shareholders are probably the most dedicated and persistent shareholder group they have ever known, and as a matter of fact our legal counsel is the most dangerous litigation assault weapon.
2. NOLs and others
As most people recognized that the majority of the court’s opinion that accompanies the denial order is in favor of GSA positions. However, in addition to Court’s strong stand on the Releases, there are a few other bright or potentially positive spots for the equity. For instance, undecided issue on federal judgment rate vs. contract rate, possible reclassification of H shares, and recognition of expanding NOLs. Considering just how close the equity could be “in the money” ($375M short), a favorable ruling on FJR alone will move the A > L. Reclassification of Hs can potentially upset the current GSA alliance, offering hedge funds (creditors who currently controls the debtors) less incentive to continue to shield JPMC and FDIC if they cannot monopolize the reorganized WMI as a nice added “bonus”. Even though those factors haven’t been materialized yet (or they may never be), GSAs have to factor in the court’s concerns in their calculation while crafting the next POR. They can either run the risk by ignoring the uncertainty on those issues or be more practical to cut deals with adversary parties seriously.
Among aforementioned positives, NOLs is the most obvious. According to debtors’ expert, WMRRC has the value in excess of $157.5 million. However, the court observed that “[h]ad the Debtors emerged from bankruptcy before December 31, 2010, they would have been able to use only $100 million of their NOLs. The Debtors’ valuation expert acknowledged that based on the business plan and projections for the Reorganized Debtor which assumed emergence before December 31, 2010, his valuation did not consider the ability of the Debtors to use more than $100 million of their NOLs.” (p.99 ft.47). In other words, WMRRC could be seriously under-valued. And, the court continued “[f]inally, because the Debtors will not emerge from bankruptcy before December 31, 2010, the Debtors could potentially have the full use of their approximately $5 billion in NOLs.” (p.99) The court also identified factors such as its potential to be a “public company” that will add value to the reorganized company, and “committee’s expert opined that the fact that the senior creditors and management were taking stock in the reorganized company is a “strong indicator that the company is being undervalued” (p.98-99) The value is now no way to hide. As I said before, everything about NOL is on the record, displayed at the hearing, and argued in closing arguments. The court acknowledges it. Furthermore, the issue ($5B NOL) is far greater than WMRRC itself. Everyone knows it.
3. Disappointed but Not Discouraged
I have great respect for the Court. But I am deeply disappointed at the court’s conclusion that GSA is fair and reasonable, and strongly disagree with many of her opinions. I had hoped, given so many troubling signs in issues after issues, the court will take a fair and balanced approach. Instead, many of her opinions are one sided. For instance, regarding COI, the court opined that “the Court personally observed the actions of the Debtors’ professionals and finds no evidence that they failed to represent adequately the interests of the estate” (p.15). However, the court ignored the facts that GSA was worked out before the debtors’ conflicts counsel was haired, and debtors’ restructuring officers’ firm’s long time business relations with JPMC. The court further contends that “[t]he Plan Objectors presented no evidence to the contrary other than the insinuation that because there was a potential conflict, there must have been undue influence exerted by JPMC on the Debtors’ professionals.” (p.15) The court cited a case precedent arguing “in most cases the use of conflicts counsel solves the problem.” (p.16, Project Orange Court). However, in fact, two of EC’s previous legal firms were conflicted out by the debtors in this case. What a double standard!
In regard to attorney-client privileges, the court expressed her suspicions repeatedly the debtors’ ability to show the burden of prove without sharing work products. In her opinion, the court argued that it’s not necessary (yet helpful) to waive the attorney-client privileges, contradicting herself. The court basically takes over and makes the arguments for the debtors, instead of demanding the debtors to show the burden of prove. (p. 20-22) I am not a legal person and may not have the qualifications to criticize the court. Correct me if my impression is wrong.
As for deposit account – turnover action and tax refund issues, the court holds that the debtors have “a strong likelihood of success” or “a fair likelihood prevailing” on the merits of their claims. Once having JPMC and FDIC arguments introduced, the court conceded that the debtors could not get better results than GSA. It seems arbitrary to me. Especially, when clear and strong evidence shows the debtors’ estate is the owner of deposit account, why allowing JPMC and FDIC to continue to hold the debtors’ deposit account as hostage in negotiation and subsequently justify their so called “contributions”? (p. 23, 26, 29-30)
In a worst case scenario, even though JPMC and FDIC have some claims on deposit account, tax refund, BOLI/COLI, etc., it then begs the bigger question: how is that possible that a $300+B company with so many additional cash or cash equivalent assets was sold for a song ($1.88)? Who should be responsible for just compensation of WMI? Unfortunately, as much as I hate to admit and I am not cynical at all, the BK court doesn’t care. It cares about “the lowest point in the range of reasonableness” and “paramount interests of creditors”. In normal BK case, it makes sense. But in this one, the justice may left un-served. As I said before, I’m a believer in the court and still do, but “[a]fter more than two years involvement in this case, however, I’ve become deeply suspicious of our legal system. The bankruptcy law and system are structured in name (or in principle) to be equal and fair to all constituencies of the estates. But in reality and in practice, the law and system are structured heavily in favor of creditors class. Adding seasoned BK specialists like WGM in the mix, it’s not hard for those BK old hands (hedge funds and A&M included) to take advantage of loop holes, tricks, etc, to manipulate, twist, abuse, and even coerce the system.” That being said, I don’t believe JPMC and FDIC stand a chance in a civil court with a jury and much wider public attention.
Lots of people are upset with the court’s remarks that “[t]he collapse of WMB itself demonstrates that bank deposits (especially in the amount of $4 billion) may not be easily collectible without resulting in another bank collapse.” This is odd. We are not demanding our deposit back at the time of seizure but two and half years later when the financial market is largely stabilized. The citation of Lehman and AIG makes no sense either. Yes, it’s logic to say if Lehman and AIG can go under, other largest institutions (like JPMC) can go under to and need to be protected (btw, AIG was saved selectively by the government). Such reasoning can help us understand series of fatal events happened two years ago. But they offer no help in understanding and justification of JPMC holding deposit account as hostage as of today. There is no correlations between the two. I can understand that the courts sometimes have to take politics (or maybe national interests) into consideration when making decisions. But a prudent and conservative (not in a political sense) will be hesitate to put them out in writing as formal opinions. Such remarks can fan the flames in public forums. While reading the court opinions, I have an impression that JPMC and FDIC are untouchable. I don’t blame the court, I blame the system. I think this court is smart. She might have set the camp on fire. It’s now up to all participating parties to put out the fire before it’s too later.
Disappointed? Yes.
Discouraged? No.
Gratified? Yes. The door is left open for the Releases issue; NOL is a reality with the court’s blessing; a few subtle moves here and there (FJR or Hs) can also change the game.
The bottom line is, like Justin said, the confirmation of POR is denied. We are gratified.
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