Pratt’s Journal of Bankruptcy Law VOLUME 8
NUMBER 2
FEBRUARY/MARCH 2012
HEADNOTE: THE CHANGING FACE OF CHAPTER 11 Steven A. Meyerowitz
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THE CHANGING FACE OF CHAPTER 11 FOR LARGE OPERATING BUSINESSES Jonathan M. Landers
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ZING VII: IMPLICATIONS FOR THE BANKRUPTCY REMOTENESS OF SPECIAL PURPOSE ENTITIES Chris DiAngelo, Roxana I. Bargoz, and David J. Matthews
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CHANGE FOR BANKRUPTCY PROOFS OF CLAIM Edwin H. Garrison
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BANKRUPTCY COURT DENIES CONFIRMATION OF WAMU’S PLAN OF REORGANIZATION David Neier, Rolf Woolner, and Myja Kjaer
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SUBSIDIARY RESTRUCTURINGS Melissa G. Sallee and Bianca Stoll
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A BANKRUPTCY CASE THAT RESEMBLES A HOLLYWOOD MOVIE PLOT Ronald G. Steen, Jr.
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NEW YORK DISTRICT COURTS DIFFER REGARDING THE SCOPE OF THE BANKRUPTCY CODE’S “SAFE HARBORS” FOR PROTECTED CONTRACTS Brian Trust and Rick Hyman
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CHANGES TO RUSSIAN CORPORATE LAW: ADDITIONAL PROTECTION OF CREDITORS’ RIGHTS UPON REDUCTION OF CHARTER CAPITAL AND INTRODUCTION OF NEW FEDERAL REGISTER Alyona N. Kucher and Evgenia S. Shpak
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COLLECTION MATTERS, PART 2: FORECLOSURES AND GUARANTORS Patricia Y. Trendacosta and Peter Csato
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EDITOR-IN-CHIEF Steven A. Meyerowitz President, Meyerowitz Communications Inc. ASSISTANT EDITOR Catherine Dillon BOARD OF EDITORS Scott L. Baena Bilzin Sumberg Baena Price & Axelrod LLP Leslie A. Berkoff Moritt Hock & Hamroff LLP Andrew P. Brozman Clifford Chance US LLP Kevin H. Buraks Portnoff Law Associates, Ltd. Peter S. Clark II Reed Smith LLP Thomas W. Coffey Tucker Ellis & West LLP
Mark G. Douglas Jones Day
William I. Kohn Schiff Hardin LLP
Timothy P. Duggan Stark & Stark
Matthew W. Levin Alston & Bird LLP
Gregg M. Ficks Coblentz, Patch, Duffy & Bass LLP
Alec P. Ostrow Stevens & Lee P.C.
Mark J. Friedman DLA Piper Rudnick Gray Cary US LLP Robin E. Keller Lovells
Deryck A. Palmer Cadwalader, Wickersham & Taft LLP N. Theodore Zink, Jr. Chadbourne & Parke LLP
PRATT’S JOURNAL OF BANKRUPTCY LAW is published eight times a year by A.S. Pratt & Sons, 805 Fifteenth Street, NW., Third Floor, Washington, DC 20005-2207, Copyright © 2012 THOMPSON MEDIA GROUP LLC. All rights reserved. No part of this journal may be reproduced in any form — by microfilm, xerography, or otherwise — or incorporated into any information retrieval system without the written permission of the copyright owner. Requests to reproduce material contained in this publication should be addressed to A.S. Pratt & Sons, 805 Fifteenth Street, NW., Third Floor, Washington, DC 20005-2207, fax: 703-528-1736. For permission to photocopy or use material electronically from Pratt’s Journal of Bankruptcy Law, please access www.copyright. com or contact the Copyright Clearance Center, Inc. (CCC), 222 Rosewood Drive, Danvers, MA 01923, 978750-8400. CCC is a not-for-profit organization that provides licenses and registration for a variety of users. For subscription information and customer service, call 1-800-572-2797. Direct any editorial inquires and send any material for publication to Steven A. Meyerowitz, Editor-in-Chief, Meyerowitz Communications Inc., PO Box 7080, Miller Place, NY 11764,
[email protected], 631.331.3908 (phone) / 631.331.3664 (fax). Material for publication is welcomed — articles, decisions, or other items of interest to bankers, officers of financial institutions, and their attorneys. This publication is designed to be accurate and authoritative, but neither the publisher nor the authors are rendering legal, accounting, or other professional services in this publication. If legal or other expert advice is desired, retain the services of an appropriate professional. The articles and columns reflect only the present considerations and views of the authors and do not necessarily reflect those of the firms or organizations with which they are affiliated, any of the former or present clients of the authors or their firms or organizations, or the editors or publisher. POSTMASTER: Send address changes to Pratt’s Journal of Bankruptcy Law, A.S. Pratt & Sons, 805 Fifteenth Street, NW., Third Floor, Washington, DC 20005-2207.
ISSN 1931-6992
Bankruptcy Court Denies Confirmation of WaMu’s Plan of Reorganization DAVID NEIER, ROLF WOOLNER, AND MYJA KJAER
The authors of this article provide a brief overview of the bankruptcy court’s denial of Washington Mutual Inc.’s plan of reorganization.
S
ending the debtors back to the drawing board after almost three years in bankruptcy, in a 139 page opinion, the bankruptcy court has for the second time denied confirmation of the Plan of Reorganization for Washington Mutual, Inc. (“WaMu”), which was the owner of the largest savings bank ever to be seized by the FDIC. In denying confirmation, the bankruptcy court determined that an equityholders’ committee had stated “colorable claims” of insider trading by certain noteholders during the bankruptcy case, and, as a result, the claims of the noteholders against WaMu could be subject to “equitable disallowance.” The bankruptcy court directed the parties to engage in mediation to see if they could reach a settlement on these issues and thereby avoid a “litigation morass.” The bankruptcy court also provided significant insight into issues surrounding a bankruptcy court’s claim settlement jurisdiction in the wake of the Supreme Court’s decision in Stern v. Marshall,1 including whether David Neier is a corporate partner in Winston & Strawn LLP’s New York office. Rolf Woolner is a litigation partner in the firm’s Los Angeles office. Myja Kjaer is an associate at the firm. The authors may be contacted at
[email protected],
[email protected], and
[email protected], respectively.
127 Published by A.S. Pratt in the February/March 2012 issue of Pratt’s Journal of Bankruptcy Law. Copyright © 2012 THOMPSON MEDIA GROUP LLC. 1-800-572-2797.
PRATT’S JOURNAL OF BANKRUPTCY LAW
a plan may be confirmed despite pending appeals on issues that will be mooted by such confirmation, the interest rate certain creditors will be allowed under a plan, and the steps creditors should take to avoid insider trading liability in the future when engaged in claim settlement discussions where material non-public information might be revealed.
BACKGROUND WaMu filed for bankruptcy on September 26, 2008, the day after its banking unit was seized by the FDIC and sold to JPMorgan. Early in the bankruptcy case, disputes arose among the debtors, the FDIC, and JPMorgan regarding ownership of certain assets and various claims that the parties asserted against each other. Those disputes were ultimately resolved in a global settlement that was incorporated in the proposed plan. Certain parties who will receive little or nothing under the proposed plan objected to confirmation on multiple grounds.
INFORMATION OBTAINED DURING SETTLEMENT DISCUSSIONS MAY CREATE INSIDER TRADING LIABILITY The bankruptcy court ruled that a creditor who receives non-public material information from a debtor must either not trade or must have established a “wall” between the individuals receiving the inside information and those trading claims. This may well result in the resumption of trading orders and other methods used in the past to allow institutions to both trade and receive inside information. The bankruptcy court found that a creditor trading on inside information received from a debtor could result in “equitable disallowance” of the creditor’s claim in addition to other remedies such as subordination or disallowance of a claim. The plan objectors asserted that certain noteholders, while continuing to engage in settlement discussions surrounding their claims and receive material information regarding the debtors in the context of such settlement discussions, engaged in trading activity and, accordingly, engaged in insider trading. The bankruptcy court found that the plan objectors had 128
BANKRUPTCY COURT DENIES CONFIRMATION OF WAMU’S PLAN
established “colorable claims” that insider trading had occurred. Creditors should be aware that under the bankruptcy court’s analysis, almost any settlement discussions with debtors could be considered material non-public information and therefore any trading should either be restricted or an ethical wall between analysts and traders established. Creditors also cannot rely upon the defense that debtors agree to “cleanse” the creditors who are party to settlement discussions by periodically disclosing any material non-public information. While the WaMu debtors agreed to disclose any material non-public information at the end of each confidentiality period, the bankruptcy court ruled that the noteholders could not rely on such assurances to insulate them from insider trading liability. The bankruptcy court found that where possible insider trading by a creditor has occurred that would establish equitable grounds for the disallowance of the creditor’s claim, a plan cannot be confirmed without resolution of such insider trading issues, reservation of funds with respect to such claims until resolution of such insider trading issues and/or temporary allowance of such claims with the ability to “claw back” funds paid out on account of such claims depending on the ultimate resolution of insider trading issues. The bankruptcy court has ordered the parties to mediation in an attempt to avoid “a litigation morass” over insider trading allegations.
CORRECT POST-PETITION INTEREST RATE IS FEDERAL JUDGMENT RATE AND NOT CONTRACT RATE Perhaps the most significant part of the bankruptcy court’s ruling is its decision that the correct post-petition interest rate paid on unsecured claims in solvent estates, including bondholder claims, is the federal judgment rate and not the rate that may have been agreed to in any contract a debtor had entered into prior to filing for bankruptcy. The effect of this ruling on banks and financial institutions that have significant unsecured claims in other bankruptcy cases, including, for example, the Tribune cases, could be substantial. There has been wide disagreement on which interest rate applies because the bankruptcy code simply states that unsecured creditors are entitled to post-petition interest under a plan at the “legal rate” where the debtor is solvent. Some courts have held that “legal rate” refers to the contract rate 129
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and some courts have held that it means only the federal judgment rate. Still other courts have opined that “legal rate” could refer to the state judgment rate. The bankruptcy court in WaMu found that the federal judgment rate of interest was the appropriate rate of interest in all circumstances and that “legal rate” referred only to the federal judgment rate. In addition, the bankruptcy court held that the federal judgment rate of interest should be calculated as of the petition date. The bankruptcy court overruled the plan objectors who had asserted that interest should only be paid after confirmation of the plan. The bankruptcy court further held that creditors were not entitled to compounded interest (whether or not contractually required). Although the bankruptcy court’s ruling on use of the federal judgment rate may have profound effects, it may not have much negative effect on the claims of senior noteholders in WaMu, as the bankruptcy court also ruled that junior noteholders were contractually subordinated and required to pay all interest at the contract claim to the senior noteholders before receiving any recovery on their subordinated claims.
JURISDICTIONAL ISSUES FOLLOWING STERN v. MARSHALL The plan objectors argued that the settlement of non-bankruptcy claims must be decided by the district court as a result of the Supreme Court’s decision in Stern v. Marshall. Because the bankruptcy court was only determining whether the settlement was reasonable and did not have to rule on the underlying merits of such claims, the bankruptcy court ruled that it had jurisdiction. As a practical matter, it appears that bankruptcy courts will continue to assert jurisdiction over the approval of such settlements.
NOTE 131 S. Ct. 2594 (2011).
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