Docket #9559 Date Filed: 2/2/2012

IN THE UNITED STATES BANKRUPTCY COURT FOR THE DISTRICT OF DELAWARE ____________________________________ ) ) ) WASHINGTON MUTUAL, INC., et al., ) ) Debtors. ) ) ____________________________________) In re: Chapter 11 Case No. 08-12229 (MFW) Jointly Administered Related to Docket Nos.: 6528 & 8612 Response Deadline: February 16, 2012 1

REQUEST FOR AN ORDER CERTIFYING CONFIRMATION ORDER FOR DIRECT APPEAL TO THE COURT OF APPEALS FOR THE THIRD CIRCUIT The consortium of holders of interests (the TPS Consortium 2) subject to treatment under Class 19 of the Seventh Amended Joint Plan of liquidation proffered by the abovecaptioned Debtors (the Plan) [Docket No. 9178], by and through undersigned counsel, respectfully submits this request for certification of direct appeal to the United States Court of Appeals for the Third Circuit (the Third Circuit), pursuant to 28 U.S.C. 158(d)(2) and Rule 8001(f) of the Federal Rules of Bankruptcy Procedure (the Bankruptcy Rules), of the Order (if ultimately entered) of the Bankruptcy Court confirming the Plan. In support of this Motion, the TPS Consortium respectfully states as follows:

Federal Rule of Bankruptcy Procedure 8001(f)(3)(D) provides that a party may file a response to a request for certification or a cross-request within 14 days after the notice of the request is served, or another time fixed by the Court. The TPS Consortium is comprised of holders of interests (as set forth more fully in the Verified Fifth Amended Statement of Brown Rudnick LLP and Campbell & Levine LLC [Docket No. 9384], as such may be amended) proposed by the Debtors to be treated under Class 19 of the Plan [Docket No. 9178] and described in the Plan and Disclosure Statement as the REIT Series. For the sake of clarity, the TPS Consortium maintains its position that its members continue to hold Trust Preferred Securities as a result of the failed transaction by which those interests were to have been exchanged for REIT Series.
2

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PRELIMINARY STATEMENT 1. These are, to be sure, very difficult Chapter 11 cases, involving numerous issues

of extreme complexity without clear-cut answers in the law. Perhaps for this reason primarily, the cases have witnessed: (i) two lengthy confirmation trials; (ii) thousands of pages of briefing in support of, and in opposition to, confirmation of two prior plans; and (iii) two extraordinarily long and in-depth opinions denying confirmation of the two prior plans (the Courts 109 page January 7, 2011 opinion referred to herein as the January Confirmation Ruling and the Courts 139-page September 13, 2011 opinion referred to herein as the September Confirmation Ruling). 3 The Court is now poised to consider a further revised version of the Plan, premised on much of the same structure and architecture that spawned historic objections and, in turn, hundreds of pages in judicial opinion denying confirmation. To confirm this Plan, the Court will be required to again determine controversial issues without clear answers in the law, over the fervent objection of the TPS Consortium. This is precisely the circumstance contemplated by 28 U.S.C. 158(d)(2). 2. Taking into account interim rulings in the January and September Confirmation

Rulings, and anticipating rulings the Court would be required to make to confirm the Plan, a confirmation Order entered with respect to the current Plan would be appealable with respect to,

As required by Bankruptcy Rule 8001(f)(3)(C)(v), attached are copies of the January Confirmation Ruling (Exhibit A) [Docket No. 6528] and the September Confirmation Ruling (Exhibit B) [Docket No. 8612]. To the extent the Court confirms the Plan, the TPS Consortium will supplement this filing with a copy of such Order. For the Courts convenience, the TPS Consortium also attaches: (1) Confirmation Objection of the TPS Consortium [Docket No. 6020] (Exhibit C); (2) First Supplemental Confirmation Objection of the TPS Consortium [Docket No. 7480] (Exhibit D); (3) Second Supplemental Confirmation Objection of the TPS Consortium [Docket No. 8100] (Exhibit E); (4) Post-trial Brief of the TPS Consortium [Docket No. 8438] (Exhibit F); and (5) Motion to Stay Confirmation Proceedings [Docket No. 9260] (Exhibit G), each of which is incorporated herein by reference.
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inter alia, the following issues: Whether the Divestiture Rule deprives the Court of jurisdiction to approve a Plan structured to eviscerate the TPS Consortiums appellate rights regarding ownership of the Trust Preferred Securities. Whether the Court has the Constitutional power, after the Supreme Courts ruling in Stern v. Marshall, to enter a final Order approving the settlement of non-core estate causes of action that may only be adjudicated by an Article III court. Whether, in a solvent debtor case, such as this one, post-petition interest for unsecured creditors is determined by using the Federal Judgment Rate in effect on (1) the petition date or (2) the date of entry of the confirmation order. Whether the Court may confirm a Plan that withholds stakeholders due distribution entitlements, unless such stakeholders tender a release of all claims against nondebtor third-parties (e.g., JPMorgan), especially where such coerced release is intended to eviscerate the TPS Consortiums appellate rights regarding ownership of the Trust Preferred Securities. Whether the thin evidentiary record (essentially only unproven pleadings) regarding the Global Settlement of fact-intensive estate causes of action, was sufficient to meet the standard enunciated under the Supreme Courts ruling in TMT Trailer Ferry, Inc. v. Anderson and its decisional progeny. Whether the Court may, notwithstanding the clear language of Bankruptcy Code Section 365(c)(2), approve a Plan calling for the issuance of preferred stock and, in turn, consummate post-petition, the conditional exchange transaction. To the extent Class 19 rejects the Plan and the Court allows value to be distributed to Classes 21 and/or 22, whether such Plan would violate the Absolute Priority Rule, as articulated by the Third Circuit Court of Appeals in In re Armstrong World Indus, Inc. As will be explained in the TPS Consortiums confirmation objection, the Plan

3.

should not be confirmed. If the Court ultimately overrules such objection and confirms the Plan, the above issues should be certified simultaneously with issuance of the confirmation Order to enable prompt and direct appeal to the Third Circuit Court of Appeals. 4 As discussed herein,

Federal Rule of Bankruptcy Procedure 8001(f)(1) provides that a certification shall not be effective until a timely appeal has been taken . . . and the notice of appeal has become effective under Rule 8002. In anticipation of the Debtors seeking to proceed quickly to consummate the transactions contemplated under the Plan, the TPS Consortium is filing this motion now so that it may be taken up immediately should the Court be inclined to grant Plan confirmation. This Court may prospectively certify an appeal of its Order before an appeal thereof is taken. See, e.g., Samson Res. Co. v. SemCrude, L.P. (In re SemCrude, L.P.), 407 B.R.
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certification is mandated by 28 U.S.C. 158(d)(2) and is otherwise appropriate under the circumstances of this case. APPLICABLE LEGAL STANDARD 4. Under 28 U.S.C. 158(d)(2), direct certification for Circuit-level review is

required when: (a) the judgment, order or decree involves a question of law as to which there is no controlling decision of the court of appeals for the circuit or of the Supreme Court; (b) the judgment, order or decree involves a matter of public importance; (c) the judgment, order or decree involves a question of law requiring resolution of conflicting decisions; or (d) an immediate appeal from the judgment, order or decree may materially advance the progress of the case or proceeding in which the appeal is taken. See 28 U.S.C. 158(d)(2)(A). 5. When even one of the foregoing circumstances is present, the Court must certify

the appeal to the Circuit Court. See 28 U.S.C. 158(d)(2)(B) (If the bankruptcy court . . . determines that a circumstance specified in clause (i), (ii), or (iii) of subparagraph (A) exists . . . then the bankruptcy court . . . shall make the certification described in subparagraph (A).) (emphasis added). Once that mandatory certification has been effected, the court of appeals then has the discretion to accept or reject the certification. See 28 U.S.C. 158(d)(2)(A). I. Lack Of Controlling Third Circuit Or Supreme Court Precedent. 6. The first alternative ground requiring direct certification is when the Bankruptcy

Courts Order involves a question of law as to which there is no controlling decision of the court of appeals for the circuit or of the Supreme Court of the United States. 28 U.S.C.

140, 157-58 (Bankr. D. Del. 2009) (Bankruptcy Judge Shannon Ordering certification in an opinion that had not been, but was expected to be, appealed); Arrow Oil & Gas, Inc. v. SemCrude, L.P. (In re SemCrude, L.P.), 407 B.R. 112, 139-40 (Bankr. D. Del. 2009) (same); Mull Drilling Co. v. SemCrude, L.P. (In re SemCrude, L.P.), 407 B.R. 82, 110-11 (Bankr. D. Del. 2009) (same).

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158(d)(2)(A)(i). This Court has previously found the controlling precedent prong of 28 U.S.C. 158(d)(2)(A)(i) to require that there be no governing law on the issue before the court. In re Nortel Networks Corp., No. 09-10138, 2010 WL 1172642, at *1 (Bankr. D. Del. Mar. 18, 2010). Certification may be especially appropriate where it involv[es] important matters of statutory interpretation. 1 Collier on Bankruptcy 5.06[4][a] (16th ed. 2011); see also In re Am. Home Mortg. Holdings, Inc., 637 F.3d 246, 247 (3d Cir. 2011) (accepting jurisdiction over appeal involving an issue of statutory interpretation). Certification is certainly appropriate where the Circuit Court ha[s] not spoken to the issue. 1 Collier on Bankruptcy 5.06[4][c] n.36. II. Matters Of Public Importance. 7. If an appellate issue involves a matter of public importance, it must be certified

to the Third Circuit. 28 U.S.C. 158(d)(2)(A)(i). Congress intended that certification to the applicable Circuit Court would be used to expedite appeals that involve issues of public import that transcend the litigants and involve a legal question the resolution of which will advance the cause of jurisprudence to a degree that is usually not the case. Travelers Indem. Co. & Travelers Cas. & Sur. Co. v. Common Law Settlement Counsel (In re Johns-Manville Corp.), 449 B.R. 31, 34 (S.D.N.Y. 2011) (citation and internal quotations omitted). 8. In determining the necessity for certification, courts may also take into account

the monetary value of the matters at issue and the prominence of the case from which the appeal emanates. See, e.g., Bank of New York Trust Co. v. Official Unsecured Creditors Comm. (In re Pac. Lumber Co.), 584 F.3d 229, 242-43 (5th Cir. 2009) (noting the prominence of the case and stating that [s]uch issues . . . when considered in the context of reorganizing nearly a billion dollars total debt and over $700 million of the [appellants] secured debt, deserved certification and an opportunity for direct appeal); In re SemCrude, 407 B.R. at 118 & 139 (in deciding to 5

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certify appeal sua sponte, recognizing the issues, implicating not less than $57 million, were of great significance to the parties). Both the prominence of these proceedings and the amounts at issue strongly support certification in this case. III. Issues Implicating Conflicting Decisions. 9. An alternative ground requiring certification is when the order . . . involves a

question of law requiring resolution of conflicting decisions. 28 U.S.C. 158(d)(2)(A)(ii). To satisfy this circumstance, the conflict must exist within the particular circuit. 1 Collier on Bankruptcy 5.06[4][c] (16th ed. 2011); see id. (noting that this prong can be so readily satisfied). IV. Material Advancement Of The Proceeding From Which The Appeal Is Taken. 10. Finally, an issue must be certified for direct appeal if an immediate appeal . . .

may materially advance the progress of the case or proceeding in which the appeal is taken. 28 U.S.C. 158(d)(2)(A)(iii). The Court of Appeals for the Second Circuit explained how a direct appeal taken pursuant to 28 U.S.C. 158(d)(2) might materially advance the progress of the case as follows: [W]here a bankruptcy court has made a ruling which, if correct, will essentially determine the result of future litigation, the parties adversely affected by the ruling might very well fold up their tents if convinced that the ruling has the approval of the court of appeals, but will not give up until that becomes clear. Where that ruling is manifestly correct or manifestly erroneous, the parties would profit from its immediate review in this court. Weber v. U.S. Trustee, 484 F.3d 154, 158 (2d Cir. 2007). Furthermore, where the Court is confident the litigants will continue to exercise their appellate rights, certification may materially advance litigation. See In re SemCrude, 407 B.R. at 157-58 (sua sponte

certification of appeal to the Third Circuit where, inter alia, the Court ha[d] little doubt that this decision will be appealed).

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11.

If the Court enters an Order confirming the Plan, based on the herein described

rulings, the TPS Consortium intends to pursue its appellate rights. Neither the TPS Consortium, nor the supporters of the Plan, will benefit from unnecessarily prolonging the appellate process. As such, certification of the appeal of any Order confirming the Plan would materially advance this litigation insofar as it would reduce the time and expense (to be born by Plan proponents and opponents alike) associated with the preservation and exhaustion of such appellate rights. APPELLATE ISSUES REQUIRING DIRECT CERTIFICATION 12. For certification to be required, the Court need find only one issue meeting the

requirements of 28 U.S.C. 158(d)(2)(A)(i)-(iii). As discussed below, in addition to the abovenoted general considerations, an Order confirming the Plan would give rise to multiple specific issues requiring certification to the Third Circuit. Such issues, and the circumstances warranting direct certification, include: I. Whether The Divestiture Rule Deprives The Court Of Jurisdiction To Approve A Plan Intended To Eviscerate The TPS Consortiums Appellate Rights Regarding Ownership Of The Trust Preferred Securities. 13. In the September Confirmation Ruling, and again on January 11, 2011 in denying

the TPS Consortiums request for a stay, the Court ruled that the Divestiture Rule did not deprive the Court of jurisdiction to confirm those provisions of the Plan intended to affect the TPS Consortiums appeal. See September Confirmation Ruling, p. 20; Order Denying Motion to Stay Confirmation Proceedings [Docket No. 9397]. The TPS Consortium argued that, given the pendency of the TPS Litigation appeal, the Court should stay further confirmation proceedings or Order modification of the Plan so as to avoid any potential invasion of the District Courts jurisdiction over matters currently on appeal. An appeal as to the scope and applicability of the Divestiture Rule must be certified to the Third Circuit because: (a) the issue of whether a Bankruptcy Court, by confirmation Order entered subsequent to the initiation of an appeal, may 7

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affect matters on appeal before a superior Court warrants the issuance of clear, controlling precedent by the Third Circuit; and (b) to the extent the Courts decision was based on perceived discretion in applying the Divestiture Rule, there would appear to be conflicting decisions warranting clarification by the Third Circuit. 5 II. Whether The Court Has The Constitutional Power, After The Supreme Courts Ruling In Stern v. Marshall, To Enter A Final Order Approving The Settlement Of Non-Core Estate Causes Of Action That May Only Be Adjudicated By An Article III District Court. 14. In the September Confirmation Ruling, the Court ruled that it had the

Constitutional authority and jurisdiction to enter a final Order approving the settlement of, inter alia, claims that would require adjudication by an Article III court. See September Confirmation Ruling, p. 9. The TPS Consortium argued that the Court had the authority to enter only proposed findings of fact and conclusions of law as to non-core claims. See Second Supplemental

Objection of the TPS Consortium, p. 16. Neither the Supreme Court nor the Third Circuit has spoken to whether, in light of the Supreme Courts ruling in Stern v. Marshall, 131 S.Ct. 2594 (2011), non-Article III courts retain the power to issue final Orders approving and enforcing compromises of claims that otherwise must be adjudicated by an Article III Court. It would significantly advance bankruptcy jurisprudence if the Third Circuit were presented an

In opposing the TPS Consortiums request for a stay, JPMorgan disputed that the Divestiture Rule automatically and mandatorily divests the trial court of jurisdiction over issues on appeal. See, e.g., JPMorgans Objection to the TPS Consortiums Motion to Stay Confirmation Proceedings [Docket No. 9315], at 10 (citing Mary Ann Pensiero, Inc. v. Lingle, 847 F.2d 90, 97 (3d Cir. 1988)). The Mary Ann Pensiero decision was read by JPMorgan to suggest the Divestiture Rule allows the reviewing court to exercise discretion as to whether to apply the Rule. Competing jurisprudence from both the Supreme Court of the United States and Third Circuit suggests that the filing of a notice of appeal automatically and mandatorily divests the trial court of jurisdiction over the issues on appeal. See, e.g., Griggs v. Provident Consumer Discount Co., 459 U.S. 56, 58 (1982); Venen v. Sweet, 758 F.2d 117, 120 (3d Cir. 1985) ([T]he timely filing of a notice of appeal is an event of jurisdictional significance, immediately conferring jurisdiction on a[n appellate court] and divesting a [trial court] of its control over those aspects of the case involved in the appeal.) (emphasis added).
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opportunity to clarify the meaning and application of Stern in this Circuit, in particular as to Bankruptcy Court approval of settlements of litigation the Bankruptcy Court does not have the Constitutional authority to adjudicate on a final basis. III. Whether, In A Solvent Debtor Case, Such As This One, Post-Petition Interest For Unsecured Creditors Is Determined By Using The Federal Judgment Rate In Effect On (1) The Petition Date Or (2) The Date Of Entry Of The Confirmation Order. 15. In the September Confirmation Ruling, the Court ruled that post-petition interest

on claims against a solvent debtor must be paid under a plan at the Federal Judgment Rate in effect as of the petition date. 6 See September Confirmation Ruling, p. 88. The TPS Consortium argued that the reference date should be the date on which a confirmation Order is entered, including, inter alia, based on precedent standing for the proposition that entry of a confirmation Order is most analogous to entry of a final judgment. See Post-trial Brief of the TPS

Consortium, pp. 26-29 (citing, inter alia, Silverman v. Tracar, S.A. (In re Am. Preferred Prescription, Inc.), 255 F.3d 87, 92 (2d Cir. 2001) (The confirmation of a plan in a Chapter 11 proceeding is an event comparable to the entry of a final judgment in an ordinary civil litigation.)). An appeal of the Courts ruling must be certified because: (a) there is no

controlling precedent from the Supreme Court or Third Circuit as to reference date for applying the Federal Judgment Rate to interest owed by solvent chapter 11 debtors, and there is persuasive precedent that the reference date should be the date of the confirmation Order; (b) the Courts ruling in this case appears to be inconsistent with the Courts prior ruling in In re Coram, suggesting that there are now conflicting decisions on the issue within the Third Circuit; and (c)

The TPS Consortium agrees that the Federal Judgment Rate must be used when calculating post-petition interest payable to unsecured creditors by a solvent debtor, and will appeal only the reference date selected by the Court.
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determination of the appropriate rate of interest payable by a solvent debtor is a matter of public interest. 16. In ruling, the Court considered the interplay between Bankruptcy Code Section

726(a)(5) and Section 1961(a) of Title 28 of the United State Code, which states, in pertinent part, that interest shall be calculated from the date of the entry of the judgment . . . . (emphasis added). Neither the Supreme Court, nor the Third Circuit, has ruled on the appropriate rate of interest to be paid in a solvent debtor chapter 11 case. See September Confirmation Ruling, at 85-88 (finding that post-petition interest should be calculated using the Federal Judgment Rate as of the petition date, without citation to any Third Circuit or Supreme Court decisions requiring such conclusion). In ruling that the reference date should be the petition date, the Court found that the language of Bankruptcy Code Section 726(a)(5) suggest[ed] that it is the interest rate effective on the petition date that should be used. September Confirmation Ruling, p. 88 (emphasis added). This issue involves statutory interpretation on which the Third Circuit should be given the opportunity to provide guidance. See 1 Collier on Bankruptcy 5.06[4][a] (16th ed. 2011) (discussing the appropriateness of certification where an issue involv[es] important matters of statutory interpretation). 17. Moreover, in the present case, the Court determined that the Federal Judgment

Rate in effect on the Petition Date should be used. Yet, in In re Coram, an earlier decision of this Court referenced in both the January and September Confirmation Rulings, the Court did not apply the Federal Judgment Rate existing on the petition date in that case 6.35%. Rather, in Coram, the Court approved use of the Federal Judgment Rate that was in effect on the date the Official Equity Committee filed its Third Amended Disclosure Statement 0.97%. See In re Coram Healthcare, 315 B.R. 321 (Bankr. D. Del. 2004); Third Amended Disclosure Statement of the Equity Committee [Bankr. No. 00-3299, Docket No. 2785], at 73 (The Equity Committee 10

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believes that post-petition interest, if required to be paid, will be calculated using the federal judgment rate established at 28 U.S.C. Section 1961 (0.97% as of June 17, 2003).). 18. Finally, the issue of the appropriate reference date for determining the Federal

Judgment Rate transcends the interests of the TPS Consortium. See Johns-Manville Corp., 449 B.R. at 34. As was established at the July 2011 confirmation hearing, payment of postpetition interest at the Federal Judgment Rate, as measured on the confirmation date, would deliver approximately $400 million in additional value to junior creditors, and, potentially, equity interest holders, by way of the waterfall distribution. See Waterfall Impact Applying Contract and Federal Judgment Rate, Exhibit 301-B [Docket No. 8315]. While the TPS

Consortium, to the extent it receives a distribution under Class 19, might share in that extra value, a significant portion of that value would be available to other stakeholders. IV. Whether The Court May Confirm A Plan That Withholds Stakeholders Due Distribution Entitlements, Unless Such Stakeholders Tender A Release Of All Claims Against NonDebtor Third-Parties (e.g., JPMorgan), Especially Where Such Coerced Release Is Intended To Eviscerate The TPS Consortiums Appellate Rights Regarding Ownership Of Trust Preferred Securities. 19. In the January and September Confirmation rulings, the Court ruled that the

Plans requirement that stakeholders grant releases to non-Debtors to receive an estate recovery did not violate Bankruptcy Code Sections 1129(a)(7) or 1123(a)(4). See September

Confirmation Ruling, p. 99; January Confirmation Ruling, p. 85. The TPS Consortium argues that the coerced release of claims against non-Debtors in exchange for an estate recovery to which the stakeholder is otherwise entitled under the Plan essentially an impermissible death trap violates, inter alia: (a) Bankruptcy Code Section 524(e)s limitation of discharge benefits to debtors; (b) Bankruptcy Code Section 1123(a)(4)s requirement that a plan provide for equal treatment for each claim or interest within a class (including where holders of REIT Series

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would be forced to compromise unique rights/claims in exchange for the same class treatment, without receiving any additional consideration), unless the holder of such claim or interest agrees to less favorable treatment; (c) Bankruptcy Code Section 1129(a)(7)(ii)s requirement that a plan be accepted by an individual holder of a claim or interest, or provide such holder will receive or retain property of a value equal to or greater than would be received under a chapter 7 liquidation; and/or (d) to the extent any class rejects the Plan, Bankruptcy Code Section 1129(b)s requirement that the Plan be fair and equitable and not discriminate unfairly. 20. An appeal of the Courts ruling as to the permissibility of coerced (as opposed to

truly consensual) releases in exchange for receipt of an estate entitlement must be certified because: (a) there is no controlling precedent from the Supreme Court or Third Circuit as to the propriety of such a provision; (b) to the extent the Third Circuit has addressed this issue, it would appear that its decision conflicts with this Courts (see Gillman v. Contl Airlines (In re Continental Airlines), 203 F.3d 203, 212-15 n. 13 (3d Cir. 2000) (suggesting that receipt of what a party is already entitled to receive is not consideration sufficient to support third-party release)); and (c) the request for certification of this issue transcends the interests of the TPS Consortium in that the Third Circuits reversal or affirmance of the any confirmation Order imposing the death trap would implicate the recoveries of each and every stakeholder in these cases, and would have a significant impact on the Chapter 11 practice in this Circuit. V. Whether The Thin Evidentiary Record (Essentially Only Unproven Pleadings) Regarding The Global Settlement Of Fact-Intensive Estate Causes Of Action, Was Sufficient To Meet The Standard Enunciated Under The Supreme Courts Ruling In TMT Trailers v. Anderson And Its Decisional Progeny. 21. In the January Confirmation Ruling, the Court approved the Global Settlement

Agreement based on an evidentiary record consisting of pleadings from the to-be-resolved actions and testimony of Debtors witnesses lacking any testimony regarding the likelihood of 12

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success on any of the Debtors positions with respect to the disputed claims. See January Confirmation Ruling, at pp. 20-22. The TPS Consortium argued that settlement approval

required sufficient admissible evidence as to each of the four factors set forth in the Third Circuits decision in Myers v. Martin (In re Martin), 91 F.3d 389, 393 (3d Cir. 1996) (announcing test consisting of: a) probability of success in the litigation; b) the likely difficulties in collection; c) the complexity of the litigation involved, and the expense, inconvenience and delay necessarily attending it; and d) the paramount interest of the creditors). See Post-trial Brief of the TPS Consortium, pp. 52-54. In particular, the TPS Consortium asserts that the Debtors failed to provide any admissible evidence as to at least the first three factors of the Martin test. More specifically, Debtors failed to meet their evidentiary burden given the limited testimony of the Debtors witnesses, the lack of any expert testimony regarding the claims, the lack of sufficient affidavits speaking to the factors required to be considered, and the fact that pleadings from other proceedings do not constitute evidence. 22. An appeal of the Courts ruling regarding the appropriate standard, and required

evidentiary record, for approval of settlements requires certification to the Third Circuit because there are conflicting decisions on the topic. See In re Spansion, No. 09-106901, 2009 Bankr. LEXIS 1283, at *12-30 (Bankr. D. Del. June 2, 2009) (denying settlement approval where proponent failed to adduce sufficient, admissible evidence as to satisfaction of each of the Martin factors). In the January Confirmation Ruling, the Court sought to distinguish the

Spansion decision. See January Confirmation Ruling, pp. 21-22 (focusing only on Spansions holding that the first Martin factor could not be met because the witness in that case denied relying on counsel). Respectfully, this Courts ruling on the Global Settlement Agreement (based, as discussed above, on non-evidentiary pleadings and an insufficient record) cannot be

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reconciled with Judge Careys decision in Spansion (requiring sufficient evidence as to all four Martin factors before approving a settlement). VI. Whether The Court May, Notwithstanding The Clear Language Of Bankruptcy Code Section 365(c)(2), Approve A Plan Calling For The Issuance Of Preferred Stock And, In Turn, Consummate Post-Petition, The Conditional Exchange Transaction. 23. The Plan remains premised on the assumption that the conditional exchange

transaction occurred on September 25, 2008 (the day prior to the petition date) which ruling is currently on appeal before the District Court. Yet, the Plan and Global Settlement Agreement continue to require an Order of this Court compelling performance of the steps necessary to effectuation of that conditional exchange transaction. See Plan, Section 36.1(a)(8) and Global Settlement Agreement, Section 2.3 (requiring, inter alia, recordation of transfer of Trust Preferred Securities to the Debtors, delivery to the Debtors of the certificate representing the Trust Preferred Securities, etc.). Included in the relief requested under the Plan is authority to assume the Exchange Agreements pursuant to which such steps were to have been taken and pursuant to which the securities for which the Trust Preferred Securities were to have been exchanged would be issued. See Plan Supplement [Docket No. 9488], Ex. D. 24. Bankruptcy Code Section 365(c)(2) prohibits a trustee or debtor in possession

from assuming an executory contract to make a loan, or extend other debt financing or financial accommodations, to or for the benefit of the debtor, or to issue a security of the debtor. See 11 U.S.C. 365(c)(2) (emphasis added). In the briefing related to the TPS Litigation, the Debtors and JPMorgan suggested that Bankruptcy Code Section 365(c)(2)s absolute prohibition against assumptions of contracts to issue securities might be side-stepped by engrafting a new money exception onto the statutes otherwise clear language. See Defendants Joint Reply in Support of Their Motions for Summary Judgment and Opposition to Plaintiffs Cross-Motion for Summary

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Judgment, p. 12 [Adv. Pro. No. 10-51387, Docket No. 149] (citing to The Chase Manhattan Bank v. Iridium African Corp., No. Civ. A. 00-564JJF, 2004 WL 323178, at *4 (D. Del. Feb. 13, 2004)). 25. Third Circuit guidance as to the meaning and application of Bankruptcy Code

Section 365(c)(2) is needed. VII. To The Extent Class 19 Rejects The Plan And The Court Allows Value To Be Distributed To Classes 21 And/Or 22, Whether Such Plan Would Violate The Absolute Priority Rule, As Articulated By The Third Circuit Court Of Appeals In In re Armstrong. 26. As currently-constituted, the Plan provides for an immediate distribution to

common shareholders (Classes 21 and 22) without providing for payment in full of the liquidation preferences associated with the senior interests classified under Class 19. To the extent Class 19 rejects the Plan, such rejection would bring into play the additional confirmation protections afforded preferred equity holders under Bankruptcy Code Section 1129(b). One such protection is the absolute priority rule, which precludes Plan confirmation unless the class of preferred equity receives payment in full of its liquidation preference or no junior class receives or retains property on account of such junior interests. See 11 U.S.C. 1129(b)(2)(C). 27. The Third Circuit, in In re Armstrong World Indus., Inc., 432 F.3d 507 (3d Cir.

2005) addressed application of the absolute priority rule under Bankruptcy Code Section 1129(b)(2)(B) in denying confirmation of a plan based on an almost identical attempt to divert value to common equity, in that case around a dissenting class of unsecured creditors. In Armstrong, the Third Circuit affirmed the absolute priority rules application in gifting plans such as the one at bar to prohibit parties from gifting around the absolute priority rule to impermissibly sidestep the carefully crafted strictures of the Bankruptcy Code. See id. at 514.

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As such, to the extent Class 19 rejects the Plan, the Third Circuits Armstrong decision would prohibit distribution of any value to Classes 21 or 22. 28. It is not yet clear what theory the Debtors would present to circumvent Armstrong

if this Court is required to review the Plan under Bankruptcy Code Section 1129(b)s cram down provisions. But, to the extent the Court were to confirm the Plan over the dissenting vote of Class 19 and allow value to be distributed to Classes 21 and 22, the Third Circuit must be given an opportunity to review that decision to confirm its consistency with Armstrong and/or to further clarify the meaning of Bankruptcy Code Section 1129(b)(2)(C). Further, this issue transcends the interests of the TPS Consortium in that the Third Circuits statutory interpretation as to the proper application of the absolute priority rule to the Plan will affect the distributions of all members of Classes 19, 21 and 22 entitled to receive distributions under the Plan, and may well shape the Chapter 11 practice throughout the Third Circuit.

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CONCLUSION WHEREFORE, the TPS Consortium respectfully requests that the Court (i) enter the annexed proposed Certification Order certifying the TPS Consortiums appeal of certain findings of facts and conclusions of law contained in the Courts purported Order (and/or the January and September Confirmation Rulings) confirming the Debtors Plan; and (ii) provide any other relief that the Court deems just and proper. Dated: Wilmington, Delaware February 2, 2012 Respectfully Submitted, CAMPBELL & LEVINE LLC /S/ Bernard G. Conaway_____________ Bernard G. Conaway, Esq. (DE 2856) Kathleen Campbell Davis, Esq. (DE 4229) 800 North King Street, Suite 300 Wilmington, DE 19809 (302) 426-1900 (302) 426-9947 (fax) and BROWN RUDNICK LLP Robert J. Stark, Esq. Seven Times Square New York, NY 10036 (212) 209-4800 (212) 209-4801 (fax) and James W. Stoll, Esq. Jeremy B. Coffey, Esq. Daniel J. Brown, Esq. Jonathan D. Marshall, Esq. One Financial Center Boston, MA 02111 (617) 856-8200 (617) 856-8201 (fax) Counsel for the TPS Consortium 17

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EXHIBIT A

IN THE UNITED STATES BANKRUPTCY COURT FOR THE DISTRICT OF DELAWARE In re: WASHINGTON MUTUAL, INC., et al., Debtors. ) ) ) ) ) Chapter 11 Case No. 08-12229 (MFW) Jointly Administered

OPINION1 Before the Court is the request of Washington Mutual, Inc. (WMI) and WMI Investment Corp. (collectively the Debtors) for confirmation of their Sixth Amended Joint Plan of Affiliated Debtors Pursuant to Chapter 11 of the United States Bankruptcy Code, filed on October 6, 2010, as modified on October 29 and November 24, 2010 (the Plan). The Plan incorporates a Global

Settlement among the Debtors, JPMorgan Chase Bank, N.A. (JPMC), the Federal Deposit Insurance Corporation (FDIC) in its corporate capacity and as receiver for Washington Mutual Bank (WMB), certain settling creditors (the Settlement Noteholders),2 certain WMB Senior Noteholders, and the Creditors Committee (collectively, the Plan Supporters). The

This Opinion constitutes the findings of fact and conclusions of law of the Court pursuant to Rule 7052 of the Federal Rules of Bankruptcy Procedure, which is made applicable to contested matters by Rule 9014 of the Federal Rules of Bankruptcy Procedure. The Settlement Noteholders (Owl Creek Asset Management, L.P., Appaloosa Management, L.P., Centerbridge Partners, LP, and Aurelius Capital Management LP, and several of their respective affiliates) hold claims in various classes, including Senior Notes, Senior Subordinated Notes, and PIERS claims.
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Plan is opposed by the Equity Committee, alleged holders of Trust Preferred Securities (the TPS Holders), holders of Litigation Tracking Warrants (the LTW Holders), the United States Trustee (the UST), certain WMB Noteholders, and several individual shareholders and creditors3 (collectively, the Plan Objectors). Although concluding that the Global Settlement is fair and

reasonable, the Court finds that the Debtors Plan is not confirmable unless the deficiencies explained herein are corrected.

I.

BACKGROUND WMI is a bank holding company, that formerly owned WMB. WMB

was the nations largest savings and loan association, having over 2,200 branches and holding $188.3 billion in deposits. Beginning in 2007, revenues and earnings decreased at WMB, causing WMIs asset portfolio to decline in value. By September

2008, in the midst of a global credit crisis, the ratings agencies had significantly downgraded WMIs and WMBs credit ratings. A bank run ensued; over $16 billion in deposits were

The individual Plan Objectors include Philipp Schnabel, Robert Alexander and James Lee Reed, Jeffrey S. Schultz, Nate Thoma, Sonterra Capital, Truck Insurance Exchange, Fire Insurance Exchange, and certain WMB Noteholders (holding senior and subordinated WMB notes). While certain WMI Senior Noteholders filed an objection, they have agreed to defer it because it may be moot if they are paid in full on the Effective Date. 2

withdrawn from WMB in a ten-day period beginning September 15, 2008. On September 25, 2008, WMBs primary regulator, the Office of Thrift Supervision (the OTS), seized WMB and appointed the FDIC as receiver. The FDICs takeover of WMB marked the largest On the same day, the FDIC

bank failure in the nations history.

sold substantially all of WMBs assets, including the stock of WMBs subsidiary WMB fsb, to JPMC through a Purchase & Assumption Agreement (the P&A Agreement). Under the P&A Agreement, JPMC

obtained substantially all of the assets of WMB for $1.88 billion plus the assumption of more than $145 billion in deposit and other liabilities of WMB. The FDIC, as the receiver of WMB,

retained claims that WMB held against others. On September 26, 2008, the Debtors filed petitions under chapter 11 of the Bankruptcy Code. Early in the bankruptcy case

disputes arose among the Debtors, the FDIC and JPMC regarding ownership of certain assets. On December 30, 2008, the Debtors

asserted various claims in the WMB Receivership by filing proofs of claim with the FDIC. The FDIC denied all of the Debtors On March 20, 2009,

claims in a letter dated January 23, 2009.

the Debtors filed suit in the United States District Court for the District of Columbia (the DC Court) against the FDIC (the

DC Action)4 asserting the following five counts: (1) review of the FDICs denial of the Debtors proofs of claim; (2) wrongful dissipation of WMBs assets; (3) taking of the Debtors property (stock interest in WMB) without just compensation; (4) conversion of the Debtors property; and (5) a declaration that the FDICs disallowance of the Debtors claims was void. JPMC and certain

WMB debt security holders (the WMB Noteholders) were permitted to intervene in the DC Action. The DC Court has stayed the DC

Action pending the outcome of the bankruptcy proceeding.5 On March 24, 2009, JPMC filed a complaint in the Bankruptcy Court against the Debtors (the JPMC Adversary)6 seeking a declaratory judgment that it owned various assets as a result of its purchase of WMB, including the funds on deposit at WMB in the name of the Debtors with a value of approximately $3.8 billion (the Deposit Accounts), tax refunds in the approximate amount of $5.5 to $5.8 billion, the Trust Preferred Securities (TPS) with a value of $4 billion, intellectual property, assets in certain employee deferred compensation plans, shares in Visa,

Washington Mutual, Inc., et al. v. F.D.I.C., No. 1:09-cv00533 (D.D.C. Mar. 20, 2009). Washington Mutual, Inc., et al. v. F.D.I.C., No. 1:09-cv00533 (D.D.C. January 7, 2010) (Order granting stay). JPMorgan Chase Bank, N. A. v. Washington Mutual, Inc. et al., Case No. 08-12229, Adv. No. 09-50551 (Bankr. D. Del. Mar. 24, 2009). The JPMC Adversary Action also named the FDIC as an additional defendant on an interpleader claim related to the Deposit Accounts. 4
6 5

Inc., certain judgments awarded in the Goodwill Litigation,7 and contract rights. (Ex. D-41.) On May 29, 2009, the Debtors filed

an answer and counterclaims in the JPMC Adversary asserting ownership of the disputed assets and seeking to avoid as preferences and fraudulent conveyances certain pre-petition capital contributions and other payments they had made to WMB. (Ex. D-42.) JPMC filed a motion to dismiss the Debtors

counterclaims, which was denied by the Court on September 14, 2009. (Ex. D-45.) JPMC sought leave to appeal that ruling,

which was opposed by the Debtors. In addition, the Debtors filed a complaint in the Bankruptcy Court against JPMC (the Turnover Action)8 on April 27, 2009, seeking the turnover of the $3.8 billion held in Deposit Accounts in the Debtors names at WMB. (Ex. D-48.) JPMC filed a motion

to dismiss the Turnover Action, which was denied on June 24, 2009. (Ex. D-49.) JPMC filed an answer, counterclaim and a (Ex. D-53.) On May 19,

crossclaim against the FDIC as Receiver.

2009, the Debtors filed a Motion for Summary Judgment in the Turnover Action, in which the Creditors Committee joined. D-50.) (Ex.

JPMC, the FDIC and the WMB Noteholders filed responses to

The Goodwill Litigation is described in further detail in Part A(2)(a)(viii), infra. Washington Mutual, Inc. et al. v. JPMorgan Chase Bank, N. A., Case No. 08-12229, Adv. No. 09-50934 (Bankr. D. Del. filed Apr. 27, 2009). 5
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the Debtors Motion.

(Exs. D-54 & D-55.)

The Court heard oral

argument on the Debtors Motion on October 22, 2009. In the interim, the Debtors filed a Motion for an order under Rule 2004 to investigate additional potential claims against JPMC, including tortious interference with business expectancy, antitrust, and breach of contract (the Business Tort Claims). (Ex. D-69.) (Ex. D-68.) That motion was granted on June 24, 2009.

The Debtors filed a second motion under Rule 2004

seeking discovery of third parties (including the OTS and other regulators, investment banks and rating agencies) regarding those same claims. (D.I. # 1997.) That motion was denied on January

28, 2010, with the Court suggesting that such discovery should be sought after an adversary proceeding was commenced raising the Business Tort Claims. (Hrg Tr. 1/28/2010 at 88-90.)

On November 4, 2009, the FDIC filed a Motion seeking relief from the stay to permit it to exercise its right under the P&A Agreement to have JPMC transfer the Deposit Accounts back to the FDIC (to allow the FDIC to set off against them claims it asserts it has against the Debtors). (Ex. D-59.) The parties asked the

Court to consider the Debtors Summary Judgment Motion with the FDICs Motion; oral argument on the motions was continued several times to permit settlement discussions. On March 12, 2010, the parties announced that they had reached a settlement of all issues regarding the disputed

property and the claims of the FDIC and JPMC (the Global Settlement). (Kosturos Decl. at 36.) The Global Settlement

was incorporated into the Plan which was originally filed on March 26, 2010. (Id. at 37.) The Global Settlement and the

Plan were modified on May 21, 2010, to adjust the parties split of the tax returns and to adjust the price JPMC was paying for the Visa shares. (Id. at 38.) The Plan modification also

provided a distribution of a portion of the tax refund (capped at $150 million) to WMB Senior Noteholders and WMB Subordinated Noteholders, to the extent their claims were not subordinated under section 510(b) of the Code, if the class of such holders accepted the Plan. (Id.) The Plan was modified again on October

6, 2010, to adjust further the allocation of the tax refund, to provide a distribution to WMB Senior Noteholders only (and not to WMB Subordinated Noteholders) of $355 million, to delineate the mechanism by which REIT Trust Holders who are granting a release obtain their pro rata share of $50 million paid by JPMC, and providing that the Global Settlement may be terminated if the Plan is not confirmed by December 31, 2010 (unless WMI and JPMC agree to extend it to January 31, 2011, with the consent of the Creditors Committee).9 (Id. at 39.)

On December 20, 2010, the Court entered an order directing the necessary parties to confer and advise whether they would extend the deadline. (D.I. # 6376.) On December 28, 2010, the parties agreed to that extension. (D.I. # 6446.) As a result of the Courts order, the Equity Committee filed a motion 7

On July 6, 2010, the TPS Holders filed an adversary proceeding against WMI and JPMC seeking a declaration that they were the owners of the TPS (the TPS Adversary).10 Because the

TPS will go to JPMC free of all claims under the Global Settlement and the Plan, the TPS Holders also filed objections to confirmation. The parties to the TPS Adversary filed cross The motions were briefed and oral

motions for summary judgment.

argument was held on the first day of the confirmation hearing. By separate Opinion and Order, the Court has granted the Defendants motions and denied the TPS Holders motion for summary judgment, finding that the TPS Holders no longer have any interests in the TPS because their interests have been converted to interests in preferred stock of WMI. On April 12, 2010, an adversary proceeding was commenced by certain LTW Holders against WMI and JPMC seeking a declaratory judgment, inter alia, that they are entitled to 85% of the

to reopen the record to address the issue of the added value that the Reorganized Debtor would have had if it emerged after December 31, 2010. (D.I. # 6381.) The Court denied that request, because the Debtors own witnesses already testified to that fact. (Hrg Tr. 12/6/2010 at 32-37; D.I. # 6384.) Black Horse Capital LP, et al. v. JPMorgan Chase Bank, N. A., et al., Case No. 08-12229, Adv. No. 10-51387 (Bankr. D. Del. filed July 6, 2010). 8
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proceeds of the Anchor Litigation11 (the LTW Adversary).12

The

complaint was subsequently amended to be a class action on behalf of all LTW Holders. Because the Anchor Litigation proceeds will

go to JPMC free of all claims under the Global Settlement and the Plan, the LTW Holders also filed objections to confirmation. On

October 29, 2010, WMI filed a motion for summary judgment in the LTW Adversary. The motion was briefed and oral argument was held By separate

on the first day of the confirmation hearing.

Opinion and Order, the Court has denied WMIs motion for summary judgment in the LTW Adversary, finding that there are genuine issues of material fact in dispute. On January 11, 2010, the UST appointed the Official Committee of Equity Security Holders (the Equity Committee). On April 26, 2010, the Equity Committee filed a Motion for the Appointment of an Examiner Pursuant to Section 1104(c) of the Bankruptcy Code (the Initial Examiner Motion). (D.I. # 3579.)

The Court denied the Initial Examiner Motion on May 5, 2010, finding that there was no appropriate scope for an examiner to conduct an investigation given that issues pertinent to, and even beyond the scope of, the chapter 11 cases had been investigated

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The Anchor Litigation is described in Part A(2)(a)(viii),

infra. Broadbill Investment Corp. et al. v. Washington Mutual, Inc., Case No. 08-12229, Adv. No. 10-50911 (Bankr. D. Del. filed April 12, 2010). 9
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to death.

(D.I. # 3663; Hrg Tr. 5/5/2010 at 98.)

The Court

specifically premised its ruling on the fact that the Debtors and Creditors Committee had done an investigation of the various claims being settled by the Global Settlement and that the results of that investigation would be shared with the Equity Committee. (Hrg Tr. 5/4/2010 at 97-101.)

While certain information was shared with the Equity Committee, the Debtors and Creditors Committee refused to provide it with their work product. As a result, the Equity

Committee and the UST renewed their requests for appointment of an Examiner. (D.I. ## 4644 & 4728.) The UST argued that the

cost benefit analysis favors the appointment of an examiner in the short term as opposed to miring the process immediately [in] what seems to be [protracted] litigation between the parties over a host of issues. And in fact the cooling down period . . . may,

in turn, allow the parties to . . . hopefully, potentially, resolve some points. (Hrg Tr. 6/3/2010 at 86.)

On July 22, 2010, the Court granted the renewed motion for appointment of an examiner. (D.I. # 5120.) On July 28, 2010,

the Court approved the USTs selection of Joshua Hochberg as Examiner to conduct an investigation into the merits of the various claims of the estate, JPMC, and the FDIC which were being resolved by the Global Settlement, as well as additional claims

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the estate might have.

(D.I. # 5162.)

The Examiner filed his

final report on November 1, 2010.13

(D.I. # 5735.)

The hearing to consider confirmation of the Plan was scheduled for December 1, 2010. Because resolution of issues

raised in the LTW and TPS Adversaries could affect the confirmability of the Plan, the Court held oral argument on the summary judgment motions filed in those adversaries first. Testimony and argument on the confirmation issues was presented on December 2, 3, 6, and 7, 2010. At the conclusion of the It is ripe

hearing, the Court took the matter under advisement. for decision.

II.

JURISDICTION The Court has subject matter jurisdiction over approval of

the Global Settlement and confirmation of the Debtors Plan pursuant to 28 U.S.C. 157 & 1334. These matters are core

pursuant to 28 U.S.C. 157(b)(2)(A), (B), (C), (K), (L), (M), (N), & (O).

III. DISCUSSION A.
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Reasonableness of the Global Settlement

At the confirmation hearing, the Plan Objectors filed motions in limine to preclude the use of the Examiners report by the Plan Supporters, arguing that it was hearsay. (D.I. # 6148.) Because the ultimate decision on the reasonableness of the Global Settlement resides with the Court, the motions in limine were granted. (Hrg Tr. 12/2/2010 at 37-38.) 11

The Plan Supporters acknowledge that the Global Settlement is the foundation of the Debtors Plan. They contend that the

Global Settlement provides value to the estates of approximately $6.1 to $6.8 billion in readily available funds. Together with

the approximately $900 million in cash that the Debtors currently have, the Plan Supporters argue that there will be approximately $7.5 billion available for distribution to creditors and interest holders upon confirmation of the Plan. In addition, under the

Plan, WMMRC, an insurance company subsidiary of WMI that is currently in run-off (the Reorganized Debtor), is expected to provide additional value to stakeholders from cash flow and the possible use of net operating loss carry-forwards (the NOLs). With the release under the Global Settlement of substantial claims filed by JPMC and the FDIC (which the Debtors contend are approximately $27 billion each), the Plan Supporters believe that the Plan should result in payment in cash in full (plus postpetition interest) of all creditors claims except the lowest class of creditors, which are expected to receive approximately 74% of their claims plus the right to participate in an offering of stock in the Reorganized Debtor.14 (Ex. D-5C.) The Plan

Supporters contend that the Global Settlement must be considered

Other creditors are also given the right to take stock in the Reorganized Debtor in lieu of cash for their claims. (Ex. D5 at 19.) 12

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as a whole because the elimination of one part of the settlement will cause it all to collapse. The Plan Objectors argue that the Global Settlement is unreasonable because it releases substantial claims of the estate for no value. They contend that the Global Settlement was

reached before the Debtors even conducted an investigation into the merits of those claims. They note that the Debtors agreed to

settle only for sufficient funds to pay creditors, ignoring their fiduciary duty to shareholders. This was exacerbated, the Plan

Objectors contend, by the fact that lead counsel and the chief restructuring officer for the Debtors had a conflict of interest because of their firms representation of JPMC in other matters. See, e.g., In re Project Orange Assocs., LLC, 431 B.R. 363, 37475 (Bankr. S.D.N.Y. 2010) (denying retention application of debtors lead counsel where counsel represented a major creditor in unrelated matters and despite conflicts waiver, was precluded from suing it and finding that retention of conflicts counsel was insufficient). 1. Conflict of Interest

The Court takes seriously any allegation that professionals involved in cases before it are conflicted or have acted unethically. See, e.g., In re Universal Bldg. Prods., 2010 WL

4642046 (Bankr. D. Del. Nov. 4, 2010) (disqualifying counsel for creditors committee because of improper solicitation); In re

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eToys, Inc., 331 B.R. 176, 194 (Bankr. D. Del. 2005) (disallowing fees of counsel for debtors and committee because they had undisclosed conflicts of interest). Further, a conflict of

interest may result in a finding that a plan of reorganization has not been proposed in good faith. See, e.g., In re Coram

Healthcare Corp., 271 B.R. 228, 234-40 (Bankr. D. Del. 2001) (denying confirmation because a conflict of interest arising from the relationship between the Debtors chief executive officer and largest creditor tainted the entire reorganization effort). Thus, this issue must be addressed at the outset. The Plan Objectors argued at the confirmation hearing that because the Debtors principal negotiators of the Global Settlement represented JPMC in other matters, they were reluctant to push for the best possible deal for the estate. The Debtors

and their representatives vigorously deny this and contend that the allegations are a sideshow to divert attention from the real issues in the case. The Plan Objectors presented no evidence to support their contentions, however, and the record in this case refutes the suggestion that the Debtors professionals acted in any manner other than in the best interests of the estate. In their

original retention applications, counsel for the Debtors did disclose that their firm represented JPMC in unrelated matters. (Ex. D-20.) In addition, at the hearing to consider counsels

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retention held on October 30, 2008, the parties advised that the issue had been raised by the UST and counsel clarified that it was able to sue JPMC with respect to the Deposit Accounts but not for any lender liability or avoidance action. 10/30/2008 at 15-16.) (Hrg Tr.

As a result, the Court approved the

retention but directed that in the event the Debtors determined that additional claims existed against JPMC, they should promptly advise the UST and the Committee so that the issue could be addressed. (Ex. D-21.) Subsequently, an application was filed

by the Debtors to hire conflicts counsel to pursue the other claims the estate had against JPMC. (Ex. D-26.)

As noted above the Debtors did sue JPMC shortly after the case was commenced for turnover of the $4 billion in Deposit Accounts held at JPMC and vigorously defended the JPMC Adversary. All of the litigation between the parties was contentious and hard-fought, even efforts by the Debtors to obtain discovery from JPMC. During the course of that litigation, 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. The 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.

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This case is clearly distinguishable from the Coram case where direct evidence of an actual conflict was presented (that the Debtors CEO was being paid $1 million a year as a consultant by one of the largest creditors while serving as an officer of the Debtor). 271 B.R. at 231. This case is also In that case the

distinguishable from the Project Orange case.

conflicts waiver severely limited counsels ability to bring suit against the creditor or even to threaten suit. 431 B.R. at 375.

In contrast, in this case Debtors counsel was permitted to sue JPMC over the Deposit Accounts. Further, the Project Orange

Court acknowledged that in most cases the use of conflicts counsel solves the problem. Id. Therefore, the Court rejects

the Plan Objectors argument that the potential conflict taints the Global Settlement or makes it unapprovable. 2. Standard of review See, e.g.,

Compromises are generally favored in bankruptcy.

Myers v. Martin (In re Martin), 91 F.3d 389, 393 (3d Cir. 1996) (finding that compromises help expedite case administration and minimize litigation). The approval of a settlement under Rule

9019 of the Federal Rules of Bankruptcy Procedure is committed to the discretion of the bankruptcy court. Key3Media Group, Inc. v.

Pulver.com Inc. (In re Key3Media Group Inc.), 336 B.R. 87, 92 (Bankr. D. Del. 2005) (finding that pursuant to Bankruptcy Rule 9019(a), approving a settlement is within the sound discretion of

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the bankruptcy court).

In making its evaluation, the court must

determine whether the compromise is fair, reasonable, and in the best interest of the estate. In re Louises Inc., 211 B.R. 798,

801 (D. Del. 1997) (explaining the factors the court should take into consideration when deciding whether to approve a compromise under Rule 9019(a)). The court does not have to be convinced

that the settlement is the best possible compromise, but only that the settlement falls within a reasonable range of litigation possibilities. In re Coram Healthcare Corp., 315 B.R. 321, 330

(Bankr. D. Del. 2004) (finding that the proper test to apply in the determination of whether to approve a proposed compromise is if the compromise falls within the reasonable range of litigation possibilities). Therefore, the settlement need only Id.

be above the lowest point in the range of reasonableness.

(citing Official Unsecured Creditors Comm. of Pa. Truck Lines. Inc. v. Pa. Truck Lines, Inc. (In re Pa. Truck Lines, Inc.), 150 B.R. 595, 598 (E.D. Pa. 1992)). The Plan Supporters bear the burden of persuading the Court that the Global Settlement falls within the range of reasonableness. Key3Media Group, 336 B.R. at 93 (While a court

generally gives deference to the Debtors business judgment in deciding whether to settle a matter, the Debtors have the burden of persuading the bankruptcy court that the compromise is fair and equitable and should be approved.). In addition, the Plan

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Supporters bear the burden of proving that the Plan complies with all of the requirements of the Bankruptcy Code for confirmation. See, e.g., In re Adelphia Commcns Corp., 368 B.R. 140, 252 (Bankr. S.D.N.Y. 2007) (finding that the plan proponent has the burden of proof in establishing by a preponderance of evidence that its plan meets the best interest of creditors test). The Plan Objectors argue that in considering whether the Global Settlement is reasonable, the Court must determine whether it is fair to them. Under the fair and equitable standard,

[the court looks] to the fairness of the settlement to the other parties, i.e., the parties who did not settle. Will v.

Northwestern Univ. (In re Nutraquest, Inc.), 434 F.3d 639, 645 (3d Cir. 2006). Because the Plan Objectors contend that they are

not getting a fair recovery under the Global Settlement, they argue that the Global Settlement is not reasonable. When determining the best interests of the estate, the Court must balance the value to the estate of accepting the settlement against the claims that are being compromised. at 393. Martin, 91 F.3d

See also Nutraquest, 434 F.3d at 644-45 (tracing the

history, and reaffirming the applicability, of the Martin test in considering the compromise of claims by and against the estate). In striking this balance, the Court should consider: (1) the probability of success in litigation; (2) the likely difficulties in collection; (3) the complexity, expense, and delay of the

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litigation involved; and (4) the paramount interest of the creditors. Protective Comm. for Indep. Stockholders of TMT

Trailer Ferry, Inc. v. Anderson, 390 U.S. 414, 424 (1968) (finding that a bankruptcy judge should form an educated estimate of the complexity, expense, and likely duration of such litigation, the possible difficulties of collecting on any judgment which might be obtained, and all other factors relevant to the full and fair assessment of the wisdom of the proposed compromise); In re RFE Indus., Inc., 283 F.3d 159, 165 (3d Cir. 2002) (finding that the bankruptcy court should examine four factors in deciding whether to approve a settlement: the probability of success of litigation, the likely difficulties in collection, the complexity of the litigation involved, and the interest of the creditors); Martin, 91 F.3d at 393 (same).15 a. Probability of success

The Plan Supporters argue that the Court must take a holistic approach to the Global Settlement contending that the resolution of each claim is dependent on the resolution of all the claims. The Plan Objectors disagree, contending that the

Court cannot determine whether the settlement as a whole is reasonable without evaluating the merits of each claim.

One of the individual shareholders, Mr. Schnabel, contends that the Debtors are abandoning property which has value in violation of section 554. The Court rejects this argument as the Debtors are not abandoning property but are instead settling claims they have against JPMC and the FDIC. 19

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The Court agrees with the Plan Objectors: each part of the settlement must be evaluated to determine whether the settlement as a whole is reasonable. This is not to say, however, that this

is a mere math exercise comparing the sum of the parts to the whole. Rather, the Court recognizes that there are benefits to

be recognized by a global settlement of all litigation (eliminating costs of continued litigation and delay in distributions to creditors and shareholders) that may recommend a settlement that does not quite equal what would be a reasonable settlement of each part separately. Nonetheless, the Court must

consider the reasonableness of the resolution in light of each of the separate claims being resolved or released in the Global Settlement.16 The Plan Objectors contend preliminarily that the Plan Supporters have failed to meet their burden of presenting objective evidence regarding the probability of success on the various claims. Both in discovery and at the hearing, the

Debtors objected to any testimony being elicited from their

In conducting this analysis, however, the Court rejects the contention of Jeffrey S. Schultz, an LTW Holder, that the Court should conduct an auction of the Anchor Litigation because it will realize more value for the LTW Holders. The competing ownership interests in that asset are being resolved as a part of the Global Settlement, and there is no suggestion that it can be separated from that Settlement. Further, as noted below, the Court believes that the interests of the LTW Holders can be adequately protected by means of a cash reserve and, therefore, it is unnecessary to consider that asset separately. 20

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witnesses regarding anything that counsel discussed with them. This essentially precluded any testimony regarding the likelihood of success on any of the Debtors positions with respect to the disputed claims. Because of this, the Plan Objectors argue that

the Plan Supporters have not met their burden of proof on this factor and the Global Settlement cannot be approved. See, e.g.,

In re Spansion Inc., No. 09-10690, 2009 WL 1531788, at *7 (Bankr. D. Del. June 2, 2009) (finding the debtors provided little information as to the specifics of the Actions to provide a basis for evaluating the strengths and weaknesses of the litigation.). The Plan Supporters respond that they have presented objective evidence about the probability of success. the witnesses were not permitted to testify about any attorney/client communications (in order to preserve the privilege), the Plan Supporters argue that the witnesses did testify to the analysis that the witnesses themselves performed. This they contend, together with the pleadings filed by the parties in the litigation, is sufficient for the Court to determine the likelihood of whether the Debtors would have succeeded on their claims. The Court agrees with the Plan Supporters. The Spansion Although

case is distinguishable; in that case debtors management stated that they did not rely on counsel at all in evaluating the merits of potential litigation, which the Court found incredible. Id.

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at *8 (finding it unlikely that a reasonable evaluation of the merits of litigation of this nature and extent could have been made without taking into account advice of counsel.). Here, the

Debtors management admitted that they relied substantially on the advice of counsel. Unlike Spansion, the Court finds that a

reasonable evaluation of the merits of the litigation was conducted by the Debtors. It is not necessary for the Debtors to waive the attorney/client privilege by presenting testimony regarding what counsel felt was the likelihood they would win on the claims being settled. Although it may be helpful, it is also not

necessary that the Plan Supporters present the testimony of a legal expert on the strengths and weaknesses of each sides position. It is sufficient to present the Court with the legal

positions asserted by each side and the facts relevant to those issues. The Court itself can then evaluate the likelihood of the

parties prevailing in that litigation to determine whether the settlement is reasonable. Mere arguments of counsel or opinions Rather,

of experts cannot substitute for that decision-making.

the objective evidence that the Court should consider is the factual analysis (which was presented in this case by the Debtors witnesses) and the legal positions of both sides (which are contained in the pleadings filed by them). The Court finds

that sufficient evidence of this kind has been presented by the

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Plan Supporters in this case to determine whether the Global Settlement is reasonable. i. Deposit Accounts

The dispute regarding ownership of the Deposit Accounts was raised in both the JPMC and the Turnover Adversaries. Decl. at 53.) (Kosturos

Essentially, the issue was who owned the cash in The Debtors

WMB that was in bank accounts in the Debtors name.

relied on well-settled case law in arguing that the Debtors Deposit Accounts are property of the estate subject to turnover. See, e.g., In re Amdura Corp., 75 F.3d 1447, 1451 (10th Cir. 1996) (We presume that deposits in a bank to the credit of a bankruptcy debtor belong to the entity in whose name the account is established.); In re Meadows, 396 B.R. 485, 490 (B.A.P. 6th Cir. 2008) (finding that funds in a debtors checking account became property of the estate); In re Rocor Intl, Inc., 352 B.R. 319, 328 (W.D. Okla. 2006) ([T]he presumption is that deposits in a bank to the credit of a bankruptcy debtor belong to the entity in whose name the account is also established.); In re LandAmerica Fin. Group, Inc., 412 B.R. 800, 809 (Bankr. E.D. Va. 2009) (In line with the broad definition of property of the estate, money held in a bank account in the name of a debtor is presumed to be property of the bankruptcy estate); In re Rock Rubber & Supply of CT, Inc., 345 B.R. 37, 40 (Bankr. D. Conn. 2006) (holding that debtors deposit accounts were property of

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the estate); In re Tarbuck, 318 B.R. 78, 81 (Bankr. W.D. Pa. 2004) (holding that money chapter 7 debtor had placed into depository account was property of the estate). See generally 11

U.S.C. 541(a)(1) (property of the estate includes all legal or equitable interests of the debtor in property as of the commencement of the case.); 4 Collier on Bankruptcy 541.09 (15th ed. 2009) (deposits in the debtors bank account become property of the estate under section 541(a)(1).). JPMC argued, however, that under the unique circumstances presented in this case the presumption that the funds in the Deposit Accounts are property of the Debtors estate should not be applied. In fact, JPMC pointed to notations in the parties

books and records that suggested the Deposit Accounts were meant to be a capital contribution by WMI to WMB. 53.) (Kosturos Decl. at

In support of its response to the Debtors summary judgment

motion, JPMC offered the declaration of an expert in bank accounting, who stated that there are inherent differences between a typical depositor opening an account at a third party bank and a bank holding company creating an account at its subsidiary. For example, the expert stated that a typical third

party depositor would be required to present good funds, whereas the Debtors might have been able to create the Deposit Accounts without the delivery of money. In some instances, JPMC contended

24

that rather than transfer actual funds, the Debtors simply adjusted general ledger entries.17 The Debtors countered that the Deposit Accounts contain actual funds deposited by WMI when it sold WMI securities ($2.2 billion) and received tax refunds ($1.15 billion). In addition,

they argued that WMI had exercised control over the accounts for more than four years, utilizing one of them as its primary checking account to service its outstanding debt, pay dividends, pay tax obligations, and pay a myriad of other operating expenses. JPMC and the FDIC also contended that even if the Deposit Accounts are property of the estate, they have the right to set off against them any claims they have against the estate. at 57.) setoff. The Debtors responded that JPMC has no right of The Debtors note that all of JPMCs claims must be post(Id.

petition because under the P&A Agreement the FDIC retained all of WMBs claims that existed as of September 25, 2008. Therefore,

the Debtors argued that JPMC could not satisfy the mutuality requirement for setoff. 553(a). (Id. at 58.) See also 11 U.S.C.

In addition, JPMC asserted that the transfer of $3.674 billion of the deposits from WMB to WMB fsb was fraudulent. (Kosturos Decl. at 54.) The Debtors disputed this and argued that there was no harm to WMB by the transfer because it simultaneously eliminated a liability. (Id. at 56.) 25

17

JPMC asserted that it did acquire pre-petition claims that WMB had against WMI under the P&A Agreement. 59.) (Kosturos Decl. at

Alternatively, to the extent that WMBs claims against

WMI were not sold to JPMC, the FDIC Receiver and JPMC argued that the FDIC has the right to claw back the Deposit Accounts under section 9.5 of the P&A Agreement. (Id. at 60.) The Debtors

opposed the FDIC Receivers motion for relief from the stay to permit the claw back, contending that any rights the FDIC acquired from the claw back of the Deposit Accounts would be equally ineligible for setoff as they would be deemed postpetition claims. (Id. at 61.)

Based on the pleadings filed in the Turnover Action, the Court finds that the Debtors had a strong likelihood of success on the merits of their claim to the Deposit Accounts, although the issues were hotly contested and the FDIC vowed to fight the issue to the Supreme Court. (Hrg Tr. 12/7/2010 at 141.) Under

the Global Settlement, the Debtors will receive the entire Deposit Accounts totaling almost $4 billion. The Court concludes

that the Debtors could not do any better than this if they had continued to litigate rather than settle this claim. ii. Tax refunds

In the JPMC Adversary, WMI argued that it was entitled to all of the tax refunds (which total between $5.5 and 5.8

26

billion)18 because it had filed the consolidated federal tax return for itself and its subsidiaries which meant that the tax refunds would be paid to WMI by the respective taxing authorities.19 The Debtors contended that at most JPMC and/or

the FDIC Receiver have a claim against the estate under the Tax Sharing Agreement for any amounts attributable to WMBs losses. (Carreon Decl. at 11-12, 16.) JPMC, the FDIC, and the WMB Senior Noteholders argued that they had legal or equitable claims to the tax refunds, because the refunds were based in large part on the losses suffered by WMB. (Id. at 11, 13.) They argued that WMB was the legal

owner of the tax refunds and that WMI had only acted as WMBs agent in filing the consolidated tax return. (Id. at 14-15.)

See, e.g., Capital Bancshares, Inc. v. F.D.I.C., 957 F.2d 203, 210 (5th Cir. 1992) (holding that the parent could not convert the refund into its own property because [t]he refund is the property of the [subsidiary] Bank, which could have generated the refund on its own had it filed with the IRS as a separate

In addition, WMI asserted that WMB owed it approximately $350 million for taxes paid by WMI on behalf of WMB, pursuant to the Tax Sharing Agreement dated August 31, 1999. (Carreon Decl. at 12.) The Tax Sharing Agreement provided that WMB would file the returns and pay the consolidated state and local taxes for the group. (Carreon Decl. at 7.) However, in practice, WMI filed returns for and paid the state and local taxes as it did the federal taxes. (Id.) 27
19

18

entity.); In re Bob Richards Chrysler-Plymouth Corp., 473 F.2d 262, 265 (9th Cir. 1973) (Allowing the parent to keep any funds arising solely from a subsidiarys losses simply because the parent and subsidiary chose a procedural device to facilitate their income tax reporting unjustly enriches the parent and concluding that parent receive[s] the tax refund from the government only in its capacity as agent for the consolidated group and is therefore acting as a trustee of a specific trust and [is] under a duty to return the tax refund to the [subsidiary].). See also Interagency Policy Statement on Income

Tax Allocation in a Holding Company Structure, 63 Fed. Reg. 64,757-79 (Nov. 23, 1998) (providing that a parent company which receives a tax refund from a taxing authority obtains these funds as agent for the consolidated group). Further, JPMC and the FDIC Receiver contended that the Tax Sharing Agreement among WMI and its affiliates required WMI to pay to each member of the group its share of the respective tax refund. (Carreon Decl. at 7, 13.) They noted that WMI had At a

consistently complied with that agreement in the past.

minimum, JPMC and the FDIC argued that they had a claim against WMI for WMBs share of the tax refunds which was almost the entire $5.5 to $5.8 billion. (Id. at 15.) See, e.g., In re

First Cent. Fin. Corp., 377 F.3d 209, 218 (2d Cir. 2004) (holding that failed subsidiary had contract claim against parent, under tax sharing agreement). 28

Under the Global Settlement, the parties are splitting the tax refunds: the estate will receive $2.195 billion and JPMC will receive $2.36 billion. (Ex. D-1 at 2.4.) JPMC and the FDIC

are waiving all claims against the estate, including any claims related to the tax refunds. The Plan Objectors argue that this portion of the Global Settlement is not reasonable because the Debtors had a greater chance for success on this claim than acknowledged. First, they

argue that the tax refunds are based largely on a recent change in the tax laws which allowed the Debtors to extend the NOL carryback period from two to five years. (Carreon Decl. at 9.)

That change in the tax laws, however, prohibited any financial institution which took TARP funds from taking advantage of the more favorable NOL rules on which the tax refunds were based. (See Objection of Schnabel, D.I. # 5964.) Consequently, the Plan

Objectors contend that JPMC would not be entitled to the bulk of the tax refunds. The Plan Objectors also note that JPMC acquired

the assets of WMB and did not merge with it; therefore, they question how JPMC can argue it is entitled to the tax attributes of WMB. (Id.)

The Court concludes that the Debtors have a fair likelihood of prevailing on the tax claims in the first instance. Even if

the Debtors were correct and the tax refunds were property of the WMI estate, however, it would create a corresponding claim by

29

JPMC (or the FDIC Receiver20) for the vast majority of those tax refunds. Because creditors are being paid almost in full under

the Plan, the likelihood that the Debtors would succeed in obtaining a net result better for the estate than the Global Settlement with respect to the tax refund issue is not strong. iii. TPS The background facts relating to the TPS are detailed in the Opinion issued this same date resolving the cross motions for partial summary judgment filed in the TPS Adversary. In that

Opinion the Court concludes that because the Conditional Exchange occurred, the TPS Holders no longer have any interest in the TPS and instead are now deemed to be the holders of securities representing preferred shares in WMI. There is a dispute, however, between the Debtors, JPMC, and the FDIC regarding who is entitled to the TPS. Under the Global

Settlement, the Debtors will waive any interest in the TPS and the TPS will belong to JPMC. (Ex. D-1 at 2.3.)

The TPS Holders contend, of course, that the Debtors cannot convey the TPS to JPMC as part of the Global Settlement. For the

reasons set forth in the TPS Opinion, however, the Court finds that the TPS Holders no longer have any interest in the TPS.

Even if JPMC is precluded from claiming the tax refunds because it took TARP money or because it only bought WMBs assets and is not WMBs successor, the FDIC as Receiver argued that it had a claim to the portion of the tax refunds which is due to WMB under the Tax Sharing Agreement. 30

20

Therefore, the Court finds that the Debtors are able to transfer their interest in the TPS to JPMC (or to acknowledge that the transfer already occurred pursuant to the Assignment Agreement dated September 25, 2008). 11 U.S.C. 363(f).21

The Plan Objectors also contend, however, that the estate is not getting reasonable value for the TPS (which are worth $4 billion) under the Global Settlement because the Debtors have a strong likelihood of success on their claims to the TPS. The

Plan Supporters disagree, noting that JPMC and the FDIC contended in the JPMC Adversary that the Debtors interest in the TPS was already transferred to WMB on September 25, 2008, pursuant to the Assignment Agreement. (Smith Decl. at 17.) As noted in the

TPS Adversary, however, the TPS have still not been delivered to, or registered in the name of, WMI or JPMC as a result of the intervening bankruptcy filing. (Smith Decl. at 20.) In

addition, the Debtors contended that any transfer of the TPS to

Section 363(f) provides in relevant part: The trustee may sell property under subsection (b) or (c) of this section free and clear of any interests in such property of an entity other than the estate only if (1) applicable nonbankruptcy law permits sale of such property free and clear of such interests; (2) such entity consents; (3) such interest is a lien and the price at which such property is to be sold is greater than the aggregate value of all liens on such property; (4) such interest is in bona fide dispute; or (5) such entity could be compelled, in legal or equitable proceeding, to accept a money satisfaction of such interest. 11 U.S.C. 363(f). 31

21

WMB before the Debtors filed bankruptcy may be avoided as preferential or fraudulent. In response, JPMC argued that WMI could not avoid the assignment of the TPS because section 546(e) provides a safe harbor for transfers made in connection with a securities contract if they involve financial institutions (such as JPMC). 11 U.S.C. 546(e).22 See, e.g., Contemporary Indus. Corp. v.

Frost, 564 F.3d 981, 986 (8th Cir. 2009) (concluding that section 546(e) protects settlement payments from avoidance if the payments were made to a financial institution even if the financial institution did not obtain a beneficial interest in them). Further, because the assignment was accomplished pursuant

to the prior agreement that WMI had with the OTS, JPMC contended that WMI served merely as a conduit of the TPS. See, e.g., In re

Columbia Gas Sys., 997 F.2d 1039, 1059 (3d Cir. 1993) (finding avoidance claim improper where debtor served merely as a conduit for funds and lacked an equitable interest therein). JPMC also

argued that, even if the Debtors could avoid the assignment of the TPS, the assignment agreement would be deemed assumed (and JPMC would be entitled to an administrative claim) under section

Section 546(e) provides in relevant part: Notwithstanding sections 544, 545, 547, 548(a)(1)(B), and 548(b) of this title, the trustee may not avoid a transfer that is a . . . settlement payment . . . made by or to (or for the benefit of) a . . . financial institution . . . that is made before the commencement of the case . . . . 11 U.S.C. 546(e). 32

22

365(o).23

The Debtors, of course, disputed the validity of

JPMCs arguments. The Court finds that there is a legitimate disagreement as to whether the TPS were already conveyed to JPMC in September, 2008, and whether value was received by the Debtors for that transfer. Further, there are defenses that JPMC has asserted it

would raise in any action the Debtors may take to avoid the assignment of the TPS to WMB. Finally, even if the Debtors were

successful in avoiding the transfer of the TPS, JPMC and/or the FDIC would have a corresponding claim (potentially administrative) for the value of the TPS under the Assignment Agreement in the amount of $4 billion. Given these difficult

legal issues and the other consideration being given to the estates under the Global Settlement, the Court finds it is unlikely that the Debtors could achieve a result on the TPS claim that is superior to the Global Settlement. iv. Intellectual property

The intellectual property consists largely of trademarks

Section 365(o) provides in relevant part: In a case under chapter 11 of this title, the trustee shall be deemed to have assumed . . . and shall immediately cure any deficit under, any commitment by the debtor to a Federal depository institutions regulatory agency . . . to maintain the capital of an insured depository institution, and any claim for a subsequent breach of the obligations thereunder shall be entitled to priority under section 507. 11 U.S.C. 365(o). 33

23

including the names WaMu and Washington Mutual. were largely registered in WMIs name.

The marks

(Goulding Decl. at 20.)

In its adversary, JPMC sought a declaratory judgment that it held equitable title to the intellectual property; alternatively it sought a ruling that it was authorized to use them. 21.) (Id. at

In their Amended Counterclaims to the JPMC Adversary, the

Debtors took the position that the trademarks were owned by WMI and that its subsidiaries were able to use them only under an implied license for so long as they remained subsidiaries. at 20.) It, therefore, contended that JPMCs use was (Id. at 22.) (Id.

unauthorized and infringing.

The Plan Objectors contend that there has been no appraisal of the intellectual property and therefore there can be no analysis of whether the Global Settlement, under which JPMC is given the majority of the disputed intellectual property, is reasonable. The Debtors respond that an appraisal would merely

establish that the trademarks are virtually worthless because they are associated with the largest bank failure in the countrys history. The Court concludes that the Debtors are likely to succeed on the claim to the intellectual property, because it was titled in WMIs name. However, the fact that WMB (rather than WMI) used

the marks historically in the operation of its business and the marks are closely associated with WMBs failure, suggests that

34

their intrinsic value is not high.

Further, the fact that WMI

has virtually no remaining business operations convinces the Court that the marks, if owned by WMI, have insignificant value. v. Employee-related assets and liabilities 1. WMI pension plan

WMI was the sponsor of the WaMu Pension Plan which covered more than 60,000 employees, the vast majority of which were employed by WMB. (Goulding Decl. at 25-26.) Since the

takeover of WMB, JPMC has handled the daily administration of the Pension Plan at the direction of WMI. (Id. at 27.) As the

sponsor of the Pension Plan, WMI retains a contingent interest in the assets, if any, remaining after all liabilities have been satisfied, but is obligated to maintain the Pension Plans funded status and cover its administrative costs (which in 2008 were $12 million).24 (Id. at 28 & 32.) As of November 2008, the

Pension Plan had a total of $1.7 billion and was over-funded by approximately $39 million based on the market value of the assets and the actuarial estimate of the liabilities.25 31.) (Id. at 29 &

In addition, a claim was filed against WMI asserting violations of ERISA in connection with the Pension Plan, which was recently settled for $20 million payable from the funds in the Pension Plan. (Goulding Decl. at 34.) The Plan Objectors contend that the value of the Pension Plan must have increased since November 2008 when the stock markets generally were at their lowest level. The Debtors respond, however, that liabilities have continued to accrue under the Pension Plan and that the two have offset each other. 35
25

24

In its adversary, JPMC sought a declaration that it be permitted to take over the Pension Plan because the vast majority of the employees covered by it were employees of WMB (which therefore had the real economic interest in it). (Id. at 38.)

JPMC also sought damages from WMI to the extent that the value of the Pension Plan declined while WMI was administering it in the bankruptcy case. (Id.)

Under the Global Settlement, JPMC will take over the Pension Plan, be responsible for its administration, assume any potential liabilities arising thereunder, waive any claims it has against WMI related to the Pension Plan, and indemnify WMI for any liabilities it may incur in connection therewith. The Plan

Supporters contend that the Global Settlement treatment is preferable to any other option that the Debtors may have with respect to the Pension Plan. They argue that it is impractical

for WMI to continue to administer the Pension Plan, especially after confirmation when the only remaining operations of the Reorganized Debtor will be the runoff of the reinsurance business. The Plan Supporters argue that the only other

alternative (terminating the Pension Plan) will result in considerable additional risk, including tax consequences, which will consume any over-funding that may exist in the Pension Plan. (Id. at 36-38.)

36

The Plan Objectors argue that the Pension Plan has significant value which should inure to the WMI estate. They

note that there is really no dispute that WMI is the funder of the Pension Plan and, therefore, is entitled to the excess assets therein. The Court finds that the Debtors do have a high likelihood of success on their claim to the Pension Plan assets. However,

the value to the Debtors is not simply the amount by which the Plan assets currently exceed the liabilities. In order to

realize any of that excess value, the Debtors would have to either (1) terminate the Pension Plan which will result in immediate costs and potential termination liability that might exceed the amount of any overfunding or (2) continue to administer the Pension Plan indefinitely which will result in continuing administrative costs (totaling approximately $12 million per year), the burden of paying claims (exacerbated by the fact that the Debtors no longer employ the persons covered by the Pension Plan), and possible additional liability if the pension obligations ultimately exceed the market value of the assets in the Pension Plan. (Id. at 30, 32.) The Court

concludes that the Debtors other options are not likely to realize more than the Global Settlement. 2. Rabbi trusts

In addition to the WMI Pension Plan, WMI had inherited

37

certain trust assets related to non-qualified deferred compensation plans covering highly compensated employees and former employees. The deferred compensation plans are top hat

plans because they provided a means by which top management could receive tax benefits by deferring the receipt of a portion of their compensation. In order to qualify for the deferred tax

benefits, the deferred compensation plans had to be unfunded, that is, provide that any distributions to the employees will come only from the general assets of the company. See, e.g.,

Accardi v. IT Litig. Trust (In re IT Group, Inc.), 448 F.3d 661, 664-65 (3d Cir. 2006) (explaining the requirements of a top hat plan under ERISA). The deferred compensation plans did, however,

create trusts (commonly called rabbi trusts) into which WMI deposited funds sufficient to cover its obligations under the deferred compensation plans. The rabbi trusts did not affect the

deferred compensation plans unfunded status, however, because they provided that the employees had no interest in the trust and the trust assets were considered part of WMIs general assets. Id. at 665 (finding the top hat plan was unfunded because the assets used to pay the deferred compensation were general assets of the company subject to the claims of its creditors in the event of insolvency). See also Resolution Trust Corp., v.

Mackenzie, 60 F.3d 972, 974-75 (2d Cir. 1995) (finding that a deferred compensation plan was unfunded when the plans assets

38

were held in grantor trusts because the assets remained available to the employers general creditors in the event of insolvency); Goodman v. Resolution Trust Corp., 7 F.3d 1123, 1127 (4th Cir. 1993) (finding that beneficial tax treatment of a rabbi trust depends on the trust remaining subject to the claims of creditors as if the trusts assets were the general assets of the employer); Schroeder v. New Century Holdings, Inc., (In re New Century Holdings, Inc.), 387 B.R. 95, 111 (Bankr. D. Del. 2008) (finding that the deferred compensation plan was unfunded, as required to constitute a top hat plan, given that the plan participants did not have a res separate from the employers general assets and did not have a legal right greater than that of general unsecured creditors). In its adversary, JPMC asserted that it had acquired twelve of the rabbi trusts (all except those originally sponsored by H. F. Ahmanson and Co.)26 because they were reflected as assets of WMB on its books and records and WMB was the successor to the original settlors. 130-31, 134 n.2.) (Goulding Decl. at 40-41; Ex. D-41 at After reviewing their books and records, the

Debtors agreed in the Global Settlement to transfer all the rabbi

The Ahmanson rabbi trusts are the subject of a contested matter between the Debtors and some of the employees covered by those deferred compensation plans who contend that they are entitled to the funds in the trusts because they had asked for a distribution from them before the bankruptcy case was filed and the Debtors had wrongfully refused. The matter has been tried and briefed and is pending decision. 39

26

trusts to JPMC except the Ahmanson trusts. 43.)

(Goulding Decl. at

Based on the manner in which the rabbi trusts are reflected on the parties books and records, the Court concludes that the Debtors do not have a strong likelihood of getting a better result on these assets than their recovery under the Global Settlement. 3. Deferred compensation plans

As part of the Global Settlement, the parties also agreed that JPMC will accept responsibility for certain other deferred compensation plans, based on how they had been recorded on the WMI/WMB records. (Goulding Decl. at 55.) There appears to be

no value, but only liability, associated with those plans. The Court concludes that the Debtors do not have a strong likelihood of getting a better result on these plans than is reflected in the Global Settlement. 4. Employee medical plans

WMI was also the sponsor of an employee medical plan. (Goulding Decl. at 56.) When WMB was seized and sold to JPMC,

JPMC began to administer and pay the claims under that plan of former WMI and WMB employees who became employed by JPMC. JPMC

subsequently consolidated that plan into its own medical plan. (Id.) Nonetheless, former employees have filed medical claims (Id. at 58.)

against the Debtors totaling at least $3 million.

40

As part of the Global Settlement, the parties agreed that JPMC will accept responsibility for all claims under the employee medical plan. (Id. at 55.) The Debtors contend that there is

no benefit to it retaining the medical plan because most of the covered employees are now employed by JPMC, there is continuing liability under the medical plans, and there are no funds set aside to cover the liabilities. (Id. at 61.)

The Court concludes that given the fact that the medical plans constitute only liabilities and not assets, the Debtors do not have a strong likelihood of getting a better result on these plans than they are getting under the Global Settlement. 5. BOLI/COLI policies

Among the disputed assets are the bank-owned life insurance and company-owned life insurance policies on the lives of employees of WMB and WMI respectively (the BOLI/COLI). The

policies were reflected on the respective books and records of WMB and WMI, who paid the premiums and were the primary beneficiaries. (Goulding Decl. at 44.) Some of the policies

were split dollar policies under which the insurance proceeds would be shared between the insured employees beneficiary and WMB or WMI. (Id.)

In most instances JPMC and the Debtors agreed who owned the BOLI/COLI, largely based on which company reflected the policy on its records. (Id. at 46.) Some were disputed, however,

41

including two policies issued by Pacific Life and approximately 995 split dollar policies. (Id.) JPMC contended that those

policies belonged to it because they had originally been owned by a bank which merged into WMB and were historically reflected on WMBs books and records. 155-56.) (Id. at 48-49; Ex. D-41 at 152,

The Debtors disputed that contention, asserting

specifically that the Pacific Life policies had been transferred on June 4, 2003, to the WMI Revocable Trust which is owned by WMI. (Id. at 50; Ex. D-41 at 169.) Under the Global Settlement, the BOLI/COLI policies will be owned by the entity on whose records they are listed. With

respect to the disputed policies, the Debtors will keep the Pacific Life policies and JPMC will keep the split dollar policies. The Court concludes that because the Global Settlement

divides the BOLI/COLI policies largely based on how they were reflected on the books and records of WMI and WMB, respectively, the Debtors do not have a strong likelihood of getting a significantly better result than reflected in the Global Settlement on these policies. vi. Visa shares

WMI holds approximately 3.15 million Class B shares of Visa, Inc. (Visa). (Goulding Decl. at 62.) Those shares had been

issued in connection with an IPO pursuant to which Visa had issued Class B shares to former members of Visa U.S.A. In

42

conjunction with the IPO, Visa had also established an escrow to cover certain litigation liability of Visa U.S.A., for which its former members were liable. (Id. at 64-66.) The Class B

shares are restricted and their value is adjustable depending on the value of Visa Class A shares at the time of conversion. at 65.) (Id.

In addition, WMI and WMB have certain indemnification

liability to Visa, if the escrow is insufficient to cover the actual litigation liabilities. (Id. at 67-68.) The Debtors

estimated that the value of the Class B Visa shares could be between $0 and $151 million, depending on the amount of liability and the value of the Class A shares. (Id. at 70.)

JPMC and the Debtors disputed ownership of the Visa shares. WMI asserted that it was the owner because the shares were registered in its name. (Id. at 71.) JPMC asserted that

although WMI was the legal owner, the beneficial owner was WMB because WMB had been the member of Visa U.S.A. to whom the shares should have been issued. (Id. at 71-72.) 11 U.S.C. 541(d)

(providing that to extent debtor only holds legal title it is property of the estate only to the extent of the legal title but not to the extent of any equitable interest in the property). In addition, WMI had been receiving certain subsidies in accordance with a strategic agreement between Visa U.S.A. and Providian Financial Corporation which later merged into WMI. (Goulding Decl. at 78.) After WMI filed its bankruptcy

43

petition, Visa U.S.A. filed a proof of claim in the amount of at least $9.1 million for account subsidies it had paid. JPMC filed

a claim against the Debtors in the amount of at least $4.6 million, asserting that it was entitled to the future unpaid subsidies and sought a declaration that the strategic agreement with Visa U.S.A. really belongs to WMB, not WMI. (Id. at 79.)

Pursuant to the Global Settlement, WMI will transfer the Visa shares and the strategic agreement to JPMC for $25 million. (Id. at 76 & 81.) JPMC will assume all indemnification

obligations that WMI may have for those shares, will defend and indemnify the Debtors with respect to the Visa U.S.A. proof of claim, and will waive its claim to the subsidies. (Id.)

The Plan Objectors contend that the Debtors have a strong probability of winning this claim because the shares are in WMIs name. They further contend that the value of the shares is $150

million. The Court finds, however, that even though the Visa shares may be titled in WMIs name and therefore are property of the estate, JPMC has a plausible claim that WMB is the equitable owner of them because it had been the Visa U.S.A. member, not WMI. In addition, though the shares may currently be worth $150

million, the liability associated with the escrow could diminish that value. Therefore, the Court concludes that the Debtors do

44

not have a strong likelihood of getting a significantly better result on this claim than is reflected in the Global Settlement. vii. Vendor claims and contracts WMI was a party to numerous contracts with vendors who performed services for WMB; WMB typically paid for those services directly or through WMI. (Goulding Decl. at 83-84.) After

filing its bankruptcy petition, WMI entered into a stipulation with JPMC which was approved by the Court on October 16, 2008, whereby JPMC paid the vendors directly for services and goods provided to it thereafter. (Id. at 86.) According to the

Debtors books and records, the potential liability under the vendor contracts for WMI is less than $50 million. 88.) (Id. at

The Debtors believe that none of the vendor contracts

provide any value to the estate because they are not used in the Debtors business but are used only in WMBs operations. 89.) Pursuant to the Global Settlement, JPMC will pay $50 million into an escrow account from which the vendor claims will be paid. In addition, the Debtors will transfer designated vendor contracts to JPMC. (Id. at 90.) (Id. at

Because the contracts are largely in WMIs name (which traditionally contracted for all its subsidiaries) and because WMI is no longer operating, these contracts largely represent a liability rather than an asset of the estate. There is no

45

evidence that the contracts have any value to WMI or anyone else. Consequently, WMIs only alternative would be to reject them which could result in rejection damages claims. Therefore, the

Court concludes that the Debtors do not have a strong likelihood of getting a significantly better result on this claim than is reflected in the Global Settlement. viii. Goodwill litigation WMI was a party to litigation seeking damages resulting from the change in the ability of purchasers of failed financial institutions to account for the goodwill of those institutions as a result of the passage of the Financial Institutions Reform Recovery and Enforcement Act of 1989 (FIRREA). at 91.) (Goulding Decl.

WMI and JPMC disputed who had an interest in suits

commenced by American Savings Bank, F.A.27 and by Anchor Savings Bank FSB.28 (Id. at 91-106.) JPMC asserted that it was the

real party in interest in the litigation because WMB was the successor to the original plaintiffs. Ex. D-41.) (Id. at 93, 95 & 98;

WMI contended that according to its records, it was (Goulding Decl. at 94 & 99.)

the real party in interest.

The American Savings Litigation was commenced in 1992 and on September 12, 2008, the Court of Federal Claims entered final

American Savings Bank, F.A. v. United States, No. 92-872C (Fed. Cl. 1992) (hereinafter the American Savings Litigation). Anchor Savings Bank FSB v. United States, No. 95-039C (Fed. Cl. 1995) (hereinafter the Anchor Litigation). 46
28

27

judgment directing payment to WMI in the amount of $55 million subject to additional claims that are still pending. 93 & n.37; Ex. D-216.) (Id. at

On January 6, 2009, the United States

filed a motion for relief from the automatic stay seeking authority to set off that judgment against claims it had against WMI. (Goulding Decl. at 93 & n.37; D.I. # 542.) That motion

was opposed and, as a result, the Court directed that the funds be placed into the registry of the Court pending resolution of the competing claims to them. (Ex. D-217.) In

The Anchor Litigation was commenced in January, 1995. 1995, Anchor merged into Dime Savings Bank (Dime), which (Id. at 96 & 98.)

merged into WMB in 2002.

On July 16, 2008,

the Court of Federal Claims entered judgment in favor of Anchor in the amount of approximately $356 million. (Ex. D-218; Id. at 96-97.) In addition, the Court confirmed that Anchor was

entitled to an upward adjustment to make it whole for any taxes that may be due (the tax gross up). (Ex. D-218.) The Court of

Appeals affirmed the judgment on March 10, 2010, and remanded for determination of whether the damage award should be increased by $63 million. (Id. at 97.)

In the interim, Dime Bancorp, Inc. (DBI), the parent of Dime, had issued Litigation Tracking Warrants (LTW) which entitled each shareholder of DBI to convert the LTW into DBI common stock upon the occurrence of certain events. The common

47

stock to be issued was based on 85% of the amount of recovery on the Anchor Litigation and had no exercise price. 2002, DBI merged into WMI. On January 4,

The LTW Warrant Agreement was

subsequently modified on March 11, 2003, pursuant to which the LTW Holders are entitled to common stock of WMI upon a trigger event. Under the Global Settlement, JPMC will control and be entitled to all proceeds from the Anchor Litigation. This will

be free of the interests that the LTW Holders have, if any, in the Anchor Litigation. The Debtors will control and be entitled

to all proceeds from the American Savings Litigation as a result of the Global Settlement. a. LTW Holders

The LTW Holders object to the Global Settlement because it does not preserve their asserted interest in the Anchor Litigation. They contend that they are entitled to 85% of any

recovery in the Anchor Litigation; the Debtors dispute this and contend that, instead, the LTW Holders merely hold a claim for breach of the Warrant Agreement. Because that Agreement dealt

with the purchase or sale of a security (a warrant for common stock), the Debtors contend that the LTW Holders claim must be subordinated under section 510(b) to the level of common stock.29

Section 510(b) provides, in relevant part: For the purpose of distribution under this title, a claim . . . for damages arising from the purchase or 48

29

The LTW Holders disagree, contending that the Warrant Agreement is not an agreement for the purchase of a security and that, instead, they have a claim to the Anchor Litigation itself. The Debtors respond that, even if the LTW Holders are right, their interests are protected by the Plan. The Plan provides

that the Liquidating Trust will reserve for disputed claims an amount in cash equal to the pro rata share of any distribution to which the disputed claims would be entitled in the lesser of (1) the amount on the proof of claim, (2) the amount the Court estimates the claim, or (3) the amount the parties agree should be escrowed. (Ex. D-5 at 101.) The Debtors have apparently

suggested that $250 million be reserved for the disputed LTW Holders claims. (Hrg Tr. 12/2/2010 at 211-13.) The LTW Holders contend, however, that the Debtors calculations are erroneous. They note that the Anchor Litigation

has already realized $355 million (the original judgment) plus $63 million (the amount by which the appellate court suggested the judgment be increased on remand). In addition, they contend

that the Debtors improperly reduce the amount by expected taxes,

sale of . . . a security [of the debtor or of an affiliate of the debtor] . . . shall be subordinated to all claims or interests that are senior to or equal the claim or interest represented by such security, except that if such security is common stock, such claim has the same priority as common stock. 11 U.S.C. 510(b). The term security is defined to include a warrant for the purchase of stock. 11 U.S.C. 101(49). 49

when in fact the trial court had preserved the right of the plaintiffs to get a tax gross up to protect them from the effects of taxes. Therefore, the LTW Holders contend that their claim is

85% of $419 million less the $22 million in expenses the Debtors have estimated for a total of approximately $340 million. As noted above, the Court has determined that genuine issues of material fact are in dispute in the LTW Adversary which preclude it from granting the Debtors motion for summary judgment. Because the claim is disputed, the Debtors may sell 11

the Anchor Litigation free of the claims of the LTW Holders. U.S.C. 363(f)(4). Alternatively, if the LTW Holders hold a

lien or other interest in the Anchor Litigation, the Debtors may sell free and clear of that interest because the proceeds being received under the Global Settlement are more than the value of the Anchor Litigation. 11 U.S.C. 363(f)(3). In the interim,

however, the Court concludes that the interests of the LTW Holders are adequately protected by the disputed claims holdback provisions of the Plan so long as the reserve for their claims is set at $347 million.30

A hearing was held on January 7, 2010, on the Debtors motion to estimate claims for the purpose of the setting reserves under the Plan. Evidence was presented by the Debtors to support their assertion that the LTW Holders claims should be estimated at approximately $250 million. On cross, the LTW Holders raised numerous issues about that estimate, challenging the amount of expenses deducted from the claim as well as the calculation of the tax gross up. At the conclusion of the hearing, the Court estimated the claim at $347 million. This was premised largely 50

30

b.

Other Objections

The other Plan Objectors contend that the settlement with JPMC over the Goodwill Litigation is not reasonable. They note

that there was no explanation for why the Debtors chose to give JPMC the Anchor Litigation (which is worth more than $419 million) while retaining the American Savings Litigation (which is worth only $55 million). They contend that $364 million of The

value that belongs to the estate is just being given away.

Debtors respond that this was just one of the many moving parts of the Global Settlement that requires a holistic approach. The Court finds that there is a legitimate question as to who owns the Goodwill Litigation. Both WMI and WMB have

arguments that they are the real parties in interest or are the successor to the named plaintiffs. The Court cannot conclude

that the Debtors probability of winning that dispute is so great as to make the Global Settlement of these claims unreasonable. ix. Fraudulent transfers and preferences

The Debtors have also asserted various claims for recovery of some $6.5 billion in capital contributions made pre-petition by WMI to WMB, asserting that they were preferences or fraudulent conveyances. The FDIC and JPMC raised various defenses to these

on the fact that if the LTW Holders were successful at trial in obtaining a claim larger than the estimate, their distribution under the Plan would nonetheless be capped at the estimated amount. (Ex. D-5 at 101.) 51

claims.

They contended preliminarily that the Debtors would be

unable to prove insolvency because during the relevant period, the stock market showed WMI was worth between $4 and $12.7 billion. See, e.g., VFB LLC v. Campbell Soup Co., 482 F.3d 624,

633 (3d Cir. 2007) (concluding that markets valuation of a company is strong evidence of solvency and more probative than the opinions of experts); In re Hechinger Inv. Co. of Del., 327 B.R. 537, 548 (D. Del. 2005) (giving deference to market valuation rather than hindsight expert testimony). In addition, JPMC argued that the Debtors would not be able to recover from it under section 548 as a subsequent transferee because it had no notice of the voidable transfer and gave significant value (almost $2 billion and the assumption of an additional $145 billion in deposit liabilities) for the assets of WMB. 11 U.S.C. 548(c).31 See, e.g., In re Hill, 342 B.R. 183,

202-04 (Bankr. D.N.J. 2006) (holding that a good faith defense under section 548(c) requires a transferee prove (1) innocence and (2) an exchange of value).

Section 548(c) provides: Except to the extent that a transfer or obligation voidable under this section is voidable under section 544, 545, or 547 of this title, a transferee or obligee of such a transfer or obligation that takes for value and in good faith has a lien on or may retain any interest transferred or may enforce any obligation incurred, as the case may be, to the extent that such transferee or obligee gave value to the debtor in exchange for such transfer or obligation. 11 U.S.C. 548(c). 52

31

Under the Global Settlement, the Debtors are waiving these claims against JPMC. The Plan Objectors contend that this is not

reasonable given the probability of the Debtors succeeding on these claims and recovering the $6.5 billion. The Court does not agree with the Plan Objectors. It is far

from certain that the Debtors would be able to recover the prepetition payments made to WMB. JPMC has raised defenses to those In

claims, which at least raise significant factual issues.

addition, as noted below, prosecution of the avoidance actions is contingent on the Debtors proving insolvency at the time of the transfers. Not only is this a significant hurdle to prove, but

if the Debtors were successful in proving that element, it would eliminate their ability to claim any damages under their Business Tort Claims. x. Business Tort Claims

On February 16, 2009, certain holders of WMI common stock and debt securities issued by WMI and WMB (the ANICO Plaintiffs) filed an action against JPMC in state court in Galveston County, Texas, alleging misconduct by JPMC in connection with the seizure of WMB and the P&A Agreement (the ANICO Litigation). (Kosturos Decl. at 23.) On March 25,

2009, the ANICO Litigation was removed and transferred to the DC Court on motion of JPMC and the FDIC Receiver as intervening defendant. (Id. at 24.) On April 13, 2010, the DC Court

53

dismissed the ANICO Litigation finding that under FIRREA the receivership was the exclusive claims process for claims relating to the sale of WMB. ANICO v. JPMorgan Chase & Co., 705 F. Supp. That order is presently on appeal.

2d 17, 21 (D.D.C. 2010). (Kosturos Decl. at 25.)

As noted above, early in the bankruptcy case, the Debtors conducted discovery of JPMC under Rule 2004 regarding the Business Tort Claims which are similar to the various claims asserted in the ANICO Litigation. (Id. at 26.)

Both JPMC and the FDIC Receiver contend that the Debtors have no chance of recovery on those claims. Principally, they

argue that any claims challenging the closing of WMB or its sale to JPMC are barred by FIRREA. See, e.g., Freeman v. F.D.I.C., 56

F.3d 1394, 1399 (D.C. Cir. 1995) (finding that anyone bringing a claim against the assets of a failed bank held by the FDIC as receiver must first exhaust its remedies under the FDICs claims process); Cal. House. Sec. Inc. v. United States, 959 F.2d 955, 958 (Fed. Cir. 1992) (holding that the plaintiff could not have expected to be compensated for a regulatory take-over if that occurred following a determination that the plaintiffs financial situation mandated a federal receivership); ANICO, 705 F. Supp.

2d at 21 (finding that the plaintiffs were required to pursue their claims against the FDIC as receiver through the process provided by Congress in FIRREA). Further, JPMC and the FDIC

54

Receiver contend that any derivative claim that WMI may have for alleged harm to WMB is now owned by the FDIC. 12 U.S.C.

1821(d)(2)(A)(i) (providing that the FDIC as receiver succeeds to all rights, titles, powers, and privileges of . . . stockholder of the bank). See also Pareto v. F.D.I.C., 139 F.3d

696, 700 (9th Cir. 1998) (determining that 1821(d)(2)(A)(i) vests all rights and powers of a stockholder of a bank to bring a derivative action in the FDIC). The FDIC Receiver further argues

that the Debtors did not file any claim in the Receivership action based on the alleged Business Tort Claims and those claims are, therefore, time-barred. Cf. 12 U.S.C. 1464(d)(2)(B) (any

claims challenging the appointment of the FDIC as Receiver must be brought against the OTS within 30 days of the appointment). Under the Global Settlement, the Debtors are waiving any claims they have against JPMC and the FDIC Receiver, including any derivative claims based on the Business Tort Claims.32 The

Plan Objectors contend that the Business Tort Claims are valid and valuable claims, meriting denial of approval of the Global Settlement on that basis alone. The Court finds, however, that the Debtors likelihood of success on the Business Tort Claims is not high. The ANICO suit

Many objections were filed to this part of the Global Settlement, largely because it appeared that the Debtors were releasing other partys claims, including direct claims of the ANICO Plaintiffs. This issue is addressed in Part B(1)(c)(ii)(b), infra. 55

32

has already been dismissed on the basis that it had to be brought in the FDIC receivership action. ANICO, 705 F. Supp. 2d at 21.

There is a question whether the Business Tort Claims were included in the claim the Debtors originally filed in the FDIC receivership action. Further, as noted above, any claim for

damages under the Business Tort Claims would require that the Debtors prove that they were solvent at the time of the seizure of WMB, a position diametrically opposed to assertions they would need to prove in the preference and fraudulent conveyance claims. xi. Miscellaneous other claims

The Global Settlement also resolves other claims, including intercompany debt (for which JPMC is paying $180 million), certain environmental liabilities known as the BKK claims (which are being assumed by JPMC and could aggregate over $600 million), and the provision of loan servicing by JPMC for WMI. Decl. at 124; Hrg Tr. 12/2/10 at 237.) The resolution of the miscellaneous claims all appear to resolve claims favorably to the Debtor. The Court concludes that (Goulding

the Debtors do not have a strong likelihood of getting a significantly better result than reflected in the Global Settlement on these claims. After reviewing each of the claims, the Court is not convinced that the Debtors have a probability of achieving a result significantly better if they were to continue to litigate

56

than they will receive under the Global Settlement considering the claims separately or holistically. Therefore, the Court

finds that this factor supports approval of the Global Settlement. b. Difficulties in Collection

The Plan Supporters argue that given the complexity of the case and the fact that it involves claims against the FIDC as well as JPMC means that the possibility of collecting is very difficult. They note that because WMIs claims against the FDIC

are premised in part on its equity ownership of WMB, the possibility of collecting on those claims are particularly remote. The FDIC as Receiver of WMB has significantly fewer

assets than the claims of creditors, making any recovery for equity unlikely. The Plan Supporters argue that even collection

against JPMC for claims the Debtors have against it is not assured. The Plan Objectors disagree, contending that JPMC is a huge financial institution with many resources and that any collection of claims against it cannot be difficult. They also note that

several of the assets in dispute are liquid: notably, the $4 billion in Deposit Accounts, the more than $5 billion in tax refunds, and the $4 billion in TPS. collectibility is not an issue. Therefore, they argue that

57

The Court disagrees with the Plan Objectors.

The 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. Further, given the economic

turmoil in 2008, when even huge institutions like Lehman Brothers and AIG faced financial difficulties, the Court concludes that it is not possible to say that any judgment against JPMC would not face difficulty in collection, especially if it is in the billions of dollars as the Plan Objectors contend. Finally, to

the extent that the Debtors are successful in proving any claim against the FDIC as Receiver for WMB, it would be but one of many claims against the receivership with little prospect of any meaningful distribution. (Hrg Tr. 12/2/2010 at 71.) Finally,

the significant counterclaims against the Debtors raised by JPMC and the FDIC (in excess of $54 billion) add to the difficulties of collecting from them. Therefore, the Court finds that this

factor supports approval of the Global Settlement. c. Complexity, Expense and Delay

The Plan Supporters argue that continuing the various litigation on the disputed claims will cause at least a 3-4 year delay in any distribution to creditors, increase post-petition interest and professional fees (which are currently running at the monthly rate of $30 million and $10 million, respectively) and require the resolution by this Court and others of complex

58

issues relating to the takeover and sale of WMB and conflicting claims of many parties to the various disputed assets. Decl. at 30.) (Kosturos

The Plan Supporters contend that the litigation

in this case was particularly complex given the involvement of the government regulators which added issues of sovereign immunity (affecting even whether discovery could be taken of the government agents), preemption, and jurisdiction. The Plan Objectors note that this factor is really not significant because all settlements eliminate the complexity, expense, and delay inherent in litigating. The Court disagrees with the Plan Objectors contention that this factor is not significant. The dollars at risk in this case

are enormous and each individual disputed claim involves a multiplicity of issues raising complex arguments about the intersection of bankruptcy law and the regulation of banks. In

addition, many of the arguments overlap, making it difficult to decide (or settle) one issue without impacting another. Therefore, the Court concludes that this is the precise type of multi-faceted litigation that cries out for settlement. factor supports approval of the Global Settlement. d. Paramount interests of creditors This

The Plan Supporters argue that consideration of the interests of creditors mandates that the Court approve the Global Settlement. They note that creditors have overwhelmingly voted

59

in favor of Plan.

(Exs. D-18 & D-19.)

As a result of the Global

Settlement, the Debtors project that all creditors except the lowest subordinated class will be paid in full with interest. (Ex. D-5C.) They also note that the creditors will be paid

quickly because the Global Settlement provides mostly cash to the Debtors in resolution of their claims. The Plan Objectors contend that, where a debtor is solvent, the Court must consider not just the interests of the creditors but also the interests of the shareholders in evaluating the reasonableness of the settlement. Because the Global Settlement

only results in a recovery for creditors when there is additional value to be given to shareholders without a settlement, the Plan Objectors argue that the Global Settlement must be rejected as unreasonable. The Court rejects this analysis. The Court has determined

that the Global Settlement provides a reasonable return in light of the possible results of the litigation. The fact that the

recovery may not reach shareholders is not enough to find it unreasonable, so long as the recoveries are distributed to the stakeholders in accordance with the priorities of the Code. B. Other Objections to Confirmation 1. Reasonableness of releases

The Plan Objectors contend that the releases provided in the Plan (and the Global Settlement) are excessively broad and not permissible under applicable law. 60 The Plan Supporters argue that

the releases are an integral part of the Global Settlement and accordingly must be approved. They further argue that, as

recently modified, the releases do comply with applicable law. Determining the fairness of a plan which includes the release of non-debtors requires the consideration of numerous factors and the conclusion is often dictated by the specific facts of the case. See, e.g., Gillman v. Continental Airlines

(In re Continental Airlines), 203 F.3d 203, 212-14 (3d Cir. 2000) (finding that a non-consensual third party release of another third party was not valid under the specific facts of that case but concluding that it might be in other cases based on fairness, necessity to the reorganization, and specific factual findings to support these conclusions); In re Genesis Health Ventures, Inc., 266 B.R. 591, 608 (Bankr. D. Del. 2001) (finding that clauses in debtors proposed plan purporting to relieve senior lenders liability on third-party claims precluded plan confirmation absent a showing of extraordinary circumstances supporting non-consensual third-party releases); In re Zenith Elecs. Corp., 241 B.R. 92, 110 (Bankr. D. Del. 1999) (in considering debtors release of third parties, court applied five-factor test articulated in In re Master Mortgage Inv. Fund, Inc., 168 B.R. 930, 937 (Bankr. W.D. Mo. 1994)). In evaluating releases, courts distinguish between the debtors release of non-debtors and third parties release of

61

non-debtors.

In re Exide Techs., 303 B.R. 48, 71-74 (Bankr. D.

Del. 2003) (using different analyses to evaluate releases by a debtor of non-debtor third parties and releases by a non-debtor of other non-debtor third parties). a. Releases granted by Debtors

In Zenith, the Court identified five factors that are relevant to determine whether a debtors release of a non-debtor is appropriate: (1) (2) (3) (4) (5) an identity of interest between the debtor and non-debtor such that a suit against the non-debtor will deplete the estates resources; a substantial contribution to the plan by the nondebtor; the necessity of the release to the reorganization; the overwhelming acceptance of the plan and release by creditors and interest holders; and the payment of all or substantially all of the claims of the creditors and interest holders under the plan.

Zenith, 241 B.R. at 110 (citing Master Mortgage, 168 B.R. at 937). These factors are neither exclusive nor conjunctive

requirements, but simply provide guidance in the Courts determination of fairness. Master Mortgage, 168 B.R. at 935

(finding that there is no rigid test to be applied in every circumstance and that the five factors are neither exclusive, nor conjunctive). Under section 43.5 of the Plan, the Debtors33 are releasing

Although section 43.5 of the Plan purports to deal with releases by the Debtors only, in fact, it includes releases by 62

33

all claims against the Released Parties which include WMB, JPMC, the FDIC, the Settlement Noteholders, the Creditors Committee and each of its members, the Indenture Trustees for each of the tranches of the Debtors debt, and the Liquidating Trust and Trustee. (Ex. D-2 at 43.5 & 1.160.) In addition, the Debtors

are releasing all the Related Persons of each of those entities which include, inter alia, their present and former affiliates, current and former officers, directors, financial advisors, attorneys, accountants, and investment bankers. 1.158, 1.160.) (Id. at 43.5,

The releases of each of these parties must be

evaluated separately to determine if they are reasonable. The Third Circuit has refused to articulate a test for when releases by Debtors are appropriate in the chapter 11 context. Continental Airlines, 203 F.3d at 214. However, the Court

continues to believe that the factors articulated in Master Mortgage form the foundation for such an analysis, with due consideration of other factors that may be relevant to this case.

non-debtors. In addition to the Debtors releases, that section includes releases by each of [the Debtors] respective Related Persons, and on behalf of the Liquidating Trust, the Liquidating Trustee, the Liquidating Trustee Beneficiaries and the Disbursing Agent, and each of their respective Related Persons. (Ex. D-2 at 43.5.) The Liquidating Trustee Beneficiaries are creditors and shareholders; therefore, section 43.5 is not simply a release by the Debtors. This must be modified to limit the releases in section 43.5 to the Debtors only. Any releases by non-debtors must be clearly and separately identified as they are subject to a different standard. Zenith, 241 B.R. at 111. 63

i.

JPMC, FDIC and WMB

In this case, the Plan Supporters contend that the releases to be provided by the Debtors to JPMC, the FDIC, and WMB are appropriate because of the substantial contribution being made by JPMC and the FDIC in releasing claims and resolving litigation as set forth in the Global Settlement. They argue that without the

contributions made by JPMC and the FDIC, there would be no basis for the Plan which provides for payment in full plus interest of most creditors and a substantial recovery for the lowest subordinated creditors who are estimated to receive 74% of their claims. (Ex. D-5C.)

The Plan Objectors opposition to the releases of JPMC and the FDIC are largely premised on their opposition to the Global Settlement and their arguments that the Debtors are simply not getting enough under that settlement. Therefore, they argue that

the releases of JPMC, the FDIC, and WMB are not fair. Accepting that the Global Settlement is fair and reasonable, as the Court concludes above, however, leads the Court to conclude that the releases being granted to JPMC, the FDIC, and WMB by the Debtors meet the Master Mortgage standards. First,

because of the numerous interlocking and competing claims of the Debtors, JPMC and the FDIC to the various assets which are sought to be resolved by the Global Settlement, the Court concludes that there is an identity of interest between the Debtors, JPMC, the

64

FDIC, and WMB.

Particularly important is the fact that JPMC In fact,

and/or the FDIC may be viewed as the successor to WMB.

the numerous law suits that have been filed against JPMC and the FDIC by the Debtors (and derivatively by third parties) relating to the seizure of WMB evidences the identity of interest they share with the Debtors such that a suit against them relating to WMB could be viewed as a suit against the Debtors. Such suits,

if permitted to continue, would deplete the estates resources by increasing claims and administrative costs against the Debtors estates. Second, JPMC and the FDIC have made a substantial contribution to the Plan by waiving claims they had asserted against numerous assets of the Debtors (including the Deposit Accounts and portions of the Tax Refunds) and by waiving the proofs of claim they have filed which the Debtors have estimated to be in excess of $54 billion. These waivers are not simply

significant in total dollars but also in comparison to the total claims against the estate; they are clearly the largest claims. Further, the claims being waived do not simply reduce the claims against the Debtors estate; they permit the use of property of the estate free of competing claims to ownership. Third, the releases of JPMC, the FDIC, and WMB are necessary to the Debtors reorganization and confirmation of the Plan. Because of the complex and interrelated claims that the Debtors,

65

JPMC and the FDIC have to virtually every asset in the Debtors estates, it is hard to imagine what plan the Debtors could propose without the resolution of those claims first. Given the

substantial contributions being made to the Plan by JPMC and the FDIC contained in the Global Settlement and given the numerous suits which have been spawned by the failure of WMB, the Court is not surprised that JPMC and the FDIC are insisting on a release from the Debtors of them and WMB as a condition to the settlement. Fourth, the Plan has the overwhelming acceptance of creditors who recognize that their recovery is largely dependent on the value being conveyed by JPMC and the FDIC under the Global Settlement. (Exs. D-18 & D-19.)

Fifth, the Global Settlement and Plan provide the basis for the payment of all or substantially all of the claims of the creditors. As noted, all creditors, except the lowest

subordinated class, will receive payment in full plus postpetition interest from the proceeds of the assets released by the Global Settlement. The total payout under the Plan is expected (Ex. D-5C at 3.) In addition further

to exceed $7.5 billion.

recoveries may be possible from the assets conveyed to the Liquidating Trust and from the Reorganized Debtor and the NOLs. Although equity interest holders are not likely to get a recovery, the Court is not convinced that continued litigation

66

against JPMC and/or the FDIC would change that result. Therefore, the Court concludes that the releases given by the Debtors to JPMC, the FDIC, and WMB are reasonable. ii. Other parties to the Settlement

The Plan and Global Settlement also provide that the Debtors are releasing the Settlement Noteholders, the Creditors Committee and its members, the Indenture Trustees, and the Liquidating Trust and Trustee from any and all claims. at 43.5.) (Ex. D-2

The Court concludes that these are not reasonable.

The Liquidating Trust and its Trustee have not done anything yet for which they need a release. They will not even come into (Ex. D-2 at 28.1.)

existence until the Plan is confirmed.

Further, it is impossible to determine how the Liquidating Trust and its Trustee will prospectively make a substantial contribution to the Plan or that their actions will result in a substantial recovery for creditors or the equity security holders. The releases being granted to the Committee and its members are also not appropriate. It is acceptable to provide

exculpations for such parties for the role they played in the bankruptcy process, and the Court will approve appropriate ones in this case.34 See, e.g., In re PWS Holding Corp., 228 F.3d

224, 246 (3d Cir. 2000) (holding that exculpation clause in plan

34

See Part B(1)(b), infra. 67

which provided that committee members and estate professionals had no liability to creditors or shareholders for their actions in the case except for willful misconduct or gross negligence merely conformed to the standard applicable to such fiduciaries and, therefore, did not violate any provision of the Code).35 There is nothing unusual about this case that demonstrates that the Committee or its members have done anything other than fulfill their fiduciary duties. Under the Master Mortgage

factors, they do not qualify for a release from the Debtors. There is no identity of interest between them and the Debtors. They have not contributed cash or anything else of a tangible value to the Plan or to creditors nor provided an extraordinary service that would constitute a substantial contribution to the Plan or case. While creditors are receiving a substantial

recovery in the case, it is not coming from the Committee or its members. The same analysis applies to the Indenture Trustees.36

While the same analysis also applies to the Settlement Noteholders and suggests no release is warranted, there are additional reasons not to approve any release of them. The only

Originally the Plan exculpation clause did not comply with the applicable standards of the Code because it did not exclude willful misconduct or gross negligence of the Committee and estate professionals. That was corrected, however, in the October 29 modification of the Plan. (Ex. D-3 at 43.8.) This provision appears to be duplicative anyway, because the Committee members are the Indenture Trustees of the various tranches of the Debtors debt. (D.I. # 78.) 68
36

35

alleged contribution made by them was their participation in the settlement negotiations. (Ex. D-1 at Ex. G.) The Settlement

Noteholders were not acting in this case in any fiduciary capacity; their actions were taken solely on their own behalf, not others. The Settlement Noteholders hold interests in various

levels of debt and the result of the negotiations was to get them a full recovery in all but the lowest level of debt. insufficient to warrant a release by the Debtors. Further, one of the individual creditors who objected to the Plan, Mr. Thoma, sought to introduce evidence that the Settlement Noteholders used their position in the negotiations to gain nonpublic information about the Debtors which permitted them to trade in the Debtors debt. While the evidence was not admitted That is

because it was hearsay, the Court is reluctant to approve any releases of the Settlement Noteholders in light of those allegations. iii. Related Persons a. Directors, officers, professionals Because of the definition of Related Persons, the Debtors originally granted broad releases in section 43.5 of the Plan of their current and former officers, directors, employees, managers, shareholders, partners, financial advisors, attorneys, accountants, investment bankers, consultants, agents and professionals. (Ex. D-2 at 1.158.) The October 29

modification of section 43.5 appeared to eliminate releases with 69

respect to pre-petition activity of the Related Persons by adding the proviso that the release shall not include the Debtors retained financial advisors, attorneys, accountants, investment bankers, consultants, agents and professionals with respect to Claims and Causes of Action relating to the period prior to the Petition Date. (Ex. D-3.) However, the testimony of the

Debtors witnesses on this point was unclear, suggesting that the intent was to limit the release to any persons who were acting on the Debtors behalf post-petition. 26.) (Hrg Tr. 12/6/2010 at 122-

It was not clear whether the release was limited only to (Id.) Even if that is the intent,

their post-petition activity.

however, the Court finds that it is overly broad or unnecessary. Under the Master Mortgage test, the Court finds that there is no basis whatsoever for the Debtors to grant a release to directors and officers or any professionals of the Debtors, current or former. The Debtors may argue that there is an

identity of interest between them and the directors and officers who served pre-petition because their charter (or by laws) provide that those parties will be indemnified by the Debtors for certain claims that may be brought against them by creditors or shareholders. (Ex. D-104.) While this does satisfy the first

factor of Zenith, this alone is insufficient to justify the releases. To hold otherwise would eliminate the other four

factors and would justify releases of directors and officers in

70

every bankruptcy case.

That is not the law.

See, e.g.,

Continental Airlines, 203 F.3d at 216 (finding that even if the debtor might face an indemnity claim in the future, this does not make the release and permanent injunction of claims against the debtors directors and officers necessary to the reorganization). With respect to the other four factors, no evidence has been presented in this case sufficient to convince the Court that releases of the Debtors directors, officers or professionals are warranted. Specifically, there has been no evidence presented of

any substantial contribution made to the case by the directors, officers, or professionals, justifying releases for those parties. Nor is there any evidence that any of the legends of

directors, officers, or professionals covered by the Debtors releases are necessary for the reorganization (which may be limited to the run off of WMMRCs insurance business). Finally,

while the Plan has been accepted by many of the creditor classes, that is not because of any contribution by the directors, officers or professionals; it is because the creditors are getting paid in full. Further, some of the creditor classes did

not accept the Plan and none of the equity classes (which are getting nothing under the Plan) voiced any support for the Plan. There is quite simply no basis for the Debtors releases of their directors, officers or professionals.

71

With respect to the directors, officers or professionals of the Debtors and the Committee who served in the chapter 11 case, they are receiving exculpations. (See Part B(1)(b), infra.)

Consequently, the releases as to them are unnecessary, duplicative or exceed the limits of what they are entitled to receive. b. Affiliates of Released Parties

The definition of Related Persons also includes the respective present and former Affiliates and each of their respective current and former members, partners, equity holders, officers, directors, employees, managers, shareholders, [and] partners. (Ex. D-2 at 1.158.) There is no explanation why

all present and former Affiliates of Released Parties are included in the broad releases granted by the Debtors; this should be deleted.37 b. Exculpation clause

In addition to the releases being granted by the Debtors in section 43.5 of the Plan, certain parties are getting an exculpation (or release) of any claim with respect to actions they took during the bankruptcy case from the Debtors and all creditors, shareholders, and other parties in interest. (Ex. D-2

While the third party releases were modified to exclude Related Persons (except for the JPMC Related Persons, the Debtors directors and officers serving post-petition and the Debtors present affiliates), section 43.5 was not similarly modified. (Ex. D-4.) 72

37

at 43.8.)

Under section 43.8 of the Plan, the exculpation is

extended to all Released Parties and each of their Related Persons, as well as to the Plan Administration Committee and Plan Investment Committee of the WaMu Savings Plan. this provision much too broad. As mentioned above, the Third Circuit has held that a creditors committee, its members, and estate professionals may be exculpated under a plan for their actions in the bankruptcy PWS, 228 The Court finds

case except for willful misconduct or gross negligence. F.3d at 246.

The Third Circuit reasoned that such a provision

merely stated the standard to which such estate fiduciaries were held in a chapter 11 case. Id.

That fiduciary standard, however, applies only to estate fiduciaries. The Debtors Plan goes further and seeks to

encompass all the Released Parties and their Related Persons. This is either duplicative of the releases granted by the Debtors or third parties contained in sections 43.5 and 43.6 or is an effort to extend those releases. Either way it is inappropriate.

The exculpation clause must be limited to the fiduciaries who have served during the chapter 11 proceeding: estate professionals, the Committees and their members, and the Debtors directors and officers. Further, the UST observed that the Debtors exculpation provision originally did not state the correct standard, seeking

73

an exculpation even for willful misconduct and gross negligence. (Ex. D-2 at 43.8.) The October 29 modification of the Plan

amended the Debtors release of third parties to provide that it did not extend to acts of gross negligence or willful misconduct, but it did not modify section 43.8. (Ex. D-3.)

The standard for exculpations has been extant in this district since the Third Circuits PWS decision in 2000. There

is no reason that the Debtors Plan as originally filed contained any more extensive language. See also Coram, 315 B.R. at 337

(stating that third party release of trustee, equity committee and their related professionals is not permissible except to the extent it relates to post-petition activity which does not constitute gross negligence or willful misconduct). The LTW Holders object, however, to even this limited provision because they contend that they have a post-petition claim against the Debtors directors and officers for their failure to comply with the requirements of the Amended Warrant Agreement to protect the interests of the LTW Holders. Because

the Court is denying the summary judgment motion in the LTW Adversary, the Court concludes that the Plan exculpation clause must carve out any claims related to the LTW Adversary until the merits of those claims are resolved. c. Releases by creditors and shareholders i. Original version

The Plan as originally drafted contained a release of all 74

Released Parties by non-debtor third parties who were creditors or shareholders of the Debtors.38 (Ex. D-2 at 43.6.) That

provision did purport to allow third parties (who were entitled to vote on the Plan) to opt out of granting that release by checking a box on their ballot. (Id.) Notwithstanding that

option, however, the Plan provided that because the releases were essential to the Global Settlement, even parties who thought they were opting out of the releases by checking the box on their ballot would be bound by the releases and would receive whatever distributions the Plan afforded their class. provisions obviously drew lots of objections. The Plan Objectors principally object to the Third Party Releases because they were not consensual. They contend that (Id.) Those

third party releases of non-debtors can only be accomplished with the affirmative agreement of the third party affected. While the Third Circuit has not barred third party releases, it has recognized that they are the exception, not the rule. Continental Airlines, 203 F.3d at 212 (non-consensual releases by a non-debtor of other non-debtor third parties are to be granted only in extraordinary cases.). Other courts agree.

See, e.g., In re Metromedia Fiber Network, Inc., 416 F.3d 136, 141 (2d Cir. 2005) (holding that third party releases may be

WMB Senior Noteholders were given the ability to opt in to the releases (and thereby obtain a share of the distribution given to their class under the Plan). (Ex. D-2 at 21.1.) 75

38

granted if important to the chapter 11 plan, but it is clear that such a release is proper only in rare cases.); Class Five Nev. Claimants v. Dow Corning Corp. (In re Dow Corning Corp.), 280 F.3d 648, 657-58 (6th Cir. 2002) (concluding that such an injunction is a dramatic measure to be used cautiously). Some

courts proscribe it completely, except in asbestos cases where third party injunctions are permitted under the express language of section 524(g). See, e.g., Resorts Intl, Inc. v. Lowenschuss

(In re Lowenschuss), 67 F.3d 1394, 1401-02 n. 6 (9th Cir. 1995) (This court has repeatedly held, without exception, that 524(e) precludes bankruptcy courts from discharging the liabilities of non-debtors.); Landsing Diversified Props.-II v. First Natl Bank and Trust Co. of Tulsa (In re W. Real Estate Fund, Inc.), 922 F.2d 592, 600-01 (10th Cir. 1990) (applying the basic principle permitting creditors whose claims have been discharged vis-a-vis the bankrupt to recover on the same claims from third parties in a variety of settings.). This Court has previously held that it does not have the power to grant a third party release of a non-debtor. See, e.g.,

Coram, 315 B.R. at 335 (holding that the Trustee (and the Court) do not have the power to grant a release of the Noteholders on behalf of third parties.). Rather, any such release must be

based on consent of the releasing party (by contract or the mechanism of voting in favor of the plan). Id.; Zenith, 241 B.R.

76

at 111.

Therefore, the original language in the Plan that would

mandate third party releases even in the place of an indication on the ballot that the party did not wish to grant the release would not pass muster. See, e.g., In re Nichols Midway Pier,

LLC, 2010 WL 2034542, at *13 (Bankr. D.N.J. May 21, 2010) (finding third party releases were impermissible where no consideration was going to the releasing parties who had objected and they were not necessary to the debtors reorganization because it was liquidating); In re Spansion, Inc., 426 B.R. 114, 145 (Bankr. D. Del. 2010) (finding improper releases of third parties by objecting shareholders who were receiving nothing under the plan); Exide, 303 B.R. at 74 (approving releases which were only binding on those creditors and equity holders who accepted the terms of the plan); Zenith, 241 B.R. at 111 (finding that a release provision had to be modified to permit third parties release of non-debtors only for those creditors who voted in favor of the plan). ii. Modifications

Recognizing the problems inherent in seeking third party releases under the language of the original Plan, the Debtors announced a further modification to the Plan that would provide that no releases would be granted by any entity that opted out of the release, but that such entity would not be entitled to a distribution under the Plan. On November 24, 2010, the Debtors

77

modified the release provisions of the Plan to eliminate the language that the releases would be deemed given even in the face of an opt out on the ballot. (Ex. D-4 at 43.6.) The second

modification also provided that the releases would not release anyone from willful misconduct or gross negligence, except JPMC Entities and that Released Parties would not include Related Persons except for JPMC Related Persons, the Debtors directors and officers who served post-petition, and the Debtors present affiliates. (Id.) a. Inconsistencies

The Court finds, however, that the modifications are internally inconsistent and potentially ineffective. The Plan

provides that if there is any conflict, the Global Settlement controls over the Plan. (Ex. D-2 at 2.1.) Therefore, while

the Debtors have modified the release language in the Plan, the Global Settlement language has not been modified and may nullify any Plan modification.39 This problem is particularly evident with respect to the Releases. As noted by the ANICO Plaintiffs, the Global

Settlement contains a very broad release, stating that every Person who is not a Releasor hereunder is permanently enjoined, barred and restrained from instituting, prosecuting, pursuing or litigating in any

While the parties filed a modification of the Global Settlement, it did not modify the language of which the Plan Objectors complain. (Ex. D-252.) 78

39

manner any and all claims, demands, rights, liabilities, or causes of action of any and every kind, character or nature whatsoever, in law or in equity, known or unknown . . . whether asserted or unasserted, against any of the WMI Releasees, the JPMC Releasees, the FDIC Releasees, the Creditors Committee Releasees or the Settlement Note Releasees, that are Released Claims, or otherwise are based upon, related to, or arise out of or in connection with the Debtors Claims, the JPMC Claims, the FDIC Claims, the Purchase and Assumption Agreement . . . confirmation and consummation of the Plan, the negotiation and consummation of the [Global Settlement] or any claim, act, fact, transaction, occurrence, statement or omission in connection with or alleged or that could have been alleged in the Related Actions or other similar proceedings . . . . (Ex. D-1 at 3.7.) To the extent this is in conflict with the provisions of section 43.6 of the Plan, the Plan currently provides that the Global Settlement controls. (Ex. D-2 at 2.1.) Therefore, all

the modifications of the Plan proposed by the Debtors are completely ineffective. It is not sufficient to rely on the

Confirmation Order to remedy deficiencies in the Plan or to deal with all inconsistencies between the Global Settlement and the Plan. With respect to issues that affect any third party who is

not a signatory to the Global Settlement, the Court concludes that the Plan and Confirmation Order must control over the terms of the Global Settlement. b. ANICO Plaintiffs

With respect to the rights of the ANICO Plaintiffs specifically, the Debtors Plan originally had broad release

79

language that could be read to release third party claims against JPMC related to the Debtors. The ANICO Plaintiffs objected to The Plan

the release of their claims in the ANICO Litigation.

Supporters modified the release language and now contend that there is no release of direct claims against any third parties that may be held by shareholders or anyone who is not getting a distribution under the Plan. The Debtors argued at the

confirmation hearing that because the ANICO Plaintiffs are not getting any distribution under the Plan, they are not releasing anyone. (Hrg Tr. 12/7/2010 at 100.) However, the Global

Settlement expressly provides that the Debtors are required to file a notice of dismissal of the ANICO Litigation. 2.7.) (Ex. D-1 at

While the Debtors argued that this was only to the

extent the ANICO Litigation is premised on derivative claims held by the Debtors, the terms of the dismissal stipulation are not so limited and purport to dismiss all claims in the ANICO Litigation. (Id. at Ex. K.)

Therefore, the Court concludes that the Plan must provide that there is no release being provided under the Plan or the Global Settlement by the ANICO Plaintiffs of their direct claims against any party (other than the Debtors) and that the Court is making no determination as to who owns the claims in the ANICO Litigation. Further, any stipulation of dismissal that the

80

Debtors file in the ANICO Litigation must expressly state that they are dismissing only claims which they own. c. Release of Debtors affiliates and directors and officers

Truck Insurance Exchange and Fire Insurance Exchange filed a limited objection to confirmation that highlights a problem with the broad language of the releases. The Exchanges are inter-

insurance exchanges owned by their insurance policy holders which hold approximately $20 million in WMB Senior Notes on behalf of their policy holders. In addition, however, they hold $43

million in asset-backed securities issued by special purpose entities (SPEs) related to the Debtors. Because the definition

of the WMI Entities is so broad, it could be argued that it includes a release of the SPEs (because they are affiliates of the Debtors) from any obligation to pay on the securities held by the Exchanges (merely because the Exchanges are creditors in this case). The Court agrees with the Exchanges that the third party releases are too broad and should not extend to any affiliates of the Debtors. There is no evidence of who the affiliates are or

why they should be getting a discharge without filing their own bankruptcy cases.40
40

Further, there is no basis for granting

While the Second Modification of the Plan filed on November 24, 2010, eliminated third party releases of former affiliates of the Debtors, it retained them with respect to present Affiliates of the Debtors and post-petition activities of the directors and officers. (Ex. D-4.) 81

third party releases of the Debtors officers and directors, even if it is limited to their post-petition activity. The only

contribution made by them was in the negotiation of the Global Settlement and the Plan. Those activities are nothing more than

what is required of directors and officers of debtors in possession (for which they have received compensation and will be exculpated); they are insufficient to warrant such broad releases of any claims third parties may have against them. Spansion, 426 B.R. at 145. d. Release by creditors affiliates See, e.g.,

In addition, the Exchanges also object to the definition of who is providing a release because it includes Related Parties of creditors and specifically includes present (and former) affiliates of creditors. (Ex. D-2 at 43.6 & 1.158.) Thus,

under a plain reading of the Plan definitions, it could be argued that an affiliate (or even a former affiliate) of a creditor is releasing all claims it may have against JPMC and any affiliate of JPMC. These could include defenses to insurance claims on

policies issued by the Exchanges or their affiliates that JPMC is purportedly assuming under the Global Settlement Agreement. the Exchanges note, they do not have authority to release all claims that affiliates of theirs may have against JPMC and its Related Persons. Nor is there any evidence of what contribution As

was made by any of the Released Parties or their Related Persons to the Exchanges affiliates. 82

The Court agrees with the Exchanges that the third party releases should not extend to any affiliates of the creditors, who have no relationship to this case. e. Need to allow opt in/out

The UST argues that the Plan modification that was filed on November 24, 2010, just a week before the confirmation hearing (and after the deadline for casting ballots) materially changes the terms of the Plan. The UST contends that parties must now be

given a chance to determine whether they wish to opt out of the third party releases. As originally drafted, although a party

could purportedly opt out of the releases, because the Debtors were asking the Court to enforce the releases anyway, the Plan did not provide that by opting out a party would lose its entitlement to a distribution. Now, however, the Plan does

provide that anyone opting out of granting third party releases will lose the right to a distribution. (Ex. D-4.)

The Court agrees with the UST that the Plan provision with respect to the third party releases has changed materially. This

is equally applicable to those who originally opted out of the releases (feeling that even though the Court might find the opt out invalid, they would still get a distribution) as to those who did not bother checking the box to opt out (feeling that the Court would simply enforce the releases anyway).

83

However, the Court concludes that the opt out mechanism is not sufficient to support the third party releases anyway, particularly with respect to parties who do not return a ballot (or are not entitled to vote in the first place). Failing to

return a ballot is not a sufficient manifestation of consent to a third party release. Zenith, 241 B.R. at 111 (finding that a

release provision had to be modified to permit third parties release of non-debtors only for those creditors who voted in favor of the Plan). Therefore, the Court concludes that any

third party release is effective only with respect to those who affirmatively consent to it by voting in favor of the Plan and not opting out of the third party releases. f. Applicable to those who may get a distribution

There is an additional problem with the third party releases: it is unclear to whom they may apply. The language

says they are applicable to any entity that may be entitled to a distribution under the Plan. (Ex. D-4.) The Debtors currently

project that only creditors will get a distribution under the Plan. (Ex. D-5C.) However, the Liquidating Trust is receiving

certain assets, including potential lawsuits, which it will liquidate. It may not be known for years whether all creditors

will be paid in full so that preferred shareholders will be entitled to a distribution. Consequently, shareholders cannot If the

vote intelligently on whether to give a release. 84

preferred shareholders are not getting any distribution under the Plan, there is no consideration for the releases of third parties. See, e.g., Nichols Midway Pier, 2010 WL 2034542, at *13

(finding third party releases were impermissible where no consideration was given to the releasing parties who had objected); Spansion, 426 B.R. at 145 (finding improper releases of third parties by objecting shareholders who were receiving nothing under the plan). g. Discrimination

The UST also objects to the Plans conditioning any distribution on whether the entity grants a third party release, arguing that it discriminates between creditors within a class. The UST contends that this violates section 1123(a)(4) of the Code and the fundamental bankruptcy policy of equality of distribution among creditors. See, e.g., In re Combustion

Engg, Inc., 391 F.3d 190, 241, 248 (3d Cir. 2004) (vacating confirmation order based on apparent disparate treatment of creditors within a class). The Court disagrees. Providing different treatment to a creditor who agrees to settle instead of litigating is permitted by section 1123(a)(4). See, e.g., In re Dow Corning Corp., 255

B.R. 445, 472 (E.D. Mich. 2000) (finding that a claimant who elects to settle instead of pursuing litigation agrees to a less favorable treatment and is in compliance with 1123(a)(4)); In

85

re Dana Corp., 412 B.R. 53, 62 (S.D.N.Y. 2008) (finding that the fact that some claimants settled while others did not, does not by itself indicate unequal treatment). What is important is that

each claimant within a class have the same opportunity to receive equal treatment. Dana Corp., 412 B.R. at 62 (finding equal

treatment where all the claimants had the option to settle their claims or litigate them). That is the case here. Therefore, the

Court concludes that this provision of the Plan does not violate section 11 23(a)(4). h. Released Claims

The Plan Objectors also contend that the definition of Released Claims is overly broad and could cause the release of claims beyond what is permissible. They note that the definition

includes all claims that otherwise arise from or relate to any act, omission, event or circumstance relating to any WMI Entity, or any current or former subsidiary of an WMI Entity. at 1.159.) The Court agrees that the definition is too broad and that it should be limited to claims of the Debtors (with respect to releases given by the Debtors) and to claims of creditors relating to claims they have asserted against the Debtors (with respect to releases given by creditors or shareholders). i. Injunctions (Ex. D-2

The Plan Objectors also argue that the Global Settlement and

86

Plan injunction provisions greatly expanded the releases given by the Debtors and by creditors or shareholders. Ex. D-2 at 43.3, 43.7, 43.12 & 43.13.) (Ex. D-1 at 3.7;

The Court agrees that

those provisions must be limited to the terms of permissible releases and not seek to expand those releases through the back door. 2. Best interests of creditors

The Plan Objectors contend that the Plan violates the best interest of creditors test articulated in section 1129(a)(7). That section requires that a plan of reorganization provide nonconsenting impaired creditors with at least as much as they would receive if the debtor was liquidating in chapter 7. 1129(a)(7). a. Payment of post-petition interest 11 U.S.C.

The general rule is that unsecured creditors are not entitled to recover post-petition interest. United Sav. Assn v.

Timbers of Inwood Forest Assocs., Ltd., 484 U.S. 365, 372-73 (1988) (holding that unsecured creditors are not entitled to have post-petition interest added to their claims). There is an

exception to the general rule, however, when the debtor is solvent. See Onink v. Cardelucci (In re Cardelucci), 285 F.3d

1231, 1234 (9th Cir. 2002) (finding that when a debtor is solvent, unsecured creditors are entitled to post-petition interest at the legal rate). In a chapter 7 liquidation, where

87

the debtor is solvent, a creditor must receive post-petition interest on its claim before shareholders receive any distribution. 11 U.S.C. 726(a)(5). Therefore, to meet the

best interest of creditors test in section 1129(a)(7), the nonconsenting impaired creditors must get interest on their claims before shareholders receive any recovery. 344. Coram, 315 B.R. at

The Plan Supporters argue that they have met this

requirement because the Plan provides that all creditors will receive interest at their contract rate before creditors subordinated to them or shareholders get a recovery.41 i. Before subordinated claims

The LTW Holders contend, however, that the Plan violates the absolute priority rule by providing for payment of interest to some creditors before all creditors have been paid in full. Specifically, they contend that their claims cannot be subordinated (as the Debtors argue) to the level of shareholders under section 510(b) but must be treated as unsecured (albeit subordinated) claims. They argue that neither section 1129 nor

section 726 permit the payment of interest on other unsecured

The WMI Noteholders had objected to the Plan contending that it violated section 1129(a)(7) because it provided that the post-petition interest on the Senior Noteholders claims was being paid pro rata with the Senior Subordinated Noteholders claims. The WMI Noteholders have deferred pressing this objection, however, because it appears that both the Senior Noteholders claims and the Senior Subordinated Noteholders claims will be paid in full with post-petition interest, thereby mooting the objection. 88

41

creditors claims before their subordinated claims are paid in full. The Court agrees that interest cannot be paid on any unsecured claims until all unsecured claims are paid in full. U.S.C. 726(a). 11

The priority of distributions established under

section 726(a), however, is expressly subject to subordination under section 510. 11 U.S.C. 726(a). The Debtors argue that

the LTW Holders claims must be subordinated under section 510(b) to the level of common stock because they represent a claim for breach of an agreement by which the LTW Holders were to receive common stock. See, e.g., In re VF Brands, Inc., 275 B.R. 725,

730 (Bankr. D. Del. 2002) (subordinating fraudulent transfer and breach of contract claims asserted against debtor-parent by purchaser of stock of debtors corporate subsidiary to the creditors of the debtor-parent and treating the claims on par with claims of equity holders). Therefore, if the LTW claims are

subordinated at all, they would be subordinated to the level of common stock, which gets paid, under section 726 only after all creditors get paid post-petition interest. To the extent that

the LTW Holders win their suit and are not subordinated, the Debtors agree they will be entitled to treatment as general unsecured creditors under class 12 and get paid in full with interest.42 The LTW Holders contend that the Debtors agreed at the Disclosure Statement hearing that if they win the LTW Adversary, 89
42

ii.

Before late-filed claims

The LTW Holders also contend that interest should not be paid on creditors claims until payment in full of late-filed claims.43 The Court agrees because this is specifically mandated The Plan

under the priorities delineated in section 726(a).44 should be modified to make this clear. b. Rate of post-petition interest

To the extent post-petition interest is appropriate, the Plan Objectors argue that it should be calculated at the federal judgment rate. Under section 726(a)(5), where the debtor is

solvent a creditor must receive post-petition interest at the legal rate from the date of filing the petition. Neither the

Code nor its legislative history provides a definition of the legal rate. The Plan Objectors assert that this Court should follow other courts that have interpreted the term to refer to the federal judgment rate. See, e.g., Cardelucci, 285 F.3d at 1234

the LTW Holders will be entitled to treatment in Class 12 as general unsecured creditors. This has not, however, been incorporated into the Plan. The Court agrees that the Plan should be clarified on this point. This is particularly relevant to the LTW Holders because many of them had not filed proofs of claim. That was, in part, the reason the Court suggested that the LTW Adversary proceed as a class action. The Debtors have, however, reserved the right to object to any late-filed claims. Late-filed claims are entitled to be paid ( 726(a)(3)) after all timely claims have been paid in full ( 726(a)(2)), but before interest is paid on any claims ( 726(a)(5)). 90
44 43

(awarding post-petition interest at the federal judgment rate); In re Dow Corning Corp., 237 B.R. 380, 412 (Bankr. E.D. Mich. 1999) (Dow I) (determining that the phrase interest at the legal rate means the federal judgment rate); In re Melenyzer, 143 B.R. 829, 832-33 (Bankr. W.D. Tex. 1992) (concluding that the appropriate rate of interest payable to unsecured creditors pursuant to section 726(a)(5) is the federal judgment rate). These courts reason that the term is akin to post-judgment interest. Cardelucci, 285 F.3d at 1235 (analogizing post-

petition interest on an allowed claim to post-judgment interest on a federal judgment because they both serve the same purpose of compensating a plaintiff for being deprived of compensation for the loss of time between the determination of damages and payment); Dow I, 237 B.R. at 405-06 (finding that post-petition interest on an allowed claim and post-judgment interest on a federal judgment perform the same function and share the same purpose). By viewing an allowed claim as the equivalent of a

money judgment, those courts conclude that the federal judgment rate is the appropriate legal rate of interest to be applied for post-petition interest. 237 B.R. at 391, 406. Those courts reasoned that by using the language at the legal rate, Congress was referring to a specific type and amount of interest, rather than making a general reference to a Cardelucci, 285 F.3d at 1235; Dow I,

91

creditors entitlement to interest from a solvent debtor.

See

Dow I, 237 B.R. at 403 (finding that Congress rejection of the phrase interest on claims allowed in favor of the more specific phrase interest at the legal rate indicates Congress intended a rate of interest fixed by federal statute). In addition, the

courts find that Congress use of the instead of the indefinite a or an, indicated its intent for a single uniform source to be used to calculate post-petition interest. Cardelucci, 285

F.3d at 1234; Dow I, 237 B.R. at 404; Melenyzer, 143 B.R. at 831 n.2. Some courts, however, have concluded that there is a presumption that the contract rate (and even the default rate) of interest should be applied in solvent debtor cases. In re Dow

Corning Corp., 456 F.3d 668, 681 (6th Cir. 2006) (noting that that there is a presumption that default interest should be paid to unsecured claim holders in a solvent debtor case but remanding for determination if there were equitable factors that warranted a departure from that rule); In re Southland Corp., 160 F.3d 1054, 1059-60 (5th Cir. 1998) (noting that a default interest rate is generally allowed, unless the higher rate would produce an inequitable result and concluding that the higher rate would not be inequitable in that case because junior creditors were not adversely affected by it and the difference between the contract and default rate was only 2%); In re Chicago, Milwaukee,

92

St. Paul & Pacific R.R. Co., 791 F.2d 524, 529 (7th Cir. 1986) (holding that creditors were entitled only to contract default rate although they argued they were entitled to the higher market rate because in the absence of the bankruptcy filing they would have been able to get paid faster and reinvest their money at the market rate). This Court has considered this issue before and concluded that the federal judgment rate was the minimum that must be paid to unsecured creditors in a solvent debtor case under a plan to meet the best interest of creditors test, but that the Court had discretion to alter it. Coram, 315 B.R. at 346 (citing In re Dow

Corning Corp., 244 B.R. 678, 689 (Bankr. E.D. Mich. 1999) (Dow II) (finding that a creditor of a solvent bankruptcy estate must receive post-petition interest at a rate that is at least equal to the federal statutory rate)). See also In re Schoeneberg, 156

B.R. 963, 969 (Bankr. W.D. Tex. 1993) (finding that section 726(a) provides no clear answer as to the definition of legal rate and that it was within the courts discretion to determine a rate of interest that is fair and equitable based on the specific facts of the case). The Plan Objectors argue that the equities of this case warrant that post-petition interest be calculated at the federal judgment rate. The Plan Objectors rely on the decision in Coram

where the Court awarded interest at the federal judgment rate

93

rather than the contract rate.

315 B.R. at 347.

As noted, in

that case, the Court concluded that the proper rate of interest to be awarded to creditors in solvent debtor cases depends on the equities of the case. Id. The Court found the equities in Coram

did not warrant use of the default contract rate because one of the noteholders had created a conflict of interest that tainted and delayed the debtors restructuring of debt, negotiations of a plan, and its ultimate emergence from bankruptcy.45 47. In this case the Court does not have enough evidence to conclude that there were conflicts of interest that tainted the reorganization process or other equitable reasons warranting payment at the federal judgment rate rather than contract rate. As noted above, however, there are allegations that the Settlement Noteholders (who hold claims in several of the creditor classes) used information obtained in the negotiations to trade in claims. The evidence offered in support, however, Because the Plan as Id. at 346-

was hearsay. (See Part B(1)(a)(ii), supra.)

written cannot be confirmed, the Court need not decide the issue. c. Effect of releases

The Plan Objectors also argue that the analysis done by the

The conflict arose when the noteholder paid the Debtors president a consulting fee of $1 million during the course of the chapter 11 case and plan negotiations. Coram, 271 B.R. at 231. 94

45

Debtors of the recovery creditors would receive in chapter 7 is faulty. In their liquidation analysis the Debtors assumed that

in chapter 7 the trustee would accept the Global Settlement so that the releases would also be accepted. The Court disagrees with this analysis. Although the Court

found the Global Settlement to be reasonable, it did not find the releases to be reasonable. It is likely that a chapter 7 trustee

would come to the same conclusion especially because there is no mechanism under chapter 7 to grant third party releases to nondebtors. Alternatively, the chapter 7 trustee may elect to

pursue some of the Debtors claims rather than accept the Global Settlement in toto. Without the Global Settlement, however, an In

additional $54 billion claims would have to be considered.

that event, the creditors would not be getting as much as they are under the Debtors Plan and the best interest of creditors test is met. In their analysis the Debtors also assumed that what creditors can recover from other sources should be ignored under section 1129(a)(7). See, e.g., Dow I, 237 B.R. at 411-1

(finding the best interest of creditors test takes into consideration only the dividend creditors would receive from a chapter 7 trustee in a hypothetical liquidation in comparison with the dividend under the plan).

95

The Court disagrees.

In a case where claims are being

released under the chapter 11 plan but would be available for recovery in a chapter 7 case, the released claims must be considered as part of the analysis in deciding whether creditors fare at least as well under the chapter 11 plan as they would in a chapter 7 liquidation. Again, however, when the additional $54

billion in claims held by the FDIC and JPMC is considered, the Court concludes that the recovery under chapter 7 even without the releases would be less than the recovery under the Debtors Plan. Therefore, the best interest of creditors test has been

met here. 3. Discriminatory Treatment of Creditors a. Small PIERS claimants

One of the individual creditors, Nate Thoma, argued that he is being discriminated against in violation of the Code. Mr.

Thoma is the holder of a PIERS claim which is less than the $2 million threshold necessary under the Plan for a PIERS claimant to participate in the rights offering to purchase stock in the Reorganized Debtor. (Ex. D-2 at 20.4 & 34.1.) Mr. Thoma

argues that because he is precluded from participating in the rights offering, he is receiving less than others in his class, in violation of section 1123(a)(4) of the Code. Section 1123(a)(4) provides that a plan shall - . . . (4) provide the same treatment for each claim or interest of a particular class, unless the holder of a particular claim or 96

interest agrees to a less favorable treatment of such particular claim or interest. 11 U.S.C. 1123(a)(4).

The Plan Supporters argued that the offering was made only to the larger claimants to avoid the administrative burden of issuing stock to small holders. (Hrg Tr. 12/7/2010 at 273.)

There is nothing in section 1123(a)(4), however, that would permit discrimination for administrative convenience.46 The Plan Supporters also contend that there is no discriminatory treatment because the rights offering is of no value. They argue that the rights offering does not provide for The Court is

any discount in the purchase price of the stock. not sure this is correct.

Under the rights offering, PIERS

Claimants have the right to purchase $100 million in stock in the Reorganized Debtor (each can buy stock based on its percentage of total holdings of PIERS claims). Apparently only $31 million has (Sharp Decl. filed

been purchased through that offering. 11/30/2010 at Ex. A.)

The Debtors presented testimony that the

enterprise value of the Reorganized Debtor was $157.5 million. (Hrg Tr. 12/2/2010 at 72.) Under the Plan, however, other

creditors have the right to accept stock in lieu of cash for their claims. (Ex. D-2 at 16.2, 18.2 & 19.2.) The Debtors

A plan may provide for a convenience class claims that are less than (or reduced to) a specific that class usually receives payment in full to avoid administrative burden of calculating and paying very amounts to creditors. 11 U.S.C. 1122(b). 97

46

of unsecured amount, but the small

were unable to advise how many creditors had chosen that option as the deadline to do so had apparently not passed. The Court,

therefore, cannot determine if the value of the stock of the Reorganized Debtor to be held by the PIERS Claimants exceeds the price they will pay for it. Even if the analysis showed that the PIERS Claimants were getting stock at par, the Court still could not conclude that the rights offering has no value. The right to buy into a company

does have inherent value; it includes the upside if the company is successful. Further, in this case the Court concludes that the reorganized company has value in excess of the enterprise value of $157.5 million set by the Debtors expert. The expert

acknowledged that his valuation was based only on the cash flows expected to be generated by the runoff of the insurance assets currently held by the Reorganized Debtor and did not consider that the Reorganized Debtor might start or acquire another business. (Hrg Tr. 12/6/2010 at 32.) The fact that the

Reorganized Debtor is raising new capital through the rights offering suggests otherwise. See, e.g., Exide, 303 B.R. at 60

(committees expert opined that fact that the senior creditors and management were taking stock in the reorganized company is a strong indicator that the company is being undervalued). see In re Mirant, 334 B.R. 800, 832-35 (finding that [t]he But

98

market is not the proper measure for the value of Mirant Group for the purpose of satisfying claims because the market often undervalues companies in bankruptcy). Further, the Reorganized Debtor may in fact be a public company (depending on the number of creditors who accept stock instead of cash or who participate in the rights offering). public company has additional value in its ability to raise capital and acquire (or be acquired by) other businesses. MicroSignal, Corp. v. MicroSignal Corp., 147 Fed. Appx. 227, 232 (3d Cir. 2005) (finding that a merger would result in a public company which is better equipped to raise capital); David N. Feldman, Reverse Mergers + Pipes: The New Small-Cap IPO Reprinted and Updated from Pipes: Revised and Updated Edition A Guide to Private Investment in Public Equity, 3 Bus. L. Brief (Am. U.) 34, 39 (2007) (It is easier to raise money as a public company than as a private company.). Finally, because the Debtors will not A

emerge from bankruptcy before December 31, 2010, the Debtors could potentially have the full use of their approximately $5 billion in NOLs.47 See Chaim J. Fortgang & Thomas M. Mayer,

Had 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. (Hrg Tr. 12/6/2010 at 34-35.) 99

47

Valuation in Bankruptcy, 32 UCLA L. Rev. 1061, 1129-30 (1985) (noting that NOLs often are a debtors largest asset). Therefore, the Court cannot accept, as the Plan Supporters contend, that the rights offering is of no value. correct. Mr. Thoma is

The Plan must be modified to allow all PIERS Claimants See,

the opportunity to participate in the rights offering. e.g., Combustion Engg, 391 F.3d at 241, 248 (vacating

confirmation order based on apparent disparate treatment of creditors within a class). b. Treatment of PIERS as creditors

The Equity Committee and the LTW Holders argue that the PIERS Claimants should be classified as equity, not as creditors, because their rights included warrants to purchase WMI common stock (exercisable in 2041). (Ex. D-5 at 41.) The Plan

Supporters disagreed, arguing that the PIERS claimants hold preferred and/or common stock in a trust, Washington Mutual Capital Trust 2001 (WMCT 2001"), but that the Debtors have an obligation to WMCT 2001 based on Junior Subordinated Debentures issued by the Debtors to WMCT 2001. Further, they note that the

PIERS warrants have not been exercised and they currently do not hold stock in WMI. represent debt. However, the Debtors witness was not sure whether WMCT 2001 had been merged into WMI. (Hrg Tr. 12/2/2010 at 147-48, 150.) Therefore, they argue that the PIERS claims

100

If WMCT 2001 was merged into WMI, then the PIERS claims could be viewed as equity. If it was not, then they are properly treated

as creditors under the Plan because they do not hold stock in the Debtors but only stock in WMCT 2001, which is a creditor of the Debtors. Consequently, the Court is unable to determine whether

the PIERS are properly classified as creditors ahead of the equity security holders. c. Treatment of LTW Holders

The LTW Holders made a similar argument to Mr. Thomas: that they are receiving less than other general unsecured creditors in violation of section 1123(a)(4) of the Code. The LTW Holders

contend that even if they are successful in the LTW Adversary and their claims are allowed as general unsecured claims in Class 12, they have been discriminated against because they are not given the option other general unsecured creditors have to take stock in the Reorganized Debtor rather than cash. They note that

because of their dispute with the Debtors, they did not receive a ballot through which they could exercise the option to receive stock. This, the LTW Holders argue, means that they are

receiving less favorable treatment than other unsecured creditors in violation of section 1123(a)(4). The Court agrees that the LTW Holders are receiving disparate treatment from other creditors in whose class it may be determined they belong. The Plan must be modified to afford the

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same option to all claims in the same class that other claims have, if they are allowed. d. Treatment of REIT Holders

The TPS Holders also object to the treatment afforded to Class 19 (REIT Holders) because the latter are receiving consideration in addition to their pro rata share of the Liquidating Trust on account of their preferred share holdings. (Ex. D-2 at 23.1.) Specifically, the REIT Holders will receive

a pro rata share of a payment of $50 million from JPMC if they consent to releases of JPMC. (Id.) The TPS Holders contend that

this is discriminatory treatment and is designed principally to give additional consideration to the Settlement Noteholders. The Court disagrees. To the extent that the REIT Holders

are receiving anything more than other preferred shareholders, they are receiving it directly from JPMC in exchange for releases. See, e.g., Official Comm. of Unsecured Creditors v.

Stern (In re SPM Mfg. Corp.), 984 F.2d 1305, 1313 (1st Cir. 1993) (allowing a senior creditor to agree to give up part of its collateral to another class, skipping other classes in between); In re World Health Alternatives, Inc., 344 B.R. 291, 299 (Bankr. D. Del. 2006) (finding that a secured creditors gift to a junior creditor did not violate the absolute priority rule since the property belongs to the secured creditor and not the estate.). Further, it appears that the offer is made to all REIT Holders

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who agree to release JPMC, not simply to the Settlement Noteholders. (Ex. D-2 at 50.) Therefore, there is no 11 U.S.C. 1123(a)(4).

discrimination within that class. e.

Treatment of WMB Noteholders

Certain WMB Noteholders contended that they have a claim directly against WMI for its misrepresentation of the financial stability of WMB, thereby causing them to buy (or hold onto) WMB Notes. In an omnibus objection to claims, the Debtors contended

that the WMB Noteholders did not have a valid claim, but that even if they had a claim it must be subordinated under section 510(b). A hearing on the objection as it relates to the WMB

Noteholders was held on January 6, 2010, at which time the Court made the following ruling. Section 510(b) provides, in relevant part: For the purpose of distribution under this title, a claim . . . for damages arising from the purchase or sale of . . . a security [of the debtor or of an affiliate of the debtor] . . . shall be subordinated to all claims or interests that are senior to or equal the claim or interest represented by such security, except that if such security is common stock, such claim has the same priority as common stock. 11 U.S.C. 510(b). The term security is defined to include a 11 U.S.C. 101(49)(A)(i)

debt security such as a note or bond. & (iv).

The WMB Noteholders conceded that their holdings are debt securities issued by an affiliate of the Debtors and that their claim results from the purchase of those securities. 103 They

argued, however, that section 510(b) does not apply because at the time the bankruptcy case was filed WMB had been taken over by the FDIC and was no longer an affiliate of the Debtors. The Debtors disagreed with this argument, noting that as of the bankruptcy filing date WMI still held all the stock in WMB. They noted that there is no case law suggesting that simply because a company is placed in receivership the parent company loses its rights as shareholder. The Court is not sure this is

correct in the context of an FDIC receivership of a bank though. As noted earlier, the FDIC has taken the position that they have succeeded to the rights of the shareholder of WMB. supra. See Part

See also 12 U.S.C. 1821(d)(2)(A)(i) (providing that the

FDIC as receiver succeeds to all rights, titles, powers, and privileges of . . . stockholder of the bank). The Court found it unnecessary to decide this issue, however, because the relevant time for determining whether the security was issued by an affiliate, is at the time the claim arose (i.e., when the security was bought or sold). See, e.g.,

VF Brands, Inc., 275 B.R. at 728 (subordinating claim based on purchase of stock of debtors former subsidiary even though as of petition date the subsidiary was no longer an affiliate of the debtor because claimant had bought all of the stock prepetition); In re Wisconsin Barge Line, Inc., 76 B.R. 142, 144 (Bankr. E.D. Mo. 1987) (rejecting argument that sale of all stock

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of subsidiary pre-petition meant that section 510(b) did not apply). At that time, WMB was an affiliate of WMI.

Therefore, the Court concluded that section 510(b) was applicable to the WMB Notes. The WMB Noteholders argued,

however, that because their holdings are debt securities, they should be subordinated only to the WMI debt securities (i.e., the senior and subordinated noteholders) but not to the general unsecured creditors. Therefore, they argued that they should be

in Class 12 with the general unsecured claims. The Court rejected this argument as well. While the WMB

Noteholders have a claim against WMB based on their debt securities, their claim against the Debtors is for misrepresentation in the purchase of those claims. Therefore,

their claim against the Debtors is a general unsecured claim. Under section 510(b) their claim must be subordinated to all unsecured claims. The Court found that the placement of the WMB

Noteholders in Class 17 was appropriate. 4. Designation of votes

Mr. Thoma says that the Settlement Noteholders votes should be designated under section 1126(e) because of their participation in settlement negotiations and use of insider information they received during the negotiations to trade in the Debtors securities. See, e.g., In re Allegheny Intl, 118 B.R.

282, 289 (Bankr. W.D. Pa. 1990) (designating votes of hedge fund

105

that acquired claims with ulterior motive to seize control of debtor). The Court was unable to consider the evidence offered

by Mr. Thoma, however, because it was hearsay. The Court finds it unnecessary to address this issue, at any rate, because there still is at least one class of impaired creditors voting for the plan without considering the Settlement Noteholders or insider votes. Classes 12 and 17a (who do not

include claims of Settlement Noteholders) voted in favor of the Plan. (Klamser Decl. at 29.) 5. Lack of good faith

Mr. Thoma and an individual shareholder, Mr. Schnabel, each contend that the Plan has not been proposed in good faith because the Debtors did not allow the Equity Committee to participate in the plan negotiations and did not protect the shareholders interests. however. The Court finds no evidence of lack of good faith, Simply because the Debtors were not able to achieve a

greater recovery in the Global Settlement, does not mean that they did not meet their fiduciary duty to all constituents. More

than mere innuendo and speculation is needed to establish a lack of good faith. 6. Lack of notice

One of the individual shareholders, Mr. Schnabel, asserts that the Plan cannot be confirmed because the Debtors did not give proper notice to foreign shareholders. (D.I. # 5964.) The

106

Debtors notice and claims agent testified that the notice provided was in accordance with the Courts voting procedures order and was similar to procedures used in other cases. Tr. 12/3/2010 at 175.) (Hrg

Specifically, he testified that notice

was provided to the registered owner of the securities, which often was a broker or other financial institution but not the beneficial owner. (Id. at 824-30.) He stated that the Debtors

did not have any record of the beneficial owners and had to rely on the brokers to assure that notice was provided to the beneficial owners. (Id. at 826-27.)

The Court concludes that proper notice was provided by the Debtors and that any failure of any shareholder to receive actual notice was not attributable to the Debtors. 7. Post-confirmation process

The Equity Committee also complains that there is no provision in the Plan for its continued existence after confirmation. Because any distribution to preferred shareholders

depends on what the Liquidating Trustee can recover, the Equity Committee contends that it should have a supervisory role or at least the ability to seek relief in this Court if the Liquidating Trustee is not performing. The Court agrees with the Equity

Committee that it should continue to have a role, albeit limited, to protect the interests of the shareholders. The Plan Objectors also complain about the makeup of the

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Board of the Reorganized Debtor, noting that it was entirely comprised of representatives of the Settlement Noteholders. (Hrg Tr. 12/2/2010 at 152-54; D.I. # 6188.) The Settlement

Noteholders argue that because they will be the majority shareholders initially as a result of the rights offering, it is appropriate that they should control the Board. The Plan

Supporters note that the Plan has a mechanism to change the Board in six months to allow for a change in the shareholder constituency as a result of other creditors election to take stock in lieu of cash. (Ex. D-2 at 42.4.) The Court agrees

that the Plan mechanism for selection of the Board is fair. The Plan Objectors also complain that the Debtors have designated their CRO as the Liquidating Trustee. 102.) (Ex. D-5 at

There does not appear to be any mechanism for replacement (Id.) The

of the Liquidating Trustee unless he resigns or dies.

Court agrees with the Plan Objectors that there should be some mechanism for replacement of the Liquidating Trustee by the beneficiaries of the Trust. 8. Payment of fees of settling parties

The Plan Objectors also object to the provision of the Plan that provides that fees of the Indenture Trustees, the Settlement Noteholders, and the Liquidating Trustee will be paid without notice or approval of the Court. (Ex. D-2 at 43.18.) The

Court agrees that this provision violates section 1129(a)(4),

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which requires that [a]ny payment made or to be made by the proponent, by the debtor, or by a person issuing securities or acquiring property under the plan, for services or for costs and expenses in or in connection with the case, or in connection with the plan and incident to the case, has been approved by, or is subject to approval of, the court as reasonable. 1129(a)(4). 11 U.S.C.

Therefore, the Plan must provide that such fees are

to be approved by the Court as reasonable before they are paid.

III. CONCLUSION For the foregoing reasons, the Court will deny confirmation of the Plan because of the deficiencies identified above. An appropriate Order is attached.

DATED: January 7, 2011

BY THE COURT:

Mary F. Walrath United States Bankruptcy Judge

109

EXHIBIT B

THE UNITED STATES BANKRUPTCY COURT FOR THE DISTRICT OF DELAWARE In re: WASHINGTON MUTUAL, INC., et al., Debtors. ) ) ) ) ) Chapter 11 Case No. 08-12229 (MFW) Jointly Administered

OPINION1 Before the Court is the request of Washington Mutual, Inc. (WMI) and WMI Investment Corp. (collectively the Debtors) for confirmation of the Modified Sixth Amended Joint Plan of Affiliated Debtors (the Modified Plan). For the reasons stated

below, the Court will deny confirmation of the Modified Plan.

I.

BACKGROUND WMI is a bank holding company that formerly owned Washington

Mutual Bank (WMB).

WMB was the nations largest savings and

loan association, having over 2,200 branches and holding $188.3 billion in deposits. Beginning in 2007, revenues and earnings

decreased at WMB, causing WMIs asset portfolio to decline in value. By September 2008, in the midst of a global credit

crisis, the ratings agencies had significantly downgraded WMIs and WMBs credit ratings. A bank run ensued; over $16 billion in

This Opinion constitutes the findings of fact and conclusions of law of the Court pursuant to Rule 7052 of the Federal Rules of Bankruptcy Procedure, which is made applicable to contested matters by Rule 9014 of the Federal Rules of Bankruptcy Procedure.

deposits were withdrawn from WMB in a ten-day period beginning September 15, 2008. On September 25, 2008, WMBs primary regulator, the Office of Thrift Supervision (the OTS), seized WMB and appointed the Federal Deposit Insurance Corporation (the FDIC) as receiver. The FDICs takeover of WMB marked the largest bank failure in the nations history. On the same day, the FDIC sold substantially

all of WMBs assets, including the stock of WMBs subsidiary, WMB fsb, to JPMorgan Chase Bank, N.A. (JPMC) through a Purchase & Assumption Agreement (the P&A Agreement). Under the P&A

Agreement, JPMC obtained substantially all of the assets of WMB for $1.88 billion plus the assumption of more than $145 billion in deposit and other liabilities of WMB. The FDIC, as the

receiver of WMB, retained claims that WMB held against others. On September 26, 2008, the Debtors filed petitions under chapter 11 of the Bankruptcy Code. Early in the bankruptcy case

disputes arose among the Debtors, the FDIC, and JPMC regarding ownership of certain assets and various claims that the parties asserted against each other. Those disputes (and disputes

between the Debtors and other claimants) were the subject of litigation in this Court,2 as well as in the United States

See, e.g., Black Horse Capital LP, et al. v. JPMorgan Chase Bank, N.A., Bankr. No. 08-12229, Adv. No. 10-51387 (Bankr. D. Del. July 6, 2010) (the TPS Adversary); Broadbill Investment Corp. v. Wash. Mut., Inc., Bankr. No. 08-12229, Adv. No. 10-50911 (Bankr. D. Del. Apr. 12, 2010) (the LTW Adversary); Wash. Mut., 2

District Court for the District of Columbia (the DC Court),3 and in the Federal Court of Claims.4 On March 12, 2010, the parties announced that they had reached a global settlement agreement (the GSA). The GSA

resolved issues among the Debtors, JPMC, the FDIC in its corporate capacity and as receiver for WMB, certain large creditors (the Settlement Noteholders),5 certain WMB Senior Noteholders, and the Creditors Committee. The GSA was

incorporated into the Sixth Amended Plan which was originally filed on March 26, 2010, and modified on May 21 and October 6, 2010. Hearings on confirmation of the Sixth Amended Plan, as well as argument on summary judgment motions in the related LTW and TPS Adversaries, were held on December 1-3 and 6-7, 2010. The

Inc. v. JPMorgan Chase Bank, N.A., Bankr. No. 08-12229, Adv. No. 09-50934 (Bankr. D. Del. Apr. 27, 2009); JPMorgan Chase Bank, N.A. v. Wash. Mut., Inc., Bankr. No. 08-12229, Adv. No. 09-50551 (Bankr. D. Del. Mar. 24, 2009). Am. Nat. Ins. Co. v. JPMorgan Chase & Co., 705 F. Supp. 2d 17, 21 (D.D.C. 2010) (the ANICO Litigation); Wash. Mut., Inc. v. F.D.I.C., No. 1:09-cv-00533 (D.D.C. January 7, 2010). Anchor Savings Bank FSB v. United States, No. 95-039C (Fed. Cl. 1995) (hereinafter the Anchor Litigation); American Savings Bank, F.A. v. United States, No. 92-872C (Fed. Cl. 1992) (hereinafter the American Savings Litigation). The Settlement Noteholders are Appaloosa Management, L.P. (Appaloosa), Aurelius Capital Management LP (Aurelius), Centerbridge Partners, LP (Centerbridge), and Owl Creek Asset Management, L.P. (Owl Creek), and several of their respective affiliates. 3
5 4 3

matter was taken under advisement.

In an Opinion and Order dated

January 7, 2011, the Court concluded that the GSA was fair and reasonable, but declined to confirm the Debtors Sixth Amended Plan because of certain deficiencies. In re Wash. Mut., Inc.,

442 B.R. 314, 344-45, 365 (Bankr. D. Del. 2011) (the January 7 Opinion). By separate Opinion and Order, the Court found that

certain purported holders of the Trust Preferred Securities (the TPS) no longer had any interest in the TPS because their interests had been converted to interests in preferred stock of WMI. 2011). In re Wash. Mut., Inc., 442 B.R. 297, 304 (Bankr. D. Del. In another Opinion and Order issued that day, the Court

held that it was unable to grant WMIs motion for summary judgment in the LTW Adversary, because there are genuine issues of material fact in dispute. In re Wash. Mut., Inc., 442 B.R. Trial on the LTW Adversary

308, 313-14 (Bankr. D. Del. 2011).

has been scheduled for September 12-14, 2011. The Sixth Amended Plan and the GSA were modified on March 16 and 25, 2011, in an attempt to address the Courts concerns expressed in the January 7 Opinion. (D 255; D 253.)6 The

Modified Plan is supported by the Debtors, JPMC, the FDIC, the

References to pleadings on the Docket at D.I. #; the Transcripts of the hearings are Tr. date; the Debtors trial exhibits are D #; the Debtors demonstrative exhibits are D Demo #; the Equity Committees exhibits are EC #; Aurelius exhibits are Au #; the TPS Consortiums exhibits are TPS #; the Appaloosa/Owl Creek exhibits are AOC #; and the WMI Senior Noteholders Group exhibits are WMI NG #. 4

Creditors Committee, the WMI Senior Noteholders Group, the Plaintiffs in the ANICO Litigation, and the Indenture Trustees of the Senior, the Senior Subordinated, and the PIERS7 (collectively, the Plan Supporters).8 The Modified Plan is

still opposed by the Equity Committee, the putative holders of the TPS,9 holders of Litigation Tracking Warrants (the LTW Holders), certain WMB Noteholders, Normandy Hill Capital L.P., and several individual shareholders and creditors10 (collectively, the Plan Objectors). Hearings were held on July

13-15 and 18-21, 2011, to consider confirmation of the Modified Plan. Post-hearing briefs were filed by interested parties on

August 10, 2011, and oral argument was heard on August 24, 2011. The matter is now ripe for decision.

The PIERS are Preferred Income Equity Redeemable Securities issued by the Washington Mutual Capital Trust 2001 (WMCT 2001"). The proceeds received by WMCT 2001 were used to purchase junior subordinated deferrable interest debentures issued by WMI. (See WMI NG 7.) Many of the Plan Supporters do, however, request certain changes to the Modified Plan, some of which conflict with other requested changes. The TPS holders have now divided into two groups, with separate counsel, making separate arguments. They are referred to herein as the TPS Group and the TPS Consortium. The individual Plan Objectors include Philipp Schnabel, William Duke, James Berg, Kermit Kubitz, Charles McCurry, and Bettina M. Haper. 5
10 9 8

II.

JURISDICTION Congress has legislated that the Bankruptcy Court has core

subject matter jurisdiction over approval of settlements of claims and counterclaims and confirmation of plans of reorganization. 28 U.S.C. 1334 & 157(b)(2)(A), (B), (C), (K),

(L), (M), (N), & (O). The TPS Consortium contends, however, that the Court cannot enter a final order on confirmation for two reasons. TPS Consortium argues that the Bankruptcy Court lacks jurisdiction to confirm the Modified Plan because to do so the Court must decide the estates claims against JPMC and the FDIC, over which only an Article III court has jurisdiction. Marshall, 131 S. Ct. 2594, 2609 (2011). Stern v. First, the

At the commencement of

the confirmation hearings, the TPS holders acknowledged that the Bankruptcy Court had authority to conduct the confirmation hearing but asserted that the Court could not enter a final order. Instead, the TPS Consortium contended that the Bankruptcy

Court must present proposed findings of fact and conclusions of law to the District Court, for consideration de novo. 157(c)(1). Second, the TPS Consortium argues that the Bankruptcy Court has been divested of jurisdiction over the disputed TPS because the TPS Consortium has appealed the Courts ruling in the TPS Adversary that they no longer have any interest in the TPS but 28 U.S.C.

only have an interest in WMI preferred stock. B.R. at 304.

Wash. Mut., 442

It contends that, as a result, the Court must order

that the TPS be escrowed (and not transferred to JPMC pursuant to the GSA and the Modified Plan) until the District Court rules on the pending appeal. A. Effect of Stern v. Marshall

The TPS Consortium argues that under the Supreme Courts recent decision in Stern v. Marshall, the Bankruptcy Court does not have jurisdiction over the claims the estate has against JPMC or the FDIC (and does not have jurisdiction to approve any settlement of those claims) because the underlying claims are the stuff of the traditional actions at common law tried by the courts at Westminster and must be decided by an Article III court. 131 S. Ct. at 2609 (quoting N. Pipeline Constr. Co. v. The TPS

Marathon Pipe Line Co., 458 U.S. 50, 90 (1982)).

Consortium argues that Stern v. Marshall is directly applicable in this case because the underlying disputes with JPMC and the FDIC are typical of causes of action which only Article III courts can adjudicate, involving state corporate law, tort law, fraudulent conveyance law, as well as federal intellectual property and tort claims. The TPS Consortium argues that this is

not a matter within the particularized area of law with which bankruptcy courts typically deal and are considered experts at resolving. Id. at 2615. It contends that this is so even though

Congress has expressly granted core jurisdiction to this Court pursuant to section 157(b)(2). Id. at 2608 (holding that

bankruptcy court did not have jurisdiction over state law counterclaim to a filed proof of claim despite core jurisdiction designation in 28 U.S.C. 157(b)(2)(C)). The Plan Supporters disagree with the TPS Consortiums reading of the Stern v. Marshall decision. They note that the

Supreme Court itself recognized the narrowness of its ruling. 131 S. Ct. at 2620 (finding that Congress had exceeded Article IIIs limitation in one isolated respect and finding only that the bankruptcy court lacked authority to enter a final judgment on a counterclaim arising under state law which did not need to be resolved in order to rule on the proof of claim). See also

Salander OReilly Galleries, No. 07-30005, 2011 WL 2837494, at *6 (Bankr. S.D.N.Y. July 18, 2011) (concluding that the Supreme Courts opinion in Stern v. Marshall emphasizes that it is limited to the particular circumstances surrounding the estates counterclaim in that case). In Stern v. Marshall, the Supreme Court held that to find bankruptcy court jurisdiction the court must consider whether the action at issue stems from the bankruptcy itself or would necessarily be resolved in the claims allowance process. Ct. at 2618. The concurring opinion also suggested that in 131 S.

instances where there is a firmly established historical

practice allowing non-Article III judges to make a determination, they should be permitted to continue doing so. Id. at 2621 (concurring opinion). The Court concludes that the Stern v. Marshall decision does not support the TPS Consortiums contention that the Court lacks jurisdiction over the GSA or confirmation of the Modified Plan for several reasons. 1. Historical context

Approval of settlements by bankruptcy courts is a firmly established historical practice that stretches back before the enactment of the Bankruptcy Code to the Bankruptcy Act and, therefore, the bankruptcy court may continue to exercise that jurisdiction. Id.

Currently, Rule 9019 provides the court with the authority to approve a compromise or settlement. 9019(a). Fed. R. Bankr. P.

Bankruptcy Rule 9019 is the successor to Bankruptcy

Rule 919, which provided on application by the trustee or receiver and after hearing on notice to the creditors . . . the court may approve a compromise or settlement. 919(a) (1982) (repealed). Fed. R. Bankr. P.

See Magill v. Springfield Marine Bank

(In re Heissinger Res. Ltd.), 67 B.R. 378, 382 (C.D. Ill. 1986) (noting that Bankruptcy Rule 9019 is similar to Rule 919, which had been interpreted to give the bankruptcy court broad authority to approve compromises). Rule 919 was based on section 27 of

the Bankruptcy Act which stated that the receiver or trustee may, with approval of the court, compromise any controversy arising in the administration of the estate upon such terms as he may deem for the best interest of the estate. (1976) (repealed 1978). Compromises were routinely approved under the Bankruptcy Act and continue to be approved by bankruptcy courts in the context of almost every bankruptcy case. See, e.g., Protective Comm. for 11 U.S.C. 50

Indep. Stockholders of TMT Trailer Ferry, Inc. v. Anderson, 390 U.S. 414, 424 (1968) (holding that [c]ompromises are a normal part of the process of reorganization.) (quoting Case v. L.A. Lumber Prods. Co., 308 U.S. 106, 130 (1939)); Myers v. Martin (In re Martin), 91 F.3d 389, 393 (3d Cir. 1996) (To minimize litigation and expedite the administration of a bankruptcy estate, [c]ompromises are favored in bankruptcy. . . . Indeed,

it is an unusual case in which there is not some litigation that is settled between the representative of the estate and an adverse party.) (quoting 9 Collier on Bankruptcy 9019.03[1] (15th ed. 1993)); In re Okwonna-Felix, No. 10-31443-H4-13, 2011 WL 3421561, at *4 (Bankr. S.D. Tex. Aug. 3, 2011) (holding that Stern v. Marshall does not preclude a bankruptcy court from exercising jurisdiction to consider a settlement which is based entirely on federal bankruptcy law (both [Rule 9019] and the case law instructing how to apply the Rule)); In re Drexel

10

Burnham Lambert Grp., Inc., 138 B.R. 723, 758 (Bankr. S.D.N.Y. 1992) (Compromises are favored by the Courts because they allow the estate to avoid the expenses and burdens associated with litigating contested claims.) (citations omitted). See

generally Reynaldo Anaya Valencia, The Sanctity of Settlements and the Significance of Court Approval: Discerning Clarity from Bankruptcy Rule 9019, 78 Or. L. Rev. 425, 431-32 (1999) (The glue that often holds the bankruptcy process together is the ability of parties to resolve disputes by settlement instead of litigation. If bankruptcy judges had to try a much larger

percentage of matters than they currently do, the system would surely bog down. Thus, the sanctity of settlements can hardly be

overemphasized.) (footnotes omitted). Settlements are often included in a plan of reorganization. Valencia, The Sanctity of Settlements, 78 Or. L. Rev. at 447. Indeed, section 1123(b)(3)(A) of the Bankruptcy Code expressly states that a plan may . . . provide for the settlement or adjustment of any claim or interest belonging to the debtor or to the estate. 11 U.S.C. 1123(b)(3)(A). Confirmation of a plan

of reorganization is within the bankruptcy courts core jurisdiction. 28 U.S.C. 157(b)(2)(L). See also In re AOV

Indus., Inc., 792 F.2d 1140, 1145-46 (D.C. Cir. 1986) (The approval of a disclosure statement and the confirmation of a reorganization plan are clearly proceedings at the core of

11

bankruptcy law. . . .

Accordingly, we find that the bankruptcy

court had jurisdiction to approve [them].). 2. Nature of settlement approval

Second, there is a fundamental difference between approval of a settlement of claims (which the Court is being asked to do here) and a ruling on the merits of the claims. See, e.g.,

Matsushita Elec. Indus. Co., Ltd. v. Epstein, 516 U.S. 367, 382 (1996) (holding that a Delaware Chancery Court judgment settling shareholders state and federal claims was entitled to preclusive effective because [w]hile it is true that the state court assessed the general worth of the federal claims in determining the fairness of the settlement, such assessment does not amount to a judgment on the merits of the claims.). As an initial matter, a court does not have to have jurisdiction over the underlying claims in order to approve a compromise of them. See, e.g., Matsushita Elec., 516 U.S. at 381

(holding that [w]hile 27 prohibits state courts from adjudicating claims arising under the Exchange Act, it does not prohibit state courts from approving the release of Exchange Act claims in the settlement of suits over which they have properly exercised jurisdiction, i.e., suits arising under state law or under federal law for which there is concurrent jurisdiction.); Grimes v. Vitalink Commcns Corp., 17 F.3d 1553, 1563 (3d Cir. 1994) (stating that [w]hile this rule of law may seem anomalous

12

at first glance, it is widely recognized that courts without jurisdiction to hear certain claims have the power to release those claims as part of a judgment approving a settlement including federal courts entering judgments that release state claims that they would not have jurisdictional competency to entertain in the first instance because [t]his rule of law serves the important policy interest of judicial economy by permitting parties to enter into comprehensive settlements) (citations omitted). Cf. Musich v. Graham (In re Graham), Adv.

No. 11-01073, 2011 WL 2694146, at *3 n.27 (Bankr. D. Colo. July 11, 2011) (analyzing Stern v. Marshall decision and concluding that bankruptcy court had statutory and constitutional jurisdiction to determine dischargeability of a criminal/tort claim over which it did not have jurisdiction). The standards which a court must apply in considering a settlement establish that the court is not rendering a final decision on the merits of the underlying claims being compromised. See, e.g., TMT Trailer Ferry, 390 U.S. at 424

(finding that a bankruptcy judge should form an educated estimate of the complexity, expense, and likely duration of such litigation, the possible difficulties of collecting on any judgment which might be obtained, and all other factors relevant to a full and fair assessment of the wisdom of the proposed compromise.) (emphasis added); In re W.T. Grant Co., 699 F.2d

13

599, 608 (7th Cir. 1989) (in approving a settlement, the responsibility of the bankruptcy court is not to decide the numerous questions of law and fact raised . . . but rather to canvass the issues and see whether the settlement fall[s] below the lowest point in the range of reasonableness.) (citations omitted); In re Martin, 212 B.R. 316, 319 (B.A.P. 8th Cir. 1997) (stating that it is not necessary for a bankruptcy court to conclusively determine claims subject to a compromise, nor must the court have all of the information necessary to resolve the factual dispute, for by so doing, there would be no need of settlement.). The lowest point in the range of reasonableness is far from the standard required for an Article III court to enter a final determination on the merits of the claims. The Courts

conclusion in the January 7 Opinion was not a decision on the merits of the underlying claims but merely a determination that the settlement of those claims by the Debtors on the terms of the GSA was reasonable. 3. Wash. Mut., 442 B.R. at 345.

Nature of claims compromised

Third, the approval of the GSA in this case is particularly within the core jurisdiction of the Bankruptcy Court because it deals with a determination of what is property of the estate. See 11 U.S.C. 541(a) (stating that [t]he commencement of a case under . . . this title creates an estate [which] is

14

comprised of all the following property, wherever located and by whomever held . . . [including] all legal or equitable interests of the debtor in property.). In this case, the claims which are resolved by the GSA largely relate to who owned specific property: the bank deposits in the name of WMI at WMB and WMB, fsb; the tax refunds due for the consolidated tax group which included WMI and WMB; the TPS; intellectual property; employee related assets (including pension plans and insurance policies); the goodwill litigation that was the subject of the Litigation Tracking Warrants (the LTWs); and various other miscellaneous assets. 44. It is without question that bankruptcy courts have exclusive jurisdiction over property of the estate. See 28 U.S.C. Wash. Mut., 442 B.R. at 330-

1334(e) (stating that the court in which a case under title 11 is commenced or is pending shall have exclusive jurisdiction (1) of all the property, wherever located, of the debtor as of the commencement of such case, and of property of the estate). See

also, Cent. Va. Cmty. Coll. v. Katz, 546 U.S. 356, 363-64 (2006) (stating that [c]ritical features of every bankruptcy proceeding are the exercise of exclusive jurisdiction over all of the debtor's property . . . .). That jurisdiction includes jurisdiction to decide whether disputed property is, in fact, property of the estate. See,

15

e.g., Salander OReilly Galleries, 2011 WL 2837494, at *12-13 (concluding that the bankruptcy court had core jurisdiction to decide priority of estates and creditors asserted interests in a piece of art and denying request for arbitration of issue); Mata v. Eclipse Aerospace, Inc. (In re AE Liquidation, Inc.), 435 B.R. 894, 904-05 (Bankr. D. Del. 2010) (holding that the bankruptcy court had exclusive jurisdiction to determine whether or not disputed aircraft was property of the estate at the time of its sale); Williams v. McGreevey (In re Touch Am. Holdings, Inc.), 401 B.R. 107, 117 (Bankr. D. Del. 2009) (stating approvingly that [v]arious courts have concluded that matters requiring a declaration of whether certain property comes within the definition of property of the estate as set forth in Bankruptcy Code 541 are core proceedings.). For all the above reasons, the Court concludes that it has jurisdiction to decide confirmation of the Modified Plan which incorporates the GSA resolving the disputed claims to putative property of the Debtors estate. B. Effect of Appeal of TPS Ruling

The TPS Consortium argues further that the Court is precluded from confirming the Modified Plan by the Divestiture Rule which provides that an appeal divests the lower court of any further jurisdiction over the subject of the appeal. See, e.g.,

Griggs v. Provident Consumer Disc. Co., 459 U.S. 56, 58 (1982)

16

(The filing of a notice of appeal is an event of jurisdictional significance - it confers jurisdiction on the court of appeals and divests the district court of its control over those aspects of the case involved in the appeal.); Venen v. Sweet, 758 F.2d 117, 120-21 (3d Cir. 1985) (Divest means what it says - the power to act, in all but a limited number of circumstances, has been taken away and placed elsewhere.); Bialac v. Harsh Inv. Corp. (In re Bialac), 694 F.2d 625, 627 (9th Cir. 1982) (Even though a bankruptcy court has wide latitude to reconsider and vacate its own prior decisions, not even a bankruptcy court may vacate or modify an order while on appeal.); In re Whispering Pines Estates, 369 B.R. 752, 757 (B.A.P. 1st Cir. 2007) (It is well established that the filing of a notice of appeal is an event of jurisdictional significance in which a lower court loses jurisdiction over the subject matter involved in the appeal. The

purpose of the general rule is to avoid the confusion of placing the same matter before two courts at the same time and preserve the integrity of the appeal process.) (citations omitted); In re DeMarco, 258 B.R. 30, 32 (Bankr. M.D. Fla. 2000) (The parties appear to agree that the Court does not have jurisdiction to consider matters which would interfere with the appeal and the jurisdiction of the appellate court, but that the Court does have jurisdiction over, and should proceed with, other aspects of the case.); In re Strawberry Square Assocs., 152 B.R. 699, 701

17

(Bankr. E.D.N.Y. 1993) (noting that the bankruptcy court [may not] exercise jurisdiction over those issues which, although not themselves on appeal, nevertheless so impact those on appeal as to effectively circumvent the appeal process.). The TPS Consortium specifically objects to the provisions of the Modified Plan that authorize the transfer of the TPS from the Debtors to JPMC11 because ownership of the TPS is the subject of the appeal. The TPS Consortium argues that the Modified Plan

must recognize the limits of this Courts ability to deal with the TPS by providing that the TPS will be held in escrow until the appeal is resolved. The Plan Supporters disagree with the TPS Consortiums articulation of the Divestiture Rule as applied in bankruptcy cases. They note that in the bankruptcy context the appeal of

one ruling does not mean that the entire bankruptcy case is stayed. The Bankruptcy Rules make this clear by providing that

during an appeal, the bankruptcy judge may suspend or order the continuation of other proceedings in the case under the Code or make any other appropriate order during the pendency of an appeal

Specifically, the TPS Consortium argues that the Modified Plan provides that the TPS will be transferred pursuant to section 363 to JPMC, which will be a good faith purchaser and entitled to the protections of section 363(m). (D 255 at 2.1(c)(i) & 38.1(a)(10).) The Modified Plan also provides that the Debtors, JPMC, and the FDIC will be released from any claims related to the TPS which are held by any third party claiming through the Debtors. (Id. at 2.1(c), 23.2, 43.2, 43.6, 43.7, 43.9 & 43.12; D 255H at 2.3, 3.2.) 18

11

on such terms as will protect the rights of all parties in interest. Fed. R. Bankr. P. 8005. See also In re Hagel, 184

B.R. 793, 798-99 (B.A.P. 9th Cir. 1995) (holding that Rule 8005 does not provide that the bankruptcy court must stay all proceedings but that it has discretion to stay any proceedings). The Plan Supporters argue that contrary to the suggestion of the TPS Consortium, absent a stay pending appeal,12 the lower court may take all actions necessary to implement or enforce the order from which an appeal has been taken. See, e.g., Hope v.

Gen. Fin. Corp. of Ga. (In re Kahihikolo), 807 F.2d 1540, 1542-43 (11th Cir. 1987) (dismissing appeal as moot because, absent stay pending appeal, the secured lender was free to treat order granting relief from stay as final and sell the collateral); In re VII Holdings Co., 362 B.R. 663, 666 n.3 (Bankr. D. Del. 2007) (holding that absent a stay pending appeal, [the lower court] may retain jurisdiction to decide issues and proceedings different from and collateral to those involved in the appeal . . . . [and] may also enforce the order or judgment appealed.)

The Plan Supporters argue that the logical extension of the TPS Consortiums argument would effectively be to eliminate the need to ask for (or to comply with the requirements of) a stay pending appeal. They contend that to get a stay pending appeal of the order entered in the TPS Adversary, the TPS Consortium would have to post a supersedeas bond. Fed. R. Bankr. P. 7062. 10 Collier on Bankruptcy 8005.03 (2011) (the procedure mandates that an appellant desiring the stay of a [judgment] determining an interest in property should present to the bankruptcy court a supersedeas bond in an amount adequate to protect the appellee). 19

12

(citations omitted); In re Bd. of Dir. of Hopewell Intl Ins. Ltd., 258 B.R. 580, 583 (Bankr. S.D.N.Y. 2001) (holding that a bankruptcy court retains jurisdiction, while an appeal is pending and in the absence of a stay, to enforce the [appealed] order or judgment). The Court agrees with the Plan Supporters. The TPS

Consortiums argument that the Divestiture Rule provides that an appeal divests the bankruptcy court of all jurisdiction over the matter is too broad. Pines: As courts have noted, however, a bankruptcy case typically raises a myriad of issues, many totally unrelated and unconnected with the issues involved in any given appeal. The application of a broad rule that a bankruptcy court may not consider any request filed while an appeal is pending has the potential to severely hamper a bankruptcy courts ability to administer its cases in a timely manner. 369 B.R. at 758. The correct statement of the Divestiture Rule is that so long as the lower court is not altering the appealed order, the lower court retains jurisdiction to enforce it. See, e.g., In re As explained by the Court in Whispering

Dadashti, No. CC-07-1311, 2008 WL 8444787, at *6 (B.A.P. 9th Cir. Feb. 12, 2008) (stating that when there is no stay pending appeal, the bankruptcy court retains jurisdiction to enforce an order that is on appeal, on condition that in doing so, the bankruptcy court does not significantly alter or expand upon the terms of that order.); Hagel, 184 B.R. at 798 (courts have 20

recognized a distinction between acts undertaken to enforce the judgment which are permissible, and acts which expand upon or alter it, which are prohibited.). The cases on which the TPS Consortium relies do not change this general rule and are easily distinguishable.13 In

Whispering Pines, for example, the lower court modified the order that was on appeal (confirmation of the lenders plan that gave the trustee time to sell the property before the lender could foreclose on it) by granting the lender immediate relief from the stay to foreclose. 369 B.R. at 759. In Bialac, the bankruptcy

court enjoined the secured lender from foreclosing while the order granting the lender relief from the stay to foreclose was on appeal. 694 F.2d at 627. In both instances, the bankruptcy

court was not merely enforcing the appealed order but was

Most of the cases cited by the TPS Consortium merely stand for the proposition that approval of a settlement is a final order for purposes of appeal or has res judicata effect. See, e.g., United States v. Kellogg (In re West Tex. Mktg. Corp.), 12 F.3d 497, 501 (5th Cir. 1994) (concluding that while bankruptcy court approval of settlement was not a final order because no separate order was entered on the docket other than a dismissal of the adversary, the ruling was entitled to res judicata effect); SEC v. Drexel Burnham Lambert Grp., Inc. (In re Drexel Burnham Lambert Grp., Inc.), 960 F.2d 285, 289 (2d Cir. 1992) (finding that order approving settlement agreement, which was contingent on later confirmation of a plan, was final for purposes of appeal); In re Beaulac, 294 B.R. 815, 818 (B.A.P. 1st Cir. 2003) (considering order approving settlement as final for purposes of appeal). 21

13

modifying it.14

In DeMarco, the bankruptcy court acknowledged

that it should consider confirmation of the debtors chapter 13 plan if it did not interfere with the appeal but declined to do so because it found that confirmation might render the appeal moot. 258 B.R. at 36.

Unlike the Court in DeMarco, the Court declines to exercise its discretion under Rule 8005 not to consider the Modified Plan simply because it might render moot the TPS Consortiums appeal of the decision in the TPS Adversary. The TPS Consortium could To do as the

have avoided this by seeking a stay pending appeal.

TPS Consortium requests would preclude the Court from dealing with confirmation of any plan of reorganization that implicates the TPS and possibly stall these bankruptcy cases indefinitely. Further, in considering confirmation of the Modified Plan, the Court is not being asked to modify the order that is on appeal (which held that the Debtors own the TPS). 442 B.R. at 305-06. Wash. Mut.,

Rather, the Court is being asked to enforce

its order by approving the Modified Plan that provides for the transfer or sale of the TPS by the Debtors to JPMC as part of the GSA. Therefore, the Court concludes that it has jurisdiction to

The other cases cited by the TPS Consortium are also inapplicable. See, e.g., Griggs, 459 U.S. at 61 (holding that notice of appeal filed while motion to alter judgment was pending was a nullity); Venen, 758 F.2d at 120, 123 (holding that trial court did not have jurisdiction to grant motion for reconsideration and vacate order that was on appeal). 22

14

consider confirmation of the Modified Plan, including the transfer of the TPS, notwithstanding the pendency of an appeal from its prior order determining that the Debtors own them. See,

e.g., Kahihikolo, 807 F.2d at 1542-43; VII Holdings, 362 B.R. at 666 n.3; Bd. of Dir. of Hopewell Intl, 258 B.R. at 583.

III. DISCUSSION A. Modifications Made per January 7 Opinion

The Plan Supporters assert that the Debtors have made corrections to the Modified Plan to fix all of the deficiencies identified by the Court in its January 7 Opinion. Specifically,

they contend that (1) the release, injunction, and exculpation provisions of the Modified Plan now are limited to releases by the Debtors, (2) the release and exculpation language and parties have been changed to reflect only those the Court felt were entitled to be released or exculpated, and (3) the activities related to the LTWs have been excluded from the exculpation provision. Compare Wash. Mut., 442 B.R. at 348-56 with D 255 at

28.15, 43.5, 43.7, 43.8, 43.9, 43.12. The Modified Plan also contains provisions for Court approval of fees to be paid by the Debtors. 365 with D 255 at 3.2, 32.12 & 43.18. Compare 442 B.R. at

The LTW Holders

complain, however, that the fees of some of the parties (notably the WMB Noteholders and the Liquidating Trustee) are being paid

23

without Court approval.

(D 255 at 21.1, 28.11.)

The Court 11

agrees that Court approval of those fees is also required. U.S.C. 1129(a)(4). In addition, the Modified Plan provides that late-filed claims will be paid before post-petition interest is paid on unsecured claims. Ex. G.

Compare 442 B.R. at 357 with D 255 at 16.2 &

In the Modified Plan, the Debtors also revised the

definition of unsecured claims and provided that if the LTW Holders are determined to hold allowed unsecured claims that are not subordinated under section 510, then they will be treated in Class 12. Compare 442 B.R. at 357 with D 255 at 1.209 & 25.1.

The Debtors also solicited stock elections from the LTW Holders and other disputed claims, so that those creditors would have the same rights as others in the event their claims are allowed. Compare 442 B.R. at 362 with D.I. 7081. The Debtors did not, however, include in the Modified Plan that smaller PIERS holders would have the same right to participate in the rights offering as the larger PIERS holders. 442 B.R. at 360-61. Instead the rights offering was eliminated.

The Debtors explained that this was done because to expand the rights offering to include all PIERS would have resulted in the Reorganized Debtor being a public company, requiring the Debtors to update their filings with the SEC at the cost of millions.

24

(See Tr. 2/18/2011 at 80-81.)15 Finally, the Modified Plan provides that the Equity Committee will have a representative on the Liquidating Trust board and that there will be a mechanism for removal of the Liquidating Trustee. 8.2 & 35.2. Compare 442 B.R. at 364-65 with D 255 at

However, the Modified Plan provides only for removal

of the Liquidating Trustee for fraud, misconduct, or breach of fiduciary duty. (D 255 at 8.2.) The Court believes that the

Liquidating Trustee must be removable at the discretion of a majority of the Trust Advisory Board. In addition, the

composition of the Trust Advisory Board must reflect the constituents who hold Liquidating Trust Interests. When

creditors are paid in full, their Liquidating Trust Interests will be canceled and preferred shareholders will be issued Liquidating Trust Interests. (Tr. 7/13/2011 at 98; D 255 at

6.3, 7.3, 16.3, 18.3, 19.3, 20.3, 22.1, 22.2, 23.1 & 24.1.) Consequently, the Trust must provide that when creditors lost their Liquidating Trust Interests, the creditors representatives on the Board will be replaced by representatives selected by equity.

It appears, nonetheless, that because stock is being issued to creditors under the Modified Plan, the Reorganized Debtor may be a public company. The Debtors have now changed their position and contend that they will not be required to update their filings with the SEC. See infra Part F. 25

15

B.

Reasonableness of the GSA

In the January 7 Opinion, the Court concluded that the GSA was reasonable. 442 B.R. at 345. After reviewing all of the

claims being resolved in the GSA, the Court was not convinced that the Debtors had a probability of achieving a significantly better result if they were to continue to litigate than they will receive under the GSA considering the claims separately or holistically. Id. at 344. The Court further concluded that it

is not possible to say that any judgment against JPMC or the FDIC would not face difficulty in collection, especially if it is in the billions of dollars as the Plan Objectors contend. Id. In

particular, the Court found that the significant counterclaims raised by JPMC and the FDIC against the Debtors (in excess of $54 billion) added to the difficulties of collecting from them. The Court also concluded that the complexity of the various litigation and its interrelatedness, favored a settlement. at 345. The Plan Supporters contend that the January 7 Opinion is the law of the case and may not be altered in the absence of an intervening change in the law or new evidence. See, e.g., Hayman Id. Id.

Cash Register Co. v. Sarokin, 669 F.2d 162, 169 (3d Cir. 1982); In re Ameriserve Food Distrib., Inc., 315 B.R. 24, 36 (Bankr. D. Del. 2004). They contend that no new evidence or intervening

change in the law has been presented which merits reconsidering

26

the Courts conclusion that the GSA is reasonable. The TPS Consortium disagrees. It contends that the Courts

January 7 Opinion was not a final order on this issue because the Court denied confirmation rather than granting it. See, e.g.,

Gander Mountain Co. v. Cabelas, Inc., 540 F.3d 827, 830 (8th Cir. 2008) (holding that [a] district courts comments during oral argument do not constitute a final order subject to the lawof-the-case doctrine); Cable v. Millennium Digital Media Sys., L.L.C. (In re Broadstripe, L.L.C.), 435 B.R. 245, 256 (Bankr. D. Del. 2010) (holding that ruling by state court on motion to expedite proceeding was not law of the case on the merits of the claim). The Court finds the TPS Consortiums cases distinguishable and agrees with the Plan Supporters that its ruling on the reasonableness of the GSA rendered as part of the January 7 Opinion is law of the case because it decided a disputed issue. Cf. Drexel Burnham, 960 F.2d at 289 (finding that order approving settlement agreement, which was contingent on later confirmation of a plan, was final for purposes of appeal). The Equity

Committee agreed that the January 7 Opinions ruling on reasonableness of the GSA would not be retried. 51-52.) (Tr. 1/20/11 at

The Equity Committee does argue, however, that

intervening events have occurred which require reconsideration of this Courts decision that the GSA is reasonable.

27

1.

Business tort claims

On February 16, 2009, certain holders of WMI common stock and debt securities issued by WMI and WMB16 filed the ANICO Litigation against JPMC in state court in Galveston County, Texas, alleging misconduct by JPMC in connection with the seizure of WMB and the P&A Agreement. (D.I. 6083 at 23.) On March 25,

2009, the ANICO Litigation was removed and transferred to the DC Court on motion of JPMC and the FDIC Receiver as intervening defendant. (Id. at 24.) On April 13, 2010, the DC Court

dismissed the ANICO Litigation finding that under the Financial Institutions Reform Recovery and Enforcement Act of 1989 (FIRREA), the receivership was the exclusive claims process for claims relating to the sale of WMB. Am. Nat. Ins. Co. v.

JPMorgan Chase & Co., 705 F. Supp. 2d 17, 21 (D.D.C. 2010). That order was recently reversed on June 24, 2011, by the Court of Appeals for the D.C. Circuit. Am. Natl Ins. Co. v.

FDIC, 642 F.3d 1137, 1142 (D.C. Cir. 2011) (holding that because the suit is against a third-party bank for its own wrongdoing, not against the depository institution for which the FDIC is receiver (i.e., Washington Mutual), their suit is not a claim within the meaning of [FIRREA] and thus is not barred) (citing

Since the suit was filed, all claims based on WMI stock or debt have been voluntarily dismissed and the ANICO Plaintiffs currently assert rights only as WMB bondholders. Am. Natl Ins. Co. v. FDIC, 642 F.3d 1137, 1140 (D.C. Cir. 2011). 28

16

Rosa v. Resolution Trust Corp., 938 F.2d 383, 394 (3d Cir. 1991) (holding that claims for damages against assuming bank for its own acts did not fall within jurisdictional bar because they did not seek payment from assets of the receiver)). As a result, the

Plan Objectors contend that the business tort claims which the Debtors have against JPMC are not barred and are potentially valuable assets which are being released for no consideration under the GSA. The Court disagrees. Despite the recent ANICO decision, the

likelihood of success on the Debtors business tort claims, the delay and cost of pursuing them, their complexity, and the possible difficulties of collecting all militate in favor of approval of the GSA. See, e.g., TMT Trailer Ferry, 390 U.S. at

424; In re RFE Indus., Inc., 283 F.3d 159, 165 (3d Cir. 2002); Martin, 91 F.3d at 393. With respect to the first factor, even the D.C. Circuit acknowledged that there were knotty questions left to be decided in the case, including whether the claims belonged exclusively to the FDIC as the receiver of WMB.17 Am. Natl

JPMC and the FDIC Receiver contend that any derivative claim that WMI may have for alleged harm to WMB is now owned by the FDIC. 12 U.S.C. 1821(d)(2)(A)(i) (providing that the FDIC as receiver succeeds to all rights, titles, powers, and privileges of . . . any stockholder of the bank). See also Pareto v. F.D.I.C., 139 F.3d 696, 700 (9th Cir. 1998) (holding that 1821(d)(2)(A)(i) vests in the FDIC all rights and powers of a stockholder of a bank to bring a derivative action). 29

17

Ins., 642 F.3d at 1145.

The FDIC Receiver further argues that

the Debtors did not file any claim in the Receivership action based on the alleged business tort claims and those claims are, therefore, time-barred. Cf. 12 U.S.C. 1464(d)(2)(B) (any

claims challenging the appointment of the FDIC as Receiver must be brought against the OTS within 30 days of the appointment). Even if the Debtors do have an independent business tort claim against JPMC, however, they still face significant obstacles in successfully prosecuting it. Any claim for damages

would require that the Debtors prove that they were solvent18 at the time of the seizure of WMB, a position diametrically opposed to assertions they would need to prove in the preference and fraudulent conveyance claims which are also waived as part of the GSA. The Debtors would also have to establish the facts

necessary to win those claims, namely that JPMC fraudulently caused the decline in value of WMB in order to buy it at a discount price.

The TPS Consortium asks the Court to consider a summary of and excerpts from the Senate Report issued after an investigation into the WMB collapse, which it contends shows that the Debtors have viable claims against their directors and officers. That Report, however, also noted that the market value of the Debtors was based on misinformation, suggesting that the Debtors might have been insolvent. (D.I. 8312 at Ex. A p. 4.) This would defeat any claim that the Debtors might have on the business tort claims, because the Debtors would have suffered no damages. 30

18

Further, the difficulties in collecting any judgment against JPMC have not changed since the Courts January 7 Opinion. The

GSA resolves not only the Debtors business tort claims but the many disputed claims which involve a multiplicity of issues raising complex arguments about the intersection of bankruptcy law and the regulation of banks. The Supreme Courts recent

decision in Stern v. Marshall also makes it likely that, in the absence of a global settlement, the various claims would have to be litigated in numerous state and federal courts, which might result in conflicting decisions. Continuing the litigation on

the disputed claims will cause at least a 3-4 year delay in any distribution to creditors, increase post-petition interest and professional fees (which are currently running at the monthly rate of $30 million and $10 million, respectively), and involve complex issues including sovereign immunity (affecting even whether discovery could be taken of the government agents), pre-emption, and jurisdiction. Given all these factors, the fact that one part of the GSA is now more unsettled than it was does not change the Courts mind about the overall reasonableness of the GSA. In fact, it

reinforces the Courts belief that this is precisely the type of multi-faceted, multi-district litigation that calls for a global settlement. The Court, therefore, reaffirms its conclusion that

the GSA provides a reasonable resolution in light of the possible

31

results of the multiple complex litigation, the likely difficulties in collection, the expense inherent in any further delay, and the paramount interests of the stakeholders. at 345. 2. Other objections to reasonableness 442 B.R.

Many of the individual shareholders who object to confirmation of the Modified Plan do so based on the assertion that the GSA should not be approved. Some of the objections are

based on alleged facts for which no evidence was presented at the confirmation hearings.19 support in the record. Many of the individual objectors also repeat arguments presented at the confirmation hearing in December which the Court already addressed in its January 7 Opinion. Absent changed facts See, e.g., Those objections must fail for lack of

or law, the Court will not reconsider that decision. Hayman, 669 F.2d at 169; Ameriserve, 315 B.R. at 36.

The individual objectors do, however, refer to some issues that the Court can consider. Specifically, they reference some

recent decisional law that they say the Court should consider in determining reasonableness.

These include allegations about the value that JPMC received in acquiring WMB. (D.I. 8407, 8408.) 32

19

a.

Colonial BancGroup decision

The first was a decision in the Colonial BancGroup case in which the Court found that the FDIC did not have the right to set off claims it had against deposits that the debtor had in its former subsidiary bank that had been seized and sold to another bank. In re The Colonial BancGroup, Inc., Bankr. No. 09-32303, This,

2011 WL 239201, at *9 (Bankr. M.D. Ala. Jan. 24, 2011).

they argue, means that the Debtors would have won the fight over who had title to the deposit accounts in WMIs name at WMB. The Court does not find, however, that the Colonial BancGroup decision alters its conclusion on the reasonableness of the GSA for two reasons. First, that decision did not deal with

the claim by the acquiring bank to the deposit accounts but only dealt with the FDIC claim. Id. Second, the Court already

concluded in the January 7 Opinion that the Debtors had a strong likelihood of success on the merits on their claim of ownership to the deposit accounts. 442 B.R. at 331. The Colonial

BancGroup decision merely reinforces that conclusion. b. Team Financial decision

The individual objectors also refer the Court to the decision in Team Financial in which the Bankruptcy Court held that the debtor, not the FDIC, owned a tax refund received by the debtor for its consolidated tax group which included a bank for which the FDIC was the receiver. In re Team Fin., Inc., Bankr.

33

No. 09-10925, 2010 WL 1730681, at *10 (Bankr. D. Kan. Apr. 27, 2010). The Team Financial Court held that the FDIC was limited

to a pre-petition breach of contract claim under the groups tax sharing agreement. Id. at *11.

Again, the Court finds that decision is insufficient to change its mind about the reasonableness of the GSA. In the

January 7 Opinion the Court concluded that the Debtors had a fair likelihood of prevailing on the issue of who owned the tax refunds. 442 B.R. at 333. The Court noted, however, that the

FDIC asserted a claim under the Tax Sharing Agreement between WMI and WMB to the portion of the tax refund which related to WMBs operating losses. Id. Because the estate is solvent and

unsecured creditors are likely to get paid in full, the Court found that the FDICs claim would entitle it to a substantial recovery and, therefore, the Debtors were not likely to obtain a net recovery which is substantially better than the GSA by litigating that issue. c. Id.

Deutsche Bank National Trust Co. decision

The Court is also aware that the DC Court recently denied a motion of the FDIC to dismiss a complaint against it which raised business tort claims arguably similar to the ANICO claims. Deutsche Bank Natl Trust Co. v. FDIC, 1:09-cv-01656 (D.D.C. Aug. 17, 2011). The Court does not consider this relevant to its

consideration of the merits of any claims that the estate may

34

have against the FDIC in this case, however, as the order was not a decision on the merits. For all the above reasons, the Court concludes that there is not any intervening change in the law or facts to cause it to reconsider its conclusion in the January 7 Opinion that the GSA is reasonable. C. Value Distributed Under the Modified Plan

Pursuant to the Modified Plan, stock in WMI will be canceled and stock in reorganized WMI (the Reorganized Debtor) will be issued to creditors who elect to receive stock in lieu of cash payments or interests in the Liquidating Trust, as well as to PIERS for that portion of their claims that are not paid in cash or Liquidating Trust Interests. (Tr. 7/13/2011 at 97-98; D 255 The Reorganized

at 6.2, 7.2, 16.2, 18.2, 19.2, 20.2 & 22.2.)

Debtor will be vested with miscellaneous assets, the most valuable of which is the stock of a subsidiary of WMI, WM Mortgage Reinsurance Company (WMMRC). 248.) (Tr. 7/13/2011 at 97-98,

The value of the Reorganized Debtor also includes certain The

tax attributes, namely net operating losses (NOLs).

Debtors NOLs (including WMB in its tax group) amount to an estimated $17.7 billion in face value for pre-2011 losses, assuming an Effective Date of the Plan of August 31, 2011. Demo 1; Tr. 7/13/2011 at 102-03.) (D

The use of the NOLs, however,

is subject to the limitations of section 382 of the Internal

35

Revenue Code (the Tax Code). The Reorganized Debtor will not be vested with any claims (including claims against directors and officers) of the Debtors. Instead, those claims are vested in the Liquidating Trust, interests in which are being distributed to certain creditor classes. (D 255 at 6.1, 7.1, 16.1, 18.1, 19.1, 20.1, 21.1,

28.3 & 32.1(b).) According to the stock election results, stock in the Reorganized Debtor will be held as follows: 24 million shares by Senior Noteholders, 13 million shares by Senior Subordinated Noteholders, and 123 million shares by PIERS holders. at 32; Tr. 7/13/2011 at 101.) (D.I. 8108

The shares will be issued at a (D 255 at

rate of one share for each dollar of claim exchanged. 1.167.)

Based on the Debtors valuation of the Reorganized

Debtor, the stock, cash, and interests in the Liquidating Trust to be distributed to creditors will result in all creditor classes being paid in full, with the exception of the lowest class, the PIERS. Therefore, the Modified Plan anticipates that

there will be no distribution to any shareholders and their interests will be canceled. 26.1.) (D 255 at 23.2, 24.2, 25.1 &

In the event that all the creditors do get paid in full,

however, Liquidating Trust Interests will be redistributed to the preferred shareholders. (Tr. 7/13/2011 at 98; D 255 at 6.3,

7.3, 16.3, 18.3, 19.3, 20.3, 22.1, 22.2, 23.1 & 24.1.)

36

The Plan Objectors contend, however, that the Reorganized Debtor has substantial value in excess of the claims of the creditors that are receiving its stock. The stock in the

Reorganized Debtor is not being distributed to anyone other than the creditors. (Tr. 7/13/2011 at 101.) Therefore, the Plan

Objectors argue that those creditors are getting more than the amount of their claims in violation of section 1129(b). See,

e.g., In re Exide Techs., 303 B.R. 48, 61 (Bankr. D. Del. 2003) (holding that section 1129(b) prohibits creditors from receiving more than the full value of their claims before junior classes receive a distribution). Instead, the Plan Objectors argue that

the excess value should be given to the other stakeholders, notably the preferred and common shareholders. The Plan Supporters and the Plan Objectors each presented valuation experts in support of their positions. 1. Daubert Motion

The Debtors filed a motion to exclude the testimony of both of the Equity Committees experts: Peter Maxwell, the valuation expert, and Kevin Anderson, the tax expert. The Debtors argue

that Maxwells opinion is not based on accepted methodologies and is based on hypothetical scenarios that have no relevance to this case (namely, that the Reorganized Debtor will raise substantial amounts of debt and equity to develop or acquire additional business in order to utilize more of the NOLs). See, e.g., Neb.

37

Plastics, Inc. v. Holland Colors Ams., Inc., 408 F.3d 410, 416-17 (8th Cir. 2005) (although factual basis of expert opinion generally goes to credibility, if the opinion is so fundamentally unsupported because it fails to consider relevant facts, then it can offer no assistance to the trier of fact and must be excluded); Guillory v. Domtar Indus., Inc., 95 F.3d 1320, 1331 (5th Cir. 1996) (expert testimony was properly excluded where it was not based upon facts in the record but on altered facts and speculation designed to bolster a partys position); Boucher v. U.S. Suzuki Motor Corp., 73 F.3d 18, 21 (2d Cir. 1996) (expert testimony should be excluded if it is speculative or conjectural or if it is based on assumptions that are so unrealistic and contradictory as to suggest bad faith); McMillan v. Weeks Marine, Inc., 474 F. Supp. 2d 651, 657-59 (D. Del. 2007) (excluding expert testimony as speculative because it was based on unrealistic assumptions); In re Nellson Nutraceutical, Inc., 356 B.R. 364, 373 (Bankr. D. Del. 2006) ([I]f the factual basis of an experts opinion is so fundamentally unsupported because the expert fully relies on altered facts and speculation, or fails to consider relevant facts in reaching a conclusion, the experts opinion can offer no assistance to the trier of fact, and is not admissible on relevance grounds.); In re Gretz, Bankr. No. 09-10069, 2011 WL 1048635, at *4 (Bankr. D. Del. Mar.

38

18, 2011) (rejecting a valuation hypothesizing that an unrenovated property with no rental income was a fully-renovated income-producing property because it was simply too far removed from the facts on the ground for the Court to be able to confidently rely upon it.). The Equity Committee responded that even the Debtors own expert, Steven Zelin, considered and valued the Reorganized Debtors corporate opportunity to acquire or develop new business. It argues that this type of disagreement does not

warrant excluding one experts opinion but merely goes to the credibility of the witnesses. The Equity Committee contends that

the Courts gatekeeper function under Rule 702 of the Federal Rules of Evidence and Daubert is not a substitute for testing the assumptions underlying the expert witness testimony on cross-examination. Lichtenstein v. Anderson (In re Eastern

Continuous Forms, Inc.), No. Civ. A. 04-629, 2004 WL 2418285, at *4 (E.D. Pa. Oct. 28, 2004). A party confronted with an adverse

expert witness who has sufficient, though perhaps not overwhelming, facts and assumptions as the basis for his opinion can highlight those weaknesses through effective crossexamination. Stecyk v. Bell Helicopter Textron, Inc., 295 F.3d The Equity Committee argues that Rule

408, 414 (3d Cir. 2004).

702 establishes a liberal policy of admitting expert testimony which will probably aid the trier of fact. Knight v. Otis

39

Elevator Co., 596 F.2d 84, 87 (3d Cir. 1979) (quoting Universal Athletic Sales Co. v. Am. Gym, Recreational & Athletic Equip. Co., 546 F.2d 530, 537 (3d Cir. 1976)). Accordingly, the Equity

Committee asserts that doubts about whether an experts testimony will be useful should generally be resolved in favor of admissibility. In re Japanese Elec. Prods., 723 F.2d 238, 278

(3d Cir. 1983), revd on other grounds, 475 U.S. 574 (1986). To admit an experts testimony under Rule 702 of the Federal Rules of Evidence, courts must focus on the trilogy of restrictions on expert testimony: qualification, reliability and fit. 2003). Calhoun v. Yamaha Motor Corp., 350 F.3d 316, 321 (3d Cir. The first element considers the qualifications of the

proposed expert in the field in which he is to testify, i.e., his knowledge, skills, and training. In re Paoli R.R. Yard PCB The second element

Litig., 35 F.3d 717, 741 (3d Cir. 1994). considers several factors:

(1) whether a method consists of a testable hypothesis; (2) whether the method has been subject to peer review; (3) the known or potential rate of error; (4) the existence and maintenance of standards controlling the techniques operation; (5) whether the method is generally accepted; (6) the relationship of the technique to methods which have been established to be reliable; (7) the qualifications of the expert witness testifying based on the methodology; and (8) the nonjudicial uses to which the method has been put. Id. at 742 n.8. The third element requires that the evidence Relevant evidence is

must first be relevant to be admissible.

evidence that helps the trier of fact to understand the evidence 40

or to determine a fact in issue. F.3d 136, 145 n.12 (3d Cir. 2000).

Oddi v. Ford Motor Co., 234

The Court heard argument and reserved judgment on the Daubert motion until the testimony was presented and crossexamination completed, in order to have a better idea of the bases for the experts qualifications and opinions. After

considering that testimony, the Court concludes that the testimony of Maxwell should not be excluded because, although he did not follow normal methodologies for valuing a business, his report was not a valuation of the Reorganized Debtor but simply a critique of the valuation done by the Debtors expert. extent it is helpful to the Court. To that

With respect to the argument

that Maxwells opinion is based on hypothetical scenarios that have no basis in the record, the Court is able to evaluate and consider the likelihood of the occurrence of the various scenarios on which Maxwell relies in considering the credibility of his testimony about the value of the Reorganized Debtor. The Debtors also argue that Anderson is not an expert in the field on which he is asked to opine, namely the likelihood that the IRS will use section 269 of the Tax Code to disallow some or all of the NOLs. The Debtors specifically note that Anderson had

no experience with cases in which section 269 was a major consideration. (Tr. 7/13/2011 at 132-35.) In addition, the

Debtors seek to exclude Andersons opinion as an impermissible

41

legal opinion.

See, e.g., Berckeley Inv. Grp., Ltd. v. Colkitt,

455 F.3d 195, 217 (3d Cir. 2006) (Although Federal Rule of Evidence 704 permits an expert witness to give expert testimony that embraces an ultimate issue to be decided by the trier of fact, an expert witness is prohibited from rendering a legal opinion.). With respect to the first issue, the Court found Anderson to be an expert in tax issues relevant to the acquisition and merger of corporations, particularly troubled companies. at 127-29, 135.) (Tr. 7/13/2011

Although the Debtors contend that he is not an

expert on section 269 of the Tax Code, the Court finds that too narrow of an area of expertise to expect. Anderson testified

that in rendering advice on mergers and acquisitions involving NOLs, he considered section 269, as well as section 382, because the two were both implicated. (Id. at 128-29, 132-35.) Thus,

although he never issued a pure section 269 opinion, he always considered its effect. (Id.) Consequently, the Court finds that

Anderson had sufficient experience with the applicability of section 269 of the Tax Code to render an opinion. With respect to the second factor, the Court is not being asked to render a decision on the legal issue of whether the use of the NOLs by the Reorganized Debtor will be challenged (and if challenged, will be disallowed). Instead, the issue before the

Court is what is the value of the NOLs to the Reorganized Debtor

42

and its stakeholders.

This requires not simply a determination

of the legal effect of section 269 but also the possibility that it would be invoked under various scenarios which may occur in the future. The Court finds that Andersons opinion on this

issue is helpful to its ultimate determination of those possibilities and their effect on the value of the NOLs. Therefore, the Court will not exclude Andersons testimony. 2. Value of WMMRC a. Value of existing business

WMMRC is a captive reinsurance company which wrote policies on mortgage loans issued by WMB and other affiliates of the Debtors. (Tr. 7/13/2011 at 97-98, 252.) Since the seizure of

WMB, WMMRC has been in run-off: it has not issued any new policies and is simply collecting premiums and paying claims on the existing policies. (Id. at 97-98, 251-52.) WMMRC has no

independent management, no independent sales force, and no employees. (Id. at 251.)

The Debtors valuation expert, Zelin, testified that in his opinion the value of WMMRC was between $115 and $140 million. (Id. at 260; D 341 at 8.) This was based on the Debtors

business and actuarial projections for the run-off of WMMRCs current policies through 2019 (when they will expire). 7/13/2011 at 251-59, 262, 277-82; D 340.) (Tr.

Zelin assumed that the

Reorganized Debtor would have no other business and that the

43

income generated from the run-off of WMMRCs business would be paid in dividends to investors rather than used to make acquisitions or build new business. (Tr. 7/13/2011 at 308-09.)

The Equity Committee does not disagree with the Debtors valuation of the existing WMMRC run-off business. In fact, its

expert, Maxwell, opined that the value of WMMRC in run-off was in the same range as Zelins, $129 to $135 million. at 68-70, 120.) The only valuation of WMMRC which was done using accepted valuation methodologies was that done by Zelin. The Court (Tr. 7/15/2011

recognizes, however, the inclinations of debtors to undervalue themselves and plan objectors to overvalue the company to support their arguments. See, e.g., Exide, 303 B.R. at 61 (The

Creditors Committee argues that the Debtors expert has undervalued the company and that the Plan will result in paying the Prepetition Lenders more than 100% of their claims to the detriment of the unsecured creditors. The Debtor, on the other

hand, argues that the Creditors Committee's expert has overvalued the company and that the Plan is fair and equitable in its treatment of unsecured creditors.). In addition, the Court The

agrees that there are some flaws in Zelins analysis.20

Maxwell highlighted some internal inconsistencies and problems with Zelins analysis: Zelin used the weighted average cost of capital (WACC) figure from his December 2010 report, although that number has fallen since then by 5 to 10 percentage points, which would have increased the value (Tr. 7/13/2011 at 44

20

Court, therefore, finds that the value of the existing business of WMMRC (assuming no new business is generated or acquisitions are made) is at the high end of Zelins range of value, or $140 million. b. Value of the NOLs

Although the face amount of the Debtors NOLs is estimated to be $17.7 billion for pre-2011 losses, the value of the NOLs is limited by several factors. (D Demo 1; Tr. 7/13/2011 at 102-03.)

First, section 382 of the Tax Code will limit the Reorganized Debtors ability to use the NOLs, because under the terms of the Modified Plan there will be a change in ownership of WMI (from the current shareholders to the creditors). 102-03, 141-42, 162; D 367 at 4-5.) A large part of that NOLs will also be lost once WMB ceases to be a member of the tax group, because the bulk of the losses were attributable to WMBs operations. 162-63.) (Tr. 7/13/2011 at 102-03, (Tr. 7/13/2011 at

WMB will cease being a member of the Debtors tax group (Id. at 104-05.)

upon conclusion of the FDICs receivership.

Therefore, the Debtors have filed a motion for authority to abandon the stock of WMB before the Effective Date of the

314-17; Tr. 7/15/2011 at 58); he used a WACC of 13-15% although historical returns on equity for similar businesses are 8 to 12.5% and current returns for insurance companies are 6 to 10% (Tr. 7/13/2011 at 324-32); he gave little weight to the value of precedent transactions (which yielded a value of $145 to $205 million) and accorded most weight to the discounted cash flow analysis (id. at 310-11; D 341 at 13, 23). 45

Modified Plan, which will result in a $6 billion NOL for 2011 if the Modified Plan is confirmed.21 4-5.) (Id. at 106, 164-65; D 368 at

The portion of the tax loss for 2011 which occurs before

the Effective Date is subject to the limitations of section 382 of the Tax Code; the portion after the Effective Date is not. (Tr. 7/13/2011 at 105, 108.) Assuming an Effective Date of

August 31, 2011, the Debtors projected a limited NOL of $4 billion and an unlimited NOL of approximately $2 billion for the 2011 losses.22 (Id. at 109-10, 163-64; D 368 at 4-5.) The

Equity Committees expert, Anderson, agreed with the Debtors decision to take a worthless stock deduction for the WMB stock. (Tr. 7/13/2011 at 164-65.) i. NOLs used by run-off business

Zelin did attempt to determine the net present value of the NOLs in two components. The first was the value of the NOLs to

The Debtors filed a certificate of no objection to the motion, causing the Court to grant it by order dated July 8, 2011. (D.I. 8104.) At a status hearing held on August 12, 2011, the Debtors advised that they had withdrawn the certificate of no objection late on the evening of July 5, 2011, when they were advised by the Equity Committee that individual shareholders objected to the motion. (Tr. 8/12/2011 at 15.) However, after reviewing the docket the Debtors were unable to identify any objection to the motion. At the status hearing the Equity Committee advised that it had no objection to the motion, so long as the Debtors did not abandon the stock until after a plan was confirmed. The Debtors agreed and a form of order to that effect was to be filed with the Court. (Id. at 21.) The later in the year that the Effective Date occurs, the smaller the amount of the unlimited NOL. (Tr. 7/13/2011 at 10710, 161; D Demo 2.) 46
22

21

existing WMMRC if it simply remains in run-off.

Based on his

valuation of the Reorganized Debtor, Zelin testified that under section 382 the portion of the NOLs which could be used by WMMRC during run-off was approximately $7 million per year. Tr. 7/13/2011 at 103-04.) (D Demo 1;

According to Zelin, the present value

of the NOLs that could be used by WMMRC is $10 to $20 million. (Tr. 7/13/2011 at 260-61, 275-78, 284-85; D 341 at 8.) The Plan Objectors do not really dispute this value; they contend only that it is based on WMMRCs current operations and does not take into account the possible future revenues that could be generated. See, e.g., Consol. Rock Prods. Co. v. Du

Bois, 312 U.S. 510, 526 (1941) (in valuing company court must consider all facts relevant to future earning capacity and hence to present worth). Because Maxwell did not do a valuation of the existing business with its NOLs, the Court accepts that the value of the NOLs to the existing WMMRC business is that determined by Zelin or $20 million. (Tr. 7/15/2011 at 36-37.) ii. NOLs used by future business

Zelin also attempted to value the NOLs that might be able to be used in the event of a future acquisition of a profitable business by WMMRC, which he valued at an additional $10 to $25 million. (Tr. 7/13/2011 at 260-61, 275-78, 284-85; D 341 at 8.)

47

The Plan Objectors argue that the principal defect23 in Zelins valuation is that he values the Reorganized Debtor as a liquidating company (rather than as a going concern) and fails to attribute sufficient value to the ability of the Reorganized Debtor to generate new business itself or to use the NOLs through the acquisition of profitable businesses. (Tr. 7/15/2011 at 38.)

The Equity Committees expert, Maxwell, opined that, assuming an initial capital infusion of $140 million, debt of $200 million, and a subsequent second tranche of debt of $160 million, the Reorganized Debtor could have a value (based on a net present value calculation) of $275 million. 8, 11.) (Id. at 39-50; EC 154 at 7-

He also opined that the value could increase with

subsequent equity raises or other merger/acquisition opportunities.24 (Tr. 7/15/2011 at 50-51.)

The Equity Committee also had more technical criticisms of this part of the Zelin report: Zelin used a WACC for the future acquisition of 25 to 35%, because it was an unknown, but then did an additional downward adjustment of 33% to reflect the probability that the acquisition will not be effective on day one but will take time to occur. (Tr. 7/13/2011 at 332-34; D 341 at 37.) Maxwell characterized this as double-discounting resulting in an effective rate of 38 to 52% when the correct rate should be 15.8 to 20%. (Tr. 7/15/2011 at 55-56.) Maxwell opined that it is possible that the Reorganized Debtor could have additional value of $240 to $420 million but that is premised on raising billions of dollars in additional equity to generate hundreds of millions of dollars in additional income to use the NOLs. (Tr. 7/15/2011 at 84-86; EC 154 at 8.) The Court finds that assumption purely speculative and unrealistic. 48
24

23

The Plan Supporters disagree with Maxwells conclusion and assert that there are many flaws in his analysis.25 Their

primary criticism is that Maxwell did not use typical methodologies to do a conventional valuation of the Reorganized Debtor. (Id. at 71-73.) Maxwell admitted this but stated that

he was just showing what the possible values are that could be achieved by the Reorganized Debtor if new money was invested or borrowed. The Equity Committee argues that this is not just

speculation but was, in fact, what the Settlement Noteholders were expecting to do as evidenced by numerous analyses they performed. (EC 132 & 138.)

The Plan Supporters also contend that Maxwells assumption that WMMRC will operate as a going concern is faulty. It is not

based on the current Modified Plan, any existing business plan, or the known intentions of the future shareholders. 7/15/2011 at 74-75, 119.) (Tr.

The Plan Objectors argue that the

Debtors have intentionally not done a business plan for WMMRC so that the true value of the Reorganized Debtor as a going concern

The Debtors technical criticisms of the Maxwell report included: Maxwells comparables for the debt to equity ratios were not reinsurance companies (Tr. 7/15/2011 at 91); Maxwells cost of debt was based on double B rated securities though none of the reinsurance comparables have that good a rating (id.); his rate of return is based on going-concern reinsurance companies, not startups or run-offs (id. at 92); Maxwell gave 40% weight to precedent transactions, because he erroneously thought Zelin did, although he normally would not give that much weight to them (id. at 131-32). 49

25

could not be evaluated.

The Plan Supporters respond that it

would be presumptuous of the Debtors to prepare a business plan for the Reorganized Debtor and that it will be up to the new owners to decide how it will be run. Maxwell admitted that to achieve his going concern value, the Reorganized Debtor would have to get new management, hire employees, develop a business plan, get customers and vendors, and acquire hard assets, none of which it currently has. 75-79, 118.) (Id. at

Maxwell could not give an opinion on whether the

Reorganized Debtor could raise the equity or debt needed to realize the values he attributes to the Reorganized Debtor. at 98.) (Id.

He admitted he did not know of anyone willing to lend or

invest in the Reorganized Debtor and stated that his report was just one of a number of possible future scenarios. 84, 88-89; EC 135.) (Id. at 82-

He was also aware that only one third of the

rights offering had been subscribed in the Sixth Amended Plan and the Modified Plan does not even have a rights offering. 7/15/2011 at 90.) (Tr.

Further, Maxwell does not account for any (Tr.

costs or risks associated with the scenarios he posits. 7/13/2011 at 297.)

Although Maxwell stated that the cost of

equity and debt takes into account some of those risks, he admitted that it did not include the costs and risks of converting a liquidating company with no employees or business into a going concern. (Tr. 7/15/2011 at 149-52.) In addition,

50

Maxwell assumed that the future acquisition will be fully implemented on day one (generating $37 million in income, net of interest expense) but admitted that is not realistic and there would necessarily be time delays before any additional revenue could be generated. (Id. at 79-81, 100-01, 124, 126.)

The Court agrees with the Plan Supporters that these are all serious flaws in Maxwells analysis, which precludes the Court from concluding (as Maxwell opines) that the Reorganized Debtor could have a value in excess of $275 million. However, the Court

agrees with Maxwells critique of Zelins report that it gives too little value to the possible future earning capacity of the Reorganized Debtor that could be achieved simply by operating as a going concern or merging with a viable company. Consol. Rock, 312 U.S. at 526. (1) Risk of Loss See, e.g.,

The parties also disagree about the effect of the Tax Code on the ability of the Reorganized Debtor to use the NOLs. The

Plan Supporters contend that Maxwell does not account at all for any tax risk. 107, 119.) (Tr. 7/13/2011 at 297; Tr. 7/15/2011 at 52-53,

They argue that he ignores the possibility that the

IRS will disallow all NOLs under section 269 of the Tax Code. The Plan Objectors, in contrast, contend that Zelin artificially undervalued the Reorganized Debtor because of imaginary tax restrictions.

51

In valuing NOLs, bankruptcy courts must take into account the risk that the NOLs will be disallowed. See, e.g., In re

Jartran, Inc., 44 B.R. 331, 380 (Bankr. N.D. Ill. 1984) (holding that the realization of the tax savings [from use of NOLs] is subject to a number of contingencies, including continuation in effect of relevant tax provisions, potential challenge under section 269 of the Internal Revenue Code, and possible recapture of the benefits utilized. Accordingly . . . a substantial See generally, Chaim J. Fortgang

discount would be required.).

& Thomas M. Mayer, Valuation in Bankruptcy, 32 UCLA L. Rev. 1061, 1130 (1985) (Uncertainties in preserving the NOL increase the discount.). Section 269 of the Tax Code states in relevant part that: If any person or persons acquire . . . control of a corporation, . . . and the principal purpose for which such acquisition was made is evasion or avoidance of Federal income tax . . . then the Secretary may disallow such deduction, credit, or other allowance. 26 U.S.C. 269(a)(1). For the principal purpose of

a transaction to be tax avoidance, the purpose of tax evasion or avoidance has to be more significant, more important, or more prominent than any other purpose; it can be one of the purposes but not the principal purpose. See, e.g., Scroll, Inc. v.

Commr, 447 F.2d 612, 618 (5th Cir. 1971) (noting that the burden of proof on the taxpayer is not an easy one, and when the

52

disputed tax benefits are so disproportionate to the value of the other asserted advantages, that burden may be practically impossible to sustain); U.S. Shelter Corp. v. United States, 13 Cl. Ct. 606, 620 (Cl. Ct. 1987) (in considering what is the primary purpose, the court should aggregate all tax avoidance purposes and compare them to the aggregate business purposes) (citing Bobsee Corp. v. United States, 411 F.2d 231, 239 (5th Cir. 1969)). The Court in U.S. Shelter concluded that tax evasion was not the primary purpose of the acquisition even though the acquiror was aware of and interested in using the NOLs, because it found persuasive the testimony that the principal motivations for doing the deal were the business reasons of acquiring a public company and the specific assets of the acquired company. 622-28. 13 Cl. Ct. at

In contrast, the Court in Scroll found the principal

purpose was tax avoidance where the acquired company was not integrated into the acquirors business and the tax attributes and value of the tangible assets were significantly more than the price paid. 447 F.2d at 615 n.4, 618. A finding of tax

avoidance can be made even if the change in control was through a foreclosure by a creditor. See, e.g., The Swiss Colony, Inc. v.

Commr, 428 F.2d 49, 54 (7th Cir. 1970) (upholding Tax Court conclusion that primary purpose of acquisition was tax avoidance even though taxpayer argued that acquisition was accomplished

53

through foreclosure on stock to protect its position as a creditor). The Plan Supporters presented a tax expert, Richard Reinhold, a tax partner at Wilkie Farr & Gallagher, who testified that the transfer of stock under the Modified Plan to the creditors was a change of control that could trigger section 269 disallowance of the NOLs. (Tr. 7/13/2011 at 113.) Reinhold

opined that in considering the issue of what the principal purpose of the creditors election to take stock in lieu of cash under the Modified Plan was, the IRS and courts will consider future events that may shed light on the intent of the creditors. (Id. at 200; D 404 at 7 n.15.) Those future events would include

any additional acquisitions of other companies by the Reorganized Debtor. (Tr. 7/13/2011 at 197.) Reinhold did not testify that

the IRS or courts would be more likely to find that tax avoidance was the principal purpose if the amount of capital raised exceeded the non-tax assets value; he only said that he could not give an opinion that they would not. 404 at 4-6.) (Id. at 200-01, 224; D

Reinhold opined, however, that if the amount of

capital raised is not more than the value of the non-tax assets of the Reorganized Debtor then the company has quite a good argument that Section 269 will not be brought into play because the principal purpose for the acquisition of shares would not be considered tax avoidance. (Tr. 7/13/2011 at 200; D 404 at 7-9.)

54

The Equity Committees expert, Anderson, opined that it was unlikely that section 269 of the Tax Code would apply (resulting in loss of the NOLs) if the Reorganized Debtor acquired additional businesses, because to disallow the NOLs that future acquisition would have to be for the primary purpose of tax avoidance. (Tr. 7/13/2011 at 138; D 367 at 15-20; D 370 at 2-5.)

He stated that section 269 is rarely used by the IRS because the newer section 382 is more specific in describing instances where NOLs should be disallowed. (Tr. 7/13/2011 at 184.)

Anderson specifically disagreed with Reinholds opinion that the Reorganized Debtor could not acquire a company whose value was more than the value of Reorganized Debtor (excluding the NOLs) without running afoul of section 269. 369 at 3.) (Id. at 146-47; D

Instead, Anderson stated that as long as the acquired

business had legitimate substantial operations, its acquisition would not result in a loss of the NOLs. 47; D 367 at 15-17; D 369 at 3-4.) (Tr. 7/13/2011 at 142-

In addition, Anderson opined

that there were specific ways in which the Reorganized Debtor could acquire assets and/or stock in the future that would not implicate section 269. 369 at 3-4.) The Debtors expert, Reinhold, did not disagree with Andersons conclusion that a subsequent acquisition by the Reorganized Debtor was not likely to cause a problem under (Tr. 7/13/2011 at 149; D 367 at 15-17; D

55

section 269 or 382.

(Tr. 7/13/2011 at 208-11.)

However, he

noted that his opinion was not addressing the risk that the IRS will challenge any future transfer of ownership under 269 (as Andersons was), but whether it will challenge the current transfer of ownership to the creditors under the Modified Plan. (Id. at 193, 202-03, 208-11; D 404 at 7-9, D 341 at 36.) Anderson admitted that section 269 could apply to the transfer of stock under the Modified Plan to the creditors and that in determining principal purpose courts look at future actions to discern present intention. (Tr. 7/13/2011 at 166-67.)

Anderson still felt, however, that it was unlikely that the IRS (or courts) would find that the principal purpose of the transfer of stock in the Reorganized Debtor under the Modified Plan was tax avoidance or evasion. (Id. at 147-48, 151-53.)

In evaluating the two conflicting opinions, the Court finds the opinion of Anderson more convincing. The cases that apply

section 269 are fundamentally different from the case at bench. Those cases deal with taxpayers who acquire a company which has a significant NOL and then merge it with their own business in order to shelter their income. See, e.g., Scroll, 447 F.2d at

615 (noting that [o]ne of the most obvious advantages accruing to [the acquiror] as a result of the merger was the possibility . . . of offsetting [the acquired companys] substantial preacquisition net operating loss carryover against [the acquirors]

56

even more substantial post-acquisition profits); The Swiss Colony, 428 F.2d at 52 (tax court had found that Taxpayer acquired control of [liquidating company] for the principal purpose of evading or avoiding Federal income taxes by securing the benefit of net operating loss deductions which it would not otherwise have enjoyed); U.S. Shelter, 13 Cl. Ct. at 609-10 (noting that section 269 was passed to prevent the recently developed practice of corporations with large excess profits . . . acquiring corporations with current past, or prospective losses or deductions, . . . for the purpose of reducing [the acquirors] income and excess profits taxes.) (citing S. Rep. No. 627, 78th Cong., 1st Sess. 58 (1943)). In this case, the creditors are acquiring the Reorganized Debtor under the Modified Plan not to shelter their own income or to merge it with a company they own. Instead, they are receiving

stock in the Reorganized Debtor simply in repayment of debt owed them. Even the situation in The Swiss Colony case is In that case, although the Taxpayer had

distinguishable.

acquired the loss companys stock through foreclosure, it then attempted to use that companys NOL to shelter its own profits. 428 F.2d at 52. That is not being done by the acquiring

creditors in this case. In addition, most of the new shareholders will receive their stock in the Reorganized Debtor not by election but by default.

57

(Tr. 7/14/2011 at 96-97; D 255 at 20.1 & 20.2.)

In fact, the

bulk of the stock is being distributed to the PIERS, not because they elected to receive it but because they are the lowest creditor class.26 (D 255 at 20.1 & 20.2.) Thus, the Court

concludes that the IRS is unlikely to find that the principal reason that the creditors in this case are receiving stock under the Modified Plan is for tax evasion purposes. The fact that the Settlement Noteholders (who as holders of PIERS will receive the bulk of the stock under the Modified Plan) performed analyses of the value of the NOLs does not alone suggest that tax evasion was their reason for accepting stock instead of a cash distribution. See, e.g., In re Federated Dept

Stores, Inc., 135 B.R. 962, 970 (S.D. Ohio 1992) (Consideration by corporate officials of the tax ramifications of an acquisition is not, by itself, indicative of tax avoidance but is simply intelligent business planning.) (citation omitted); VGS Corp. v. Commr, 68 T.C. 563, 596 (1977) (Complicated business

Under the Debtors valuation of the Reorganized Debtor, there is nothing available for equity shareholders, so the fact that stock in the Reorganized Debtor is being given to the creditors is in large part mandated by the absolute priority rule. See, e.g., Case, 308 U.S. at 115-16 (stating that absolute priority rule requires that shareholders not receive any distribution under a plan until creditors are paid in full). While the Debtors could have simply liquidated WMMRC and disbursed the proceeds to the creditors rather than the stock, the Debtors stated that the offers they received for WMMRC were too low and that they, therefore, concluded that the creditors would get a higher recovery by allowing WMMRC to finish its runoff. (Tr. 7/14/2011 at 45-47; D 391.) 58

26

transactions do not take place in a vacuum and we find this [consideration of loss carryovers or other tax benefits] to be nothing more than prudent business planning.]; U.S. Shelter, 13 Cl. Ct. at 625 (holding that the principal purpose of a transaction does not become tax avoidance merely because the parties were cognizant of and considered the tax consequences.). Further, despite doing those analyzes, three of the Settlement Noteholders testified that they did not elect to take extra stock in lieu of cash distributions. (Tr. 7/18/2011 at 123; Tr.

7/19/2011 at 112-13; Tr. 7/20/2011 at 81.) In this case given the conservative valuation done by Zelin (which assumes that WMMRC will generate no new business), the Court also finds that the electing creditors decisions to take stock was likely influenced by a belief that the Debtors undervalued the Reorganized Debtor by viewing it as a liquidating company rather than as a going concern. 40.) (Tr. 7/14/2011 at 39-

See, e.g., Exide Techs., 303 B.R. at 48, 61 (noting the

inclination of debtor to undervalue the reorganized entity). Given the various reasons for distribution of stock to creditors under the Modified Plan, the Court concludes that the principal purpose of the transfer of ownership of the Reorganized Debtor under the Modified Plan is not the avoidance of taxes. The Court is cognizant of the fact that its opinion on this point is not binding on the IRS. 26 C.F.R. 1.269-3(e) (In

59

determining for purposes of section 269 . . . whether an acquisition pursuant to a plan of reorganization in a case under [the Bankruptcy Code] was made for the principal purpose of evasion or avoidance of Federal income tax, . . . any determination by a court under 11 U.S.C. 1129(d) that the principal purpose of the plan is not avoidance of taxes is not controlling.). See also In re Hartman Material Handling Sys.,

Inc., 141 B.R. 802, 811-12 (Bankr. S.D.N.Y. 1992) (holding that [a] confirmation ruling that the principal purpose of a plan is not tax avoidance is significantly different from a 269 ruling because the two rulings are made pursuant to different factual frames of reference and noting that the bankruptcy court can only consider facts up to the time of its ruling on confirmation while the IRS can consider facts after confirmation until the deduction is taken). Nonetheless, the Court considers it

significant that the IRS has not objected to confirmation of the Modified Plan on the basis that its principal purpose is tax avoidance although it clearly could have. 11 U.S.C. 1129(d).27

For purposes of estimating the value of the NOLs, therefore, the Court cannot accept the Debtors assertion that the

If a governmental unit objected and the Court found that the principal purpose was to avoid taxes, the Modified Plan could not be confirmed. 11 U.S.C. 1129(d) (Notwithstanding any other provision of this section, on request of a party in interest that is a governmental unit, the court may not confirm a plan if the principal purpose of the plan is the avoidance of taxes . . . .). 60

27

Reorganized Debtor could not obtain future investments that are more than the value of its non-tax assets without having the IRS conclude that the acquisition of stock by creditors under the Modified Plan runs afoul of section 269 of the Tax Code. (2) Value adjusted for loss

In determining the value of the NOLs resulting from any future acquisition, Zelin assumed that any capital raised would be no more than the value of the current WMMRC non-tax assets based on section 269. 341 at 8.) (Tr. 7/13/2011 at 260-61, 275-78, 284; D

As a result, he concluded that the value of the NOLs

resulting from any additional acquisitions was no more than $10 to $25 million. (Tr. 7/13/2011 at 260-61, 275-78, 284.)

The Court finds that Zelins valuation is too low, because it was based on the erroneous assumption that the Reorganized Debtor would be restricted by section 269 of the Tax Code in what capital it could raise in the future. However, as noted above,

the Court finds that Maxwells determinations of value are fraught with problems, including the assumption that the Reorganized Debtor will be able to raise debt and equity instantly, even though the Debtors have not obtained exit financing or any new debt or equity commitments. Maxwells

present value of the NOLs also assumes that the Reorganized Debtor will be able to generate instant cash flow from the new debt and equity that has not even been committed yet. As a

61

result, the Court cannot accept Maxwells determination that the value of the Reorganized Debtor is $275 million. Based on the two expert opinions, one of which is too conservative and the other of which is too aggressive, the Court concludes that the present value of the NOLs to the Reorganized Debtor is $50 million. This is based on the Courts conclusion

that the Reorganized Debtor should be able to raise additional capital and debt over the next twenty years equal to twice the value of its current assets which will be invested in restarting the reinsurance business of WMMRC or acquiring other related businesses. The Court accepts as credible Maxwells opinion that

the reinsurance market is a prime area for new investment given the recent turmoil in the real estate market.28 Based on all of the above, the Court concludes that the value of the Reorganized Debtor and its NOLs is $210 million. 3. Value of Liquidating Trust Interests

In addition to distributions of cash, certain creditors are receiving interests in the Liquidating Trust. 7.1, 16.1, 18.1, 19.1, 20.1, 21.1 & 32.1(b).) (D 255 at 6.1, The Debtors are

transferring to the Liquidating Trust all of their interests in any causes of action the estates have, including potential suits

Maxwell testified that there would be interest in investing in WMMRC because of the current opportunities in the home insurance industry; he cited as an example that Goldman partners had recently raised $600 million to start a new reinsurance business. (Tr. 7/15/2011 at 38, 67, 122.) 62

28

against the Debtors directors and officers. 43.5.)

(Id. at 28.3 &

The LTW Holders contend, however, that this major component of value that is being distributed to the creditors has been ignored by the Debtors and must be valued in order for the Court to determine whether the Modified Plan meets the best interests of creditors test under section 1129(a)(7). The Plan Supporters contend that it is not necessary to value the Liquidating Trust Interests because under the Modified Plans waterfall provisions, once creditors have received payment in full of their claims, with interest, their Liquidating Trust Interests will be canceled and all further recoveries realized by the Liquidating Trust will flow to the preferred shareholders. (Id. at 6.3, 7.3, 16.3, 18.3, 19.3, 20.3, 22.1, 22.2, 23.1 & 24.1; Tr. 7/13/2011 at 98.) The Court agrees with the Plan Supporters that it is not necessary to determine the precise value of the Liquidating Trust assets because whatever they are worth will be distributed to creditors and then to shareholders in accordance with the priorities of the Code.29

The Court therefore finds it unnecessary to determine what if any value the suits against the Debtors directors and officers have. (D.I. 8312 at Ex. A pp. 2-4; Tr. 7/21/2011 at 204-05.) 63

29

D.

Good Faith

Several Plan Objectors, led by the Equity Committee, complain that the Plan cannot be confirmed because it has not been proposed in good faith as a result of the improper conduct of the Settlement Noteholders. They argue that any prior finding

of good faith in the January 7 Opinion should be reconsidered by the Court, based on the newly discovered evidence of the Debtors and Settlement Noteholders misconduct. 9024(b). 1. Conduct of the Settlement Noteholders Fed. R. Bankr. P.

The conduct of the Settlement Noteholders was first raised by a pro se PIERS holder, Mr. Thoma, at the confirmation hearings held in December, 2010. Although Mr. Thoma sought to introduce

what he described as evidence of improper trades by the Settlement Noteholders, the Court refused that request as it was hearsay. In its January 7 Opinion denying confirmation, however,

the Court stated that it was reluctant to approve any releases of the Settlement Noteholders as required by the GSA and Sixth Amended Plan in light of Mr. Thomas allegations of insider trading by the Settlement Noteholders. 349. Wash. Mut., 442 B.R. at

Following denial of confirmation, both the Settlement

Noteholders and the Equity Committee engaged in discovery, which the Court limited to what information the Settlement Noteholders

64

received from the Debtors.30

Evidence regarding the conduct of

the Settlement Noteholders during the bankruptcy case was presented over the course of four days during the hearings on confirmation of the Modified Plan. following. The Debtors and JPMC began negotiating a resolution of their disputes about ownership of various assets in March 2009. 7/18/2011 at 55; Tr. 7/21/2011 at 101.) Those negotiations (Tr. That testimony revealed the

continued off and on until the announcement that the parties had reached an agreement in principal on March 4, 2010, and the terms were read into the record on March 12, 2010. 144; Tr. 7/20/2011 at 74-75.) (Tr. 7/19/2011 at

The settlement negotiations

included the exchange of term sheets between the Debtors and JPMC reflecting the parties relative stances on settlement of issues related to the ownership of disputed assets. 67-68; Tr. 7/19/2011 at 130-35.) (Tr. 7/18/2011 at

Counsel for the Settlement

Noteholders, Fried Frank, participated in many of these negotiations, though they were precluded from sharing information with the Settlement Noteholders unless the latter were under confidentiality agreements. (Tr. 7/18/2011 at 57-59, 116, 119;

Tr. 7/19/2011 at 144; Tr. 7/20/2011 at 75; Tr. 7/21/2011 at 136.)

The Court did not permit discovery of any analyses that the Settlement Noteholders did in determining whether to trade in the Debtors securities. The Settlement Noteholders asserted that analysis was privileged and not relevant. 65

30

At times during that period, the Settlement Noteholders also participated directly in the negotiations. Tr. 7/21/2011 at 101.) (Tr. 7/18/2011 at 55;

As a condition to their participation,

the Settlement Noteholders entered into confidentiality agreements with the Debtors. (Tr. 7/20/2011 at 198.) During the

two formal confidentiality periods, the Settlement Noteholders were required to restrict trading of the Debtors securities or to establish an ethical wall (precluding any confidential information from being used by their traders). (Id.)

The First Confidentiality Period ran from March 9 to May 8, 2009. (EC 24.) Only Aurelius established an ethical wall during

the First Confidentiality Period; the others restricted their trading. (Tr. 7/18/2011 at 55.) Immediately after the First

Confidentiality Period, the Settlement Noteholders shared all confidential information they had received from the Debtors with their traders and actively traded in the Debtors securities. (AOC 18; AOC 54; AOC 62; Au 8.) That information included the

amount of a tax refund the Debtors estimated they would receive (in excess of $2 billion), which information the Debtors also made public. (D.I. 970; D 427; Tr. 7/18/2011 at 65, 79, 144; Tr. The Debtors did not, however, make public

7/20/2011 at 232-33.)

any of the settlement term sheets or even the fact that settlement negotiations were occurring.

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After the conclusion of the First Confidentiality Period, two of the Settlement Noteholders (Appaloosa and Centerbridge) independently approached JPMC in July and August 2009 in an effort to further negotiations. sheets were exchanged. (Tr. 7/20/2011 at 54-55.) Term

(EC 14; EC 115; Tr. 7/20/2011 at 57-58, Appaloosa restricted its trading

243; Tr. 7/21/2011 at 32-33.)

during these negotiations, while Centerbridge restricted trading only upon receipt of a counter-proposal from JPMC on August 18, 2009. (Tr. 7/20/2011 at 58-59, 130, 244-45.) JPMC withdrew its

counter-proposal in early September 2009. 45.)

(Id. at 58-59, 244-

Negotiations did not resume again until the Second Confidentiality Period, which ran from November 16 to December 31, 2009 (the Second Confidentiality Period). (EC 37; EC 117;

EC 148; Tr. 7/18/2011 at 105; Tr. 7/19/2011 at 139-40; Tr. 7/21/2011 at 128-29.) During the Second Confidentiality Period, (Tr.

all the Settlement Noteholders restricted trading.

7/18/2011 at 104-05; Tr. 7/19/2011 at 140; Tr. 7/20/2011 at 7172, 246.) Near the end of the Second Confidentiality Period,

Aurelius asked the Debtors to terminate the confidentiality period a day early. (Tr. 7/18/2011 at 111.) The Debtors agreed

and again released to the public the Debtors estimate of an additional tax refund (in excess of $2 billion) which the Debtors anticipated receiving because of a recent change in the tax laws.

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(D.I. 2077; D 428; Tr. 7/18/2011 at 105; Tr. 7/19/2011 at 141; Tr. 7/21/2011 at 127-28.) Once again, immediately after the

Second Confidentiality Period, the Settlement Noteholders actively traded in the Debtors securities using information they had received from the Debtors, including the status of settlement negotiations. (AOC 18; AOC 54; AOC 62; Au 8.)

Following the Second Confidentiality Period, the Settlement Noteholders involvement in negotiations was limited to a meeting with the Debtors in January and a meeting with the Debtors, JPMC, the FDIC, and the WMB Noteholders in February 2010 to discuss a proposed plan of reorganization, how the Debtors assets would be distributed under a plan (the Waterfall), and updates on litigation. (Tr. 7/19/2011 at 62-63, 70; Tr. 7/21/2011 at 130.)

One of the Settlement Noteholders, Appaloosa, also participated in a meeting with the Debtors and JPMC on March 1 and thereafter restricted its trading until the terms of the GSA were announced on March 12, 2010. (Tr. 7/20/2011 at 76-77, 96.) After the

announcement of the GSA, the Debtors sent the Settlement Noteholders advance drafts of the plan of reorganization, disclosure statement, and Waterfall analyses. 7/20/2011 at 77, 220, 262.) (EC 42; EC 34; Tr.

Upon receipt of those drafts, the

Settlement Noteholders restricted trading until the documents were publicly filed. 7/20/2011 at 77, 262.) (AOC 18; Tr. 7/19/2011 at 77-78; Tr.

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2.

Application of section 1129(a)(3)

The Bankruptcy Code requires that, to be confirmed, a plan of reorganization must be proposed in good faith and not by any means forbidden by law. 11 U.S.C. 1129(a)(3). To meet this

standard, the Third Circuit has stated that a plan must fairly achieve a result consistent with the objectives and purposes of the Bankruptcy Code. (3d Cir. 2000). In re PWS Holding Corp., 228 F.3d 224, 242

See also In re Abbotts Dairies of Pa., Inc., 788

F.2d 143, 150 n.5 (3d Cir. 1986); In re Madison Hotel Assocs., 749 F.2d 410, 424-25 (7th Cir. 1984). To meet this standard, the

plan proponent must establish that (1) [the plan] fosters a result consistent with the Codes objectives . . . , (2) the plan has been proposed with honesty and good intentions and with a basis for expecting that reorganization can be effected . . . , and (3) there was fundamental fairness in dealing with the creditors. In re Genesis Health Ventures, Inc., 266 B.R. 591, Accord In re Frascella Enters., Inc.,

609 (Bankr. D. Del. 2001).

360 B.R. 435, 446 (Bankr. E.D. Pa. 2007). The Settlement Noteholders, and the Debtors contend that the conduct of the Settlement Noteholders was in accordance with the terms of the parties written confidentiality agreements and did not violate any law or duty that the Settlement Noteholders might have had. They contend that the Modified Plan is proposed in

good faith and confirmable under section 1129(a)(3).

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The Equity Committee objects to confirmation of the Modified Plan31 asserting that it has not been proposed in good faith because the Settlement Noteholders dominated or hijacked the settlement negotiations and engaged in inequitable conduct, including trading in the Debtors securities while in possession of material nonpublic information. The Plan Objectors

specifically contend that the Settlement Noteholders used material nonpublic information to acquire a blocking position in the various creditor classes to get a seat at the negotiating table and assure that their claims got paid while nothing was given to the shareholders. See, e.g., In re ACandS, Inc., 311

B.R. 36, 43 (Bankr. D. Del. 2004) (finding a lack of good faith where pre-petition creditors committee dominated the debtors affairs resulting in obvious self-dealing); In re Coram Healthcare Corp., 271 B.R. 228, 234 (Bankr. D. Del. 2001) (denying confirmation for lack of good faith where debtors CEO had an undisclosed million dollar consulting agreement with a creditor); In re Unichem Corp., 72 B.R. 95, 100 (Bankr. N.D. Ill. 1987) (finding lack of good faith where plan proponent breached

The Equity Committee has also filed a motion seeking authority to prosecute an action against the Settlement Noteholders for equitable disallowance of their claims. Although the Motion only sought disallowance of the claims of Aurelius and Centerbridge, the Equity Committees objection to confirmation asserts that equitable disallowance of the claims of all the Settlement Noteholders is warranted. At oral argument, the Equity Committee clarified that it seeks authority to bring such a claim against all four Settlement Noteholders. 70

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fiduciary duties to debtor because Congress did not intend the objectives and purposes of the Bankruptcy Code to include rewarding an individual for breaching his fiduciary duty). Based on the record developed, the Court finds that the conduct of the Settlement Noteholders does not mean that the Plan was proposed in bad faith. Despite the allegations of insider

trading by the Settlement Noteholders, the Court is unconvinced that their actions had a negative impact on the Plan or tainted the GSA. Rather, the actions of the Settlement Noteholders appear to have helped increase the Debtors estates. During the First

Confidentiality Period, the Settlement Noteholders, together with other creditors, persuaded the Debtors to submit a term sheet to JPMC that was more aggressive than the one the Debtors had initially contemplated. (Tr. 7/20/2011 at 50.) In addition,

during the July negotiations that Appaloosa and Centerbridge had alone with JPMC, they persuaded JPMC to submit a counter-proposal that increased the share of the tax refunds that JPMC was willing to allocate to the Debtors. (EC 115; Tr. 7/20/2011 at 243.)

The cases cited by the Plan Objectors are distinguishable from the present facts. Both Coram and Unichem involved

inequitable conduct of an executive of the debtor that lead to the conclusion that the debtors plan was offered in bad faith. Coram, 271 B.R. at 234-35; Unichem, 72 B.R. at 99-100.

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While ACandS is closer, the Court finds it distinguishable in important respects. In that case, the Court found that the

pre-petition creditors committee gained control of the debtor to the point where the committee alone made all the important decisions, including taking over the process of reviewing and settling all asbestos claims. 311 B.R. at 40.32 In addition, the

plan and settlement drafted by the committee and proposed by the debtor placed creditors in different classes for no discernible reason, other than the fact that creditors represented by the law firms on the committee were treated as secured creditors entitled to payment in full while other creditors (with the same illness and manifestations) were treated as unsecured creditors entitled to little or nothing. Id. at 43.

While the evidence in this case shows that the Settlement Noteholders participated in the settlement negotiations and plan drafting and review, the Court finds that it falls short of the almost total control exercised by the committee in ACandS. Settlement Noteholders were only one of several groups of creditors involved in this case, including the WMI Noteholders and the WMB Noteholders. Nor does the Modified Plan have the The

The Court in ACandS was particularly concerned to learn that while counsel for the debtor was purportedly reviewing and settling claims, in fact that task was subcontracted to a company whose sole principal was a paralegal from the law firm that served as chair of the pre-petition creditors committee. 311 B.R. at 40. The settlement of claims by that firm appeared to favor creditors represented by the members of the committee. Id. 72

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fatal flaw of improper classification and treatment of claims that the ACandS plan had. In this case, the creditor classes are

treated in accordance with the priorities of the Bankruptcy Code and their contractual subordination rights. If the Settlement

Noteholders had improperly dominated the case as in ACandS, the Modified Plan would have elevated the treatment of the PIERS class (in which they hold the bulk of their claims); instead the PIERS are receiving the treatment warranted by their subordinated status. 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 harm caused by the Settlement Noteholders has or can be remedied by other means.33 E. See infra Part H.

Best Interests of Creditors

The Plan Objectors continue to press their arguments that the Modified Plan violates the best interests of creditors test articulated in section 1129(a)(7). That section requires that a

plan of reorganization provide non-consenting impaired creditors

The Court in its January 7 Opinion held that the Settlement Noteholders were not entitled to releases. 442 B.R. at 349. In addition, the Court held that the Settlement Noteholders almost exclusive right to participate in the rights offering discriminated against other creditors in the same class. Id. at 361. The rights offering has subsequently been removed. (Tr. 2/18/2011 at 80-81.) 73

33

(and shareholders) with at least as much as they would receive if the debtor was liquidating in chapter 7. 11 U.S.C. 1129(a)(7).

See, e.g., In re U.S. Wireless Data, Inc., 547 F.3d 484, 495 (2d Cir. 2008). The Plan Objectors raise many reasons why the

Modified Plan does not comply with that section. 1. Contract v. federal judgment rate a. Plan Objectors

The Plan Objectors contend that the Modified Plan fails to comply with the best interests of creditors test because it provides for the payment of post-petition interest on creditors claims at their contract rate of interest rather than at the federal judgment rate. This results, they argue, in the

creditors receiving more (and the shareholders accordingly receiving less) than they would under a chapter 7 liquidation.34 The general rule is that unsecured creditors are not entitled to recover post-petition interest. United Sav. Assn v.

Timbers of Inwood Forest Assocs., Ltd., 484 U.S. 365, 372-73 (1988) (holding that only over-secured creditors are entitled to receive post-petition interest under section 506(b)). There is

This could also conflict with the requirements of the fair and equitable test under section 1129(b). Although that section embodies the absolute priority rule, which forbids junior classes of creditors or equity from receiving any distribution until senior creditors are paid in full, it also mandates that senior creditors not receive more than 100% of their claim before junior classes receive a distribution. See, e.g., Exide Techs., 303 B.R. at 61 (Bankr. D. Del. 2003). 74

34

an exception to the general rule, however, when the debtor is solvent. See Onink v. Cardelucci (In re Cardelucci), 285 F.3d

1231, 1234 (9th Cir. 2002) (finding that when a debtor is solvent, unsecured creditors are entitled to post-petition interest at the legal rate). This is so because under a

chapter 7 liquidation, where the debtor is solvent, unsecured creditors are entitled to post-petition interest on their claims before shareholders receive any distribution. 11 U.S.C.

726(a)(5) & (6) (stating that in a chapter 7 case unsecured creditors are entitled to interest at the legal rate from the date of the filing of the petition before any payment can be made to the debtor or equity). See, e.g., Kitrosser v. The CIT

Grp./Factoring, Inc., 177 B.R. 458, 469 (S.D.N.Y. 1995) (Although the requirements of Chapter 7 are in general not applicable to Chapter 11 proceedings . . . Section 726 does apply through the requirements of Section 1129.); In re Premier Entmt Biloxi LLC, 445 B.R. 582, 644 (Bankr. S.D. Miss. 2010) (Section 726 applies indirectly to chapter 11 cases by virtue of the best interests of creditors test in 1129, under which distributions proposed under a plan of reorganization under chapter 11 must at least equal the amount that would have been paid in a liquidation under chapter 7.). The Plan Objectors contend that the majority of courts to address this issue conclude that the legal rate due under

75

section 726(a)(5) is the federal judgment rate.

See, e.g.,

Cardelucci, 285 F.3d at 1234 (concluding that federal judgment rate, rather than state judgment rate or contract rate, was due on unsecured claims under section 726(a)(5) for purposes of best interests of creditors test); In re Garriock, 373 B.R. 814, 816 (E.D. Va. 2007) (Having reviewed each line of cases, the Court is persuaded that the legal rate refers to the federal judgment rate, and does not encompass . . . any lawful pre-petition contract rate.); In re Adelphia Commcns Corp., 368 B.R. 140,

257 (Bankr. S.D.N.Y. 2007) (concluding that [i]t is by far the better view, in my opinion, that legal rate is the federal judgment rate and not the same as that authorized under section 506(b), which is the contract rate.); In re Best, 365 B.R. 725, 727 (Bankr. W.D. Ky. 2007) (The more recent cases hold that the federal judgment rate is the proper rate of interest under 11 U.S.C. 726(a)(5)); In re Dow Corning Corp., 237 B.R. 380, 412 (Bankr. E.D. Mich. 1999) (determining that the phrase interest at the legal rate means the federal judgment rate); In re Chiapetta, 159 B.R. 152, 161 (Bankr. E.D. Pa. 1993) ([W]e further conclude that, since a claim is like a judgment entered at the time of the bankruptcy filing, the applicable rate should be the federal judgment rate . . . .); In re Melenyzer, 143

B.R. 829, 832-33 (Bankr. W.D. Tex. 1992) (concluding that the appropriate rate of interest payable to unsecured creditors

76

pursuant to section 726(a)(5) is the federal judgment rate). The Plan Supporters argue, however, that the Court has already decided this issue in the January 7 Opinion and concluded that the contract rate was the presumed rate under section 726(a)(5) unless the equities of the case mandate otherwise. They contend that ruling is the law of the case and cannot be reargued. The Court disagrees with the Plan Supporters on this point. In the January 7 Opinion, the Court did not conclude that the contract rate was the presumed rate, it merely cited a line of cases that so hold. 442 B.R. at 358. At the same time, however,

the Court noted that there is a line of cases that hold that the federal judgment rate is the appropriate rate under section 726(a)(5). Id. at 357-58. The Court also noted that it had

previously concluded that the federal judgment rate was the minimum that must be paid to unsecured creditors in a solvent debtor case under a plan to meet the best interest of creditors test, but that the Court had discretion to alter it. (emphasis added) (citing Coram, 315 B.R. at 346). Id. at 358

The Court,

however, did not decide the question in this case, because the Court believed it needed to consider the equities of the case. Now that all issues have been presented to the Court, the Court concludes that the better view is that the federal judgment rate is the appropriate rate to be applied under section

77

726(a)(5), rather than the contract rate.35 conclusion is supported by many factors.

The Courts

First, section 726(a)(5) states that interest on unsecured claims shall be paid at the legal rate as opposed to a legal rate or the contract rate. As the LTW Holders note, where

Congress intended that the contract rate of interest apply, it so stated. See 11 U.S.C. 506(b) (stating that if a secured

creditor is over-secured, the creditor shall be entitled to interest on such claim . . . provided for under the agreement or State statute under which such claim arose.) (emphasis added). See also Adelphia Commcns, 368 B.R. at 257; Dow, 237 B.R. at 405-06 (holding that use of term legal as opposed to contract rate mandated conclusion that Congress meant a rate fixed by statute). Second, the payment of post-judgment interest is procedural by nature and dictated by federal law rather than state law, further supporting use of the federal judgment rate. Cardelucci,

285 F.3d at 1235 (citing Hanna v. Plumer, 380 U.S. 460, 473-74 (1965)). Third, the use of the federal judgment rate promotes two important bankruptcy goals: fairness among creditors and

To the extent I suggested in Coram that the federal judgment rate was not required by section 726(a)(5), I was wrong. 315 B.R. at 346 (applying federal judgment rate nonetheless because of the equities of the case). 78

35

administrative efficiency.

Cardelucci, 285 F.3d at 1236.

See

also Best, 365 B.R. at 727 (federal judgment rate provides an efficient and inexpensive means of calculating the amount of interest to be paid to each creditor); Dow, 237 B.R. at 407 (providing a uniform rate keeps the bankruptcy estate from being saddled with potentially difficult and time-consuming administrative burdens of determining what rate is applicable to each creditors claim); Melenyzer, 143 B.R. at 833 (federal judgment rate provides court with an easily ascertainable, nationally uniform rate and increases predictability in the process). The Court finds that the line of cases holding there is a presumption the contract rate applies are distinguishable and/or unpersuasive. See, e.g., Dow, 456 F.3d at 676-79 (remanding to

bankruptcy court to determine if equities of case permitted allowance of default interest to creditors rather than the contract rate); In re Southland Corp., 160 F.3d 1054, 1059-60 (5th Cir. 1998) (determining rate of interest for an over-secured creditor); In re Chi., Milwaukee, St. Paul & Pac. R.R. Co., 791 F.2d 524, 529-30 (7th Cir. 1986) (in case under railroad reorganization chapter of Bankruptcy Act, court held that creditors were entitled only to contract default rate, not higher market rate, without discussing federal judgment rate).

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The Indenture Trustee for the PIERS urges the Court not to be swayed by arguments that equity will receive a recovery if the federal judgment rate is used rather than the contract rate, because that is not a factor which courts should consider. See,

e.g., Urban Communicators PCS LP v. Gabriel Capital, L.P., 394 B.R. 325, 340 (S.D.N.Y. 2008) (holding that it is not inequitable to cut down the interest of Debtors shareholders by interest payments at a default rate to which the Debtors contractually agreed); In re Intl Hydro-Elec. Sys., 101 F. Supp. 222, 224 (D. Mass. 1951) (holding that [t]he burden of . . . payment [of post-petition interest on interest] will fall entirely on the interest of the stockholders . . . [who] cannot complain that they are treated inequitably when their interest is cut down by the payment of a sum to which the debenture holders are clearly entitled by the express provisions of the trust indenture.). The cases cited by the Indenture Trustee are not on point. The Urban Communicators Court was considering what was due to an over-secured creditor under section 506(b) rather than what postpetition interest is due to unsecured creditors under section 726(a)(5). 394 B.R. at 333-34. The Intl Hydro-Elec. Court was

dealing with the rearrangement of a public utility company under title 15, not a reorganization under title 11. 223. 101 F. Supp. at

Nonetheless, the Court agrees that the effect on equity is

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not an appropriate factor to be considered, and the Court will not consider that. In applying the plain language of the

statute, however, the Court concludes that the federal judgment rate is the proper measure for post-petition interest due to the unsecured creditors. Even if a consideration of the equities was appropriate, after considering the evidence in this case, the Court does not find that the equities support the use of anything other than the federal judgment rate. Cf. Cardelucci, 285 F.3d at 1236

(rejecting argument that in cases where all creditors could get paid contract rate of interest, debtor would be getting a windfall if creditors interest claims are limited by the federal judgment rate because interest at the legal rate is a statutory term with a definitive meaning that cannot shift depending on the interests invoked by the specific factual circumstances before the court.). The Plan Supporters argue, however, that payment of the various contract rates of interest as provided in the Modified Plan is warranted because the distribution scheme is simply a function of the subordination provisions in the various creditors contracts (the Senior Subordinated Indenture, the CCB1 Guarantee Agreements, the CCB-2 Guarantee Agreements, the Junior Subordinated Notes Indenture, and the PIERS Guarantee Agreement) which they say mandate that the subordinated creditors

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pay the senior creditors their claims in full, including contract interest. (See WMI NG 1-7.) It argues that

The TPS Consortium disputes this contention.

the Debtors are only obligated to pay to each creditor class their allowed claims and interest at the rate required by the Code. To the extent that the creditors have agreements among

themselves - for one class to pay over its distribution to another class - it does not impact the obligations of the Debtors. See, e.g., Bank of Am. N.A. v. N. LaSalle St. Ltd.

Pship (In re 203 N. LaSalle St. Pship), 246 B.R. 325, 330 (Bankr. N.D. Ill. 2000) (holding that senior creditor could assert its unsecured deficiency claim against subordinated creditor even though it was a non-recourse obligation and could not be collected from the debtor); First Fidelity Bank, N.A. v. Midlantic Natl Bank (In re Ionosphere Clubs, Inc.), 134 B.R. 528, 532 (Bankr. S.D.N.Y. 1991) (concluding that because creditors were under-secured, senior creditors were entitled to interest only from the distributions due to subordinated creditors); In re Smith, 77 B.R. 624, 627 (Bankr. N.D. Ohio 1987) (holding that subordination agreements between creditors may not impair the rights of the other creditors and that the amount of claims against the Debtor, and the distribution to uninvolved creditors, remain unaffected). See also Patrick Darby,

Southeast and New England Mean New York: The Rule of Explicitness

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and Post-Bankruptcy Interest on Senior Unsecured Indebtedness, 38 Cum. L. Rev. 467, 477 (where interest claim is not allowed under Bankruptcy Code, the senior creditor must seek to collect that interest from subordinated creditors). The Court agrees with the TPS Consortiums argument. The

fact that some of the creditors have contractually agreed to pay their distribution to other creditors does not mean that the Debtors are required to make payments to the senior creditors that are more than the Bankruptcy Code allows, while preserving the subordinated creditors claims against the estate. While the

Debtors can, through a plan of reorganization, effectuate the subordination agreements by diverting payments from subordinated creditors to senior creditors, that cannot affect the total claims against the estate, which do not include post-petition interest on any unsecured claim at more than the federal judgment rate. at 627. b. WMI Senior Noteholders Group See, e.g., First Fidelity, 134 B.R. at 532; Smith, 77 B.R.

The WMI Senior Noteholders Group argues that the best interest of creditors test mandates that the Court award them the higher of the federal judgment rate and the contract rate on their floating interest rate bonds. During certain periods

throughout the case, the contract rate on the floating interest bonds was actually less than the federal judgment rate.

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Consequently, the WMI Senior Noteholders Group argues that if they are awarded only their contract rate of interest, it would lead to the absurd result of junior creditors getting paid postpetition interest at a higher rate than senior creditors. This argument is moot because the Court is not awarding anyone post-petition interest at the contract rate. The WMI

Senior Noteholders are entitled under section 726(a)(5) only to the federal judgment rate of interest from the Debtors, the same as all other unsecured creditors. To the extent that this

results in them getting more or less than their contract rate of interest, it may be a matter between them and the other creditors who are parties to a subordination agreement, but it is irrelevant to the Debtors obligations under the Bankruptcy Code. c. General unsecured creditors

The Creditors Committee argues that application of the federal judgment rate is inequitable in this case because the only class that is adversely affected by doing so is the class of general unsecured creditors. It cites the Debtors updated

liquidation analysis which shows that, after application of the subordination provisions, the general unsecured creditors are the only ones who will receive less by application of the federal judgment rate than by application of the contract rate. Tr. 7/14/2011 at 61-62, 82, 170.) (D 375;

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This is, of course, true in total dollars because none of the general unsecured creditors will be getting a contract rate of interest. (D 375.) However, they will be getting a higher

percentage of the post-petition interest to which they are entitled under the federal judgment rate (76%) than under the contract rate (29%), because of the limitation on payment of interest to senior creditors. (Id.) Further, it is irrelevant

that general unsecured creditors would get more in dollars if the Court were to award contract rates of interest, because they are simply not entitled to receive that rate under sections 726(a)(5) and 1129(a)(7). The Creditors Committee also contends that further delay will be caused by the Court denying confirmation of the Modified Plan because of the need to make further revisions and perhaps re-solicit, which will further erode recoveries for the lower creditor classes. (D 254, D 375; Tr. 7/14/2011 at 43-44, 71-72.)

This of course does not justify ignoring the requirements of the Bankruptcy Code. As the LTW Holders note, further delay

might have been avoided by the Debtors if the Modified Plan had simply provided that post-petition interest would be paid to unsecured creditors at whatever rate the Court determined was appropriate. 2. Date of computation of federal judgment rate

The Plan Objectors contend that if the federal judgment rate

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of interest is paid on creditors claims, it should not be the rate as of the petition date. They propose calculating it as of

different dates largely because shortly after this case was filed, the federal judgment rate fell precipitously from 1.95% to as low as .18% as of June 16, 2011. (EC 301.)

The Equity Committee argues that the post-petition interest rate should be either the rate as of the Effective Date of any confirmed plan or a floating monthly rate. The Equity Committee

argues that this is appropriate because the purpose of postpetition interest is to compensate the creditors for the time value of their money and should reflect the different rates applicable during the pendency of the case. Melenyzer, 143 B.R. at 833. The Court rejects this argument, however, because similar arguments have been made to justify using market or contract rates but were rejected. Id. at 832-33. See, e.g.,

The TPS Consortium argues that the confirmation date is the appropriate date to use because the federal judgment rate is derived from section 1961(a) of title 28 which states that interest shall be paid from the date of the entry of the judgment. The TPS Consortium argues that none of the claims at

issue derive from any judgment and that the most analogous order to a judgment is the confirmation order because it establishes the parties rights. See, e.g., In re Am. Preferred

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Prescription, Inc., 255 F.3d 87, 92 (2d Cir. 2001) (The confirmation of a plan in a Chapter 11 proceeding is an event comparable to the entry of a final judgment in an ordinary civil litigation.); Johnson v. Stemple (In re Stemple), 361 B.R. 778, 796 (Bankr. E.D. Va. 2007) (holding that orders of confirmation, like myriad orders entered by this Court, are considered final judgments, thus triggering the doctrines of res judicata and/or collateral estoppel.). The Plan Supporters disagree arguing that, in the event the Court finds that the federal judgment rate is the appropriate rate to be paid for post-petition interest, it should be the rate that was applicable as of the petition date, because it is from that date that the creditors are measuring the loss of the use of their money. See, e.g., In re Evans, Bankr. No. 10-80446C, 2010

WL 2976165, at *2 (Bankr. M.D.N.C. July 28, 2010) (holding that the date on which the applicable federal judgment rate is to be determined for purposes of section 726(a)(5) is the federal judgment rate in effect on the petition date); In re Gulfport Pilots Assn, Inc., 434 B.R. 380, 392-93 (Bankr. S.D. Miss. 2010) (stating that if the debtor were solvent, creditor would be entitled to post-petition interest at the federal judgment rate in effect on the petition date); Best, 365 B.R. at 727 (holding that the legal rate mean[s] the federal judgment interest rate at the date the petition is filed); Chiapetta, 159 B.R. at 161

87

(holding that since a claim is like a judgment entered at the time of the bankruptcy filing, the applicable rate should be the federal judgment rate in effect at the time of the bankruptcy filing); Melenyzer, 143 B.R. at 833 (holding that for purposes of [section] 726(a)(5), the federal judgment rate selected should be that in effect as of the date of filing, as opposed to the date of distribution. . . . Setting the legal rate of interest

as of the date of distribution . . . makes little sense.). The Court agrees with the Plan Supporters on this point. The statute expressly provides that such interest shall be paid at the legal rate from the date of the filing of the petition suggesting that it is the interest rate effective on the petition date that should be used. 11 U.S.C. 726(a)(5). The case law

is uniform in holding that it is the petition date at which the federal judgment rate is determined for purposes of awarding interest under section 726(a)(5). See, e.g., Evans, 2010 WL

2976165, at *2; Gulfport Pilots Assn, 434 B.R. at 393; Best, 365 B.R. at 727; Chiapetta, 159 B.R. at 161; Melenyzer, 143 B.R. at 833. 3. Compounding of interest

The Modified Plan provides that interest shall continue to accrue only on the then outstanding and unpaid obligation or liability, including any Post-petition Interest Claim thereon, that is the subject of an Allowed Claim. (D 255 at 1.151.)

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The Equity Committee contends that this compounding of interest is not permissible. See, e.g., Vanston Bondholders Protective

Comm. v. Green, 329 U.S. 156, 165-66 (1946) (holding that interest on interest is not allowable on equitable principles); Chi., Milwaukee, St. Paul & Pac. R.R., 791 F.2d at 532 (denying compounding of interest because it would result in a windfall for the debenture holders); In re Anderson, 69 B.R. 105, 109 (B.A.P. 9th Cir. 1986) (affirming bankruptcy courts denial of interest on interest); In re The N.Y., New Haven and Hartford R.R. Co., 4 B.R. 758, 799 (D. Conn. 1980) (denying interest on interest under the principles articulated in Vanston). The Debtors respond that compound interest is being paid because that is exactly what the Debtors are obligated to pay under the indentures. (See, e.g., WMI NG 1 at 5.3.) Once again, in

The Court rejects the Debtors argument.

awarding post-petition interest to creditors in this case, the Court is doing so not because of any contractual right they may have to it. Their contractual right to compound interest has Their

been eliminated (as not allowed) by section 502(b)(2).

entitlement to post-petition interest is being granted only as required by the terms of section 726(a)(5), which the Court determines is the federal judgment rate. annual compounding of interest. The latter permits only

28 U.S.C. 1961(b) (providing

that [i]nterest shall be computed daily to the date of payment .

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. . and shall be compounded annually.).

See also Curry v. Am.

Intl Grp., Inc., Plan No. 502, 579 F. Supp. 2d 424, 426 (noting that the federal judgment rate is compounded annually). Because the Court concludes that creditors are only entitled to the payment of interest from the Debtors at the federal judgment interest rate in effect on the petition date, compounded annually, the Court finds that the Modified Plan which provides for payment of the contract rate violates the best interests of creditors test. 4. 11 U.S.C. 726(a)(5) & 1129(a)(7). Payment of subordinated claims

The WMB Noteholders object to the Modified Plan because it provides that senior unsecured creditors will receive postpetition interest on their claims before the WMB Noteholders subordinated claims are paid. They contend that this violates

the best interests of creditors test because they will not receive at least as much as they would receive under chapter 7 according to the provisions of section 726. The WMB Noteholders have stipulated that their claims are subordinated to general unsecured claims because they hold claims arising from rescission of a purchase or sale of a security of WMB, an affiliate of the Debtors. 11 U.S.C. 510(b). Although

the distribution scheme in section 726 expressly provides that it is subject to section 510, the WMB Noteholders contend that section 510(b) only subordinates them to all claims or interests

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that are senior to or equal the claim or interest represented by such security. Id. They argue that because their securities

were bonds issued by WMB, i.e. debt, that their claims are only subordinated to the general unsecured claims of the Debtors and not to equity. Although case law is sparse on this issue, they See, e.g., In re El Paso

contend that it supports their theory.

Refinery, L.P., 244 B.R. 613, 624-25 (Bankr. W.D. Tex. 2000) (holding that a subordinated claim is subordinated only to other general unsecured claims of the same type but not to interest unless the subordinated claim is itself a claim for interest). The Indenture Trustee for the PIERS responds that the Modified Plan properly provides for post-petition interest on unsecured claims before any distribution is due to subordinated creditors such as the WMB Noteholders. The Indenture Trustee for

the PIERS notes that section 726 is expressly subject to section 510. 11 U.S.C. 726(a). See also, In re Virtual Network,

Servs. Corp., 902 F.2d 1246, 1249 (7th Cir. 1990); Wash. Mut., 442 B.R. at 357; In re Rago, 149 B.R. 882, 889 (Bankr. N.D. Ill. 1992). At oral argument, the Indenture Trustee for the PIERS argued that section 510(b) subordinates the WMB Noteholders claims to all claims. 11 U.S.C. 510(b). (Tr. 8/24/2011 at 185-87.)

The definition of claim includes all right to payment, whether or not such right is reduced to judgment, liquidated,

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unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, legal, equitable, secured, or unsecured. 101(5) (emphasis added). Id. at

The Indenture Trustee for the PIERS

contends that this definition includes unmatured (i.e., postpetition) interest. Although section 502(b)(2) provides that

allowed claims do not include unmatured interest, the subordination in section 510(b) is to claims not allowed claims. Id. at 510(b). In contrast, section 510(c) provides Id. at

for equitable subordination to allowed claims only. 510(c)(1).

The Court agrees with the argument of the Indenture Trustee for the PIERS. According to the plain language of sections 510

and 726, the WMB Noteholders are subordinated to all claims, the definition of which includes unmatured interest on those claims. Therefore, the Court concludes that unsecured creditors

are entitled to post-petition interest on their claims before any distribution to the WMB Noteholders. 5. Effect on subordination rights

The PIERS Holders36 argue that if the Court determines that the Debtors are only obligated to pay creditors at the federal judgment rate of interest, then that is all the senior creditors are entitled to receive and the subordinated creditors are not

The PIERS Holders include Normandy Hill Capital L.P. (an individual PIERS holder) and Wells Fargo Bank, NA, the Indenture Trustee for the PIERS. 92

36

obligated to pay them the difference between what the Debtors pay and their contract rate of interest. The WMI Senior Noteholders Group and WMI Senior Noteholders Indenture Trustee disagree. They contend that the

subordination provisions in the various creditors contracts (the Senior Subordinated Indenture, the CCB-1 Guarantee Agreements, the CCB-2 Guarantee Agreements, the Junior Subordinated Notes Indenture, and the PIERS Guarantee Agreement) mandate that the subordinated creditors pay the senior creditors their claims in full, including contract interest. (WMI NG 1 at 15.3; WMI NG 2

at 15.3; WMI NG 3 at 3(a) & (b); WMI NG 4 at 15.01; WMI NG 5 at 3(a) & (b); WMI NG 6 at 12.2; WMI NG 7 at 6.1.) The PIERS Holders contend that the subordination provisions do not require that they pay the senior creditors their full contract rate of interest because it does not explicitly refer to the rate of post-petition interest to which they are subordinate. Therefore, the PIERS Holders contend that the interest they are subordinated to is only the rate the Court determines is appropriate. They rely on the Rule of Explicitness, which

provides that in order to subordinate junior creditors the indenture must explicitly provide for that outcome. See, e.g.,

In re King Res. Co., 528 F.2d 789, 791 (10th Cir. 1976) (adopting holdings in Kingsboro and Time Sales that where the subordinating provisions are unclear or ambiguous as to whether

93

post-petition interest is to be allowed a senior creditor, the general rule that interest stops on the date of filing of the petition in bankruptcy is to be followed); In re Kingsboro Mort. Corp., 514 F.2d 400, 401 (2d Cir. 1975) (holding that language of subordination agreement requiring payment in full of all principal and interest on all Senior Debt was insufficiently express to apply to post-petition interest); In re Time Sales Fin. Corp., 491 F.2d 841, 844 (3d Cir. 1974) (affirming denial of enforcement of subordination agreement for payment of postpetition interest because the agreement did not appropriately apprise the debenture note holders that their claims against the bankrupt would be subordinated to [the senior creditors] demand for post-petition interest). The WMI Senior Noteholders Group responds that the Rule of Explicitness no longer applies since passage of the Bankruptcy Code and the enactment of section 510. See, e.g., In re Bank of

New England Corp., 364 F.3d 355, 362, 365 (1st Cir. 2004) (concluding that the enactment of section 510(a) [of the Bankruptcy Code] means that the enforcement of subordination provisions is no longer a matter committed to the bankruptcy courts notions of what may (or may not) be equitable and therefore the Rule of Explicitness is no longer applicable); Chem. Bank v. First Trust of N.Y. (In re Southeast Banking Corp.), 156 F.3d 1114, 1124 (11th Cir. 1998) (stating that we

94

conclude that Congress, by enacting section 510(a) of the Bankruptcy Code, abrogated the pre-Code Rule of Explicitness. a necessary consequence of this change in bankruptcy law, the Rule of Explicitness can no longer survive as the progeny of the bankruptcy courts equity powers or as a federal canon of contract construction.). The Court disagrees with the argument of the WMI Senior Noteholders Group that the Rule of Explicitness is no longer applicable. While section 510(a) provides that subordination As

agreements are enforceable, it states that they are only enforceable to the same extent that such agreement is enforceable under applicable law. 11 U.S.C. 510(a). In the

Southeast Banking Corp. case, the Eleventh Circuit certified to the New York Court of Appeals the question of the applicability of the Rule of Explicitness under New York law.37 1126. 156 F.3d at

The New York Court of Appeals answered the question in the

affirmative, stating that [i]n accordance with the Rule of Explicitness, New York law would require specific language in a subordination agreement to alert a junior creditor to its assumption of the risk and burden of allowing the payment of a senior creditors post-petition interest demand. Chem. Bank v.

The Indentures are governed by New York law. (WMI NG 1 at 1.12; WMI NG 2 at 1.12; WMI NG 3 at 6(a); WMI NG 4 at 14.05; WMI NG 5 at 6(a); WMI NG 6 at 1.11; WMI NG 7 at 9.4.) 95

37

First Trust of N.Y. (In re Southeast Banking Corp.), 93 N.Y. 2d 178, 186 (N.Y. 1999). As a result, the Eleventh Circuit held

that the language of the subordination provision was insufficiently precise on the issue of post-petition interest to satisfy the Rule of Explicitness under New York law. Chem. Bank

v. First Trust of N.Y. (In re Southeast Banking Corp.), 179 F.3d 1307, 1310 (11th Cir. 1999). See also, First Fidelity Bank, N.A.

v. Midlantic Natl Bank (In re Ionosphere Clubs, Inc.), 134 B.R. 528, 534-35 (Bankr. S.D.N.Y. 1991) (concluding that the Rule of Explicitness articulated in Kingsboro retains its vitality and remains the controlling law in the Second Circuit under the Bankruptcy Code and refusing to enforce subordination agreement that would pay post-petition interest to senior creditors because of lack of specificity in the indenture). The WMI Senior Noteholders Indenture Trustee further argues, however, that Normandy Hill is relying on a prior version of the Indenture Agreement and does not refer to critical language from the subordination provision. The Indenture Trustee

contends that the correct version of the subordination provision requires subordination to Senior Indebtedness, which is defined as principal of, premium, if any, interest (including all interest accruing subsequent to the commencement of any bankruptcy or similar proceeding, whether or not a claim for post-petition interest is allowable as a claim in any such

96

proceeding).

(WMI NG 7 at 6.)38

The Court concludes that the WMI Senior Noteholders Group and the Senior Noteholders Indenture Trustee are correct. The

subordination provisions adequately apprised the subordinated creditors that their payments were subordinate to all contractual post-petition interest, even if the Court allowed none. They

certainly, therefore, were on notice that they were subordinate to contractual post-petition interest if the Court allowed some. Therefore, the Court concludes that to the extent the Rule of Explicitness is still applicable, the indentures at issue in this case meet its requirements.39 Therefore, the Plan provisions that

give effect to the subordination provisions in the indentures and require subordinated creditors to pay senior creditors postpetition interest at the contract rate even though the Debtors are only required to pay interest at the federal judgment rate

The Indenture Trustee notes that it would have been impossible to give notice to the subordinated creditors of exactly what interest rate they were subordinated to, because the PIERS were issued in 2001 and the Senior Notes were issued between November 2003 and August 2006 with varying rates of interest. (WMI NG 1-7.) According to Normandy Hill, however, to hold as the WMI Senior Noteholders Group argues would penalize the subordinated creditors for the bad acts of the senior creditors. It assumes that the Court can apply the federal judgment interest rate only if it finds that the Settlement Noteholders engaged in improper conduct. Because the Court finds that the federal judgment interest rate is the rate due under section 726(a)(5) without considering the equities of the case, Normandy Hills argument on this point is moot. (See supra Part E1.) 97
39

38

are not violative of the Bankruptcy Code.40 6. Releases for distributions

The Equity Committee also objects to confirmation of the Modified Plan because it conditions distributions to creditors and other stakeholders on granting a direct release to JPMC and other non-debtors. (D 255 at 43.2 & 43.6.) The Equity

Committee contends that this violates the best interests of creditors test under section 1129(a)(7). See, e.g., AOV Indus.,

792 F.2d at 1151 (holding that plan which required a creditor who had a unique direct claim against plan funder to provide a release of plan funder to get a distribution unfairly discriminated against it because majority of creditors had no such claim); In re Conseco, 301 B.R. 525, 528 (Bankr. N.D. Ill. 2003) (holding that plan provision predicating receipt of distribution on granting third party releases violated best interest of creditors test because creditors could not be held to have voluntarily agreed to a release simply by accepting a distribution). The Equity Committee argues that under chapter 7, even though preferred shareholders are not projected by the Debtors to receive any distribution, they would still retain their claims

While the PIERS may receive payment in full of their claims from the Debtors, they may be required to give a part of their distribution to senior creditors. This, however, is simply a result of the terms they accepted when investing in a subordinated note. 98

40

against third parties including JPMC.

Therefore, because the

preferred shareholders are not getting any consideration under the Plan for their agreement to release JPMC and the others, they should be able to receive a distribution without granting a release to JPMC and the FDIC. The Plan Supporters disagree. They contend that the

releases are a condition to the GSA imposed by JPMC and the FDIC. They argue that the $7 billion in assets which are being used to provide a recovery for creditors is only available because JPMC and the FDIC have agreed to waive their claims of ownership of certain assets and to waive in excess of $54 billion in claims they hold against the estates. They argue that without the GSA,

creditors (and shareholders) would get no recovery. The Court finds that the condition requiring a release in order to receive a distribution does not violate the best interest of creditors test. Any potential recovery which

shareholders may receive, even from the Liquidating Trust, is largely due to the GSA which is funding the payments to creditors who are senior in priority to the shareholders and who, in the absence of the GSA, would have first priority to the proceeds of the assets in the Liquidating Trust. release is purely voluntary. In addition, granting a

A preferred shareholder who does

not wish to give a release does not have to, but will be forgoing any distribution. The cases cited by the Equity Committee do not

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compel a different result because the release provision in this case is voluntary and is applicable equally to all creditors and shareholders, rather than applicable only to a creditor or shareholder that has a unique direct claim against the released parties. See, e.g., AOV Indus., 792 F.2d at 1151 (finding

unequal treatment because one creditor asserted it was being required to release a direct, rather than an indirect, claim against plan funder); Conseco, 301 B.R. at 528 (finding releases which were consensual did not violate the Bankruptcy Code). 7. Use of Liquidating Trust structure

The LTW Holders argue that the Modified Plan also violates the best interests of creditors test because it provides for the assignment of the estates causes of action to a Liquidating Trust and the issuance to creditors of interests in the Trust. They contend that by using this mechanism, creditors will be required to pay capital gains tax now on the value of the interests in the Trust that are distributed to them, without any concomitant payment to them of any value for many years until the claims of the estate are litigated to judgment or settled. The

LTW Holders argue that in a chapter 7 case they would not have any tax obligations until they actually received a distribution from the estate. Because the Court is denying confirmation for other reasons, and directing the parties to mediation, the Court suggests that

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the parties consider a means to avoid negative tax consequences to creditors. 8. See infra Part H. Distribution to WMB Senior Noteholders

The Equity Committee objects to the distribution of $335 million of estate assets to WMB Senior Noteholders (Class 17A) because it asserts that they are not creditors of this estate. It contends that such a distribution provides no benefit to the estate and merely diverts assets that could be used to provide a distribution to legitimate creditors (or shareholders) of the Debtors. The WMB Noteholders have asserted that they have claims against the Debtors for misrepresentations made by the Debtors in connection with the sale of the WMB Senior Notes. While they

admit that such a claim would be subordinated under section 510(b), they contend that it is nonetheless a legitimate claim against the Debtors. Rather than litigate this issue, the

Debtors have agreed (apparently with the urging of the FDIC) to the payment of $335 million from the tax refunds for this class of creditors. The Court finds that this resolution is a reasonable settlement of the dispute because it will avoid contentious and expensive securities litigation which could result in a significantly larger judgment against the Debtors. See, e.g.,

TMT Trailer Ferry, 390 U.S. at 424; In re RFE Indus., Inc., 283

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F.3d at 165; Martin, 91 F.3d at 393. F. Feasibility

The Equity Committee argues that if more than 300 creditors elect to receive stock in the Reorganized Debtor,41 then the Modified Plan will not be feasible. It contends that if the

Reorganized Debtor has more than 300 shareholders, it will be required to comply with the reporting requirements of the Securities Exchange Act of 1934. Because the Debtors have not

been complying with those requirements during the pendency of the bankruptcy case, the Equity Committee asserts that the Reorganized Debtor would be unable to file the delinquent reports and audited financial reports. The Debtors do not dispute that it would be cost prohibitive to file the missing financial statements. The Debtors argue,

however, that an entity that complies with SEC Staff Legal Bulletin No. 2 (Apr. 15, 1997, II.c.) is not required to file any 10-Ks or 10-Qs while in chapter 11 nor to file any missed 10-Ks or 10-Qs upon emergence. They contend that they have The Debtors note

complied with the requirements in the Bulletin.

that the SEC has not initiated any enforcement inquiry or

The Debtors claims agent could not testify as to the exact number of creditors who will hold stock in the Reorganized Debtor, either by election or default. (Tr. 7/13/2011 at 90-91.) In addition, the Modified Plan provides the holders of Disputed Claims, including the LTW Holders, the right to elect stock if their claims are allowed, which may not be known for some time. (D 255 at 27.3.) 102

41

suggested that the Debtors financial reporting was deficient. The Court finds that the Debtors have presented sufficient evidence that the Modified Plan could be feasible even if the Reorganized Debtor has more than 300 shareholders. Feasibility

does not require that success be guaranteed but rather only a reasonable assurance of compliance with plan terms. In re

Orlando Investors LP, 103 B.R. 593, 600 (Bankr. E.D. Pa. 1989). See also In re Briscoe Enters., Ltd., II, 994 F.2d 1160, 1166 (5th Cir. 1993) ([I]t is clear that there is a relatively low threshold of proof necessary to satisfy the feasibility requirement.). Based on the foregoing, the Court finds that the

Modified Plan meets the feasibility test under section 1129(a)(11). G. Miscellaneous Other Objections 1. WMI Senior Noteholders Group

The Modified Plan provides that WMI Senior Noteholders will receive their pro rata share of Creditor Cash and Liquidating Trust Interests totaling their aggregate claims plus postpetition interest. (D 255 at 6.1.) In addition, to the extent

that WMI Senior Noteholders do not get paid in full in cash on the Effective Date, WMI Senior Noteholders were entitled to elect to receive stock in the Reorganized Debtor in lieu of a distribution of cash or Liquidating Trust Interests. 6.2.) (Id. at

Approximately $24 million in WMI Senior Noteholders did

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elect to receive stock in lieu of cash or Liquidating Trust Interests. (D.I. 8108 at 32.)

The WMI Senior Noteholders Group and the WMI Senior Noteholders Indenture Trustee object to the Modified Plan contending it violates the absolute priority rule by providing for a distribution (of cash, stock and interests in the Liquidating Trust) to junior creditors before the Senior Notes are paid in full in cash, as mandated by the subordination provisions of the Indentures. (WMI NG 1 at 15.2; WMI NG 2 at

15.2; WMI NG 4 at 15.03; WMI NG 6 at 12.2(b); WMI NG 7 at 6.1(c).) See also In re Westpoint Stevens, Inc., 600 F.3d 231,

255-56 (2d Cir. 2010) (holding that under terms of subordination agreement, senior creditors were entitled to be paid in full in cash before subordinated creditors could receive distribution under plan). The Court rejects the argument of the WMI Senior Noteholders Group and the WMI Senior Noteholders Indenture Trustee. First, the language of the Indentures do not support For example, section 15.2 of the First

their argument.

Supplemental Indenture for the Senior Debt Securities provides in relevant part that [i]n the event of . . . bankruptcy . . . such Senior Debt shall be first paid and satisfied in full before any payment or distribution of any kind or character, whether in cash, property or securities . . . shall be made upon the

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[Junior] Securities . . . .

(WMI NG 1 at 15.2.

See also, WMI

NG 2 at 15.2; WMI NG 4 at 15.03; WMI NG 6 at 12.2(b).) Those sections merely require that the WMI Senior Noteholders claims be paid and satisfied in full not that they be paid in cash. (Id.) The WMI Senior Noteholders are, in fact, being

paid and satisfied in full under the Modified Plan by the payment to them of a combination of cash and Liquidating Trust Interests and/or, if they so elected, stock in the Reorganized Debtor. They are entitled to no more under the provisions of the

Indentures. Section 6.1(e)(1) of the First Supplemental Indenture relating to the PIERS contains different language but the result is the same. (WMI NG 7 at 6.1(e)(1).) It provides that [i]n

the event of and during the continuance of any event specified in Section 6.1(a) [which includes a bankruptcy case] unless all Senior Indebtedness is paid in full in cash, or provision shall be made therefor payments made by the Debtors to the PIERS shall be segregated for the benefit of the Senior Noteholders. (Id.)

Under the Modified Plan, provision has been made for the payment of the Senior Noteholders from the cash that the Debtors have on hand or from cash distributions from the Liquidating Trust. To

the extent that the Senior Noteholders have elected to receive stock in lieu of cash, they have consented to the provision for the payment of their claims in that manner.

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Second, the Senior Noteholders have accepted their treatment under the Modified Plan overwhelmingly, by more than 99% in amount and in number. (D.I. 8113 at 9; Tr. 7/13/2011 at 65.)

Therefore, even if the Modified Plan did not comply with the requirements of the subordination agreements, the Court finds that the Senior Noteholders have waived that failure. See, e.g.,

Bartle v. Markson Bros., Inc., 314 F.2d 303, 305 (2d Cir. 1963) (refusing to reverse bankruptcy referees finding that plan was in best interests of creditors although it violated subordination agreement because senior creditors had knowingly voted to accept plan that waived their rights). See also 4 Collier on Bankruptcy

510.03[3] (Alan N. Resnick & Henry Sommer eds., 16th ed. 2011) (If subordination agreements were not waivable under a plan of reorganization acceptable to the senior creditor, the section would prevent just what Congress envisioned: that senior creditors may compromise with junior creditors in order to confirm a plan.). Third, the Bankruptcy Code does not require that the WMI Senior Noteholders be paid in cash before junior creditors receive a distribution. See, e.g., Case, 308 U.S. at 117 (In

application of this rule of full or absolute priority this Court recognized certain practical considerations and made it clear that such rule did not require the impossible, and make it necessary to pay an unsecured creditor in cash as a condition of

106

stockholders retaining an interest in the reorganized company. His interest can be preserved by the issuance, on equitable terms, of income bonds or preferred stock.) (quoting N. Pac. Ry. Co. v. Boyd, 228 U.S. 482, 508 (1913)). The payment under

the Modified Plan of cash, Liquidating Trust Interests, or stock of a value equal to their claims satisfies the absolute priority rule and provides the Senior Noteholders with payment in full of their claims. 2. LTW Holders

The LTW Holders object to confirmation of the Modified Plan because they contend that the PIERS are improperly treated as creditors rather than as equity. They argue that part of the

PIERS claims are based on the accretion of an original issue discount that the claims had because of the value of warrants that were issued in connection with the PIERS. The Court rejects this argument. The same argument was

raised by the LTW Holders in connection with the Sixth Amended Plan. In the January 7 Opinion, the Court found that the PIERS

hold preferred stock issued by WMCT 2001 and that WMCT 2001 holds debt of the Debtors. 442 B.R. at 361. Therefore, the Court

concluded that unless WMCT 2001 had been merged into the Debtors (as had several other affiliates), the PIERS claims were debt. Id. at 362.

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At the confirmation hearings held in connection with the Modified Plan, the Debtors presented evidence that WMCT 2001 did not merge with the Debtors and remains a separate entity. 7/14/2011 at 20-33; D 401.) PIERS are debt, not equity. H. Equity Committee Standing Motion (Tr.

Consequently, it is clear that the

The Equity Committee has recently filed a motion for authority to prosecute an action to equitably subordinate or disallow the Settlement Noteholders claims. (D.I. 8179.) The

parties agreed to present evidence, brief and argue those issues in conjunction with confirmation of the Modified Plan. In order for the Court to grant the Equity Committees motion, the Court must find that it has stated a colorable claim which the Debtors have unjustifiably refused to prosecute. See Official Comm. of Unsecured Creditors of Cybergenics Corp. v. Chinery, 330 F.3d 548, 566-67 (3d Cir. 2003). standing bears the burden of proof. The party seeking

G-1 Holdings, Inc. v. Those

Parties Listed on Exhibit A (In re G-1 Holdings, Inc.), 313 B.R. 612, 629 (Bankr. D.N.J. 2004). The Court finds, through the Debtors support of the Settlement Noteholders opposition to the Equity Committees motion, that the Debtors have refused to pursue the equitable subordination or disallowance claim. Whether that was justified

depends on whether the claim is colorable and the costs of

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pursuing that claim.

See, e.g., In re STN Enters., 779 F.2d 901,

905 (2d Cir. 1985) (noting that in order to determine whether the refusal to prosecute the claim was unjustified the court must balance the probability of success against the financial burden the suit would have on the estate). The threshold for stating a colorable claim is low and mirrors the standard applicable to a motion to dismiss for failure to state a claim.42 See, e.g., In re Centaur, LLC, No.

10-10799, 2010 WL 4624910, at *4 (Bankr. D. Del. Nov. 5, 2010) (In deciding whether there is a colorable claim, the court should undertake the same analysis as when a defendant moves to dismiss a complaint for failure to state a claim.); In re Adelphia Commcn Corp., 330 B.R. 364, 376 (Bankr. S.D.N.Y. 2005) (noting that the burden of showing a colorable claim is a relatively easy one). 1. Claim for equitable subordination

In its objection to confirmation, the Equity Committee contends that there is a viable claim for equitable subordination of the Settlement Noteholders claims. raised the same objection. An individual shareholder

The Settlement Noteholders argued

While the Settlement Noteholders assert that the Court should apply a summary judgment standard because it has considered the extensive evidence presented at the confirmation hearings, the Court declines to do so because it substantially restricted the discovery which the Equity Committee could take on this issue. 109

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preliminarily that the objection is procedurally defective.

See,

e.g., Protarga v. Webb (In re Protarga), Adv. No. 04-53374, 2004 WL 1906145, at *3 (Bankr. D. Del. Aug. 25, 2004) (Claims for equitable subordination must be brought as a separate adversary proceeding pursuant to Rule 7001(8) . . . .). The Equity

Committees motion for authority to bring an adversary action solves that procedural requirement. The Settlement Noteholders and the Creditors Committee contend, however, that the Equity Committee and shareholders do not have standing to bring an equitable subordination claim based on the requirements of the Constitution because they have suffered no damages which could be remedied by equitable subordination. See Lujan v. Defenders of Wildlife, 504 U.S. 555,

560 (1992) (discussing the three elements needed for standing: (1) an injury in fact, which is concrete, particularized and actual or imminent; (2) a causal connection between the injury and the conduct; and (3) a likelihood that the injury will be redressed by a favorable decision). They argue that even if the

Settlement Noteholders claims are subject to equitable subordination,43 they would simply be subordinated to other

In order to show a valid claim for equitable subordination three elements are required: (1) engagement in some type of inequitable conduct; (2) the misconduct resulted in injury to the creditors or created an unfair advantage to the defendant; and (3) the equitable subordination of the claim must be consistent with the provisions of the Bankruptcy Code. See, e.g., United States v. Noland, 517 U.S. 535, 538-39 (1996); 110

43

creditors claims and still be paid ahead of equity.

See, e.g.,

Adelphia Recovery Trust v. Bank of Am., N.A., 390 B.R. 80, 99 (S.D.N.Y. 2008) (granting motion to dismiss equitable subordination claim by creditors of parent against lenders of subsidiary because [i]t follows reasonably from the judicial and legislative interpretations of the statute that the other creditors whose welfare is the primary focus of equitable subordination law must be creditors of the same debtor, as a given claim may not be subordinated to an equity interest, but only to another claim.). The Court agrees with the Settlement Noteholders and the Creditors Committee that under the plain language of the statute equitable subordination only permits a creditors claim to be subordinated to another claim and not to equity. See 11 U.S.C.

510(c) (providing for equitable subordination of all or part of an allowed claim to all or part of another allowed claim). Equitable subordination is not a remedy available to (or of much help in redressing any injury to) the shareholders for the Settlement Noteholders actions. Therefore, the Court finds that

the Equity Committee has failed to state a colorable claim for equitable subordination of the Settlement Noteholders claims.

Citicorp Venture Cap. Ltd. v. Comm. of Creditors Holding Unsecured Claims, 160 F.3d 982, 986-87 (3d Cir. 1998); In re Mobile Steel Co., 563 F.2d 692, 699-700 (5th Cir. 1977). 111

2.

Claim for equitable disallowance a. Availability of Remedy

The Equity Committee contends alternatively that, because of the improper conduct of the Settlement Noteholders in trading on material non-public information, the equitable disallowance of their claims is warranted so that any distribution to which they would be entitled is redistributed to other creditors and ultimately to the shareholders.44 See, e.g., Citicorp, 160 F.3d

at 991 & n.7 (3d Cir. 1998) (affirming equitable subordination of insiders claim to other creditors because of trading on insider information, but not precluding additional remedies such as equitable disallowance and an award of expenses, fees, and other costs caused by insiders conduct); Adelphia Commcns Corp. v. Bank of Am., N.A. (In re Adelphia Commcns Corp.), 365 B.R. 24, 71-73 (Bankr. S.D.N.Y. 2007) (denying motion to dismiss because equitable disallowance of claims by bankruptcy court remains viable cause of action and equitable subordination is not the exclusive remedy for wrongdoing), affd in relevant part, 390

The Indenture Trustee for the PIERS contends that even if the Court equitably disallows the claims of the Settlement Noteholders, the Indenture Trustee as the holder of the claims is still entitled to payment of 100% of those claims. The Court disagrees. To the extent the Court disallows those claims, they are disallowed regardless of who holds them. Cf. Enron Corp. v. Springfield Assocs., L.L.C. (In re Enron Corp.), 379 B.R. 425, 439-45 (S.D.N.Y. 2007) (concluding that transferee of a claim could be subject to equitable subordination and disallowance under section 502(d) for conduct of transferor if claim was assigned, though not if it was sold). 112

44

B.R. 64, 74-75 (S.D.N.Y. 2008). The Equity Committee argues that equitable disallowance of the Settlement Noteholders claims is warranted in this case because they traded on insider information obtained while they participated in settlement negotiations with the Debtor and JPMC. See Pepper v. Litton, 308 U.S. 295, 311 (1939) (holding that claim of insider who traded on inside information was properly subordinated on equitable principles). The Equity Committee contends that the instant case is the paradigm case of inequitable conduct by a fiduciary. 160 F.3d at 987. Citicorp,

Like the creditor in Citicorp, the Equity

Committee contends that the Settlement Noteholders purchased (and sold) the Debtors securities with the benefit of non-public information acquired as a fiduciary for the dual purpose of making a profit and influenc[ing] the reorganization in [their] own self-interest. Id. See also Wolf v. Weinstein, 372 U.S.

633, 642 (1962) (Access to inside information or strategic position in a corporate reorganization renders the temptation to profit by trading in the Debtors stock particularly pernicious.). The Settlement Noteholders contend initially that equitable disallowance is not a valid remedy under the Bankruptcy Code, because it is not one of the specific exceptions to allowance of a claim articulated in section 502(b). See, e.g., Travelers

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Casualty & Surety Co. of Am. v. Pac. Gas & Elec. Co., 549 U.S. 443, 449-50 (2007) (holding that Bankruptcy Code does not bar contractual claim for attorneys fees incurred during bankruptcy case because it was not disallowable under one of the nine exceptions to disallowance under section 502(b)). See also

Mobile Steel, 563 F.2d at 699 (concluding that equitable considerations can justify only the subordination of claims, not their disallowance). The Settlement Noteholders argue that the

legislative history of the Code supports this argument, citing a version of the Senate bill that did not get included in the Bankruptcy Code, which would have provided that the court may disallow, in part or in whole, any claim or interest in accordance with the equities of the case. 510(c)(3) (1977). The Equity Committee responds that both arguments were rejected in the Adelphia case. part, 390 B.R. at 74-75. 365 B.R. at 71, affd in relevant S. 2266, 95th Cong.

The Bankruptcy Court in Adelphia noted

that there is other legislative history that expressly states that section 510 is intended to codify case law, such as Pepper v. Litton . . . and is not intended to limit the courts power in any way. 365 B.R. at 71 (citing Kenneth N. Klee, Legislative

History of the New Bankruptcy Law, 28 DePaul L. Rev. 941 (1979), reprinted in Collier on Bankruptcy, App. Pt. 4-1495)). As a

result, the District Court in Adelphia concluded that the Court

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cannot give any weight to the omission of Section 510(c)(3) of S. 2266 from the Bankruptcy Code, Congress could have decided to do away with equitable disallowance, or it could have thought specific reference to it was superfluous. 390 B.R. at 76.

In addition, the District Court in Adelphia held that the Travelers decision did not overturn the Pepper v. Litton decision which fairly read, certainly endorses the practice (in appropriate circumstances) of the equitable disallowance of claims, not on the basis of any statutory language, but as within the equitable powers of a bankruptcy court. Id.

Here, the Court agrees with the well-reasoned decisions of the Bankruptcy and District Courts in Adelphia and concludes that it does have the authority to disallow a claim on equitable grounds in those extreme instances - perhaps very rare - where it is necessary as a remedy. Adelphia, 365 B.R. at 73. See

also, Citicorp, 160 F.3d at 991 n.7 (disagreeing with district courts conclusion that equitable subordination was the exclusive remedy available for inequitable conduct and noting that Pepper v. Litton expressly upheld the bankruptcy courts power to disallow or subordinate a claim based on equitable grounds). The cases cited by the Settlement Noteholders do not foreclose the equitable disallowance of claims albeit under a different analysis. Cf. Travelers, 549 U.S. at 449-50 (holding

that Section 502(b)(1) disallows any claim that is

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unenforceable against the debtor . . . under any agreement or applicable law . . . [which is] most naturally understood to provide that, with limited exceptions, any defense to a claim that is available outside of the bankruptcy context is also available in bankruptcy.); Mobile Steel, 563 F.2d at 699 n.10 (concluding that equitable disallowance of claims is not available because it would add nothing to the protection against unfairness already afforded the bankrupt and its creditors. . . . If the misconduct directed against the bankrupt is so extreme that disallowance might appear to be warranted, then surely the claim is either invalid or the bankrupt possesses a clear defense against it.). Because the Equity Committee seeks to disallow

the claims of the Settlement Noteholders under facts that suggest they violated the securities laws, the Court believes that the Debtors would have a defense to those claims outside of the bankruptcy context as well. See, e.g., SEC v. Universal Express,

Inc., 646 F. Supp. 2d 552, (S.D.N.Y. 2009) (In addition to its discretion to order disgorgement, a court has the discretion to award prejudgment interest on the amount of disgorgement and to determine the rate at which such interest should be calculated. Awarding prejudgment interest, like the remedy of disgorgement itself, is meant to deprive wrongdoers of the fruits of their ill-gotten gains from violating securities laws.) (quoting SEC v. Lorin, 877 F. Supp. 192, 201 (S.D.N.Y. 1995), aff'd in part

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and vacated in part, 76 F.3d 458 (2d Cir. 1996)); SEC v. Haligiannis, 470 F. Supp. 2d 373, 385-86 (S.D.N.Y. 2009) (holding that civil monetary penalties can be awarded for securities violations, which are designed to punish the individual violator and deter future violations of the securities laws, and awarding civil monetary penalties of $15 million, roughly the amount of the defendants ill-gotten gains). b. Merits of claim

In Pepper v. Litton, the Supreme Court upheld the equitable disallowance of the claim of an insider who traded on material inside information, concluding that: He who is in . . . a fiduciary position . . . . cannot utilize his inside information and his strategic position for his own preferment. He cannot violate rules of fair play by doing indirectly through the corporation what he could not do directly. He cannot use his power for his personal advantage and to the detriment of the stockholders and creditors no matter how absolute in terms that power may be and no matter how meticulous he is to satisfy technical requirements. 308 U.S. at 311. The TPS Group contends that, although the Court need not decide that the Settlement Noteholders have violated the securities laws, reference to insider trading cases illustrates the magnitude of the Settlement Noteholders inequitable conduct. The Supreme Court has recognized two theories of insider trading under section 10(b): the classical theory and the misappropriation theory. See SEC v. Cuban, 620 F.3d 551, 553

117

(5th Cir. 2010).

Under the classical theory, section 10(b) and

Rule 10b-5 are violated when a corporate insider (i) trades in the securities of his corporation (ii) on the basis of (iii) material nonpublic information (iv) in violation of the fiduciary duty owed to his shareholders. See, e.g., U.S. v. OHagan, 521

U.S. 642, 651-52 (1997) (Trading on such information qualifies as a deceptive device under 10(b) . . . because a relationship of trust and confidence [exists] between the shareholders of a corporation and those insiders who have obtained confidential information by reason of their position with that corporation.) (citation omitted). Under the

misappropriation theory, by contrast, a corporate outsider violates section 10(b) and Rule 10b-5 when he misappropriates confidential information for securities trading purposes, in breach of a duty owed to the source of the information rather than a duty owed to the persons with whom he trades. Id. at 652.

The Equity Committee and the TPS Group both assert that the Settlement Noteholders conduct violated the classical theory of insider trading. In addition, the TPS Group asserts that

Centerbridge violated the misappropriation theory. i. Classical theory (1) Material nonpublic information

The Settlement Noteholders argue that they did not trade on any material nonpublic information. Instead, they contend that

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the only material nonpublic information which they received from the Debtors during the confidentiality periods were the estimated amounts of the Debtors tax refunds, which were disclosed by the Debtors to the public before the Settlement Noteholders began to trade again. The Equity Committee and the TPS Group assert that the Settlement Noteholders received additional nonpublic information including the knowledge that a settlement was being discussed and the relative stances the parties were taking in those negotiations. In particular, the Equity Committee and the TPS

Group focus on the term sheets exchanged by the parties. According to the Equity Committee, the parties were conceding issues at a time when the public knew only that the Debtors, JPMC, and the FDIC were engaged in contentious litigation. Materiality of nonpublic information is determined by an objective, reasonable investor test: [T]he law defines material information as information that would be important to a reasonable investor in making his or her investment decision. In re Burlington Coat Factory Sec. Litig., 114 F.3d 1410, 1425 (3d Cir. 1997). With regard to information on events like a

potential merger, courts determine materiality based on a balancing of both the indicated probability that the event will occur and the anticipated magnitude of the event in light of the totality of the company activity. Basic, Inc. v. Levinson, 485

119

U.S. 224, 238 (1988) (emphasis added). The parties largely do not dispute that the magnitude of a global settlement with JPMC and the FDIC would be great in this case.45 See, e.g., SEC v. Geon Indus., Inc., 531 F.2d 39, 47-48

(2d Cir. 1976) (stating that [s]ince a merger in which [a company] is bought out is the most important event that can occur in a small corporations life, to wit, its death, we think that inside information, as regards a merger of this sort, can become material at an earlier stage than would be the case as regards lesser transactions - and this even though the mortality rate of mergers in such formative stages is doubtless high.). The issue

the parties in this case dispute is the probability that a settlement would occur, specifically whether the negotiations were too tentative and the parties were too far apart. The Debtors and the Settlement Noteholders contend that neither the knowledge of negotiations nor the parties relative stances during the negotiations were material non-public information because of the extreme distance between the parties

Owl Creek alone argues that the magnitude factor is not met here because, unlike a merger, settlement proposals are a common and necessary component of bankruptcy cases. The Court agrees that settlement proposals are common, but also notes that statements of interest and merger proposals are just as common and yet may be material. Basic, 485 U.S. at 238-39. What the magnitude factor measures is not the fact that a proposal was made, but what the result of the proposal would be if accepted (i.e. the actual merger or settlement were consummated). SEC v. Geon Indus., Inc., 531 F.2d 39, 47-48 (2d Cir. 1976). 120

45

stances and the ebbs and flows of the negotiation process.

See,

e.g., Taylor v. First Union Corp. of S.C., 857 F.2d 240, 244-45 (4th Cir. 1988) (holding that preliminary, contingent, and speculative negotiations were immaterial because there was no agreement as to the price or structure of the deal); Filing v.

Phipps, No. 5:07CV1712, 2010 WL 3789539, at *5-6 (N.D. Ohio Sept. 24, 2010) (finding that merger talks were not material where parties had a get acquainted meeting and discussed executing a confidentiality agreement); Levie v. Sears Roebuck & Co., 676 F. Supp. 2d 680, 688 (N.D. Ill. 2009) (finding merger discussions not material where they were preliminary in nature). According to the Settlement Noteholders, it would have been sheer speculation that JPMCs position on one or more potential settlement terms in March or November 2009 could have provided assurance that JPMC would take that same position in future complex, multi-party, multi-issue negotiations. In the context

of such a complex negotiation, the Settlement Noteholders argue that the discussions could only be material once all the parties reached an agreement in principal or at least came extremely close to a deal. (D.I. 8429 at 10.) The

The Court disagrees with this statement of materiality.

Supreme Court has explicitly rejected the argument that there is no materiality to discussions until an agreement-in-principle has been reached. Basic, 485 U.S. at 237. In addition, the cases

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cited by the Plan Supporters are distinguishable as they deal only with preliminary discussions. Unlike the cases cited, here

the parties executed confidentiality agreements, exchanged a significant amount of information, and engaged in multi-party negotiations for over a year. mere get acquainted meeting. The discussions went far beyond a Filing, 2010 WL 3789539, at *5-6.

The Settlement Noteholders contend that whether a settlement was likely to occur should be evaluated in light of the facts as they existed at the time, not with the benefit of hindsight. See, e.g., In re General Motors Class E Stock Buyout Sec. Litig., 694 F. Supp. 1119, 1127 (D. Del. 1988) (The probability of a transaction occurring must be considered in light of the facts as they then existed, not with the hindsight knowledge that the transaction was or was not completed.). According to the

Settlement Noteholders, in this case at the conclusion of both confidentiality periods, the parties felt that the negotiations were dead and, therefore, they were not material. The Court is not convinced, however, by this contention. See, e.g., SEC v. Gaspar, 83 Civ. 3037, 1985 WL 521, at *14 (S.D.N.Y. Apr. 16, 1985) (The ultimate success of the negotiations is only one factor to consider in determining materiality). The first set of negotiations ended in March, with

the Settlement Noteholders claiming they were a disaster, yet the Debtors continued to negotiate with JPMC in April. (Tr.

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7/20/2011 at 55-56.)

In fact, Aurelius and Owl Creek berated the

Debtors for conducting settlement talks during that time without them, indicating that the Settlement Noteholders themselves viewed the negotiations as continuing and material. 7/18/2011 at 73.) The contention that settlement negotiations were dead (and therefore not material) is also belied by the actions of Centerbridge and Appaloosa. In July and August 2009 they engaged (Tr.

in their own separate negotiations with JPMC, at which time they both restricted their trading, even though they had not received any other information from the Debtors.46 The Equity Committee argues that the fact that there was early agreement on several terms of the settlement negotiations made them particularly material. The Settlement Noteholders

disagree, asserting that the market already understood the two major components of any deal: that the Debtors were likely to prevail in retaining ownership of the disputed bank deposits and that, as a predicate for a plan, some agreement on the tax

Centerbridge stated that such restrictions were taken only out of an abundance of caution but admitted that an acceptable counterproposal from JPMC might nudge the negotiations towards the materiality end of the spectrum of the settlement negotiations, in that an acceptable proposal could lead to further fruitful negotiations. (D.I. 8430 at 17-18.) The Court is unconvinced by this explanation. Centerbridge admits that it determined quickly that JPMCs counter-proposal was inadequate, yet continued to restrict trading until six days after JPMC withdrew its counter-proposal. 123

46

refunds would have to be reached between the Debtors and JPMC. See Elkind v. Liggett & Myers, Inc., 635 F.2d 156, 166 (2d Cir. 1980) (finding that the confirmation of facts that were fairly obvious to all who followed the stock . . . cannot be deemed reasonably certain to have a substantial effect on the market price of the security.). Again, the Court disagrees. There is no evidence in the

record that the market knew that the Debtors would prevail on the disputed bank deposits or that there would be a settlement on the tax refunds. All the public knew was that the Debtors, JPMC, and In fact, the Court was

the FDIC were litigating those issues.

prepared to issue a decision on the summary judgment motions filed by the parties on the bank deposit issue when the GSA was announced. The Settlement Noteholders argue further that the probability of a settlement cannot be evaluated based on agreement on a few terms but must be viewed as a whole. the fact that some terms did not change, the Settlement Noteholders note that many terms were constantly changing as later term sheets were exchanged. (Tr. 7/21/2011 at 109.) At Despite

one point, JPMC changed its stance in the negotiations so drastically that the Debtors viewed it as essentially reset[ting] the bookends of any potential deal. 7/18/2011 at 108.) (EC 16; Tr.

The Settlement Noteholders warn that if

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disclosure of the constantly changing settlement terms was required, it would result in endless bewildering guesses as to the need for disclosure, operate as a deterrent to the legitimate conduct of corporate operations, and threaten to bury the shareholders in an avalanche of trivial information. Taylor, 857 F.2d at 245. This same argument was denounced by the Supreme Court when it rejected the agreement-in-principle standard for evaluating materiality of merger discussions and applies equally here. Three rationales have been offered in support of the agreement-in-principle test. The first derives from the concern expressed in TSC Industries that an investor not be overwhelmed by excessively detailed and trivial information, and focuses on the substantial risk that preliminary merger discussions may collapse: because such discussions are inherently tentative, disclosure of their existence itself could mislead investors and foster false optimism. . . . The first rationale, and the only one connected to the concerns expressed in TSC Industries, stands soundly rejected, even by a Court of Appeals that otherwise has accepted the wisdom of the agreement-in-principle test. It assumes that investors are nitwits, unable to appreciate - even when told - that mergers are risky propositions up until the closing. Disclosure, and not paternalistic withholding of accurate information, is the policy chosen and expressed by Congress. Basic, 485 U.S. at 237 (quoting Flamm v. Eberstadt, 814 F.2d 1169, 1175 (7th Cir. 1987). The Plan Objectors disagree with the Settlement Noteholders contention that the settlement negotiations were too tentative to be material. The TPS Group asserts that over the course of

negotiations it became clear that a settlement was more probable 125

(as issues were resolved) and that the funds available to the estate were increasing. The Plan Objectors argue that the

materiality of the information is evident from the fact that as soon as the Settlement Noteholders were free to trade on that information they did: engaging in what the Equity Committee characterizes as a buying spree concentrating on acquiring (at a discount) junior claims because the Settlement Noteholders knew (although the public did not) that the junior creditors were likely to receive a recovery. (AOC 18; AOC 54; AOC 62; Au 8.)

The Equity Committee also asserts that a materiality inference can be drawn from the fact that the Settlement Noteholders requested (and the Debtors granted) a termination of the Second Confidentiality Period a day early, on December 30, 2009, in order to permit them to trade before the end of the year. (Tr. 7/18/2011 at 111.) See, e.g., Basic, 485 U.S. at 240

n.18 (We recognize that trading (and profit making) by insiders can serve as an indication of materiality.); United States v. Victor Teicher & Co., No. 88 CR. 796, 1990 WL 29697, at *2 (S.D.N.Y. Mar. 9, 1990) (citing the very fact of [defendants] trading as evidence of the materiality of the information). The Settlement Noteholders respond that materiality cannot be gleaned from the trades in question, however, because some of the Settlement Noteholders were selling while others were buying or not trading at all. (AOC 18; AOC 54; AOC 62; Au 8.) If the

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settlement discussions had any materiality, the Settlement Noteholders argue that they would have all traded in the same fashion. They point to Appaloosa and Centerbridge as an example.

Both received a summary of the Debtors April negotiations and JPMCs August counter-offer during their own separate negotiations, yet they engaged in opposite trades after receiving that information. (AOC 54; AOC 62.) In another instance,

Aurelius sold PIERS on March 8, 2010, four days before the announcement of the GSA, after which the price of the PIERS skyrocketed. (Au 8.) According to the Settlement Noteholders,

if Aurelius possessed material nonpublic information regarding the settlement, it would not have made such an unwise trade. The fact that the Settlement Noteholders made unwise or contrary trades, however, does not provide a defense to an insider trading action. See, e.g., SEC v. Thrasher, 152 F. Supp.

2d 291, 301 (S.D.N.Y. 2001) (concluding that a tippee is potentially liable for insider trading even if it loses money by trading on false information) (citing Bateman Eichler, Hill Richards, Inc. v. Berner, 472 U.S. 299, 318 (1985)). The Court does find it difficult to draw any conclusions from the Settlement Noteholders trades. The Settlement

Noteholders actively traded in the Debtors securities prior to, and after, the confidentiality periods. It is possible that

their trades were based on the publically disclosed information

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regarding the tax refunds, but because full discovery on the Settlement Noteholders internal trading decisions has not been permitted to date, the Court is unable to reach any conclusion based on the trades alone. Based on the evidence presented thus far, however, it appears that the negotiations may have shifted towards the material end of the spectrum and that the Settlement Noteholders traded on that information which was not known to the public. Consequently, the Court finds that the Equity Committee has stated a colorable claim that the Settlement Noteholders received material nonpublic information. Further discovery would help

shed light on how the Settlement Noteholders internally treated the settlement discussions and if they considered them material to their trading decisions. (2) Insider status (a) Temporary Insider

Insiders of a corporation are not limited to officers and directors, but may include temporary insiders who have entered into a special confidential relationship in the conduct of the business of the enterprise and are given access to information solely for corporate purposes. n.14 (1983). Dirks v. SEC, 463 U.S. 646, 655

See also In re Krehl, 86 F.3d 737, 743 (7th Cir.

1996) (holding that [a]ccess to inside information can be sufficient to confer insider status even where there is no legal

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right or ability to exercise control over a corporate entity). The Equity Committee and the TPS Group contend that the Settlement Noteholders became temporary insiders when they were given material non-public information creating a fiduciary duty on their part towards other creditors and shareholders. The Settlement Noteholders assert that temporary insider status under the securities law is inapplicable to situations where the corporation and the outsider work together toward a goal in which they each have diverse interests and only applies if they are working towards a common goal. 655 n.14. Dirks, 463 U.S. at

According to the Settlement Noteholders, the Supreme

Courts use of the phrase solely for corporate purposes in Dirks was meant to exclude instances where a corporate purpose may be one or even the primary reason among others. Id.

Further, the Settlement Noteholders assert that the Debtors have always been aware that the Settlement Noteholders purpose for participating in the negotiations was to further their own economic self interest. (Tr. 7/21/2011 at 185, 202.)

The Equity Committee responds that the Debtors only gave the Settlement Noteholders access to the settlement term sheets to further the Debtors efforts to effectuate a consensual plan of reorganization, which was the common goal of both the Debtors and the Settlement Noteholders. This, it argues, satisfies the 463 U.S. at 655 n.14.

common corporate goal required by Dirks.

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In addition, the Equity Committee argues that the Settlement Noteholders only obtained the information because they had acquired blocking positions in two subordinated classes of creditors (the senior subordinated notes and the PIERS). It

contends that this is sufficient to create a fiduciary duty on their part to those two classes of creditors. Cf. Rickel &

Assocs., Inc. v. Smith (In re Rickel & Assocs., Inc.), 272 B.R. 74, 100 (Bankr. S.D.N.Y. 2002) (holding that creditors committee member could not use his position on committee to advance his own personal interest at the expense of the unsecured creditors). The Court finds that the Equity Committee has stated a colorable claim that the Settlement Noteholders became temporary insiders of the Debtors when the Debtors gave them confidential information and allowed them to participate in negotiations with JPMC for the shared goal of reaching a settlement that would form the basis of a consensual plan of reorganization. (b) Non-statutory insider

Alternatively, the Equity Committee and TPS Group assert that the Settlement Noteholders owed duties as non-statutory insiders under bankruptcy law. See, e.g., Luedke v. Delta Air

Lines, Inc., 159 B.R. 385 (S.D.N.Y. 1993) (holding that plaintiff stated a claim that creditors committee assumed a duty to all parties by becoming a joint sponsor and proponent of plan); In re Wash. Mut., Inc., 419 B.R. 271, 278 (Bankr. D. Del. 2009) (noting

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that members of a class of creditors may, in fact, owe fiduciary duties to other members of the class when they hold themselves out as representing that class); Official Comm. of Equity Sec. Holders of Mirant Corp. v. The Wilson Law Firm, P.C. (In re Mirant Corp.), 334 B.R. 787, 793 (Bankr. N.D. Tex. 2005) ([W]hen a party purports to act for the benefit of a class, the party assumes a fiduciary role as to the class.); Rickel, 272 B.R. at 100 (noting that creditors committee member may not use his position to advance his personal interest at the expense of the creditor class); In re Allegheny Intl, Inc., 118 B.R. 282, 298 (Bankr. W.D. Pa. 1990) (party who received a great volume of information that was not available to other creditors, shareholders, and the general public was a temporary insider). See generally Mark J. Krudys, Insider Trading by Members of Creditors Committees - Actionable!, 44 DePaul L. Rev. 99, 142 (1994) (noting that members of creditor steering committees, like official creditors committees, appear to come within the temporary insider definition articulated in Dirks); Donald C. Langevoort, 18 Insider Trading Regulation, Enforcement and Prevention 3:8 (database updated April 2011) (More recently, the view has been expressed that members of a creditors committee overseeing a reorganization of the issuer would be treated as [temporary] insiders). See also In re Winstar Commcns, Inc.,

554 F.3d 382, 396-97 (3d Cir. 2009) (holding that parties who do

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not fit the Bankruptcy Code definition of an insider may nonetheless be insiders if they have a sufficiently close relationship with the debtor to suggest that their transactions were not conducted at arms length). The Equity Committee has alleged and presented some evidence that the Settlement Noteholders could be considered insiders of the Debtors because of their status as holders of blocking positions in two classes of the Debtors debt structure. such, it could be found that they owed a duty to the other members of those classes to act for their benefit. Therefore, As

the Court finds that the Equity Committee has stated a colorable claim that the Settlement Noteholders are temporary insiders of the Debtors. (3) Knowledge

The Settlement Noteholders assert that there is no evidence that they knowingly or recklessly traded while in possession of material nonpublic information, and, therefore, the required scienter element of an insider trading claim is lacking. See,

e.g., Burlington Coat Factory Sec. Litig., 114 F.3d at 1422 (finding that scienter requires a strong inference that when trading the defendant knew or recklessly disregarded the fact that information in his possession was material). Because the

Debtors explicitly agreed to disclose any material nonpublic information at the end of each confidentiality period, the

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Settlement Noteholders contend that they had no knowledge that the public did not know all material information. The Settlement

Noteholders note that the burden was on the Debtors to assure that the disclosures were appropriate. 37; EC 111; EC 117; EC 141; EC 148.) (Au 16; Au 27; EC 24; EC See also Richard H. Walker,

Div. of Enforcement, Sec. Exch. Commn, Regulation FD - An Enforcement Perspective (Nov. 1, 2000), 2000 WL 1635668, at *2 (stating that the regulation places the responsibility for avoiding selective disclosure, and the risks of engaging in it, squarely on the issuer of the information). The Equity Committee responds that good faith reliance on assurances of a third party, such as the source of the information, to disclose all material information to the public cannot be a defense. Such a rule would vitiate the insider

trading laws if a third partys assurances, with no further duty of inquiry, automatically insulated a party from insider trading liability. Further, the Equity Committee asserts that there is

clear circumstantial evidence (the volume of trades immediately after the confidentiality periods ended) which show that the Settlement Noteholders knowingly traded on the basis of the material, nonpublic information. See, e.g., SEC v. Heider, 90

Civ. 4636, 1990 WL 200673, at *4 (S.D.N.Y. Dec. 4, 1990) (allegations that volume of call option purchases spiked prior to merger and that defendants were responsible for a significant

133

portion of that volume supported a strong inference of defendants scienter). The Settlement Noteholders disagree, asserting that the evidence of their trading does not support an inference of scienter. Burlington Coat Factory Sec. Litig., 114 F.3d at 1424

(declining to infer fraudulent intent from trading in the normal course of events). They argue that the trading volume can be

attributed to other facts of public record such as the momentum of the tax bill through Congress and the Debtors estimates of their tax refunds. While trades may provide circumstantial evidence of intent or recklessness, the statute only requires that the Settlement Noteholders have knowledge that they were in possession of material nonpublic information. Whether or not they profited

from such knowledge or actually applied such knowledge in trading is not a required element. United States v. Teicher, 987 F.2d

112, 120 (2d Cir. 1993) (stating that [u]nlike a loaded weapon which may stand ready but unused, material information can not lay idle in the human brain). In addition the Court does not agree with the Settlement Noteholders reliance exception to the scienter element of insider trading. The Settlement Noteholders each had strict (EC 3; EC 19; EC

internal policies prohibiting insider trading. 103; AOC 16.)

The Equity Committee contends that notwithstanding

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those internal policies, the Settlement Noteholders knowingly traded with knowledge that the Debtors were engaged in global settlement negotiations with JPMC of which the trading public was unaware. The Settlement Noteholders cannot use the Debtor or

their own counsel as a shield if they violated those policies. The Court finds that the Equity Committee has made sufficient allegations and presented enough evidence to state a colorable claim that the Settlement Noteholders acted recklessly in their use of material nonpublic information. See Goldman v.

McMahan, Brafman, Morgan & Co., 706 F. Supp. 256, 259 (S.D.N.Y. 1989) (An egregious refusal to see the obvious, or to investigate the doubtful, may in some cases . . . be the functional equivalent of recklessness.); Rolf v. Blyth, Eastman Dillon & Co., Inc., 570 F.2d 38, 47 (2d Cir. 1978) (Reckless conduct is . . . an extreme departure from the standards of ordinary care . . . to the extent that the danger was either known to the defendant or so obvious that the defendant must have been aware of it.) (citation omitted). ii. Misappropriation theory

The TPS Group also alleges that Centerbridge is liable under the misappropriation theory which provides that insider trading can be found where (1) . . . the defendant possessed material, nonpublic information; (2) which he had a duty to keep confidential; and (3) . . . the defendant breached his duty by

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acting on or revealing the information in question. Lyon, 605 F. Supp. 2d 531, 541 (S.D.N.Y. 2009).

SEC v.

Liability

attaches where the tippee traded on the misappropriated information when [it] knew or should have known it was misappropriated. (S.D.N.Y. 1991). According to the TPS Group, the Debtors shared information about the April 2009 negotiations with Fried Frank which was under a written confidentiality agreement barring it from sharing information with its clients, unless they were subject to confidentiality agreements of their own. (EC 10; D 408.) SEC v. Willis, 777 F. Supp. 1165, 1169

Nonetheless, on July 1, 2009, Fried Frank shared summaries of the April negotiations with both Centerbridge and Appaloosa, who were not at the time subject to a confidentiality agreement with the Debtors. (EC 215.) Centerbridge continued to trade, while The TPS Group

Appaloosa voluntarily restricted its trading.

asserts that, as a result, Fried Frank breached its duty of confidentiality to the Debtors and Centerbridge misappropriated confidential information. The TPS Group asserts that Centerbridge knew or should have known that the information was restricted and subject to Fried Franks confidentiality obligations to the Debtors. 7/21/2011 at 30-31.) (Tr.

SEC v. Musella, 578 F. Supp. 425, 442

(S.D.N.Y. 1984) (finding knowledge where the individual was a

136

sophisticated . . . market professional who should have inquired about the underlying circumstances of the tip received). In addition, the Equity Committee contends that following the Second Confidentiality Period, material information was shared with the Settlement Noteholders by Fried Frank. The

Settlement Noteholders contend, however, that although they had discussions and meetings with Fried Frank about the plan of reorganization, they received no material information from Fried Frank about the substance of the negotiations during this period. (Tr. 7/18/2011 at 116, 119; Tr. 7/19/2011 at 144; Tr. 7/20/2011 at 75; Tr. 7/21/2011 at 136.) about these assertions. clarify this point. For all the above reasons, the Court finds that the Equity Committee and the TPS Group have stated a colorable claim that the Settlement Noteholders engaged in insider trading under the classical and misappropriation theories. The Settlement Noteholders warn that any finding of insider trading will chill the participation of creditors in settlement discussions in bankruptcy cases of public companies. disagrees. The Court The Court has substantial doubts

Further discovery on this issue would

There is an easy solution: creditors who want to

participate in settlement discussions in which they receive material nonpublic information about the debtor must either

137

restrict their trading or establish an ethical wall between traders and participants in the bankruptcy case. restrictions are common in bankruptcy cases. These types of

Members of

creditors committees and equity committees are always subject to these restrictions. See e.g., Adelphia, 368 B.R. at 152 n.11.

The Court does not believe that a requirement to restrict trading or create an ethical wall in exchange for a seat at the negotiating table places an undue burden on creditors who wish to receive confidential information and give their input. c. Burden on estate

The Court is required, however, to balance the probability of success on the claim against the burden on the estate that would result from its prosecution. Judging from the vigor with

which the Settlement Noteholders have opposed the Equity Committees standing motion, the Court is concerned that the case will devolve into a litigation morass. In addition, the Court

notes that as the case continues, the potential recoveries for all parties in the case dwindles. Regardless of which parties

prevail, they may be disappointed to find their recovery significantly less than expected. Therefore, before the Equity Committee proceeds with its claim any further, the Court will direct that the parties go to mediation on this issue, as well as the issues that remain an impediment to confirmation of any plan of reorganization in this

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case.

A status hearing to discuss this will be held at the

omnibus hearing currently scheduled for October 7, 2011, 11:30 am.

IV.

CONCLUSION For the foregoing reasons, the Court will deny confirmation

of the Plan, grant but stay the Equity Committees standing motion, and direct the parties to proceed to mediation. An appropriate Order is attached.

DATED: September 13, 2011

BY THE COURT:

Mary F. Walrath United States Bankruptcy Judge

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EXHIBIT A

**CONFIDENTIAL FILED UNDER SEAL **

{D0191339.1 }

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**CONFIDENTIAL FILED UNDER SEAL **

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Page 1

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VERITEXT REPORTING COMPANY www.veritext.com

UNITED STATES BANKRUPTCY COURT DISTRICT OF DELAWARE Case No. 08-12229 (MFW) Adv. Case No. 10-51387 (MFW) Adv. Case No. 10-51297 (MFW)

In the Matter of:

WASHINGTON MUTUAL, INC., et al.,

Debtors.

BLACKHORSE CAPITAL LP, et al., Plaintiffs, -againstJPMORGAN CHASE BANK, N.A., et al., Defendants.

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Page 2 1 2 3 4 5 6 7 8 9 -againstWASHINGTON MUTUAL, INC., Defendants. x MICHAEL WILLINGHAM and ESOPUS CREEK VALUE LP, Plaintiffs, x

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VERITEXT REPORTING COMPANY www.veritext.com

United States Bankruptcy Court 824 North Market Street Wilmington, Delaware

November 9, 2010 10:30 AM

BEFOR E: HON. MARY F. WALRATH U.S. BANKRUPTCY JUDGE

ECR OPERATOR: BRANDON MCCARTHY

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WASHINGTON MUTUAL, INC., et al.

Page 24 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 suspect.
MR. STARK: You are, but it bears upon what we do

for the 300 odd pages of Mr. Hochberg's report, he dedicates three and a half pages to our adversary proceeding. That's the analytical portion of the lawsuit. And I think that makes sense, because we had a scheduled trial date. We spoke with Mr. Hochberg, and we told him that, you know, it didn't seem to make an awful lot of sense for you to opining about the ultimate issues, if Your Honor's going to be hearing them in six weeks. And, so, in light of that, three and a half pages of "analysis" doesn't really surprise us. The analysis, though, which I think is important, covers only two out of nine counts in the complaint, and cites about three cases. So, it's not much analysis, at least as far as our perspective is concerned. He does, at the conclusion, draw certain conclusions that he expresses, I would characterize them as flippant, in light of the fact that he doesn't have analysis to back it up, and it's somewhat unfavorable. And that's the part where I thought Your Honor may want to know what we have to think about all that.
THE COURT: I'm going to hear it on the 1st, I

between now and then. That report doesn't move us very much. We believe firmly in our case. We're actually very much looking forward to the trial on the 1st. And we don't generally believe that, as much respect as we have for Mr.

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WASHINGTON MUTUAL, INC., et al.

Page 25 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Hochberg in the role of an examiner, in a case as grandiose and as interesting as this one is, it doesn't move us. We have a lot of fight in us, and Your Honor I think knows us well enough to presume that. There are some partial summary judgment motions that are on file. We'll respond to them in due course. We'll respond to them appropriately in due course. That's makes it a little bit unclear as to what December 1st is. Is it going to be argument? These are complicated issues. The -- again, the complaint was ninety odd pages, had lots of counts in it, and I fear that someone reading the examiner's three and a half pages of "analysis", would draw the conclusion it's relatively simple. It is far from simple. And three case cites isn't going to get you there. So -- and I believe the summary judgment motions themselves are dozens and dozens of pages long each. So, we have a lot to do on the 1st. And I don't know whether or not the 1st is just simply argument. These are partial summary judgment motions. And so we have a procedural point that I will discuss in due course, outside of the courtroom, with the debtors and JPMorgan, about how we are going to proceed. And hopefully, we'll do that in time for the November 23rd hearing, and we can give Your Honor a consensus view -- a mature view of about how we ought to handle the December 1st trial. Whether it's just going to be argument, or

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CERTIFICATION

I, Karen Schiffmiller, certify that the foregoing transcript is a true and accurate record of the proceedings.

Karen Schiffmiller
KAREN SCHIFFMILLER

Digitally signed by Karen Schiffmiller DN: cn=Karen Schiffmiller, o, ou, email=digitall@veritext.com , c=US Date: 2010.11.10 16:39:00 -0500'

Veritext 200 Old Country Road Suite 580 Mineola, NY 11501

Date: November 9, 2010

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VERITEXT REPORTING COMPANY www.veritext.com

516-608-2400

EXHIBIT K

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UNITED STATES BANKRUPTCY COURT DISTRICT OF DELAWARE Case No. 08-12229 (MFW) Adv. Case No. 10-50731 (MFW) Adv. Case No. 10-50911 (MFW) Adv. Case No. 10-51387 (MFW)

In the Matter of: WASHINGTON MUTUAL, INC., et al., Debtors.

12 13 14 15 16 17 18 19 20 21 22 23 24 25

OFFICIAL COMMITTEE OF EQUITY SECURITY HOLDERS, Plaintiff, -againstWASHINGTON MUTUAL, INC., Defendant.

BROADBILL INVESTMENT CORP., Plaintiff, -againstWASHINGTON MUTUAL, INC., Defendant.

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x BLACKHORSE CAPITAL LP, et al., Plaintiffs, -againstJPMORGAN CHASE BANK, N.A., et al., Defendants. x U.S. Bankruptcy Court 824 North Market Street Wilmington, Delaware

September 7, 2010 3:00 PM

BEFOR E: HON. MARY F. WALRATH U.S. BANKRUPTCY JUDGE

ECR OPERATOR: BRANDON MCCARTHY

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WASHINGTON MUTUAL, INC., et al.

Page 78 use that at confirmation and it's improper because first, the request to seek information that is privileged and work product and has not been put at issue by the debtors and the motion makes clear that TPS is trying to lay a foundation to later argue that there's been a waiver which as I indicated, there has not been. We had a meet and confer which was not mentioned a couple of weeks ago where we indicated that we did not intend to put the advice of counsel at issue at confirmation and we asked the TPS group to tell us the impact of that on the request because we think it makes most of them moot and irrelevant. They did not respond. Instead they just went and filed the motion. We also, Your Honor, offered to provide additional responses to the request if TPS admitted -- I'm sorry, stipulated that they would not argue that there had been a waiver of privilege or work product protection and they did not respond to that offer either. Instead they went and filed the motion. The first page of the motion itself, Your Honor, it states that they claim that because the debtors had not yet indicated whether they planned to put the advice of counsel at issue, they had to serve the requests. But the requests don't ask do you plan to put the advice of counsel at issue. The requests are broad, vague, ambiguous, because they cover

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WASHINGTON MUTUAL, INC., et al.

Page 79 1 2 3 4 5 6 7 8 multiple subjects and ask whether the debtors relied on, based decisions on, advice of counsel and these are clearly not the type of things that are appropriate for requests for admission which are, in fact, the goal of request for admission is to narrow the issue for trials and streamline the proof. This, in fact, would do the opposite. As an initial matter, Your Honor, the fairness of the settlement at confirmation can be established objectively without putting the advice of counsel at issue. And the contents of communications between counsel and the debtors and the private thoughts of counsel are irrelevant and unnecessary for confirmation of the settlement. And settlements are routinely approved without putting the advice of counsel at issue as I am sure Your Honor is well aware. As I indicated, Your Honor, the debtors do not plan to put the advice of counsel at issue. I don't think the qualifications that were pointed out are problematic in any way. That is the current intention of the debtors and the case law cited by TPS even supports that proposition. In the Home Indemnity case, for instance, which they cited the Court said "As long as the reasonableness of the settlement was defended at trial on objective terms apart from the advice of counsel, the attorney-client privilege would be protected." And the Court there found there was sufficient objective evidence of the reasonableness of the settlement to

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Page 96 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Date: September 8. 2010 Veritext 200 Old Country Road Suite 580 Mineola, NY 11501 Penina Wolicki I, Penina Wolicki, certify that the foregoing transcript is a true and accurate record of the proceedings. CERTIFICATION

Penina Wolicki

Digitally signed by Penina Wolicki D i ReNaz:Pieninah1:9ttct, r . 41:1!s document Date: 2010.09.09 15:08:19 -0400'

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516-608-2400

EXHIBIT N

**CONFIDENTIAL FILED UNDER SEAL **

{D0191348.1 }

EXHIBIT O

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IN THE UNITED STATES BANKRUPTCY COURT FOR THE DISTRICT OF DELAWARE _________________________________________ x : In re : : No. 08-12229 (MFW) : WASHINGTON MUTUAL, INC., et al., : Jointly Administered : Debtors : __________________________________________x SUPPLEMENTAL OBJECTION1 OF THE CONSORTIUM OF TRUST PREFERRED SECURITY HOLDERS TO CONFIRMATION OF THE MODIFIED SIXTH AMENDED JOINT PLAN OF AFFILIATED DEBTORS PURSUANT TO CHAPTER 11 OF THE UNITED STATES BANKRUPTCY CODE, FILED ON FEBRUARY 7, 2011 The consortium of holders of interests subject to treatment under Class 19 of the Plan (as defined herein) (the TPS Consortium),2 by and through its undersigned counsel, hereby files this objection (the Objection) to confirmation of the Modified Sixth Amended Joint Plan of Washington Mutual Inc., (WMI) and WMI Investment Corp. (WMI Investment, and together with WMI, the Debtors), filed on February 7, 2011, as modified on March 16, 2011 and March 25, 2011 (the Plan) [Docket Nos. 6696, 6964, and 7038].3 In support of this Objection, the TPS Consortium respectfully represents as follows:

The TPS Consortium expressly incorporates by reference herein each of the arguments set forth in the Objection Of The TPS Consortium To Confirmation Of The Sixth Amended Joint Plan Of Affiliated Debtors Pursuant To Chapter 11 Of The United States Bankruptcy Code [Docket No. 6020] (the Initial Objection), including its objections to the proposed settlement underlying the prior and current Plans. A copy of the Initial Objection is attached hereto as Exhibit A. The TPS Consortium is made up of holders of interests proposed by the Debtors to be treated under Class 19 of the Plan -- described in the Plan and Disclosure Statement (defined herein) as the REIT Series. As is discussed in greater detail below, the REIT Series securities were purportedly exchanged, prior to the Petition Date, for certain Trust Preferred Securities issued by former affiliates of non-Debtor Washington Mutual Bank. Capitalized terms not otherwise defined herein shall bear the meanings ascribed thereto in the Plan and/or the Prior Disclosure Statement, dated October 6, 2010 and the Supplemental Disclosure Statement, dated March 16, 2011 [Docket No. 6966] (together, the Disclosure Statement), as applicable.

{D0203592.1 }

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PRELIMINARY STATEMENT 1. The Plan suffers from numerous fatal flaws, which, as a matter of law, render it

incapable of confirmation. These defects include, inter alia: The Plan would effect the underlying steps of the conditional exchange of the Trust Preferred Securities, purports to deliver the Trust Preferred Securities to JPMC free and clear of the claims now on appeal before the District Court, and provides releases purporting to affect claims against JPMC and others relating to the Trust Preferred Securities, despite the divestiture of this Courts jurisdiction to grant such relief because of the ongoing appeal of the TPS Litigation in the District Court. As this Court has been divested of jurisdiction to grant the relief requested regarding the Trust Preferred Securities, those securities must be held in escrow and related Plan-terms held in abeyance pending resolution of the TPS Litigation appeal. The Plan inappropriately pays post-petition interest on allowed unsecured claims at the contract rate rather than at the federal judgment rate set forth in 28 U.S.C. 1961 (FJR). To the extent post-petition interest is payable on allowed unsecured claims, the rate of interest mandated under Bankruptcy Code Section 726(a)(5) and incorporated into Chapter 11 through the best interests of creditors test under Bankruptcy Code Section 1129(a)(7) is the FJR. Moreover, to the extent unsecured creditors are paid post-petition interest at the FJR, the Classes of unsecured creditors would be unimpaired and not entitled to vote on the Plan. Consequently, the cramdown provisions of Bankruptcy Code Section 1129(b) will not be implicated (through Bankruptcy Code Section 1129(a)(8)) if the Plan were modified to pay post-petition interest at the FJR. The result of the current structure of the Plan is that it impermissibly provides unsecured creditors (including, in large part, the Settlement Noteholders) with approximately $700 million in value in excess of their claims, a significant portion of which value properly belongs to the Debtors preferred equity holders pursuant to the Bankruptcy Codes distribution scheme. The Plan continues to provide illegal non-consensual releases to third parties (including JPMorgan Chase Bank, N.A. (JPMC)) and enjoins actions against assets and properties provided to such third parties free and clear through the Plan (including the Trust Preferred Securities and the value of Washington Mutual Preferred Funding LLC) notwithstanding the Courts Opinion (defined herein) that such non-consensual releases are impermissible. The Plan unfairly discriminates against the dissenting members of Class 19 by providing for an unequal distribution amongst the members of Class 19 based on their votes for a prior Plan and by denying dissenting members an opportunity to re-vote, and discriminates unfairly against disadvantaged members of Class 19 as compared to Class 20, consisting of similarly-situated interest holders by permitting only Class 20 to revote

{D0203592.1 }

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and allowing Class 20 members their pari passu interests in the residual value of WMIs estate (value denied to disadvantaged members of Class 19). The Plan would also effect a prohibited taking of the dissenting Class 19 members interests in their allocable share of estate value. 2. As Plan proponents, it is the Debtors burden to prove and persuade this Court, by

a preponderance of the evidence, that the Plan satisfies every applicable confirmation requirement under Bankruptcy Code Sections 1129(a) and (b). As discussed herein and in the Initial Objection, the Debtors cannot carry these burdens and confirmation must be denied. BACKGROUND A. 3. The Courts January 2011 Decisions. On January 7, 2011, the Court rendered its decision in the adversary proceeding

captioned Black Horse Capital, LP, et al. v. JPMorgan Chase Bank, N.A., et al. (Adv. Pro. No. 10-51387) (the TPS Litigation). In its ruling in connection with the TPS Litigation, the Court held, inter alia, that a purported conditional exchange of non-Debtor trust preferred securities (the Trust Preferred Securities) for unissued preferred stock of Debtor WMI had occurred hours before the commencement of these cases, notwithstanding the failure of the parties to take any of the steps required under the applicable documents to complete the transaction.4 That decision has been appealed, and the matter is now before Chief Judge Sleet of the District Court for the District of Delaware (Civ. Action No. 11-124-GWS). Briefing in that matter is expected to be completed prior to this Courts consideration of the Plan. 4. Also on January 7, 2011, the Court entered an opinion [Docket No. 6528] (the

Opinion) and related Order [Docket No. 6529] denying confirmation of the Sixth Amended
4

These steps include, inter alia, the failure to issue the WMI preferred stock for which the Trust Preferred Securities were to have been exchanged, the failure to deliver that newly-issued WMI preferred stock to a depositary for creation of depositary shares to be delivered to holders of Trust Preferred Securities, the failure to record the purported transfer of the Trust Preferred Securities on the applicable issuers books and records (as required under UCC Article 8), and the failure to deliver the underlying certificates for the Trust Preferred Securities (also as required under Article 8) (together, the Completion Steps).

{D0203592.1 }

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Joint Plan of Affiliated Debtors Pursuant To Chapter 11 of the Bankruptcy Code, dated October 6, 2010, as modified on October 29, 2010 and November 24, 2010 (the Sixth Amended Plan). In the Opinion, the Court laid out in detail numerous reasons the Sixth Amended Plan was incapable of confirmation and left certain issues open for consideration should the Debtors again attempt to obtain confirmation of a plan of liquidation. The Debtors filed the current version of the Plan approximately one month later. B. 5. The Debtors New Proposed Plan. The current Plan remains premised on a purported settlement of various pieces

of litigation to which the Debtors are parties, including various actions to which JPMC is also a party. Among the issues settled under the Plan is the dispute as to whether the conditional exchange had occurred and whether the Trust Preferred Securities were transferred to JPMC prior to the Petition Date. In that regard, the current Plan (like its predecessor, the Sixth Amended Plan) contemplates the Bankruptcy Court entering an affirmative injunction, ordering parties (including non-Debtors) to effectuate all of the steps in the applicable exchange, deposit and trust agreements that WMI failed to carry out pre-petition (i.e., the Completion Steps).5 Next, the Plan contemplates assumption of agreements necessary to consummation of the conditional exchange transaction, including agreements to issue the WMI preferred stock that was never issued pre-petition. As noted in the Initial Objection, this proposed assumption is absolutely prohibited under Bankruptcy Code Section 365(c)(2) and, consequently, Bankruptcy Code Section 1129(a)(1).6 The Plan also contemplates entry of an Order transferring the Trust

See Proposed Settlement, 2.3(f) (causing the applicable trustees, registrars, paying agents, depositary, and transfer agents to amend their records (including the securities registers of each Issuing Trust) to reflect a transfer of the Trust Preferred Securities to WMI and causing the trustees and boards of directors of the Issuing Trusts to take all necessary, proper and advisable action to reflect JPMorgan as the sole legal, equitable, and beneficial owner of the Trust Preferred Securities). See Initial Objection, at pp. 41-46.

{D0203592.1 }

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Preferred Securities free and clear of Liens (defined to mean any charge against or interest in property to secure payment of a debt or performance of an obligation).7 6. The basic economic terms of the settlement were negotiated by, inter alia, JPMC

and a group of four hedge funds (the Settlement Noteholders)8 who have accumulated large positions at various levels of WMIs capital structure slated to receive very favorable treatment under the Plan, including payment of post-petition interest on funded debt at the various contract rates as opposed to interest at the FJR.9 This difference (contract rate versus FJR) results in overpayment to creditors of the estate in the amount of approximately $700 million, a significant portion of which value otherwise would be allocable to holders of WMI preferred equity under the Bankruptcy Codes distribution scheme. 7. While the Settlement Noteholders were signatories to the settlement underlying

the Sixth Amended Plan, they are not signatories to the current version of the settlement agreement. As the Court noted in the Opinion, the Settlement Noteholders have been alleged to have traded illegally in WMIs securities based on non-public information obtained in their negotiations with the Debtors. The Official Committee of Equity Security Holders (the Equity Committee) is currently investigating this issue, but discovery is not complete as of the filing

See Plan, 43.1 and 1.124. The Settlement Noteholders include Appaloosa Management L.P., Centerbridge Partners, L.P., Owl Creek Asset Management, L.P., Aurelius Capital Management, LP, and certain affiliates thereof. The Settlement Noteholders previously have represented through counsel that, as of May 14, 2010, in the aggregate they were the beneficial owners of or had investment authority with respect to (i) $453,813,700 in face amount of WMIs senior indebtedness, (ii) $1,291,124,000 in fact amount of WMIs senior subordinated indebtedness, (iii) $792,268,700 in face amount of WMIs junior subordinated indebtedness, and (iv) approximately 955,665 shares of preferred stock issued by WMI. See First Supplemental Verified Statement of Fried, Frank, Harris, Shriver & Jacobson LLP Pursuant to Rule 2019 of the Federal Rules of Bankruptcy Procedure [Docket No. 3761], at p. 2. These holdings may have changed as there are pending allegations that the Settlement Noteholders engaged in insider trading activities facilitated by the Settlement to purchase claims that receive preferable treatment under the Plan and to sell claims and interests that receive less favorable treatment.

{D0203592.1 }

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this Objection. C. 8. The Plans Unequal Treatment Amongst Members Of Class 19. Like the Sixth Amended Plan, the current Plan contemplates delivery of the Trust

Preferred Securities to JPMC. Under the Sixth Amended Plan, in addition to any distribution from the Debtors estates, Class 19 claimants also stood to receive from JPMC cash in an amount equal to $1,250.00 times the number of shares of REIT Series (or an amount of JPMC stock of equal value) (in either case, the Additional Class 19 Consideration) held by such claimants in exchange for, inter alia, granting a release of JPMC.10 Section 1.161 of the version of the Sixth Amended Plan sent out for solicitation [Docket No. 5659] further provided that if Class 19 voted to accept the Sixth Amended Plan, each member of Class 19 (regardless of its actual vote) would be deemed to have granted a release of JPMC and would receive its allocable share of the Additional Class 19 Consideration. Further, Section 43.6 of the version of the Sixth Amended Plan sent out for solicitation contained a similar provision, regarding releases generally, that stated that entities opting out of the demanded releases would nonetheless be bound and forced to accept the distribution they would otherwise be entitled to receive pursuant to the Plan. Subsequently, after the voting deadline for the Sixth Amended Plan, the Debtors modified Section 43.6 of the Sixth Amended Plan to provide that elections to opt out of the third-party releases would be honored and entities so electing would lose the right to a distribution.11 In addressing this late change to the Sixth Amended Plan, the Court stated in the Opinion that: The Court agrees with the UST that the Plan provision with respect to third-party releases has changed materially. This is equally applicable to those who originally opted out of the releases (feeling that even though the Court might find the opt out invalid, they
10

See Sixth Amended Plan, p. 50. See Opinion, p. 83.

11

{D0203592.1 }

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would still get a distribution) as those who did not bother checking the box to opt out (feeling that the Court would simply enforce the releases anyway).12 Section 1.161 of the Sixth Amended Plan, providing for the compelled release of claims and acceptance of plan consideration if Class 19 voted to accept the Sixth Amended Plan, was not modified. Further, as was made clear through the Debtors witnesses at the confirmation

hearing, the Sixth Amended Plan was rife with provisions that could have required releases of claims regardless of an entitys vote or election. 9. To address the Courts concerns about material changes to the release provisions

after the close of voting on the Sixth Amended Plan, every impaired class except Class 19 was given the opportunity to vote and make an election with respect to releases under the new Plan. But, under the new Plan, members of Class 19 who voted in favor of the Sixth Amended Plan (which, again, was denied confirmation) and who elected to grant the releases demanded thereunder will receive under the new Plan: a) the share of estate value to which they are entitled as a result of their ownership of WMI preferred stock (whatever that value may be); and b) a direct payment from JPMC of the Additional Class 19 Consideration that had been allocated for Class 19 under the Sixth Amended Plan. Based on prior Rule 2019 filings in this case, it appears that the group of Class 19 holders who will receive this favorable treatment is comprised, in significant part, of the Settlement Noteholders. Class 19 members who voted against the Sixth Amended Plan and/or declined to grant the releases demanded thereunder, on the other hand, will receive nothing under the current Plan not even the estate value to which they would be entitled outside of the Plan and/or in a chapter 7 liquidation. 10. The Equity Committee objected to this unequal treatment amongst members of

Class 19 in connection with the Courts consideration of the Supplemental Disclosure Statement
12

Id.

{D0203592.1 }

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and Plan solicitation procedures (and counsel for the TPS Consortium joined in that objection and presented argument). In response to those objections, counsel for JPMC threatened that, if the Court were to force the Debtors to resolicit Class 19, JPMC would simply refuse to pay any portion of the Additional Class 19 Consideration in exchange for the releases it is slated to receive under the current Plan.13 The Court declined to compel resolicitation of Class 19, but specifically preserved consideration of the effect of the resulting unequal treatment on the confirmability of the Plan.14 ARGUMENT 11. As Plan proponents, it is the Debtors burden to prove and persuade this Court, by

a preponderance of the evidence, that the Plan satisfies every applicable confirmation requirement under Bankruptcy Code Sections 1129(a) and (b).15 As discussed herein and in the Initial Objection, the Debtors cannot carry these burdens and confirmation must be denied.16 I The Plan Cannot Be Confirmed Because It Contemplates Relief This Court Has Been Divested Of Jurisdiction To Grant Given The Pendency Of The Appeal Related To The TPS Litigation. 12. It is axiomatic that the act of filing a notice of appeal of a final Order divests a

13

Transcript of March 21, 2011 Hearing, at p. 56. Id. at 171. See, e.g., In re Armstrong World Indus., Inc., 348 B.R. 111, 120 n.15 (D. Del. 2006) (plan proponent must establish by preponderance of the evidence the satisfaction of requirements of Bankruptcy Code Sections 1129(a) and 1129(b)); 7 Collier on Bankruptcy 1129.02[4] (16th ed.) (At the [confirmation] hearing, the proponent bears the burdens of both introduction of evidence and persuasion that each subsection of section 1129(a) has been satisfied. If nonconsensual confirmation is sought, the proponent of such a plan will have to satisfy the court that the requirements of section 1129(b) are also met. In either situation, the plan proponent bears the burden of proof by a preponderance of the evidence.). See In re Sacred Heart Hosp. of Norristown, 182 B.R. 413, 423 (Bankr. E.D. Pa. 1995) (a confirmation hearing warrants a meticulous analysis of whether the Plan meets each of the technical requirements of the Code).

14

15

16

{D0203592.1 }

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trial court of its jurisdiction over the matters on appeal.17

The divestiture rule applies to

bankruptcy appeals and exists to prevent[] the confusion and inefficiency which would of necessity result were two courts to be considering the same issue or issues simultaneously.18 13. The Third Circuit Court of Appeals has recognized the broad nature of the

divestiture rule: Divest means what it says the power to act, in all but a limited number of circumstances, has been taken away and placed elsewhere.19 Because a bankruptcy case typically raises a myriad of issues, many totally unrelated and unconnected with the issues involved in any given appeal, however, Bankruptcy Courts retain jurisdiction over matters presented subsequent to an appeal where the appeal concerns unrelated aspects of the case.20 Nonetheless, when a determination would involve a key issue identical to one of the issues involved in the order being appealed, application of the divestiture rule is appropriate.21

17

See Griggs v. Provident Consumer Discount Co., 459 U.S. 56, 58 (1982) (The filing of a notice of appeal is an event of jurisdictional significance it confers jurisdiction on the [appellate court] and divests the [trial court] of its control over those aspects of the case involved in the appeal.); Venen v. Sweet, 758 F.2d 117, 120 (3d Cir. 1985) ([T]he timely filing of a notice of appeal is an event of jurisdictional significance, immediately conferring jurisdiction on a[n appellate court] and divesting a [trial court] of its control over those aspects of the case involved in the appeal.). Trimble v. Cambridge Mgmt. Grp. (In re Trimble), No. 07-2115, 2008 Bankr. LEXIS 835, at *6 (Bankr. D.N.J. March 18, 2008) (emphasis added); see also In re Whispering Pines Estates, 369 B.R. 752, 757 (B.A.P. 1st Cir. 2007) (The purpose of the general rule is to avoid the confusion of placing the same matter before two courts at the same time and preserve the integrity of the appeal process.) (emphasis added). Venen, 758 F.2d at 120-21; see also Trimble, 2008 Bankr. LEXIS 835 at *6 (citing Venen in the bankruptcy context). Whispering Pines, 369 B.R. at 758 (As courts have noted, however, a bankruptcy case typically raises a myriad of issues, many totally unrelated and unconnected with the issues involved in any given appeal. The application of a broad rule that a Bankruptcy Court may not consider any request filed while an appeal is pending has the potential to severely hamper a Bankruptcy Courts ability to administer its cases in a timely manner.) (citation omitted). Winimo Realty, 270 B.R. at 108; see also In re Urban Dev. Ltd., Inc., 42 B.R. 741, 743-44 (Bankr. M.D. Fla. 1984) (In order to assure that the integrity of the appeal process is preserved, it is imperative that once the appeal is lodged, the lower court should not take any action which in any way would interfere with the appeal process and with jurisdiction of the appeal court. When one considers the relief sought by the Debtor in light of the foregoing, it is obvious that this Court should not interfere with the appeal process and entertain any request the Debtor which either directly or indirectly touches upon the issues involved in

18

19

20

21

{D0203592.1 }

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14.

The divestiture rule does not prohibit the Bankruptcy Court from implementing or

enforcing the order appealed because in implementing an appealed order, the court does not disrupt the appellate process so long as its decision remains intact for the appellate court to review.22 However, courts have recognized a distinction between actions that enforce or implement an order, which are permissible, and acts that expand or alter that order, which are prohibited. Any actions that interfere with the appeal process or decide an issue identical to the one appealed are beyond mere enforcement and are therefore impermissible.23 This distinction is particularly important in the context of a [sic] Chapter 11 bankruptcy cases, where the court will issue innumerable orders involving a myriad of issues, one or more of which may be on appeal at any given moment. . . . Permitting the Bankruptcy Court to enforce orders that are on appeal while prohibiting the court from altering such orders allows the least disruption of the courts administration of a bankruptcy plan.24

the pending appeal. [I]f this court would grant the injunctive relief sought by the Debtor, this would in effect not only frustrate but for all practical purposes moot out the appeal and would, in fact, serve as a substitute for the appeal process.) (emphasis added).
22

In re VII Holdings Co., 362 B.R. 663, 666 n. 3 (Bankr. D. Del. 2007) (emphasis added); In re Winimo Realty Corp., 270 B.R. 99, 105 (S.D.N.Y. 2001) ([I]n implementing an appealed order, the court does not disrupt the appellate process so long as its decision remains intact for the appellate court to review.) (citation omitted). Winimo Realty, 270 B.R. at 105-06; see also In re Emergency Beacon Corp., 58 B.R. 399, 402 (Bankr. S.D.N.Y. 1986) (finding that a Bankruptcy Court, once divested of jurisdiction by the filing of a notice of appeal, should [not] be able to vacate or modify an order under appeal, not even a Bankruptcy Court attempting to eliminate the need for a particular appeal) (citations omitted); Bialac v. Harsh Inv. Corp. (In re Bialac), 694 F.2d 625, 627 (9th Cir. 1982) (holding Bankruptcy Court lacked jurisdiction to enjoin foreclosure of note because [a] pending appeal divest[s] the lower court of jurisdiction to proceed further in the matter. . . . Even though a Bankruptcy Court has wide latitude to reconsider and vacate its own prior decisions, not even a Bankruptcy Court may vacate or modify an order while on appeal) (citations omitted); Buesgens v. Bergman (In re Bergman), 397 B.R. 348, 351 (Bankr. E.D.Va. 2008) (quoting Ingersoll-Rand Fin. Corp. v. Kendrick Equip. Corp. (In re Kendrick Equip. Corp.), 60 B.R. 356, 358 (Bankr. W.D. Va. 1986)) ([T]he taking of an appeal transfers jurisdiction from the Bankruptcy Court to the Appellate Court with regard to any matter involved in the appeal and divests the Bankruptcy Court of jurisdiction to proceed further with such matters. . . . [I]t is imperative that the lower court take no action which might in any way interfere with the jurisdiction of the appeal court.). Winimo Realty, 270 B.R. at 106 (citation and quotations omitted).

23

24

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15.

For instance, in Whispering Pines, the debtor appealed the confirmation order

which provided for a scheduled sale of property and that the secured creditor would be entitled to relief from the automatic stay if the property was not sold by the scheduled date.25 During the appeal, the Bankruptcy Court granted the secured lender relief from the automatic stay to foreclose the property.26 The appellate court held that the Bankruptcy Court was divested of jurisdiction to enter such an order which was an impermissible modification of the confirmation order on appeal.27 The appellate court noted that once an appeal is pending, it is imperative that a lower court not exercise jurisdiction over those issues which, although not themselves expressly on appeal, nevertheless so impact the appeal so as to interfere with or effectively circumvent the appeal process.28 16. The admonition of the Whispering Pines Court, that Bankruptcy Courts cannot act

on those matters directly on appeal or issues which, although not themselves expressly on appeal, nevertheless so impact the appeal so as to interfere with or effectively circumvent the appeal process, has been followed by a number of other jurisdictions.29 In In re Demarco, the Bankruptcy Court delayed confirmation of the debtors plan pending resolution of an appeal in an adversary proceeding instituted by a creditor whose claim would have been disallowed under the plan.30 The debtor moved the Bankruptcy Court for an order determining that he did not

25

369 B.R. at 759. Id. Id. at 759-60. Id. at 759 (citations omitted). Whispering Pines, 369 B.R. at 758 (citations omitted). In re Demarco, 258 B.R. 30 (Bankr. M.D.Fla. 2000).

26

27

28

29

30

{D0203592.1 }

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qualify as a responsible person within the meaning of the United States Tax Code.31 The Court ruled for the debtor and found that he had no tax liability as a responsible person.32 Shortly thereafter, the government appealed the Bankruptcy Courts decision to the District Court on the question of the debtors liability under the Tax Code.33 Subsequent to the

governments filing of the appeal, the debtor amended the plan to disallow the governments claim and to require that, effective upon confirmation, the government release its lien and any future cause of action against the debtor.34 In its objection to confirmation of the debtors plan, the government contended that the act of filing an appeal with the district court divested the Bankruptcy Court of jurisdiction to consider confirmation of the plan, because an order confirming the plan would have an impact directly or indirectly on the appeal.35 Over an objection by the debtor, the Bankruptcy Court adopted the governments rationale and stayed confirmation, finding that confirmation of the Debtors plan would preclude any effective judicial relief for the [government] in the event it prevails on its appeal.36 17. The Plan seeks an Order from this Court providing for: a) an affirmative

injunction requiring completion of the steps necessary to effect the conditional exchange of the Trust Preferred Securities (steps, conveniently, WMI and JPMC argued to this Court were unnecessary and/or irrelevant during summary judgment proceedings on the TPS Litigation); and

31

Id. at 31. Id. Id. at 32. Id. Id. (citations omitted). Id. at 34.

32

33

34

35

36

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b) assumption of the agreements necessary to complete the conditional exchange transaction.37 The Court ruled in the TPS Litigation that these acts were ministerial and unnecessary in determining that the exchange of the TPS Securities occurred. The actions contemplated in the Plan are identical to issues that are central in the pending appeal of the TPS Litigation now within the purview of the District Court, and as such are clearly prohibited from the Courts consideration, let alone the confirmation of these portions of the Plan dealing with the transfer of the Trust Preferred Securities to JPMC. Similarly, the pendency of the TPS Litigation appeal divests this Court of jurisdiction to consider any aspect of the Plans proposed releases or the Settlement Agreement: a) that would affect any of the TPS Consortiums claims against JPMC (or any of its affiliates) related to the Trust Preferred Securities; or b) that would purport to deliver the Trust Preferred Securities to JPMC free and clear of the very claims now on appeal before the District Court. 18. Faced with these Debtors request that this Court interfere with matters currently

on appeal before Chief Judge Sleet in the District Court, this Court should following the teachings of Demarco and Whispering Pine avoid any action that would preclude any effective judicial relief for the [Consortium] in the event it prevails on its appeal.38 The filing of the appeal to the District Court constituted an event of jurisdictional significance that divested the Bankruptcy Court of its jurisdiction to proceed further with matters related to the releases. It is of no consequence that the Court is not convinced that continued litigation against JPMC and/or the FDIC would provide equity interest holders with any recovery.39 Respectfully, it is not this
37

The assumption of such agreements, which provide for the issuance of WMI securities, would also clearly violate Bankruptcy Code Section 365(c)(2), which itself would preclude confirmation of the Plan under Bankruptcy Code Sections 1129(a)(1) (also discussed infra). Id. Opinion, pp. 66-67.

38

39

{D0203592.1 }

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Courts decision to make. Rather, the nature of the issues on appeal to the District Court prohibits this Court from interfering with the appellate process. 40 19. A very reasonable and commonly-employed alternative to a complete stay of this

Courts proceedings, and one the Court should employ here, would be to deposit the disputed property (the Trust Preferred Securities) into an escrow account and hold in abeyance any Plan provision that would interfere with the pending appeal of the TPS Litigation pending resolution by the District Court.41 In that way, the Court may avoid taking any action offensive to the District Courts jurisdiction over the TPS Litigation and preserve the sanctity of the bankruptcy and appellate processes.42

40

See In re Emergency Beacon Corp., 58 B.R. 399 at 402 (Bankr. S.D.N.Y. 1986) (finding that a Bankruptcy Court, once divested of jurisdiction by the filing of a notice of appeal, should [not] be able to vacate or modify an order under appeal, not even a Bankruptcy Court attempting to eliminate the need for a particular appeal) (citations omitted). See, e.g., Premier Entmt Biloxi LLC v. Pacific Mgmt. Co., LLC (In re Premier Entmt Biloxi LLC), No. 08-60349, 2009 WL 1616681 (5th Cir. 2009) (finding that the Bankruptcy Court properly deposited disputed funds into an escrow agreement, with a determination of which party was entitled to those funds to be made through an ordered process and at a later date, for purposes of continuing confirmation process).

41

42

Knapp v. Seligson (In re Ira Haupt & Co.), 361 F.2d 164, 168 (2d Cir. 1966) (as Judge Friendly succinctly put it many years ago, the conduct of bankruptcy proceedings not only should be right but must seem right.

{D0203592.1 }

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II

The Plan Cannot Be Confirmed Because It Inappropriately Allows Post-Petition Interest Claims At The Contract Rate. A. 20. To The Extent Post-Petition Interest Is Payable, The Appropriate Rate Of Interest Is The Federal Judgment Rate. To the extent post-petition interest is payable on allowed unsecured claims in

bankruptcy, the rate of interest mandated under Bankruptcy Code Section 726(a)(5) and incorporated into Chapter 11 through the best interests of creditors test under Bankruptcy Code Section 1129(a)(7) is the FJR set forth in 28 U.S.C. 1961. Notwithstanding, the Plan provides for Postpetition Interest Claims on allowed unsecured claims calculated at the contract rate set forth in any agreement related to such Allowed Claim or, if no such rate or contract exists, at the federal judgment rate.43 21. But, to the extent unsecured creditors were to be paid post-petition interest at the

FJR as mandated under Bankruptcy Code Sections 1129(a)(7) and 726(a)(5), those classes of unsecured creditors would be unimpaired and not entitled to vote on the Plan. Consequently, the cramdown provisions of Bankruptcy Code Section 1129(b) would never be implicated because Bankruptcy Code Section 1129(a)(8) would be satisfied. But, even if the cramdown principles of Bankruptcy Code Section 1129(b) did have application to the treatment of unsecured creditors here in other words, the holders of unsecured claims were somehow deemed to be impaired (notwithstanding payment in full, plus post-petition interest at the legal rate) and rejected the Plan the Debtors would be unable to demonstrate that payment of the higher contract rates of interest would be fair and equitable. The result is that the Plan, as currently constituted,

impermissibly diverts to unsecured creditors (including, in large part, the Settlement

43

See Plan, p. 17, 1.151 (emphasis added).

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Noteholders) approximately $700 million in value in excess of their claims and any entitlement to post-petition interest. A significant portion of that misallocated value properly belongs to WMIs preferred equity holders under to the Bankruptcy Codes distribution scheme.44 A. The Legal Rate Of Interest Under Bankruptcy Code Section 726 Of The Bankruptcy Code Is The Federal Judgment Rate. Bankruptcy Code Section 726(a)(5) provides on allowed unsecured claims a fifth-

22.

priority payment of interest at the legal rate from the date of the filing of the petition.45 Courts have consistently interpreted the reference in Bankruptcy Code Section 726(a)(5) to interest at the legal rate to mandate application of the FJR.46 23. As set forth in the Initial Objection and expanded upon herein, principles of

statutory interpretation compel the conclusion that the phrase interest at the legal rate in Bankruptcy Code Section 726(a)(5) means interest at the FJR.47 When interpreting a section of the Bankruptcy Code, it is the Courts duty, if possible, to give effect to every clause and word of a statute48 and a court should construe a statute to avoid rendering any element of it superfluous.49 Further, courts must focus on the plain meaning of a statute and can look to

44

In its Opinion, the Court reserved the issue of the appropriate rate of post-petition interest on allowed unsecured claims. See Opinion, p. 94. 11 U.S.C. 726(a)(5) (emphasis added). See, e.g., Premier Entmt Biloxi LLC v. U.S. Bank Natl Assoc. (In re Premier Entmt Biloxi LLC), No. 06-50975, 2010 Bankr. LEXIS 2994, at *167-74 (Bankr. S.D. Miss. Sept. 3, 2010) (finding that the FJR provides the appropriate measure of interest in a solvent debtor case); Onink v. Cardelucci (In re Cardelucci), 285 F.3d 1231, 1234 (9th Cir. 2002); In re Country Manor of Kenton, Inc., 254 B.R. 179 (Bankr. N.D. Ohio 2000); In re Dow Corning Corp., 237 B.R. 380, 412 (Bankr. E.D. Mich. 1999) (Dow I); In re Melenyzer, 143 B.R. 829, 832-33 (Bankr. W.D. Tex. 1992). See Cardelucci, 285 F.3d at 1234-36; In re Country Manor of Kenton, 254 B.R. at 182; Dow I, 237 B.R. at 400-11. In re Anderson, 348 B.R. 652, 657 (Bankr. D. Del. 2006) (Walrath, J.) (citations omitted) (rejecting creditors argument that the phrase allowed claim in Section 521(a)(6) should be read to mean merely claim, since the Court cannot ignore [Congresss] choice of words). First Bank Natl Assoc. v. F.D.I.C., 79 F.3d 362, 367 (3d Cir. 1996).

45

46

47

48

49

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the dictionary definition of a term to understand the statutes meaning.50

When the plain

meaning of the statute is not clear on its face, the Court may then consider the legislative history to assist its interpretation.51 Where the legislative history is consulted to illuminate the meaning of a statute, the authoritative source for finding the Legislatures intent lies in the Committee Reports on the bill.52 24. As noted by the court in Country Manor, the analysis of Bankruptcy Code Section

726(a)(5) and its impact on chapter 11 cases must begin with an examination of the language of the statute itself.53 As the Dow I court noted, the phrase interest at the legal rate had a commonly understood meaning when Congress enacted the Bankruptcy Code in 1978 which was, and is, commonly understood to mean a rate of interest fixed by statute, and not by contract.54 The Dow I court found that Bankruptcy Act cases achieve[d] uniformity in using the term the legal rate to mean a rate of interest fixed by statute55 and that [f]or over 100 years

50

See In re Charter Behavioral Health Sys., LLC, 292 B.R. 36, 44-45 (Bankr. D. Del. 2003). In re Continental Airlines, Inc., 257 B.R. 658 (Bankr. D. Del. 2000) (Walrath, J.) (resolving to rely on (i) the plain meaning of the term employee, (ii) the scant legislative history of the relevant Bankruptcy Code section, and (iii) other courts interpretations to determine the meaning of employees under Bankruptcy Code Section 502(b)(7)); In re Washington Mut., Inc., 419 B.R. 271, 277 (Bankr. D. Del. 2009) (Generally, legislative history should not be relied upon where the language of the statute or rule is clear.) (citations omitted). In re Paret, 347 B.R. 12, 16 (Bankr. D. Del. 2006) (Walrath, J.) (quoting Garcia v. United States, 469 U.S. 70, 76 (1984)). See 254 B.R. at 181. 237 B.R. at 400-05. Id. at 401 (See, e.g., Dayton v. Stanard, 241 U.S. 588, 590 (1916); Dower v. Bomar, 313 F.2d 596, 597 (5th Cir. 1963); Delatour v. Prudence Realization Corp., 167 F.2d 621, 622 (2d Cir. 1948); In re Realty Assocs. Sec. Corp. 163 F.2d 387, 389 (2d Cir. 1947); Imperial 400 National Inc., 374 F. Supp. 949, 954 (D.N.J. 1974) (contrasting contract rate with the governing legal rate); In re Maryvale Community Hosp., Inc., 307 F. Supp. 304 (D. Ariz. 1969); In re Norcor Mfg., 36 F. Supp. 978 (E.D. Wis. 1941); Rollins v. Repper, 69 F. Supp. 976, (E.D. Mich. 1947); In re Jones, 2 B.R. 46 (Bankr. N.D. Ala. 1979)).

51

52

53

54

55

{D0203592.1 }

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courts have consistently used the term to mean a rate of interest fixed by statute.56 The Cardelucci court also recognized that the commonly understood meaning of at the legal rate at the time the Bankruptcy Code was enacted was a rate fixed by statute.57 25. As the Dow I court reasoned, Congress intended for the term to carry this

commonly understood meaning.58 First, Congress chose the language interest at the legal rate when it could simply have said interest when it enacted, for the first time, a statute requiring
56

Id. at 402. See also City of New York v. Saper, 336 U.S. 328, 336 (1949) (referring to rate fixed by statute as interest at the legal rate); Louisville & N. R. Co. v. Holloway, 246 U.S. 525, 528 (1918) (referring to a rate fixed by Kentucky statute as that states legal rate of interest); Dayton v. Stanard, 241 U.S. 588, 590 (1916) (observing that the ordinary legal rate is the statutorily-fixed rate of interest that will apply when there is no contract); American Iron & Steel Mfg. Co. v. Seaboard Air Line Ry., 233 U.S. 261 (1914) (referring to legal interest as the applicable state statutory rate in situation where contract did not specify an interest rate); Mohamed v. UNUM Life Ins. Co., 129 F.3d 478, 481 (8th Cir. 1997); In re M/V Nicole Trahan, 10 F.3d 1190, 1192 (5th Cir. 1994) (referring to the rate under 28 U.S.C. 1961(a) as the legal rate); Carte Blanche (Singapore) Pte., Ltd. v. Carte Blanche Intl, Ltd., 888 F.2d 260, 269 (2nd Cir. 1989) (same); U.S. v. Griffin, 782 F.2d 1393, 1395 (7th Cir. 1986) (same); Colegrove, 771 F.2d at 123 (distinguishing between interest [at] the legal rate, which is fixed by statute, and the rate provided for in the original loan agreement); Memphis Sheraton Corp. v. Kirkley, 640 F.2d 14, 19 (6th Cir. 1981) (observing that interest at the legal rate is a rate fixed by statute); Texas Eastern Transmission Corp. v. Marine Office-Appleton & Cox Corp., 579 F.2d 561, 568 (10th Cir. 1978) (referring to the rate under 28 U.S.C. 1961(a) as the legal rate); National Packing Co. v. Century Provision Co., 354 F.2d 7, 9 (7th Cir. 1965) (equating legal rate with a Kansas statutory rate); Dower v. Bomar, 313 F.2d 596, 597 (5th Cir. 1963) (noting Florida statute establishing the maximum legal rate of interest for loans to a corporation); E.I. Du Pont De Nemours & Co. v. Lyles & Lang Constr. Co., 227 F.2d 517 (4th Cir. 1955) (referring to interest at the legal rate [as a] rate fixed by statute); Delatour v. Prudence Realization Corp., 167 F.2d 621 (2d Cir. 1948) (calling the statutorily-created rate of interest imposed on debts overdue in New York as the legal rate of interest); In re Realty Associates Securities Corp., 163 F.2d 387, 389 (2d Cir. 1947) (equating interest at the legal rate with the statutory judgment rate); Bins v. Artison, 764 F. Supp. 129, 132 (E.D. Wis. 1991) (referring to the rate under 28 U.S.C. 1961(a) as the legal rate); Reid v. Prudential Ins. Co. of America, 755 F. Supp. 372, 377 (M.D. Fla. 1990) (same); Burston v. Commonwealth of Virginia, 595 F. Supp. 644, 652 (E.D. Va. 1984) (same); In re Maryvale Cmty. Hosp., Inc., 307 F. Supp. 304, 309 (D. Ariz. 1969) (referring to rate of interest in an Arizona statute as The Arizona legal rate of interest); In re Norcor Mfg. Co., 36 F. Supp. 978, 980 (E.D. Wis. 1941) (equating the legal rate with a Wisconsin statutory rate); Rollins v. Repper, 69 F. Supp. 976, 979 (E.D. Mich. 1947) (referring to interest rate established by Michigan statute as the legal rate of interest); Fitch v. Remer, 1860 U.S. App. LEXIS 453 (D. Mich. July 1860) (observing that in Michigan the legal rate of interest was a rate fixed by statute); City of Danville v. Chesapeake & O. Ry., 34 F. Supp. 620, 637 (W.D. Va. 1940) (The legal rate of interest, generally speaking, is a rate fixed by statute ....); Family Fed. Sav. & Loan v. Davis (In re Davis), 172 B.R. 437, 457 (Bankr. D.C. 1994) (referring to the rate under 28 U.S.C. 1961(a) as the legal rate); In re Goldblatt Bros., 61 B.R. 459, 465 (Bankr. N.D. Ill. 1986) (same); In re Jones, 2 B.R. 46, 49 (Bankr. N.D. Ala. 1979) (awarding interest on judgment at the legal rate as established by Alabama statute)). 285 F.3d at 1234-35. Dow I, 237 B.R. at 403.

57

58

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the payment of post-petition interest to unsecured creditors in solvent estates.59 Moreover, the language originally proposed for Bankruptcy Code Section 726(a)(5) was interest on allowed claims, as set forth in the 1973 Report of the Commission on the Bankruptcy Laws of the United States, which explained the rate of interest is to be determined by other applicable law.60 The fact that Congress rejected the phrase interest on allowed claims in favor of interest at the legal rate is significant: other applicable law is a broad, general term [c]onversely, interest at the legal rate carries a much more definite meaning, a rate of interest fixed by statute.61 The Dow I court relied on several cornerstone rules of statutory construction to reach its conclusion: (1) a rejected proposition strongly militates against a judgment that Congress intended a result that it expressly declined to enact, (2) a court must assume that Congress carefully selects and intentionally adopts the language that it chooses to employ in a statute, and (3) where Congress uses terms that have accumulated settled meaning under the common law, a court must infer, unless the statute otherwise dictates, that Congress means to incorporate the established meaning of these terms.62 26. Moreover, use of the definite article the as a modifier for legal rate

demonstrates that Congress meant for a single source to be used to calculate post-petition

59

Id. Id. (H.R. Doc. No. 93-137, 93d Cong., 1st Sess., 4-405(a)(8) reprinted in Volume B Collier on Bankruptcy App. Pt. 4(c) (Alan N. Resnick & Henry J. Sommer eds., 15th ed. Rev., at 4-679; Note 6 reprinted at id. at 4-681). Id. Id. (citations omitted); see also Cardelucci, 285 F.3d at 1234 (assuming that Congress carefully selects and adopts the language used in a statute and recognizing that instead of a general statement allowing for awards of interest, Congress modified what type and amount of interest could be awarded with a specific phrasing at the legal rate.).

60

61

62

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interest, as opposed to using whatever rate of interest happened to be in a contract.63 This rationale is widely accepted and continues to be applied by courts around the country.64 Moreover, outside of the instant context, federal courts have consistently interpreted statutes that use the definite article the to mean a specific or particular person, object, or idea.65 The definite article the necessarily restricts the scope of the clause it modifies and, in this instance, specifies the FJR as the legal rate for calculating post-petition interest on claims in bankruptcy cases. 27. The use of the phrase at the legal rate would also make little sense had

Congress intended the term simply to mean any legally permissible rate of interest fixed by contract.66 It would be entirely unnecessary for Congress to have to instruct Bankruptcy Courts not to allow post-petition interest at illegal or usurious rates, but had Congress felt such instruction necessary, it presumably would have used legal in a similar manner throughout the

63

Dow I, 237 B.R. at 404; Cardelucci, 285 F.3d at 1234; Melenyzer, 143 B.R. at 831 n.2; In re Country Manor of Kenton, Inc., 254 B.R. 179, 182 (Bankr. N.D. Ohio 2000). See, e.g., In re Smith, 431 B.R. 607, 610 (Bankr. E.D.N.C. 2010) (explaining and adopting the Cardelucci distinction between Congresss purposeful use of the instead of a or an); see also Garriock v. McDowell (In re Garriock), 373 B.R. 814, 816 (E.D.Va. 2007) (same). See e.g., Freytag v. C.I.R., 501 U.S. 868, 902 (1991) (noting that [t]he definite article the obviously narrows the scope of any clause that follows); Flandreau Santee Sioux Tribe v. United States, 197 F.3d 949 (8th Cir. 1999) (interpreting the statutes use of the definite article the instead of the indefinite article a to refer to a specific person or object) (citations omitted); St. Clair Intellectual Prop. Consultants, Inc. v. Matsushita Elecs. Indus. Co., Ltd., 691 F.Supp.2d 538, 553 (D. Del. 2009) (noting that an indefinite article a or an. . .carries the meaning of one or more) (citations omitted); OSullivan v. Loy (In re Loy), 432 B.R. 551, 559 n.9 (E.D.Va. 2010) (An estate is not a reference to a specific foreign proceeding. The indefinite article signals that the phrase refers to a hypothetical estate. If Congress had meant to reference a specific, existing estate, it would likely have used the definite article.); see also Blacks Law Dictionary 1324 (5th ed. 1979) (Grammatical niceties should not be resorted to without necessity; but it would be extending liberality to an unwarrantable length to confound the articles a and the. The most unlettered persons understand that a is indefinite, but the refers to a certain object.); Chicago Manual of Style 116 (15th ed. 2003) (An article is a limiting adjective . . .The definite article points to a definite object . . . And indefinite article points to nonspecific objects . . .). Dow I, 237 B.R. at 404.

64

65

66

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Bankruptcy Code. But Congress did not do this.67 28. Moreover, any post-petition interest required to be paid pursuant to Bankruptcy

Code Section 726(a)(5) accrues because of the delay caused by the administration of the federal bankruptcy law. Accordingly, post-petition interest, which is akin to post-judgment interest, is procedural and governed by federal law and the allowance of a claim is akin to a money judgment, therefore, Bankruptcy Courts are required to calculate post-petition interest in accordance with 28 U.S.C. 1961(a).68 Moreover, federal courts have long referred to the rate of interest calculated pursuant to 1961(a) as the legal rate or the federal legal rate.69 29. Leading commentators on bankruptcy law also recognize that proper statutory

analysis leads to the conclusion that Bankruptcy Code Section 726(a)(5) must refer to the FJR: The reference in the statute to the legal rate suggests that Congress envisioned a single rate, probably the federal statutory rate for interest on judgments set by 28 U.S.C. 1961. . . . Had Congress intended contract rates to apply, it presumably would have used language other than the legal rate, a term that typically refers to a statutory rate.70 30. Significantly, had Congress intended to provide interest under Bankruptcy Code

Section 726(a)(5) at state judgment rates or contractual rates of interest, it certainly knew how to specify such an arrangement. For instance, Bankruptcy Code Section 506(b) provides that an allowed secured claim (secured by property with value greater than the amount of the claim) is permitted interest on such claim, and any reasonable fees, costs, or charges provided for under the agreement or State statute under which such claim arose. 11 U.S.C. 506(b) (emphasis added). As expressed by the Country Manor court, the distinction between Bankruptcy Code
67

Id. at 404-05. Id. at 406; Country Manor, 254 B.R. at 183. Dow I, 237 B.R. at 407. 6 Collier on Bankruptcy 726.02[5] (16th ed. rev. 2010).

68

69

70

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Section 726(a)(5) (interest at the legal rate) and Bankruptcy Code Section 506(b) (which explicitly uses the term agreement) beg[s] the question, if both 506(b) and 726(a)(5) were intended to refer to the agreed upon interest rate, why is the term agreement specified in one section and not the other.71 Other examples of Congress distinguishing between rights provided under the Bankruptcy Code versus those provided by contract or non-Bankruptcy law abound. For example, Bankruptcy Code Section 365(d)(5) incorporates both concepts in the same statutory provision (providing for satisfaction of contractual obligations pursuant to Bankruptcy Code Section 503(b)(1) for the first sixty days following commencement of the case and pursuant to the terms of the underlying agreement thereafter). Clearly, where Congress wanted rights to be determined pursuant to contract, it knew how to effect that treatment. That it chose not to do so with respect to calculation of post-petition interest on unsecured claims leaves the FJR as the only logical alternative, as discussed above. 31. In addition to statutory construction, several other factors support application of

the FJR to the payment of post-petition interest under Bankruptcy Code Section 726(a)(5). Application of the FJR to post-petition interest claims promotes uniformity within federal law.72 Applying the FJR, a single, easily determined interest rate to all unsecured claims for postpetition interest ensures equitable treatment of creditors and is the most practical, judiciallyefficient method of allocating distributions.73

71

254 B.R. at 182. See Cardelucci, 285 F.3d at 1235; Dow I, 237 B.R. at 400 n.14; see also Beguelin v Volcano Vision Inc. (In re Beguelin), 220 B.R. 94, 100-01 (B.A.P. 9th Cir. 1998) (citing Godsey, 134 B.R. 865, 867 (Bankr. M.D. Tenn. 1991)). Cardelucci, 285 F.3d at 1235-36 (By using a uniform interest rate, no single creditor will be eligible for a disproportionate share of any remaining assets to the detriment of other unsecured creditors. Calculating the appropriate rate and amount of interest to be paid to a myriad of investors has the potential to overwhelm what could otherwise be a relatively simply process pursuant to 11 U.S.C. 726(a)(5).) (citations omitted); Country Manor, 254 B.R. at 182.

72

73

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32.

Thus, principles of statutory construction and other considerations make it plain

that Bankruptcy Code Section 726(a)(5) mandates FJR as the appropriate rate of interest. The guiding principle with respect to statutory construction is that the expression of one thing [in a statute] is the exclusion of others.74 Therefore, if interest at the legal rate in Bankruptcy Code Section 726(a)(5) means the FJR, courts do not have discretion to provide another rate under the provision.75 B. 33. Bankruptcy Code Section 1129(a)(7)s Best Interest Test Makes The FJR Applicable To Post-Petition Interest Claims Under A Chapter 11 Plan. Bankruptcy Code Section 726(a)(5) (and its requirement to pay post-petition

interest at the legal rate) is not directly applicable to cases under chapter 11. See Bankruptcy Code Section 103(b). Rather, Bankruptcy Code Section 726(a)(5)s application in chapter 11 is a product of the best interests test imposed under Bankruptcy Code Section 1129(a)(7). This section requires that, under a chapter 11 plan, with respect to each class under the plan, dissenting members must receive as much as they would if the case had been administered under chapter 7.76 In applying the best interests test, this Court must give consideration to not only what creditors would receive in a chapter 7 case (post-petition interest at the legal rate) but also what junior impaired classes (e.g., WMI preferred equity holders) would receive in a chapter 7 liquidation all residual value after payment of claims and post-petition interest at the legal rate. Here, payment of anything beyond the FJR would result in an impermissible diversion of
74

Acme Metals Inc. v. Raytheon Engrs & Constructors (In re Acme Metals, Inc.), 257 B.R. 714, 719 (Bankr. D. Del. 2000) (Walrath, J.) (quoting Springer v. Govt of the Philippine Islands, 277 U.S. 189, 206 (1928)). Cardelucci, 285 F.3d at 1236 (Nonetheless, interest at the legal rate is a statutory term with a definitive meaning that cannot shift depending on the interests invoked by the specific factual circumstances before the court.) (citation omitted); Dow I, 237 B.R. at 409 ([A]lthough, it is frequently described as a court of equity, a Bankruptcy Court is not empowered to ignore the actual provisions of the Bankruptcy Code in order to reach a result that it finds more palatable.). See Bankruptcy Code Section 1129(a)(7)(A)(ii).

75

76

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value to unsecured creditors in excess of their entitlement under Bankruptcy Code Section 1129(a)(7) value that is required to flow to dissenting WMI preferred equity holders (per Bankruptcy Code Section 1129(a)(7)s application to Classes 19 and 20 also impaired Classes under the Plan). 34. Of the cases cited in the Opinion to suggest payment of interest at the contract

rate under a chapter 11 plan might be appropriate, only one In re Schoeneberg held that Bankruptcy Code Section 726(a)(5) allowed for the payment of post-petition interest on unsecured claims at the contract rate.77 The Schoeneberg court, however, reached its decision considering: a) case law concerning post-petition interest on secured claims under Bankruptcy Code Section 506(b), which as discussed above are explicitly allowed interest provided for under the agreement or State statute under which such claim arose; and b) case law under the Bankruptcy Act prior to enactment of the Bankruptcy Code Section 726(a)(5).78 Of further note, the contractual rate to which the creditor in Schoeneberg was deemed to be entitled was a rate established by a Federal statute for agricultural lenders.79 35. Two of the other cases cited in the Opinion, In re Chicago, Milwaukee, St. Paul

and Pacific Railroad Company80 and Southland Corp. v. Toronto-Dominion (In re Southland Corp.)81 addressed post-petition interest under the Bankruptcy Act and under Bankruptcy Code Section 506(b) for an oversecured claim, respectively not Bankruptcy Code Section 726(a)(5).
77

156 B.R. 963, 972 (Bankr. W.D. Tex. 1993). Id. at 970-72 (analyzing case law determining the rate of post-petition interest in an analogous 506(b) situation and cases finding that secured creditors are to be awarded interest at the contract rate). Id. (setting the post-petition interest rate at the rate determined by 12 U.S.C. 2205). 791 F.2d 524 (7th Cir. 1986) (the railroad filed its petition for reorganization in 1977 under section 77 of the Bankruptcy Act, which while since appealed remained applicable to its proceedings). 160 F.3d 1054 (5th Cir. 1998).

78

79

80

81

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Relying on pre-Code cases here would constitute error because, under the Bankruptcy Act, the award of interest on unsecured claims was discretionary and was based on equitable principles.82 Under the Bankruptcy Code, however, the award of post-petition interest is now statutorilyprovided under Bankruptcy Code Section 726(a)(5) at the legal rate. 36. In addition, the Court cited to two Dow Corning cases in the Opinion for the

propositions that: a) some courts have concluded there is a presumption the contract rate of interest should be applied in solvent debtor cases;83 and b) the FJR is only a minimum for postpetition interest to unsecured creditors and courts have within their discretion to allow interest at some other rate.84 But, both cases provide such propositions in the context of the fair and equitable test, which is only applicable to classes that do not accept the plan not to Bankruptcy Code Section 726(a)(5) and Bankruptcy Code Section 1129(a)(7)s best interests test. In fact, the Dow II court explicitly held that post-petition interest is provided at the FJR under the best interests of creditors test pursuant to Bankruptcy Code Section 726(a)(5).85 Similarly, this Court in In re Coram Healthcare Corp. addressed post-petition interest under the fair and equitable test and appeared to have accepted that post-petition interest under the best interests test and Bankruptcy Code Section 726(a)(5) was to be paid only at the FJR.86 C. Bankruptcy Code Section 1129(b)s Fair And Equitable Test Does Not Justify Payment Of Post-Petition Interest At Anything Other Than The FJR. Pursuant to Bankruptcy Code Section 1124(1), a claim is unimpaired if treatment

37.
82

See e.g., Vanston Bond Holders Protective Committee v. Green, 329 U.S. 156, 163, (1946). In re Dow Corning Corp., 456 F.3d 668, 677-80 (6th Cir. 2006) (Dow Corning). In re Dow Corning Corp., 244 B.R. 678, 694-96 (Bankr. E.D. Mich. 1999) (Dow II). Id. at 686. 315 B.R. 321, 346-47 (Bankr. D. Del. 2004).

83

84

85

86

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under a plan leaves unaltered the legal, equitable and contractual rights to which such claim or interest entitles the holder of such claim or interest. Courts, including this Court, have held that to the extent the Bankruptcy Code defines or alters the rights of creditors, a claim is not impaired by a plan merely because it provides treatment in accordance with those Bankruptcy Code provisions.87 This Court, in Coram Healthcare, applied this very concept to the payment of post-petition interest on unsecured claims, and held that application of the FJR did not render such claims impaired pursuant to Bankruptcy Code Section 1124(a). As the Court noted in Coram: It is not the Equity Committees Plan which limits the rights of [unsecured creditors receiving the FJR]. Instead, if their rights are altered at all, it is because of the Code and decisional law under the Code.88 38. In this case, like the Coram case, if the Plan were to be modified to provide for

payment of post-petition interest at the FJR (as mandated by Bankruptcy Code Sections 1129(a)(7) and 726(a)(5)), the Plan would not alter contractual, legal or equitable rights of unsecured creditors. Rather, the Plan would simply reflect application of Bankruptcy Code provisions in respect of treatment of unsecured claims. 39. Where it is the Bankruptcy Code that defines the rights of unsecured creditors,

and not the Plan, such creditors would not be impaired by application of the FJR. As such, to the extent unsecured creditors were to be paid post-petition interest at the FJR, as mandated under

87

See In re Mirant Corp., No. 03-46590-DML-11, 2005 Bankr. LEXIS 909, at *15 (Bankr. N.D. Tex. May 24, 2005) (noting that the court also must distinguish between an effect of the Plan and an effect brought about by operation of the Code); In re PPI Enterprises (U.S), Inc., 324 F.3d 197, 205 (3d Cir. 2003) (PPI Enterprises) (finding claim held by debtors former landlord unimpaired where plan allowed landlords damages up to cap established by Bankruptcy Code Section 502(b)(6)); In re American Solar King Corp., 90 B.R. 808, 819-820 (Bankr. W.D. Tex 1988) (Solar King) (finding creditor unimpaired under a plan where it was treated as a subordinated creditor pursuant to Bankruptcy Code Section 510(b)). Id.

88

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Bankruptcy Code Sections 1129(a)(7) and 726(a)(5), those classes of unsecured creditors would be unimpaired and not entitled to vote on the Plan. Pursuant to Bankruptcy Code Section 1126(f), a class that is not impaired under a plan, and each holder of a claim or interest of such class, are conclusively presumed to have accepted the plan, and solicitation of acceptances with respect to such class from the holders of claims or interests of such class is not required.89 40. Bankruptcy Code Section 1129(a)(8) requires only that each class of claims or

interests accept the Plan or not be impaired under the Plan.90 The cramdown provisions of Bankruptcy Code Section 1129(b), including the fair and equitable requirements, are only implicated when the alternative requirements of Bankruptcy Code Section 1129(a)(8) are not met.91 Consequently, if the Plan provided for payment of unsecured claims in full, plus interest at the FJR, such Classes would be unimpaired and the cramdown provisions of Bankruptcy Code Section 1129(b) would never come into play. 41. But, assuming arguendo, Bankruptcy Code Section 1129(b)s fair and equitable

standard were implicated by payment of unsecured claims in full, plus interest at the FJR, it would still not provide a basis for payment of post-petition interest at anything above the FJR. In Coram Healthcare, this Court held that in a cramdown, the specific facts of each case will determine what rate of [post-petition] interest is fair and equitable.92 The Court further noted that actions of [creditors] are relevant in making that determination.93 And, in Coram

89

11 U.S.C. 1126(f) (emphasis added). 11 U.S.C. 1129(a)(8). 11 U.S.C. 1129(b). 315 B.R. at 347. Id. at 346 (finding the FJR of interest fair and equitable because conduct of certain creditors ultimately resulted in delay in cases); see also In re Dow Corning Corp., 244 B.R. 678, 695 (Bankr. E.D. Mich. 1999) ([t]he touchstone of each decision on allowance of interest in bankruptcy . . . and reorganization has been

90

91

92

93

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Healthcare, this Court correctly declined to award interest beyond the FJR because, among other things, the noteholders in that case generally had acted as a group in th[e] case in advancing their interests and opposing the Equity Committee.94 42. First, it must be noted that here, unlike in Coram Heathcare or Dow, in which the

courts considered the general equitable principles of Chapter 11 in addition to the plain language of Bankruptcy Code Sections 1129(a)(7) and 726(a)(5) (so-called solvent debtor interest), the Plan in this case is essentially a settlement and liquidation. For all practical purposes, there is no reorganized debtor that will continue to operate as a going concern and that would have received the benefit of the Chapter 11 process without affording creditors of their contractual rights.95 Rather, the reorganization here is a sham based on the emergence of a shell

reinsurance company already in run-off mode. Accordingly, the fairness concerns implicit in a Courts analysis of a reorganizing plan under Chapter 11 have little (if any) application here, where there is no concern that an entitys restructuring is occurring at the expense of creditors with contractual rights to payment of interest at particular rates. The only concern here is the potential right to so-called solvent-debtor interest under Bankruptcy Code Section 1129(a)(7) and 726(a)(5) interest that, as set forth herein, plainly would accrue (if at all) at the FJR. 43. Moreover, even if the fairness concerns implicit in Coram Healthcare were

applicable here, the circumstances of these cases demonstrate that, if post-petition interest is to be afforded to unsecured creditors, payment of interest at the FJR is more than fair and equitable. Stated differently, the payment of post-petition interest to creditors beyond the FJR would not be
a balance of equities between creditor and creditor or between creditors and the debtor) (citations omitted).
94

315 B.R. at 347. See, e.g., In re Dow, 244 B.R. at 695, revd on other grounds 456 F.3d. 668 (6th Cir. 2006) (drawing distinction between FJR interest to be paid as a floor by a solvent debtor pursuant to 1129(a)(7), and the fairness concerns implicit in 1129(b)).

95

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fair and equitable to the members of Class 19, because it would result in an effective windfall to, in large part, the very creditors who gifted away significant estate value to JPMC once they had negotiated for full payment of their own interests and who now stand accused of violating securities laws by trading on non-public information obtained during those negotiations. Moreover, the Debtors have not demonstrated that unsecured creditors have suffered any unique or particular harm or delay that would justify post-petition interest at a rate other than the FJR. And, in fact, as in Coram Healthcare, the unsecured creditors in these cases, led by the Settlement Noteholders, have largely acted as a group in advancing their own interests at the expense of other estate constituents and opposing interests advanced by both the TPS Consortium and the Equity Committee. 44. Finally, the Plan voting results are not available as of the filing of this Objection.

But, to the extent Classes reject the Plan, the Debtors will have the burden of demonstrating the Plan is fair and equitable with respect to each rejecting Class (including Class 19, which, by the Debtors own design, has been deemed to reject this current Plan based on votes submitted with respect Sixth Amended Plan).96 In light of the circumstances giving rise to the Plan (the economic terms of which were negotiated by holders of unsecured claims to provide for their recovery in full (plus interest), with all other value shunted away to JPMC rather than distributed to WMI preferred equity), and in balancing the equities between unsecured creditors and the members of Class 19, the Debtors simply cannot meet their burden to demonstrate that payment of post-petition interest at the contract rate would be: a) necessary to satisfy Bankruptcy Code Section 1129(b) with respect to rejecting unsecured Classes (if any); or b) permissible with
96

See, e.g., United States v. Arnold & Baker Farms (In re Arnold & Baker Farms), 177 B.R. 648, 654-55 (B.A.P. 9th Cir. 1994); 266 Washington Associates v. Citibank, N.A. (In re Washington Associates), 147 B.R. 827, 830 (E.D.N.Y. 1992) (burden of proof on confirmation rests squarely on the plans proponent).

{D0203592.1 }

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respect to application of Bankruptcy Code Section 1129(b) to WMI preferred equity holders who would be directly harmed by the overpayment of value to senior classes.97 As such, the Plan cannot be confirmed. III The Plan Cannot Be Confirmed Because It Continues To Provide Non-Consensual Releases to Third Parties. 45. A primary reason the Sixth Amended Plan was denied confirmation by this Court

was its inclusion of aggressive and illegal third-party releases. As this Court has correctly noted on multiple occasions, third-party releases are permissible only when the releasing party consents and receives compensation.98 While that was made clear to the Debtors again in the Opinion,99 the current Plan continues to include releases (some overt, and some disguised) that violate this Courts specific rulings on this topic. 46. For example: Section 43.6 provides that each entity that has elected not to grant the releases set forth in this Section 43.6 shall not be entitled to, and shall not receive, any payment, distribution or other satisfaction of its claim pursuant to the Plan. Moreover, Section 43.6 grants third-party releases from each Entity that elects to grant releases. Importantly, this provision fails to explicitly preserve the rights of non-electing holders to pursue claims against non-debtor third parties notwithstanding any other provision of the Plan. Also, while this provision sets out the punishment the Debtors would exact on non-consenting stakeholders, it does nothing to limit the applicability of the Plans illegal releases to the thirdparty claims of those punished holders.

97

See 11 U.S.C. 1129(a)(7); see also Genesis Health, 266 B.R. at 612 (A corollary of the absolute priority rule is that a senior class cannot receive more than full compensation for its claims.); In re MCorp Fin. Inc., 137 B.R. 219, 235 (Bankr. S.D. Tex. 1992) ([A] dissenting class should be assured that no senior class receives more than 100 percent of the amount of its claims.); see also 7 Collier on Bankruptcy 1129.04[4][a][i] (15th ed. rev. 2004) ([F]air and equitable can be seen to have two key components: the absolute priority rule; and the rule that no creditor be paid more than it is owed.). See Opinion, at pp. 74-77; Coram, 315 B.R. at 335 (holding that the Trustee (and the Court) do not have the power to grant a release of the Noteholders on behalf of third parties, rather, any such release must be based on consent of the releasing party (by contract or the mechanism of voting in favor of the plan); In re Zenith Elecs. Corp., 241 B.R. 92, 111 (Bankr. D. Del. 1999) (plan could not be confirmed where it required non-consensual release of third-party claims). See Opinion, at pp. 74-87.

98

99

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Section 43.1 contemplates entry of an Order transferring certain assets and properties, including the Trust Preferred Securities, free and clear of Liens (defined to mean any charge against or interest in property to secure payment of a debt or performance of an obligation) and in accordance with Bankruptcy Code Sections 363 and 1141. This provision is overbroad and impermissible to the extent the free and clear language would deprive non-electing holders of the ability to seek recovery from assets delivered to JPMC, including the Trust Preferred Securities and the value of Washington Mutual Preferred Funding LLC which are being transferred to JPMC under the Plan. Section 43.2 discharges and releases Debtors and Reorganized Debtors from any and all Claims and suits whether or not the holder of a Claim based upon such debt voted to accept the Plan. This provision is overbroad and impermissible to the extent it fails to carve out the pending appeal of the TPS Litigation, the subject matter of which is now before the District Court. Section 43.3 provides injunctive protection to all of the Released Parties (which includes JPMC and its Related Persons) and with respect to their assets. This provision is overbroad and impermissible to the extent such injunction applies to non-electing holders or purports to affect the appeal of the TPS Litigation. Section 43.10 deems consent to the Global Third-party Releases set forth in Section 43.6 for each holder of a Claim or Equity Interest that does not elect to withhold consent. This provision should explicitly limit deemed consent with respect to each Claim or Equity Interest for which the election is made, as discussed above, so that holders are able to elect whether to grant such release with respect to each Claim or Equity Interest held. As such, the Plan cannot be confirmed.

47. IV

The Plan Cannot Be Confirmed Because It Violates Bankruptcy Code Sections 1129(a)(1) And 1129(a)(3). 48. Bankruptcy Code Section 1129(a)(1) makes it a confirmation requirement that a

plan comply with all applicable provisions of Title 11 of the United States Code. See 11 U.S.C. 1129(a)(1). Bankruptcy Code Section 1129(a)(3) requires that, for a plan to be confirmed, it have been proposed in good faith and not by any means prohibited by law. See 11 U.S.C. 1129(a)(3). This good faith standard requires that the plan be proposed with honesty, good intentions and a basis for expecting that a reorganization can be effected with results consistent

{D0203592.1 }

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with the objectives and purposes of the Bankruptcy Code.100 Notably, a plan must not only comply with the provisions of the Code, but must comply with any other applicable nonbankruptcy law.101 Furthermore, under Bankruptcy Code Section 1129(a)(3), the Court must find that the plan will fairly achieve a result consistent with the objectives and purposes of the Bankruptcy Code.102 A. Assumption Of The Trust Preferred Securities Exchange Agreements Clearly Would Violate Bankruptcy Code Sections 365(c)(2) And 1129(a)(1), And Must Not Be Approved. As set forth in detail in the Initial Objection,103 the Plans proposed assumption of

49.

the Trust Preferred Securities exchange agreements (each calling for the issuance of the WMI preferred stock that was to have been exchanged for the Trust Preferred Securities) violates the complete prohibition against assumption of agreements to issue a security of the debtor set forth in Bankruptcy Code Section 365(c)(2) (thereby causing the Plan to fail to satisfy Bankruptcy Code Section 1129(a)(1)). B. To The Extent The Settlement Noteholders Have Acted Illegally With Information Obtained During Confidential Plan Negotiations, The Debtors Are Incapable Of Satisfying The Good Faith Requirement. When assessing the good faith of a plan, courts must consider the totality of the

50.

circumstances surrounding the negotiation and filing of the plan.104 As this Court has noted, the ultimate fairness of the process in bankruptcy is a paramount principle to be protected by
100

In re Zenith Elecs. Corp., 241 B.R. 92, 107 (Bankr. D. Del. 1999) (citations and quotations omitted). See Zenith Elecs. Corp., 241 B.R. at 108 (incorporating Delaware corporate law in section 1129(a)(3) analysis, the court evaluated whether the transaction between a controlling shareholder and its corporation was entirely fair). In re Combustion Engg, Inc., 391 F.3d 190 (3d Cir. 2004) (quoting In re PWS Holding Corp., 228 F.3d 224 (3d Cir. 2000)) (emphasis added). See Initial Objection, at III. Solow v. PPI Enters. (U.S.), Inc. (In re PPI Enters. (U.S.), Inc.), 324 F.3d 197, 211 (3d Cir. 2003).

101

102

103 104

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the Bankruptcy Court.105 Given the courts duty to safeguard the process from inequities, the court is granted considerable judicial discretion to inquire into the fundamental fairness of that process.106 51. In Coram, this Court denied confirmation of the debtors plan on good faith

grounds where it found that the continuing conflict of interest and breach of fiduciary duty by the debtors chief executive officer tainted the debtors negotiations of its plan and, ultimately, the plan itself.107 Without the debtors knowledge, the debtors chief executive was receiving nearly $1 million in annual payments pursuant to an employment contract signed with one of the debtors largest creditors.108 Because the chief executive officer had an actual conflict of interest with the interests of the debtor, and because the creditor paying him was able to exert undue influence on the process, by virtue of a provision in the employment contract requir[ing] that [the chief executive officer] obey the instructions of the creditor, the Court denied confirmation of the plan because it had not been proposed in good faith pursuant to Bankruptcy Code Section 1129(a)(3).109 52. Similarly, leading commentators on bankruptcy law recognize that activity

forbidden by law that corrupts the plan negotiation process will cause the plan not to comply with Bankruptcy Code Section 1129(a)(3), even if the plan otherwise technically complies with title 11: Given the wide range of possible plan proponents, it is possible that a plan could
105

In re Coram Healthcare, 271 B.R. 228, 232 (Bankr. D. Del. 2001) (emphasis added). In re Am. Family Enters., 256 B.R. 377, 401 (D.N.J. 2000) (citations and internal quotations omitted). Coram, 271 B.R. at 232. Id. at 231-32. Id. at 234-35.

106

107

108

109

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be part of a scheme that technically complies with title 11, but violates other law. For example, a plan proponent could have bribed another to take actions that would ease confirmation in the proponents favor. If done knowingly and fraudulently, such activity is a bankruptcy crime. That is clearly something forbidden by law and thus, if discovered, would preclude confirmation even if no provision of title 11 was violated.110

53.

In this case, the Court must once again safeguard the paramount principle of

ultimate fairness of the process in bankruptcy to find that the Plan is unconfirmable because of the circumstances surrounding its negotiation. As the Court is well aware, there are pending allegations that the benefits the Settlement Noteholders received from trading on the information and provisions of the Plan were unreasonable and, frankly, illegal. If proven to have occurred, the insider trading activities of the Settlement Noteholders facilitated by the Settlement will constitute the very type of illegality that precludes a finding of good faith and should be found to have tainted the entire negotiation process.111 As such, the Plan cannot be confirmed. C. 54. The Plan Cannot Be Confirmed Because It Would Effect Prohibited Discrimination Against Certain Members Of Class 19. A plan may not unfairly discriminate against or amongst like creditors.

Bankruptcy Code Section 1123(a)(4), which requires that a plan provide the same treatment for each claim or interest of a particular class unless the holder of such claim or interest agrees to less favorable treatment,112 restates the cardinal principal of bankruptcy law, namely that creditors of the same class have a right to equality of treatment.113 Similarly, Bankruptcy Code Section 1129(b)(1) requires that, within the context of a cram down, the plan does not
110

7 Collier on Bankruptcy 1129.02[3][b][ii] (16th ed. rev. 2010). See In re Frascella Enters., Inc., 360 B.R. 435, 445 (Bankr. E.D. Pa. 2007) ([S]ome illegalities might indeed undermine the bona fides of the plans proposal, or be part of an illegal means of proposal.). 11 U.S.C. 1123(a)(4). 7 Collier on Bankruptcy 1123.01[4][a] (16th ed. rev. 2010).

111

112

113

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discriminate unfairly between impaired classes of claims that have not accepted the plan.114 Although the two sections contemplate separate forms of unfair discrimination1123(a)(4) prohibiting unfair discrimination within a single class and 1129(b)(1) prohibiting unfair discrimination between different classes of claimants with similar rightsthe diagnostics used to determine whether the plan provides for such discrimination are often intertwined.115 That is because the purpose of the prohibition against unfair discrimination is to ensure fairness in the bankruptcy process. Indeed, equality of treatment of and amongst creditors is a fundamental precept of bankruptcy law.116 55. The Plan, on its face, effects prohibited discrimination in two ways. First, by

providing unequal treatment to members within Class 19, based on their votes on the prior Sixth Amended Plan, the Plan violates Bankruptcy Code Section 1123(a)(4) and, as a result, Bankruptcy Code Section 1129(a)(1). Next, while Class 19 is the only Class not allowed to vote, Class 20 (comprised of other WMI preferred equity holders with rights pari passu to those held by members of Class 19) is allowed to vote and members are allowed to retain their rights to estate distributions. As noted above, members of Class 19 who voted against the prior Sixth Amended Plan were deemed to have rejected the current Plan and to have forfeited their right
114

11 U.S.C. 1129(b)(1). Although not explicitly defined by legislative history or case law, the prohibition against unfair discrimination ensures that a dissenting class will receive relative value equal to the value given to all other similarly situated classes. In re Armstrong World Indus., Inc., 348 B.R. at 121 (quoting In re Johns-Manville Corp., 68 B.R. 618, 636 (Bankr. S.D.N.Y. 1986); see H.R. Rep. No. 595, at 416-17 (1977), reprinted in U.S. Code Cong. & Admin. News 1978, pp. 6372, 6373 (explaining the rule against unfair discrimination as one which demands that a class not be unfairly discriminated against with respect to equal classes and which preserves just treatment of a dissenting class from the classs own perspective). See e.g., Armstrong v. Rushton (In re Armstrong), 294 B.R. 344, n.4 (B.A.P. 10th Cir 2003). See Begier v. IRS, 496 U.S. 53, 58 (1990); Am. United Mut. Life Ins. Co. v. City of Avon Park, Fla., 311 U.S. 138, 147 (1940) ([A] composition would not be confirmed where one creditor was obtaining some special favor or inducement not accorded the others, whether that consideration moved from the debtor or from another . . . . That rule of compositions is but part of the general rule of equality between creditors applicable in all bankruptcy proceedings.) (internal citations omitted).

115

116

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even to the estate value to which they would be entitled as a result of their position in WMIs capital structure. As a result, the Plan effects prohibited discrimination as between Class 19 (at least with respect to those holders who were automatically deprived of their entitlement to Plan value) and Class 20, in violation of Bankruptcy Code Section 1129(b). 56. The Debtors bear the burden of proof to show the Plan does not unfairly While the prohibition against unfair discrimination does not require a

discriminate.117

plan to provide for identical treatment between dissenting and accepting classes, assuming that different treatment is based upon some rational basis,118 the plan may not provide harsher treatment for members of a class who reject the plan; each member of a class must receive the same treatment.119 Bankruptcy Code Section 1123(a)(4) requires that the Plan provide the same treatment for each claim or interest of a particular class, unless the holder of a particular claim or interest agrees to a less favorable treatment of such particular claim or interest.120 Where a plan provides for the disparate treatment of members of the same class, it is unconfirmable as a matter of law.121 57. Respectfully, the Courts reliance on In re Dana Corp. for the proposition that

Section 1123(a)(4) does not require equal treatment among members of a class, but merely the
117

See Educ. Credit Mgmt. Corp. v. Coleman (In re Coleman), 560 F.3d 1000, 1011 (9th Cir. 2009). In re Drexel Burnham Lambert Grp., Inc., 138 B.R. 714, 715-16 (Bankr. S.D.N.Y. 1992). 7 Collier on Bankruptcy 1129.03[3][b][vii], n.44 (16th ed. rev. 2010) (citing 11 U.S.C. 1123(a)(4)); Combustion Engg Inc., 391 F.3d at 239 (The Bankruptcy Code furthers the policy of equality of distribution among creditors by requiring that a plan of reorganization provide similar treatment to similarly situated claims.). 11 U.S.C. 1123(a)(4) (emphasis added). See In re AOV Indust., Inc., 792 F.2d 1140, 1152 (D.C. Cir. 1986) (finding plan unconfirmable where it required creditors to release any claims against non-debtor plan funders in order to participate in the plan); In re Union Meeting Partners, 165 B.R. 553, 567 (Bankr. E.D. Pa. 1994) affd 52 F.3d 317 (3d Cir. 1995) (finding plan unconfirmable and violative of Section 1123(a) where it required members of the same class to tender different consideration in exchange for the same percentage recovery).

118

119

120

121

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opportunity for equal treatment, is misplaced.122 In Dana Corp., a portion of the approximately 133,000 members of the Ad Hoc Committee of Asbestos Personal Injury Claimants (the Ad Hoc Committee) entered into a number of settlement agreements with the Debtor wherein the settling members of the Ad Hoc Committee were to receive under the Debtors plan approximately $267 per member in satisfaction of each members personal injury claim against the Debtor.123 Since all personal injury claimants were grouped together into one class, those members who chose not to settle would receive nothing through the Plan, but their claims would pass through the bankruptcy and [be] reinstated against the Debtor post-bankruptcy.124 So, while the Court did correctly cite Dana Corp. for the proposition that [w]hat is important is that each claimant within a class have the same opportunity to receive equal treatment, the equal opportunity afforded dissenting class members in Dana Corp. is not akin to the opportunity afforded dissenting class members in the present case.125 In Dana Corp., the members of the class who chose not to settle with the Debtor had their claims preserved, to be reinstated after the bankruptcy, and thus ha[d] the opportunity to settle their claims or litigate themthe same options given to the participants in the settlement agreements.126 58. Here, dissenting members of Class 19 have no such opportunity. Instead, the

claims held by members of Class 19 who voted against the Plan and, in so doing, rejected the settlement offer from JPMC, are to be discharged and released regardless of whether any

122

See Opinion, pp. 85-86. Ad Hoc Comm. of Pers. Injury Asbestos Claimants v. Dana Corp. (In re Dana Corp.), 412 B.R. 53, 57 (S.D.N.Y. 2008). Id. Opinion, p. 86. Dana Corp., 412 B.R. at 62.

123

124

125

126

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property will have been distributed or retained pursuant to the Plan on account of such Claims.127 Thus, far from the equal opportunity afforded claimants in Dana Corp., the dissenting members of Class 19 are unfairly discriminated against by the Plan not only because they do not receive their equal distribution of residual estate value under the Plan, but also because they purportedly lose their rights to litigate their claims against JPMC and the FDIC post-bankruptcy. 59. Putting aside, for the moment, the multiple instances of illegal discrimination

against members of Class 19 who rejected the Sixth Amended Plan, the Plan illegally deprives dissenting members of Class 19 of any recovery, including estate distribution rights in which those members hold a vested property interest. Assuming the Court adopts the FJR as the proper standard for post-petition interest, as it should for the aforementioned reasons, approximately $700 million in additional value would be available for distribution to stakeholders, a large portion of which would be allocable to holders of WMI preferred equity under the Bankruptcy Codes distribution scheme. Because the members of Class 19 retain a property interest in any potential estate distribution to Class 19,128 confirmation of the Plan (depriving them of that recovery) by the Court would amount to an unconstitutional taking of the dissenting members property interests, insofar as it would involuntarily transfer the property interests of one set of private partiesthe dissenting members of Class 19to another set of private parties (other members of Class 19 and members of Class 20). Although a Bankruptcy Court, in applying the provisions of the Bankruptcy Code, will likely affect contractual obligations and potentially
127

Plan, 43.2. A property interest held by a party-in-interest to a bankruptcy is afforded in federal bankruptcy court the same protection [it] would have under state law if no bankruptcy had ensued. Butner v. United States, 440 U.S. 48, 55-56 (1979). This protection extends to an equity holders right to receive an estate distribution after all Allowed Claims and post-petition interest have been paid in full. See In re Introgen Therapeutics, Inc., 429 B.R. 570 (Bankr. W.D. Tex. 2010).

128

{D0203592.1 }

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sanction the diminution of some partys property rights, the Court must consider whether the interference goes so far as to constitute total destruction of the value in the property held by a creditor, and, where such action does, recognize that it violates the Fifth Amendment and may not stand.129 Here, where the Plan seeks to transfer the property interests of Class 19s

dissenting members to the accepting members of Class 19 and members of Class 20, confirming the Plan would result in the total destruction of one private partys property rights through the enrichment of another private party.130 Accordingly, the Plan authorizes an unconstitutional taking an cannot be confirmed. 60. In addition to the unequal distributions to members of Class 19 based on their

votes on the prior Sixth Amended Plan and the potential for an unconstitutional taking that would be effected by the Plans redistribution of property from one private party to another, the Plan further discriminates against Class 19 as a whole by eliminating the Class members right to vote on the latest Plan. Unlike the members of Class 19, those in Class 20who hold similar interests to the members in Class 19have been afforded the opportunity to revote and reclassify themselves as accepting members of the class, which entitles them to a potential estate
129

Americredit Fin. Servs., Inc. v. Nichols (In re Nichols), 440 F.3d 850, 854 (6th Cir. 2006) (finding that a modification to the debtors plan did not constitute total destruction of the creditors right to payment was merely delayed, not extinguished) (citations omitted). The Plan offends the Fifth Amendment Takings Clause in two respects. First, there is no conceivable public purpose for the Court to endorse the total destruction of dissenting Class 19 members property interests in the estate. Such a result, however, is unavoidable if the Plan is confirmed, since the Plan involuntarily transfers the property interests of those members to other creditors in the distribution scheme. Without any conceivable purpose other than the redistribution of property from one private party to another, the Plan sanctions a transfer that is unlawful regardless of the compensation paid. Theodorou v. Measel, 53 F. Appx. 640, 642 (3d Cir. 2002). Furthermore, even if the Court could fashion some public use for which the transfer was to be madesuch as the efficient administration of the Debtors estate through the judicial systemthe involuntary transfer still violates the Fifth Amendment since the dissenting members do not receive just compensation for their loss. Not only do the dissenting members of Class 19 fail to receive just compensation, they do not even receive one cent of compensation for the loss of their property interests in the Debtors estate. Thus, because the Plan provides for the involuntary transfer of property from one private party to another, or, in the alternative, the taking of property for public use without just compensation, the Courts approval of the Plan would be tantamount to a unconstitutional regulatory taking.

130

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distribution. Because these classes hold similarly-situated interests, but are treated differently with respect to their right to vote, the Plan unfairly discriminates against Class 19. 61. Courts have developed several methods to determine whether a plan unfairly

discriminates against or amongst like creditors.131 Recently, a number of courts, in evaluating a plans treatment of impaired, dissenting classes, have adopted the rebuttable presumption test derived from an influential article written by former professor, now Bankruptcy Judge, Bruce A. Markell.132 Under the so-called Markell Test, there is a rebuttable presumption of unfair

discrimination whenever there is: (a) a dissenting class; (b) another class of the same priority; and (c) a difference in the plans treatment of the two classes that results in either (i) a materially lower percentage recovery for the dissenting class, or (ii) regardless of percentage recovery, an allocation under the plan of materially greater risk to the dissenting class in connection with its proposed distribution.133 Where there is a materially lower percentage recovery, the

presumption [of unfair discrimination] can be rebutted by showing that, outside of bankruptcy, the dissenting class would similarly receive less than the class receiving a greater recovery. . .134 62. Thus, under the Markell Test, a rebuttable presumption arises that the Plan

unfairly discriminates against Class 19 since the members of Class 19, unlike those in Class 20 who hold similar interests, were not entitled to vote on the Plan or receive their allocable share of

131

Armstrong World Indus., Inc., 348 B.R. at 121. See, e.g., Id.; In re Quay Corp., Inc., 372 B.R. 378, 386 (Bankr. N.D. Ill. 2007); In re Greate Bay Hotel & Casino, Inc., 251 B.R. 213, 231 (Bankr. D.N.J. 2000); see also Bruce A. Markell, A New Perspective on Unfair Discrimination in Chapter 11, 72 Am. Bankr. L. J. 227 (1998). Armstrong World Indust., Inc., 348 B.R. at 121 (citing In re Dow Corning Corp., 244 B.R. 696, 702 (Bankr. E.D. Mich. 1999)). Id.

132

133

134

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distributable estate value. Furthermore, the Debtors are unable to rebut this presumption of illegality. Outside of bankruptcy, members of Class 19 would be treated equally, both with respect to one another and in regards to members of Class 20. That is to say, it is only through the Plan that accepting members of Class 19 are awarded a higher percentage of recovery than their dissenting counterparts. And it is only through the Plan that members of Class 20 (who are presumed to hold rights of equal priority to estate value as members of Class 19) are able to leapfrog the members of Class 19 who voted against the Sixth Amended Plan. As such, the Debtors will be unable to overcome this rebuttable assumption of unfair discrimination that arises under the Markell Test. 63. Finally, by eliminating Class 19 members right to vote, the modified Plan

violates Bankruptcy Code Section 1127 (and by extension, Bankruptcy Code Section 1129(a)(1)) because the Plan provision removing the right to revote fails to meet the requirements of sections 1122 and 1123 of this title.135 The Debtors are barred from modifying a plan if such modification violates another provision of the Bankruptcy Code, specifically, and as mentioned, the provisions that require equal treatment both against and amongst creditors. Moreover, regardless of the effect a modified plan has on those Bankruptcy Code Sections, pursuant to Bankruptcy Rule 3019, any modification must be voted on by the members of an impaired class unless (i) the modification does not adversely change a members treatment and (ii) the member previously accepted the plan.136 This Court has recognized the importance of

safeguarding the right to vote, within the context of a debtor who filed a modified plan, since a party must be given an opportunity to change its prior election . . . [because a party] must know

135

11 U.S.C. 1127(a). F.R.B.P. 3019(a) (emphasis added).

136

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the prospects of its treatment under the plan before it can intelligently determine its rights. . .137 64. As is clear from the spirit and text of Bankruptcy Code Section 1127 and

Bankruptcy Rule 3019, the Debtors were obligated, per Bankruptcy Code Section 1126(a),138 to provide Class 19 (or at least the members thereof who voted against the Sixth Amended Plan) an opportunity to vote on the current Plan. They chose not to do so, and this Court specifically preserved the issue of whether that decision would have an effect on confirmation of the Plan. It does; and the Plan cannot be confirmed. RESERVATION OF RIGHTS 65. The TPS Consortium reserves the right to amend, modify or supplement this

Objection prior to the conclusion of the hearing on confirmation of the Plan and to review and object to any amended or revised version of the Settlement or Plan. The TPS Consortium also reserves the right to object to any documents contained in the Plan Supplement and any amendments, modifications or supplements thereto prior to the conclusion of the hearing on confirmation of the Plan. The TPS Consortium reserves the right to assert additional objections at the hearing on confirmation of the Plan. Moreover, any failure to respond herein to a specific statement or omission contained in the Settlement, Plan, or Plan Supplement shall not be deemed acceptance thereof.

137

In re Century Glove, Inc., 74 B.R. 958, 961 (Bankr. D. Del. 1987); see In re Frontier Airlines, Inc., 93 B.R. 1014 (Bankr. D. Colo. 1998) (holding that where the modification of a chapter 11 plan adversely affects a party, that party is entitled to reconsider and change its vote). See 11 U.S.C. 1126(a) (The holder of a claim or interest allowed under section 502 of this title may accept or reject a plan.).

138

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WHEREFORE, the TPS Consortium respectfully requests that the Court (a) deny confirmation of the Plan, and (b) grant such other and further relief as it deems just and proper. Dated: Wilmington, Delaware May 13, 2011

Respectfully submitted, CAMPBELL & LEVINE LLC /s/ Kathleen Campbell Davis ________________ Marla Rosoff Eskin, Esq. (DE 2989) Bernard G. Conaway, Esq. (DE 2856) Kathleen Campbell Davis, Esq. (DE 4229) 800 North King Street, Suite 300 Wilmington, DE 19809 (302) 426-1900 (302) 426-9947 (fax) and BROWN RUDNICK LLP Robert J. Stark, Esq. Sigmund Wissner-Gross, Esq. Seven Times Square New York, NY 10036 (212) 209-4800 (212) 209-4801 (fax) and Jeremy B. Coffey, Esq. Timothy J. Durken, Esq. Jonathan D. Marshall, Esq. One Financial Center Boston, MA 02111 (617) 856-8200 (617) 856-8201 (fax) Counsel for the TPS Consortium

# 1828526v7

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EXHIBIT E

IN THE UNITED STATES BANKRUPTCY COURT FOR THE DISTRICT OF DELAWARE _________________________________________ x : In re : : No. 08-12229 (MFW) : WASHINGTON MUTUAL, INC., et al., : Jointly Administered : Debtors : __________________________________________x

SECOND SUPPLEMENTAL OBJECTION OF THE CONSORTIUM OF TRUST PREFERRED SECURITY HOLDERS TO CONFIRMATION OF THE MODIFIED SIXTH AMENDED JOINT PLAN OF AFFILIATED DEBTORS PURSUANT TO CHAPTER 11 OF THE UNITED STATES BANKRUPTCY CODE The consortium of holders of interests subject to treatment under Class 19 of the Plan (the TPS Consortium), by and through its undersigned counsel, hereby files this second supplemental objection (the Objection)1 to confirmation of the Modified Sixth Amended Joint Plan of Washington Mutual Inc. (WMI) and WMI Investment Corp. (WMI Investment and, together with WMI, the Debtors), filed on February 7, 2011, as modified on March 16, 2011 and March 25, 2011 (the Plan) [Docket Nos. 6696, 6964, and 7038]. In support of this Objection, the TPS Consortium respectfully represents as follows: PRELIMINARY STATEMENT 1. Two significant recent court rulings, each occurring after the TPS Consortiums

May 13, 2011 Plan objection deadline, compel the filing of this second supplemental Objection

The TPS Consortium expressly incorporates by reference herein each of the arguments set forth in the Objection Of The TPS Consortium To Confirmation Of The Sixth Amended Joint Plan Of Affiliated Debtors Pursuant To Chapter 11 Of The United States Bankruptcy Code [Docket No. 6020] (the Initial Objection) and the Supplemental Objection of the Consortium of Trust Preferred Security Holders to Confirmation of the Modified Sixth Amended Joint Plan of Affiliated Debtors Pursuant to Chapter 11 of the United States Bankruptcy Code [Docket No. 7480] (the First Supplemental Objection).

{D0207804.1 }

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to confirmation. First, on June 23, 2011, the Supreme Court of the United States issued its seminal opinion in the Stern v. Marshall2 matter, clarifying Constitutional limitations on the adjudicatory powers of Bankruptcy Courts. Second, on June 24, 2011, the United States Court of Appeals for the District of Columbia Circuit, in American National Insurance Co. v. Federal Deposit Insurance Co. (the ANICO Decision),3 reversed a lower Courts dismissal, on jurisdictional grounds, of a lawsuit asserting, inter alia, numerous claims against JPMorgan Chase Bank, N.A. (JPMC) for its actions in connection with the September 2008 seizure and sale of the Washington Mutual Bank (WMB), the Debtors primary operating subsidiary. Both of the foregoing recently-delivered decisions have a direct bearing on this Courts ability to approve the global settlement underlying the Plan (the Settlement), and, ultimately, render approval of that Settlement and the Plan inappropriate. 2. In Stern, the Supreme Court issued guidance as to the restrictions imposed on a

Bankruptcy Courts ability to adjudicate matters reserved under the Constitution to Article III Courts. The relief sought by the Debtors through the Plan and the Settlement (asking this Court to resolve and/or adjudicate on a final basis issues reserved to Article III Courts) exceeds the permissible bounds of the adjudicatory power of this Court, as clarified by Stern. This Court has, in the past, correctly declined to take actions beyond its adjudicatory authority (e.g.,

See Stern v. Marshall, No. 10-179 (U.S. June 23, 2011), slip opinion attached hereto at Exhibit A. See Am. Natl Ins. Co. v. Fed. Deposit Ins. Co., No. 10-5245 (D.C. Cir. June 24, 2011), slip opinion attached hereto at Exhibit B.

{D0207804.1 }

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declining, on jurisdictional grounds, to grant illegal third-party releases). Given the recent guidance provided by the Supreme Court through Stern, the Court should do no less here.4 3. Second, in its January 7, 2011 opinion denying confirmation of the Plan, this Court

discussed certain of the potential claims and actions proposed to be resolved or released pursuant to the Settlement. Among the matters proposed to be compromised are potential claims arising from serious allegations regarding misconduct by JPMC at or around the time of the FDICs seizure and sale of WMB to JPMC (the JPMC Business Torts). The Court concluded the likelihood of success on such claims was not high because: (a) a lawsuit by third-parties asserting similar claims against JPMC had, at that time, been dismissed on the basis of limitations imposed under the Financial Institutions Reform Recovery and Enforcement Act of 1989 (FIRREA); and (b) Debtors counsels possible failure to preserve the right to pursue such claims in connection with the WMB receivership proceedings. As the ANICO Decision makes clear, FIRREA does not serve to protect JPMC for wrongful conduct in connection with its purchase of WMB. Rather, to the extent JPMC acted wrongfully, direct claims against JPMC exist (making irrelevant, for purposes of estate recoveries, any failure by the Debtors to properly preserve such claims in the WMB receivership). Given the potential value to the estates of such claims, and the broad release proposed for JPMC under the Plan (going so far as to provide a release from liability for even JPMCs gross negligence and willful misconduct), the Court should carefully reconsider the propriety of the Settlement, which remains incapable of approval on the existing record before the Court.

By this Objection, the TPS Consortium addresses the impact of the Supreme Courts decision in Stern only with respect to the proposed compromise of non-core claims (many of which are not pending before this Court) in the context of Plan confirmation.
{D0207804.1 }

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4.

In sum, the Supreme Courts decision in Stern underscores that the relief sought

through the Plan and the Settlement Agreement is beyond this Courts ability to grant. As such, confirmation of the Plan and approval of the Settlement should be denied. But, even if the Court were to find that it had the power to adjudicate the fairness of the Settlement, the recent ANICO Decision compels reconsideration and disapproval of the Settlement in light of the potentially valuable claims against JPMC that would be sacrificed for little (or no) value thereunder. BACKGROUND I. Prior Proceedings Concerning The Plan And Settlement. 5. As this Court is aware, the Plan is premised upon approval and implementation of a

global Settlement that would resolve or release, on a final basis, numerous separate issues, claims and pieces of litigation. Certain of these matters are pending before this Court in the context of adversary proceedings, counterclaims and otherwise. Certain of the matters are pending before other Courts. Certain of the matters are based on rights created under the Bankruptcy Code. Certain of the matters are based on non-bankruptcy statutes (state and

federal). Certain of the matters are based entirely on state common law. Certain of the actions were commenced against the Debtors, and certain were commenced by the Debtors against nonDebtors. 6. Just as an example of the diverse and wide-ranging matters with respect to which

the Debtors ask this Court to exercise jurisdiction and enter final Orders (to implement the Settlement and confirm the Plan), the Debtors would have this Court resolve or release claims by the Debtors, including, inter alia:5

In addition to the specific multi-party litigations noted herein that are to be finally resolved under the Settlement, the Plan and Settlement also have sweeping implications on numerous other rights of third parties.
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Litigation in the District Court for the District of Columbia seeking review of WMIs claim in the WMB receivership pursuant to 12 U.S.C. 1821(d)(6)(A); Litigation in the District Court for the District of Columbia, pursuant to 12 U.S.C. 1821(d)(13)(E)(i), seeking recovery from the FDIC for a breach of its statutory duty to maximize the value received for WMB; Litigation in the District Court for the District of Columbia seeking compensation from the FDIC pursuant to the Takings Clause of the United States Constitution; Litigation in the District Court for the District of Columbia regarding claims sounding in conversion against the FDIC pursuant to the Federal Tort Claims Act, 28 U.S.C. 1346(b), 2671-80; Claims against JPMC for recovery of fraudulent transfers of approximately $6.5 billion and Trust Preferred Securities with a value of $4 billion, pursuant to Washington state law and 11 U.S.C. 544 and 548; Claims against JPMC for recovery of preferential transfers, pursuant to Washington state law and 11 U.S.C. 544 and 547; Claims for avoidance of the sale of WMB to JPMC, pursuant to Washington and Nevada state avoidance laws; Claims for unjust enrichment, constructive trust and equitable liens, presumably under state law; Claims for trademark infringement, pursuant to 15 U.S.C. 1114; Claims for common law trademark infringement; Claims against JPMC for patent infringement, pursuant to 35 U.S.C. 271; and Claims against JPMC for copyright infringement, pursuant to 17 U.S.C. 501.6 On December 2, 2010, this Court began a four-day contested evidentiary hearing on

7.

confirmation of a prior iteration of the Plan. In response to the TPS Consortiums objections that the Debtors were incapable of proving the reasonableness of the Settlement, the Debtors at the last minute scrambled to introduce numerous pleadings related to the issues, claims and litigations to be compromised pursuant to the Settlement. But, the Debtors continued to

expressly refuse to provide any legal analysis performed as to the merits of the estates rights

The table attached hereto at Exhibit C sets forth a more detailed description of the various claims and causes of action the Debtors ask the Court to release or resolve through the Plan and Settlement.
{D0207804.1 }

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with respect to any of the underlying claims or why the Debtors chose to compromise estate claims and rights. That record is now closed, and the Debtors must live with the evidence (or lack thereof) they chose to provide. 8. On January 7, 2011, this Court issued its Order and Opinion denying confirmation

of that version of the Plan (the Confirmation Opinion). [Docket Nos. 6528 and 6529]. Among the bases cited in the confirmation Opinion for the proposition that the matters decided thereby were within the Courts core jurisdiction was 28 U.S.C. 157(b)(2)(C) (dealing with counterclaims by the estate against persons filing claims against the estate). The

Constitutionality of this subsection was, in particular, the primary focus of the Stern decision.7 9. In the Confirmation Opinion, the Court indicated it was favorably inclined to

approve the Settlement, if certain other critical defects in the Plan were remedied. As set forth in the TPS Consortiums First Supplemental Objection, numerous of those defects remain extant, leaving the Plan still incapable of confirmation. 10. Following the Courts delivery of the Confirmation Opinion, the Official

Committee of Equity Security Holders (the Equity Committee) appealed and sought direct certification to the Third Circuit Court of Appeals of the portion of the Confirmation Opinion finding the Settlement to be fair and reasonable. [Docket No. 6575]. In opposing the Equity Committees efforts to obtain appellate review of the portion of the Confirmation Opinion dealing with the Settlement, the Debtors and JPMC argued there was not a final confirmation Order or a final Order approving the Settlement capable of appellate review. See JPMCs Objection to the Equity Committees Petition for Certification of Direct Appeal, at 4 [Docket No. 6656] (As of now, there is no confirmation order, no final plan and no final settlement

See Slip Op. at 4-5.

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for an appellate court to review . the Equity Committees appeal therefore is premature); see also Debtors Objection to the Equity Committees Petition for Certification of Direct Appeal, at 2 [Docket No. 6653] (Any appeal of the Courts findings regarding the Global Settlement Agreement must await entry of an order confirming a plan.). The Debtors, through the revised Plan, now ask this Court to grant final approval of the Settlement and confirmation of the Plan. II. The Confirmation Opinions Treatment Of Business Tort Claims Against JPMC. 11. In the Confirmation Opinion, the Court spent considerable time discussing certain

pieces of litigation that were proposed to be resolved pursuant to the Settlement. Among them was litigation commenced by the ANICO Plaintiffs (as defined in the Confirmation Opinion, p. 53) against JPMC. Through that litigation, the ANICO Plaintiffs seek recovery from JPMC for alleged misconduct in connection with the FDICs September 2008 seizure and sale to JPMC of the Debtors primary operating subsidiary, WMB. That alleged misconduct included misuse of access to government regulators to gain non-public information about WMB, misuse of confidential information obtained from WMB during sham negotiations, efforts to distort market and regulatory perceptions of WMBs financial condition, and exertion of improper influence over government regulators to force the premature seizure and sale of WMB to JPMC. See ANICO Decision, at 4. 12. Early in these cases, the Debtors themselves commenced an investigation into estate

claims against JPMC for much of this same alleged misconduct. See Confirmation Opinion, at 54. Indeed, in seeking authority to conduct discovery into these claims, the Debtors claimed a fiduciary duty to the estates to determine whether myriad meritorious and highly valuable claims existed. See Debtors Motion for an Order Pursuant to Bankruptcy Rule 2004 and Local Bankruptcy Rule 2004.1 Directing the Examination of JPMorgan Chase Bank, N.A., at 2, 3

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[Docket No. 974] (emphasis added). By the requested discovery, the Debtors claimed to be seeking to uncover facts that would allow them to assess the merit of various allegations against JPMC, including unfair competition, tortious interference, interference with prospective economic advantage, breach of contract, misappropriation of confidential information and trade secrets, and conversion, among others. Id. at 8, 10. Upon information and belief, that discovery was not conducted before the Debtors decided to compromise the JPMC Business Torts, and has not been conducted since. 13. At the time the Confirmation Opinion was issued, the ANICO Plaintiffs lawsuit

against JPMC had been dismissed on the basis that, under FIRREA, the WMB receivership was the exclusive claims process for claims relating to the sale of WMB. See Confirmation Opinion, at 54. The Court went on to note, inter alia, that JPMC and FDIC contended FIRREA similarly prevented the estates from pursuing the JPMC Business Torts as well (in the Confirmation Opinion, the Court also noted the possibility that Debtors counsel had failed to properly preserve such rights in connection with the WMB receivership). See id. at 54-55. Ultimately, the Court concluded that, at the time of the Confirmation Opinion, the Debtors likelihood of success on the Business Tort Claims [was] not high first citing to the then-current status of the ANICO litigation. Id. at 56. 14. On June 24, 2011, United States Court of Appeals for the District of Columbia

entered the ANICO Decision, which reversed and remanded the lower Courts dismissal of the ANICO litigation on FIRREA grounds. In ruling, the ANICO appellate Court held that FIRREA did not deprive an appropriate Court of jurisdiction to consider claims against JPMC for its wrongdoing. See ANICO Decision, at 8. More specifically, claims against JPMC for its role in WMBs collapse were determined not to constitute claims subject to FIRREA. See id.

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ARGUMENT I. The Court Is Prohibited From Entering Final Orders Approving The Settlement Incorporated Into The Plan. A. 15. The Objection Is Timely. A Bankruptcy Courts Constitutional authority to adjudicate a particular matter is of

paramount importance, and can be raised/challenged at any time. See Lindsey v. Ipock, 732 F.2d 619, 622 n.2 (8th Cir. 1984) (The challenge of the bankruptcy courts contempt power is in essence a challenge to the courts subject matter jurisdiction for contempt. We find [Appellant] is not estopped from challenging the constitutionality of this jurisdiction.); accord Intl. Longshoremens Assoc. v. Davis, 476 U.S. 380, 399 (1986) (challenge to Courts power to adjudicate matter on preemption grounds was jurisdictional, and amenable to challenge at any time); B & P Holdings I, LLC v. Grand Sasso Inc., 114 Fed. Appx. 461, 465 (3d Cir. 2004) (citing Kontrick v. Ryan, 540 U.S. 443 (2004) (holding that a courts jurisdiction may be raised initially by either party, or sua sponte by the Court, at any stage of litigation, including appeal) (citations omitted)). Where a question exists as to whether a Court has the power to act with respect to particular matter, the burden lies with the party seeking relief or with the Court itself. See Columbia Gas Transmission Corp. v. Tarbuck, 62 F.3d 538, 541 (3d Cir. 1995) (A party who invokes the jurisdiction of the federal courts has the burden of demonstrating the courts jurisdiction.); Howery v. Allstate Ins. Co., 243 F.3d 912, 916 (5th Cir. 2001) (Federal courts are courts of limited jurisdiction. We must presume that a suit lies outside this limited

jurisdiction, and the burden of establishing federal jurisdiction rests on the party seeking the federal forum.); see also In re Geauga Trenching Corp., 110 B.R. 638, 642-43 (Bankr. E.D.N.Y. 1990) ([A] Bankruptcy Court has the independent responsibility to make a 28 USC 157(b)(3)

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determination that this proceeding is or is not a core matter or otherwise related to the pending Title 11 case.). 16. This Court previously recognized the critical importance of honoring the limits of

its power to grant requested relief. See In re Coram Healthcare Corp., 315 B.R. 321, 335-36 (Bankr. D. Del. 2004) (citing In re Digital Impact, Inc., 223 B.R. 1, 14 (Bankr. N.D. Okla. 1998) (Bankruptcy Court does not have jurisdiction to approve non-debtor releases by third parties) and In re Davis Broad., 176 B.R. 290, 292 (M.D. Ga. 1994) (holding that Bankruptcy Court erred in not vacating confirmation order because Court did not have jurisdiction to grant releases of third party claims, even though no creditor had objected). 17. Since the TPS Consortium is entitled to raise objections predicated on this Courts

Constitutional authority to act at any time (including at the appellate level), this Objection is timely as a matter of law. The Court must, therefore, closely consider the arguments raised herein. B. In Stern, The Supreme Court Announced Principles Of Law That Render Approval Of The Settlement (And, In Turn, The Plan) Beyond This Courts Constitutional Authority. 1. Sterns Holding As To Whether An Estate Cause Of Action May Be Resolved By A Non-Article III Court.

18.

Since the enactment of the Bankruptcy Act of 1978, courts and scholars have

wrestled with the permissible scope of matters that may be adjudicated on a final basis by Bankruptcy Courts Courts created under Article I of the Constitution versus those matters that must be reserved for final adjudication by Courts created under Article III of the Constitution. See, e.g., Granfinanciera, S.A. v. Nordberg, 492 U.S. 33 (1989); Northern Pipeline Constr. Co. v. Marathon Pipe Line Co., 458 U.S. 50 (1982); Halper v. Halper, 164 F.3d 830, 835 (3d Cir. 1999) (Bankruptcy Court jurisdiction has been the subject of heated controversy in

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recent decades.); In re Guild & Gallery Plus, Inc., 72 F.3d 1171, 1176-79 (3d Cir. 1996) (discussing Bankruptcy Courts history); Radha A. Pathak, Breaking the Unbreakable Rule: Federal Courts, Article I, and the Problem of Related To Bankruptcy Jurisdiction, 85 Or. L. Rev. 59 (2006); Frank J. Kennedy, The Bankruptcy Court Under the New Bankruptcy Law: Its Structure and Jurisdiction, 55 Am. Bankr. L.J. 63 (1981). On June 23, 2011, the Supreme Court issued its decision clarifying which matters a Bankruptcy Court is empowered to adjudicate and which matters must be reserved for adjudication by Article III Courts. See Stern v. Marshall, Slip Op. No. 10-179 (June 23, 2011). 19. Initially, the Supreme Courts decision in Stern makes clear that the determination

of whether a Bankruptcy Court can adjudicate a particular matter requires two inquiries: first, whether the matter falls within the authority granted to Bankruptcy Courts by statute in 28 U.S.C. 157; and second, whether the matter falls within the exercise of jurisdiction allowed nonArticle III Courts under the Constitution. See Stern, Slip Op. at 16. And, it is on this second inquiry what is allowed under the Constitution that this Court must focus when considering the relief sought by the Debtors through the Plan and Settlement. 20. This second inquiry is critical here because Congress may not, through this Courts

actions, withdraw from judicial cognizance any matter which, from its nature, is the subject of a suit at the common law, or in equity, or admiralty. Stern, Slip Op. at 18 (quoting Murrays Lessee v. Hoboken Land & Improvement Co., 18 How. 272, 284 (1856)). When a suit is made of the stuff of the traditional actions at common law tried by the courts at Westminster in 1789, and is brought within the bounds of federal jurisdiction, the responsibility for deciding that suit rests with Article III judges in Article III courts. Id. (quoting Northern Pipeline, 458 U.S. at 90 (Rehnquist, J. concurring)) (emphasis added).

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21.

In Northern Pipeline, a plurality of the Supreme Court did recognize an exception to

the foregoing general rule where the matter at issue implicated public rights that Congress could Constitutionally assign to non-Article III Courts or agencies for final resolution. See Northern Pipeline, 458 U.S. at 67-68 (plurality determining the public rights exception applied to matters arising between individuals and the government in connection with the performance of Constitutional functions of the Executive and Legislative branches that, historically, could have been determined exclusively by those branches). While the Supreme Court has since clarified the public rights exception is not limited just to suits to which the government is a party, the exception is still limited only to claims deriving from a federal regulatory scheme or for which resolution of the claim by an expert government agency is deemed essential to a limited regulatory objective within that agencys authority. See Stern, Slip Op. at 25. 22. In determining whether a particular action or claim not involving the government should nonetheless fall within the public rights exception to Article III adjudication, inquiry must be made as to whether: (a) the claim and some related matter within an agencys proper exercise of authority concern a single dispute; (b) the non-Article III tribunals assertion of authority would involve only a narrow class of common law claims in a particularized area of law; (c) the area of law in question is governed by a specific and limited federal regulatory scheme as to which the non-Article III tribunal has obvious expertise; (d) the decision rendered by the non-Article III tribunal would be enforceable only by order of an Article III Court; and8 (e) the parties had freely consented to resolution of their differences before the non-

Use of the conjunction and (rather than the disjunctive or) indicates the inquiries are to be made conjunctively, rather than disjunctively. See Condrey v. Suntrust Bank of Ga., 431 F.3d 191, 201 (5th Cir. 2005) (statutes use of the conjunctive and requires that evidence on all elements be presented); In re Grantsville Hotel Assocs., L.P., 103 B.R. 509, 510 (Bankr. D. Del. 1989) (same).

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Article III tribunal.9 See Commodity Futures Trading Commn v. Schor, 478 U.S. 833, 844, 852-855 (1986) (quoting Northern Pipeline, 458 U.S., at 85). Another consideration is whether Congress devised an expert and inexpensive method for dealing with a class of questions of fact which are particularly suited to examination and determination by an administrative agency specially assigned to that task. Stern, Slip Op. at 28 (citation omitted) (holding that [t]he experts in the federal system at resolving common law counterclaims such as [debtors] are the Article III courts, and it is with those courts that [debtors] claim must stay). 23. Where a claim or action is based on statute, if the statutory right is not closely

intertwined with a federal regulatory program Congress has power to enact, and if that right neither belongs to nor exists against the Federal Government, then it must be adjudicated by an Article III court. Stern, Slip Op. at 26; Northern Pipeline, 492 U.S. at 54-55 (rejecting

argument that a fraudulent conveyance action filed on behalf of a bankruptcy estate against a non-creditor fell within the public rights exception). 24. And, in considering the bounds of its authority to approve the Settlement, the Court

should be mindful of the Supreme Courts decision in Celotex Corp. v. Edwards, where it was
9

While a party may consent to personal jurisdiction, it is not possible for parties to bestow on the Bankruptcy Court by agreement (e.g., the Settlement) the authority to adjudicate on a final basis matters reserved to Article III Courts under the Constitution. Accord Stern, Slip Op. at 30 (rejecting the filing of a claim in bankruptcy as a basis for ignoring Constitutional limitations on the Bankruptcy Courts power to act, noting it is hard to see why [Respondent]s decision to file a claim should make any difference with respect to the characterization of [Petitioner]s counterclaim); see also Okereke v. United States, 307 F.3d 117, 120 n.1 (3d Cir. 2002) (citing Pa. v. Union Gas Co., 491 U.S. 1, 26, (1989) (Stevens, J., concurring) ([T]he cases are legion holding that a party may not waive a defect in subject-matter jurisdiction or invoke federal jurisdiction simply by consent.)); Mennen Co. v. Atl. Mut. Ins. Co., 147 F.3d 287, 293-94 (3d Cir. 1998) ([I]t is axiomatic that a party may not confer or defeat jurisdiction by mere pleading.). Moreover, given the coercive nature of bankruptcy laws centralization of disputes in the Bankruptcy Court, the concept of consent should be viewed differently in applying this test to questions of a Bankruptcy Courts Constitutional authority to act. See Stern, Slip Op. at 28 and n. 8; Granfinanciera, 492 U.S. at 59 n. 14.

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noted that a Bankruptcy Courts authority is even more circumscribed in the context of a liquidation (in that case, under chapter 7) than when the Court has before it a bona fide reorganization. See 514 U.S. 300, 310 (1995). Here, while the Plan has been presented as reorganization, it simply effects a liquidation under Chapter 11. 25. In sum, the Court does not have the Constitutional authority to resolve on a final

basis non-core estate causes of action based on non-bankruptcy law. Such matters fall outside of the public rights doctrine and, therefore, must be left for adjudication by Article III Courts. 2. Settlement Approval Is Claims Resolution That Must Be Reserved For Article III Courts. a. Approval Of A Settlement Is Dispositive Adjudication, As A Matter Of Law.

26.

A Bankruptcy Courts approval of a settlement is, in effect, a final adjudication of

the compromised claims. See Rosenberg v. XO Commcns., Inc. (In re XO Commcns., Inc.), 330 B.R. 394, 450 (Bankr. S.D.N.Y. 2005) (citing Adam v. Itech Oil Co. (In re Gibraltar Res., Inc.), 210 F.3d 573, 576 (5th Cir. 2000) (A bankruptcy courts approval of a settlement order that brings to an end litigation between parties is a final order.)); Martin v. Pahiakos (In re Martin), 490 F.3d 1272, 1276-77 (11th Cir. 2007) (noting that a bankruptcy courts order approving the settlement agreement is sufficiently final such that it is entitled to preclusive effect . . . [and] [f]or purposes of res judicata, the order approving the settlement agreement provides a final determination on the merits); Beaulac v. Tomsic (In re Beaulac), 294 B.R. 815, 818 (1st Cir. B.A.P 2003) (noting that a bankruptcy order approving the stipulation of a settlement is a final Order from which jurisdiction exists to hear an appeal); In re Drexel Burnham Lambert Grp., 960 F.2d 285 (2d Cir. 1992) (finding a District Courts Order approving a settlement agreement as final for purposes of appeal).

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27.

When a Court issues a ruling on a settlement agreement, it has the same effect as

adjudicating the settled claims at trial. See In re XO Commcns., Inc., 330 B.R. at 451 (quoting In re Joint E. and S. Dist. Asbestos Litig., 129 B.R. 710 (E.D.N.Y. & S.D.N.Y. 1991), vacated on other grounds by 982 F.2d 721 (2d Cir. 1992) (Once approved by the Bankruptcy Court, a compromise takes the form of an order of the court and has the effect of a final judgment.)); In re Dominelli, 820 F.2d 313, 316 (9th Cir. 1987) (Order approving settlement considered final judgment for res judicata purposes); 10 Collier on Bankruptcy 9019.01[3] (15th ed. rev. 2004) (An order approving a settlement will be reversed only if the lower court has been guilty of an abuse of discretion. Once it has become final, an order approving a settlement has the same res judicata effect as any other order of a court); In re Pac. Gas & Elec. Co., 304 B.R. 395, 414-15 (Bankr. N.D. Ca. 2004) (explaining that a partys rights under the Settlement Agreement will vest pursuant to applicable state and federal law, and this courts determinations will become binding under principles of res judicata, law of the case, etc. . . . Thereafter, any attempt to alter (other than by mutual consent) or obtain a determination contrary to this courts present determinations will be barred by those same principles) (citations omitted); In re Mal Dun Assocs., Inc., 406 B.R. 622 (Bankr. S.D.N.Y. 2009) (finding releases of causes of action against the debtor in the settlement agreement, plan, and confirmation order to enjoin creditors from pursuing claims in state Court); United States v. Kellogg (In re West Texas Mktg. Corp.), 12 F.3d 497, 499 (5th Cir. 1994) ([S]ettlement agreement approved and embodied in a judgment by a Court is entitled to full res judicata effect, . . . . preclud[ing] subsequent litigation of issues which arise out of claims which were conclusively decided in the prior decision.) (citations omitted).

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28.

Clearly, once a Bankruptcy Court resolves litigation through the approval of a

settlement, the matter has been withdraw[n] from judicial cognizance of Article III Courts with only the limited appellate review from an Article III Court available thereafter. See Stern, Slip Op. at 21-22 (noting the Northern Pipeline Courts concern with the marked deference to be afforded a Bankruptcy Courts findings of fact pursuant to 28 U.S.C. 158(a) and Fed. R. Bankr. P. 8013). 29. For this reason, final Settlement approval (to the extent involving non-core estate

claims) is beyond the Constitutional authority of the non-Article III Bankruptcy Courts. Accord 28 U.S.C. 636(b)(1)(A) & (B) (magistrate judges may not adjudicate dispositive motions, such as involuntary case dismissal or class action settlements, but may submit proposed findings of fact and recommendations to the District Court pursuant to Federal Rule of Civil Procedure 72(b)(1)); see also Beazer East, Inc. v. The Mead Corp., 412 F.3d 429, 437 (3d Cir. 2005) (referral to non-Article III court of determination of liability allocations exceeded Constitutional bounds of that Courts authority); Prudential Ins. Co. of Am. V. U.S. Gypsum Co., 991 F.2d 1080, 1088 (3d Cir. 1993) (same). This Court, therefore, may not make the necessary final

determinations and/or adjudications underlying approval of the Settlement or, in turn, the Plan. b. Settlement Approval Requires Final Factual And Legal Determinations Exceeding The Constitutional Authority Of Bankruptcy Courts.

30.

The Supreme Court, in a decision pre-dating Stern, Northern Pipeline and even the

enactment of 28 U.S.C. 157, provided the following admonishment to Courts considering whether to approve settlements: There can be no informed and independent judgment as to whether a proposed compromise is fair and equitable until the bankruptcy judge has apprised himself of all facts necessary for an intelligent and objective opinion of the probabilities of ultimate success

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should the claim be litigated. Further, the judge should form an educated estimate of the complexity, expense, and likely duration of such litigation, the possible difficulties of collecting on any judgment which might be obtained, and all other factors relevant to a full and fair assessment of the wisdom of the proposed compromise. Basic to this process in every instance, of course, is the need to compare the terms of the compromise with the likely rewards of litigation. Protective Comm. for Indep. Stockholders of TMT Trailer Ferry, Inc. v. Anderson, 390 U.S. 414, 424-25 (1968); see also Myers v. Martin (In re Martin), 91 F.3d 389, 393 (3d Cir. 1996) (recognizing four criteria a Bankruptcy Court should consider in making the judicial determinations called for under TMT Trailer: (a) the probability of success in litigation; (b) the likely difficulties in collection; (c) the complexity of the litigation involved, and the expense, inconvenience and delay necessarily attending it; and (d) the paramount interest of the creditors). 31. The Courts affirmative decision to enter a final Order to approve and enforce a

compromise is not to be a thoughtless, fait accompli upon the filing of a request for such approval. Rather, the caselaw mandates careful consideration and determinations by the

approving Court. While a mini-trial on each component of the proposed settlement is not required, the approving Courts conclusions must still be well-reasoned and supported by its own determination as to the facts and an analysis of the law. See TMT Trailer, 390 U.S. at 434. The opinions of the parties that a settlement is fair and equitable may be considered; but it is the approving Court that must ultimately make its own, independent, determination before approving a settlement. See In re Millennium Multiple Empr. Welfare Benefit Plan, No. 10-13528, 2011 Bankr. LEXIS 1973 (Bankr. W.D. Okla. Feb. 18, 2011); In re Albrecht, 245 B.R. 666 (B.A.P. 10th Cir. 2000); see also In re WorldCom, Inc., 347 B.R. 123 (Bankr. S.D.N.Y. 2006) (citing TMT Trailer, 390 U.S. at 424 (While the bankruptcy court may consider the objections lodged by parties in interest, such objections are not controlling. Similarly, although weight should be

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given to the opinions of counsel for the debtors and any creditors committees on the reasonableness of the proposed settlement, the bankruptcy court must still make an informed and independent judgment. The Court must consider whether the proposed compromise is fair and equitable by apprising itself of all the factors relevant to an assessment of the wisdom of the proposed compromise.)). It is not necessary to be convinced the compromise is the best possible result; but it is the approving Court that must nonetheless make the final determination the settlement is within the reasonable range of litigation outcomes on the claims to be compromised. See In re Spansion, Inc., No. 09-10690, 2009 LEXIS.Bankr. 1283, at *13-14 (Bankr. D. Del. June 2, 2009). Finally, the determination as to whether the compromise is preferable to continued litigation must be based on the approving courts reasoned judgment as to the probable outcome of [such] litigation. TMT Trailer, 390 U.S. at 434; In re Boston & Providence R.R. Corp., 673 F.2d 11, 12 (1st Cir. 1982) (Bankruptcy proceedings, by definition, coerce the bankrupts creditors into a compromise of their interests. Therefore [in approving a compromise in reorganization] the supervising court must play a quasi-inquisitorial role, ensuring that all aspects of the reorganization are fair and equitable) (citation omitted). 32. Making the foregoing determinations with respect to each claim the Court is being

asked to resolve or release pursuant to the Settlement and/or Plan (as the Court must do), it appears, in light of Stern, that a significant portion of the matters proposed to be resolved or released fall outside of this Courts Constitutional authority to adjudicate on a final basis. The Supreme Courts decision in Stern instructs that it is beyond the Constitutional authority of this Court to make final determinations with respect to, and Order resolution or release of, any of: a) the common law claims asserted by WMI; b) the claims asserted by WMI under the statutes of the States of Washington and/or Nevada; c) the claims asserted by WMI under Title 12 of the

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United States Code; d) the claims asserted by WMI under the Federal Tort Claims Act; e) the claims asserted by WMI under Title 15 of the United States Code; f) the claims asserted by WMI under Title 17 of the United States Code; and g) the claims asserted by WMI under Title 35 of the United States Code. Each of the foregoing claims is capable of final adjudication in the federal Court system only by an Article III Court, and none of the various public rights exceptions apply. 33. Approval of a settlement (particularly one, such as in this case, that would result in

final determinations as to the ultimate allocation of billions of dollars in estate value and the extinguishment of litigation claims that could otherwise result in estate recoveries of many more billions of dollars) is not a matter to be taken lightly. Indeed, this Court presided over a four-day evidentiary hearing on confirmation in December 2010. A significant portion of those

proceedings consisted of the Debtors attempts to present sufficient bases for this Court to make the requisite determinations concerning the numerous claims and causes of action subsumed in the Settlement to support a final Order approving the compromise of such claims. Not only did the Plan proponents fail, as a matter of fact, to provide sufficient evidence of the Settlements fairness and reasonableness, this Court is nonetheless precluded, as a matter of law, from making the final determinations with respect to, and Ordering the resolution or release of, the majority of the various litigations (as discussed herein). 3. Expected Cries For Expediency And Efficiency Are Not Relevant To The Paramount Issue Of Whether This Court Has The Constitutional Authority To Approve The Settlement.

34.

As discussed above, the Settlement and Plan are contingent on this Courts Ordered

final resolution or release of claims and litigation an act in excess of this Courts Constitutional authority. Accordingly, the Settlement and Plan must fail. The TPS Consortium understands

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this Courts inability to Order final resolutions and/or releases of claims in excess of its Constitutional authority will be inconvenient to the Debtors, JPMC and others who would ask this Court to ignore the Stern Courts guidance.10 The fact that Stern was issued only days ago is of no moment. It is the law of the land, and it must be followed by this Court. Nor is the anticipated response that it would be more efficient for this Court to adjudicate the proposed Settlement an appropriate response. Indeed, the fact that a given law or procedure is efficient, convenient, and useful in facilitating functions of the government, standing alone, will not save it if it is contrary to the Constitution. Stern, Slip Op. at 36; INS v. Chadha, 462 U.S. 919, 944 (1983). II. The Court Must Deny The Settlement In Light Of The ANICO Decision. 35. Because the Debtors have withheld any analysis of the various estate claims against

third-parties, such as JPMC, it is unclear why the Debtors have not more vigorously pursued a recovery from JPMC on the JPMC Business Torts.11 Assuming the Debtors have taken steps

10

Although even Debtors counsel concedes that, because of the Supreme Courts decision in Stern, the jurisdictional issue will, in some instances, be difficult for the bankruptcy court to determine at the outset of a case, and there may be cases where it becomes apparent that jurisdiction is lacking after substantial investment in the litigation by the parties. Sara Coelho, Stern Views on Bankruptcy Court Jurisdiction United States Supreme Court Addresses Bankruptcy Court Jurisdiction in the Anna Nicole Smith Case, Weil Bankr. Blog (July 6, 2011), http://business-financerestructuring.weil.com/claims/stern-views-on-bankruptcy-court-jurisdiction%e2%80%93-united-states-supreme-court-addresses-bankruptcy-court-jurisdiction-inthe-anna-nicole-smith-case/, attached hereto as Exhibit D. In the Initial Objection, and during the December 2010 confirmation hearing, the TPS Consortium objected to approval of the Settlement on numerous bases, including, inter alia, that its propriety could not be established given the lack of evidence presented by its proponents and that pleadings alone could not support approval of the Settlement. See also Will v. Northwestern Univ. (In re Nutraquest, Inc.), 434 F.3d 639, 645 (3d Cir. N.J. 2006) (citing In re Boston & Providence R.R. Corp., 673 F.2d 11, 13 (1st Cir. 1982) (noting that a court cannot rely on the objections, or the absence thereof, in evaluating a proposed settlement, but rather the court must act independently, out of its own initiative, for the benefit of all creditors. This obligation prevails even where the creditors
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necessary to preserve the estates rights in this regard (as the Confirmation Opinion noted, it has been alleged that the Debtors failed to properly preserve the estates ability to pursue such claims in connection with the WMB receivership), with the FIRREA bar removed, unconflicted counsel for the Debtors could commence such litigation directly against JPMC. To the extent the Courts favorable view of the Settlement Agreement was based on the assumption that FIRREA would stand in the way of such direct litigation by the estates,12 the Court must reconsider the Debtors continuing attempt to compromise this potentially significant source of estate value in light of the D.C. Circuit Courts ruling in the ANICO Decision (particularly in light of JPMCs insistence that, before it will return billions of dollars in estate value it has been holding for nearly three years, it receive a sweeping release of all liability even for acts that would constitute gross negligence or willful misconduct such as those comprising the JPMC Business Torts). Given the potential value to the estates of even a partial recovery on the JPMC Business Torts, the Settlement must be rejected.

are silent . . . .)); In re WorldCom, Inc., 347 B.R. 123 (Bankr. S.D.N.Y. 2006) (citing TMT Trailer, 390 U.S. at 424 (While the bankruptcy court may consider the objections lodged by parties in interest, such objections are not controlling. Similarly, although weight should be given to the opinions of counsel for the debtors and any creditors' committees on the reasonableness of the proposed settlement, the bankruptcy court must still make informed and independent judgment.)). As such, this is not a new objection to confirmation; but rather intended to apprise the Court of certain developments pertinent to the Courts consideration of the Settlement underlying the Plan.
12

In Myers v. Martin, the Third Circuit set out four factors to be considered in connection with a request to approve a settlement of litigation. See 91 F.3d 389, 393 (3d Cir. 1996). At least two of these (the probability of success in the litigation and the likely difficulties in collection) must be reevaluated in light of the ANICO Decision.
{D0207804.1 }

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WHEREFORE, the TPS Consortium respectfully requests that the Court (a) deny confirmation of the Plan, and (b) grant such other and further relief as it deems just and proper. Dated: Wilmington, Delaware July 7, 2011

Respectfully submitted, CAMPBELL & LEVINE LLC /s/ Kathleen Campbell Davis ________________ Marla Rosoff Eskin, Esq. (DE 2989) Bernard G. Conaway, Esq. (DE 2856) Kathleen Campbell Davis, Esq. (DE 4229) 800 North King Street, Suite 300 Wilmington, DE 19809 (302) 426-1900 (302) 426-9947 (fax) and BROWN RUDNICK LLP Robert J. Stark, Esq. Martin S. Siegel, Esq. Seven Times Square New York, NY 10036 (212) 209-4800 (212) 209-4801 (fax) and Jeremy B. Coffey, Esq. Daniel J. Brown, Esq. One Financial Center Boston, MA 02111 (617) 856-8200 (617) 856-8201 (fax) Counsel for the TPS Consortium

{D0207804.1 }

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EXHIBIT A

(Slip Opinion)

OCTOBER TERM, 2010 Syllabus

NOTE: Where it is feasible, a syllabus (headnote) will be released, as is being done in connection with this case, at the time the opinion is issued. The syllabus constitutes no part of the opinion of the Court but has been prepared by the Reporter of Decisions for the convenience of the reader. See United States v. Detroit Timber & Lumber Co., 200 U. S. 321, 337.

SUPREME COURT OF THE UNITED STATES

Syllabus

STERN, EXECUTOR OF THE ESTATE OF MARSHALL v. MARSHALL, EXECUTRIX OF THE ESTATE OF MARSHALL
CERTIORARI TO THE UNITED STATES COURT OF APPEALS FOR THE NINTH CIRCUIT No. 10179. Argued January 18, 2011Decided June 23, 2011

Article III, 1, of the Constitution mandates that [t]he judicial Power of the United States, shall be vested in one supreme Court, and in such inferior Courts as the Congress may from time to time ordain and establish, and provides that the judges of those constitutional courts shall hold their Offices during good Behaviour and receive for their Services[ ] a Compensation[ ] [that] shall not be diminished during their tenure. The questions presented in this case are whether a bankruptcy court judge who did not enjoy such tenure and salary protections had the authority under 28 U. S. C. 157 and Article III to enter final judgment on a counterclaim filed by Vickie Lynn Marshall (whose estate is the petitioner) against Pierce Marshall (whose estate is the respondent) in Vickies bankruptcy proceedings. Vickie married J. Howard Marshall II, Pierces father, approximately a year before his death. Shortly before J. Howard died, Vickie filed a suit against Pierce in Texas state court, asserting that J. Howard meant to provide for Vickie through a trust, and Pierce tortiously interfered with that gift. After J. Howard died, Vickie filed for bankruptcy in federal court. Pierce filed a proof of claim in that proceeding, asserting that he should be able to recover damages from Vickies bankruptcy estate because Vickie had defamed him by inducing her lawyers to tell the press that he had engaged in fraud in controlling his fathers assets. Vickie responded by filing a counterclaim for tortious interference with the gift she expected from J. Howard. The Bankruptcy Court granted Vickie summary judgment on the defamation claim and eventually awarded her hundreds of millions of dollars in damages on her counterclaim. Pierce objected that the

STERN v. MARSHALL Syllabus Bankruptcy Court lacked jurisdiction to enter a final judgment on that counterclaim because it was not a core proceeding as defined by 28 U. S. C. 157(b)(2)(C). As set forth in 157(a), Congress has divided bankruptcy proceedings into three categories: those that aris[e] under title 11; those that aris[e] in a Title 11 case; and those that are related to a case under title 11. District courts may refer all such proceedings to the bankruptcy judges of their district, and bankruptcy courts may enter final judgments in all core proceedings arising under title 11, or arising in a case under title 11. 157(a), (b)(1). In non-core proceedings, by contrast, a bankruptcy judge may only submit proposed findings of fact and conclusions of law to the district court. 157(c)(1). Section 157(b)(2) lists 16 categories of core proceedings, including counterclaims by the estate against persons filing claims against the estate. 157(b)(2)(C). The Bankruptcy Court concluded that Vickies counterclaim was a core proceeding. The District Court reversed, reading this Courts precedent in Northern Pipeline Constr. Co. v. Marathon Pipe Line Co., 458 U. S. 50, to suggest[ ] that it would be unconstitutional to hold that any and all counterclaims are core. The court held that Vickies counterclaim was not core because it was only somewhat related to Pierces claim, and it accordingly treated the Bankruptcy Courts judgment as proposed, not final. Although the Texas state court had by that time conducted a jury trial on the merits of the parties dispute and entered a judgment in Pierces favor, the District Court went on to decide the matter itself, in Vickies favor. The Court of Appeals ultimately reversed. It held that the Bankruptcy Court lacked authority to enter final judgment on Vickies counterclaim because the claim was not so closely related to [Pierces] proof of claim that the resolution of the counterclaim is necessary to resolve the allowance or disallowance of the claim itself. Because that holding made the Texas probate courts judgment the earliest final judgment on matters relevant to the case, the Court of Appeals held that the District Court should have given the state judgment preclusive effect.

Held: Although the Bankruptcy Court had the statutory authority to enter judgment on Vickies counterclaim, it lacked the constitutional authority to do so. Pp. 638. 1. Section 157(b) authorized the Bankruptcy Court to enter final judgment on Vickies counterclaim. Pp. 816. (a) The Bankruptcy Court had the statutory authority to enter final judgment on Vickies counterclaim as a core proceeding under 157(b)(2)(C). Pierce argues that 157(b) authorizes bankruptcy courts to enter final judgments only in those proceedings that are both core and either arise in a Title 11 case or arise under Title 11 it-

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self. But that reading necessarily assumes that there is a category of core proceedings that do not arise in a bankruptcy case or under bankruptcy law, and the structure of 157 makes clear that no such category exists. Pp. 811. (b) In the alternative, Pierce argues that the Bankruptcy Court lacked jurisdiction to resolve Vickies counterclaim because his defamation claim is a personal injury tort that the Bankruptcy Court lacked jurisdiction to hear under 157(b)(5). The Court agrees with Vickie that 157(b)(5) is not jurisdictional, and Pierce consented to the Bankruptcy Courts resolution of the defamation claim. The Court is not inclined to interpret statutes as creating a jurisdictional bar when they are not framed as such. See generally Henderson v. Shinseki, 562 U. S. ___; Arbaugh v. Y & H Corp., 546 U. S. 500. Section 157(b)(5) does not have the hallmarks of a jurisdictional decree, and the statutory context belies Pierces claim that it is jurisdictional. Pierce consented to the Bankruptcy Courts resolution of the defamation claim by repeatedly advising that court that he was happy to litigate his claim there. Pp. 1216. 2. Although 157 allowed the Bankruptcy Court to enter final judgment on Vickies counterclaim, Article III of the Constitution did not. Pp. 1638. (a) Article III is an inseparable element of the constitutional system of checks and balances that both defines the power and protects the independence of the Judicial Branch. Northern Pipeline, 458 U. S., at 58 (plurality opinion). Article III protects liberty not only through its role in implementing the separation of powers, but also by specifying the defining characteristics of Article III judges to protect the integrity of judicial decisionmaking. This is not the first time the Court has faced an Article III challenge to a bankruptcy courts resolution of a debtors suit. In Northern Pipeline, the Court considered whether bankruptcy judges serving under the Bankruptcy Act of 1978who also lacked the tenure and salary guarantees of Article IIIcould constitutionally be vested with jurisdiction to decide [a] state-law contract claim against an entity that was not otherwise part of the bankruptcy proceedings. Id., at 53, 87, n. 40 (plurality opinion). The plurality in Northern Pipeline recognized that there was a category of cases involving public rights that Congress could constitutionally assign to legislative courts for resolution. A full majority of the Court, while not agreeing on the scope of that exception, concluded that the doctrine did not encompass adjudication of the state law claim at issue in that case, and rejected the debtors argument that the Bankruptcy Courts exercise of jurisdiction was constitutional because the bankruptcy judge was acting merely as an adjunct of the district court or court of appeals.

STERN v. MARSHALL Syllabus Id., at 6972; see id., at 9091 (Rehnquist, J., concurring in judgment). After the decision in Northern Pipeline, Congress revised the statutes governing bankruptcy jurisdiction and bankruptcy judges. With respect to the core proceedings listed in 157(b)(2), however, the bankruptcy courts under the Bankruptcy Amendments and Federal Judgeship Act of 1984 exercise the same powers they wielded under the 1978 Act. The authority exercised by the newly constituted courts over a counterclaim such as Vickies exceeds the bounds of Article III. Pp. 1622. (b) Vickies counterclaim does not fall within the public rights exception, however defined. The Court has long recognized that, in general, Congress may not withdraw from judicial cognizance any matter which, from its nature, is the subject of a suit at the common law, or in equity, or admiralty. Murrays Lessee v. Hoboken Land & Improvement Co., 18 How. 272, 284. The Court has also recognized that [a]t the same time there are matters, involving public rights, . . . which are susceptible of judicial determination, but which congress may or may not bring within the cognizance of the courts of the United States, as it may deem proper. Ibid. Several previous decisions have contrasted cases within the reach of the public rights exceptionthose arising between the Government and persons subject to its authority in connection with the performance of the constitutional functions of the executive or legislative departmentsand those that are instead matters of private right, that is, of the liability of one individual to another under the law as defined. Crowell v. Benson, 285 U. S. 22, 50, 51. Shortly after Northern Pipeline, the Court rejected the limitation of the public rights exception to actions involving the Government as a party. The Court has continued, however, to limit the exception to cases in which the claim at issue derives from a federal regulatory scheme, or in which resolution of the claim by an expert Government agency is deemed essential to a limited regulatory objective within the agencys authority. In other words, it is still the case that what makes a right public rather than private is that the right is integrally related to particular Federal Government action. See United States v. Jicarilla Apache Nation, 564 U. S. ___, ______ (slip op., at 1011); Thomas v. Union Carbide Agricultural Products Co., 473 U. S. 568, 584; Commodity Futures Trading Commission v. Schor, 478 U. S. 833, 844, 856. In Granfinanciera, S. A. v. Nordberg, 492 U. S. 33, the most recent case considering the public rights exception, the Court rejected a bankruptcy trustees argument that a fraudulent conveyance action filed on behalf of a bankruptcy estate against a noncreditor in a bankruptcy proceeding fell within the exception. Vickies counter-

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claim is similar. It is not a matter that can be pursued only by grace of the other branches, as in Murrays Lessee, 18 How., at 284; it does not flow from a federal statutory scheme, as in Thomas, 473 U. S., at 584585; and it is not completely dependent upon adjudication of a claim created by federal law, as in Schor, 478 U. S., at 856. This case involves the most prototypical exercise of judicial power: the entry of a final, binding judgment by a court with broad substantive jurisdiction, on a common law cause of action, when the action neither derives from nor depends upon any agency regulatory regime. If such an exercise of judicial power may nonetheless be taken from the Article III Judiciary simply by deeming it part of some amorphous public right, then Article III would be transformed from the guardian of individual liberty and separation of powers the Court has long recognized into mere wishful thinking. Pp. 2229. (c) The fact that Pierce filed a proof of claim in the bankruptcy proceedings did not give the Bankruptcy Court the authority to adjudicate Vickies counterclaim. Initially, Pierces defamation claim does not affect the nature of Vickies tortious interference counterclaim as one at common law that simply attempts to augment the bankruptcy estatethe type of claim that, under Northern Pipeline and Granfinanciera, must be decided by an Article III court. The cases on which Vickie relies, Katchen v. Landy, 382 U. S. 323, and Langenkamp v. Culp, 498 U. S. 42 (per curiam), are inapposite. Katchen permitted a bankruptcy referee to exercise jurisdiction over a trustees voidable preference claim against a creditor only where there was no question that the referee was required to decide whether there had been a voidable preference in determining whether and to what extent to allow the creditors claim. The Katchen Court intimate[d] no opinion concerning whether the bankruptcy referee would have had summary jurisdiction to adjudicate a demand by the [bankruptcy] trustee for affirmative relief, all of the substantial factual and legal bases for which ha[d] not been disposed of in passing on objections to the [creditors proof of ] claim. 382 U. S., at 333, n. 9. The per curiam opinion in Langenkamp is to the same effect. In this case, by contrast, the Bankruptcy Courtin order to resolve Vickies counterclaimwas required to and did make several factual and legal determinations that were not disposed of in passing on objections to Pierces proof of claim. In both Katchen and Langenkamp, moreover, the trustee bringing the preference action was asserting a right of recovery created by federal bankruptcy law. Vickies claim is instead a state tort action that exists without regard to any bankruptcy proceeding. Pp. 2934. (d) The bankruptcy courts under the 1984 Act are not adjuncts of the district courts. The new bankruptcy courts, like the courts

STERN v. MARSHALL Syllabus considered in Northern Pipeline, do not ma[k]e only specialized, narrowly confined factual determinations regarding a particularized area of law or engage in statutorily channeled factfinding functions. 458 U. S., at 85 (plurality opinion). Whereas the adjunct agency in Crowell v. Benson possessed only a limited power to issue compensation orders . . . [that] could be enforced only by order of the district court, ibid., a bankruptcy court resolving a counterclaim under 157(b)(2)(C) has the power to enter appropriate orders and judgmentsincluding final judgmentssubject to review only if a party chooses to appeal, see 157(b)(1), 158(a)(b). Such a court is an adjunct of no one. Pp. 3436. (e) Finally, Vickie and her amici predict that restrictions on a bankruptcy courts ability to hear and finally resolve compulsory counterclaims will create significant delays and impose additional costs on the bankruptcy process. It goes without saying that the fact that a given law or procedure is efficient, convenient, and useful in facilitating functions of government, standing alone, will not save it if it is contrary to the Constitution. INS v. Chadha, 462 U. S. 919, 944. In addition, the Court is not convinced that the practical consequences of such limitations are as significant as Vickie suggests. The framework Congress adopted in the 1984 Act already contemplates that certain state law matters in bankruptcy cases will be resolved by state courts and district courts, see 157(c), 1334(c), and the Court does not think the removal of counterclaims such as Vickies from core bankruptcy jurisdiction meaningfully changes the division of labor in the statute. Pp. 3638.

600 F. 3d 1037, affirmed. ROBERTS, C. J., delivered the opinion of the Court, in which SCALIA, KENNEDY, THOMAS, and ALITO, JJ., joined. SCALIA, J., filed a concurring opinion. BREYER, J., filed a dissenting opinion, in which GINSBURG, SOTOMAYOR, and KAGAN, JJ., joined.

Cite as: 564 U. S. ____ (2011) Opinion of the Court

NOTICE: This opinion is subject to formal revision before publication in the preliminary print of the United States Reports. Readers are requested to notify the Reporter of Decisions, Supreme Court of the United States, Wash ington, D. C. 20543, of any typographical or other formal errors, in order that corrections may be made before the preliminary print goes to press.

SUPREME COURT OF THE UNITED STATES

_________________

No. 10179
_________________

HOWARD K. STERN, EXECUTOR OF THE ESTATE OF

VICKIE LYNN MARSHALL, PETITIONER v.
ELAINE T. MARSHALL, EXECUTRIX OF THE
ESTATE OF E. PIERCE MARSHALL

ON WRIT OF CERTIORARI TO THE UNITED STATES COURT OF

APPEALS FOR THE NINTH CIRCUIT
[June 23, 2011]

CHIEF JUSTICE ROBERTS delivered the opinion of the Court. This suit has, in course of time, become so complicated, that . . . no two . . . lawyers can talk about it for five min utes, without coming to a total disagreement as to all the premises. Innumerable children have been born into the cause: innumerable young people have married into it; and, sadly, the original parties have died out of it. A long procession of [judges] has come in and gone out dur ing that time, and still the suit drags its weary length before the Court. Those words were not written about this case, see C. Dickens, Bleak House, in 1 Works of Charles Dickens 45 (1891), but they could have been. This is the second time we have had occasion to weigh in on this long running dispute between Vickie Lynn Marshall and E. Pierce Marshall over the fortune of J. Howard Marshall II, a man believed to have been one of the richest people in Texas. The Marshalls litigation has worked its way

STERN v. MARSHALL Opinion of the Court

through state and federal courts in Louisiana, Texas, and California, and two of those courtsa Texas state probate court and the Bankruptcy Court for the Central District of Californiahave reached contrary decisions on its mer its. The Court of Appeals below held that the Texas state decision controlled, after concluding that the Bankruptcy Court lacked the authority to enter final judgment on a counterclaim that Vickie brought against Pierce in her bankruptcy proceeding.1 To determine whether the Court of Appeals was correct in that regard, we must resolve two issues: (1) whether the Bankruptcy Court had the statu tory authority under 28 U. S. C. 157(b) to issue a final judgment on Vickies counterclaim; and (2) if so, whether conferring that authority on the Bankruptcy Court is constitutional. Although the history of this litigation is complicated, its resolution ultimately turns on very basic principles. Arti cle III, 1, of the Constitution commands that [t]he judi cial Power of the United States, shall be vested in one supreme Court, and in such inferior Courts as the Con gress may from time to time ordain and establish. That Article further provides that the judges of those courts shall hold their offices during good behavior, without diminution of salary. Ibid. Those requirements of Article III were not honored here. The Bankruptcy Court in this case exercised the judicial power of the United States by entering final judgment on a common law tort claim, even though the judges of such courts enjoy neither tenure during good behavior nor salary protection. We conclude that, although the Bankruptcy Court had the statutory authority to enter judgment on Vickies counterclaim, it lacked the constitutional authority to do so.

1 Because both Vickie and Pierce passed away during this litigation, the parties in this case are Vickies estate and Pierces estate. We continue to refer to them as Vickie and Pierce.

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I Because we have already recounted the facts and proce dural history of this case in detail, see Marshall v. Marshall, 547 U. S. 293, 300305 (2006), we do not repeat them in full here. Of current relevance are two claims Vickie filed in an attempt to secure half of J. Howards fortune. Known to the public as Anna Nicole Smith, Vickie was J. Howards third wife and married him about a year before his death. Id., at 300; see In re Marshall, 392 F. 3d 1118, 1122 (CA9 2004). Although J. Howard bestowed on Vickie many monetary and other gifts during their courtship and marriage, he did not include her in his will. 547 U. S., at 300. Before J. Howard passed away, Vickie filed suit in Texas state probate court, asserting that PierceJ. Howards younger sonfraudulently in duced J. Howard to sign a living trust that did not include her, even though J. Howard meant to give her half his property. Pierce denied any fraudulent activity and de fended the validity of J. Howards trust and, eventually, his will. 392 F. 3d, at 11221123, 1125. After J. Howards death, Vickie filed a petition for bank ruptcy in the Central District of California. Pierce filed a complaint in that bankruptcy proceeding, contending that Vickie had defamed him by inducing her lawyers to tell members of the press that he had engaged in fraud to gain control of his fathers assets. 547 U. S., at 300301; In re Marshall, 600 F. 3d 1037, 10431044 (CA9 2010). The complaint sought a declaration that Pierces defamation claim was not dischargeable in the bankruptcy proceed ings. Ibid.; see 11 U. S. C. 523(a). Pierce subsequently filed a proof of claim for the defamation action, meaning that he sought to recover damages for it from Vickies bankruptcy estate. See 501(a). Vickie responded to Pierces initial complaint by asserting truth as a defense to the alleged defamation and by filing a counterclaim for tortious interference with the gift she expected from J.

STERN v. MARSHALL Opinion of the Court

Howard. As she had in state court, Vickie alleged that Pierce had wrongfully prevented J. Howard from taking the legal steps necessary to provide her with half his property. 547 U. S., at 301. On November 5, 1999, the Bankruptcy Court issued an order granting Vickie summary judgment on Pierces claim for defamation. On September 27, 2000, after a bench trial, the Bankruptcy Court issued a judgment on Vickies counterclaim in her favor. The court later awarded Vickie over $400 million in compensatory dam ages and $25 million in punitive damages. 600 F. 3d, at 1045; see 253 B. R. 550, 561562 (Bkrtcy. Ct. CD Cal. 2000); 257 B. R. 35, 3940 (Bkrtcy. Ct. CD Cal. 2000). In post-trial proceedings, Pierce argued that the Bank ruptcy Court lacked jurisdiction over Vickies counter claim. In particular, Pierce renewed a claim he had made earlier in the litigation, asserting that the Bankruptcy Courts authority over the counterclaim was limited be cause Vickies counterclaim was not a core proceeding under 28 U. S. C. 157(b)(2)(C). See 257 B. R., at 39. As explained below, bankruptcy courts may hear and enter final judgments in core proceedings in a bankruptcy case. In non-core proceedings, the bankruptcy courts instead submit proposed findings of fact and conclusions of law to the district court, for that courts review and issu ance of final judgment. The Bankruptcy Court in this case concluded that Vickies counterclaim was a core proceed ing under 157(b)(2)(C), and the court therefore had the power to enter judgment on the counterclaim under 157(b)(1). Id., at 40. The District Court disagreed. It recognized that Vickies counterclaim for tortious interference falls within the literal language of the statute designating certain proceedings as core, see 157(b)(2)(C), but understood this Courts precedent to suggest[ ] that it would be un constitutional to hold that any and all counterclaims are

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core. 264 B. R. 609, 629630 (CD Cal. 2001) (citing Northern Pipeline Constr. Co. v. Marathon Pipe Line Co., 458 U. S. 50, 79, n. 31 (1982) (plurality opinion)). The District Court accordingly concluded that a counterclaim should not be characterized as core when it is only somewhat related to the claim against which it is asserted, and when the unique characteristics and context of the counterclaim place it outside of the normal type of set-off or other counterclaims that customarily arise. 264 B. R., at 632. Because the District Court concluded that Vickies counterclaim was not core, the court determined that it was required to treat the Bankruptcy Courts judgment as proposed[,] rather than final, and engage in an inde pendent review of the record. Id., at 633; see 28 U. S. C. 157(c)(1). Although the Texas state court had by that time conducted a jury trial on the merits of the parties dispute and entered a judgment in Pierces favor, the District Court declined to give that judgment preclusive effect and went on to decide the matter itself. 271 B. R. 858, 862867 (CD Cal. 2001); see 275 B. R. 5, 5658 (CD Cal. 2002). Like the Bankruptcy Court, the District Court found that Pierce had tortiously interfered with Vickies expectancy of a gift from J. Howard. The District Court awarded Vickie compensatory and punitive damages, each in the amount of $44,292,767.33. Id., at 58. The Court of Appeals reversed the District Court on a different ground, 392 F. 3d, at 1137, and wein the first visit of the case to this Courtreversed the Court of Ap peals on that issue. 547 U. S., at 314315. On remand from this Court, the Court of Appeals held that 157 man dated a two-step approach under which a bankruptcy judge may issue a final judgment in a proceeding only if the matter both meets Congress definition of a core proceeding and arises under or arises in title 11, the Bankruptcy Code. 600 F. 3d, at 1055. The court also

STERN v. MARSHALL Opinion of the Court

reasoned that allowing a bankruptcy judge to enter final judgments on all counterclaims raised in bankruptcy proceedings would certainly run afoul of this Courts decision in Northern Pipeline. 600 F. 3d, at 1057. With those concerns in mind, the court concluded that a coun terclaim under 157(b)(2)(C) is properly a core proceeding arising in a case under the [Bankruptcy] Code only if the counterclaim is so closely related to [a creditors] proof of claim that the resolution of the counterclaim is necessary to resolve the allowance or disallowance of the claim it self. Id., at 1058 (internal quotation marks omitted; second brackets added). The court ruled that Vickies counterclaim did not meet that test. Id., at 1059. That holding made the Texas probate courts judgment . . . the earliest final judgment entered on matters relevant to this proceeding, and therefore the Court of Appeals concluded that the District Court should have afford[ed] preclusive effect to the Texas courts determination of relevant legal and factual issues. Id., at 10641065.2 We again granted certiorari. 561 U. S. __ (2010). II
A
With certain exceptions not relevant here, the district courts of the United States have original and exclusive jurisdiction of all cases under title 11. 28 U. S. C. 1334(a). Congress has divided bankruptcy proceedings into three categories: those that aris[e] under title 11; those that aris[e] in a Title 11 case; and those that are

2 One judge wrote a separate concurring opinion. He concluded that Vickies counterclaim . . . [wa]s not a core proceeding, so the Texas probate court judgment preceded the district court judgment and controls. 600 F. 3d, at 1065 (Kleinfeld, J.). The concurring judge also offer[ed] additional grounds that he believed required judgment in Pierces favor. Ibid. Pierce presses only one of those additional grounds here; it is discussed below, in Part IIC.

Cite as: 564 U. S. ____ (2011) Opinion of the Court

related to a case under title 11. 157(a). District courts may refer any or all such proceedings to the bankruptcy judges of their district, ibid., which is how the Bankruptcy Court in this case came to preside over Vickies bank ruptcy proceedings. District courts also may withdraw a case or proceeding referred to the bankruptcy court for cause shown. 157(d). Since Congress enacted the Bank ruptcy Amendments and Federal Judgeship Act of 1984 (the 1984 Act), bankruptcy judges for each district have been appointed to 14-year terms by the courts of appeals for the circuits in which their district is located. 152(a)(1). The manner in which a bankruptcy judge may act on a referred matter depends on the type of proceeding in volved. Bankruptcy judges may hear and enter final judgments in all core proceedings arising under title 11, or arising in a case under title 11. 157(b)(1). Core proceedings include, but are not limited to 16 different types of matters, including counterclaims by [a debtors] estate against persons filing claims against the estate. 157(b)(2)(C).3 Parties may appeal final judgments of a
full, 157(b)(1)(2) provides: (1) Bankruptcy judges may hear and determine all cases under title 11 and all core proceedings arising under title 11, or arising in a case under title 11, referred under subsection (a) of this section, and may enter appropriate orders and judgments, subject to review under section 158 of this title. (2) Core proceedings include, but are not limited to (A) matters concerning the administration of the estate; (B) allowance or disallowance of claims against the estate or exemp tions from property of the estate, and estimation of claims or interests for the purposes of confirming a plan under chapter 11, 12, or 13 of title 11 but not the liquidation or estimation of contingent or unliquidated personal injury tort or wrongful death claims against the estate for purposes of distribution in a case under title 11; (C) counterclaims by the estate against persons filing claims against the estate; (D) orders in respect to obtaining credit;
3 In

STERN v. MARSHALL Opinion of the Court

bankruptcy court in core proceedings to the district court, which reviews them under traditional appellate stan dards. See 158(a); Fed. Rule Bkrtcy. Proc. 8013. When a bankruptcy judge determines that a referred pro ceeding . . . is not a core proceeding but . . . is otherwise related to a case under title 11, the judge may only submit proposed findings of fact and conclusions of law to the district court. 157(c)(1). It is the district court that enters final judgment in such cases after reviewing de novo any matter to which a party objects. Ibid. B Vickies counterclaim against Pierce for tortious inter ference is a core proceeding under the plain text of 157(b)(2)(C). That provision specifies that core proceed ings include counterclaims by the estate against persons filing claims against the estate. In past cases, we have suggested that a proceedings core status alone author izes a bankruptcy judge, as a statutory matter, to enter
(E) orders to turn over property of the estate; (F) proceedings to determine, avoid, or recover preferences; (G) motions to terminate, annul, or modify the automatic stay; (H) proceedings to determine, avoid, or recover fraudulent convey ances; (I) determinations as to the dischargeability of particular debts; (J) objections to discharges; (K) determinations of the validity, extent, or priority of liens; (L) confirmations of plans; (M) orders approving the use or lease of property, including the use of cash collateral; (N) orders approving the sale of property other than property result ing from claims brought by the estate against persons who have not filed claims against the estate; (O) other proceedings affecting the liquidation of the assets of the estate or the adjustment of the debtor-creditor or the equity security holder relationship, except personal injury tort or wrongful death claims; and (P) recognition of foreign proceedings and other matters under chapter 15 of title 11.

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final judgment in the proceeding. See, e.g., Granfinanciera, S. A. v. Nordberg, 492 U. S. 33, 50 (1989) (explaining that Congress had designated certain actions as core proceedings, which bankruptcy judges may adjudicate and in which they may issue final judgments, if a district court has referred the matter to them (citations omitted)). We have not directly addressed the question, however, and Pierce argues that a bankruptcy judge may enter final judgment on a core proceeding only if that proceeding also aris[es] in a Title 11 case or aris[es] under Title 11 itself. Brief for Respondent 51 (internal quotation marks omitted). Section 157(b)(1) authorizes bankruptcy courts to hear and determine all cases under title 11 and all core pro ceedings arising under title 11, or arising in a case under title 11. As written, 157(b)(1) is ambiguous. The aris ing under and arising in phrases might, as Pierce sug gests, be read as referring to a limited category of those core proceedings that are addressed in that section. On the other hand, the phrases might be read as simply de scribing what core proceedings are: matters arising under Title 11 or in a Title 11 case. In this case the structure and context of 157 contradict Pierces interpretation of 157(b)(1). As an initial matter, Pierces reading of the statute necessarily assumes that there is a category of core pro ceedings that neither arise under Title 11 nor arise in a Title 11 case. The manner in which the statute delineates the bankruptcy courts authority, however, makes plain that no such category exists. Section 157(b)(1) authorizes bankruptcy judges to enter final judgments in core pro ceedings arising under title 11, or arising in a case under title 11. Section 157(c)(1) instructs bankruptcy judges to instead submit proposed findings in a proceeding that is not a core proceeding but that is otherwise related to a case under title 11. Nowhere does 157 specify what

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bankruptcy courts are to do with respect to the category of matters that Pierce positscore proceedings that do not arise under Title 11 or in a Title 11 case. To the contrary, 157(b)(3) only instructs a bankruptcy judge to deter mine, on the judges own motion or on timely motion of a party, whether a proceeding is a core proceeding under this subsection or is a proceeding that is otherwise related to a case under title 11. Two options. The statute does not suggest that any other distinctions need be made. Under our reading of the statute, core proceedings are those that arise in a bankruptcy case or under Title 11. The detailed list of core proceedings in 157(b)(2) provides courts with ready examples of such matters. Pierces reading of 157, in contrast, supposes that some core pro ceedings will arise in a Title 11 case or under Title 11 and some will not. Under that reading, the statute pro vides no guidance on how to tell which are which. We think it significant that Congress failed to provide any framework for identifying or adjudicating the asserted category of core but not arising proceedings, given the otherwise detailed provisions governing bankruptcy court authority. It is hard to believe that Congress would go to the trouble of cataloging 16 different types of proceedings that should receive core treatment, but then fail to spec ify how to determine whether those matters arise under Title 11 or in a bankruptcy case ifas Pierce assertsthe latter inquiry is determinative of the bankruptcy courts authority. Pierce argues that we should treat core matters that arise neither under Title 11 nor in a Title 11 case as pro ceedings related to a Title 11 case. Brief for Respondent 60 (internal quotation marks omitted). We think that a contradiction in terms. It does not make sense to describe a core bankruptcy proceeding as merely related to the bankruptcy case; oxymoron is not a typical feature of congressional drafting. See Northern Pipeline, 458 U. S.,

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at 71 (plurality opinion) (distinguishing the restructuring of debtor-creditor relations, which is at the core of the federal bankruptcy power, . . . from the adjudication of state-created private rights); Collier on Bankruptcy 3.02[2], p. 326, n. 5 (16th ed. 2010) (The terms non core and related are synonymous); see also id., at 326, (The phraseology of section 157 leads to the conclusion that there is no such thing as a core matter that is related to a case under title 11. Core proceedings are, at most, those that arise in title 11 cases or arise under title 11 (footnote omitted)). And, as already discussed, the statute simply does not provide for a proceeding that is simulta neously core and yet only related to the bankruptcy case. See 157(c)(1) (providing only for a proceeding that is not a core proceeding but that is otherwise related to a case under title 11). As we explain in Part III, we agree with Pierce that designating all counterclaims as core proceedings raises serious constitutional concerns. Pierce is also correct that we will, where possible, construe federal statutes so as to avoid serious doubt of their constitutionality. Commodity Futures Trading Commn v. Schor, 478 U. S. 833, 841 (1986) (internal quotation marks omitted). But that canon of construction does not give [us] the prerogative to ignore the legislative will in order to avoid constitutional adjudication. Ibid. In this case, we do not think the plain text of 157(b)(2)(C) leaves any room for the canon of avoidance. We would have to rewrit[e] the statute, not interpret it, to bypass the constitutional issue 157(b)(2)(C) presents. Id., at 841 (internal quotation marks omitted). That we may not do. We agree with Vickie that 157(b)(2)(C) permits the bankruptcy court to enter a final judgment on her tortious interference counterclaim.

12

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Opinion of the Court

C
Pierce argues, as another alternative to reaching the constitutional question, that the Bankruptcy Court lacked jurisdiction to enter final judgment on his defamation claim. Section 157(b)(5) provides that [t]he district court shall order that personal injury tort and wrongful death claims shall be tried in the district court in which the bankruptcy case is pending, or in the district court in the district in which the claim arose. Pierce asserts that his defamation claim is a personal injury tort, that the Bankruptcy Court therefore had no jurisdiction over that claim, and that the court therefore necessarily lacked jurisdiction over Vickies counterclaim as well. Brief for Respondent 6566. Vickie objects to Pierces statutory analysis across the board. To begin, Vickie contends that 157(b)(5) does not address subject matter jurisdiction at all, but simply specifies the venue in which personal injury tort and wrongful death claims should be tried. See Reply Brief for Petitioner 1617, 19; see also Tr. of Oral Arg. 23 (Dep uty Solicitor General) (Section 157(b)(5) is in [the United States] view not jurisdictional). Given the limited scope of that provision, Vickie argues, a party may waive or for feit any objections under 157(b)(5), in the same way that a party may waive or forfeit an objection to the bank ruptcy court finally resolving a non-core claim. Reply Brief for Petitioner 1720; see 157(c)(2) (authorizing the district court, with the consent of all the parties to the proceeding, to refer a related to matter to the bank ruptcy court for final judgment). Vickie asserts that in this case Pierce consented to the Bankruptcy Courts adjudication of his defamation claim, and forfeited any argument to the contrary, by failing to seek withdrawal of the claim until he had litigated it before the Bankruptcy Court for 27 months. Id., at 2023. On the merits, Vickie contends that the statutory phrase personal injury tort

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and wrongful death claims does not include non-physical torts such as defamation. Id., at 2526. We need not determine what constitutes a personal injury tort in this case because we agree with Vickie that 157(b)(5) is not jurisdictional, and that Pierce consented to the Bankruptcy Courts resolution of his defamation claim.4 Because [b]randing a rule as going to a courts subject-matter jurisdiction alters the normal operation of our adversarial system, Henderson v. Shinseki, 562 U. S. ___, ______ (2011) (slip op., at 45), we are not inclined to interpret statutes as creating a jurisdictional bar when they are not framed as such. See generally Arbaugh v. Y & H Corp., 546 U. S. 500, 516 (2006) (when Congress does not rank a statutory limitation on coverage as juris dictional, courts should treat the restriction as nonjuris dictional in character).

4 Although Pierce suggests that consideration of the 157(b)(5) issue would facilitate an easy resolution of the case, Tr. of Oral Arg. 4748, he is mistaken. Had Pierce preserved his argument under that provi sion, we would have been confronted with several questions on which there is little consensus or precedent. Those issues include: (1) the scope of the phrase personal injury torta question over which there is at least a three-way divide, see In re Arnold, 407 B. R. 849, 851853 (Bkrtcy. Ct. MDNC 2009); (2) whether, as Vickie argued in the Court of Appeals, the requirement that a personal injury tort claim be tried in the district court nonetheless permits the bankruptcy court to resolve the claim short of trial, see Appellees/Cross-Appellants Supplemental Brief in No. 0256002 etc. (CA9), p. 24; see also In re Dow Corning Corp., 215 B. R. 346, 349351 (Bkrtcy. Ct. ED Mich. 1997) (noting divide over whether, and on what grounds, a bankruptcy court may resolve a claim pretrial); and (3) even if Pierces defamation claim could be considered only by the District Court, whether the Bankruptcy Court might retain jurisdiction over the counterclaim, cf. Arbaugh v. Y & H Corp., 546 U. S. 500, 514 (2006) (when a court grants a motion to dismiss for failure to state a federal claim, the court generally retains discretion to exercise supplemental jurisdiction, pursuant to 28 U. S. C. 1367, over pendent state-law claims). We express no opinion on any of these issues and simply note that the 157(b)(5) question is not as straightforward as Pierce would have it.

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Section 157(b)(5) does not have the hallmarks of a juris dictional decree. To begin, the statutory text does not refer to either district court or bankruptcy court jurisdic tion, instead addressing only where personal injury tort claims shall be tried. The statutory context also belies Pierces jurisdictional claim. Section 157 allocates the authority to enter final judgment between the bankruptcy court and the district court. See 157(b)(1), (c)(1). That allocation does not implicate questions of subject matter jurisdiction. See 157(c)(2) (parties may consent to entry of final judgment by bankruptcy judge in non-core case). By the same token, 157(b)(5) simply specifies where a particular cate gory of cases should be tried. Pierce does not explain why that statutory limitation may not be similarly waived. We agree with Vickie that Pierce not only could but did consent to the Bankruptcy Courts resolution of his defa mation claim. Before the Bankruptcy Court, Vickie ob jected to Pierces proof of claim for defamation, arguing that Pierces claim was unenforceable and that Pierce should not receive any amount for it. See 29 Court of Appeals Supplemental Excerpts of Record 6031, 6035 (hereinafter Supplemental Record). Vickie also noted that the Bankruptcy Court could defer ruling on her objec tion, given the litigation posture of Pierces claim before the Bankruptcy Court. See id., at 6031. Vickies filing prompted Pierce to advise the Bankruptcy Court that [a]ll parties are in agreement that the amount of the contin gent Proof of Claim filed by [Pierce] shall be determined by the adversary proceedings that had been commenced in the Bankruptcy Court. 31 Supplemental Record 6801. Pierce asserted that Vickies objection should be overruled or, alternatively, that any ruling on the objection should be continued until the resolution of the pending adversary proceeding litigation. Ibid. Pierce identifies no point in the record where he argued to the Bankruptcy Court that

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it lacked the authority to adjudicate his proof of claim be cause the claim sought recompense for a personal injury tort. Indeed, Pierce apparently did not object to any court that 157(b)(5) prohibited the Bankruptcy Court from resolving his defamation claim until over two yearsand several adverse discovery rulingsafter he filed that claim in June 1996. The first filing Pierce cites as raising that objection is his September 22, 1998 motion to the District Court to withdraw the reference of the case to the Bankruptcy Court. See Brief for Respondent 2627. The District Court did initially withdraw the reference as requested, but it then returned the proceeding to the Bankruptcy Court, observing that Pierce implicated the jurisdiction of that bankruptcy court. He chose to be a party to that litigation. App. 129. Although Pierce had objected in July 1996 to the Bankruptcy Courts exercise of jurisdiction over Vickies counterclaim, he advised the court at that time that he was happy to litigate [his] claim there. 29 Supplemental Record 6101. Counsel stated that even though Pierce thought it was probably cheaper for th[e] estate if [Pierces claim] were sent back or joined back with the State Court litigation, Pierce did choose the Bankruptcy Court forum and would be more than pleased to do it [t]here. Id., at 61016102; see also App. to Pet. for Cert. 266, n. 17 (District Court referring to these statements). Given Pierces course of conduct before the Bankruptcy Court, we conclude that he consented to that courts reso lution of his defamation claim (and forfeited any argument to the contrary). We have recognized the value of waiver and forfeiture rules in complex cases, Exxon Shipping Co. v. Baker, 554 U. S. 471, 487488, n. 6 (2008), and this case is no exception. In such cases, as here, the consequences of a litigant . . . sandbagging the court remaining silent about his objection and belatedly raising the error only if the case does not conclude in his favor,

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Puckett v. United States, 556 U. S. ___, ___ (2009) (slip op., at 5) (some internal quotation marks omitted)can be particularly severe. If Pierce believed that the Bank ruptcy Court lacked the authority to decide his claim for defamation, then he should have said soand said so promptly. See United States v. Olano, 507 U. S. 725, 731 (1993) ( No procedural principle is more familiar to this Court than that a constitutional right, or a right of any other sort, may be forfeited . . . by the failure to make timely assertion of the right before a tribunal having jurisdiction to determine it (quoting Yakus v. United States, 321 U. S. 414, 444 (1944))). Instead, Pierce repeat edly stated to the Bankruptcy Court that he was happy to litigate there. We will not consider his claim to the contrary, now that he is sad. III Although we conclude that 157(b)(2)(C) permits the Bankruptcy Court to enter final judgment on Vickies counterclaim, Article III of the Constitution does not. A Article III, 1, of the Constitution mandates that [t]he judicial Power of the United States, shall be vested in one supreme Court, and in such inferior Courts as the Con gress may from time to time ordain and establish. The same section provides that the judges of those constitu tional courts shall hold their Offices during good Behav iour and receive for their Services[ ] a Compensation[ ] [that] shall not be diminished during their tenure. As its text and our precedent confirm, Article III is an inseparable element of the constitutional system of checks and balances that both defines the power and protects the independence of the Judicial Branch. Northern Pipeline, 458 U. S., at 58 (plurality opinion). Under the basic concept of separation of powers . . . that flow[s] from the

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scheme of a tripartite government adopted in the Consti tution, the judicial Power of the United States . . . can no more be shared with another branch than the Chief Executive, for example, can share with the Judiciary the veto power, or the Congress share with the Judiciary the power to override a Presidential veto. United States v. Nixon, 418 U. S. 683, 704 (1974) (quoting U. S. Const., Art. III, 1). In establishing the system of divided power in the Con stitution, the Framers considered it essential that the judiciary remain[ ] truly distinct from both the legislature and the executive. The Federalist No. 78, p. 466 (C. Rossiter ed. 1961) (A. Hamilton). As Hamilton put it, quoting Montesquieu, there is no liberty if the power of judging be not separated from the legislative and execu tive powers. Ibid. (quoting 1 Montesquieu, Spirit of Laws 181). We have recognized that the three branches are not hermetically sealed from one another, see Nixon v. Administrator of General Services, 433 U. S. 425, 443 (1977), but it remains true that Article III imposes some basic limita tions that the other branches may not transgress. Those limitations serve two related purposes. Separation-of powers principles are intended, in part, to protect each branch of government from incursion by the others. Yet the dynamic between and among the branches is not the only object of the Constitutions concern. The structural principles secured by the separation of powers protect the individual as well. Bond v. United States, 564 U. S. ___, ___ (2011) (slip op., at 10). Article III protects liberty not only through its role in implementing the separation of powers, but also by speci fying the defining characteristics of Article III judges. The colonists had been subjected to judicial abuses at the hand of the Crown, and the Framers knew the main reasons why: because the King of Great Britain made Judges

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dependent on his Will alone, for the tenure of their offices, and the amount and payment of their salaries. The Declaration of Independence 11. The Framers undertook in Article III to protect citizens subject to the judicial power of the new Federal Government from a repeat of those abuses. By appointing judges to serve without term limits, and restricting the ability of the other branches to remove judges or diminish their salaries, the Framers sought to ensure that each judicial decision would be rendered, not with an eye toward currying favor with Congress or the Executive, but rather with the [c]lear heads . . . and honest hearts deemed essential to good judges. 1 Works of James Wilson 363 (J. Andrews ed. 1896). Article III could neither serve its purpose in the system of checks and balances nor preserve the integrity of judi cial decisionmaking if the other branches of the Federal Government could confer the Governments judicial Power on entities outside Article III. That is why we have long recognized that, in general, Congress may not withdraw from judicial cognizance any matter which, from its nature, is the subject of a suit at the common law, or in equity, or admiralty. Murrays Lessee v. Hoboken Land & Improvement Co., 18 How. 272, 284 (1856). When a suit is made of the stuff of the traditional actions at common law tried by the courts at Westminster in 1789, Northern Pipeline, 458 U. S., at 90 (Rehnquist, J., concur ring in judgment), and is brought within the bounds of federal jurisdiction, the responsibility for deciding that suit rests with Article III judges in Article III courts. The Constitution assigns that jobresolution of the mundane as well as the glamorous, matters of common law and statute as well as constitutional law, issues of fact as well as issues of lawto the Judiciary. Id., at 8687, n. 39 (plurality opinion).

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B This is not the first time we have faced an Article III challenge to a bankruptcy courts resolution of a debtors suit. In Northern Pipeline, we considered whether bank ruptcy judges serving under the Bankruptcy Act of 1978 appointed by the President and confirmed by the Senate, but lacking the tenure and salary guarantees of Article IIIcould constitutionally be vested with jurisdiction to decide [a] state-law contract claim against an entity that was not otherwise part of the bankruptcy proceedings. 458 U. S., at 53, 87, n. 40 (plurality opinion); see id., at 8992 (Rehnquist, J., concurring in judgment). The Court concluded that assignment of such state law claims for resolution by those judges violates Art. III of the Con stitution. Id., at 52, 87 (plurality opinion); id., at 91 (Rehnquist, J., concurring in judgment). The plurality in Northern Pipeline recognized that there was a category of cases involving public rights that Congress could constitutionally assign to legislative courts for resolution. That opinion concluded that this public rights exception extended only to matters arising between individuals and the Government in connection with the performance of the constitutional functions of the executive or legislative departments . . . that historically could have been determined exclusively by those branches. Id., at 6768 (internal quotation marks omit ted). A full majority of the Court, while not agreeing on the scope of the exception, concluded that the doctrine did not encompass adjudication of the state law claim at issue in that case. Id., at 6972; see id., at 9091 (Rehnquist, J., concurring in judgment) (None of the [previous cases addressing Article III power] has gone so far as to sanction the type of adjudication to which Marathon will be sub jected . . . . To whatever extent different powers granted under [the 1978] Act might be sustained under the public rights doctrine of Murrays Lessee . . . and succeeding

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cases, I am satisfied that the adjudication of Northerns lawsuit cannot be so sustained).5 A full majority of Justices in Northern Pipeline also rejected the debtors argument that the bankruptcy courts exercise of jurisdiction was constitutional because the bankruptcy judge was acting merely as an adjunct of the district court or court of appeals. Id., at 7172, 8186 (plurality opinion); id., at 91 (Rehnquist, J., concurring in judgment) (the bankruptcy court is not an adjunct of either the district court or the court of appeals). After our decision in Northern Pipeline, Congress re vised the statutes governing bankruptcy jurisdiction and bankruptcy judges. In the 1984 Act, Congress provided that the judges of the new bankruptcy courts would be appointed by the courts of appeals for the circuits in which their districts are located. 28 U. S. C. 152(a). And, as we have explained, Congress permitted the newly constituted bankruptcy courts to enter final judgments only in core proceedings. See supra, at 78. With respect to such core matters, however, the bank ruptcy courts under the 1984 Act exercise the same pow ers they wielded under the Bankruptcy Act of 1978 (1978 Act), 92 Stat. 2549. As in Northern Pipeline, for example, the newly constituted bankruptcy courts are charged under 157(b)(2)(C) with resolving [a]ll matters of fact and law in whatever domains of the law to which a coun terclaim may lead. 458 U. S., at 91 (Rehnquist, J., concur ring in judgment); see, e.g., 275 B. R., at 5051 (noting that Vickies counterclaim required the bankruptcy court to determine whether Texas recognized a cause of action for tortious interference with an inter vivos gift something the Supreme Court of Texas had yet to do). As

5 The dissent is thus wrong in suggesting that less than a full Court agreed on the points pertinent to this case. Post, at 2 (opinion of BREYER, J.).

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in Northern Pipeline, the new courts in core proceedings issue final judgments, which are binding and enforceable even in the absence of an appeal. 458 U. S., at 8586 (plurality opinion). And, as in Northern Pipeline, the district courts review the judgments of the bankruptcy courts in core proceedings only under the usual limited appellate standards. That requires marked deference to, among other things, the bankruptcy judges findings of fact. See 158(a); Fed. Rule Bkrtcy. Proc. 8013 (findings of fact shall not be set aside unless clearly erroneous). C Vickie and the dissent argue that the Bankruptcy Courts entry of final judgment on her state common law counterclaim was constitutional, despite the similarities between the bankruptcy courts under the 1978 Act and those exercising core jurisdiction under the 1984 Act. We disagree. It is clear that the Bankruptcy Court in this case exercised the judicial Power of the United States in purporting to resolve and enter final judgment on a state common law claim, just as the court did in Northern Pipeline. No public right exception excuses the failure to comply with Article III in doing so, any more than in Northern Pipeline. Vickie argues that this case is different because the defendant is a creditor in the bankruptcy. But the debtors claims in the cases on which she relies were themselves federal claims under bankruptcy law, which would be completely resolved in the bankruptcy process of allowing or disallowing claims. Here Vickies claim is a state law action independent of the federal bankruptcy law and not necessarily resolvable by a ruling on the creditors proof of claim in bankruptcy. Northern Pipeline and our subsequent decision in Granfinanciera, 492 U. S. 33, rejected the application of the public rights exception in such cases. Nor can the bankruptcy courts under the 1984 Act be

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dismissed as mere adjuncts of Article III courts, any more than could the bankruptcy courts under the 1978 Act. The judicial powers the courts exercise in cases such as this remain the same, and a court exercising such broad pow ers is no mere adjunct of anyone. 1 Vickies counterclaim cannot be deemed a matter of public right that can be decided outside the Judicial Branch. As explained above, in Northern Pipeline we rejected the argument that the public rights doctrine permitted a bankruptcy court to adjudicate a state law suit brought by a debtor against a company that had not filed a claim against the estate. See 458 U. S., at 6972 (plurality opinion); id., at 9091 (Rehnquist, J., concurring in judgment). Although our discussion of the public rights exception since that time has not been entirely consistent, and the exception has been the subject of some debate, this case does not fall within any of the various formula tions of the concept that appear in this Courts opinions. We first recognized the category of public rights in Murrays Lessee v. Hoboken Land & Improvement Co., 18 How. 272 (1856). That case involved the Treasury De partments sale of property belonging to a customs collec tor who had failed to transfer payments to the Federal Government that he had collected on its behalf. Id., at 274, 275. The plaintiff, who claimed title to the same land through a different transfer, objected that the Treasury Departments calculation of the deficiency and sale of the property was void, because it was a judicial act that could not be assigned to the Executive under Article III. Id., at 274275, 282283. To avoid misconstruction upon so grave a subject, the Court laid out the principles guiding its analysis. Id., at 284. It confirmed that Congress cannot withdraw from judicial cognizance any matter which, from its nature, is

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the subject of a suit at the common law, or in equity, or admiralty. Ibid. The Court also recognized that [a]t the same time there are matters, involving public rights, which may be presented in such form that the judicial power is capable of acting on them, and which are suscep tible of judicial determination, but which congress may or may not bring within the cognizance of the courts of the United States, as it may deem proper. Ibid. As an example of such matters, the Court referred to [e]quitable claims to land by the inhabitants of ceded territories and cited cases in which land issues were conclusively resolved by Executive Branch officials. Ibid. (citing Foley v. Harrison, 15 How. 433 (1854); Burgess v. Gray, 16 How. 48 (1854)). In those cases it depends upon the will of congress whether a remedy in the courts shall be allowed at all, so Congress could limit the extent to which a judicial forum was available. Murrays Lessee, 18 How., at 284. The challenge in Murrays Lessee to the Treasury Departments sale of the collectors land likewise fell within the public rights category of cases, because it could only be brought if the Federal Government chose to allow it by waiving sovereign immunity. Id., at 283284. The point of Murrays Lessee was simply that Congress may set the terms of adjudicating a suit when the suit could not otherwise proceed at all. Subsequent decisions from this Court contrasted cases within the reach of the public rights exceptionthose arising between the Government and persons subject to its authority in connection with the performance of the constitutional functions of the executive or legislative departmentsand those that were instead matters of private right, that is, of the liability of one individual to another under the law as defined. Crowell v. Benson, 285 U. S. 22, 50, 51 (1932).6 See Atlas Roofing Co. v. Occupa
6 Although

the Court in Crowell went on to decide that the facts of the

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tional Safety and Health Review Commn, 430 U. S. 442, 458 (1977) (Exception extends to cases where the Gov ernment is involved in its sovereign capacity under . . . [a] statute creating enforceable public rights, while [w]holly private tort, contract, and property cases, as well as a vast range of other cases . . . are not at all implicated); Ex parte Bakelite Corp., 279 U. S. 438, 451452 (1929). See also Northern Pipeline, supra, at 68 (plurality opinion) (citing Ex parte Bakelite Corp. for the proposition that the doctrine extended only to matters that historically could have been determined exclusively by the Executive and Legislative Branches). Shortly after Northern Pipeline, the Court rejected the
private dispute before it could be determined by a non-Article III tribunal in the first instance, subject to judicial review, the Court did so only after observing that the administrative adjudicator had only limited authority to make specialized, narrowly confined factual deter minations regarding a particularized area of law and to issue orders that could be enforced only by action of the District Court. 285 U. S., at 38, 4445, 54; see Northern Pipeline Constr. Co. v. Marathon Pipe Line Co., 458 U. S. 50, 78 (1982) (plurality opinion). In other words, the agency in Crowell functioned as a true adjunct of the District Court. That is not the case here. See infra, at 3436. Although the dissent suggests that we understate the import of Crowell in this regard, the dissent itself recognizesrepeatedlythat Crowell by its terms addresses the determination of facts outside Article III. See post, at 4 (Crowell upheld Congress delegation of primary factfinding authority to the agency); post, at 12 (quoting Crowell, 285 U. S., at 51, for the proposition that there is no require ment that, in order to maintain the essential attributes of the judicial power, all determinations of fact in constitutional courts shall be made by judges ). Crowell may well have additional significance in the context of expert administrative agencies that oversee particular substantive federal regimes, but we have no occasion to and do not address those issues today. See infra, at 29. The United States appar ently agrees that any broader significance of Crowell is not pertinent in this case, citing to Crowell in its brief only once, in the last footnote, again for the limited proposition discussed above. Brief for United States as Amicus Curiae 32, n. 5.

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limitation of the public rights exception to actions involv ing the Government as a party. The Court has continued, however, to limit the exception to cases in which the claim at issue derives from a federal regulatory scheme, or in which resolution of the claim by an expert government agency is deemed essential to a limited regulatory objec tive within the agencys authority. In other words, it is still the case that what makes a right public rather than private is that the right is integrally related to particular federal government action. See United States v. Jicarilla Apache Nation, 564 U. S. ___, ______ (2011) (slip op., at 1011) (The distinction between public rights against the Government and private rights between private parties is well established, citing Murrays Lessee and Crowell). Our decision in Thomas v. Union Carbide Agricultural Products Co., for example, involved a data-sharing ar rangement between companies under a federal statute pro viding that disputes about compensation between the companies would be decided by binding arbitration. 473 U. S. 568, 571575 (1985). This Court held that the scheme did not violate Article III, explaining that [a]ny right to compensation . . . results from [the statute] and does not depend on or replace a right to such compensa tion under state law. Id., at 584. Commodity Futures Trading Commission v. Schor con cerned a statutory scheme that created a procedure for customers injured by a brokers violation of the federal commodities law to seek reparations from the broker before the Commodity Futures Trading Commission (CFTC). 478 U. S. 833, 836 (1986). A customer filed such a claim to recover a debit balance in his account, while the broker filed a lawsuit in Federal District Court to recover the same amount as lawfully due from the customer. The broker later submitted its claim to the CFTC, but after that agency ruled against the customer, the customer

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STERN v. MARSHALL Opinion of the Court

argued that agency jurisdiction over the brokers counter claim violated Article III. Id., at 837838. This Court disagreed, but only after observing that (1) the claim and the counterclaim concerned a single disputethe same account balance; (2) the CFTCs assertion of authority involved only a narrow class of common law claims in a particularized area of law ; (3) the area of law in question was governed by a specific and limited federal regulatory scheme as to which the agency had obvious expertise; (4) the parties had freely elected to resolve their differences before the CFTC; and (5) CFTC orders were enforceable only by order of the district court. Id., at 844, 852855 (quoting Northern Pipeline, 458 U. S., at 85); see 478 U. S., at 843844; 849857. Most signifi cantly, given that the customers reparations claim before the agency and the brokers counterclaim were competing claims to the same amount, the Court repeatedly empha sized that it was necessary to allow the agency to exer cise jurisdiction over the brokers claim, or else the reparations procedure would have been confounded. Id., at 856. The most recent case in which we considered application of the public rights exceptionand the only case in which we have considered that doctrine in the bankruptcy con text since Northern Pipelineis Granfinanciera, S. A. v. Nordberg, 492 U. S. 33 (1989). In Granfinanciera we rejected a bankruptcy trustees argument that a fraudu lent conveyance action filed on behalf of a bankruptcy estate against a noncreditor in a bankruptcy proceeding fell within the public rights exception. We explained that, [i]f a statutory right is not closely intertwined with a federal regulatory program Congress has power to enact, and if that right neither belongs to nor exists against the Federal Government, then it must be adjudicated by an Article III court. Id., at 5455. We reasoned that fraudu lent conveyance suits were quintessentially suits at com

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mon law that more nearly resemble state law contract claims brought by a bankrupt corporation to augment the bankruptcy estate than they do creditors hierarchically ordered claims to a pro rata share of the bankruptcy res. Id., at 56. As a consequence, we concluded that fraudulent conveyance actions were more accurately characterized as a private rather than a public right as we have used those terms in our Article III decisions. Id., at 55.7 Vickies counterclaimlike the fraudulent conveyance claim at issue in Granfinancieradoes not fall within any of the varied formulations of the public rights exception in this Courts cases. It is not a matter that can be pursued only by grace of the other branches, as in Murrays Lessee, 18 How., at 284, or one that historically could have been determined exclusively by those branches, Northern Pipeline, supra, at 68 (citing Ex parte Bakelite Corp., 279 U. S., at 458). The claim is instead one under state com mon law between two private parties. It does not de pend[ ] on the will of congress, Murrays Lessee, supra, at 284; Congress has nothing to do with it. In addition, Vickies claimed right to relief does not flow from a federal statutory scheme, as in Thomas, 473 U. S., at 584585, or Atlas Roofing, 430 U. S., at 458. It is not completely dependent upon adjudication of a claim cre ated by federal law, as in Schor, 478 U. S., at 856. And in contrast to the objecting party in Schor, id., at 855856, Pierce did not truly consent to resolution of Vickies claim in the bankruptcy court proceedings. He had nowhere else to go if he wished to recover from Vickies estate. See

7 We noted that we did not mean to suggest that the restructuring of debtor-creditor relations is in fact a public right. 492 U. S., at 56, n. 11. Our conclusion was that, even if one accepts this thesis, Con gress could not constitutionally assign resolution of the fraudulent conveyance action to a non-Article III court. Ibid. Because neither party asks us to reconsider the public rights framework for bankruptcy, we follow the same approach here.

28

STERN v. MARSHALL Opinion of the Court

Granfinanciera, supra, at 59, n. 14 (noting that [p]arallel reasoning [to Schor] is unavailable in the context of bank ruptcy proceedings, because creditors lack an alternative forum to the bankruptcy court in which to pursue their claims).8 Furthermore, the asserted authority to decide Vickies claim is not limited to a particularized area of the law, as in Crowell, Thomas, and Schor. Northern Pipeline, 458 U. S., at 85 (plurality opinion). We deal here not with an agency but with a court, with substantive jurisdiction reaching any area of the corpus juris. See ibid.; id., at 91 (Rehnquist, J., concurring in judgment). This is not a situation in which Congress devised an expert and inex pensive method for dealing with a class of questions of fact which are particularly suited to examination and determi nation by an administrative agency specially assigned to that task. Crowell, 285 U. S., at 46; see Schor, supra, at 855856. The experts in the federal system at resolving common law counterclaims such as Vickies are the Article III courts, and it is with those courts that her claim must stay. The dissent reads our cases differently, and in particu lar contends that more recent cases view Northern Pipeline as establish[ing] only that Congress may not vest in a non-Article III court the power to adjudicate, render final judgment, and issue binding orders in a traditional contract action arising under state law, without consent of

8 Contrary to the claims of the dissent, see post, at 1213, Pierce did not have another forum in which to pursue his claim to recover from Vickies pre-bankruptcy assets, rather than take his chances with whatever funds might remain after the Title 11 proceedings. Creditors who possess claims that do not satisfy the requirements for nondis chargeability under 11 U. S. C. 523 have no choice but to file their claims in bankruptcy proceedings if they want to pursue the claims at all. That is why, as we recognized in Granfinanciera, the notion of consent does not apply in bankruptcy proceedings as it might in other contexts.

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the litigants, and subject only to ordinary appellate re view. Post, at 6 (quoting Thomas, supra, at 584). Just so: Substitute tort for contract, and that statement directly covers this case. We recognize that there may be instances in which the distinction between public and private rightsat least as framed by some of our recent casesfails to provide con crete guidance as to whether, for example, a particular agency can adjudicate legal issues under a substantive regulatory scheme. Given the extent to which this case is so markedly distinct from the agency cases discussing the public rights exception in the context of such a regime, however, we do not in this opinion express any view on how the doctrine might apply in that different context. What is plain here is that this case involves the most prototypical exercise of judicial power: the entry of a final, binding judgment by a court with broad substantive juris diction, on a common law cause of action, when the action neither derives from nor depends upon any agency regula tory regime. If such an exercise of judicial power may nonetheless be taken from the Article III Judiciary simply by deeming it part of some amorphous public right, then Article III would be transformed from the guardian of individual liberty and separation of powers we have long recognized into mere wishful thinking. 2 Vickie and the dissent next attempt to distinguish Northern Pipeline and Granfinanciera on the ground that Pierce, unlike the defendants in those cases, had filed a proof of claim in the bankruptcy proceedings. Given Pierces participation in those proceedings, Vickie argues, the Bankruptcy Court had the authority to adjudicate her counterclaim under our decisions in Katchen v. Landy, 382 U. S. 323 (1966), and Langenkamp v. Culp, 498 U. S. 42 (1990) (per curiam).

30

STERN v. MARSHALL Opinion of the Court

We do not agree. As an initial matter, it is hard to see why Pierces decision to file a claim should make any difference with respect to the characterization of Vickies counterclaim. [P]roperty interests are created and de fined by state law, and [u]nless some federal interest requires a different result, there is no reason why such interests should be analyzed differently simply because an interested party is involved in a bankruptcy proceeding. Travelers Casualty & Surety Co. of America v. Pacific Gas & Elec. Co., 549 U. S. 443, 451 (2007) (quoting Butner v. United States, 440 U. S. 48, 55 (1979)). Pierces claim for defamation in no way affects the nature of Vickies coun terclaim for tortious interference as one at common law that simply attempts to augment the bankruptcy estate the very type of claim that we held in Northern Pipeline and Granfinanciera must be decided by an Article III court. Contrary to Vickies contention, moreover, our decisions in Katchen and Langenkamp do not suggest a different result. Katchen permitted a bankruptcy referee acting under the Bankruptcy Acts of 1898 and 1938 (akin to a bankruptcy court today) to exercise what was known as summary jurisdiction over a voidable preference claim brought by the bankruptcy trustee against a creditor who had filed a proof of claim in the bankruptcy proceeding. See 382 U. S., at 325, 327328. A voidable preference claim asserts that a debtor made a payment to a particu lar creditor in anticipation of bankruptcy, to in effect increase that creditors proportionate share of the estate. The preferred creditors claim in bankruptcy can be disal lowed as a result of the preference, and the amounts paid to that creditor can be recovered by the trustee. See id., at 330; see also 11 U. S. C. 502(d), 547(b). Although the creditor in Katchen objected that the preference issue should be resolved through a plenary suit in an Article III court, this Court concluded that summary adjudication in bankruptcy was appropriate,

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because it was not possible for the referee to rule on the creditors proof of claim without first resolving the void able preference issue. 382 U. S., at 329330, 332333, and n. 9, 334. There was no question that the bankruptcy referee could decide whether there had been a voidable preference in determining whether and to what extent to allow the creditors claim. Once the referee did that, nothing remains for adjudication in a plenary suit; such a suit would be a meaningless gesture. Id., at 334. The plenary proceeding the creditor sought could be brought into the bankruptcy court because the same issue [arose] as part of the process of allowance and disallowance of claims. Id., at 336. It was in that sense that the Court stated that he who invokes the aid of the bankruptcy court by offering a proof of claim and demanding its allowance must abide the consequences of that procedure. Id., at 333, n. 9. In Katchen one of those consequences was resolution of the preference issue as part of the process of allowing or disal lowing claims, and accordingly there was no basis for the creditor to insist that the issue be resolved in an Article III court. See id., at 334. Indeed, the Katchen Court expressly noted that it intimate[d] no opinion concerning whether the bankruptcy referee would have had sum mary jurisdiction to adjudicate a demand by the [bank ruptcy] trustee for affirmative relief, all of the substantial factual and legal bases for which ha[d] not been disposed of in passing on objections to the [creditors proof of] claim. Id., at 333, n. 9. Our per curiam opinion in Langenkamp is to the same effect. We explained there that a preferential transfer claim can be heard in bankruptcy when the allegedly favored creditor has filed a claim, because then the ensu ing preference action by the trustee become[s] integral to the restructuring of the debtor-creditor relationship. 498 U. S., at 44. If, in contrast, the creditor has not filed a

32

STERN v. MARSHALL Opinion of the Court

proof of claim, the trustees preference action does not become[ ] part of the claims-allowance process subject to resolution by the bankruptcy court. Ibid.; see id., at 45. In ruling on Vickies counterclaim, the Bankruptcy Court was required to and did make several factual and legal determinations that were not disposed of in passing on objections to Pierces proof of claim for defamation, which the court had denied almost a year earlier. Katchen, supra, at 332, n. 9. There was some overlap between Vickies counterclaim and Pierces defamation claim that led the courts below to conclude that the coun terclaim was compulsory, 600 F. 3d, at 1057, or at least in an attenuated sense related to Pierces claim, 264 B. R., at 631. But there was never any reason to believe that the process of adjudicating Pierces proof of claim would neces sarily resolve Vickies counterclaim. See id., at 631, 632 (explaining that the primary facts at issue on Pierces claim were the relationship between Vickie and her attor neys and her knowledge or approval of their statements, and the counterclaim raises issues of law entirely dif ferent from those raise[d] on the defamation claim). The United States acknowledges the point. See Brief for United States as Amicus Curiae, p. (I) (question presented concerns authority of a bankruptcy court to enter final judgment on a compulsory counterclaim when adjudica tion of the counterclaim requires resolution of issues that are not implicated by the claim against the estate); id., at 26. The only overlap between the two claims in this case was the question whether Pierce had in fact tortiously taken control of his fathers estate in the manner alleged by Vickie in her counterclaim and described in the alleg edly defamatory statements. From the outset, it was clear that, even assuming the Bankruptcy Court would (as it did) rule in Vickies favor on that question, the court could not enter judgment for Vickie unless the court additionally

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33

ruled on the questions whether Texas recognized tortious interference with an expected gift as a valid cause of action, what the elements of that action were, and whether those elements were met in this case. 275 B. R., at 5053. Assuming Texas accepted the elements adopted by other jurisdictions, that meant Vickie would need to prove, above and beyond Pierces tortious interference, (1) the existence of an expectancy of a gift; (2) a reasonable certainty that the expectancy would have been realized but for the interference; and (3) damages. Id., at 51; see 253 B. R., at 558561. Also, because Vickie sought puni tive damages in connection with her counterclaim, the Bankruptcy Court could not finally dispose of the case in Vickies favor without determining whether to subject Pierce to the sort of retribution, punishment[,] and deterrence, Exxon Shipping Co., 554 U. S., at 492, 504 (internal quotation marks omitted), those damages are designed to impose. There thus was never reason to believe that the process of ruling on Pierces proof of claim would necessarily result in the resolution of Vickies counterclaim. In both Katchen and Langenkamp, moreover, the trus tee bringing the preference action was asserting a right of recovery created by federal bankruptcy law. In Langenkamp, we noted that the trustee instituted adversary proceedings under 11 U. S. C. 547(b) to recover, as avoid able preferences, payments respondents received from the debtor before the bankruptcy filings. 498 U. S., at 43; see, e.g., 547(b)(1) (the trustee may avoid any transfer of an interest of the debtor in property(1) to or for the benefit of a creditor). In Katchen, [t]he Trustee . . . [asserted] that the payments made [to the creditor] were preferences inhibited by Section 60a of the Bankruptcy Act. Memo randum Opinion (Feb. 8, 1963), Tr. of Record in O. T. 1965, No. 28, p. 3; see 382 U. S., at 334 (considering im pact of the claims allowance process on action by the

34

STERN v. MARSHALL Opinion of the Court

trustee under 60 to recover the preference); 11 U. S. C. 96(b) (1964 ed.) (60(b) of the then-applicable Bankruptcy Act) (preference may be avoided by the trustee if the creditor receiving it or to be benefited thereby . . . has, at the time when the transfer is made, reasonable cause to believe that the debtor is insolvent). Vickies claim, in contrast, is in no way derived from or dependent upon bankruptcy law; it is a state tort action that exists without regard to any bankruptcy proceeding. In light of all the foregoing, we disagree with the dissent that there are no relevant distinction[s] between Pierces claim in this case and the claim at issue in Langenkamp. Post, at 14. We see no reason to treat Vickies counter claim any differently from the fraudulent conveyance action in Granfinanciera. 492 U. S., at 56. Granfinancieras distinction between actions that seek to augment the bankruptcy estate and those that seek a pro rata share of the bankruptcy res, ibid., reaffirms that Con gress may not bypass Article III simply because a proceed ing may have some bearing on a bankruptcy case; the question is whether the action at issue stems from the bank ruptcy itself or would necessarily be resolved in the claims allowance process. Vickie has failed to demon strate that her counterclaim falls within one of the lim ited circumstances covered by the public rights exception, particularly given our conclusion that, even with respect to matters that arguably fall within the scope of the public rights doctrine, the presumption is in favor of Art. III courts. Northern Pipeline, 458 U. S., at 69, n. 23, 77, n. 29 (plurality opinion). 3 Vickie additionally argues that the Bankruptcy Courts final judgment was constitutional because bankruptcy courts under the 1984 Act are properly deemed adjuncts of the district courts. Brief for Petitioner 6164. We

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35

rejected a similar argument in Northern Pipeline, see 458 U. S., at 8486 (plurality opinion); id., at 91 (Rehnquist, J., concurring in judgment), and our reasoning there holds true today. To begin, as explained above, it is still the bankruptcy court itself that exercises the essential attributes of judi cial power over a matter such as Vickies counterclaim. See supra, at 20. The new bankruptcy courts, like the old, do not ma[k]e only specialized, narrowly confined factual determinations regarding a particularized area of law or engage in statutorily channeled factfinding functions. Northern Pipeline, 458 U. S., at 85 (plurality opinion). Instead, bankruptcy courts under the 1984 Act resolve [a]ll matters of fact and law in whatever domains of the law to which the parties counterclaims might lead. Id., at 91 (Rehnquist, J., concurring in judgment). In addition, whereas the adjunct agency in Crowell v. Benson possessed only a limited power to issue compensa tion orders . . . [that] could be enforced only by order of the district court, Northern Pipeline, supra, at 85, a bank ruptcy court resolving a counterclaim under 28 U. S. C. 157(b)(2)(C) has the power to enter appropriate orders and judgmentsincluding final judgmentssubject to review only if a party chooses to appeal, see 157(b)(1), 158(a)(b). It is thus no less the case here than it was in Northern Pipeline that [t]he authorityand the respon sibilityto make an informed, final determination . . . remains with the bankruptcy judge, not the district court. 458 U. S., at 81 (plurality opinion) (internal quotation marks omitted). Given that authority, a bankruptcy court can no more be deemed a mere adjunct of the district court than a district court can be deemed such an ad junct of the court of appeals. We certainly cannot accept the dissents notion that judges who have the power to enter final, binding orders are the functional[ ] equiva lent of law clerks[ ] and the Judiciarys administrative

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officials. Post, at 11. And even were we wrong in this regard, that would only confirm that such judges should not be in the business of entering final judgments in the first place. It does not affect our analysis that, as Vickie notes, bankruptcy judges under the current Act are appointed by the Article III courts, rather than the President. See Brief for Petitioner 59. Ifas we have concludedthe bank ruptcy court itself exercises the essential attributes of judicial power [that] are reserved to Article III courts, Schor, 478 U. S., at 851 (internal quotation marks omit ted), it does not matter who appointed the bankruptcy judge or authorized the judge to render final judgments in such proceedings. The constitutional bar remains. See The Federalist No. 78, at 471 (Periodical appointments, however regulated, or by whomsoever made, would, in some way or other, be fatal to [a judges] necessary independence). D Finally, Vickie and her amici predict as a practical matter that restrictions on a bankruptcy courts ability to hear and finally resolve compulsory counterclaims will create significant delays and impose additional costs on the bankruptcy process. See, e.g., Brief for Petitioner 34 36, 5758; Brief for United States as Amicus Curiae 29 30. It goes without saying that the fact that a given law or procedure is efficient, convenient, and useful in facili tating functions of government, standing alone, will not save it if it is contrary to the Constitution. INS v. Chadha, 462 U. S. 919, 944 (1983). In addition, we are not convinced that the practical consequences of such limitations on the authority of bank ruptcy courts to enter final judgments are as significant as Vickie and the dissent suggest. See post, at 1617. The dissent asserts that it is important that counterclaims such as Vickies be resolved in a bankruptcy court, and

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that, to be effective, a single tribunal must have broad authority to restructure [debtor-creditor] relations. Post, at 14, 15 (emphasis deleted). But the framework Congress adopted in the 1984 Act already contemplates that certain state law matters in bankruptcy cases will be resolved by judges other than those of the bankruptcy courts. Section 1334(c)(2), for example, requires that bankruptcy courts abstain from hearing specified non-core, state law claims that can be timely adjudicated[ ] in a State forum of ap propriate jurisdiction. Section 1334(c)(1) similarly pro vides that bankruptcy courts may abstain from hearing any proceeding, including core matters, in the interest of comity with State courts or respect for State law. As described above, the current bankruptcy system also requires the district court to review de novo and enter final judgment on any matters that are related to the bankruptcy proceedings, 157(c)(1), and permits the dis trict court to withdraw from the bankruptcy court any referred case, proceeding, or part thereof, 157(d). Pierce has not argued that the bankruptcy courts are barred from hearing all counterclaims or proposing findings of fact and conclusions of law on those matters, but rather that it must be the district court that finally decide[s] them. Brief for Respondent 61. We do not think the re moval of counterclaims such as Vickies from core bank ruptcy jurisdiction meaningfully changes the division of labor in the current statute; we agree with the United States that the question presented here is a narrow one. Brief for United States as Amicus Curiae 23. If our decision today does not change all that much, then why the fuss? Is there really a threat to the separation of powers where Congress has conferred the judicial power outside Article III only over certain counterclaims in bankruptcy? The short but emphatic answer is yes. A statute may no more lawfully chip away at the authority of the Judicial Branch than it may eliminate it entirely.

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Slight encroachments create new boundaries from which legions of power can seek new territory to capture. Reid v. Covert, 354 U. S. 1, 39 (1957) (plurality opinion). Al though [i]t may be that it is the obnoxious thing in its mildest and least repulsive form, we cannot overlook the intrusion: illegitimate and unconstitutional practices get their first footing in that way, namely, by silent ap proaches and slight deviations from legal modes of proce dure. Boyd v. United States, 116 U. S. 616, 635 (1886). We cannot compromise the integrity of the system of separated powers and the role of the Judiciary in that system, even with respect to challenges that may seem innocuous at first blush. * * * Article III of the Constitution provides that the judicial power of the United States may be vested only in courts whose judges enjoy the protections set forth in that Arti cle. We conclude today that Congress, in one isolated respect, exceeded that limitation in the Bankruptcy Act of 1984. The Bankruptcy Court below lacked the constitu tional authority to enter a final judgment on a state law counterclaim that is not resolved in the process of ruling on a creditors proof of claim. Accordingly, the judgment of the Court of Appeals is affirmed. It is so ordered.

Cite as: 564 U. S. ____ (2011) SCALIA, J., concurring

SUPREME COURT OF THE UNITED STATES

_________________

No. 10179
_________________

HOWARD K. STERN, EXECUTOR OF THE ESTATE OF

VICKIE LYNN MARSHALL, PETITIONER v.
ELAINE T. MARSHALL, EXECUTRIX OF THE
ESTATE OF E. PIERCE MARSHALL

ON WRIT OF CERTIORARI TO THE UNITED STATES COURT OF

APPEALS FOR THE NINTH CIRCUIT
[June 23, 2011]

JUSTICE SCALIA, concurring. I agree with the Courts interpretation of our Article III precedents, and I accordingly join its opinion. I adhere to my view, however, thatour contrary precedents notwithstandinga matter of public rights . . . must at a minimum arise between the government and others, Granfinanciera, S. A. v. Nordberg, 492 U. S. 33, 65 (1989) (SCALIA, J., concurring in part and concurring in judgment) (internal quotation marks omitted). The sheer surfeit of factors that the Court was required to consider in this case should arouse the suspicion that something is seriously amiss with our jurisprudence in this area. I count at least seven different reasons given in the Courts opinion for concluding that an Article III judge was required to adjudicate this lawsuit: that it was one under state common law which was not a matter that can be pursued only by grace of the other branches, ante, at 27; that it was not completely dependent upon adjudication of a claim created by federal law, ibid.; that Pierce did not truly consent to resolution of Vickies claim in the bankruptcy court proceedings, ibid.; that the asserted authority to decide Vickies claim is not limited to a particularized area of the law, ante, at 28; that there was

STERN v. MARSHALL SCALIA, J., concurring

never any reason to believe that the process of adjudicating Pierces proof of claim would necessarily resolve Vickies counterclaim, ante, at 32; that the trustee was not asserting a right of recovery created by federal bankruptcy law, ante, at 33; and that the Bankruptcy Judge ha[d] the power to enter appropriate orders and judgmentsincluding final judgmentssubject to review only if a party chooses to appeal, ante, at 35. Apart from their sheer numerosity, the more fundamental flaw in the many tests suggested by our jurisprudence is that they have nothing to do with the text or tradition of Article III. For example, Article III gives no indication that state-law claims have preferential entitlement to an Article III judge; nor does it make pertinent the extent to which the area of the law is particularized. The multifactors relied upon today seem to have entered our jurisprudence almost randomly. Leaving aside certain adjudications by federal administrative agencies, which are governed (for better or worse) by our landmark decision in Crowell v. Benson, 285 U. S. 22 (1932), in my view an Article III judge is required in all federal adjudications, unless there is a firmly established historical practice to the contrary. For that reasonand not because of some intuitive balancing of benefits and harmsI agree that Article III judges are not required in the context of territorial courts, courts-martial, or true public rights cases. See Northern Pipeline Constr. Co. v. Marathon Pipe Line Co., 458 U. S. 50, 71 (1982) (plurality opinion). Perhaps historical practice permits non-Article III judges to process claims against the bankruptcy estate, see, e.g., Plank, Why Bankruptcy Judges Need Not and Should Not Be Article III Judges, 72 Am. Bankr. L. J. 567, 607609 (1998); the subject has not been briefed, and so I state no position on the matter. But Vickie points to no historical practice that authorizes a non-Article III judge to adjudicate a counterclaim of the sort at issue here.

Cite as: 564 U. S. ____ (2011) BREYER, J., dissenting

SUPREME COURT OF THE UNITED STATES

_________________

No. 10179
_________________

HOWARD K. STERN, EXECUTOR OF THE ESTATE OF

VICKIE LYNN MARSHALL, PETITIONER v.
ELAINE T. MARSHALL, EXECUTRIX OF THE
ESTATE OF E. PIERCE MARSHALL

ON WRIT OF CERTIORARI TO THE UNITED STATES COURT OF

APPEALS FOR THE NINTH CIRCUIT
[June 23, 2011]

JUSTICE BREYER, with whom JUSTICE GINSBURG, JUSTICE SOTOMAYOR, and JUSTICE KAGAN, join dissenting. Pierce Marshall filed a claim in Federal Bankruptcy Court against the estate of Vickie Marshall. His claim asserted that Vickie Marshall had, through her lawyers, accused him of trying to prevent her from obtaining money that his father had wanted her to have; that her accusa tions violated state defamation law; and that she conse quently owed Pierce Marshall damages. Vickie Marshall filed a compulsory counterclaim in which she asserted that Pierce Marshall had unlawfully interfered with her hus bands efforts to grant her an inter vivos gift and that he consequently owed her damages. The Bankruptcy Court adjudicated the claim and the counterclaim. In doing so, the court followed statutory procedures applicable to core bankruptcy proceedings. See 28 U. S. C. 157(b). And ultimately the Bankruptcy Court entered judgment in favor of Vickie Marshall. The question before us is whether the Bankruptcy Court pos sessed jurisdiction to adjudicate Vickie Marshalls coun terclaim. I agree with the Court that the bankruptcy statute, 157(b)(2)(C), authorizes a bankruptcy court to adjudicate the counterclaim. But I do not agree with the

STERN v. MARSHALL BREYER, J., dissenting

majority about the statutes constitutionality. I believe the statute is consistent with the Constitutions delegation of the judicial Power of the United States to the Judicial Branch of Government. Art. III, 1. Consequently, it is constitutional. I My disagreement with the majoritys conclusion stems in part from my disagreement about the way in which it interprets, or at least emphasizes, certain precedents. In my view, the majority overstates the current relevance of statements this Court made in an 1856 case, Murrays Lessee v. Hoboken Land & Improvement Co., 18 How. 272 (1856), and it overstates the importance of an analysis that did not command a Court majority in Northern Pipeline Constr. Co. v. Marathon Pipe Line Co., 458 U. S. 50 (1982), and that was subsequently disavowed. At the same time, I fear the Court understates the importance of a watershed opinion widely thought to demonstrate the constitutional basis for the current authority of adminis trative agencies to adjudicate private disputes, namely, Crowell v. Benson, 285 U. S. 22 (1932). And it fails to follow the analysis that this Court more recently has held applicable to the evaluation of claims of a kind before us here, namely, claims that a congressional delegation of adjudicatory authority violates separation-of-powers principles derived from Article III. See Thomas v. Union Carbide Agricultural Products Co., 473 U. S. 568 (1985); Commodity Futures Trading Commn v. Schor, 478 U. S. 833 (1986). I shall describe these cases in some detail in order to explain why I believe we should put less weight than does the majority upon the statement in Murrays Lessee and the analysis followed by the Northern Pipeline plurality and instead should apply the approach this Court has applied in Crowell, Thomas, and Schor.

Cite as: 564 U. S. ____ (2011) BREYER, J., dissenting

A In Murrays Lessee, the Court held that the Constitution permitted an executive official, through summary, nonju dicial proceedings, to attach the assets of a customs col lector whose account was deficient. The Court found evidence in common law of summary method[s] for the recovery of debts due to the crown, and especially those due from receivers of the revenues, 18 How., at 277, and it analogized the Governments summary attachment process to the kind of self-help remedies available to pri vate parties, id., at 283. In the course of its opinion, the Court wrote: [W]e do not consider congress can either withdraw from judicial cognizance any matter which, from its nature, is the subject of a suit at the common law, or in equity, or admiralty; nor, on the other hand, can it bring under the judicial power a matter which, from its nature, is not a subject for judicial determination. At the same time there are matters, involving public rights, which may be presented in such form that the judicial power is capable of acting on them, and which are susceptible of judicial determination, but which congress may or may not bring within the cognizance of the courts of the United States, as it may deem proper. Id., at 284. The majority reads the first part of the statements first sentence as authoritatively defining the boundaries of Article III. Ante, at 18. I would read the statement in a less absolute way. For one thing, the statement is in effect dictum. For another, it is the remainder of the statement, announcing a distinction between public rights and private rights, that has had the more lasting impact. Later Courts have seized on that distinction when upholding non-Article III adjudication, not when striking it down. See Ex parte Bakelite Corp., 279 U. S. 438, 451452

STERN v. MARSHALL BREYER, J., dissenting

(1929) (Court of Customs Appeals); Williams v. United States, 289 U. S. 553, 579580 (1933) (Court of Claims). The one exception is Northern Pipeline, where the Court struck down the Bankruptcy Act of 1978. But in that case there was no majority. And a plurality, not a majority, read the statement roughly in the way the Court does today. See 458 U. S., at 6770. B At the same time, I believe the majority places insuf ficient weight on Crowell, a seminal case that clarified the scope of the dictum in Murrays Lessee. In that case, the Court considered whether Congress could grant to an Article I administrative agency the power to adjudicate an employees workers compensation claim against his em ployer. The Court assumed that an Article III court would review the agencys decision de novo in respect to ques tions of law but it would conduct a less searching review (looking to see only if the agencys award was supported by evidence in the record) in respect to questions of fact. Crowell, 285 U. S., at 4850. The Court pointed out that the case involved a dispute between private persons (a matter of private rights) and (with one exception not relevant here) it upheld Congress delegation of primary factfinding authority to the agency. Justice Brandeis, dissenting (from a here-irrelvant por tion of the Courts holding), wrote that the adjudicatory scheme raised only a due process question: When does due process require decision by an Article III judge? He an swered that question by finding constitutional the stat utes delegation of adjudicatory authority to an agency. Id., at 87. Crowell has been hailed as the greatest of the cases validating administrative adjudication. Bator, The Con stitution as Architecture: Legislative and Administrative Courts Under Article III, 65 Ind. L. J. 233, 251 (1990).

Cite as: 564 U. S. ____ (2011) BREYER, J., dissenting

Yet, in a footnote, the majority distinguishes Crowell as a case in which the Court upheld the delegation of adjudica tory authority to an administrative agency simply because the agencys power to make the specialized, narrowly confined factual determinations at issue arising in a particularized area of law, made the agency a true adjunct of the District Court. Ante, at 23, n. 6. Were Crowells holding as narrow as the majority suggests, one could question the validity of Congress delegation of authority to adjudicate disputes among private parties to other agencies such as the National Labor Relations Board, the Commodity Futures Trading Commission, the Surface Transportation Board, and the Department of Housing and Urban Development, thereby resurrecting important legal questions previously thought to have been decided. See 29 U. S. C. 160; 7 U. S. C. 18; 49 U. S. C. 10704; 42 U. S. C. 3612(b). C The majority, in my view, overemphasizes the preceden tial effect of the plurality opinion in Northern Pipeline. Ante, at 1921. There, the Court held unconstitutional the jurisdictional provisions of the Bankruptcy Act of 1978 granting adjudicatory authority to bankruptcy judges who lack the protections of tenure and compensation that Article III provides. Four Members of the Court wrote that Congress could grant adjudicatory authority to a nonArticle III judge only where (1) the judge sits on a territo rial cour[t] (2) the judge conducts a courts-martial, or (3) the case involves a public right, namely, a matter that at a minimum arise[s] between the government and others. 458 U. S., at 6470 (plurality opinion) (quoting Ex parte Bakelite Corp., supra, at 451). Two other Mem bers of the Court, without accepting these limitations, agreed with the result because the case involved a breach of-contract claim brought by the bankruptcy trustee on

STERN v. MARSHALL BREYER, J., dissenting

behalf of the bankruptcy estate against a third party who was not part of the bankruptcy proceeding, and none of the Courts preceding cases (which, the two Members wrote, do not admit of easy synthesis) had gone so far as to sanction th[is] type of adjudication. 458 U. S., at 9091 (Rehnquist, J. concurring in judgment). Three years later, the Court held that Northern Pipeline establishes only that Congress may not vest in a nonArticle III court the power to adjudicate, render final judgment, and issue binding orders in a traditional contract action arising under state law, without con sent of the litigants, and subject only to ordinary ap pellate review. Thomas, 473 U. S., at 584. D Rather than leaning so heavily on the approach taken by the plurality in Northern Pipeline, I would look to this Courts more recent Article III cases Thomas and Schor cases that commanded a clear majority. In both cases the Court took a more pragmatic approach to the constitu tional question. It sought to determine whether, in the particular instance, the challenged delegation of adjudica tory authority posed a genuine and serious threat that one branch of Government sought to aggrandize its own con stitutionally delegated authority by encroaching upon a field of authority that the Constitution assigns exclusively to another branch. 1 In Thomas, the Court focused directly upon the nature of the Article III problem, illustrating how the Court should determine whether a delegation of adjudicatory authority to a non-Article III judge violates the Constitu tion. The statute in question required pesticide manufac turers to submit to binding arbitration claims for compen sation owed for the use by one manufacturer of the data of

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another to support its federal pesticide registration. After describing Northern Pipelines holding in the language I have set forth above, supra, at 6, the Court stated that practical attention to substance rather than doctrinaire reliance on formal categories should inform application of Article III. Thomas, 473 U. S., at 587 (emphasis added). It indicated that Article IIIs requirements could not be determined by the identity of the parties alone, ibid., or by the private rights/public rights distinction, id., at 585586. And it upheld the arbitration provision of the statute. The Court pointed out that the right in question was created by a federal statute, it represent[s] a pragmatic solution to the difficult problem of spreading [certain] costs, and the statute does not preclude review of the arbitration proceeding by an Article III court. Id., at 589592. The Court concluded: Given the nature of the right at issue and the con cerns motivating the Legislature, we do not think this system threatens the independent role of the Judici ary in our constitutional scheme. Id., at 590. 2 Most recently, in Schor, the Court described in greater detail how this Court should analyze this kind of Article III question. The question at issue in Schor involved a delegation of authority to an agency to adjudicate a coun terclaim. A customer brought before the Commodity Futures Trading Commission (CFTC) a claim for repara tions against his commodity futures broker. The customer noted that his brokerage account showed that he owed the broker money, but he said that the brokers unlawful actions had produced that debit balance, and he sought damages. The broker brought a counterclaim seeking the money that the account showed the customer owed. This Court had to decide whether agency adjudication of such a

STERN v. MARSHALL BREYER, J., dissenting

counterclaim is consistent with Article III. In doing so, the Court expressly declined to adopt formalistic and unbending rules. Schor, 478 U. S., at 851. Rather, it weighed a number of factors, none of which has been deemed determinative, with an eye to the practical effect that the congressional action will have on the consti tutionally assigned role of the federal judiciary. Ibid. Those relevant factors include (1) the origins and im portance of the right to be adjudicated; (2) the extent to which the non-Article III forum exercises the range of ju risdiction and powers normally vested only in Article III courts; (3) the extent to which the delegation nonetheless reserves judicial power for exercise by Article III courts; (4) the presence or absence of consent to an initial adjudi cation before a non-Article III tribunal; and (5) the con cerns that drove Congress to depart from adjudication in an Article III court. Id., at 849, 851. The Court added that where private rights, rather than public rights are involved, the danger of encroach ing on the judicial powers is greater. Id., at 853854 (internal quotation marks omitted). Thus, while nonArticle III adjudication of private rights is not necessar ily unconstitutional, the Courts constitutional examina tion of such a scheme must be more searching. Ibid. Applying this analysis, the Court upheld the agencys authority to adjudicate the counterclaim. The Court con ceded that the adjudication might be of a kind tradi tionally decided by a court and that the rights at issue were private, not public. Id., at 853. But, the Court said, the CFTC deals only with a particularized area of law ; the decision to invoke the CFTC forum is left en tirely to the parties; Article III courts can review the agencys findings of fact under the same weight of the evidence standard sustained in Crowell and review its legal determinations . . . de novo; and the agencys coun terclaim jurisdiction was necessary to make workable a

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reparations procedure, which constitutes an important part of a congressionally enacted regulatory scheme. Id., at 852856. The Court concluded that for these and other reasons the magnitude of any intrusion on the Judicial Branch can only be termed de minimis. Id., at 856. II
A
This case law, as applied in Thomas and Schor, requires us to determine pragmatically whether a congressional delegation of adjudicatory authority to a non-Article III judge violates the separation-of-powers principles inherent in Article III. That is to say, we must determine through an examination of certain relevant factors whether that delegation constitutes a significant encroachment by the Legislative or Executive Branches of Government upon the realm of authority that Article III reserves for exercise by the Judicial Branch of Government. Those factors include (1) the nature of the claim to be adjudicated; (2) the nature of the non-Article III tribunal; (3) the extent to which Article III courts exercise control over the proceed ing; (4) the presence or absence of the parties consent; and (5) the nature and importance of the legislative purpose served by the grant of adjudicatory authority to a tribunal with judges who lack Article IIIs tenure and compensa tion protections. The presence of private rights does not automatically determine the outcome of the question but requires a more searching examination of the relevant factors. Schor, supra, at 854. Insofar as the majority would apply more formal stan dards, it simply disregards recent, controlling precedent. Thomas, supra, at 587 ([P]ractical attention to substance rather than doctrinaire reliance on formal categories should inform application of Article III); Schor, supra, at 851 ([T]he Court has declined to adopt formalistic and unbending rules for deciding Article III cases).

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STERN v. MARSHALL
BREYER, J., dissenting

B
Applying Schors approach here, I conclude that the delegation of adjudicatory authority before us is consti tutional. A grant of authority to a bankruptcy court to adjudicate compulsory counterclaims does not violate any constitutional separation-of-powers principle related to Article III. First, I concede that the nature of the claim to be adjudicated argues against my conclusion. Vickie Marshalls counterclaima kind of tort suitresembles a suit at the common law. Murrays Lessee, 18 How., at 284. Although not determinative of the question, see Schor, 478 U. S., at 853, a delegation of authority to a non-Article III judge to adjudicate a claim of that kind poses a heightened risk of encroachment on the Federal Judiciary, id., at 854. At the same time the significance of this factor is miti gated here by the fact that bankruptcy courts often decide claims that similarly resemble various common-law ac tions. Suppose, for example, that ownership of 40 acres of land in the bankruptcy debtors possession is disputed by a creditor. If that creditor brings a claim in the bankruptcy court, resolution of that dispute requires the bankruptcy court to apply the same state property law that would govern in a state court proceeding. This kind of dispute arises with regularity in bankruptcy proceedings. Of course, in this instance the state-law question is embedded in a debtors counterclaim, not a creditors claim. But the counterclaim is compulsory. It arises out of the transaction or occurrence that is the subject matter of the opposing partys claim. Fed. Rule Civ. Proc. 13(a); Fed. Rule Bkrtcy. Proc. 7013. Thus, resolution of the counterclaim will often turn on facts identical to, or at least related to, those at issue in a creditors claim that is undisputedly proper for the bankruptcy court to decide. Second, the nature of the non-Article III tribunal argues in favor of constitutionality. That is because the tribunal

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11

is made up of judges who enjoy considerable protection from improper political influence. Unlike the 1978 Act which provided for the appointment of bankruptcy judges by the President with the advice and consent of the Senate, 28 U. S. C. 152 (1976 ed., Supp. IV), current law provides that the federal courts of appeals appoint fed eral bankruptcy judges, 152(a)(1) (2006 ed.). Bankruptcy judges are removable by the circuit judicial counsel (made up of federal court of appeals and district court judges) and only for cause. 152(e). Their salaries are pegged to those of federal district court judges, 153(a), and the cost of their courthouses and other work-related expenses are paid by the Judiciary, 156. Thus, although Congress technically exercised its Article I power when it created bankruptcy courts, functionally, bankruptcy judges can be compared to magistrate judges, law clerks, and the Judi ciarys administrative officials, whose lack of Article III tenure and compensation protections do not endanger the independence of the Judicial Branch. Third, the control exercised by Article III judges over bankruptcy proceedings argues in favor of constitutional ity. Article III judges control and supervise the bank ruptcy courts determinationsat least to the same degree that Article III judges supervised the agencys determina tions in Crowell, if not more so. Any party may appeal those determinations to the federal district court, where the federal judge will review all determinations of fact for clear error and will review all determinations of law de novo. Fed. Rule Bkrtcy. Proc. 8013; 10 Collier on Bank ruptcy 8013.04 (16th ed. 2011). But for the here irrelevant matter of what Crowell considered to be special constitutional facts, the standard of review for factual findings here (clearly erroneous) is more stringent than the standard at issue in Crowell (whether the agencys factfinding was supported by evidence in the record). 285 U. S., at 48; see Dickinson v. Zurko, 527 U. S. 150,

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152, 153 (1999) (unsupported by substantial evidence more deferential than clearly erroneous (internal quota tion marks omitted)). And, as Crowell noted, there is no requirement that, in order to maintain the essential at tributes of the judicial power, all determinations of fact in constitutional courts shall be made by judges. 285 U. S., at 51. Moreover, in one important respect Article III judges maintain greater control over the bankruptcy court pro ceedings at issue here than they did over the relevant proceedings in any of the previous cases in which this Court has upheld a delegation of adjudicatory power. The District Court here may withdraw, in whole or in part, any case or proceeding referred [to the Bankruptcy Court] . . . on its own motion or on timely motion of any party, for cause shown. 28 U. S. C. 157(d); cf. Northern Pipeline, 458 U. S., at 80, n. 31 (plurality opinion) (contrasting pre-1978 law where power to withdraw the case from the [bankruptcy] referee gave district courts control over case with the unconstitutional 1978 statute, which provided no such district court authority). Fourth, the fact that the parties have consented to Bank ruptcy Court jurisdiction argues in favor of constitutional ity, and strongly so. Pierce Marshall, the counterclaim defendant, is not a stranger to the litigation, forced to appear in Bankruptcy Court against his will. Cf. id., at 91 (Rehnquist, J., concurring in judgment) (suit was litigated in Bankruptcy Court over [the defendants] objection). Rather, he appeared voluntarily in Bankruptcy Court as one of Vickie Marshalls creditors, seeking a favorable resolution of his claim against Vickie Marshall to the detriment of her other creditors. He need not have filed a claim, perhaps not even at the cost of bringing it in the future, for he says his claim is nondischargeable, in which case he could have litigated it in a state or federal court after distribution. See 11 U. S. C. 523(a)(6). Thus,

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13

Pierce Marshall likely had an alternative forum to the bankruptcy court in which to pursue [his] clai[m]. Granfinanciera, S. A. v. Nordberg, 492 U. S. 33, 59, n. 14 (1989). The Court has held, in a highly analogous context, that this type of consent argues strongly in favor of using ordi nary bankruptcy court proceedings. In Granfinanciera, the Court held that when a bankruptcy trustee seeks to void a transfer of assets from the debtor to an individual on the ground that the transfer to that individual consti tutes an unlawful preference, the question of whether the individual has a right to a jury trial depends upon whether the creditor has submitted a claim against the estate. Id., at 58. The following year, in Langenkamp v. Culp, 498 U. S. 42 (1990) (per curiam), the Court empha sized that when the individual files a claim against the estate, that individual has trigger[ed] the process of allowance and disallowance of claims, thereby subjecting himself to the bank ruptcy courts equitable power. If the creditor is met, in turn, with a preference action from the trustee, that action becomes part of the claims-allowance proc ess which is triable only in equity. In other words, the creditors claim and the ensuing preference action by the trustee become integral to the restructuring of the debtor-creditor relationship through the bankruptcy courts equity jurisdiction. Id., at 44 (quoting Granfinanciera, 492 U. S., at 58; citations omitted). As we have recognized, the jury trial question and the Article III question are highly analogous. See id., at 52 53. And to that extent, Granfinancieras and Langenkamps basic reasoning and conclusion apply here: Even when private rights are at issue, non-Article III adjudica tion may be appropriate when both parties consent. Cf. Northern Pipeline, supra, at 80, n. 31 (plurality opinion)

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(noting the importance of consent to bankruptcy juris diction). See also Schor, 478 U. S., at 849 ([A]bsence of consent to an initial adjudication before a non-Article III tribunal was relied on [in Northern Pipeline] as a signifi cant factor in determining that Article III forbade such adjudication). The majority argues that Pierce Marshall did not truly consent to bankruptcy jurisdiction, ante, at 2728, but filing a proof of claim was sufficient in Langenkamp and Granfinanciera, and there is no relevant distinction between the claims filed in those cases and the claim filed here. Fifth, the nature and importance of the legislative purpose served by the grant of adjudicatory authority to bankruptcy tribunals argues strongly in favor of constitu tionality. Congress delegation of adjudicatory powers over counterclaims asserted against bankruptcy claimants constitutes an important means of securing a constitu tionally authorized end. Article I, 8, of the Constitution explicitly grants Congress the Power To . . . establish . . . uniform Laws on the subject of Bankruptcies throughout the United States. James Madison wrote in the Federal ist Papers that the power of establishing uniform laws of bankruptcy is so intimately connected with the regulation of com merce, and will prevent so many frauds where the parties or their property may lie or be removed into different States, that the expediency of it seems not likely to be drawn into question. The Federalist No. 42, p. 271 (C. Rossiter ed. 1961). Congress established the first Bankruptcy Act in 1800. 2 Stat. 19. From the beginning, the core of federal bank ruptcy proceedings has been the restructuring of debtor creditor relations. Northern Pipeline, supra, at 71 (plu rality opinion). And, to be effective, a single tribunal must have broad authority to restructure those relations, hav

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15

ing jurisdiction of the parties to controversies brought before them, decid[ing] all matters in dispute, and decree[ing] complete relief. Katchen v. Landy, 382 U. S. 323, 335 (1966) (internal quotation marks omitted). The restructuring process requires a creditor to file a proof of claim in the bankruptcy court. 11 U. S. C. 501; Fed. Rule Bkrtcy. Proc. 3002(a). In doing so, the creditor triggers the process of allowance and disallowance of claims, thereby subjecting himself to the bankruptcy courts equitable power. Langenkamp, supra, at 44 (quot ing Granfinanciera, supra, at 58). By filing a proof of claim, the creditor agrees to the bankruptcy courts resolu tion of that claim, and if the creditor wins, the creditor will receive a share of the distribution of the bankruptcy es tate. When the bankruptcy estate has a related claim against that creditor, that counterclaim may offset the creditors claim, or even yield additional damages that augment the estate and may be distributed to the other creditors. The consequent importance to the total bankruptcy scheme of permitting the trustee in bankruptcy to assert counterclaims against claimants, and resolving those counterclaims in a bankruptcy court, is reflected in the fact that Congress included counterclaims by the estate against persons filing claims against the estate on its list of [c]ore proceedings. 28 U. S. C. 157(b)(2)(C). And it explains the difference, reflected in this Courts opinions, between a claimants and a nonclaimants constitutional right to a jury trial. Compare Granfinanciera, supra, at 5859 (Because petitioners . . . have not filed claims against the estate they retain their Seventh Amendment right to a trial by jury), with Langenkamp, supra, at 45 (Respondents filed claims against the bankruptcy estate and [c]onsequently, they were not entitled to a jury trial). Consequently a bankruptcy courts determination of

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such matters has more than some bearing on a bank ruptcy case. Ante, at 34 (emphasis deleted). It plays a critical role in Congress constitutionally based effort to create an efficient, effective federal bankruptcy system. At the least, that is what Congress concluded. We owe deference to that determination, which shows the absence of any legislative or executive motive, intent, purpose, or desire to encroach upon areas that Article III reserves to judges to whom it grants tenure and compensation protections. Considering these factors together, I conclude that, as in Schor, the magnitude of any intrusion on the Judicial Branch can only be termed de minimis. 478 U. S., at 856. I would similarly find the statute before us constitutional. III The majority predicts that as a practical matter to days decision does not change all that much. Ante, at 3637. But I doubt that is so. Consider a typical case: A tenant files for bankruptcy. The landlord files a claim for unpaid rent. The tenant asserts a counterclaim for damages suffered by the landlords (1) failing to fulfill his obligations as lessor, and (2) improperly recovering pos session of the premises by misrepresenting the facts in housing court. (These are close to the facts presented in In re Beugen, 81 B. R. 994 (Bkrtcy. Ct. ND Cal. 1988).) This state-law counterclaim does not ste[m] from the bankruptcy itself, ante, at 34, it would not necessarily be resolved in the claims allowance process, ibid., and it would require the debtor to prove damages suffered by the lessors failures, the extent to which the landlords repre sentations to the housing court were untrue, and damages suffered by improper recovery of possession of the prem ises, cf. ante, at 33-33. Thus, under the majoritys holding, the federal district judge, not the bankruptcy judge, would have to hear and resolve the counterclaim.

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17

Why is that a problem? Because these types of disputes arise in bankruptcy court with some frequency. See, e.g., In re CBI Holding Co., 529 F. 3d 432 (CA2 2008) (state law claims and counterclaims); In re Winstar Communications, Inc., 348 B. R. 234 (Bkrtcy. Ct. Del. 2005) (same); In re Ascher, 128 B. R. 639 (Bkrtcy. Ct. ND Ill. 1991) (same); In re Sun West Distributors, Inc., 69 B. R. 861 (Bkrtcy. Ct. SD Cal. 1987) (same). Because the volume of bankruptcy cases is staggering, involving almost 1.6 mil lion filings last year, compared to a federal district court docket of around 280,000 civil cases and 78,000 criminal cases. Administrative Office of the United States Courts, J. Duff, Judicial Business of the United States Courts: Annual Report of the Director 14 (2010). Because unlike the related non-core state law claims that bankruptcy courts must abstain from hearing, see ante, at 36, compul sory counterclaims involve the same factual disputes as the claims that may be finally adjudicated by the bank ruptcy courts. Because under these circumstances, a constitutionally required game of jurisdictional ping-pong between courts would lead to inefficiency, increased cost, delay, and needless additional suffering among those faced with bankruptcy. For these reasons, with respect, I dissent.

EXHIBIT B

United States Court of Appeals

FOR THE DISTRICT OF COLUMBIA CIRCUIT

Argued April 5, 2011 No. 10-5245

Decided June 24, 2011

AMERICAN NATIONAL INSURANCE COMPANY AND AMERICAN NATIONAL PROPERTY AND CASUALTY COMPANY, APPELLANTS FARM FAMILY LIFE INSURANCE COMPANY AND FARM FAMILY CASUALTY INSURANCE COMPANY, APPELLANTS NATIONAL WESTERN LIFE INSURANCE COMPANY, APPELLANT v. FEDERAL DEPOSIT INSURANCE CORPORATION, AS RECEIVER FOR WASHINGTON MUTUAL BANK, HENDERSON, NEVADA, ET AL., APPELLEES

Appeal from the United States District Court for the District of Columbia (No. 1:09-cv-01743)

Gregory Stuart Smith argued the cause for appellants. With him on the briefs were Andrew J. Mytelka and James M. Roquemore.

2 Joseph Brooks, Counsel, Federal Deposit Insurance Corporation, argued the cause for appellee Federal Deposit Insurance Corporation, As Receiver For Washington Mutual Bank. With him on the brief were Colleen J. Boles, Assistant General Counsel, Lawrence H. Richmond, Senior Counsel, and John J. Clarke Jr. R. Craig Lawrence, Assistant U.S. Attorney, entered an appearance. Robert A. Sacks argued the cause for appellees JPMorgan Chase & Co., et al. On the brief were Bruce E. Clark and Stacey R. Friedman. Before: SENTELLE, Chief Judge, TATEL, Circuit Judge, and RANDOLPH, Senior Circuit Judge. Opinion for the Court filed by Chief Judge SENTELLE. SENTELLE, Chief Judge: Bondholders of the failed Washington Mutual Bank allege that JPMorgan Chase, through a series of improper acts, pressured the federal government to seize Washington Mutual Bank and then sell to it the banks most valuable assets, without any accompanying liabilities, for a drastically undervalued price. The bondholders asserted three Texas state law claims in Texas state court, but, after the Federal Deposit Insurance Corporation intervened in the lawsuit, the case was removed to federal district court. Finding that 12 U.S.C. 1821(d)(13)(D)(ii) jurisdictionally barred appellants from obtaining judicial review of their claims because they had not exhausted their administrative remedies under the Financial Institutions Reform, Recovery and Enforcement Act of 1989, the district court dismissed appellants complaint. Because we hold that appellants suit falls outside the scope of the jurisdictional bar of 1821(d)(13)(D), we reverse the decision of the district court and remand for further proceedings.

3 I. On review of a district courts dismissal of a complaint for lack of subject matter jurisdiction, we make legal determinations de novo. Natl Air Traffic Controllers Assn, AFL-CIO v. Fed. Serv. Impasses Panel, 606 F.3d 780, 786 (D.C. Cir. 2010); see FED. R. CIV. P. 12(b)(1). We assume the truth of all material factual allegations in the complaint and construe the complaint liberally, granting plaintiff the benefit of all inferences that can be derived from the facts alleged, Thomas v. Principi, 394 F.3d 970, 972 (D.C. Cir. 2005) (quoting Barr v. Clinton, 370 F.3d 1196, 1199 (D.C. Cir. 2004)); see also Talenti v. Clinton, 102 F.3d 573, 57475 (D.C. Cir. 1996), and upon such facts determine jurisdictional questions. Applying that standard to the complaint before us, we assume the following facts: Prior to September 2008, Washington Mutual Bank (WMB), a wholly owned subsidiary of Washington Mutual, Inc. (WMI), was the nations largest savings and loan association. Compl. 33. However, on September 25, 2008, the Office of Thrift Supervision (OTS) seized WMB and placed it in receivership with the Federal Deposit Insurance Corporation (FDIC). Id. 64. On the same day, the FDIC signed a purchase and assumption agreement with JPMorgan Chase & Co. and its wholly owned subsidiary JPMorgan Chase Bank (collectively, JPMC), in which it agreed to sell to JPMC for $1.9 billion the most valuable assets of [WMB] without any of [its] liabilities, including its obligations to unsecured debt holders and litigation risk. Id. 67. WMBs bond contracts remained with the FDIC-as-receiver, which now cannot meet its obligations under the contracts. Id. 71. Left without its primary income-producing asset, WMI, which filed for bankruptcy immediately following the sale of WMBs assets to JPMC, became similarly unable to service its bond contracts, and its common stock was rendered worthless. Id. 70.

4 Again assuming the truth of the allegations in the complaint, the dramatic fall of WMB and WMI (collectively, Washington Mutual) was engineered by JPMC. JPMC engaged in an elaborate scheme designed to improperly and illegally take advantage of the financial difficulties of [WMI] and strip away valuable assets of Washington Mutual without properly compensating the company or its stakeholders. Id. 20, 30. To carry out this scheme, JPMC first strategically plac[ed] key personnel [at Washington Mutual] to gather information regarding Washington Mutuals strategic business decisions and financial health, id. 25, and misus[ed] access to government regulators to gain non-public information about Washington Mutual, id. 32. Further, when Washington Mutual sought to sell itself, JPMC misrepresented to Washington Mutual that it would negotiate in good faith for the purchase of the company and engaged in sham negotiations with Washington Mutual to gain access to Washington Mutuals confidential financial information. Id. 5354. Then, despite signing a confidentiality agreement with Washington Mutual, JPMC leaked harmful information to news media, government regulators, and investors, in an effort to distort the market and regulatory perception of Washington Mutuals financial health, id. 46, 54, 58. JPMC also applied direct pressure on the FDIC to effectuate its scheme: It exerted improper influence over government regulators to prematurely seize Washington Mutual . . . and to sell assets of Washington Mutual without an adequate or fair bidding process, id. 32. Indeed, prior to the seizure of WMB, JPMC had already negotiated an agreement with the FDIC that, anticipating the seizure of WMB, set forth the requirements for a bid to purchase assets of WMB-in-receivership and provided for the transfer of WMBs valuable assets by the FDIC-asreceiver to JPMC, at a large profit to JPMC. Id. 47, 58, 62.

5 JPMC used its inside knowledge of Washington Mutual to create a bid for WMB that would be profitable to JPMC. Id. 58. When, just prior to the seizure of WMB, the FDIC sought official bids for WMB, JPMC submitted its prearranged bid, id. 58, 6263, and the FDIC accepted it, id. 64. In quick succession, OTS then seized WMB and JPMC signed a purchase and sale agreement with the FDIC for the below-market sale of WMBs cherry-picked assets, stripped of liabilities. Id. 43, 64, 67. On February 16, 2009, several insurance companies that hold bonds of WMB and bonds and stocks of WMI filed suit against JPMC in the District Court of Texas, Galveston County, alleging that JPMCs execution of its scheme had injured the value of their stocks and bonds. The insurance companies asserted three Texas state law claims: tortious interference with existing contract, id. 8893, breach of confidentiality agreement, id. 9499, and unjust enrichment, id. 10003. After JPMC filed its answer, the FDIC intervened in the lawsuit and thereby became a party to the action. See TEX. R. CIV. P. 60 (Any party may intervene by filing a pleading, subject to being stricken out by the court for sufficient cause on the motion of any party.). The FDIC then removed the action to the U.S. District Court for the Southern District of Texas, see 12 U.S.C. 1819(b)(2)(A) ([A]ll suits of a civil nature at common law or in equity to which the [FDIC], in any capacity, is a party shall be deemed to arise under the laws of the United States.); 28 U.S.C. 1331 (The district courts shall have original jurisdiction of all civil actions arising under the Constitution, laws, or treaties of the United States.), and successfully moved for a transfer of venue to the U.S. District Court for the District of Columbia.

6 Before the District Court for the District of Columbia, the FDIC and JPMC both filed motions to dismiss, and plaintiffs filed a motion to remand to Texas state court. Prior to disposition of these motions, plaintiffs voluntarily dismissed with prejudice all claims premised upon harm to their WMI bonds or stock. As a result, four original plaintiffs lost their stake in the suit, and all remaining claims alleged damage solely to WMB bonds. On April 13, 2010, the district court issued a Memorandum Opinion and Order granting the FDIC and JPMCs motions to dismiss and denying plaintiffs motion to remand, holding that it lacked jurisdiction over plaintiffs suit. Am. Natl. Ins. Co. v. JPMorgan Chase & Co., 705 F. Supp. 2d 17 (D.D.C. 2010). Plaintiffs timely moved to alter or amend the judgment and requested leave to file an amended complaint. The district court denied their motion on July 19, 2010. Plaintiffs appeal the district courts April 13, 2010, and July 19, 2010, orders. II. The district court held that the Financial Institutions Reform, Recovery and Enforcement Act of 1989 (FIRREA or the Act) barred it from exercising jurisdiction to hear appellants claims. It held that because appellants injuries depended on the FDICs sale of Washington Mutuals assets to JPMC, 1821(d)(13)(D)(ii) of FIRREA required it to dismiss appellants complaint. Id. at 21. Passed to enable the FDIC . . . to expeditiously wind up the affairs of literally hundreds of failed financial institutions throughout the country, Freeman v. FDIC, 56 F.3d 1394, 1398 (D.C. Cir. 1995), FIRREA creates an administrative claims process for banks in receivership with the FDIC. 12 U.S.C. 1821(d)(3)(13). The Act requires the FDIC to give notice to

7 the failed banks creditors to file claims against the bank, 1821(d)(3)(b), and authorizes the FDIC to receive and then disallow or allow and pay such claims, 1821(d)(5), (10). FIRREA allows claimants either to obtain administrative review, followed by judicial review, of any [disallowed] claim against a depository institution for which the [FDIC] is receiver, or to file suit for de novo consideration of the disallowed claim in a district court. 1821(d)(6)(7). It also prevents a court from exercising jurisdiction, [e]xcept as otherwise provided in the Act, over: (i) any claim or action for payment from, or any action seeking a determination of rights with respect to, the assets of any depository institution for which the [FDIC] has been appointed receiver, including assets which the [FDIC] may acquire from itself as such receiver; or (ii) any claim relating to any act or omission of such institution or the [FDIC] as receiver. 1821(d)(13)(D). Noting that 1821(d)(6) is [t]he only clause of the subsection that otherwise provide[s] jurisdiction, Auction Co. of Am. v. FDIC, 141 F.3d 1198, 1200 (D.C. Cir. 1998), we have described 1821(d)(6) and 1821(d)(13)(D) as setting forth a standard exhaustion requirement, id. Section 1821(d)(6)(A) routes claims through an administrative review process, and [ 1821](d)(13)(D) withholds judicial review unless and until claims are so routed. Id.; see also Freeman, 56 F.3d at 1400 (Section 1821(d)(13)(D) thus acts as a jurisdictional bar to claims or actions by parties who have not exhausted their 1821(d) administrative remedies.).

8 The question we must answer, the same as that addressed by the district court, is whether 1821(d)(13)(D) applies to and bars the suit brought by appellants. The FDIC and JPMC argue that subsection (ii) of 1821(d)(13)(D) bars appellants claims, in the absence of administrative exhaustion under 1821(d)(6), because they relat[e] to an act of the FDIC-as-receiver: the FDICs sale of Washington Mutuals assets to JPMC. Alternatively, they contend that subsection (i) of the same provision withholds jurisdiction without administrative exhaustion because appellants claims are for payment from, or . . . seek[] a determination of rights with respect to, the assets of Washington Mutual. We disagree. First, subsection (ii) of 1821(d)(13)(D) bars only claims that relate to an act or omission of the failed bank of the FDIC-as-receiver, and appellants suit is simply not a claim under FIRREA. In FIRREA, the word claim is a term-of-art that refers only to claims that are resolvable through the FIRREA administrative process, and the only claims that are resolvable through the administrative process are claims against a depository institution for which the FDIC is receiver. Because appellants suit is against a third-party bank for its own wrongdoing, not against the depository institution for which the FDIC is receiver (i.e., Washington Mutual), their suit is not a claim within the meaning of the Act and thus is not barred by subsection (ii). Second, although subsection (i) of 1821(d)(13)(D) reaches more broadly than (ii), encompassing not just claims but also action[s] for payment from, or . . . seeking a determination of rights with respect to, the assets of any depository institution for which the [FDIC] has been appointed receiver, its plain language excludes the suit brought by appellants. Appellants suit seeks relief from JPMC for its own conduct; the mere fact that JPMC now owns assets that Washington Mutual once

9 owned does not render this suit one against or seeking a determination of rights with respect to those assets. See Rosa v. Resolution Trust Corp., 938 F.2d 383, 394 (3d Cir. 1991) (holding that claims for damages against assuming bank for its own acts did not fall within jurisdictional bar of subsection (i) because they seek neither payment from nor a determination of rights with respect to the assets of [the bank-in-receivership] but from the assuming bank). An examination of FIRREA as a whole demonstrates that claim is a term-of-art that encompasses only demands that are resolvable through the administrative process set out by FIRREA. The Act creates a comprehensive administrative mechanism simply for the processing and resolution of claims. Indeed, it builds the components of the administrative mechanism by defining how claims are to be treated at each stage of the administrative process. For example, after establishing the [a]uthority of [the FDIC-as-receiver] to determine claims, 1821(d)(3), and the FDICs [r]ulemaking authority relating to determination of claims, 1821(d)(4), FIRREA sets forth the [p]rocedures for determination of claims, 1821(d)(5), the requirements for agency review or judicial determination of claims, 1821(d)(6), the content of administrative [r]eview of claims, 1821(d)(7), the availability of [e]xpedited determination of claims, 1821(d)(8), the exclusion of certain [a]greement[s] as [forming the] basis of claim[s], 1821(d)(9), and the authority of the FDIC to make [p]ayment of claims, 1821(d)(10). It borders on tautology, therefore, that claims are necessarily demands that come within the scope of FIRREAs administrative process. Stated another way, demands unresolvable through the process are not claims, as the term is used in the Act. See Homeland Stores, Inc. v. Resolution Trust Corp., 17 F.3d 1269, 1274 (10th Cir. 1994) (As a practical matter of statutory construction, . . . we proceed on the

10 assumption that Congress intended the claims barred by 1821(d)(13)(D) to parallel those contemplated under FIRREAs administrative claims process laid out in the greater part of 1821(d).); Rosa, 938 F.2d at 394 (Whatever its breadth, we do not believe that clause (ii) [of 1821(d)(13)(D)] encompasses claims that are not susceptible of resolution through the claims procedure.). Several factors convince us that only claims against depository institutions for which the FDIC has been appointed receiver can be processed by the administrative system set forth in FIRREA. First, 1821(d)(5)(A)(i), entitled Procedures for determination of claims: Determination period: In general, provides that [b]efore the end of the 180-day period beginning on the date any claim against a depository institution is filed with the [FDIC] as receiver, the [FDIC] shall determine whether to allow or disallow the claim (emphasis added). FIRREA does not contain any other deadline for FDIC action for other types of claims. No other kinds of claims are ever specified in the provisions setting forth the administrative claims process. Rather, 1821(d)(6), which establishes the availability of agency review or judicial determination of claims, similarly governs only claim[s] against a depository institution for which the [FDIC] is receiver, and subsequent claims process provisions refer simply to claims. Furthermore, FIRREA authorizes the FDIC to allow and pay claims, see 1821(d)(3)(A), (5)(B), (10)(A)(B), and requires the FDIC to distribute amounts realized from the liquidation or other resolution of any insured depository institution in payment of claims, see 1821(d)(11)(A). That such relief would be categorically inappropriate in cases not against a depository institution for which the FDIC is receiver strengthens our conviction that FIRREAs administrative claims process is available only to claims against depository institutions.

11 The FDIC and JPMC argue that the jurisdictional bar of 1821(d)(13)(D) demonstrates that claims other than those against a depository institution can go through the administrative claims process. They claim that the broad language used in that subsection demonstrates that the claims process was intended to be more widely available. To be sure, we have construed 1821(d)(6)s claim against a depository institution language broadly in light of 1821(d)(13)(D)(i) and (ii). See Freeman v. FDIC, 56 F.3d 1394, 140001 (D.C. Cir. 1995); OPEIU, Local 2 v. FDIC, 962 F.2d 63, 67 (D.C. Cir. 1992). Indeed, to have done otherwise would mean either ignoring Congresss use of such broad language in 1821(d)(13)(D) or transforming FIRREA from an administrative exhaustion scheme into a grant of immunity, a result troubling from a constitutional perspective and certainly not the goal of FIRREA, Auction Co. v. FDIC, 141 F.3d 1198, 1200 (D.C. Cir. 1998); see also id. (Congress did not intend FIRREAs claims process to immunize the receiver, but rather wanted to require exhaustion of the receivership claims before going to court. (quoting Hudson United Bank v. Chase Manhattan Bank of Conn., 43 F.3d 843, 84849 (3d Cir. 1994))). We, however, have only construed the claims process broadly where either the failed depository institution or the FDIC-as-receiver might be held legally responsible to pay or otherwise resolve the asserted claim. Where, as here, neither the failed depository institution nor the FDIC-as-receiver bears any legal responsibility for claimants injuries, the claims process offers only a pointless bureaucratic exercise. See supra 1011. And we doubt Congress intended to force claimants into a process incapable of resolving their claims. The FDIC and JPMC also assert that the principle motivating the Sixth Circuits decision in Village of Oakwood v. State Bank & Trust Co., 539 F.3d 373 (6th Cir. 2008), bars this lawsuit. In Village of Oakwood, depositors of a failed bank sued

12 another bank (the assuming bank) that had purchased various assets and liabilities of the failed bank from the FDIC-asreceiver. 539 F.3d at 376. Although plaintiffs in that case named only the assuming bank as a defendant in the action, their complaint alleged that the FDIC, not the assuming bank, had breached its fiduciary duty. Id. One of the four claims asserted against the third-party bank was aiding and abetting the FDICs breach of its fiduciary duty. Id. Holding that plaintiffs claims fell within the jurisdictional bar of FIRREA, the court of appeals explained that permit[ting] claimants to avoid [the] provisions of [ 1821](d)(6) and [ 1821](d)(13) by bringing claims against the assuming bank . . . would encourage the very litigation that FIRREA aimed to avoid. Id. at 386 (quoting Brady Dev. Co. v. Resolution Trust Corp., 14 F.3d 998, 100203 (4th Cir. 1994)) (alterations in original). In other words, the court of appeals rightly noted that plaintiffs cannot circumvent FIRREAs jurisdictional bar by drafting their complaint strategically. Where a claim is functionally, albeit not formally, against a depository institution for which the FDIC is receiver, it is a claim within the meaning of FIRREAs administrative claims process. Thus because the Village of Oakwood plaintiffs suit was functionally a claim against the FDIC-as-receiver, which is a claim against the depository institution for which the FDIC is receiver, see OMelveny & Myers v. FDIC, 512 U.S. 79, 86 (1994) ([T]he FDIC as receiver steps into the shoes of the failed [bank]) (internal quotations marks omitted); 1821(d)(2)(A) ([T]he [FDIC] shall, . . . by operation of law, succeed to all rights, titles, powers, and privileges of the insured depository institution.), the court of appeals correctly held the action jurisdictionally barred. The suit appellants press, however, is clearly distinguishable from that in Village of Oakwood. As just described, in Village of Oakwood the wrongdoing alleged was perpetrated by the FDIC-as-receiver, which the assuming bank

13 allegedly aided and abetted. Here, in contrast, appellants allege that JPMC, not the FDIC-as-receiver or Washington Mutual, itself committed the tortious acts for which they claim relief. Although the complaint alleges that the FDIC engaged in conduct without which JPMCs tortious acts would not have caused injury to appellants, that actions by the FDIC form one link in the causal chain connecting JPMCs wrongdoing with appellants injuries is insufficient to transform the complaint into one against the FDIC. The FDIC and JPMC maintain that this case resembles Village of Oakwood because appellants complaint is similarly premised upon wrongdoing by the FDIC: They argue that the complaint alleges an agreement between JPMC and the FDIC to commit the torts alleged. However, even if a suit against only a third party that alleged a conspiracy between the FDIC and the third party to commit the acts forming the basis of the claim were properly characterized as a suit against a depository institutiona question we do not reachthat is not the case here. Although appellants complaint may be susceptible to the interpretation urged by the FDIC and JPMC, the procedural posture of this case requires us to construe the complaint liberally, in the light most favorable to appellants. Thomas v. Principi, 394 F.3d 970, 972 (D.C. Cir. 2005). Doing so, we read the complaint to allege that JPMC alone committed the wrongdoing for which appellants sue and find no agreement between JPMC and the FDIC. We therefore hold that 1821(d)(13)(D) does not withdraw jurisdiction from the judiciary to entertain appellants lawsuit because their complaint neither asserts a claim under FIRREA nor constitutes an action for payment from, or seeking a determination with respect to, the assets of a depository institution for which the FDIC is receiver.

14 III. The FDIC and JPMC argue that we should uphold the district courts dismissal of appellants complaint on an alternative jurisdictional ground. They contend that appellants lacked standing to bring their claims because the claims are for generalized harm to Washington Mutual and thus belong to the FDIC-as-receiver. See 12 U.S.C. 1821(d)(2)(A) (The [FDIC] shall, as conservator or receiver, and by operation of law, succeed to all rights, titles, powers, and privileges of the insured depository institution, and of any stockholder, member, accountholder, depositor, officer, or director of such institution with respect to the institution and the assets of the institution.). Perhaps it is true that if either the exclusive right to bring appellants claims or the right to preclude appellants from bringing those claims rested with Washington Mutual, that right was passed to the FDIC-as-receiver by operation of 1821(d)(2)(A) and appellants may not assert those claims here. However, the question whether Washington Mutual had any such right was not decided by the district court. This question is complex and involves several layers of inquiry: Are the rights, titles, powers, and privileges inherited by the FDIC-asreceiver from Washington Mutual determined exclusively by reference to state law or does federal law play a role? If we should look to state law, which states law governs the claims asserted in this case? What is the substance of the applicable body of law? And, most basically, is the ownership of the claims presented below a jurisdictional question, as the FDIC and JPMC suggest, or is it a question of whether appellants have a cause of action? We need not answer these knotty questions and instead remand to the district court to consider them in the first instance.

15 Because we conclude that 1821(d)(13)(D) did not bar the district court from hearing appellants suit and remand to the district court for further proceedings, we do not reach appellants alternative arguments regarding the availability of subject matter jurisdiction or appellants contention that the district court erred in denying its motion to alter or amend the judgment and for leave to file an amended complaint. IV. For the reasons set forth above, we reverse the order of the district court and remand for proceedings consistent with this opinion.

Exhibit C

Claims/Actions Proposed To Be Resolved Or Released Pursuant To The Settlement

{D0207804.1 }

WMI ACTION (currently Pending in District Court in District of Columbia)13 WMI CLAIMS Claim/Matter Parties (P = Plaintiff; D = Defendant) P: WMI; WMI Investment D: FDIC P: WMI; WMI Investment D: FDIC Description of Claim/Matter

Determination of Debtors Proof of Claim in WMB Receivership Dissipation of WMBs Assets

Pursuant to 12 U.S.C. 1821(d)(6)(A), Debtors seek review and determination of the validity of their claims against the FDIC Receivership. Debtors allege the FDIC breached its statutory duty to maximize distribution (12 U.S.C. 1821(d)(13)(E)(i)) of the Debtors assets by entering into the Purchase and Assumption (P&A) Agreement with JPMC, rather than liquidating WMBs assets. Based on the above, the FDICs wasting of WMBs assets constituted a taking of Debtors property without just compensation pursuant to the Fifth Amendment of the United States Constitution. Because the FDIC failed to compensate Plaintiffs for the property taken into the Receivership (property that belonged to Debtors rather than WMB), the FDIC converted Plaintiffs property, which is actionable under the Federal Tort Claims Act (28 U.S.C. 1346(b), 2671-80). Plaintiffs seek a declaratory judgment finding the FDIC-Receivers failure to consider Plaintiffs Proof of Claim (and subsequent disallowance of that POC) to be a violation of the FDICs statutory duties, and, by extension, the decision the FDIC made (to disallow the claim) void.

Fifth Amendment Taking of Debtors Property Without Just Compensation

P: WMI; WMI Investment D: FDIC

Conversion of Debtors P: WMI; WMI Investment Property D: FDIC

Declaration that the FDIC-Receivers Disallowance of Debtors Claim in the WMB Receivership is Void

P: WMI; WMI Investment D: FDIC

13

Washington Mut., Inc. v. FDIC, Adv. Proc. No. 09-00533 (RMC) (D.D.C. Oct. 13, 2009) (a/k/a DC Action).

{D0207804.1 }

FDIC COUNTERCLAIMS Claim/Matter Parties (P = Plaintiff; D = Defendant) P: FDIC D: WMI; WMI Investment Description of Claim/Matter

Ownership of Tax Refunds Declaratory Relief

All tax refunds either received or due to WMI are due and owing in substantial part to WMB. Pursuant to 28 U.S.C. 2201 and Fed. R. Civ. P. 57, the FDIC requests a declaratory judgment finding that any refunds received by, or now due to, WMI be held in trust for WMB. Based on above facts, the FDIC requests that tax-related funds now held by WMI that for which WMB is the rightful owner be turned over to WMB. The FDIC seeks a declaratory judgment finding WMB is the rightful owner of the TPS, or, in the alternative, that the FDICReceiver or JPMC, as its assignee, may record the transfer of ownership of the TPS in the ownership registers of the SPE subsidiaries of WMPF. The Assignment Agreement, under which WMI purportedly transferred the TPS to WMB, is governed by Washington State Law. In the alternative, the FDIC seeks an order requiring WMI to turnover the TPS to the FDIC-Receiver, or pay a sum to the FDIC equal to the full amount of any liquidation preference accompanying the TPS. The FDIC seeks payment of any intercompany monies owed to WMB.

Recovery of Tax Related Assets

P: FDIC D: WMI; WMI Investment

Trust Preferred Securities Declaratory Relief

P: FDIC D: WMI; WMI Investment

Request for Turnover or Compensation for Trust Preferred Securities

P: FDIC D: WMI; WMI Investment

Recovery of Intercompany Amounts

P: FDIC D: WMI; WMI Investment

{D0207804.1 }

Deposit Accounts

P: FDIC D: WMI; WMI Investment

The FDIC alleges substantial WMB assets exist in the co-mingled Deposit Accounts and requests an order requiring the turnover of those funds to the FDIC. WMIs alleged failure to maintain its capital obligations harmed WMB in an unliquidated amount. The FDIC demands judgment against WMI for failing to maintain its capital obligations, and requests damages in an amount to be determined at trial. The FDIC asserts fraudulent transfer claims for the $15 billion in cash dividend payments WMI made from September 2003 to September 2008. To the extent WMI recovers anything through the litigation that preceded the filing of its petition, the FDIC claims that it is entitled to the proceeds due WMB. To the extent covered losses occurred under the Insurance Policies held by WMI and WMB (for which WMB was, at least in part, claimed to be a named or intended beneficiary), FDIC demands payments for covered losses suffered by WMB.

Damages for Failure to Comply with Capital Maintenance Obligations

P: FDIC D: WMI; WMI Investment

Unlawful dividends

P: FDIC D: WMI; WMI Investment

Goodwill Litigation

P: FDIC D: WMI; WMI Investment

Insurance Proceeds

P: FDIC D: WMI; WMI Investment

{D0207804.1 }

JPMC ACTION (Currently Pending In Bankruptcy Court)14 JPMC CLAIMS Claim/Matter Parties (P = Plaintiff; D = Defendant) P: JPMC Ds: WMI; WMI Investment Description of Claim/Matter

Ownership of Trust Securities Request for Declaratory Relief

JPMC seeks declaratory judgment finding Debtors must proceed with any claim to the TPS via its District Court action (the DC Action). Alternatively, JPMC requests declaratory judgment finding JPMC to be the rightful owner of the TPS by virtue of the Purchase and Assumption Agreement [entered into pursuant to 12 U.S.C. 1823(c)(2)(A)]. By entering into the Contribution Agreement, WMI is claimed to have assumed a direct obligation to WMB to immediately contribute and transfer the TPS to WMB following a Conditional Exchange. Alternatively, it is claimed that WMB was the third-party beneficiary of WMIs commitment to the OTS and the FDIC under the Contribution Agreement. It is also claimed that WMI assumed a direct obligation to WMB pursuant to the Assignment Agreement (governed by the laws of the State of Washington). To the extent the Court does not enter a judgment declaring JPMC the rightful owner of the TPS, JPMC requests the creation of a constructive trust, alleging the Debtors would be unjustly enriched on

Trust Securities Breach of Contract

P: JPMC Ds: WMI; WMI Investment

Trust Securities Unjust Enrichment

P: JPMC Ds: WMI; WMI Investment

14

JPMorgan Chase Bank, N.A. v. Washington Mut., Inc., Adv. Proc. No. 09-50551 (MFW) (Bankr. D. Del. March 24, 2009).

{D0207804.1 }

account of their treatment of the TPS as core capital, which allowed the Debtors to satisfy regulatory requirements and satisfy higher capital ratios. Tax Refunds Request for Declaratory Relief P: JPMC Ds: WMI; WMI Investment JPMC seeks declaratory relief that it, through its acquisition of WMB, is the rightful owner of any tax refunds inuring to WMB and its subsidiaries. WaMU filedand JPMC claims ownership of the refunds forreturns in AK, AZ, CA, CO, HI, ID, IL, IN, KS, ME, MI, MN, MT, NE, NH, NM, OK, OR, TN, TX, UT, VT, as well as Federal returns JPMC seeks, in the alternative to its request for declaratory relief, the imposition of a constructive trust, into which would flow any proceeds from the tax refunds. JPMC disputes the deposit liability that WMI claims it owns on account of receiving a $3.7 billion Book Entry Transfer and seeks declaratory judgment finding that (a) WMI must proceed with its deposit liability action through the DC Action or (b) JPMC is not liable. To the extent the Court finds that JPMC has any liabilities to the Debtors, including deposit liability, JPMC alleges that it should be entitled to (a) recoup and/or setoff all such amounts under the MBA; (b) impose a constructive trust over the funds of Debtors it possesses; or (c) enforce any security interest determined to apply to the Debtors funds. JPMC seeks to interplead any remaining funds that constitute deposit liability

Tax Refunds Unjust Enrichment

P: JPMC Ds: WMI; WMI Investment

Disputed Funds Declaratory Judgment

P: JPMC Ds: WMI; WMI Investment

Disputed Funds Setoff, Recoupment, & Other Equitable Remedies

P: JPMC Ds: WMI; WMI Investment

Disputed Funds Interpleader

P: JPMC Ds: WMI; WMI Investment; FDIC P: JPMC Ds: WMI; WMI

Goodwill Litigation Declaratory Judgment

JPMC seeks a declaratory judgment finding it to be the owner of the beneficial interests in all judgment monies paid by and through

{D0207804.1 }

Investment

Anchor Savings Bank and/or American Savings Bank litigation. JPMC seeks declaratory judgment that it is the rightful owner of WMB and WMIs 16 Legacy Rabbi Trusts valued at approximately $550 million. In the event the Court does not provide JPMC with its requested declaratory relief, JPMC requests that the Court impose a constructive trust consisting of the value of the Legacy Rabbi Trusts. JPMC seeks to assume the Pension and 401(k) Plans in their entirety. Debtors maintain that (a) the pensions must be terminated; (b) that JPMC must pay WMI an amount reflecting a purported excess funding; and (c) pay for associated litigation costs. JPMC seeks a declaratory judgment forcing WMI to pursue any ownership claims in the DC Action and, in the alternative, a declaratory judgment finding JPMC may assume the Pensions without paying excess funding. In the event the Court does not provide JPMC with its requested declaratory relief, JPMC requests that the Court impose a post-petition constructive trust in the full amount necessary to compensate JPMC for the amounts it contributed to the 401(k) Plans. JPMC seeks declaratory judgment finding WMI must pursue any claim to ownership of the Bank Owned Life Insurance (BOLI) and Split Dollar Life Insurance Policies in the DC Action, or, alternatively, that JPMC is the rightful owner of the BOLI and Split Dollar Life Insurance Policies issued to the Debtors by various

Rabbi Trusts Declaratory Judgment

P: JPMC Ds: WMI; WMI Investment

Rabbi Trusts Unjust Enrichment

P: JPMC Ds: WMI; WMI Investment

Pension and 401(k) Plans Declaratory Judgment

P: JPMC Ds: WMI; WMI Investment

Pension and 401(k) Plans Declaratory Judgment

P: JPMC Ds: WMI; WMI Investment

Bank Owned Life Insurance Policies Declaratory Judgment

P: JPMC Ds: WMI; WMI Investment

{D0207804.1 }

insurance companies. Bank Owned Life Insurance Policies Unjust Enrichment P: JPMC Ds: WMI; WMI Investment In the event the Court does not provide JPMC with its requested declaratory relief, JPMC requests that the Court impose a constructive trust consisting of the value of the BOLI and Split Dollar Policies. JPMC seeks declaratory judgment finding the Visa Shares are assets purchased by JPMC, or, in the alternative, if the Court finds the Visa Shares belong to the Debtors, that the Debtors assume full liability for the restructuring and initial public offering associated with those shares. In the event the Court finds the Debtors remain the rightful owners of the Visa Shares, JPMC seeks to impose a constructive trust for the value of those shares (to cover any attendant litigation and provide excess value of those shares to JPMC). JPMC seeks declaratory judgment finding that pursuant to the P&A and Title 12, it owns the Intangible Assets (including trademarks, logos, vendor contracts, and other contracts (e.g., licensing/software Ks)), or, in the alternative, has no liability to any persons for those Intangible Assets In the event the Court finds the Debtors remain the rightful owners of the Intangible Assets, JPMC seeks to impose a constructive trust for the value of those Intangible Assets. JPMC seeks reimbursement for litigation expenses incurred in any disputes over the Debtors assets. JPMC seeks indemnity for any acts, omissions or conduct of the Debtors prior to the Petition Date for which JPMC, on

Visa Shares Declaratory Judgment

P: JPMC Ds: WMI; WMI Investment

Visa Shares Unjust Enrichment

P: JPMC Ds: WMI; WMI Investment

Intangible Assets Declaratory Judgment

P: JPMC Ds: WMI; WMI Investment

Intangible Assets Constructive Trust

P: JPMC Ds: WMI; WMI Investment

Administrative Claim

P: JPMC Ds: WMI; WMI Investment P: JPMC Ds: WMI; WMI Investment

Indemnification

{D0207804.1 }

account of its acquisition of WaMu, might be held liable.

WMI COUNTERCLAIMS Claim/Matter Parties (P = Plaintiff; D = Defendant) P: WMI; WMI Investment D: JPMC Description of Claim/Matter

Avoidance and Recovery of Capital Contributions Pursuant to 11 U.S.C. 548, 550

WMI made capital contributions to WMB within 2 years of filing for bankruptcy for which it did not receive reasonably equivalent value. JPMC, as successor to WMB, owes WMI approximately $6.5 billion for the fraudulent transfers made by WMI to WMB. Based on the same facts, JPMC is liable for the fraudulent transfers WMB received pursuant to 11 U.S.C. 544 and under Washington State Law [RCW (Revised Code of Washington) 19.40.041 and 19.40.051].

Avoidance and Recovery of Capital Contributions Pursuant to 11 U.S.C. 544, 550; RCW 19.40.041, 19.40.051, & 19.40.081 Avoidance and Recovery of Trust Securities Pursuant to 11 U.S.C. 548, 550

P: WMI; WMI Investment D: JPMC

P: WMI; WMI Investment D: JPMC

WMI alleges that the transfer of the TPS to either WMB or JPMC was a fraudulent transfer since the transfer either rendered WMI insolvent or WMB being seized by the OTS was so likely that equity shares in WMB were valueless. Based on the same facts, JPMC is liable for the fraudulent transfers WMB received pursuant to 11 U.S.C. 544 and under Washington State Law.

Avoidance and Recovery of Trust Securities Pursuant to 11 U.S.C. 544, 550; RCW 19.40.041, 19.40.051, 19.40.071 & 19.40.081

P: WMI; WMI Investment D: JPMC

{D0207804.1 }

Avoidance and Recovery of Trust Securities Pursuant to 11 U.S.C. 547, 550 Avoidance and Recovery of Trust Securities Pursuant to 11 U.S.C. 544, 550; RCW 19.40.051, 19.40.071, & 19.40.081 Declaratory Judgment that Trust Securities are Property of the Estate Avoidance and Recovery of Preferential Transfers to WMB Pursuant to 11 U.S.C. 547, 550

P: WMI; WMI Investment D: JPMC P: WMI; WMI Investment D: JPMC

In the alternative, the transfer of the TPS was a preference avoidable under 11 U.S.C. 547.

In the alternative, the transfer of the TPS is avoidable pursuant to 11 U.S.C. 544 and under Washington State Law.

P: WMI; WMI Investment D: JPMC P: WMI; WMI Investment D: JPMC

WMI disputes that the P&A transferred ownership interest of the TPS to JPMC

Within one year of the petition date, WMI transferred substantial sums of cash to WMB and WMB fsb to satisfy tax and intercompany obligations. Those transfers were preferential and thus now avoidable, since JPMC is liable as a subsequent transferee. In the alternative, the Preferential Transfers are avoidable pursuant to 11 U.S.C. 544 and under Washington State Law.

Avoidance and Recovery of Preferential Transfers Pursuant to 11 U.S.C. 544, 550; RCW 19.40.051, 19.40.071, & 19.40.081 Fraudulent Transfer Pursuant to 11 U.S.C. 541; RCW 19.40.041, 19.40.051, 19.40.071 & 19.40.081; NEV. REV. STAT. 112.180, 112.190, 112.210, & 112.220

P: WMI; WMI Investment D: JPMC

P: WMI; WMI Investment D: JPMC

The P&A Transaction is avoidable as a fraudulent transfer under Nevada State Law or, in the alternative, under Washington State Law.

Disallowance of Claims P: WMI; WMI Investment Pursuant to 11 U.S.C. 105, 502 D: JPMC

Debtors object to any and all claims filed by JPMC pursuant to 11 U.S.C. 502(d). Debtors also have a right of set off so,

{D0207804.1 }

because the Debtors have claims against JPMC that exceed any liability they may have to JPMC, JPMCs claims are unenforceable and should be disallowed. Declaratory Judgment that Certain Assets are Property of the Estate P: WMI; WMI Investment D: JPMC Debtors dispute JPMCs claims to the Assets JPMC lists in its Complaint and request declaratory judgment finding that those Disputed Assets are property of the Debtors. Pursuant to 11 U.S.C. 542, Debtors allege that the Intercompany Amounts Due are debts that JPMC must pay to the Debtors estates.

Turnover of Intercompany Amounts Due Pursuant to 11 U.S.C. 542 Unjust Enrichment, Constructive Trust, and Equitable Lien

P: WMI; WMI Investment D: JPMC

P: WMI; WMI Investment D: JPMC

In the event the Court does not grant Debtors request for a Declaratory Judgment finding them to be the rightful owner of the Disputed Assets, the Debtors request the Court impose a constructive trust for the value of those assets transferred to JPMC. WMI, as the owner of the WaMu trademarks, alleges it is entitled to (a) force JPMC to reassign any rights it may have in the WaMu trademarks or (b) recover damages as a result of the JPMC federal trademark infringement, including any profits arising therefrom. WMI seeks treble damages for the willful and deliberate infringement of its trademarks. Same facts as above for federal trademark infringement

Trademark Infringement Pursuant to 15 U.S.C. 1114

P: WMI; WMI Investment D: JPMC

Common Law Trademark Infringement

P: WMI; WMI Investment D: JPMC

Patent Infringement

P: WMI; WMI Investment D: JPMC

WaMu developed and registered a patent that JPMC, by practicing the patent in connection with its business, is infringing pursuant to 35 U.S.C. 271.

{D0207804.1 }

Federal Copyright Infringement Pursuant to 17 U.S.C. 501

P: WMI; WMI Investment D: JPMC

Despite WMI owning the copyright for the website at wamu.com, JPMC continues to display, reproduce, and distribute the website, thus violating 17 U.S.C. 106.

{D0207804.1 }

TURNOVER ACTION (Currently Pending in Bankruptcy Court)15 WMI CLAIMS Claim/Matter Parties (P = Plaintiff; D = Defendant) P: WMI; WMI Investment D: JPMC Description of Claim/Matter

Turnover Pursuant to 11 U.S.C. 542

Plaintiffs demand that JPMC turnover the nearly $4 billion in deposits that the Debtors held with WMB pre-petition, citing 11 U.S.C. 363 and 542 as authority. Moreover, JPMC is not entitled to set off (pursuant to 11 U.S.C. 553) any of the monies it holds in those deposit accounts. Plaintiffs claim that JPMC has been unjustly enriched by withholding the funds in the deposit accounts, and that they do not have an adequate remedy of law. Plaintiffs seek an order from the Court finding JPMC has been unjustly enriched and providing Plaintiffs with restitution, at an amount to be determined by the Court.

Unjust Enrichment

P: WMI; WMI Investment D: JPMC

JPMC COUNTERCLAIMS Claim/Matter Parties (P = Plaintiff; D = Defendant) P: JPMC D: WMI Description of Claim/Matter

Intercompany Amounts in Disputed Accounts Declaratory Judgment

Absent a contrary finding in the DC Action, WMI has had its claim against the FDIC-Receiver disallowed. JPMC seeks a declaratory judgment (i) that WMIs claims against JPMC for the same assets for which their claim against the

15

Washington Mut., Inc. v. JPMorgan Chase Bank, N.A., Adv. Proc. No. 09-50934 (Bankr. D. Del. April 27, 2009).

{D0207804.1 }

FDIC were disallowed are similarly disallowed and (ii) that it may challenge disallowance only in the DC Action. $3.7 Billion Book Entry Transfer Declaratory Judgment P: JPMC D: WMI JPMC requests a declaratory judgment finding that Debtors must proceed with any claim to ownership of the nearly $4 billion in deposit monies in the DC Action or, alternatively, that JPMC has no deposit liability. To the extent JPMC has any liabilities, it seeks to (i) recoup/set off all such amounts under the MBA Policy, (ii) impose a constructive trust, or (iii) enforce any security interest that may apply to the funds of the Debtors.

Setoff, Recoupment, and Other Equitable Limitations Declaratory Judgment

P: JPMC D: WMI

Fraud

P: JPMC D: WMI

[Asserted only if Court determines JPMC has deposit liability] WMI directed the nearly $4 billion to WMBs deposit accounts with knowledge that WMB was unsafe and would shortly be seized by regulators, and it intentionally concealed these facts from WMB fsb. JPMC seeks to interplead any remaining funds that constitute deposit liabilities, since JPMC, WMI, and the FDIC have asserted (and may assert) competing claims to those funds. JPMC seeks a declaratory judgment that it owns the Disputed Assets (intercompany amounts; the TPS; tax refunds; proceeds of the Debtors goodwill litigation; ownership of certain Rabbi trust and benefit plans; ownership of common stock in Visa; and ownership of the intellectual property, contracts, and intangible assets of the Debtors). JPMC seeks a declaratory judgment that it is the rightful owner of the assets transferred from WMB to JPMC, but now subject to a claim dispute by the Debtors.

Interpleader

P: JPMC D: WMI; WMI Investment; FDIC

Disputed Assets Declaratory Judgment

P: JPMC D: WMI

Ownership of Other Assets Declaratory Judgment

P: JPMC D: WMI; WMI Investment; FDIC

{D0207804.1 }

Ownership of Other Assets Unjust Enrichment

P: JPMC D: WMI

In the event the Court denies JPMCs request for declaratory judgment finding the Other Assets are not property of JPMC, JPMC requests the Court impose a constructive trust for the benefit of JPMC consisting of the value the Debtors realized as a result of treatment of the TPS as core capital; tax refunds; value of certain Rabbi trusts and life insurance policies; amounts necessary to reimburse JPMC for contributions made to a benefit plan; ownership of common stock in Visa; and value of the intellectual property, contracts, and intangible assets of the Debtors. By entering into the Contribution Agreement [entered into pursuant to 11 U.S.C. 365(o)], WMI assumed a direct obligation to WMB to immediately contribute and transfer the TPS to WMB following the Conditional Exchange. Alternatively, WMB was the third-party beneficiary of WMIs commitment to the OTS and the FDIC under the Contribution Agreement. WMI also assumed a direct obligation to WMB pursuant to the Assignment Agreement (governed by the laws of the State of Washington). WMI breached the Contribution Agreement in the event the Assignment Agreement is interpreted as providing anything more than bare legal title. WMI further breached by refusing to assist JPMC in obtaining registered ownership of the TPS. JPMC alleges money damages as a proximate result of WMIs breach. JPMC seeks reimbursement for litigation expenses incurred in any disputes over the Debtors assets.

Breach of Contract re Trust Securities

P: JPMC D: WMI

Administrative Claim

P: JPMC Ds: WMI

{D0207804.1 }

Indemnification

P: JPMC Ds: WMI

JPMC seeks indemnity for any acts, omissions or conduct of the Debtors prior to the Petition Date for which JPMC, on account of its acquisition of WaMu, might be held liable.

{D0207804.1 }

Exhibit D

Stern Views on Bankruptcy Court Jurisdiction - United States Supreme Court Addresses Bankruptcy Court Jurisdiction in the Anna Nicole Smith Case
Posted By Sara Coelho Published on July 6, 2011 Category: Claims,Jurisdiction Recently [1] , we wrote about the United States Supreme Court's decision in Stern v. Marshall Pi, where the Court held by a 5 to 4 majority that the United States Constitution prohibits federal bankruptcy judges from entering a final judgment on a state law counterclaim asserted by a debtor where the counterclaim is not resolved in the process of ruling on the creditor's proof of claim. In Stern, the Court found that such determinations may only be made by judges who enjoy the privileges of lifetime tenure and salary protection provided by Article III of the Constitution. The decision revives questions about the extent and nature of bankruptcy court jurisdiction, that many thought were resolved by the Court's seminal 1982 decision on bankruptcy jurisdiction, Northern Pipeline Construction Company v. Marathon Pipe Line Company, and subsequent amendments to the bankruptcy jurisdiction statutes in 1984. In this post, we explore the underpinnings of the Court's decision, and some of its implications, in more detail. Facts and Procedural History The case arises from disputes over the inheritance of the late J. Howard Marshall II's fortune. Before Howard Marshall's death, his wife, Vickie Lynn Marshall (better known as Anna Nicole Smith), filed a suit in Texas alleging that Howard Marshall's son, E. Pierce Marshall, fraudulently induced Howard Marshall to cut Smith out of his estate. Following Howard Marshall's death, Smith filed for bankruptcy in California. Pierce Marshall filed a claim against Smith in the bankruptcy case, asserting that Smith's allegations of fraud defamed him, and an adversary proceeding seeking a determination that his defamation claim was not dischargeable in the bankruptcy. Smith counterclaimed, alleging, among other claims, tortious interference with the gift she expected from Howard Marshall. Under Federal Rule of Bankruptcy Procedure 7013, she was required to do so to the extent that her counterclaim was "compulsory." The bankruptcy court ruled against Pierce Marshall's claim and in favor of Smith's claim, and awarded Smith more than $425 million. Appeals ensued. In the meantime, the Texas state court issued a conflicting judgment in favor of Pierce Marshall. The various appellate findings (including one by the U.S. Supreme Court) are not detailed here, except to say that, in the end, on remand, the Ninth Circuit found that Smith's counterclaim was not a "core" proceeding that bankruptcy judges have the power to hear under section 157(b)(2)(C) of the Judicial Code because resolution of her claim was not necessary to resolve the claims asserted against her by Pierce Howard. Although Smith had, by that time, passed away, her estate had continued the case. The U.S. Supreme Court granted certiorari. The Court's Decision The Court agreed with Smith that the bankruptcy court correctly applied section 157 of the Judicial Code, but it held that the Constitution requires that Smith's common law claim be resolved by an Article III judge. Under the U.S. Constitution, Article III defines the judicial power of the United States and prescribes that federal judges enjoy important salary and tenure protections designed to prevent the political branches from encroaching on the judicial power. U.S. Const. Art. III, 1. Bankruptcy judges on the other hand, are appointed pursuant to Article I of the U.S. Constitution, which confers on the Congress the power to "establish . . . uniform Laws on the subject of Bankruptcies throughout the United States," and do not enjoy constitutionally imposed salary and tenure protections. U.S. Const. Art. I, 8. Citing Murray's Lessee v. Hoboken Land & Improvement Co., 18 How. 272, 284 (1856), a 155-year-old Supreme Court decision, which states that "Congress may not 'withdraw from judicial cognizance any matter which, from its nature, is the subject of a suit at the common law, or in equity, or admiralty,'" the Court found that Congress could not confer authority on a bankruptcy judge to resolve Smith's state law counterclaim without violating the mandate of Article III of the Constitution because a non-Article III judge could not enter final judgment on claims like

those asserted by Smith. The Court further concluded that this result was consistent with the plurality opinion in Marathon, 458 U.S. 50 (1982), which found that a statute's grant of jurisdiction to bankruptcy judges to issue final decisions on state law contract claims violated Article III, and the opinion of the majority in Marathon that (i) a public rights exception did not apply in that case, and (ii) the bankruptcy court was not acting as an adjunct of the district court. The Court rejected arguments that Smith's counterclaim could be resolved in the bankruptcy court under several alternate theories, which are discussed here in turn. First, the Court found that any "public rights" exception to the requirement of Article III adjudications was not applicable and did not permit a bankruptcy court to adjudicate Smith's claim. In Murray's Lessee, the Court described "matters, involving public rights, which may be presented in such form that the judicial power is capable of acting on them . . . but which congress may or may not bring within the cognizance of the courts of the United States, as it may deem proper." Such rights, the Court argued, are historically within the purview of the legislative or executive branches, which, in conferring such rights, have the power to determine whether those rights will be subject to adjudication before Article III courts or before a different tribunal, such as an administrative law judge. Subsequent cases have expounded on this doctrine, but the Court maintained the doctrine has always been limited to cases where the "claim at issue derives from a federal regulatory scheme, or in which resolution of the claim by an expert government agency is deemed essential to a limited regulatory objective within the agency's authority" and that public rights are "integrally related to particular federal government action." The Court held that Smith's counterclaim did not resemble public rights under any of the precedent as it was not a "matter that could be pursued only by grace of the other branches." It also found that Smith's counterclaim did not flow from any federal statutory scheme and that the bankruptcy court authority to decide Smith's counterclaim was not limited to a particularized area of the law, as in an agency adjudication. The Court similarly rejected the argument that the bankruptcy court had jurisdiction to decide Smith's counterclaim as a result of Pierce Marshall having filed a proof of claim in Smith's bankruptcy case. The Court asserted that Pierce Marshall's "decision to file a claim" should not "make any difference with respect to the characterization of [Smith's] counterclaim." The majority opinion referred to and distinguished from the instant case previous cases that had permitted assertion of a preference action in the bankruptcy court against creditors that had filed proofs of claim because, among other things, in those cases, resolution of the preference actions had been necessary to resolve the disputed proofs of claim, and the actions brought had been created by federal bankruptcy law. Thus, the Court continued the validity of bankruptcy court jurisdiction for certain counterclaims, particularly where such claims are grounded in the Bankruptcy Code. Resolution of Smith's counterclaim however, required rulings from the bankruptcy court on issues that the bankruptcy Tuft did not need to determine in the course of allowing or disallowing Pierce Howard's claim. The Court also rejected the notion that the mandates of Article III were met because the bankruptcy court was operating as an "adjunct" of the district court. It found that because the bankruptcy court "exercises the essential attributes of judicial power" and because it did not make "specialized" factual determinations in a particular area of law, but rather resolves "[a]ll matters of fact and law in whatever domains of the law to which' the parties' counterclaims might lead," the bankruptcy court could not properly be viewed as an adjunct to another court. The Court dismissed arguments that its ruling would lead to substantial additional cost and delay as unconvincing, and pointed to other kinds of state law claims that reside outside the bankruptcy court's jurisdiction. It so doing, the majority downplayed the potential effects of its decision stating, "[w]e do not think the removal of counterclaims such as [Smith's] from core bankruptcy jurisdiction meaningfully changes the division of labor in the current statute; we agree . . . that the question presented here is a 'narrow' one." The Dissent In the dissent, Justice Breyer, joined by justices Ginsburg, Sotomayor and Kagan, argued that the Court overstated the importance of Murray's Lessee and Marathon, and failed to apply more recent precedent under which the Court has laid out factors to consider in determining whether a particular delegation of adjudicatory authority to a nonArticle III judge encroaches on the judicial branch. Such factors include the nature of the claim to be adjudicated and of the non-Article III tribunal, the extent of control over the proceeding by Article III courts, whether the parties consent, and the nature and importance of the legislative purpose served by the grant of adjudicatory authority to the non-Article III forum. To the extent that the rights in question are "private rights," a more "searching' examination of the relevant factors" is required. In weighing these factors under the Court's precedent, Justice Breyer concluded that the "magnitude of any intrusion on the Judicial Branch can only be termed de minimis." (Internal quotations omitted). Justice Breyer's dissent also argued against the majority's assertion that the effect of its decision would be minor, citing the frequency of similar disputes, the "staggering" volume of bankruptcy cases (approximately 1.6 million filings in 2010 compared with approximately 358,000 federal district court cases for the same period) and the fact that

compulsory counterclaims are frequently premised on the same factual disputes as the claims asserted against bankruptcy estates that the bankruptcy courts are authorized to adjudicate. He argued that a "constitutionally required game of jurisdictional ping-pong between courts would lead to inefficiency, increased cost, delay, and needless additional suffering among those faced with bankruptcy." Effects of the Decision In addition to the logistical difficulties identified by the dissent, the Stern opinion raises numerous questions about a bankruptcy court's jurisdiction in general, and how a debtor should assert its counterclaims in particular. Most importantly, although the majority was careful to say that it was ruling on a narrow question, it will have to be seen how litigants and courts apply Stern's reasoning. In the case of state law counterclaims asserted by a debtor, it is not clear how procedures for referring those matters to the district court will evolve, or how claims presently being litigated will be treated. In addition, the jurisdictional issue will, in some instances, be difficult for the bankruptcy court to determine at the outset of a case, and there may be cases where it becomes apparent that jurisdiction is lacking after substantial investment in the litigation by the parties. Stern is not the first Supreme Court decision to raise substantial questions about the bankruptcy court's power, however, and if past controversies are any guide, it will take time to fully understand its significance as the bankruptcy courts (and no doubt, Article III courts) grapple with its application.

Article printed from Weil Bankruptcy Blog: http://business-finance-restructuring.weil.com URL to article: http://business-finance-restructuring.weil.com/claims/stern-views-on-bankruptcy-courtjurisdiction- 0/0e20/080 0/093-united-states-supreme-court-addresses-bankruptcy-court-jurisdiction-in-theanna-nicole-smith-case/ Click here to print. Copyright @ 2010 Weil Bankruptcy Blog. All rights reserved.

EXHIBIT F

IN THE UNITED STATES BANKRUPTCY COURT FOR THE DISTRICT OF DELAWARE _________________________________________ x : In re : : No. 08-12229 (MFW) : WASHINGTON MUTUAL, INC., et al., : Jointly Administered : Debtors : __________________________________________x

THE TPS CONSORTIUMS POST-TRIAL BRIEF IN FURTHER OPPOSITION TO THE DEBTORS MODIFIED SIXTH AMENDED JOINT PLAN

BROWN RUDNICK LLP Seven Times Square New York, New York 10036 (212) 209-4800 - and One Financial Center Boston, Massachusetts 02111 (617) 856-8200 - and CAMPBELL & LEVINE LLC 800 North King Street, Suite 300 Wilmington, DE 19809 (302) 426-1900

Dated: August 10, 2011

TABLE OF CONTENTS Page PRELIMINARY STATEMENT .................................................................................................... 1 ARGUMENT.................................................................................................................................. 5 I. This Court Lacks Authority To Confirm The Plan In Its Present Form, And No Evidence Or Argument Has Been Presented To Support Any Different Conclusion............................................................................................... 5 A. The Plan Violates The Divestiture Rule, And Nothing Has Been Presented To Support Any Different Conclusion ....................................... 5 1. 2. 3. Applicable Legal Principles............................................................ 5 The Plan Unabashedly Flouts The Divestiture Rule....................... 8 The Courts Jurisdictional Boundaries Must Be Recognized, Even If It Frustrates The Debtors Preferred Case Strategy ................................................................................ 10 The TPS Securities Must Be Fully Escrowed In A Disputed Claims Reserve Pending The Ultimate Outcome Of The Appellate Process.......................................................................... 12

4.

B.

The Plan Amounts To Little More Than Bankruptcy Wrapping For A Settlement Of Complex Non-Core Litigation That Is Beyond This Courts Constitutional Power To Resolve With Finality, And Nothing Has Been Presented To Support Any Different Conclusion....... 13 1. 2. The Court Lacks Constitutional Power To Adjudicate The Estate Claims Against JPMorgan And The FDIC ........................ 13 The Court Also Lacks Constitutional Power To Grant Final Approval Of The Global Settlement, Which Resolves NonCore Estate Claims Against JPMorgan And The FDIC................ 16 Such Ruling Recognizes The True Nature Of This Chapter 11 Case (A Liquidation) And The True Nature Of This Plan (Bankruptcy Wrapping For A Settlement Of Claims That Must Be Adjudicated By The District Court) ............................... 20

3.

II.

The Plan Over-Compensates Creditors, And No Evidence Or Argument Has Been Presented To Support Any Different Conclusion................................. 21 A. As A Matter Of Law, Unsecured Creditors Are Not Entitled To Post-Petition Interest Beyond The Federal Judgment Rate, Determined As Of Entry Of The Confirmation Order, Regardless Of Creditor Activity Or Good Faith.......................................................... 21 1. In A Solvent-Debtor Case, Unsecured Creditors Are Entitled Only To Post-Petition Interest At The Federal Judgment Rate............................................................................... 22

(i)

2.

Judicial Discretion To Determine The Rate Of Post-Petition Interest Arises Only In Connection With Unsecured Creditor Cram-Down; It Does Not Arise In The Circumstances Now Before The Court, Especially Where There Is Sufficient Estate Cash To Satisfy All Creditor Claims ........................................................................................... 22 The Date Of Judgment For Determining The Federal Judgment Rate Of Interest Is The Confirmation Date .................. 26 The Economic Impact Is Quite Significant................................... 29 The Debtors Are Not Able To Evade This Conclusion By Pointing To Unsustainable Tack On Claims That Have Absolutely No Legal Or Evidentiary Support .............................. 31 a. b. The WMI Estate Is Not Responsible For PIERs Turn-Over Obligations To Senior Funded Debt ............... 32 Neither The Law Nor The Trial Evidence Support A Finding Of Any Class 18 Liability.................................... 34 (i) (ii) (iii) There Is No MARTA Liability.......................... 36 There Is No D&O Liability................................... 37 There Is No Other Class 18 Liability.................... 37

3. 4. 5.

B.

The Plan Deprives Rejecting Holders Of TPS Securities (Class 19) Of Their Legal Entitlement To (1) The Proceeds Of Estate Causes Of Action And (2) Participate In The Governance Of PostConsummation Litigation, And Nothing Has Been Presented To Support Any Different Conclusion ........................................................... 38 1. The TPS Holders Are Legally Entitled To Proceeds Of Unsettled Estate Causes Of Action And Nothing Has Been Presented To Support Any Different Conclusion ......................... 38 a. The Plans Death-Trap Provision Foists A Significant Added Evidentiary Burden On The Debtors: That The Value Of Estate Causes Of Action To Be Vested In The Liquidation Trust Is Less Than The Delta Before Holders Of TPS Securities Are In-The-Money........................................ 38 The Debtors Have Failed To Carry Their Burdens Of Proof And Persuasion; To The Contrary, The Evidence Suggests That The Estate Causes Of Action May Be Worth Hundreds Of Millions, Perhaps Billions, Of Incremental Dollars ......................... 40 The Plan Wrongfully Allocates Trust Value For The Primary Benefit Of The Settlment Noteholders................ 46

b.

c.

(ii)

2.

TPS Holders Are Legally Entitled To Meaningful Participation In The Post-Consummation Governance Of Estate Litigation, And Nothing Has Been Presented To Support Any Different Conclusion ............................................... 46

III.

The Debtors Have Failed To Carry Their Burden Of Proof For Continued Approval Of The Global Settlement, Especially In Light Of Substantial New Evidence And The Appellate Reversal of ANICO ...................................... 49 A. B. The Law Of The Case Doctrine Does Not Foreclose Evaluation Of The Global Settlement ......................................................................... 49 Even If The Court Had Issued A Final Order Regarding The Global Settlement Agreement, Reconsideration Of That Order Would Be Warranted By Significant Factual Developments Since December 2010 ......................................................................................... 50 The Evidentiary Record Cannot Support Approval Of The Global Settlement Agreement............................................................................... 52 Now That Light Has Been Shed On The Plan Negotiations, It is Clear The Settlement, Negotiated By Conflicted Counsel, Was Designed To Overcompensate Creditors, Leave Equity With Nothing, And Deliver All Remaining Value To JPMorgan ..................... 54 If The Court Is Inclined To Recommend Settlement Approval To Chief Judge Sleet, The Debtors Should Be Ordered To Identify (With Specificity) Where Evidence Exists In The Record To Support Such A Recommendation............................................................ 57 1. 2. Rules Applicable To The Preparation Of Proposed Findings Of Fact And Conclusions Of Law ................................................ 57 The Debtors Should Identify Where In The Record Evidence Exists On Which To Base Final Approval Of The Global Settlement Agreement....................................................... 60

C. D.

E.

IV. V.

The Debtors Have Failed To Resolve Substantial Additional Points Of Objection Raised By The TPS Consortium .......................................................... 60 If The Court Determines To Confirm The Plan, The Case Itself And The Particular Matters Raised In Connection With Confirmation Are Sufficiently Important As To Warrant Issue Certification Directly To The Third Circuit Court Of Appeals ............................................................................ 61

CONCLUSION............................................................................................................................. 65

(iii)

TABLE OF AUTHORITIES CASES Amcast Indus. Corp. v. Detrex Corp., 45 F.3d 155 (7th Cir. 1995) ...................................................................................................... 27 Bank of Am., N.A. v. N. LaSalle St., P'ship (In re 203 N. LaSalle St. P'ship), 246 B.R. 325 (Bankr. N.D. Ill. 2000) ....................................................................................... 33 Bialac v. Harsh Inv. Corp. (In re Bialac), 694 F.2d 625 (9th Cir. 1982) ...................................................................................................... 7 Biggs v. Capital Factors, Inc. (In re Herb Goetz & Marlen Horn Assocs., Inc.), No., 96-55944, 1997 WL 415340 (9th Cir. July 24, 1997)....................................................... 54 Bittner v. Borne Chem. Co., 691 F.2d 134 (3d Cir. 1982) ..................................................................................................... 35 Cable v. Millennium Digital Media Sys., L.L.C. (In re Broadstripe, LLC), 435 B.R. 245 (Bankr. D. Del. 2010) ......................................................................................... 49 Capon v. Van Noorden, 6 U.S. 126 (1804)...................................................................................................................... 14 Case Fin., Inc. v. Alden, 2009 WL 2581873 (Del. Ch. Aug. 21, 2009) ........................................................................... 43 Council of Alt. Political Parties v. Hooks, 179 F.3d 64 (3d Cir. 1999) ....................................................................................................... 49 Credit Alliance Corp. v. Idaho Asphalt Supply, Inc. (In re Blumer) 95 B.R. 143 (B.A.P. 9th Cir. 1988) .......................................................................................... 54 Everett v. Perez (In re Perez), 30 F.3d 1209 (9th Cir. 1994) .................................................................................................... 41 Fed. Deposit Ins. Corp. v. O'Melveny & Myers, 61 F.3d 17 (9th Cir. 1995) ........................................................................................................ 45 First Fidelity Bank, N.A. v. Midlantic Nat'l Bank (In re Ionsophere Clubs, Inc.), 134 B.R. 528 (Bankr. S.D.N.Y. 1991)...................................................................................... 32 Fry's Metals, Inc. v. Gibbons (In re RFE Indus., Inc.), 283 F.3d 159 (3d Cir. 2002) ............................................................................................... 52, 53 Gander Mountain Co. v. Cabela's, Inc., 540 F.3d 827 (8th Cir. 2008) .................................................................................................... 49 Grace Bros., Ltd. v. UniHolding Corp., 2000 WL 982401 (Del. Ch. July 12, 2000) .............................................................................. 44 Granfinanciera v. Nordberg, 492 U.S. 33 (1989).................................................................................................................... 14

(iv)

Griggs v. Provident Consumer Disc. Co., 459 U.S. 56 (1982)...................................................................................................................... 6 HSBC Bank USA, N.A. v. Bank of New York Mellon Trust Co., (In re Bank of New England Corp.) No. 10-1456, 2011 WL 2476470 (1st Cir. June 23, 2011).........................................................33 In re Barone, No. 07-51621, 2011 Bankr. LEXIS 1267 (Bankr. M.D. Pa April 11, 2011)............................ 53 In re BearingPoint, No. 09-10691, 2011 WL 2709295 (Bankr. S.D.N.Y. July 11, 2011) ....................................... 15 In re Chambers Dev. Co., Inc., 148 F.3d 214 (3d Cir. 1998) ..................................................................................................... 10 In re Chicago, Milwaukee, St. Paul and Pac. R.R. Co., 791 F.2d 524 (7th Cir. 1986) .................................................................................................... 25 In re Christian Anthanassious, Nos. 09-4594 & 10-2285, Slip Opinion (3d Cir. Feb. 7, 2011)................................................ 11 In re Colfer, 159 B.R. 602 (Bankr. D. Me. 1993) ......................................................................................... 35 In re Combustion Eng'g, Inc., 391 F.3d 190 (3d Cir. 2004) ..................................................................................................... 28 In re Coram Healthcare Corp,. 271 B.R. 228 (Bankr. D. Del. 2001) ......................................................................................... 47 In re Coram Healthcare Corp., 315 B.R. 321 (Bankr. D. Del. 2004) ......................................................................................... 24 In re Country Manor of Kenton, Inc., 254 B.R. 179 (Bankr. N.D. Ohio 2000).................................................................................... 22 In re DeMarco, 258 B.R. 30 (Bankr. M.D. Fla. 2000) ......................................................................................... 7 In re Dow Corning Corp., 237 B.R. 380 (Bankr. E.D. Mich. 1999)............................................................................. 22, 23 In re Dow Corning Corp., 244 B.R. 678 (Bankr. E.D. Mich. 1999)................................................................................... 24 In re Draiman, 2011 WL 1486128 (Bankr. ND Ill. April 29, 2011) ................................................................. 40 In re Garriock, 373 B.R. 814 (E.D. Va. 2007) .................................................................................................. 23 In re MCorp Fin., Inc., 137 BR 219 (Bankr. S.D. Tex. 1992) ........................................................................... 39, 40, 54 In re Melenyzer, 143 B.R. 829 (Bankr. W.D. Tex. 1992).................................................................................... 22

(v)

In re New Valley Corp., 168 B.R. 73 (Bankr. D.N.J. 1994) ............................................................................................ 25 In re Nova Real Estate Inv. Trust, 23 B.R. 62 (Bankr. E.D. Va. 1982)........................................................................................... 35 In re Okwanna, No. 10-31663, 2011 WL 3421561 (Bankr S.D. Tex. Aug. 3, 2011) ........................................ 17 In re Olympia Holding Corp., 250 B.R. 136 (Bankr. M.D. Fla. 2000) ..................................................................................... 28 In re Pac. Lumber Co., 584 F.3d 229 n.19 (5th Cir. 2009) ............................................................................................ 11 In re PPI Enterprises (U.S.), Inc., 324 F.3d 197 (3d cir. 2003) ...................................................................................................... 24 In re Schoeneberg, 156 B.R. 963 (Bankr. W.D. Tex. 1993).................................................................................... 25 In re Smith, 77 B.R. 624 (Bankr. N.D. Ohio 1987)...................................................................................... 33 In re Strawberry Square Assocs., 152 B.R. 699 (Bankr. E.D.N.Y. 1993)........................................................................................ 8 Int'l Yacht and Tennis, Inc. v. Wasserman (In re Int'l Yacht and Tennis, Inc.), 922 F.2d 659 (11th Cir. 1991) .................................................................................................. 34 Johnson v. Stemple (In re Stemple), 361 B.R. 778 (E.D. Va. 2007) .................................................................................................. 27 Kaiser Aluminum & Chem. Corp. v. Bonjomo, 494 U.S. 827 (1990).................................................................................................................. 29 Kopp v. All Am. Life Ins. Co. (In re Kopexa Realty Venture Co.), 213 B.R. 1020 (B.A.P. 10th Cir. 1997) .................................................................................... 53 LaRoche Indus., Inc. v. Orica Nitrogen LLC (In re LaRoche Indus., Inc.), 312 B.R. 249 (Bankr. D. Del. 2004) ......................................................................................... 28 Louisville & Nashville R.R. v. Motley, 211 U.S. 149 (1908).................................................................................................................. 14 Louisville Joint Stock Land Bank v. Radford, 295 U.S. 555 (1935).................................................................................................................. 20 M/V Am. Queen v. San Diego Marine Constr. Corp., 708 F.2d 1483 (9th Cir. 1983) .................................................................................................. 54 Mazzeo v. Lenhart (In re Mazzeo), 167 F.3d 139 (2d Cir. 1999) ..................................................................................................... 58 Mennen Co. v. Atl. Mut. Ins. Co., 147 F.3d 287 (3d Cir. 1998) ..................................................................................................... 14

(vi)

Miller v. Greenwich Capital Fin. Prods. (In re Am. Bus. Fin. Servs., Inc.),, Nos. 05-10203, 06-50826, 2011 WL 3240596 (Bankr. D. Del. July 28, 2011) ....................... 16 Myers v. Martin (In re Martin), 91 F.3d 389 (3d Cir. 1996) ....................................................................................................... 53 NCP Litig. Trust v. KPMG LLP, 187 N.J. 353 (N.J. 2006)........................................................................................................... 45 Nelson v. Nationwide Mortg. Corp., 659 F. Supp. 611 (D.D.C. 1987)............................................................................................... 19 Nordhoff Invs., Inc. v. Zenith Elecs. Corp. (In re Zenith), 258 F.3d 180 (3d Cir. 2001) ..................................................................................................... 11 Official Comm. of Unsecured Creditors of Allegheny Health Educ. and Research Fund v. PricewaterhouseCoopers LLP, 989 A.2d 313 (Pa. 2010)........................................................................................................... 45 Official Comm. of Unsecured Creditors of Verestar, Inc. v. Am. Tower Co. (In re Verestar, Inc.), 343 B.R. 444 (Bankr. S.D.N.Y. 2006)...................................................................................... 44 Onink v. Cardelucci (In re Cardelucci), 285 F.3d 1231 (9th Cir. 2002) ............................................................................................ 22, 23 Polis v. Getaways, Inc. (In re Polis), 217 F.3d 899 (7th Cir. 2000) ..................................................................................................... 41 Premier Entm't Biloxi LLC v. Pacific Mgmt. Co., LLC (In re Premier Entm't Biloxi LLC), No. 08-60349, 2009 WL 1616681 (5th Cir. June 9, 2009)....................................................... 12 Protective Comm. for Indep. Stockholders of TMT Trailer Ferry, Inc. v. Anderson, 390 U.S. 414 (1968).................................................................................................................. 52 Rosener v. Majestic Mgmt., Inc. (In re OODC, LLC), 321 B.R. 128 (Bankr. D. Del. 2005) ........................................................................................ 44 Rupp v. United States (In re Rocky Mountain Refractories), 208 B.R. 709 (B.A.P. 10th Cir. 1997) ...................................................................................... 28 Schoenmann v. FDIC, Case No. 10-03989, 2011 U.S. Dist. LEXIS 43375 (N.D. Cal. April 21, 2011)...................... 49 Schroeder v. New Century Liquidating Trust (In re New Century), 407 B.R. 576 n.27 (D. Del. 2009)............................................................................................. 11 Silverman v. Tracar, S.A. (In re Am. Preferred Prescription, Inc.), 255 F.3d 87 (2d Cir. 2001) ....................................................................................................... 27 Smart World Tech., LLC v. Juno Online Servs. (In re Smart World Tech., LLC), 423 F.3d 166 (2d Cir. 2005) ..................................................................................................... 41 Southland Corp. v. Toronto-Dominion (In re Southland Corp.), 160 F.3d 1054 (5th Cir. 1998) .................................................................................................. 25 Stern v. Marshall, 131 S.Ct. 2594 (2011)........................................................................................................ Passim (vii)

SW. Equip. Rental v. Fundsnet, Inc. (In re SW Equip. Rental), 152 B.R. 207 (Bankr. E.D. Tenn. 1992) ................................................................................... 26 Travelers Cas. and Surety Co. v. Future Claimants Representative, No. 07-2785, 2008 WL 821088 (D.N.J. March 25, 2008)........................................................ 53 United States v. Hark, 320 U.S. 531 (1944).................................................................................................................. 26 Varsity Carpet Servs. v. Richardson (In re Colorex Indus., Inc.), 19 F.3d 1371 (11th Cir. 1994) .................................................................................................. 28 Venen v. Sweet, 758 F.2d 117 (3d Cir. 1985) ................................................................................................. 6, 12 Whispering Pines Estates v. Flash Island, Inc. (In re Whispering Pines Estates), 369 B.R. 752 (B.A.P. 1st Cir. 2007)....................................................................................... 6, 7 Yoo Wong Park, v. United States AG, 472 F.3d 66 (3d Cir. 2006) ................................................................................................. 10, 36 STATUTES 11 U.S.C. 502(b)(2) ................................................................................................................... 27 11 U.S.C. 502(c)(1).................................................................................................................... 35 11 U.S.C. 510(c) ........................................................................................................................ 23 11 U.S.C. 552(b)(2) ................................................................................................................... 23 11 U.S.C. 704(a)(5).................................................................................................................... 34 11 U.S.C. 762(a) ........................................................................................................................ 34 11 U.S.C. 1107......................................................................................................................... 34 11 U.S.C. 1123(a)(7).................................................................................................................. 47 11 U.S.C. 1141........................................................................................................................... 27 28 U.S.C. 636(b)(1)(A).......... 19 28 U.S.C. 1961(a) .............................................................................................................. 26, 28 Wash. Rev. Code 23B.08.510 (2010) ........................................................................................ 37 RULES Fed. R. Bankr. P. 7052.................................................................................................................. 58 Fed. R. Bankr. P. 9017.................................................................................................................. 54 Fed. R. Bankr. P. 9024.................................................................................................................. 50 Fed. R. Bankr. P. 9033(b) ............................................................................................................. 57 Fed. R. Civ. Pro. 23(e)(1)(C) ........................................................................................................ 18

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OTHER AUTHORITIES 4 Collier on Bankruptcy, 502.04[2] (16th ed. 2011) .................................................................. 35 6 Collier on Bankruptcy, 726.02[6] (16th ed. 2011)................................................................... 23 7 Collier on Bankruptcy, 1123.01[6] (16th ed. 2011)................................................................. 48 7 Collier on Bankruptcy, 1123.LH[6] (16th ed. 2011) ............................................................... 47 7 Collier on Bankruptcy, 1129.01 (16th ed. 2011) ..................................................................... 27 10 Moore's Federal Practice,54.02[2] (3rd ed. 2011) ................................................................. 26 10 Collier on Bankruptcy, 9019.02 (16th ed. 2011) ................................................................... 53 10 Moore's Federal Practice, 54.02[2] (3d ed. 2011).................................................................. 25 14 Moore's Federal Practice, 72.02[12] (3rd ed. 2011) .............................................................. 19 S. Rep. No. 95-989, 95th Cong., 2d Sess. 5, reprinted in Vol. D Collier on Bankruptcy App. Pt. 4(e)(i) (15th ed. 2011)................................................................................................................ 28 Patrick Darby, Southeast and New England Mean New York: The Rule of Explicitness and PostBankruptcy Interest on Senior Unsecured Indebtednes, 38 Cumb. L. Rev. 467 (2008)........... 34

(ix)

The consortium of holders of interests subject to treatment under Class 19 of the Plan (the TPS Consortium),1 by and through its undersigned counsel, respectfully submits this posthearing summation brief, following this Courts seven-day trial (July 13-15, 18-21, 2011) on the modified sixth amended plan [Docket Nos. 6696, 6964 and 7038], Debtors Conf. Exs. 255, 256 and 257 (collectively, the Plan) (App. A)2 filed by Chapter 11 debtors Washington Mutual Inc. (WMI) and WMI Investment Corp (WMI Investment and, together with WMI, the

Debtors). In continued opposition to the Plan and in further support of its previously-filed objections to the Plan [Docket Nos. 6020, 7480 and 8100], fully incorporated herein by reference, the TPS Consortium respectfully submits as follows: PRELIMINARY STATEMENT 1. Now before this Court is a tangle of complicated legal and factual issues. The

varied arguments and conflicting evidence are confusing and tend to obfuscate, and all are inappropriately shadowed by jingoist urgings that the settlement is Too Big To Fail. While multiple days of the confirmation trial delved into factual issues that may create independent bases for confirmation denial (e.g., allegations of insider trading), that same conclusion is otherwise mandated by a straight-forward application of legal principles to the more commercialoriented facts. 2. The thicket needs pruning, and pruning requires careful legal analysis without

rhetorical distraction. Accordingly, in this Brief, the TPS Consortium explores applicable legal
1

As set forth in the Verified Fourth Amended Statement of Brown Rudnick LLP and Campbell & Levine LLC Pursuant to Rule 2019 of the Federal Rules of Bankruptcy Procedure, dated June 16, 2011 [Docket No. 7916] (App. B), the TPS Consortium is comprised of parties who have been classified for treatment under Class 19 of the Plan. The accompanying Appendix (App. __ ) provides copies of, or excerpts from, cited record and other materials 1

principles, specifically identifies important portions of the evidentiary record, and explains why application of principle to commercial fact requires denial of confirmation. As explained herein, the Plan may not be confirmed for at least six reasons. 3. First, as a result of the pending appeal of the Courts ruling in Blackhorse Capital

LP v. JPMorgan Chase Bank, N.A., Adv. No. 10-51387 (MFW), on appeal, Civ. Action No. 11124-GWS, this Court lacks jurisdiction to confirm the Plan, given that the Plan incorporates numerous provisions obviously intended to moot issues now within the exclusive province of Chief District Court Judge Gregory M. Sleet. Unless the TPS Securities are placed into a disputed-claims escrow pending completion of the appellate process the usual and customary mechanic for plans to comply with the Divestiture Rule the Court simply lacks the jurisdictional power to issue the requested confirmation order. 4. Second, because this Plan is largely bankruptcy wrapping for a settlement of

claims that must be litigated before an Article III District Court, this Court lacks Constitutional power to approve the Global Settlement with finality. Placing the Global Settlement Agreement before this Court for final approval is akin to placing a large class action settlement before a federal magistrate (another Article I judge), and asking the magistrate to enter the final fairness judgment pursuant to Rule 23(e) of the Federal Rules of Civil Procedure, and thereby impose the settlement on all disaffected members of the class. Federal magistrates are not empowered to issue such judgments; they may only render proposed findings of fact and conclusions of law. Similarly, pursuant to Stern v. Marshall, this Court may do no more than submit proposed findings of fact and conclusions of law to Chief Judge Sleet. 5. Third, the Plan over-compensates creditors. The law mandates post-petition

interest for unsecured creditors in a solvent-debtor case, but payable at only the federal judgment

rate. Any discretion this Court may have in setting post-petition interest beyond the federal judgment rate arises only in connection with plans contemplating unsecured creditor cramdown, and that is not the Plan presently before this Court. The federal judgment rate is determined as of entry of the confirmation order (i.e., the date of entry of the judgment) and, since the Global Settlement results in distributable cash exceeding full claim satisfaction (including post-petition interest payable at the appropriate rate), creditors are unimpaired and holders of TPS Securities are entitled to excess cash, WMRRC value (whatever that may be), and proceeds from unsettled estate causes of action (whatever they prove to be), among other significant residual value. 6. Fourth, for another reason, the Plan over-compensates creditors, including

especially the Settlement Noteholders. The Plan vests unsettled estate causes of action in a Liquidation Trust that will distribute litigation proceeds first to unpaid creditors and, thereafter, to holders of TPS Securities and preferred stock. But, the Plan death-traps any such right of recovery: any holder of TPS Securities or preferred stock that did not deliver a release as part of its Plan vote is denied any such distribution. Given that few holders of TPS Securities and preferred stock (other than the Settlement Noteholders) actually tendered this release, one-half of the litigation proceeds go (uncapped) to the Settlement Noteholders. The Debtors have utterly failed to prove the value of such estate causes of action and, in turn, have utterly failed to carry their burdens of proof and persuasion that this aspect of the Plan is consistent with Bankruptcy Code Sections 1129(a)(7) and 1129(b). Quite the contrary, the evidence strongly suggests that these causes of action are worth hundreds of millions, if not billions, of dollars (the Debtors were, after all, at the epicenter of the nations macro-economic meltdown, and their role in that meltdown was facilitated by Wall Street and a number of other aiders and abetters). The Plan

therefore violates the best interests test and is not fair and equitable respecting holders of TPS Securities. 7. Fifth, the evidence supporting the Courts prior preliminary approval of the

Global Settlement Agreement has changed. The Senate Report (giving strong challenge to any continued factual contention of pre-petition solvency) and the ANICO reversal (meaning that the estate business tort claims now may be litigated) both occurred after issuance of the Courts January 7, 2011 opinion denying confirmation (the January 7th Opinion) [Docket No. 6528] (App. C). Estate avoidance and business tort claims against JPMorgan and the FDIC were among the most significant sources of potential estate recovery covered by the Global Settlement Agreement ($6+ billion); and, settlement of those claims historically had the wisp-thinnest of evidentiary support. That support has now evaporated completely, mandating a different

conclusion. At the very least, it mandates an Order of the Court directing the Debtors to deliver to this Court a draft (on notice to all parties-in-interest) of proposed findings of fact and conclusions of law, identifying with particularity where, in the record, evidence exists for the Court to conclude that the Global Settlement Agreement is fair and appropriate in light of the fact-intensive nature of the avoidance actions and business tort claims. 8. Further to this point, the trial evidence insufficient for anything more than

suspicion in December 2010, but proven conclusively in July 2011 clearly establishes that: (i) the driver of the settlement was allocation of tax refunds and the delivery of TPS Securities to JPMorgan, and did not involve any analysis whatsoever as to the value of the avoidance and business tort claims; (ii) the deal was struck at what the Settlement Noteholders thought was a pittance below full payment of the PIERs; and (iii) the Debtors (led by conflicted professionals) turned a blind-eye to and never truly investigated potential avoidance and business tort

claims to enable the deal to close, unfettered by what the true facts may be. The evidence now establishes the Debtors fairness analysis was, in truth, a hand-over-equity on the balancesheet: all above were to be paid; all beneath the hand were to receive nothing; underlying facts and legal sufficiency were (to the Debtors) analytically irrelevant. 9. Sixth, the Plan calls for completion of the Conditional Exchange of TPS

Securities for WMI preferred stock that does not exist, in violation of Bankruptcy Code Section 365(c)(2), and continues the Debtors past pattern of over-reaching releases. 10. To confirm the Plan, the Court must find for the Debtors on all six of these points.

To do so would require the Court to dramatically bend long-established legal principles and/or establish entirely new ways of thinking about the law, and to ignore incontrovertible facts. This the Court should not do. But, if the Court is inclined to find for the Debtors on all six points, the TPS Consortium respectfully asks the Court to exercise its discretion under 28 U.S.C. 158(d)(2), certifying issues for direct appeal to the Third Circuit Court of Appeals. In light of anticipated (never-ending) appeals, the TPS Consortium respectfully submits that Third Circuit certification is the surest means to near-term case conclusion. ARGUMENT I. This Court Lacks Authority To Confirm The Plan In Its Present Form, And No Evidence Or Argument Has Been Presented To Support Any Different Conclusion. A. The Plan Violates The Divestiture Rule, And Nothing Has Been Presented To Support Any Different Conclusion. 1. 10. Applicable Legal Principles. During the pendency of a

The Divestiture Rule is really quite simple.

bankruptcy case, two parties litigate a matter before the Court. The Court renders a ruling and an appeal is taken. Jurisdiction over the matter on appeal is removed from this Court and vested

exclusively with the Article III District Court. The matter thereafter is ring-fenced. This Court may do nothing to invade the District Courts exclusive jurisdiction over the matter. This Court may not enter any order on collateral issues that would disable the District Court from reversing and returning the parties to the status quo ante. The Debtors may not propose a plan, and this Court may not confirm a plan, that advertently or inadvertently moots the appeal by invading what is now the exclusive province of the District Court. 11. In Griggs v. Provident Consumer Disc. Co., 459 U.S. 56 (1982), the Supreme

Court explained the Divesture Rule as follows: The filing of a notice of appeal is an event of jurisdictional significance it confers jurisdiction on the court of appeals and divests the district court of its control over those aspects of the case involved in the appeal. Id. at 58. The Third Circuit Court of Appeals emphasized that this Rule is to be rigidly observed by lower courts: Divest means what it says the power to act, in all but a limited number of circumstances, has been taken away and placed elsewhere. Venen v. Sweet, 758 F.2d 117, 120-21 (3d Cir. 1985). Courts throughout the United States have, time and again, consistently heeded this instruction in the bankruptcy context, and correctly honored the Divestiture Rule in situations similar to the one before the Court. 12. For example, in Whispering Pines Estates v. Flash Island, Inc. (In re Whispering

Pines Estates), 369 B.R. 752 (B.A.P. 1st Cir. 2007), the Bankruptcy Court confirmed a plan proposed by the secured lender, over the debtors objection. The debtor appealed the

confirmation order. While that appeal was pending, the Bankruptcy Court entered an order granting the secured lender stay relief to foreclose on collateral. The debtor then appealed the stay relief order. In connection with the second appeal, the Bankruptcy Appellate Panel vacated the stay relief order, holding that it violated the Divestiture Rule:

[W]e find the subject matter under the appeal of the Confirmation Order so closely related to the Stay Relief Motion that the entry of the Stay Relief Order impermissibly interfered with the Debtors rights in its appeal. As such, we find that the bankruptcy courts decision contravenes the generally recognized rule of appellate jurisdiction and our previous decisions recognizing this rule. Id. at 759. 13. In Bialac v. Harsh Inv. Corp. (In re Bialac), 694 F.2d 625 (9th Cir. 1982), the

Bankruptcy Court granted the secured lender stay relief to foreclose on its collateral. The debtor appealed the stay relief order and, soon thereafter, filed a plan of reorganization with the Bankruptcy Court. At the appellate level, the debtor argued the stay relief order should be vacated so that its plan could go forward before the Bankruptcy Court. The Ninth Circuit Court of Appeals rejected the argument, finding no error in the stay relief order and, in turn, that the Divestiture Rule prohibited the Bankruptcy Court from entering any order advancing the debtors plan: The pending appeal divested the lower court of jurisdiction to proceed further in the matter. Even though a bankruptcy court has wide latitude to reconsider and vacate its own prior decisions, not even a bankruptcy court may vacate or modify an order while on appeal. Id. at 627 (citations omitted). 14. Almost directly on point is In re DeMarco, 258 B.R. 30 (Bankr. M.D. Fla. 2000).

There, the IRS filed a large secured claim. The debtor filed a motion to determine the debtor was not liable on the claim, and a trial was conducted. The Bankruptcy Court ruled against the IRS, and the IRS appealed. While the appeal was pending before the District Court, the debtor filed a plan that afforded the IRS nothing on account of its asserted secured claim. The IRS objected to the plan, contending that it violated the Divestiture Rule. The Bankruptcy Court agreed, finding that the plan invaded the District Courts exclusive jurisdiction over the matter on appeal. The Bankruptcy Court deferred consideration of the plan pending conclusion of the appeal process.

15.

The plan-related impact of the Divesture Rule was concisely stated in In re

Strawberry Square Assocs., 152 B.R. 699, 702 (Bankr. E.D.N.Y. 1993), as follows: the bankruptcy court [may not] exercise jurisdiction over those issues which, although not themselves on appeal, nevertheless so impact those on appeal as to effectively circumvent the appeal process.

2. 16.

The Plan Unabashedly Flouts The Divestiture Rule.

This Plan is, quite obviously, constructed to disable Chief Judge Sleet from

effectively reviewing on appeal this Courts decision in Black Horse Capital LP v. JPMorgan Chase Bank, N.A., Adv. No. 10-51387 (MFW), on appeal, Civ. Action No. 11-124-GWS. The following Plan provisions impermissibly encroach on Chief Judge Sleets exclusive jurisdiction in violation of the Divestiture Rule: Plan Section 2.1(c). Provides that, as part of the Global Settlement,3 the Debtors shall sell, transfer, and assign the TPS Securities to JPMorgan (App. A). Global Settlement Agreement Section 2.3. Provides that, on the Plans Effective Date, the TPS Securities will be sold to JPMorgan pursuant to Bankruptcy Code Section 363. Thereafter, JPMorgan will be the exclusive owner of the TPS Securities. JPMorgan is also granted the ability to direct parties to reflect the transfer on all applicable registers, and otherwise document the title transfer. This section also contains a release, directed towards ending the appeal before Chief Judge Sleet: And all claims against the Debtors, the WMI Entities, the Acquisition JPMC Entities and the FDIC Parties with respect to the Trust Preferred Securities shall be released and withdrawn, with prejudice, including any claims under section 365(o) of the Bankruptcy Code or any priority claim under section 507(a)(9) of the Bankruptcy Code. (App. I)

Under Plan Section 2.1 prelude, the Global Settlement Agreement is incorporated into and made part of the Plan. In fact, where there is a conflict, the Settlement Agreement controls the Plan (App. A). 8

Global Settlement Agreement Section 3.2. Provides as follows: Any other Person that claims through [the Debtors estates] . . . shall be deemed to have irrevocably and unconditionally. . . waived, released, acquitted and discharged JPMorgan from any claims, including . . . claims related in any way to the Trust Preferred Securities. (App. I) Plan Section 23.2. Extinguishes all Class 19 rights but, at the same time, provides that, as of the Plan Effective Date, JPMC or its designee is the sole legal, equitable and beneficial owner of the Trust Preferred Securities for all purposes. (App. A) Plan Section 38.1. Provides for the following conditions precedent to confirmation: (1) approval of the Global Settlement Agreement (38.1(a)(5)); (2) authorization of the taking of all actions to effectuate the transfer of the TPS Securities under the Global Settlement Agreement (38.1(a)(8)); (3) approval of the transactions reflected in the Global Settlement Agreement (38.1(a)(9)); and (4) an order providing that, on the Effective Date, the TPS Securities shall be sold to JPMorgan free and clear of all rights, claims and interests (38.1(a)(10)). Most importantly: The confirmation order must protect JPMorgan as a good faith purchaser of the TPS Securities, pursuant to Bankruptcy Code Section 363(m), thereby immunizing JPMorgan from disgorgement if Chief Judge Sleet reverses on appeal (38.1(a)(10)) (App. A). Plan Section 43.2. Provides for a release and discharge of Class 19 claims and interests asserted against the estates, thus releasing and discharging the contention on appeal that the TPS Securities are not assets belonging to the Debtors estates (App. A). Plan Sections 43.6, 43.7, 43.9 and 43.12. All further inhibit the TPS Consortiums arguments on appeal, and are directed towards preventing due recovery, if the appeal is successful (App. A).

3.

The Courts Jurisdictional Boundaries Must Be Recognized, Even If It Frustrates The Debtors Preferred Case Strategy.

17.

The Debtors and JPMorgan argue that the TPS Consortiums reference to the

Divesture Rule here is just a ruse to evade the impact of equitable mootness, and that this Court is free to simply ignore the Rule. They are wrong.4 18. First, the Divesture Rule is not a ruse. It is a long-standing rule of law that

rigidly circumscribes this Courts jurisdiction over matters on appeal before a superior court. It is clearly developed in binding precedent and must be followed, regardless of the impact to the Debtors preferred case strategy. 19. Second, the Debtors and JPMorgan misstate the law, by conflating two distinct Equitable mootness, on the one hand, arises when a Bankruptcy Court It has a

legal postulates.

wrongfully confirms a plan, but relief cannot be effectively granted thereafter.

retroactive vantage point: the appeal is meritorious but, regrettably, there is nothing the appellate court can do to rectify the situation given interceding developments. The Divestiture Rule, on the other hand, arises prior to that point in time, as parties are in the process of constructing a plan. It has a forward-looking vantage point, providing in effect as follows: (i) in the United States, due process rights are important and must be honored; (ii) Bankruptcy Courts are courts
4

Earlier in this case, JPMorgan argued aggressively in favor of application of the Divestiture Rule in its own dispute with the Debtors. See Notice of Divestiture of Jurisdiction Pending Appeals, at 2-3, JPMorgan Chase Bank, N.A. v. Washington Mut., Inc., Adv. Proc. No. 09-50551 (MFW) (Bankr. D. Del., September 18, 2009) [Docket No. 146] (App. D) (JPMC has not and need not seek a stay. The timely filing of a notice of appeal automatically divests the lower court of jurisdiction) (emphasis in the original). JPMorgan should be estopped from contending that this same rule is somehow inapplicable here. See Yoo Wong Park v. United States AG, 472 F.3d 66, 73 (3d Cir. 2006) (quoting In re Chambers Dev. Co., Inc., 148 F.3d 214, 229 (3d Cir. 1998)) (Judicial estoppel is a judge-made doctrine that seeks to prevent a litigant from asserting a position inconsistent with one that she has previously asserted in the same or in a previous proceeding.).

10

of limited jurisdiction, and their jurisdictional bounds must be honored; (iii) as parties go about constructing a plan, the plan they construct must abide by these legal principles; and (iv) if the parties fail to abide by these legal principles, the Bankruptcy Court will lack the jurisdiction necessary to confirm the plan they propose. 20. Third, equitable mootness is not some beloved, enshrined doctrine to be sheltered.

It is in fact disfavored, even despised by appellate tribunals. See Nordhoff Invs., Inc. v. Zenith Elecs. Corp. (In re Zenith), 258 F.3d 180, 192 (3d Cir. 2001) (Alito, J., concurring) (I continue to disagree with the expansive version of the equitable mootness doctrine that . . . can easily be used as a weapon to prevent any appellate review of court orders confirming reorganization plans.); In re Pac. Lumber Co., 584 F.3d 229, 244 n.19 (5th Cir. 2009) (discussing the negative impact equitable mootness can have on markets and the unwillingness of lenders to work with debtors when appellate review can be thwarted by equitable mootness). The equitable mootness doctrine, where applicable, forces appellate courts to begrudgingly acknowledge an injustice has occurred. The Debtors and JPMorgan are simply wrong to ask this Court to coddle an evasive form of justice.5 21. The position espoused by the Debtors and JPMorgan is not aided one whit by

cries of Settlement! and dire predictions that the deal is Too Big To Fail! Regardless of the accuracy/likely-inaccuracy of such predictions, this Court has no choice but to scrupulously honor its jurisdictional boundaries. As the Supreme Court specifically admonished in Stern v.

The doctrine of equitable mootness may be inapplicable in any event, being that this is a bankruptcy liquidation. See, e.g., In re Christian Anthanassious, Nos. 09-4594 & 102285, slip op. at 6 n.3 (3d Cir. Feb. 7, 2011) (App. E) (questioning whether the doctrine of equitable mootness has any application to an appeal in the context of a chapter 7 liquidation); Schroeder v. New Century Liquidating Trust (In re New Century), 407 B.R. 576, 588 n.27 (D. Del. 2009) (questioning whether the doctrine of equitable mootness applies respecting a Chapter 11 plan of liquidation). 11

Marshall: It goes without saying that the fact that a given law or procedure is efficient, convenient, and useful in facilitating functions of government, standing alone, will not save it. 131 S. Ct. 2594, 2619 (2011). Indeed, the Third Circuit Court of Appeals specifically instructed that jurisdictional bars must never bend for case advancement: This litigation has been unduly prolonged, unnecessarily burdening this court in this appeal, as it will burden the district court in the proceedings which will undoubtedly follow. Nevertheless, jurisdictional requirements may not be disregarded for convenience sake. Venen, 758 F.2d at 123. 4. The TPS Securities Must Be Fully Escrowed In A Disputed Claims Reserve Pending The Ultimate Outcome Of The Appellate Process.

22.

To be sure, Chapter 11 does not compel pre-confirmation resolution of all

disputed entitlements to estate value. It is, in fact, a usual plan mechanic to continue claimsreconciliation post-consummation. Plans commonly provide that holders of disputed claims will be afforded their fair day in court, with all attendant due process rights preserved. Distributions (based on the amount claimed by the creditor) are held in escrow, pending final adjudication of the claim. If the claimant is proven correct, it will receive its due plan entitlement from the escrow. If the claimant is proven incorrect, amounts escrowed will be released to other

claimants in the same class or in lower classes. This common plan mechanic comports perfectly with the Divesture Rule, since it ring-fences the value and, thus, enables (rather than obstructs) the appellate process. See, e.g., Premier Entmt Biloxi LLC v. Pacific Mgmt. Co., LLC (In re Premier Entmt Biloxi LLC), No. 08-60349, 2009 WL 1616681 (5th Cir. June 9, 2009) (finding the debtors plan properly deposited disputed funds into an escrow account, with a determination of which party was entitled to those proceeds to be made through post-confirmation litigation); see also January 7th Opinion, at 50-51 (App. C) (noting the need for a sufficient plan escrow to

12

protect the interests of holders of litigation tracking warrants should they be classified as unsecured claims rather than common equity). 23. Proper recognition and application of the Divesture Rule compels inclusion of the

same mechanic in this Plan: The TPS Securities must be placed in a ring-fenced escrow pending final resolution of the appellate process. If this Courts decision regarding current ownership of the TPS Securities is reversed, the TPS Securities demanded by the members of the TPS Consortium must be released to them. If the Courts decision regarding ownership is affirmed after full exhaustion of appellate rights, the TPS Securities then may be released to JPMorgan. Absent such escrowing, the Plan invades the District Courts exclusive jurisdiction in violation of the Divestiture Rule, and cannot be confirmed. No argument advanced, and no evidence admitted at trial, supports any other conclusion. B. The Plan Amounts To Little More Than Bankruptcy Wrapping For A Settlement Of Complex Non-Core Litigation That Is Beyond This Courts Constitutional Power To Resolve With Finality, And Nothing Has Been Presented To Support Any Different Conclusion. 1. The Court Lacks Constitutional Power To Adjudicate The Estate Claims Against JPMorgan And The FDIC.

24.

In Stern v. Marshall, a majority of the Supreme Court charted the boundary

between Congresss Article I power to establish uniform laws on the subject of bankruptcies and the judicial power vested exclusively in Article III Courts. Three points of law, clearly established in the Stern opinion, are particularly relevant here. 25. First, Acts of Congress do not control the question. So, even if 28 U.S.C. 157,

the Bankruptcy Code, or the Bankruptcy Rules facially provide this Court authority to render a particular order or judgment, that does not mean such order or judgment is Constitutionally valid

13

and enforceable.

On this point, Stern simply reiterates the teachings of Granfinanciera v.

Nordberg, 492 U.S. 33, 50 (1989). See Stern, 131 S. Ct. at 2614. 26. Second, if the Court is presented with an issue for resolution that has the look,

feel, taste, and smell of a true cause of action i.e., is the Stuff of the Courts of Westminster then that issue is not for this Court to decide. It must be passed to the District Court for final resolution. See id. at 2609. That is true if the lawsuit arises under non-bankruptcy law (like the estates tort claim in Stern) or under the Bankruptcy Code (like the estates fraudulent conveyance claim in Granfinanciera). See id. at 2609-10. That is also true if the parties consent to trial by this Court, since private litigants cannot confer on a tribunal Constitutional power that does not otherwise exist. See Capon v. Van Noorden, 6 U.S. 126 (1804); Mennen Co. v. Atl. Mut. Ins. Co., 147 F.3d 287, 293-94 (3d Cir. 1998). Any final judgment by this Court in violation of the foregoing would be subject to subsequent collateral attack. See Stern, 131 S. Ct. at 2594; Louisville & Nashville R.R. v. Motley, 211 U.S. 149 (1908).6

Although not issue dispositive, it bears noting that neither JPMorgan nor the FDIC have consented to this Courts jurisdiction to adjudicate estate claims asserted or assertable against them. See Notice of Divestiture of Jurisdiction Pending Appeals at 2-3, JPMorgan Chase Bank, N.A. v. Washington Mut., Inc., Adv. Proc. No. 09-50551 (MFW) (Bankr. D. Del. March 24, 2009) [Docket No. 146] (App. D) (JPMC has not and need not seek a stay. The timely filing of a notice of appeal automatically divests the lower court of jurisdiction) (emphasis in the original); Motion to Dismiss in Part Pursuant to Federal Rules 12(b)(1) and 12(b)(6) at 3, Washington Mut., Inc. v. FDIC, Adv. Proc. No. 09-00533 (RMC) (D.D.C. Oct. 13, 2009) [Docket No. 25] (App. F) (seeking dismissal of four of the five counts alleged against the FDIC on the theory that federal law expressly deprives courts of subject matter jurisdiction to even consider some of those claims). They have consented only to this Courts jurisdiction to adjudicate the settlement. If the settlement is not approved, those parties presumably will return to other courts for further proceedings; see also Supplemental Memorandum of Law in Support of Motion to Dismiss of JPMorgan Chase Bank, N.A., Lehman Bros. Holdings Inc. v. JPMorgan Chase Bank, N.A., No. 10-03266 (JMP) (Bankr. S.D.N.Y. Aug. 5, 2011) [Docket No. 90] (App. G) (advancing arguments under Stern that are indistinguishable from those advanced by the TPS Consortium in this case).

14

27.

Third, the Courts jurisdiction does not expand if the litigation target files a proof

of claim. In that situation, the Court may adjudicate the estate lawsuit as part of the trial over the disputed proof of claim, but only if: (a) the off-set provisions of Bankruptcy Code Section 502(d) apply (not applicable here); or (b) the trial concerning the estate claim is completely entwined with the trial concerning the disputed proof of claim. Stern, 131 S. Ct. at 2611, 2616. Stern instructs that estate counter-claims are entwined with the underlying claim dispute when the elements of the trial (on both sides) perfectly overlap; in other words, where the estate lawsuit does not raise any elements in addition to those at issue respecting the disputed proof of claim. Id. at 2617-18. Thus, if the debtor has a tort claim against a creditor and creditor has a contract claim against the debtor, the litigation is not entwined. In that situation, the Court may try the dispute over the proof of claim, but the estate lawsuit must be passed to the District Court for separate adjudication.7 28. Following these principles of law, it seems incontrovertible that this Court lacks

jurisdiction to resolve the estate claims against JPMorgan and the FDIC. Estate litigation already commenced asserts true causes of action; it is the Stuff of the Courts of Westminster. Much of this litigation arises under non-bankruptcy law, including causes of action asserted under Washington state corporation law, general state tort law, federal intellectual property law, state fraudulent conveyance law, and the Federal Tort Claims Act. See Second Supplemental

Objection of the Consortium of Trust Preferred Security Holders to Confirmation [Docket No.
7

For this reason, and in deference to judicial economy, SDNY Bankruptcy Judge Gerber recently deferred litigation over a proof of claim, so that it might be joined with the estate litigation that must be litigated elsewhere. See In re BearingPoint, No. 09-10691, 2011 WL 2709295, at *1 (Bankr. S.D.N.Y. July 11, 2011) ([T]here are no benefits in hearing the action here. To the contrary, requiring the Trustee to endure the procedural hurdles in starting (but evidently, not finishing) the litigation in the bankruptcy court . . . can hardly be said to be in the interests of justice.) (App. J).

15

8100], Ex. C (App. H). Moreover, these claims do not perfectly over-lap (and, thus, are not entwined with) the disputed proofs of claim asserted by JPMorgan and the FDIC. Those proofs of claim arise under other law, and involve elements distinct from those at issue in the estate claims. See Global Settlement Agreement (Second Amended and Restated Agreement, dated as of February 7, 2011) at 3, Debtors Conf. Ex. 255H (App. I). 29. As a result, this Court may not render final findings of fact or conclusions of law

bearing on those lawsuits.8 Any such findings or conclusions would be, according to Stern, subject to subsequent collateral attack. See Stern, 131 S. Ct. at 2594. 2. The Court Also Lacks Constitutional Power To Grant Final Approval Of The Global Settlement, Which Resolves Non-Core Estate Claims Against JPMorgan And The FDIC.

30.

The next level of legal analysis asks: if this Court cannot try estate causes of

action against JPMorgan and the FDIC, may the Court still adjudicate a hotly-contested settlement of those very same non-core claims? It is true that Bankruptcy Code Section 1123(b)(3)(A) and Bankruptcy Rule 9019 may be read to mean that Congress has granted Bankruptcy Courts general authority to adjudicate contested settlements of estate

This Courts decision in Miller v. Greenwich Capital Fin. Prods. (In re Am. Bus. Fin. Servs., Inc.), Nos. 05-10203, 06-50826, 2011 WL 3240596 (Bankr. D. Del July 28, 2011) is not to the contrary. In American Business, the Court concluded the Stern decision did not foreclose the Courts final adjudication of the claims at issue. See id at *2. But, the estate claims in American Business all related to post-petition acts, arose as part of the administration of the bankruptcy case, and/or related to actions taken in connection with the Courts approval of use of cash collateral. See id. at *1. Such issues, having a direct nexus to the Courts Constitutionally-permitted oversight of bankruptcy proceedings, are distinguishable from the claims and causes of action here, arising under numerous nonbankruptcy legal regimes, that would be finally resolved through the Courts approval of the Global Settlement Agreement.

16

claims.9 But, again, statutes and rules of procedure may not authorize the Court to do what, according to Stern, is reserved exclusively for Article III District Courts. Any such grant of authority would be an unconstitutional encroachment on the judicial power. See Stern, 131 S. Ct. at 2614.10 31. In circumstances like these, Stern poses the analytical inquiry in the following

way. Is the issue before the bench: (a) a court-like adjudicatory function, falling within what is traditionally thought of as the stuff of Article III District Courts; or (b) an administrative function, falling within what is traditionally thought of as the stuff of bankruptcyadministration? See id. at 2609-10, 2615. According to the Supreme Court, the issue is the stuff of bankruptcy-administration if: (x) it is within that particularized area of law generally
9

It is, however, worth noting that neither Bankruptcy Code Section 1123(b)(3)(A) nor Bankruptcy Rule 9019 specifies what particular type of estate claim may be settled and, so, a determination by this Court that it lacks jurisdiction to render the type of settlement approval requested here does not require a ruling that these provisions are facially unconstitutional. Rather, such a determination would simply recognize the bounds of the Constitutionally-appropriate application of Bankruptcy Code Section 1123(b)(3)(A) and Rule 9019, a result itself consistent with the teachings of Stern. See Stern, 131 S. Ct. at 2605 (where possible, federal statutes are to be construed so as to avoid doubts as to their Constitutionality). In a recent decision, the Bankruptcy Court for the Southern District of Texas held that, since Rule 9019 gives bankruptcy courts the discretion to approve compromises and since that Rule had been interpreted by federal courts, Bankruptcy Courts retained the power to enter final orders approving settlements notwithstanding the Stern decision. See In re Okwanna, No. 10-31663, 2011 WL 3421561 (Bankr. S.D. Tex. Aug. 3, 2011), at *4. Assuming jurisdiction based on a procedural rule would appear to fly in the face of Sterns admonition that it is the Constitution, rather than any statute, that determines whether a Bankruptcy Court has the power to act (particularly given the Stern courts holding notwithstanding the existence of 28 U.S.C. 157(b)(2)(C) and the numerous judicial interpretations thereof). Further, the Court should decline to follow Okwanna given the decision was in the context of a dispute totaling $20,000 (versus the billions of dollars at issue in this case), no party in that case had opposed the Bankruptcy Courts exercise of jurisdiction (or had briefed the issue), the holding was arguably dicta given the Courts alternative basis for exercising jurisdiction, and the decision is not controlling on this Court.

10

17

considered bankruptcy; (y) it involves issues that Bankruptcy Courts are widely seen as experts at resolving; and (z) the Bankruptcy Court is particularly suited to examine and determine the issue. Id. at 2615. 32. To be sure, the trial over the Global Settlement Agreement bears all of the

hallmarks of a court-like adjudicatory function, falling within what is traditionally thought of as the stuff of Article III District Courts. The evidentiary record of the December 2010 trial and the July 2011 trial is massive; the volume of the rhetoric is deafening; the arguments and allegations (on both sides of the aisle) are complex and aggressive, focusing on whether thirdparties bear judgment liability; the amounts at stake are staggering; and most importantly, the January 7th Opinion dedicated more than 65-pages to an evaluation of the underlying merits of non-core estate causes of action. See January 7th Opinion (App. C). This is not some rubberstamp resolution at the universal behest of all parties-in-interest. This matter prompted a large trial over whether the settlement is fair to and, therefore, may be forcibly imposed upon thousands of disaffected parties-in-interest. The Courts final order is fully intended by the parties supporting confirmation to have res judicata and collateral estoppel effect. It is fully intended to become binding on parties (such as the TPS Consortium) that vigorously oppose the settlement terms. It is fully intended to have the force of judgment by a Court of Law, as if rendered by historic Courts of Westminster. 33. This contested matter is, in fact, much like a fairness hearing over whether a

class action settlement should be made binding on all members of the class, not only the lead plaintiff. See Fed. R. Civ. Pro. 23(e)(1)(C). Pursuant to Rule 23(e)(1), notice of the hearing must be distributed to all class members, and they all must be given a full opportunity to voice their objections before the settlement is forcibly made binding on them. Under the law, a

18

magistrate judge (another Article I judge) cannot render the fairness ruling. The magistrate judge only may deliver to the District Court proposed findings of fact and conclusions of law. See 28 U.S.C. 636(b)(1)(A); Nelson v. Nationwide Mortg. Corp., 659 F. Supp. 611, 619-20 (D.D.C. 1987); see also 14 Moores Federal Practice 72.02[12] (3d ed. 2011). A final

fairness determination is the stuff of court adjudication; it is the stuff reserved exclusively for Article III District Courts. Such a division of labor between an Article I Court and the Article III Court is no less principled (and mandated) here. 34. The Debtors and JPMorgan contend the trial over the Global Settlement

Agreement instead bears the hallmarks of traditional bankruptcy-administration. That is not credible. The hotly-contested resolution of complex causes of action involving, among other non-core law, Washington State corporation law, general state business tort law, federal intellectual property law, the Federal Tort Claims Act, and FIRREA simply does not fall within the particularized area of law generally thought of as bankruptcy. Respectfully, this Court is not an expert on these matters. Stated differently, this Court is not as particularly suited to examine and determine a settlement of these claims as it is more traditional bankruptcy matters, such as (a) contested cash collateral usage, (b) DIP and exit financing, (c) lease assumption and rejection, and (d) enterprise valuation. This latter grouping is the real stuff of bankruptcy. 35. The trial over the Global Settlement Agreement is outside the ambit of bankruptcy

administration; it is outside the ambit of the Courts Constitutional power. The trial record as a whole confirms this conclusively. This Court may do no more than issue proposed findings of fact and conclusions of law for review and final consideration by Chief Judge Sleet.

19

3.

Such Ruling Recognizes The True Nature Of This Chapter 11 Case (A Liquidation) And The True Nature Of This Plan (Bankruptcy Wrapping For A Settlement Of Claims That Must Be Adjudicated By The District Court).

36.

The Debtors and JPMorgan contend that recognizing the import of Stern v.

Marshall in this manner would ring the death knell of Chapter 11 as we know it today. That is a vast overstatement. Regardless of the Courts ruling in this particular case, American companies will continue to face financial troubles for myriad reasons; American companies will therefore continue to seek Chapter 11 relief in Delaware. Louisville Joint Stock Land Bank v. Radford, 295 U.S. 555 (1935), will continue to be the law of the land and, as a result, Chapter 11 debtors will still require DIP and exit financing. Businesses will need to be reorganized or liquidated; contracts will need to be assumed or rejected; claims will need to be allowed or disallowed; businesses will need to be sold pursuant to Bankruptcy Code Section 363; plans of reorganization will need to be confirmed; and enterprises will need to be valued. 37. This case is far removed from the typical Chapter 11 case. The Debtors do not

have a business. They do not have any future prospects. They are a liquidating shell with no operational assets.11 The estates asset-base is predominantly rights of recovery from the

government and third-parties, under various theories of non-bankruptcy law. The case probably

11

See Transcript of July 13, 2011 Hearing (Testimony of Steven Zelin), at 330:3-330:8 (App. K) (The value thats intrinsic in this business is the existing runoff. It has no management team, it has no sales force, no ability today, nor did it have one while it was a captive pre-bankruptcy to go generate its own asset value. Im sorry, to go generate new reinsurance contracts); Transcript of July 14, 2011 Hearing, at 172:3-173:3 (App. K) (acknowledging that WMRRC: (i) has no employees; (ii) has only two people managing the day-to-day operations of the company; (iii) has no financing imposed on WMMRC; (iv) has no business plan; and (v) has no plans to write new insurance policies); Transcript of December 2, 2010 Hearing (Testimony of William Kosturos), at 138:17-23 (App. L) (acknowledging the current analysis of the value of WMMRC assumes that there will be no new business).

20

should have been converted to Chapter 7 a long time ago. The Plan is largely bankruptcy wrapping for a settlement of estate causes of action that must be litigated before the District Court. The Court lacks Constitutional power to render a final ruling on the Plan because the Plan, at its core, is not the stuff of bankruptcy. It is the stuff of federal District Court litigation. Final decision on the Global Settlement should be reserved for Chief Judge Sleet, and nothing in the record speaks differently.12 II. The Plan Over-Compensates Creditors, And No Evidence Or Argument Has Been Presented To Support Any Different Conclusion. A. As A Matter Of Law, Unsecured Creditors Are Not Entitled To Post-Petition Interest Beyond The Federal Judgment Rate, Determined As Of Entry Of The Confirmation Order, Regardless Of Creditor Activity Or Good Faith. As previously briefed for the Court, the best interests test of Bankruptcy Code

38.

Section 1129(a)(7) invokes Bankruptcy Code Section 726(a)(5). Those two Bankruptcy Code provisions operate to entitle unsecured creditors to post-petition interest at the legal rate before stockholders may receive dividends from the estate. This begs two questions. First, is the legal rate the contract rate, the federal judgment rate, or some other discretionary rate in between? Second, if the legal rate is the federal judgment rate, is the reference date for determining the applicable rate of interest the petition date, the confirmation date, or the plan effective date? These two questions are addressed in turn below.

12

Such a ruling also promotes judicial efficiency given that, in light of the Divestiture Rule, the TPS Securities must be escrowed through the appeal process. If the Court delivers proposed findings of fact and conclusions of law for Chief Judge Sleets final consideration, he then will be procedurally positioned to simultaneously consider the TPS Consortium appeal and the Global Settlement. 21

1.

In A Solvent-Debtor Case, Unsecured Creditors Are Entitled Only To Post-Petition Interest At The Federal Judgment Rate.

39.

The case law is clear: the legal rate for determining post-petition interest on This

unsecured claims is the federal judgment rate, as set forth in 28 U.S.C. 1961(a).

conclusion has a firm analytical foundation: (i) the phrase the legal rate has large precedential meaning outside the bankruptcy context referring to the federal judgment rate; (ii) such interpretation furthers uniformity within federal law and uniform treatment of all unsecured creditors; (iii) the Bankruptcy Codes legislative history strongly suggests Congress intended the legal rate to mean the federal judgment rate; (iv) the language of the Bankruptcy Code itself strongly suggests federal judgment rate, since Bankruptcy Code Section 726(a)(5) refers to the legal rate while Bankruptcy Code Section 506(b) refers explicitly to the rate provided under the agreement . . . under which such claim arose; and (v) Bankruptcy Code Section 726(a)(5) imposes one particular rate the legal rate not a rate. See, e.g., Onink v. Cardelucci (In re Cardelucci), 285 F.3d 1231 (9th Cir. 2002); In re Country Manor of Kenton, Inc., 254 B.R. 179 (Bankr. N.D. Ohio 2000); In re Dow Corning Corp., 237 B.R. 380 (Bankr. E.D. Mich. 1999) (Dow I); In re Melenyzer, 143 B.R. 829 (Bankr. W.D. Tex. 1992). 40. The federal judgment rate is the rate that should apply here, as a matter of law. 2. Judicial Discretion To Determine The Rate Of Post-Petition Interest Arises Only In Connection With Unsecured Creditor Cram-Down; It Does Not Arise In The Circumstances Now Before The Court, Especially Where There Is Sufficient Estate Cash To Satisfy All Creditor Claims.

41.

In the January 7th Opinion, the Court stated: The Court has considered this issue

before and concluded that the federal judgment rate [is] the minimum that must be paid to unsecured creditors in a solvent debtor case under a plan to meet the best interests of creditors

22

test, but that the court [has] discretion to alter it. January 7th Opinion, at 93 (App. C). For the reasons that follow, no such discretion should be exercised in this particular case. 42. As an initial matter, the words the legal rate do not reflect a general grant of Congress afforded Bankruptcy Courts discretion in certain specific

equitable discretion.

provisions of the Bankruptcy Code. See, e.g., 11 U.S.C. 510(c) (under principles of equitable subordination . . .); 11 U.S.C. 552(b)(2) (. . . except to the extent that the court . . . based on the equities of the case, orders otherwise.). But, not here, not respecting Bankruptcy Code Section 726(a)(5). Here, Congress did not indicate, by the words it chose, any equitable

discretion respecting the rate of post-petition interest required under Bankruptcy Code Section 726(a)(5). Instead, Congress directed Bankruptcy Courts to rigidly order the payment of interest at the rate a rate that is the legal rate as might an historic Court of Law (not a Court of Equity). 43. Consistent with that reading, the bulk of legal authority holds that Bankruptcy

Courts are not empowered to set the rate of post-petition interest based on case circumstance. See, e.g., Cardelucci, 285 F.3d at 1236 (9th Cir. 2002) ([I]nterest at the legal rate is a statutory term with a definitive meaning that cannot shift depending on the interests invoked by the specific factual circumstances before the court.); In re Garriock, 373 B.R. 814, 817 (E.D. Va. 2007) (Nor, given the statutory interpretation analysis set forth above, is the Court free to interpret the legal rate in different ways depending on the specific factual circumstances before the Court.) (citation omitted); Dow I, 237 B.R. at 409 (Therefore, this Court is dutybound, equitable concerns notwithstanding, to apply interest at the legal rate in accordance with its most plausible meaning the rate of interest fixed by 28 U.S.C. 1961(a).); see also 6

23

Collier on Bankruptcy 726.02[6] (16th ed. 2011) (The reference in the statute to the legal rate suggests that Congress envisioned a single rate.). 44. A careful review of the case law indicates that judicial discretion to set the rate of

post-petition interest arises, in a solvent-debtor case, only in connection with plans requiring unsecured creditor cram down under Bankruptcy Code Section 1129(b). See, e.g., In re Coram Healthcare Corp., 315 B.R. 321, 346 (Bankr. D. Del. 2001) ([W]e conclude that the specific facts of each case will determine what rate of interest is fair and equitable under Bankruptcy Code Section 1129(b)); In re Dow Corning Corp., 244 B.R. 678 (Bankr. E.D. Mich. 1999) (Dow II). But, that is not the nature of the Plan now before this Court. This contested matter focuses only on whether the Plan passes the best interests test of Bankruptcy Code Section 1129(a)(7), not what is fair and equitable treatment to enable creditor cram down under Bankruptcy Code Section 1129(b). The analysis under each of those two Bankruptcy Code provisions is different. See Dow II, 244 B.R. at 687 (Thus there is no contradiction between the holding in our previous decision [federal judgment rate for best interests test analysis] and the contention that 1129(b) may mandate recognition of contractual interest rates.). 45. Indeed, as discussed further below, the trial evidence clearly establishes there is

more than sufficient estate cash to fully satisfy all creditor claims, plus post-petition interest at the federal judgment rate. All creditor claims are, therefore, unimpaired and not entitled to vote; unsecured creditor cram down is not an issue under the circumstances of this case. See In re PPI Enterprises (U.S.), Inc., 324 F.3d 197, 207 (3d Cir. 2003). The Courts analysis, thus, need

24

not delve any further than determining required interest at the legal rate for the purposes of Bankruptcy Code Section 1129(a)(7).13 That is the federal judgment rate, pure and simple. 46. Other cases cited in the January 7th Opinion in connection with judicial discretion

to set the interest rate are readily distinguishable from the present case circumstance, and are therefore analytically inapposite. See Southland Corp. v. Toronto-Dominion (In re Southland Corp.), 160 F.3d 1054 (5th Cir. 1998) (determining level of interest pursuant to Bankruptcy Code Section 506(b) for an over-secured creditor); In re Chicago, Milwaukee, St. Paul and Pac. R.R. Co., 791 F.2d 524 (7th Cir. 1986) (determining level of interest for 100-year railroad debt under the prior Bankruptcy Act, which did not have provisions comparable to those in the Bankruptcy Code at issue here). 47. Only one decision cited by the Debtors, issued by a Texas bankruptcy court more

than 18 years ago, concluded that the legal rate of post-petition interest is whatever the bankruptcy judge thinks appropriate under the case circumstances. See In re Schoeneberg, 156 B.R. 963 (Bankr. W.D. Tex. 1993). Importantly, Schoeneberg dealt with post-petition interest payable to a single creditor and, therefore, did not implicate considerations of equality of treatment across a class of unsecured creditors. It also is a decision today held in wide disrepute. See, e.g., In re New Valley Corp., 168 B.R. 73, 80 (Bankr. D.N.J. 1994) (rejecting Schoeneberg because that court did not have the opportunity to consider the statutory construction argument

13

With this determination, the Court may avoid ruling on other thorny evidentiary issues presented at trial, such as the value of the WMRRC net operating loss carry-forward and the value of the estate causes of action to be vested the Liquidation Trust. That is because all such value, whatever it may be, simply flows down the capital structure to holders of TPS Securities and equity. This presents something of a Solomonic solution, if this Court determines to overrule the TPS Consortiums continued objection regarding the Global Settlement Agreement. 25

presented to this court). The Court should likewise decline to follow such an untenable reading of Bankruptcy Code Section 726(a)(5). 48. The federal judgment rate applies in this case. That is the result regardless of

whether the evidence does or does not support a finding that the Settlement Noteholders traded on inside information. That is the rate mandated by law. 3. The Date Of Judgment For Determining The Federal Judgment Rate Of Interest Is The Confirmation Date.

49.

As indicated above, the vast bulk of legal authority instructs that post-petition

interest shall be calculated in accordance with Section 1961(a) of Title 28 of the United State Code. That statute provides, in pertinent part, as follows (emphases added): Interest shall be allowed on any money judgment in a civil case recovered in a district court. Such interest shall be calculated from the date of the entry of the judgment, at a rate equal to the weekly average 1-year constant maturity Treasury yield, as published by the Board of Governors of the Federal Reserve System, for the calendar week preceding the date of the judgment. Thus, the interest reference date for determining the federal judgment rate is the date of entry of the judgment. 50. Again, this begs the following question: What event occurring in the bankruptcy

is most like the judgment date for purposes of Section 1961(a)? One thing seems certain: It is not the date the Debtors filed their voluntary bankruptcy petitions. Under Bankruptcy Code Section 301(b), the Debtors voluntary bankruptcy filing generated an automatic order for relief not subject to appeal. See, e.g., Sw. Equip. Rental v. Fundsnet, Inc. (In re Sw. Equip. Rental), 152 B.R. 207, 210 (Bankr. E.D. Tenn. 1992). But, an order is properly categorized as a judgment only if it is a final judicial decision subject to appeal. United States v. Hark, 320 U.S. 531, 534 (1944); see also 10 Moores Federal Practice 54.02[2] (3d ed. 2011) (If the order is appealable, the order is a judgment.). Analogizing a Chapter 11 case to federal civil

26

court litigation, the petition date is much more akin to the date the complaint is filed (initiating suit) than the date the judgment is entered.14 51. The plan effective date also does not analogize well to the date of judgment. No

judicial action occurs on the plan effective date; rather, that is the date of transaction closing following entry of the confirmation order directing distribution of estate value. The effective date seems more akin to the date that a judgment is paid, and thus ends the lawsuit. 52. Rather, it is entry of the confirmation order that is most analogous to the date of

federal court judgment. See Silverman v. Tracar, S.A. (In re Am. Preferred Prescription, Inc.), 255 F.3d 87, 92 (2d Cir. 2001) (The confirmation of a plan in a Chapter 11 proceeding is an event comparable to the entry of a final judgment in an ordinary civil litigation.). The

confirmation order is, after all, the order establishing the means for case resolution. See 11 U.S.C. 1141; see also 7 Collier on Bankruptcy 1129.01 (16th ed. 2011) (Confirmation of a plan of reorganization is the statutory goal of every chapter 11 case.). The confirmation order has res judicata and collateral estoppel effect, Johnson v. Stemple (In re Stemple), 361 B.R. 778, 796 (E.D. Va. 2007), just like a judgment in federal civil litigation, Amcast Indus. Corp. v.

14

Also militating against use of the petition date is the fact that, as of the petition date, there is no entitlement to payment of post-petition interest. See 11 U.S.C. 502(b)(2). Rather, the entitlement (if any) to post-petition interest arises only when distributions become payable from a solvent estate: in Chapter 7, on the date a dividend is declared and paid pursuant to Bankruptcy Rule 3009; and, in a Chapter 11 case, on the date the plan providing for such payments is confirmed. To engage in the fiction that the petition date is the date of judgment for purposes of Section 1961(a) would be to ignore, among other things: (a) the inability (in the vast majority of cases) to determine solvency on the petition date; and (b) the reality that enterprise value may fluctuate and administrative expense claims may accrue over the course of a case, meaning a debtor solvent on the petition date might become insolvent by the time estate distributions are payable (and, in the case of fluctuating enterprise valuation, vice versa). As such, use of the petition date as the judgment date for purposes of Section 1961(a) would be to adopt the untenable proposition of a judgment that, depending on subsequent case events, might or might not have any ultimate vitality. 27

Detrex Corp., 45 F.3d 155, 158 (7th Cir. 1995). After confirmation, the Bankruptcy Courts subject matter jurisdiction narrows considerably. See LaRoche Indus., Inc. v. Orica Nitrogen LLC (In re LaRoche Indus., Inc.), 312 B.R. 249, 257 (Bankr. D. Del. 2004) (Walrath, J.). And, of course, the confirmation order is appealable. See, e.g., In re Combustion Engg, Inc., 391 F.3d 190 (3d Cir. 2004) (vacating confirmation order). 53. Beyond just simple logic, this conclusion also comports with numerous cases

holding that, if a Chapter 11 case is converted midstream to a proceeding under Chapter 7, the date of judgment for determining the date post-petition interest begins accruing under Bankruptcy Code Section 726(a)(5) is not the petition date but the date of the order converting the case. See, e.g., Varsity Carpet Servs. v. Richardson (In re Colorex Indus., Inc.), 19 F.3d 1371, 1384 (11th Cir. 1994) ([U]pon conversion to Chapter 7, the interest accruing thereafter enjoys only the fifth priority pursuant to 726(a)(5).); Rupp v. United States (In re Rocky Mountain Refractories), 208 B.R. 709, 713 (B.A.P. 10th Cir. 1997) (Section 726(a)(5) applies to post-Chapter 7 interest.); In re Olympia Holding Corp., 250 B.R. 136, 144 (Bankr. M.D. Fla. 2000) (The interest accruing . . . from the date of conversion of the case until the date of payment is entitled to payment pursuant to 726(a)(5).). 54. This conclusion is not altered one iota by the language of Bankruptcy Code

Section 726(a)(5), affording payment of interest at the legal rate from the date of the filing of the petition. Congresss use of the word from indicates that the prepositional phrase (from the date of the filing of the petition) relates only to the time period interest is due; i.e., the phrase simply means that the creditor is entitled to interest for the post-petition time period. See S. Rep. No. 95-989, 95th Cong., 2d Sess. 5, reprinted in Vol. D Collier on Bankruptcy App. Pt. 4(e)(i) (15th ed. 2011) (Bankruptcy Code Section 726(a)(5) provides that postpetition interest

28

on prepetition claims is . . . to be paid to the creditor.). It says nothing about how that interest rate is to be calculated, mechanically. 55. And, the from prepositional phrase most certainly does not direct a

determination that post-petition interest shall be calculated using the federal judgment rate in existence as of the petition date. See Kaiser Aluminum & Chem. Corp. v. Bonjomo, 494 U.S. 827, 838 (1990) (finding the language of 28 U.S.C. 1961(a) that interest shall be calculated from the date of the entry of the judgment implies the calculation of interest is inextricably tied to the date of the entry of judgment) (emphasis in the original). The interest reference date is determined by the words preceding the word from; those words direct the Court to impose the legal rate of post-petition interest in accordance with 28 U.S.C. 1961(a). And, Section 1961(a) would have interest determined as of the date of judgment, to wit: the date the plan is confirmed.15 4. 56. The Economic Impact Is Quite Significant.

The liquidation analysis attached as Exhibit A to the Declaration of Jonathan

Goulding, dated July 8, 2011, Debtors Conf. Ex. 374 (the Goulding Declaration) (App. M),

15

The TPS Consortium acknowledges the existence of a limited number of cases in which Bankruptcy Courts, without analysis, used the petition date as the interest reference date rather than the confirmation date. The TPS Consortium is, however, unaware of any case (including those particular cases) where the Court was actually asked to and actually did thoroughly analyze what particular date should be used as the interest reference date. Perhaps that is because litigants previously were not economically motivated to press the legal point, given that the federal judgment rate is only now at an historically low level. Moreover, in this Courts prior decision in Coram, the Court did not apply the federal judgment rate existing on the petition date (6.35%); rather, the Court used the rate that was in effect on the date of the Official Equity Committee filed its Third Amended Disclosure Statement (0.97%). As such, it appears that the question of which federal judgment rate should be applied is really one of first impression; but one of critical importance here in that application of the correct post-petition interest rate (i.e., at the federal judgment rate on the confirmation date) will result in hundreds of millions of dollars in value being made available to otherwise disenfranchised parties-in-interest. 29

attests to the following two uncontroverted facts: (1) the amount of distributable cash on the Plans Effective Date is $7,129 million; and (2) the aggregate amount of claims to be paid in this case, excluding post-petition interest, is $7,032 million. 57. Attached hereto as Exhibit A are documents that have also been submitted as

Confirmation Exhibits TPS 301-A and TPS 301-B [Docket Number 8315]. As indicated on TPS 301-A, the now-prevalent federal judgment rate of interest has been below 0.20%, and was 0.16% at the conclusion of the confirmation trial. As indicated on TPS 301-B, application of this interest rate (0.16%) to all forms of debt, for the entire post-petition period, yields an incremental $33.5 million due to creditors. Thus, of the $7,129 million in distributable cash available, $7,065.5 million is due to creditors (principal plus pre-petition and post-petition interest), leaving an excess of $63.5 million after full creditor satisfaction. Besides the $63.5 million, the estates would also still hold the following residual value: (i) unsettled estate causes of action worth perhaps hundreds of millions or billions of dollars; (ii) WMMRC, worth (according to Messrs. Goulding and Zelin) $160 million; (iii) subsidiary investments, worth (according to Mr.

30

Goulding) $72 million; and (iv) future income tax receivables, worth (according to Mr. Goulding) $75 million.16 58. compensation. The Plan distributes all such excess value to creditors, resulting in their overRespecting holders of TPS Securities, such over-compensation violates

Bankruptcy Code Sections 1129(a)(7) and 1129(b), thus rendering the Plan unconfirmable. 5. The Debtors Are Not Able To Evade This Conclusion By Pointing To Unsustainable Tack On Claims That Have Absolutely No Legal Or Evidentiary Support.

59.

Debtors resort to non-evidentiary smoke and mirrors in an attempt to distract the

Court from the Plans legal infirmities. They contend that none of the foregoing value would accrue to holders of the TPS Securities because: (a) the PIERs are entitled to gross-up their unsecured claim to cover their contractual subordination obligations to holders of senior funded debt (i.e., senior debt takes PIERs distributions to the extent that the estates do not deliver postpetition interest at the contract rate); and (b) Class 18 litigation claims stand as a material obstacle in the way of the TPS holders realizing any of the excess value. Neither contention is supported by the law or the evidence.

16

There is a fair amount of poetic justice in this result. As discussed herein, the evidence adduced in July 2011 now conclusively establishes that: (i) the Settlement Noteholders bought negotiating influence and exploited it to construct a deal that over-enriched themselves at the expense of others lower in the capital structure; (ii) the driver of the settlement was allocation of tax refunds and the delivery of TPS Securities to JPMorgan, and did not involve any analysis whatsoever as to the value of the avoidance and business tort claims; (iii) the deal was struck at what they thought was a level just a pittance below full payment of the PIERs, so that the Settlement Noteholders retained case control; and (iv) the Debtors (led by conflicted professionals) turned a blind-eye to and never truly investigated the potential avoidance and business tort liability to enable the deal to close, unfettered by what the true facts may be. This was a Machiavellian gaming of the system. It seems perfectly fitting and equitable that, due to their miscalculation and the appropriate operation of law, all of this value flows down to those parties-in-interest the Plan architects aimed to disenfranchise. 31

a.

The WMI Estate Is Not Responsible For PIERs Turn-Over Obligations To Senior Funded Debt.

60.

Bankruptcy Code Section 502(b)(2) explicitly provides that an unsecured claim

does not include post-petition interest. That does not change in a solvent-debtor case; there is no solvency exception built into the Bankruptcy Code Section 502(b)(2). The right to post-

petition interest in the solvent-debtor case derives instead from Bankruptcy Code Section 1129(a)(7) and the Bankruptcy Code Section 726(a)(5) waterfall mechanic that entitles unsecured creditors to post-petition interest at the legal rate before any amount may flow down to preferred equity. This sort of flow-down tax is merely a supplemental creditor entitlement in a solvent-debtor case. The pre-petition unsecured claim does not grow to encapsulate postpetition interest in contravention of Bankruptcy Code Section 502(b)(2). 61. Thus, once senior creditors receive their Bankruptcy Code Section 502(b)(2)

entitlement (principal plus accrued pre-petition interest) and their Bankruptcy Code Section 726(a)(5) entitlement (post-petition interest at the federal judgment rate), they are not entitled to any additional value from the estates; all estate obligations to the senior creditor class are paid in full. Likewise, when subordinated creditors receive their Bankruptcy Code Section 502(b)(2) entitlement (principal plus accrued pre-petition interest) and their Bankruptcy Code Section 726(a)(5) entitlement (post-petition interest at the federal judgment rate), all estate obligations to the subordinated creditor class are also paid in full. Any estate value remaining thereafter goes to preferred equity. 62. That does not change if there is a subordination agreement between the senior

creditors and the junior creditors, obligating the junior creditors to turn-over their distributions so that the senior creditors receive more than the legal rate of post-petition interest (e.g., the contract rate). That is an arrangement only involving those two creditor groups; it is not anyone

32

elses business or obligation. But, if a plan properly gives Bankruptcy Code Section 510(a) effect to a subordination agreement and, as a result, (a) the senior creditors receive post-petition interest at the contract rate and (b) the junior creditors retain less than par, that is not the estates problem. Again, both classes of claims are fully paid as far as the Bankruptcy Code is

concerned, and the junior creditors do not have any entitlement whatsoever to ask the estates for more. See Bank of Am., N.A. v. N. LaSalle St. Pship (In re 203 N. LaSalle St. Pship), 246 B.R. 325, 330 (Bankr. N.D. Ill. 2000) (A senior creditor under a subordination agreement could argue that its claim was entitled to postpetition interest, despite the general prohibition, with the payment of interest coming not from the estate, but from the dividend that would otherwise be paid to the subordinated claim.); First Fidelity Bank, N.A. v. Midlantic Natl Bank (In re Ionsophere Clubs, Inc.), 134 B.R. 528, 532 (Bankr. S.D.N.Y. 1991) (Payment of [post-petition] interest may have the effect of sharply reducing or eliminating recovery for the [junior creditors] because while the [senior creditors] claim for interest increases, the [junior creditors] aggregate claim against the Debtor remains the same. Thus, the [senior creditors] can only receive their interest payment out of the potential dividends of one or more of the subordinated series.); see also HSBC Bank USA, N.A. v. Bank of New York Mellon Trust Co. (In re Bank of New England Corp.), No. 10-1456, 2011 WL 2476470 (1st Cir. June 23, 2011) (explaining that, under subordination agreements, the payment of post-petition interest to senior creditors [can eliminate] any recovery on junior indebtedness, [by] entitling senior creditors to amounts that would otherwise be payable to junior creditors); In re Smith, 77 B.R. 624, 627 (Bankr. N.D. Ohio 1987) (finding that subordination agreements between creditors (i) may not impair the rights of non-contracting parties and that (ii) the amount of claims against the Debtor, and the distribution to uninvolved creditors, remains unaffected).

33

63.

This understanding is reinforced by the lead-in clause of Bankruptcy Code

Section 726(a): Except as provided in section 510 of this title . . . . This clause states, in effect: Creditors are entitled to participate in the Bankruptcy Code Section 726(a) waterfall of estate distributions, unless a subordination agreement obligates a reallocation of such distributions to different (contractually senior) creditors. See Patrick Darby, Southeast and New

England Mean New York: The Rule of Explicitness and Post-Bankruptcy Interest on Senior Unsecured Indebtedness, 38 Cumb. L. Rev. 467, 477 (2008) ([W]hen the estate is solvent, the Bankruptcy Code may provide a basis for allowing post-petition interest on senior debt. To the extent senior debt is unsecured, however, the Bankruptcy Code does not allow for post-petition interest as a claim against the estate. To collect interest, which may be substantial in the course of a lengthy bankruptcy case involving large debts, the senior creditor must look to the junior creditor under the subordination agreement.). 64. The WMI estate does not bear PIERs gross-up liability because of that classs

contractual subordination obligations. There is absolutely nothing in the Bankruptcy Code to support such a ruling, which would otherwise be in clear derogation of the express terms of Bankruptcy Code Section 502(b)(2). The Court should reject any such contention out-of-hand. b. Neither The Law Nor The Trial Evidence Support A Finding Of Any Class 18 Liability.

65.

The law does not allow the Debtors to hold up phantom (contingent, unliquidated)

litigation claims in an effort to divert estate value from flowing where it naturally should. Such litigation strategy is not in keeping with the Debtors fiduciary responsibilities, nor with Bankruptcy Code Sections 1129(a)(2) and (a)(3). See 11 U.S.C. 1107, 704(a)(5) (obligating the debtor-in-possession to object to the allowance of any claim that is improper); Intl Yacht and Tennis, Inc. v. Wasserman (In re Intl Yacht and Tennis, Inc.), 922 F.2d 659, 661 (11th Cir.

34

1991) (finding debtor-in-possession has the duty to object to the allowance of any claim that is improper). 66. Moreover, if there truly is a question as to whether such claims are sustainable,

the law does not allow the Court simply to whisk the issue aside and confirm the Plan, as the Debtors here request. Rather, the Bankruptcy Code explicitly obligates this Court to estimate the amount of such contingent, unliquidated claims before confirming the Plan. See 11 U.S.C. 502(c)(1) (There shall be estimated for purposes of allowance under this section any contingent or unliquidated claim, the fixing or liquidation of which, as the case may be, would unduly delay the administration of the case.) (emphasis added); 4 Collier on Bankruptcy 502.04[2] (16th ed. 2011) (The language of section 502(c) is mandatory and places upon the court an affirmative duty to estimate unliquidated claims in the proper circumstances.); In re Nova Real Estate Inv. Trust, 23 B.R. 62, 65 (Bankr. E.D. Va. 1982) (estimation of contingent, unliquidated claim mandated where claim calls plan into question). 67. As Plan proponents, the Debtors bear the burdens of proof and persuasion

respecting such claim estimation. In other words, it was the Debtors obligation to present to this Court evidence proving that there are sustainable Class 18 claims that absorb the value otherwise expected by holders of the TPS Securities. See In re Colfer, 159 B.R. 602, 608 (Bankr. D. Me. 1993) (holding that the burden rests on the debtors to persuade the court, by preponderance of the evidence, that the classification and treatment they propose does not discriminate unfairly); Bittner v. Borne Chem. Co., 691 F.2d 134, 135 (3d Cir. 1982) (finding a Bankruptcy Court may determine the value of a claim only after the debtor has provided sufficient evidence on which to base a reasonable estimate of the claim). The Debtors did not carry these burdens. Quite the

35

contrary, the evidence establishes that there is no sustainable liability standing between the PIERs (Class 17) and the TPS Securities (Class 19). (i) 68. There Is No MARTA Liability.

The primary Class 18 claim is a bondholder fraud claim, called the MARTA

claim. In the Debtors Amended Thirty-Second Omnibus (Substantive) Objection to Claims (Claim Nos. 3812, 2689, 3174, 3179, 3187), dated May 18, 2010 [Docket No. 3801] (App. N), the Debtors provided a 69-page explanation, submitted to this Court under the strictures of Bankruptcy Rule 9011, as to why the estates bear absolutely no MARTA liability. 69. Second, in the Debtors Motion to Estimate Maximum Amount of Certain Claims

for Purposes of Establishing Reserves Under the Debtors Confirmed Chapter 11 Plan, dated November 17, 2010 [Docket No. 5971], at Exhibit B, pages B-10 and B-11 (App. O), the Debtors make the following representation to the Court: Claim Nos. 2689 and 3812 are based on securities claims asserted in the class action captioned Boilermakers National Annuity Trust Fund v. WaMu Mortgage Pass-Through Certificates, et al., Case No. 09-0037 (W.D. Wash.), filed by a retirement plan based on the purchase of WaMu Mortgage Pass-Through Trust Certificates. A consolidated class action complaint was filed on 11/23/09, alleging, among other things, that certain offering documents contained false and misleading statements . . . . The Debtors objected to these claims as part of the Thirty-Second Omnibus Objection to Claims, on the grounds that there was no legal basis to hold WMI liable for any of the Securities Act claims or state statutory securities claims asserted in the underlying non-bankruptcy litigation. No response was filed by the claimants. The Debtors have conferred with the claimants and are in the process of executing a stipulation pursuant to which these claims shall be withdrawn without prejudice to refile. Upon entry of the stipulation, there will be no liability to WMI arising from these claims, but in an abundance of caution, the Debtors seek to estimate their maximum exposure at $0 on account of these claims. Having made these representations to the Court in pleadings that remain outstanding, the Debtors are judicially estopped from now claiming differently for strategic purposes. See Yoo Wong

36

Park, 472 F.3d at 73 (Judicial estoppel is a judge-made doctrine that seeks to prevent a litigant from asserting a position inconsistent with one that she has previously asserted in the same or in a previous proceeding.). (ii) 70. There Is No D&O Liability.

The Debtors also classify certain contingent, unliquidated director and officer

indemnification claims against the estates under Class 18. There is absolutely no evidence in the record establishing the sustainability of any such claims. Quite the contrary, the Senate Report reflects strong likelihood that all such claims will be expunged. See Wash. Rev. Code

23B.08.510 (2010) (A [Washington] corporation may not indemnify a director [ ]: (a) in connection with a proceeding by or in the right of the corporation in which the director was adjudged liable to the corporation; or (b) in connection with any other proceeding in connection with any other proceeding charging improper personal benefit to the director, whether or not involving action in the directors official capacity, in which the director was adjudged liable on the basis that personal benefit was improperly received by the director.). Alternatively, all such claims will be covered by D&O insurance. See Docket Nos. 8367, 8368 and 8385 (App. P, Q & R). 71. Based on the findings of the Senate Report, there is no reason to suspect the

estates will ever write a check to WMI executives. But, based on the findings of the Senate Report, there is every reason to suspect WMI executives ultimately will be writing very large checks to the estates. The D&O claims do not stand in the way of Class 19 distributions. (iii) 72. There Is No Other Class 18 Liability.

Similarly, there is nothing in the record establishing Class 18 liability owed on

any other claim placed in that class. As such, the Court should not entertain any non-evidentiary

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statements of counsel regarding some significant, yet undefined, body of subordinated claims standing between Class 19 and its due entitlement to estate value once the PIERs are paid in full. 73. In sum, even if the TPS Consortium is unsuccessful on its appeal in Blackhorse

Capital LP v. JPMorgan Chase Bank, N.A., there is still value worth hundreds of millions, perhaps billions, of dollars due to holders of TPS Securities. That is true even if the Court again determines to approve the Global Settlement Agreement. The Plan deprives the TPS Consortium of that entitlement in violation of Bankruptcy Code Section 1129. No argument or evidence put before this Court directs a different conclusion. The Plan should not be confirmed. B. The Plan Deprives Rejecting Holders Of TPS Securities (Class 19) Of Their Legal Entitlement To (1) The Proceeds Of Estate Causes Of Action And (2) Participate In The Governance Of Post-Consummation Litigation, And Nothing Has Been Presented To Support Any Different Conclusion. 1. The TPS Holders Are Legally Entitled To Proceeds Of Unsettled Estate Causes Of Action, And Nothing Has Been Presented To Support Any Different Conclusion. a. The Plans Death-Trap Provision Foists A Significant Added Evidentiary Burden On The Debtors: That The Value Of Estate Causes Of Action To Be Vested In The Liquidation Trust Is Less Than The Delta Before Holders Of TPS Securities Are In-The-Money.

74.

As indicated in previous sections of this Brief, settlement cash is not the only

value being distributed under the Plan. There are also interests in the Liquidation Trust. The Trust is to receive all the estate causes of action not being compromised under the Plan. Mr. Kosturos will be the Liquidation Trustee. He reports to a four-person Trust Advisory Board that is 75% appointed by the Official Creditors Committee; including indenture trustees for bond debt fully satisfied under the Plan. See Plan, 1.201 (App. A). Trust beneficial interests are delivered to holders of PIERs, then to Class 18 claimants (until those claims are withdrawn or

38

otherwise disallowed). Then, the beneficial interests in the Trust would be delivered to holders of TPS Securities and preferred stock. 75. follows: provided, however, that each Entity that has elected not to grant the releases set forth in this Section 43.6, including, without limitation, any Entity that fails to execute and deliver a release following notice in accordance with the provisions of Section 32.6(c) hereof, shall not be entitled to, and shall not receive, any payment, distribution or other satisfaction of its claim pursuant to the Plan. (App. A). Since members of the TPS Consortium voted against the Plan and did not tender the release, they are deprived of any distributions under the Plan. Section 43.6 is, in other words, a death-trap provision and, for the members of the TPS Consortium, the death-trap has sprung. 76. In so doing, the Debtors have imposed upon themselves a tremendous added But, that last sentence is not quite accurate. Plan Section 43.6 provides as

evidentiary burden. To be sure, the Plan cannot death-trap distributions to which a party is otherwise entitled. If there is value due to members of the TPS Consortium, the Debtors have no legal entitlement to build into the Plan a carrot and stick provision because: (a) the members of the TPS Consortium are legally entitled to the carrot; and (b) the Debtors have no legal entitlement to wield the stick. Such a plan would not pass the best interests test of

Bankruptcy Code Section 1129(a)(7) and it most assuredly would not be fair and equitable under Bankruptcy Code Section 1129(b). In this regard, In re MCorp Fin., Inc., 137 BR 219 (Bankr. S.D. Tex. 1992), is directly on point: Debtors have included in their plan(s) a provision authorizing some possible payout to equity (MCorp classes 15, 16, 17) upon a favorable vote by Class 15 (Shearson), but none to these three classes upon a negative vote by Class 15. Shearson has colorfully labeled this the death trap provision. While Shearsons choice of language is indeed colorative, it is also reasonably descriptive. . . . The asset which the MCorp plan conditionally made available to Shearson and equity classes junior to it was potential overflow from the Debtors Dallas

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Federal District Court litigation with the FDIC . . . . This provision is egregious in its carrot and stick approach to the problem of how to treat, in a plan of reorganization, an asset as highly speculative as possible recovery on a lawsuit won thus far at the United States District Court level as to liability against the FDIC. . . . The court finds that this MCorp Plan provision results in the plans not being fair and equitable. Id. at 236. 77. The Debtors have thus forced the following evidentiary question: What is value of

the estate causes of action to be vested in the Liquidation Trust? By this point in the legal analysis discussed herein, the question is academic; holders of the TPS Securities are already in-the-money. Thus, the death-trap provision is unto itself a fatal Plan infirmity, given that the Debtors have no entitlement to withhold value rightfully due to the TPS Consortium. But, if the Court were to determine that post-petition interest should be calculated using the federal judgment rate in effect as of the Petition Date (rendering the TPS Securities, according to the Goulding Declaration, $96 million out-of-the-money) or using the contract rate (rendering TPS Securities, according to the Goulding Declaration, $781 million out-of-the-money), the Plan theoretically may be confirmed only if the Debtors have proven to the Court that the value of the estate causes of action to be vested in the Liquidation Trust is less than the shortfall before holders of TPS Securities are in-the-money. b. The Debtors Have Failed To Carry Their Burdens Of Proof And Persuasion; To The Contrary, The Evidence Suggests That The Estate Causes Of Action May Be Worth Hundreds Of Millions, Perhaps Billions, Of Incremental Dollars.

78.

Of course, since this is the Debtors Plan, the Debtors exclusively bear the

burdens of proof and persuasion respecting the value of estate claims. See, e.g., In re Draiman, No. 09-17582, 2011 WL 1486128, at *24, 26 (Bankr. ND Ill. April 29, 2011) (concluding that

40

the Debtor has not carried his burden of showing the best interests test has been met because the Debtor failed to present any evidence of the value of the assets to be transferred to the Litigation Trust, the value of any potential recovery claims to be transferred to the Liquidation Trust, [or] a potential recovery estimate from the Liquidation Trust.) 79. The law clearly instructs how the Debtors were supposed to carry their burdens of

proof and persuasion at trial. In Polis v. Getaways, Inc. (In re Polis), 217 F.3d 899 (7th Cir. 2000), Circuit Judge Richard Posner explained: Legal claims are assets whether or not they are assignable, especially when they are claims for money; as a first approximation, the value of [the debtors] claim is the judgment that she will obtain if she litigates and wins multiplied by the probability of that . . . happy outcome. Id. at 902. The Debtors were, in other words, required to present to the Court: (a) factual evidence regarding the estate claims to be vested in the Liquidation Trust; (b) documentary or testimonial support establishing the aggregate amount of anticipated judgment demands; and (c) expert opinion or other evidence establishing the percentage likelihood that those demands will be realized. 80. And, it bears repeating that, on this point, the Debtors burdens of proof and

persuasion to achieve Plan confirmation are heavy. See, e.g., Everett v. Perez (In re Perez), 30 F.3d 1209, 1214 n.5 (9th Cir. 1994) (The burden of proposing a plan that satisfies the requirements of the Code always falls on the party proposing it, but it falls particularly heavily on the debtor-in-possession or trustee since they stand in a fiduciary relationship to the estates creditors.); Smart World Tech., LLC v. Juno Online Servs. (In re Smart World Tech., LLC), 423 F.3d 166, 175 (2d Cir. 2005) (As fiduciary, the debtor bears the burden of maximizing the value of the estate, including the value of any legal claims.) (citations and internal quotations omitted). This aspect of the confirmation hearing is not a canvassing of the issues; this is not

41

part of settlement approval. Allocation of the proceeds of unsettled estate causes of action is a material component of the Plan itself. The Debtors must fully prove that such allocation is fair and appropriate by a preponderance of the admitted evidence. 81. This they did not do. Not a single piece of evidence, not a single utterance of

witness testimony, not a single document admitted into the trial record supports any particular valuation for the estate causes of action to be vested in the Liquidation Trust. Indeed, the Debtors aggressively opposed introduction of evidence that would allow the Court to reach a conclusion as to the significant potential value of such claims. Even if the Court were to find that post-petition interest should be calculated using the contract rate, the Plan still may not be confirmed because the Court has absolutely no evidence on which to support the required conclusion that the estate causes of action to be vested in the Liquidation Trust are not worth $1 (or even $1 billion) more than is necessary to satisfy in full the claims ahead of Class 19. 82. In fact, there is substantial evidence in the record that unsettled estate causes of

action are likely worth hundreds of millions, if not billions, of incremental dollars past the Class 19 threshold. As excerpted in Exhibit B hereto (see also Docket No. 8312), the Senate Report concludes WMI directors and officers grossly mismanaged the Debtors business enterprise, imposing vastly unsustainable risk and eventually ruining the Debtors asset-base. Such findings give rise to substantial estate claims sounding in breach of fiduciary duty and corporate waste, among other theories. The Senate Report gives reason to suspect that certain individual

members of management have personal wherewithal to satisfy large judgments; but, regardless, Mr. Kosturos testified as to the existence of at least $250 million in available D&O insurance coverage. See Transcript of July 21, 2011 Hearing (Testimony of William Kosturos), at 270:1018 (App. K). Moreover, the Senate Report concludes that deep-pocket Wall Street firms,

42

including Goldman Sachs and Deutsche Bank, knowingly assisted in such mismanagement for their own substantial economic gain, giving rise to substantial complicity liability to the WMI estate. Rating agencies and appraisal firms also bear considerable estate liability, according to the findings contained in the Senate Report. 83. The Debtors and the FDIC baldly retort that there are inhibitions on successfully

realizing on such claims. Nothing in the evidentiary record supports such a contention, which is otherwise belied by: (1) the Debtors pending application to retain the law firm of Klee Tuchin Bogdanoff & Stern, LLP [Docket No. 8111] to investigate, assess, and, if requested, potentially prosecute claims of the WMI estate against former officers and directors and other third parties, including former auditors, investment banking advisors, rating agencies, and others that may be identified ( 6) (App. S); and (2) Mr. Gouldings testimony as to the parties intent to invest $50 million to $75 million to fund, among other things, the prosecution of estate litigation. (Transcript of July 14, 2011 Hearing, at 133:15-17 (App. K). It is simply too incredible to be believed that the sophisticated parties involved in the negotiation of this Plan would have agreed to invest tens of millions of dollars to pursue litigation without the expectation of exponential returns on that investment. 84. Apparently realizing the evidentiary shortcoming, the Debtors and the FDIC now

resort to claiming that the mismanagement and complicity claims really belong to the Debtors bank subsidiary and, in turn, the FDIC. Utter nonsense. The law is quite clear that, when the directors or officers of a parent-holding company squander the corporations primary asset (a cash-generating subsidiary) by running that subsidiary into the ground and/or failing to take actions necessary to prevent the collapse of the subsidiary, those directors or officers bear liability to the parent-holding company itself. See, e.g., Case Fin., Inc. v. Alden, Civ Action No.

43

1184, 2009 WL 2581873 (Del. Ch. Aug. 21, 2009) (parent-holding company successfully alleged claim for breach of fiduciary duty against executive for actions deteriorating the value of the companys principal, wholly-owned subsidiary); Grace Bros., Ltd. v. UniHolding Corp., Civ. Action No. 17612, 2000 WL 982401, at *12 (Del. Ch. July 12, 2000) (Strine, V.C.) (To the extent that members of the parent board are on the subsidiary board or have knowledge of proposed action at the subsidiary level that is detrimental to the parent, they have a fiduciary duty, as part of their management responsibilities, to act in the best interests of the parent and its stockholders.); see also Official Comm. of Unsecured Creditors of Verestar, Inc. v. Am. Tower Co. (In re Verestar, Inc.), 343 B.R. 444, 473-74 (Bankr. S.D.N.Y. 2006) (Any situation where a wholly-owned and controlled subsidiary enters the zone of insolvency obviously requires all responsible parties to act with the utmost care and responsibility.). 85. The law is also quite clear that third-parties who knowingly aid and abet wrongful

management activities at the parent-holding company also bear complicity liability to the parentholding company. See, e.g., Rosener v. Majestic Mgmt., Inc. (In re OODC, LLC), 321 B.R. 128, 144 (Bankr. D. Del. 2005) (Walrath, J.) (To establish liability for aiding and abetting a breach of fiduciary duty, the plaintiff must prove three elements: a) that the fiduciarys conduct was wrongful; b) that the defendant had knowledge that the fiduciarys wrongful conduct was

44

occurring; and c) that the defendants conduct gave substantial assistance or encouragement to the fiduciarys wrongful conduct.) (citations and internal quotations omitted).17 86. Thus, evidence contained in the Senate Report proving that WMI directors and

officers ran the bank in a manner that effectively squandered WMIs principal, cash-generating asset (its interest in the bank) and/or failed to act appropriately to remedy mismanagement of the bank gives rise to substantial D&O liability to the WMI Chapter 11 estate. And, proof that Wall Street investment banks (e.g., Goldman Sachs and Deutsche Bank), rating agencies, appraisal firms, and others knowingly aided and abetted such wrongful WMI director and officer activity gives rise to substantial complicity liability also to the WMI Chapter 11 estate. 87. The evidence before this Court can only support a factual finding of potentially

extraordinary incremental value, distributable in part to holders of the TPS Securities. The Plan violates Bankruptcy Code Sections 1129(a)(7) and 1129(b), and should not be confirmed.

17

Even the in pari delicto defense is of lesser concern in this case, given that complicity claims likely arise under West Coast law, and the Ninth Circuit has perhaps the most bankruptcy-friendly view of that defense. See Fed. Deposit Ins. Corp. v. O'Melveny & Myers, 61 F.3d 17, 19 (9th Cir. 1995) ([T]he equities between a party asserting an equitable defense and a bank are at such variance with the equities between the party and a receiver of the bank that equitable defenses good against the bank should not be available against the receiver.). Moreover, there recently has been substantial dilution of the defense, especially in claims asserted on behalf of a bankruptcy estate. See Official Comm. of Unsecured Creditors of Allegheny Health Educ. and Research Fund v. PricewaterhouseCoopers LLP, 989 A.2d 313 (Pa. 2010); NCP Litig. Trust v. KPMG LLP, 187 N.J. 353 (N.J. 2006). And, of course, the claims at issue here would be brought against rather unsympathetic defendants, including Wall Street firms that (i) reaped extraordinary profits betting against the deals they helped construct that, in turn, precipitated the nations macro-economic collapse, and (ii) thereafter, accepted TARP bailout funding for American taxpayers.

45

c.

The Plan Wrongfully Allocates Trust Value For The Primary Benefit Of The Settlement Noteholders.

88.

The evidence establishes that the Settlement Noteholders own $955.7 million of

TPS Securities. See First Supplemental Verified Statement of Fried, Frank, Harris, Shriver & Jacobson LLP [Docket No. 3761] 2 and Exs. A & D (the Settlement Noteholder Rule 2019 Statement) (App. T). The evidence also establishes that few holders of TPS Securities and preferred stock actually tendered a release with their Plan vote. In fact, only approximately 34% of Class 19 (or, approximately 1.36 billion shares) and only approximately 20% of Class 20 (or, approximately 600,000 shares) did so and will, therefore, share in the proceeds of the Liquidation Trust. As a result, the evidence establishes that, due to the death-trap Plan mechanic, the Settlement Noteholders (as holders of approximately one-half of the preferred securities that tendered releases and became eligible to participate in Trust distributions) are entitled to receive approximately one-half (uncapped) of all litigation proceeds and other future distributions from the Liquidation Trust. According to the Settlement Noteholder Rule 2019 Statement, all of the TPS Securities owned by those parties were purchased after the Petition Date, at pennies (or even fractions of pennies) on the dollar of liquidation preference. 89. It is hard to fathom how this result is anywhere near a fair and equitable

resolution of this Chapter 11 proceeding. The Plan is not confirmable. 2. TPS Holders Are Legally Entitled To Meaningful Participation In The Post-Consummation Governance Of Estate Litigation, And Nothing Has Been Presented To Support Any Different Conclusion.

90.

Parties entitled to participate in the proceeds of estate litigation (vested post-

consummation in a liquidation trust) also are entitled to assurance that any such litigation will be properly managed post-consummation by that trust. A plan may not, in other words, replace: (a) the debtors trustee-like stewardship, under the Bankruptcy Courts watchful eye, pre-

46

consummation; for (b) a post-consummation trustee and oversight board beholden only to certain parochial interests, to the exclusion of other trust beneficiaries. See 11 U.S.C. 1123(a)(7). As explained by Collier: Section 1123(a)(7) is derived from Section 216(11) of the former Bankruptcy Act, which prescribed that a Chapter X reorganization plan shall include provisions which are equitable, compatible with the interests of creditors and stockholders, and consistent with public policy, with respect to the manner of selection of the persons who are to be directors, officers or voting trustees, if any, upon the consummation of their plan, and their respective successors. The Senate Report accompanying the Chandler Act stated with respect to Section 216(11) that such provision directs the scrutiny of the court to the methods by which the management of the reorganized corporation is to be chosen, so as to ensure, for example, adequate representation of those whose investments are involved in the reorganization. 7 Collier on Bankruptcy 1123.LH[6] (16th ed. 2011). 91. A plan trust that engenders insecurity and suspicion because of its governance

structure is almost by definition not advanced in good faith per Bankruptcy Code Section 1129(a)(3). See, e.g., In re Coram Healthcare Corp., 271 B.R. 228, 234 (Bankr. D. Del. 2004) (finding the good faith requirement considers whether the plan effects results consistent with the objectives and purposes of the Bankruptcy Code.). It also is not fair and equitable to the dissenting class of beneficiaries. 92. This is a corollary to the fundamental Chapter 11 precept that post-consummation

management must be made to answer to beneficiaries of the enterprise going forward. It is precisely for this reason Bankruptcy Code Section 1123(a)(6) prohibits the issuance of nonvoting stock and also provides for an appropriate distribution of equity voting power among classes: This section codifies a position long supported by the Securities and Exchange Commission that participation in, and control of, the selection of the management of a reorganized debtor must be considered as a part of a fair and equitable plan

47

and provided for accordingly. It is thus not enough to determine merely which of the new securities will be entitled to vote; the securities must be distributed so that the allocation of voting power i.e., the control of the company properly recognizes the respective position of the claimants and stockholders according to their rank and rights they surrender. Consequently, creditors who are forced to take stock in the new company, or whose rights as creditors are modified or altered so that they assume some risk of the success of the reorganized corporation, are entitled to an allocation of voting power and a voice in the selection of management that will protect their interests. See 7 Collier on Bankruptcy 1123.01[6] (16th ed. 2011). In other words, the law conclusively presumes that, for an interest in the enterprise to be meaningful, and not illusory, the beneficiaries should be afforded reasonable management participation and/or oversight to prevent their value entitlement from being squandered in the future. 93. The Plan is inconsistent with these legal principles. The Liquidation Trust will be

administered by Mr. Kosturos, who was selected by the Debtors and negotiating creditors without any input from holders of the TPS Securities or equity securities. Mr. Kosturos will answer to a four-person Trust Advisory Board. Three members sit on, and were appointed by, the Official Creditors Committee. They include indenture trustees for WMI bond debt that is fully repaid under the Plan meaning that the holders of such debt have absolutely no right to participate in Trust distributions. This smacks of political patronage. Holders of TPS Securities have perhaps the largest economic interest in the Liquidation Trust and, yet, have absolutely no representation on the Board, let alone the majority voice that their position in the capital structure warrants. The Plan should not be confirmed.

48

III.

The Debtors Have Failed To Carry Their Burden Of Proof For Continued Approval Of The Global Settlement, Especially In Light Of Substantial New Evidence And The Appellate Reversal Of ANICO. A. The Law Of The Case Doctrine Does Not Foreclose Evaluation Of The Global Settlement. The Debtors and JPMorgan contend that the law of the case doctrine forecloses

94.

any discussion whatsoever of the Global Settlement. That is wrong. The law of the case doctrine requires that there be a final order. For the doctrine to apply, there must be law actually issued in the case binding the parties. See Gander Mountain Co. v. Cabelas, Inc., 540 F.3d 827 (8th Cir. 2008); Council of Alt. Political Parties v. Hooks, 179 F.3d 64, 69 (3d Cir. 1999); Cable v. Millennium Digital Media Sys., L.L.C. (In re Broadstripe, LLC), 435 B.R. 245 (Bankr. D. Del. 2010) (Sontchi, J.). The Courts January 7th Opinion did not culminate in a final order. So, there is no law binding the parties.18 Indeed, it is precisely because the Debtors have renewed their request for final approval of the Global Settlement Agreement that the record from the December 2010 trial was incorporated into the record of the July 2011 trial. Simply stated, there is no law of the case precluding the Courts evaluation of the Global Settlement Agreement in connection with the Debtors current request for Plan confirmation.

18

The Debtors and JPMorgan advocated that position quite emphatically in their opposition of the Official Equity Committees request for direct appeal of the January 7th Opinion to the Third Circuit Court of Appeals. See JPMCs Objection to the Equity Committees Petition for Certification of Direct Appeal, at 4 [Docket No. 6656] (App. U) (As of now, there is no confirmation order, no final plan . . . and no final settlement for an appellate court to review. . . . [T]he Equity Committees appeal therefore is premature); see also Debtors Objection to the Equity Committees Petition for Certification of Direct Appeal, at 2 [Docket No. 6653] (App. V) (Any appeal of the Courts findings regarding the Global Settlement Agreement must await entry of an order confirming a plan.). Here again, principles of estoppel come into play. 49

B.

Even If The Court Had Issued A Final Order Regarding The Global Settlement Agreement, Reconsideration Of That Order Would Be Warranted By Significant Factual Developments Since December 2010. Even if the Court had issued a final order approving the Global Settlement

95.

Agreement in the January 7th Opinion denying confirmation, the law of the case doctrine would not stand in the way of the Courts reconsideration of that order in light of significant factual developments since the first confirmation trial concluded in December 2010. See Fed. R. Bankr. P. 9024 (incorporating Federal Rule of Civil Procedure 60(b)(2) and contemplating relief from a final order or judgment based on new evidence). More specifically, the Courts

reconsideration of any approval of the Global Settlement Agreement would be warranted in light of: (a) the subsequently-issued Senate Report; and (b) the Circuit-level reversal of the ANICO decision. 96. The evidentiary record of the December 2010 trial established that the largest

potential claims against JPMorgan and the FDIC arose under avoidance and business tort theories. See, e.g., Transcript of December 2, 2010 Hearing (Testimony of William Kosturos) at 199:13-201:18 (App. L). Such claims included potential actions against the FDIC seeking recovery: (a) for a breach of the FDICs duty to maximize the value of WMB; (b) under the Takings Clause of the 5th Amendment to the United States Constitution; and (c) on claims sounding in conversion under the Federal Tort Claims Act.19 See Complaint Against Federal

19

The heavy-handed tactics of the FDIC during the 2008/2009 financial crisis (and potential liability therefore) have come under increasing scrutiny in other cases including, inter alia, with respect to potential liability for facilitating intentional fraudulent transfers from bank holding companies to banks that were subsequently seized by the FDIC. See e.g., Order Granting in Part and Denying in Part Defendants Motions to Dismiss, at 2, Schoenmann v. FDIC, Case No. 10-03989, 2011 U.S. Dist. LEXIS 43375, *2 (N.D. Cal. April 21, 2011) (App. W) (denying FDIC motion to dismiss claims for actual fraud). The record before the Court shows WMI has similar claims against the FDIC, and nothing in the record demonstrates such claims are not viable. 50

Deposit Insurance Corporation, Washington Mut., Inc. v. FDIC, Adv. Proc. No. 09-00533 (RMC) (D.D.C. Oct. 13, 2009) [Docket No. 1], Debtors Conf. Ex. 32 (App. X). Potential claims against JPMorgan included: (x) claims to recover, inter alia, approximately $6.5 billion in pre-petition transfers from WMI to WMB and to recover the TPS Securities (valued at $4 billion); see Complaint for Turnover of Estate Property, Washington Mut., Inc. v. JPMorgan Chase Bank, N.A., Adv. Proc. No. 09-50934 (Bankr. D. Del. April 27, 2009) [Docket No. 1], Debtors Conf. Ex. 48 (App. Y), and (y) myriad potentially meritorious and highly valuable claims including unfair competition, tortious interference, interference with prospective economic advantage, breach of contract, misappropriation of confidential information and trade secrets, and conversion, among others. See Debtors Motion for an Order Pursuant to

Bankruptcy Rule 2004 and Local Bankruptcy Rule 2004.1 Directing the Examination of JPMorgan Chase Bank, N.A., at 2, 3, 8 & 10 [Docket No. 974], Debtors Conf. Ex. 68 (App. Z). 97. In the January 7th Opinion, based on the record then available, the Court

concluded WMIs chances of prevailing on business tort claims against JPMorgan were not high, citing to: (a) the potential failure of the Debtors to properly preserve such rights in the WMB receivership proceedings; and (b) and the then-current status of the ANICO litigation, which had been dismissed on the basis that similar tort-like claims would have had to have been pursued in the WMB receivership rather than against JPMorgan directly. See January 7th Opinion, at 53-56 (App. C). With the reversal of the ANICO decision in effect, clearing the way for direct WMI claims against JPMorgan without involvement of the WMB receivership both such bases for the Courts conclusions regarding business tort claims against JPMorgan have disappeared.

51

98.

Moreover, to the extent the Courts conclusions regarding the viability of estate

avoidance actions against JPMorgan and/or the FDIC were based on the possibility WMI was not insolvent prior to the petition date, the Senate Report included findings that WMIs pre-petition stock pricing was irrationally inflated, due to market misperception that the company was being appropriately regulated by the Office of Thrift Supervision. See Summary of Senate Report [Docket No. 8312], Ex. A at 4. These findings by the Senate Subcommittee were not available when the Court rendered its January 7th Opinion and must now be taken into account in considering WMIs pre-petition solvency and the viability of WMIs avoidance claims.20 C. The Evidentiary Record Cannot Support Approval Of The Global Settlement Agreement. It is a fundamental principle of law that settlement approval in the bankruptcy

99.

context requires evidence. See Protective Comm. for Indep. Stockholders of TMT Trailer Ferry, Inc. v. Anderson, 390 U.S. 414, 424 (1968) (noting that a court must apprise [ ] [itself] of all facts necessary for an intelligent and objective opinion of the probabilities of ultimate success should the claim be litigated. Further, the judge should form an educated estimate of the complexity, expense, and likely duration of such litigation, the possible difficulties of collecting on any judgment which might be obtained, and all other factors relevant to a full and fair assessment of the wisdom of the proposed compromise.); Frys Metals, Inc. v. Gibbons (In re
20

The TPS Consortium understands the Court may view pre-petition insolvency as potentially damaging to business tort claims the WMI estate might assert. See e.g., January 7th Opinion, at 56 (App. C). Respectfully, given WMIs early abandonment of its investigation into such claims, the record is insufficient with regard to the various types of claims that might be asserted and whether, under applicable law, such claims would be viable notwithstanding WMIs insolvency. Further, to the extent the Debtors conducted any legal analysis of the effect of insolvency on the viability of business tort claims, that analysis was specifically withheld from the parties and the Court, and is not part of the record. Finally, notwithstanding any effect it might have on business tort claims, WMIs pre-petition insolvency directly supports the assertion of avoidance-type estate claims. 52

RFE Indus., Inc.), 283 F.3d 159, 165 (3d Cir. 2002) (Third Circuit reversed bankruptcy courts approval of a settlement, holding that the bankruptcy court did not make any findings of fact [regarding the four Martin factors]. . . . Hence, we remand for an examination of the fairness, reasonableness and adequacy of the Settlement in light of the factors listed in Martin.) (citing to Myers v. Martin (In re Martin), 91 F.3d 389, 393 (3d Cir. 1996)). 100. Unless there is substantial reason to believe the settled claims will be dismissed

on pure legal grounds, there must be evidence as to the underlying merits of the claims proposed to be compromised. See Travelers Cas. and Surety Co. v. Future Claimants Representative, No. 07-2785, 2008 WL 821088, at *9 (D.N.J. March 25, 2008) (citing RFE Indus., 283 F.3d at 165 (finding that the bankruptcy court must make specific findings pursuant to the Martin test, and reach an objective and independent opinion as to the reasonableness of the compromise)); In re Barone, No. 07-51621, 2011 Bankr. LEXIS 1267 (Bankr. M.D. Pa. April 11, 2011) (citing to RFE Indus. as the basis for the courts request that trustees counsel present evidence in support of the motion seeking approval of the settlement); 10 Collier on Bankruptcy 9019.02 (16th ed. 2011) (discussing how the evidence must enable a court to make detailed enough findings so that a reviewing court knows that the proper factors were considered and an informed judgment made); see also Kopp v. All Am. Life Ins. Co. (In re Kopexa Realty Venture Co.), 213 B.R. 1020, 1022 (B.A.P. 10th Cir. 1997) (vacating bankruptcy court approval of settlement when such approval was not an informed one based upon an objective evaluation of developed facts) (citations and internal quotations omitted). 101. With the reversal of the ANICO decision (clearing the primary cited obstacles to

asserting business tort claims directly against JPMorgan) and the issuance of the Senate Report (clearing away doubts as to the pre-petition insolvency of WMI), the remainder of the

53

evidentiary record to support approval of the Global Settlement Agreement consists of pleadings filed in the various different litigations. No underlying evidence as to the viability of the various estate claims or defenses has been provided to the Court. As a matter of law, pleadings do not qualify as evidence. See Fed. R. Bankr. P. 9017 (applying the federal rules of evidence to bankruptcy cases); see also Biggs v. Capital Factors, Inc. (In re Herb Goetz & Marlen Horn Assocs., Inc.), No. 96-55944, 1997 WL 415340, at *2 (9th Cir. July 24, 1997) (Although a court may take judicial notice of its own records, it cannot take judicial notice of the truth of the contents of all documents found therein.); M/V Am. Queen v. San Diego Marine Constr. Corp., 708 F.2d 1483, 1491 (9th Cir. 1983) (As a general rule, a court may not take judicial notice of proceedings or records in another case so as to supply, without formal introduction of evidence, facts essential to support a contention in a cause then before it.) (citations omitted); Credit Alliance Corp. v. Idaho Asphalt Supply, Inc. (In re Blumer), 95 B.R. 143, 146 (B.A.P. 9th Cir. 1988) ([A] court [cannot] take judicial notice of the truth of all documents found within a courts records.); MCorp, 137 B.R. at 229 (The pleadings, including the Disclosure Statement . . . are therefore not accepted for the truth of the allegations contained therein . . . .). 102. Accordingly, the Global Settlement Agreement, devoid of evidentiary support in

the record, should not be approved now. D. Now That Light Has Been Shed On The Plan Negotiations, It Is Clear The Settlement, Negotiated By Conflicted Counsel, Was Designed To Overcompensate Creditors, Leave Equity With Nothing, And Deliver All Remaining Value To JPMorgan. During the December confirmation proceedings, the Settlement Noteholders

103.

remained curiously silent regarding the parts they played in negotiating the Plan and Global Settlement Agreement; instead hiding behind the Debtor and its own assertions of privilege. At the July 2011 hearing, however, the Settlement Noteholders were flushed from the back rows of

54

the courtroom by allegations of their illegal conduct and forced to reveal the roles they played and the course of the Plan negotiations. And, what had been suspected in December 2010 that the settlement was negotiated to pay creditors in full (or more), with all residual value diverted to JPMorgan and no true analysis of the estates entitlement to value has been all too painfully confirmed. 104. The testimony elicited at the July 2011 proceedings establishes the Settlement

Noteholders purchased and exploited influence to control the Plan process and richly reward themselves. As the settlement discussions matured, the Settlement Noteholders moved within the capital structure to ensure they would maintain control over the process through ownership of the PIERs the putative fulcrum security they intended to be nominally impaired through the imposition of inappropriately high rates of post-petition interest on senior classes of debt (in which the Settlement Noteholders also maintained significant holdings). See, e.g., Transcript of July 18, 2011 Hearing (Testimony of Daniel Gropper) at 173:25-174:8 (App. K). Transcript of July 19, 2011 Hearing (Testimony of Daniel Gropper) at 50:19-55:15 (App. K); Transcript of July 21, 2011 Hearing (Testimony of Vivek Melwani) at 36:21-37:16, 39:19-40:9 (App.K) (explaining how the Settlement Noteholders struck a deal with the Debtors that the Plan be drafted in order to provide for the payment of post-petition interest on their debts at the contract rate); see also Settlement Noteholder Rule 2019 Statement, 2 (App. T). The record shows that the ultimate settlement result was driven not by some analysis of the strengths and weaknesses of the parties legal rights (e.g., with respect to the business tort and avoidance claims), but by the introduction of billions of dollars in tax refunds that made it possible to get the Settlement Noteholders a rich recovery and for JPMorgan to walk away from the table further enriched, with the estates rights in the TPS Securities already in hand. See Transcript of July 18, 2011 Hearing

55

(Testimony of Daniel Gropper) at 29:2-40:17 (App. K) (claiming that the additional $2.6 billion tax refund was a very, very material input); Transcript of July 21, 201 Hearing (Testimony of William Kosturos) at 167:22-168:13 (explaining that the tax refunds were the key to the proposal); see also Transcript of December 2, 2010 Hearing (Testimony of William Kosturos) at 73:18-78:8 (App. L) (discussing JPMorgans minimal out-of-pocket expenses). 105. All the while, the Debtors remained so myopically focused on getting a

settlement, that they never bothered to do the diligence necessary to determine whether the deal being negotiated around them by the Settlement Noteholders was a fair settlement. That neglect continues to this day as the Debtors ask the Court to confirm a Plan that will vest the Settlement Noteholders with significant residual beneficial interests in all remaining estate claims and litigation (through the Liquidating Trust) yet the Debtors have not bothered to put a value on those assets. See Transcript of July 14, 2011 Hearing (Testimony of Jonathan

Goulding) at 179:2-181:5 (App. K); Transcript of July 21, 2011 (Testimony of William Kosturos) at 268:7-270:5 (App. K). Finally, the record now shows unequivocally the primary substantive terms of Global Settlement Agreement resulting in significant value diversion to JPMorgan were negotiated by Weil, Gotshal & Manges, LLP and Alvarez & Marsal, both of whom count JPMorgan as a significant source of business in other cases. See Application of the Debtors Pursuant to Sections 327(a) and 328(a) of the Bankruptcy Code For Authorization to Employ and Retain Weil, Gotshal & Manges LLP as Attorneys for the Debtors, Nunc Pro Tunc to the Commencement Date, dated October 13, 2008 [Docket No. 64], at Exhibit B (Affidavit and Disclosure Statement on Behalf of Weil, Gotshal & Manges LLP Pursuant to Sections 327, 328(a), 329 and 504 of the Bankruptcy Code and Federal Rules of Bankruptcy Procedure 2014(a) and 2016(b)), 15 (App. AA) (identifying JPMorgan Chase Bank, National Association

56

as a current client); Supplemental Declaration of William C. Kosturos in Support of Motion of the Debtors Pursuant to 11 U.S.C. 363 for an Order Authorizing the Employment of Alvarez & Marsal North America, LLC and Designating William C. Kosturos as Chief Restructuring Officer Nunc Pro Tunc to October 2, 2008, dated October 24, 2008 [Docket No. 152], at Schedule B (App. BB) (identifying JPMorgan Chase as a current client); Transcript of December 2, 2010 Hearing (Testimony of William Kosturos) at 179:17-181:1 (App. L). And, with the sunlight shed on the negotiations by the insider trading investigation, it is clear that special conflicts counsel for WMI brought in to address conflicts resulting from Weil Gotshal & Manges LLPs relationship with JPMorgan played a very limited (if any) role in the actual negotiation of the terms that came to be embodied in the Global Settlement Agreement. See Transcript of December 2, 2010 Hearing (Kosturos) at 184:9-16 (App. L). 106. As such, the estates analysis of the fairness of the settlement amounted to

nothing more than determining how much was necessary to pay creditors in full (or more) and then delivering everything else to JPMorgan without regard to the entitlement of WMI equity holders to estate value. Such a tainted result should not be graced with this Courts sanction. E. If The Court Is Inclined To Recommend Settlement Approval To Chief Judge Sleet, The Debtors Should Be Ordered To Identify (With Specificity) Where Evidence Exists In The Record To Support Such A Recommendation. 1. Rules Applicable To The Preparation Of Proposed Findings Of Fact And Conclusions Of Law.

107.

Bankruptcy Rule 9033 instructs Bankruptcy Courts to file proposed findings of Such a filing precipitates an objection process, focused on

fact and conclusions of law.

specific proposed findings and conclusions. Fed. R. Bankr. P. 9033(b) (emphasis added). Thereafter, the District Court undertakes a de novo review of the record, comparing it to the

57

proposed judgment submitted by the Bankruptcy Court. This process marries with Bankruptcy Rule 7052, which is made applicable to this contested matter by Bankruptcy Rule 9014. Bankruptcy Rule 7052 instructs as follows (emphasis added): In an action tried on the facts . . . the court must find the facts specially and state its conclusions of law separately. 108. Where the trial record is voluminous as it is here these rules prompt the Court

to include in the proposed judgment explicit evidentiary citations in support of the Courts specific and special findings of fact. See Mazzeo v. Lenhart (In re Mazzeo), 167 F.3d 139, 142 (2d Cir. 1999) (The findings and conclusions must, however, at least be sufficient to permit meaningful appellate review.). Given that the January 7th Opinion denied plan confirmation, it fittingly did not include evidentiary citations. Also, respecting avoidance and business tort claims, the Courts conclusion was based on factual and legal predicates that no longer exist. Thus, the January 7th Opinion is insufficient to deliver to Chief Judge Sleet as proposed findings of fact and conclusions of law. 109. And, of course, when preparing the proposed judgment, care must be taken so as

not to inadvertently shift the burden of proof (which, again, falls squarely and heavily on the Debtors shoulders). Rather, the proposed findings of fact must be rooted in the record as established by the Debtors and must demonstrate that the Debtors proved their case with admissible evidence, especially respecting the settlement of the estates avoidance and business tort claims. In other words, the proposed findings must show the Debtors came forward with sufficient admissible evidence in support of settlement approval and not just factual allegations set forth in pleadings (themselves devoid of any record support demonstrating the estate claims to be compromised suffered from infirmities making compromise preferable to prosecution).

58

110.

This presents a serious problem for the Debtors. The historic record shows

potentially enormous avoidance and business tort claims against JPMorgan and/or the FDIC, as discussed in the Debtors 2004 motion to investigate estate claims,21 ANICO complaint against JPMorgan,22 the Order granting the Debtors authority to conduct a Rule 2004 investigation,23 and the Debtors second Rule 2004 motion to further the investigation into estate claims.24 But, there is nothing in the record establishing those claims do not exist or are not likely to generate incremental billions of dollars in value for the estates. 111. More importantly, the record has changed since December 2010. The Senate

Report augments the evidentiary record about what happened at corporate headquarters. But, it also bears directly on the Courts evaluation of the Avoidance Actions because the Court said there are potential infirmities with the claims because (a) the Debtors pre-petition stock capitalization suggested solvency; and (b) JPMorgan has asserted a good faith purchaser defense. As discussed above, the Senate Report strongly suggests that neither potential infirmity is a fair factual assumption by the Court certainly not at this point in time, and certainly not on this new record.

21

Debtors Motion for an Order Pursuant to Bankruptcy Rule 2004 and Local Bankruptcy Rule 2004-1 Directing the Examination of JPMC, Debtors Conf. Ex. 68 (App. Z). American Natl Ins. Co., et al. v. FDIC, No. 09-cv-0199, Plaintiffs Original Petition, Debtors Conf. Ex. 61 (App. CC). Order Granting Debtors Motion for an Order Pursuant to Bankruptcy Rule 2004 and Local Bankruptcy Rule 2004-1 Directing the Examination of JPMC, Debtors Conf. Ex. 69 (App. DD). Debtors Motion for an Order Directing the Examination of Witnesses and Production of Documents from Knowledgeable Parties, Debtors Conf. Ex. 70 (App. EE).

22

23

24

59

112.

And, regarding business torts, the Court found highly probative that the ANICO

case was dismissed for the Plaintiffs failure to exhaust administrative remedies. But, that decision has since been reversed by the D.C. Court of Appeals, which held that the claims asserted were against JPMorgan specifically for independent profit-making at Washington Mutuals expense. What evidence can now be cited to support the conclusion the Global Settlement is fair vis--vis the potentially significant Business Tort claims? 2. The Debtors Should Identify Where In The Record Evidence Exists On Which To Base Final Approval Of The Global Settlement Agreement.

113.

Lawyers, not judges, should be charged with toiling with a detailing of the record.

The Debtors contend the evidentiary record is present and that it trumps the Senate Report and recent developments in the ANICO litigation. As they are so confident in their position, the Debtors should be required to furnish to this Court and to all parties in interest draft findings and conclusions, with specific citations to the evidentiary record, that they believe support Plan confirmation and approval of the Global Settlement Agreement. 114. And, the Court could similarly instruct parties opposing confirmation to prepare a

dueling draft proposed judgment in which they may point out how the record actually fails to establish the sufficiency of the Global Settlement, especially in light of the Senate Report and recent developments in the ANICO litigation. The Court would then be positioned to evaluate the proposed orders against the record cited. And, then, the Court can decide what, if anything, should be submitted to Chief Judge Sleet for de novo review and final Order. IV. The Debtors Have Failed To Resolve Substantial Additional Points Of Objection Raised By The TPS Consortium. 115. In its Objections to Confirmation, the TPS Consortium raised two additional

points of objection that bear repeating here.

60

116.

First, Bankruptcy Code Section 365(c)(2) absolutely prohibits implementation of

the Plan provisions providing for the assumption of the TPS documents and consummation of the Conditional Exchange. The Conditional Exchange was not consummated pre-petition and

cannot be consummated post-petition. Were the Plan to be confirmed, any provision effectuating the Conditional Exchange would facially violate Bankruptcy Code Section 365(c)(2) and, in turn, Bankruptcy Code Sections 1129(a)(1) and 1129(a)(3). 117. Second, the TPS Consortium continues to believe the releases provided for in the

Plan (including those summarized in Paragraph 16 of this Brief) are inordinately convoluted, can be simplified considerably, and threaten to be interpreted as prohibiting claims the TPS Consortium has against JPMorgan and others. The Plan continues to provide illegal non-

consensual releases to third parties and enjoins actions against assets and properties provided to such third-parties free and clear through the Plan. 118. These objections are sufficiently set forth in the Objections to Confirmation,

which again are incorporated herein by reference. Standing on its own, each objection provides a sufficient basis to deny confirmation of the Plan. V. If The Court Determines To Confirm The Plan, The Case Itself And The Particular Matters Raised In Connection With Confirmation Are Sufficiently Important As To Warrant Issue Certification Directly To The Third Circuit Court Of Appeals. 119. To confirm this Plan, the Court must rule for the Debtors on the following six

questions of law and fact: (1) Does this Court have the power to confirm a Plan that incorporates provisions obviously designed to: (i) invade Chief Judge Sleets exclusive jurisdiction over the TPS Consortiums appeal in Blackhorse Capital LP v. JPMorgan Chase Bank, N.A., Adv. No. 10-51387 (MFW), on appeal, Civ. Action No. 11-124-GWS; and (ii) moot such appeal before Chief Judge Sleet and the Third Circuit Court of Appeals have had an opportunity to review the merits? [Answer: No] Does the Divestiture Rule otherwise

61

obligate the Debtors to modify the Plan, striking those provisions that advertently or inadvertently hamper the appellate courts ability to reverse and return the parties to the status quo ante, and adding a disputed-claims reserve to hold the TPS Securities pending ultimate conclusion of the appellate process? [Answer: Yes] (2) Following Stern v. Marshall, does this Court have the Constitutional power to issue a final order approving the Global Settlement Agreement (and the Plan, as its bankruptcy wrapping), given that: (a) the settlement involves substantial non-core litigation that otherwise must be adjudicated elsewhere; and (b) the settlement is hotly-contested, resulting in an extended trial over whether it should be forcibly imposed on thousands of disaffected parties-in-interest? [Answer: No] Is this Court only authorized by the Constitution to deliver proposed findings of fact and conclusions of law for Chief Judge Sleets final consideration? [Answer: Yes] In the particular circumstances of this case, can the legal rate of postpetition interest (as those words are used in Bankruptcy Code Section 726(a)(5)) refer to any rate other than the federal judgment rate? [Answer: No] If it is the federal judgment rate, can the reference date for calculating post-petition interest be any date other than the confirmation date, the most obvious and logical analogue to the date of judgment in federal civil litigation? [Answer: No] Can the Plan death-trap the TPS Consortiums right to participate in the proceeds of unsettled estate causes of action without the Debtors providing this Court one iota of evidence proving, by a preponderance of the evidence: (1) that the value of all such causes of action is less than the amount needed for the TPS Securities to be in-the-money; and, therefore, (2) that the holders of TPS Securities are not otherwise legally entitled to any such value? [Answer: No] Absent such evidence, is the Plan fair and equitable with respect to the post-consummation governance of such unsettled estate litigation, given that: (1) the litigation is controlled by creditor representatives that have absolutely no interest in that litigation; and (2) disaffected holders of TPS Securities are not afforded any right to participate in future litigation governance? [Answer: No] Does the law allow the Debtors to establish the sufficiency of the Global Settlement Agreement, covering fact-intensive avoidance and business tort claims exceeding $6 billion, with only pleadings (i.e., absolutely no admissible evidence going to the underlying merits of the claims)? [Answer: No] Does the law impose a heightened evidentiary burden on the Debtors in light of: (x) the findings contained in the Senate Report (including, especially, findings giving strong challenge to any factual

(3)

(4)

(5)

62

contention that the Debtors were solvent pre-petition); (y) the ANICO reversal (now enabling the business tort claims to proceed); and (z) substantial new evidence that the Global Settlement was negotiated without any analysis of the value of such claims, by conflicted professionals that turned a blind eye to such claims to enable the deal to finalize? [Answer: Yes] (6) Does Bankruptcy Code Section 365(c)(2) prohibit post-petition completion of the Conditional Exchange of TPS Securities for WMI preferred stock that was not issued pre-petition and, today, does not exist? [Answer: Yes]

120.

As explained herein, the law does not allow the Court to render a ruling in the

Debtors favor on all six of these issues and, therefore, the Plan is not confirmable. The TPS Consortium respectfully submits that, to confirm this Plan, the Court would need to dramatically bend applicable legal principle or establish new ways of thinking about the law, and to ignore incontrovertible fact. Any such ruling would be highly controversial. 121. Under that circumstance, direct certification to the Third Court of Appeals

pursuant to 28 U.S.C. 158(d)(2) would be appropriate. Indeed, each of these issues: (i) is a matter for which there is no controlling precedent; (ii) involves a significant question of public policy; (iii) would, presuming an adverse ruling by the Court, produce severely conflicted case authority; and/or (iv) would be materially advanced by direct, immediate Circuit Court level ruling, rather than years of anticipated appellate proceedings. 122. Indeed, it seems appropriate at this juncture to pause, reset perspective, and take

due notice of the fact that this is not just another run-of-the-mill large Chapter 11 case. This bankruptcy involves Washing Mutual, Inc. This company was at the epicenter of nations recent macro-economic collapse. For very good reason, there was a deep-dive Senate investigation of this Company, culminating in a massive Senate Report (at tremendous expense to American taxpayers). This is a very important and closely-watched bankruptcy case. Should this Court

63

find it appropriate to confirm the Plan, parties-in-interest (including the many who oppose the Global Settlement and the Plan) are deserving of far better appellate process than the otherwise anticipated Jarndyce v. Jarndyce, with litigation obstruction backed by the largess of JPMorgan and the Settlement Noteholders. Moreover, the law would be advanced greatly by a Circuit-level decision, establishing precedent, on the very difficult issues now before this Court.

REMAINDER OF PAGE INTENTIONALLY BLANK

64

CONCLUSION WHEREFORE, for all the foregoing reasons, the TPS Consortium respectfully asks this Court to: (1) sustain the Objections; (2) deny confirmation of the Plan; and (3) provide the TPS Consortium such other and further relief as is just and proper. Dated: Wilmington, Delaware August 10, 2011 Respectfully submitted, CAMPBELL & LEVINE LLC /s/ Kathleen Campbell Davis Marla Rosoff Eskin, Esq. (DE 2989) Bernard G. Conaway, Esq. (DE 2856) Kathleen Campbell Davis, Esq. (DE 4229) 800 North King Street, Suite 300 Wilmington, DE 19809 (302) 426-1900 (302) 426-9947 (fax) and BROWN RUDNICK LLP Robert J. Stark, Esq. Martin S. Siegel, Esq. Seven Times Square New York, NY 10036 (212) 209-4800 (212) 209-4801 (fax) and Jeremy B. Coffey, Esq. Daniel J. Brown, Esq. One Financial Center Boston, MA 02111 Counsel for the TPS Consortium

65

EXHIBIT A

EXHIBIT 301-A Supplemental List of Nominal Weekly Average 1-Year Constant Maturity Yield: The Federal Judgment Rate For the Dates June 24, 2011 Through July 22, 2011

{D0208971.1 }

Date 6/24/2011 7/1/2011 7/8/2011 7/15/2011 7/22/2011

FJR 0.17 0.19 0.19 0.16 0.18

{D0208971.1 }

EXHIBIT 301-B Waterfall Impact Applying Contract and Federal Judgment Rate (FJR): August 31, 2011 Emergence

{D0208971.1 }

Waterfall Impact Applying Contract and Federal Judgment Rates (FJR): August 31, 2011 Emergence
(Dollars in Millions)

Deficiency / Excess After Defined Claims Contract Rate Recovery Recovery Amount Percent Federal Judgment Rate at Filing(a) Recover Recovery Cumulative Amount Percent Net Distributable Assets(d) $1,432.0 183.4 $4,315.4 100.0% 76.1% 98.7% Federal Judgment Rate at 7/15/11(b) Recovery Recovery Cumulative Amount Percent Net Distributable Assets(d) $4,132.0 19.7 100.0% 100.0% 100.0% 100.0%

Claim Amount(c)

Cumulative Net Distributable Assets (d)

Claim Amount (c)

Claim Amount(c)

Senior Notes Pre-Petition Post-Petition Total Senior Subordinated Notes Pre-Petition Post-Petition Total General Unsecured Claims Pre-Petition Post-Petition Total CCB Guarantees Pre-Petition Post-Petition Total PIERS Pre-Petition Post-Petition Total

$4,132.0 452.0 $4,584.0

$4,132.0 129.6 $4,261.6

100.0% 28.7% 93.0%

$2,762.0

$4,132.0 241.0 $4,373.0

$2,973.0

4,132.0 19.7 $4,151.7

$3,194.3

$1,666.0 341.0 $2,007.0

$1,666.0 97.8 $1,763.8

100.0% 28.7% 87.9%

$755.0

$1,666.0 97.0 $1,763.0

$1,666.0 73.8 $1,739.8

100.0% 76.1% 98.7%

$1,210.0

$1,666.0 7.9 $1,673.9

$1,666.0 7.9 $1,673.9

100.0% 100.0% 100.0%

$1,520.4

$375.0 82.0 $457.0

$375.0 23.5 $398.5

100.0% 28.7% 87.2%

$298.0

$375.0 22.0 $397.0

$375.0 16.7 $391.7

100.0% 76.1% 98.7%

$813.0

$375.0 1.8 $376.8

$375.0 1.8 $376.8

100.0% 100.0% 100.0%

$1,143.6

$70.0 10.0 $80.0 $789.0 210.0 $999.0

$70.0 2.9 $72.9 $789.0 60.2 $849.2

100.0% 28.7% 91.1% 100.0% 28.7% 85.0%

$218.0

$70.0 4.0 $74.0 $789.0 46.0 $835.0

$70.0 3.0 $73.0 $789.0 35.0 $824.0

100.0% 76.1% 98.7% 100.0% 76.1% 98.7%

$739.0

$70.0 0.3 $70.3 $789.0 3.8 $792.8

$70.0 0.3 $70.3 $789.0 3.8 $792.9

100.0% 100.0% 100.0% 100.0% 100.0% 100.0%

$1,073.3

($781.0)

($96.0)

$280.5

(a) (b) (c) (d)

Federal Judgment Rate, as determined by the Weekly Average 1-Year Constant Maturity Treasury, was 1.95% on September 26, 2008. Calculation reflects daily compounding from September 26, 2008 through August 31, 2011 (1,069 days). Federal Judgment Rate, as determined by the Weekly Average 1-Year Constant Maturity Treasury, was 0.16% on July 15, 2011. Calculation reflects daily compounding from September 26, 2008 through August 31, 2011 (1,069 days). Claim amounts per Goulding Declaration dated July 8, 2011. Net Proceeds amount to $7,346.0 mm; Cumulative Net Distributable Assets are net of Pre- and Post-Petition Claim Amounts. Other Subordinated Claims that could arise from the outcome of various litigation, but for which no estimate has been included in the July 6, 2011 Updated Liquidation Analysis, are excluded from this analysis. Brackets indicate a deficiency.

EXHIBIT B

CORPORATE WASTE, MISMANAGEMENT, AND BREACHES OF FIDUCIARY DUTY The first chapter focuses on how high risk mortgage lending contributed to the financial crisis, using as a case study Washington Mutual Bank (WaMu). . . . This case study focuses on how one banks search for increased growth and profit led to the origination and securitization of hundreds of billions of dollars in high risk, poor quality mortgages that ultimately plummeted in value, hurting investors, the bank, and the U.S. financial system. WaMu had held itself out as a prudent lender, but in reality, the bank turned increasingly to higher risk loans. Over a four-year period, those higher risk loans grew from 19% of WaMus loan originations in 2003, to 55% in 2006, while its lower risk, fixed rate loans fell from 64% to 25% of its originations. At the same time, WaMu increased its securitization of subprime loans sixfold, primarily through its subprime lender, Long Beach Mortgage Corporation, increasing such loans from nearly $4.5 billion in 2003, to $29 billion in 2006. From 2000 to 2007, WaMu and Long Beach together securitized at least $77 billion in subprime loans. (Senate Report at 2-3) In connection with the hearing, the Subcommittee released a joint memorandum from Chairman Carl Levin and Ranking Member Tom Coburn summarizing the investigation to date into Washington Mutual and the role of high risk home loans in the financial crisis. The memorandum contained the following findings of fact, which this Report reaffirms. 1. High Risk Lending Strategy. Washington Mutual (WaMu) executives embarked upon a High Risk Lending Strategy and increased sales of high risk home loans to Wall Street, because they projected that high risk home loans, which generally charged higher rates of interest, would be more profitable for the bank than low risk home loans. Shoddy Lending Practices. WaMu and its affiliate, Long Beach Mortgage Company (Long Beach), used shoddy lending practices riddled with credit, compliance, and operational deficiencies to make tens of thousands of high risk home loans that too often contained excessive risk, fraudulent information, or errors. Steering Borrowers to High Risk Loans. WaMu and Long Beach too often steered borrowers into home loans they could not afford, allowing and encouraging them to make low initial payments that would be followed by much higher payments, and presumed that rising home prices would enable those borrowers to refinance their loans or sell their homes before the payments shot up. Polluting the Financial System. WaMu and Long Beach securitized over $77 billion in subprime home loans and billions more in other high risk home loans, used Wall Street firms to sell the securities to investors worldwide, and polluted the financial system with mortgage backed securities which later incurred high rates of delinquency and loss.

2.

3.

4.

{D0208959.1 }

5.

Securitizing Delinquency-Prone and Fraudulent Loans. At times, WaMu selected and securitized loans that it had identified as likely to go delinquent, without disclosing its analysis to investors who bought the securities, and also securitized loans tainted by fraudulent information, without notifying purchasers of the fraud that was discovered. Destructive Compensation. WaMus compensation system rewarded loan officers and loan processors for originating large volumes of high risk loans, paid extra to loan officers who overcharged borrowers or added stiff prepayment penalties, and gave executives millions of dollars even when their High Risk Lending Strategy placed the bank in financial jeopardy. (Senate Report at 5051) MANAGEMENT KNEW THAT IT WAS IMPOSING UNSUSTAINABLE RISK AND HARM ON THE COMPANY

6.

For most of the five-year period reviewed by the Subcommittee, WaMu was led by its longtime Chairman of the Board and Chief Executive Officer (CEO) Kerry Killinger who joined the bank in 1982, became bank president in 1988, and was appointed CEO in 1990. Other key executives include: President Steve Rotella who joined the bank in January 2005; Chief Financial Officer Tom Casey; President of the Home Loan Division David Schneider who joined the bank in July 2005; and General Counsel Faye Chapman. David Beck served as Executive Vice President in charge of the banks Capital Markets Division, oversaw its securitization efforts, and reported to the head of Home Loans. Anthony Meola headed up the Home Loans Sales effort. Jim Vanasek was WaMus Chief Credit Officer from 1999 until 2004, and was then appointed its Chief Risk Officer, a new position, from 2004-2005. After Mr. Vanaseks retirement, Ronald Cathcart took his place as Chief Risk Officer, and headed the banks newly organized Enterprise Risk Management Division, serving in that post from 2005 to 2007. (Senate Report at 52) In 2004, before WaMu implemented its High Risk Lending Strategy, the Chief Risk Officer Jim Vanasek, expressed internally concern about the unsustainable rise in housing prices, loosening lending standards, and the possible consequences. On September 2, 2004, just months before the formal presentation of the High Risk Lending Strategy to the Board of Directors, Mr. Vanasek circulated a prescient memorandum to WaMus mortgage underwriting and appraisal staff, warning of a bubble in housing prices and encouraging tighter underwriting. (Senate Report at 65) Mr. Vanasek was the senior-most risk officer at WaMu, and had frequent interactions with Mr. Killinger and the Board of Directors. While his concerns may have been heard, they were not heeded. (Senate Report at 66) Mr. Vanasek told the Subcommittee that, because of his predictions of a collapse in the housing market, he earned the derisive nickname Dr. Doom. But evidence of a housing

{D0208959.1 }

bubble was overwhelming by 2005. Over the prior ten years, housing prices had skyrocketed in an unprecedented fashion . . . . (Senate Report at 66) Despite Mr. Killingers awareness that housing prices were unsustainable, could drop suddenly, and could make it difficult for borrowers to refinance or sell their homes, Mr. Killinger continued to push forward with WaMus High Risk Lending Strategy. (Senate Report at 68) In August 2007, more than a year before the collapse of the bank, WaMus President Steve Rotella emailed CEO Kerry Killinger saying that, aside from Long Beach, WaMus prime home loan business was the worst managed business I had seen in my career. (Senate Report at 86)

MANAGEMENT IGNORED AND AT TIMES EVEN REWARDED SHODDY LENDING PRACTICES AND LOAN FRAUD Perhaps the clearest evidence of WaMus shoddy lending practices came when senior management was informed of loans containing fraudulent information, but then did little to stop the fraud. (Senate Report at 95) Downey and Montebello Fraud Investigations. The most significant example involves an internal WaMu investigation that, in 2005, uncovered substantial evidence of loan fraud involving two top producing loan offices in Southern California. WaMu management was presented with the findings, but failed to respond, leading to the same fraud allegations erupting again in 2007. (Senate Report at 96) Despite the year-long effort put into the investigation, the written materials prepared, the meetings held, and the fraud rates in excess of 58% and 83% at the Downey and Montebello offices, no discernable actions were taken by WaMu management to address the fraud problem in those two offices. No one was fired or disciplined for routinely violating bank policy, no anti-fraud program was installed, no notice of the problem was sent to the banks regulators, and no investors who purchased RMBS securities containing loans from those offices were alerted to the fraud problem underlying their high delinquency rates. (Senate Report at 98) Over the next two years, the Downey and Montebello head loan officers . . . continued to issue high volumes of loans and continued to win awards for their loan productivity, including winning trips to Hawaii as members of WaMus Presidents Club. One of the loan officers even suggested to bank President Steve Rotella ways to further relax bank lending standards. (Senate Report at 98) Questionable compensation practices did not stop in the loan offices, but went all the way to the top of the company. WaMus CEO received millions of dollars in pay, even when his high risk loan strategy began unraveling, even when the bank began to falter, and even when he was asked to leave his post. From 2003 to 2007, Mr. Killinger was

{D0208959.1 }

paid between $11 million and $20 million each year in cash, stock, and stock options. In addition, WaMu provided him with four retirement plans, a deferred bonus plan, and a separate deferred compensation plan. In 2008, when he was asked to leave the bank, Mr. Killinger was paid $25 million, including $15 million in severance pay. (Senate Report at 153) In February 2008, the Human Resources Committee approved a bonus plan for executive officers that tried to shield the executive bonuses from any impact caused by WaMus mounting mortgage losses. . . . WaMu filed its executive compensation plan with the SEC, as required. The exclusion of mortgage related losses and expenses in the plan attracted notice from shareholders and the press. . . . Mr. Killinger sought to respond to the controversy in a way that would placate investors without alienating executives. His solution was to eliminate bonuses for the top five executives, and make cash payments to the other executives, without making that fact public. . . . In other words, WaMu would announce publicly that none of the Executive Committee members would receive bonuses in 2008, while quietly paying retention grants rather than bonuses to the next tier of executives. . . . There would be no disclosure of the retention cash payments. (Senate Report at 154)

WAMUS PRE-PETITION STOCK PRICE (SUGGESTING SOLVENCY) WAS BASED ON MARKET MISINFORMATION At the April 16, 2010 hearing of the Subcommittee, Senator Coburn had the following exchange with Inspectors General Thorson and Rymer, which explains in part why OTS failed as regulator to address WaMus harmful lending policies: Senator Coburn: As I sat here and listened to both the opening statement of the Chairman and to your statements, I come to the conclusion that actually investors would have been better off had there been no OTS because, in essence, the investors could not get behind the scene to see what was essentially misled by OTS because they had faith the regulators were not finding any problems, when, in fact, the record shows there are tons of problems, just there was no action taken on it. . . . I mean, we had people continually investing in this business on the basis as a matter of fact, they raised an additional $7 billion before they collapsed, on the basis that OTS said everything was fine, when, in fact, OTS knew everything was not fine and was not getting it changed. Would you agree with that statement or not? Mr. Thorson: Yes, sir. I think . . . basically assigning a satisfactory rating when conditions are not is contradictory to the very purpose for which regulators use a rating system. I think that is what you are saying. Senator Coburn: Any comments on that Mr. Rymer? Mr. Rymer: I would agree with Mr. Thorson . . . . (Senate Report at 208)

{D0208959.1 }

MANAGEMENTS WHEREWITHAL TO SATISFY JUDGMENTS ON ESTATE CLAIMS (IN ADDITION TO D&O INSURANCE) Altogether, from 2003 to 2008, Washington Mutual paid Mr. Killinger nearly $100 million, on top of multi-million-dollar corporate retirement benefits. (Senate Report at 153)

TARGETS FOR AIDING AND ABETTING LIABILITY: INVESTMENT BANKS A. General Findings Another group of financial institutions active in the mortgage market were securities firms, including investment banks, broker-dealers, and investment advisors. These security firms did not originate home loans, but typically helped design, underwrite, market, or trade securities linked to residential mortgages, including RMBS and CDO securities that were at the heart of the financial crisis. Key firms included Bear Stearns, Goldman Sachs, Lehman Brothers, Merrill Lynch, Morgan Stanley, and the asset management arms of large banks, including Citigroup, Deutsche Bank, and JPMorgan Chase. (Senate Report at 38) Investment banks were a major driving force behind the structured finance products that provided a steady stream of funding for lenders to originate high risk, poor quality loans and that magnified risk throughout the U.S. financial system. The investment banks that engineered, sold, traded, and profited from mortgage related structured finance products were a major cause of the financial crisis. (Senate Report at 320) If an investment bank agrees to act as an underwriter for the issuance of a new security to the public, such as an RMBS, it typically purchases the securities from the issuer, holds them on its books, conducts the public offering, and bears the financial risk until the securities are sold to the public. . . . Underwriters help issuers prepare and file the registration statements filed with the SEC, which explain to potential investors the purpose of a proposed public offering, the issuers operations and management, key financial data, and other important facts. . . . If a security is not offered to the general public, it can still be offered to investors through a private placement. Investment banks often act as the placement agent, performing intermediary services between those seeking to raise money and investors. Placement agents often help issuers design the securities, produce the offering materials, and market the new securities to investors. . . . Whether acting as an underwriter or placement agent, a major part of the investment banks responsibility is to solicit customers to buy the new securities being offered. Under the securities laws, investment banks that act as an underwriter or placement agent for new securities are liable for any material misrepresentation or omission of a material

{D0208959.1 }

fact made in connection with a solicitation or sale of those securities to investors. (Senate Report at 322-23) Broker-dealers also have affirmative disclosure obligations to their clients. With respect to the duties of a broker-dealer, the SEC has held: [W]hen a securities dealer recommends a stock to a customer, it is not only obligated to avoid affirmative misstatements, but also must disclose material adverse facts to which it is aware. That includes disclosure of adverse interests such as economic self-interest that could have influenced its recommendation. (Senate Report at 324, quoting In the Matter of Richmark Capital Corporation, Securities Exchange Act Rel. No. 48758 (Nov. 7, 2003)) Investment banks that designed, obtained credit ratings for, underwrote, sold, managed, and serviced CDO securities, made money from the fees they charged for these and other services. Investment banks reportedly netted from $5 to $10 million in fees per CDO. Some also constructed CDOs to transfer the financial risk of poorly performing RMBS and CDO securities from their own holdings to the investors they were soliciting to buy the CDO securities. By selling the CDO securities to investors, the investment banks profited not only from the CDO sales, but also eliminated possible losses from the assets removed from their warehouse accounts. In some instances, unbeknownst to the customers and investors, the investment banks that sold them CDO securities bet against those instruments by taking short positions through single name CDS contracts. Some even took the short side of the CDO they constructed, and profited when the referenced assets lost value, and the investors to whom they had sold the long side of the CDO were required to make substantial payments to the CDO. (Senate Report at 328-29) From 2000 to 2007, Washing Mutual and Long Beach securitized at least $77 billion in subprime and home equity loans. WaMu also sold or securitized at least $115 billion in Option ARM loans. Between 2000 and 2008, Washington Mutual sold over $500 billion in loans to Fannie Mae and Freddie Mac, accounting for more than a quarter of every dollar in loans WaMu originated. . . . WaMu and Long Beach worked with a variety of investment banks to arrange, underwrite, and sell its RMBS securitizations, including Bank of America, Credit Suisse, Deutsche Bank, Goldman Sachs, Lehman Brothers, Merrill Lynch, Royal Bank of Scotland, and UBS. (Senate Report at 116-118) Goldman Sachs From 2004 to 2008, Goldman was a major player in the U.S. mortgage market. In 2006 and 2007 alone, it designed and underwrote 93 RMBS and 27 mortgage related CDO securitizations totaling about $100 billion, bought and sold RMBS and CDO securities on behalf of its clients, and amassed its own multi-billion-dollar proprietary mortgage related holdings. (Senate Report at 8-9) WaMu, Long Beach, and Goldman had collaborated on at least $14 billion in loan sales and securitizations. In February 2006, Long Beach had a $2 billion warehouse account with Goldman, which was the largest of Goldmans warehouse accounts at that time. (Senate Report at 513)

B.

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Long Beach was known within the industry for originating some of the worst performing subprime mortgages in the country. . . . Nevertheless, in May 2006, Goldman acted as co-lead underwriter with WaMu to securitize about $532 million in subprime second lien mortgages originated by Long Beach. (Senate Report at 513-14) The evidence discloses troubling and sometimes abusive practices which show, first, that Goldman knowingly sold high risk, poor quality mortgage products to clients around the world, saturating financial markets with complex, financially engineered instruments that magnified risk and losses when their underlying assets began to fail. Second, it shows multiple conflicts of interest surrounding Goldmans securitization activities, including its use of CDOs to transfer billions of dollars of risk to investors, assist a favored client making a $1 billion gain at the expense of other clients, and produce its own proprietary gains at the expense of the clients to whom Goldman sold its CDO securities. (Senate Report at 476) Under Goldmans sales policies and procedures, an affirmative action by Goldman personnel to sell a specific investment to a specific customer constituted a recommendation of that investment. (Senate Report at 476) In 2006 and 2007, when selling subprime CDO securities to customers, Goldman did not always disclose that the securities contained or referenced assets Goldman believed would perform poorly, and that the securities themselves were rapidly losing value. Goldman also did not disclose that the firm had built a large net short position betting that CDO and RMBS securities similar to the ones it was selling would lose value. (Senate Report at 476) Throughout 2007, Goldman twice built up and cashed in sizeable mortgage related short positions. At its peak, Goldmans net short position totaled $13.9 billion. Overall in 2007, its net short position produced record profits totaling $3.7 billion for Goldmans Structured Products Group, which when combined with other mortgage losses, produced record net revenues of $1.1 billion for the Mortgage Department as a whole. Throughout 2007, Goldman sold RMBS and CDO securities to its clients without disclosing its own net short position against the subprime market or its purchase of CDS contracts to gain from the loss in value of some of the very securities it was selling to its clients. (Senate Report at 9)

{D0208959.1 }

C.

Deutsche Bank Both Goldman Sachs and Deutsche Bank underwrote securities using loans from subprime lenders known for issuing high risk, poor quality mortgages, and sold risky securities to investors across the United States and around the world. They also enabled the lenders to acquire new funds to originate still more high risk, poor quality loans. Both sold CDO securities without full disclosure of the negative views of some of their employees regarding the underlying assets and, in the case of Goldman, without full disclosure that it was shorting the very CDO securities it was marketing, raising questions about whether Goldman complied with its obligation to issue suitable investment recommendations and disclose material adverse interests. The case studies also illustrate how these two investment banks continued to market new CDOs in 2007, even as U.S. mortgage delinquencies intensified, RMBS securities lost value, the U.S. mortgage market as a whole deteriorated, and investors lost confidence. Both kept producing and selling high risk, poor quality structured finance products in a negative market, in part because stopping the CDO machine would have meant less income for structured finance units, smaller executive bonuses, and even the disappearance of CDO desks and personnel, which is what finally happened. (Senate Report at 11) In the face of a deteriorating market, Deutsche Bank aggressively sold a $1.1 billion CDO, Gemstone 7, which included RMBS securities that the banks top CDO trader had disparaged as crap and pigs, and which produced $1.1 billion of high risk, poor quality securities that are now virtually worthless. (Senate Report at 333) A substantial portion of the cash and synthetic assets included in Gemstone 7, 30% in all, involved subprime residential mortgages issued by three subprime lenders, Long Beach, Fremont, and New Century, all known for issuing poor quality loans and securities. (Senate Report at 358) Email [from Deutsche Banks top CDO trader] responding to a hedge fund trader at Mast Capital: Long Beach is one of the weakest names in the market. (Senate Report at 339) On another occasion in March 2007, a Moodys analyst emailed a colleague about problems she was having with someone at Deutsche Bank after Moodys suggested adjustments to the deal: [The Deutsche Bank investment banker] is pushing back dearly saying that the deal has been marketed already and that we cam back too late with this discovery. . . . She claims its hard for them to change the structure at this point. (Senate Report at 280)

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TARGETS FOR AIDING AND ABETTING LIABILITY: RATINGS AGENCIES Between 2004 and 2007, Moodys and S&P issued credit ratings for tens of thousands of U.S. residential mortgage backed securities (RMBS) and collateralized debt obligations (CDO). Taking in increasing revenue from Wall Street firms, Moodys and S&P issued AAA and other investment grade credit ratings for the vast majority of those RMBS and CDO securities, deeming them safe investments even though many relied on high risk home loans. In late 2006, high risks mortgages began incurring delinquencies and defaults at an alarming rate. Despite signs of a deteriorating mortgage market, Moodys and S&P continued for six months to issue investment grade ratings for numerous RMBS and CDO securities. (Senate Report at 6) Traditionally, investments holding AAA ratings have had a less than 1% probability of incurring defaults. But in 2007, the vast majority of RMBS and CDO securities with AAA ratings incurred substantial losses; some failed outright. Analysts have determined that over 90% of the AAA ratings given to subprime RMBS securities originated in 2006 and 2007 were later downgraded by the credit rating agencies to junk status. In the case of Long Beach, 75 out of 75 AAA rated Long Beach securities issued in 2006, were later downgraded to junk status, defaulted, or withdrawn. (Senate Report at 6) Inaccurate AAA ratings introduced risk into the U.S. financial system and constituted a key cause of the financial crisis. In addition, the July mass downgrades, which were unprecedented in number and scope, precipitated the collapse of the RMBS and CDO secondary markets, and perhaps more than any other single event triggered the beginning of the financial crisis. (Senate Report at 6) Evidence gathered by the Subcommittee shows that the credit rating agencies were aware of problems in the mortgage market, including an unsustainable rise in housing prices, the high risk nature of the loans being issued, lax lending standards, and rampant mortgage fraud. Instead of using this information to temper their ratings, the firms continued to issue a high volume of investment grade ratings for mortgage backed securities. (Senate Report at 7) It is not surprising that credit rating agencies at times gave into pressure from investment banks and accorded them undue influence in the ratings process. . . . Ratings shopping inevitably weakens standards as each credit rating agency seeks to provide the most favorable rating to win business. It is a conflict of interest that results in a race to the bottom . . . . (Senate Report at 287) "Internal Moodys and S&P emails further demonstrate that senior management and ratings personnel were aware of the deteriorating mortgage market and increasing credit risk. In June 2005, for example, an outside mortgage broker who had seen the head of S&Ps RMBS Group, Susan Barnes, on a television program sent her an email warning

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about the seeds of destruction in the financial markets. He noted that no one at the time seemed interested in fixing the looming problem: I have contacted the OTS, FDIC and others and my concerns are not addressed. I have been a mortgage broker for the past 13 years and I have never seen such a lack of attention to loan risk. I am confident our present housing bubble is not from supply and demand of housing, but from money supply. In my professional opinion the biggest perpetrator is Washington Mutual. 1) No income documentation loans. 2) Option ARMS (negative amortization) . . . 5) 100% financing loans. I have seen instances where WAMU approved buyers for purchase loans; where the fully indexed interest only payments represented 100% of borrowers gross monthly income. We need to stop this madness!!! (Senate Report at 269)

TARGETS FOR AIDING AND ABETTING LIABILITY: OUTSIDE APPRAISERS On November 1, 2007, the New York Attorney General issued a complaint against WaMus appraisal vendors, LSI and eAppraiseIT, alleging fraud and collusion with WaMu to systematically inflate real estate values. (Senate Report at 189) The OTS investigation uncovered many instances of improper appraisals. After reviewing 225 loan files, the OTS appraisal expert found that [n]umerous instances were identified where, because of undue influence on the [outside] appraiser, values were increased without supporting documentation. OTS also found that WaMu had violated the agencys appraisal regulations by failing to comply with appraisal independence procedures after they outsourced the function. The OTS investigation concluded that WaMus appraisal practices constituted unsafe or unsound banking practices. The OTS investigation also concluded that WaMu was not in compliance with the Uniform Standards of Professional Appraisal Practice and other minimum appraisal standards. (Senate Report at 190)

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10

EXHIBIT G

IN THE UNITED STATES BANKRUPTCY COURT FOR THE DISTRICT OF DELAWARE ____________________________________ ) Chapter 11 In re: ) ) Case No. 08-12229 (MFW) WASHINGTON MUTUAL, INC., et al., ) Jointly Administered ) Debtors. ) Objection Deadline: January 4, 2012 @ 4:00 p.m. ____________________________________) Hearing Date: January 11, 2012 @ 2:00 p.m. Related to Docket Nos. 9178, 9179, 9180 & 9181 MOTION OF THE CONSORTIUM OF TRUST PREFERRED SECURITY HOLDERS FOR STAY OF CONFIRMATION PROCEEDINGS PENDING APPEAL The consortium of holders of interests (the TPS Consortium1 or Movants) subject to treatment under Class 19 of the Seventh Amended Joint Plan of liquidation proffered by the above-captioned Debtors (the Plan) [Docket No. 9178], by and through undersigned counsel, hereby files this Motion for stay of further confirmation proceedings concerning the Plan, pursuant to Rule 8005 of the Federal Rules of Bankruptcy Procedure, pending final resolution of the appeal of this Courts January 7, 2011 ruling in the adversary proceeding captioned Black Horse Capital, LP, et al. v. JPMorgan Chase Bank, N.A., et al., Adv. Pro. No. 10-51387 (the TPS Litigation). In support of this Motion, the TPS Consortium respectfully represents as follows:

The TPS Consortium is comprised of holders of interests (as set forth more fully in the Verified Fourth Amended Statement of Brown Rudnick LLP and Campbell & Levine LLC [Docket No. 7916], as such may be amended) proposed by the Debtors to be treated under Class 19 of the Plan [Docket No. 9178] and described in the Plan and Disclosure Statement as the REIT Series. For the sake of clarity, the TPS Consortium maintains its position that its members continue to hold Trust Preferred Securities as a result of the failed transaction by which those interests were to have been exchanged for REIT Series.

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PRELIMINARY STATEMENT 1. The TPS Consortium owns approximately $1.5 billion in Trust Preferred

Securities. Knowing that the ownership of those securities is still subject to dispute, and that the TPS Consortium has appealed the ownership issue to the District Court, the Debtors and JPMorgan nonetheless persist in proposing a Plan that purports to transfer the Trust Preferred Securities to JPMorgan free and clear of claims by the TPS Consortium, and asks the Court to endorse various plan provisions designed to destroy the TPS Consortiums right to appeal this Courts decision. For the Court to compromise the TPS Consortiums rights in this fashion raises serious property and due process issues, and essentially denies the TPS Consortium a full and fair opportunity to litigate its rights, a fundamental tenet of our federal judicial system. 2. These fundamental principles in part underlie the Divestiture Rule. It is a bedrock

of federal civil litigation that subject to limited exceptions the filing of a notice of appeal from the judgment of a trial court divests the trial court of jurisdiction to proceed with respect to the matters on appeal, and vests that jurisdiction with the appellate court. The trial court is divested of jurisdiction to hear not only those matters directly on appeal, but also those matters the resolution of which would affect or impair the superior courts appellate jurisdiction. The Divestiture Rule is unquestionably applicable in bankruptcy proceedings. 3. Following lengthy confirmation proceedings, this Court issued its September 13,

2011 opinion denying confirmation of the then-current version of the Debtors Plan (the September Opinion). In the September Opinion, the Court also indicated its belief that, notwithstanding the pending appeal of the Courts ruling in the TPS Litigation, the Court would retain jurisdiction to consider a yet-to-be-filed, further revised version of the Plan containing provisions intended to render the TPS Litigation appeal equitably moot. The Court further

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suggested that, absent this Courts voluntary stay of its own hand (or a stay issued by the District Court to prevent this Court from proceeding), it would continue with such confirmation proceedings. Such positions are supportable only if the Court were to adopt an incorrect (or at least incomplete) articulation of the Divestiture Rule, as discussed herein. 4. Respectfully, the TPS Consortium believes this Court would commit error if it

were to confirm the revised Plan and enter related Orders not only deciding matters directly on appeal, but also specifically designed to impair the District Courts ability to consider the TPS Litigation appeal in toto. The TPS Consortium respectfully submits that under the Divestiture Rule, the pendency of the appeal of the Courts ruling in the TPS Litigation automatically and mandatorily divested this Court of jurisdiction to take any action that would affect the matters now on appeal or that would otherwise affect the District Courts ability to adjudicate that appeal (in particular, those provisions of the Plan clearly intended to render the matters before the District Court moot). If the TPS Consortium is correct, violative Orders would be null and void ab initio (potentially creating significant issues this Court would be forced to resolve when its Orders in violation of the Divestiture Rule are unraveled). See, e.g., Padilla v. Neary (In re Padilla), 222 F.3d 1184, 1189-90 (9th Cir. 2000) (bankruptcy courts discharge order was null and void as it was entered after the dismissal of the case had been appealed to the bankruptcy appellate panel); Stewart v. Donges, 915 F.2d 572, 578 n.8 (10th Cir. 1990) (Once the notice of appeal divests the [trial] court of jurisdiction, any subsequent action by it is null and void.) (citation and internal quotations omitted); Garcia v. Burlington N. R.R., 818 F.2d 713, 720-22 (10th Cir. 1987) (trial courts post-appeal amendment of order awarding damages was vacated because the trial court was divested of jurisdiction when the order was appealed); Bennett v. Gemmill (In re Combined Metals Reduction Co.), 557 F.2d 179, 201 (9th Cir. 1977) (noting that,

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because the filing of a notice of appeal divested the trial court of its jurisdiction over the matter on appeal, the trial courts subsequent order [was] a nullity, and the appealed order must stand as it was when the notice of appeal was filed). 5. The Plan proponents are asking for far more than mere enforcement of an Order.

The judicial actions requested in connection with Plan confirmation seek to destroy the TPS Consortiums appellate rights and clearly are among the types of actions that impermissibly affect matters on appeal and are therefore forbidden under the Divestiture Rule. As such, the TPS Consortium submits that it is beyond this Courts power to exercise any discretion in determining whether confirmation proceedings may continue prior to resolution of the pending appeal. Stated simply, such proceedings before this Court may not go forward, no matter how inconvenient the attendant delay might be to the Debtors, JPMorgan and others championing the purported settlement built upon this Courts appealed ruling as to current ownership of the Trust Preferred Securities. 6. The TPS Consortium recognizes that the Court ruled that the Divestiture Rule was

not applicable to the Sixth Amended Plan. But, the TPS Consortium respectfully submits that the Courts articulation of the rule was unduly narrow. And, the TPS Consortium requests in this Motion that the Court revisit its ruling in light of this submission and in connection with the Seventh Amended Plan. In the alternative, the TPS Consortium requests that the Court stay further confirmation proceedings under Bankruptcy Rule 8005. 7. The TPS Consortium is clearly entitled to such a stay: (a) the TPS Consortium has

raised a substantial case on the merits involving a serious legal question; (b) unless confirmation proceedings are halted or the Plan modified to preserve the TPS Consortiums appellate rights, the TPS Consortium faces the irreparable harm of the certain assertions of equitable mootness by

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the Plan supporters and this Court taking actions beyond its remaining jurisdiction; (c) to hold confirmation proceedings in abeyance pending resolution of the TPS Consortiums appeal will simply maintain the status quo in this liquidation (the very purpose of a stay); and (d) the interests of the public are either not implicated or would be furthered by this Court declining to trample the property and appellate rights of the TPS Consortium through continued confirmation proceedings. BACKGROUND A. The TPS Litigation And The Courts Ruling Therein. 8. As the Court is aware, members of the TPS Consortium are also party to the TPS

Litigation. Through that litigation, the plaintiffs commenced an adversary proceeding seeking various declaratory judgments related to ownership of certain trust preferred securities (Trust Preferred Securities or TPS) issued by non-Debtors and claimed to have been exchanged for interests in preferred stock of Debtor Washington Mutual, Inc. (WMI). 9. By Counts One and Two of that litigation, the TPS Consortium sought a ruling

that they continued to own the Trust Preferred Securities after the filing of the Chapter 11 Cases, because WMI and other parties failed to take the steps required by the parties contractual documents and/or applicable law to effectuate a purported exchange, including, inter alia: (a) the failure to issue the WMI preferred stock, interests in which were to have been given to TPS investors in the exchange; (b) the failure to deliver such WMI preferred shares to a depositary to facilitate the creation of depositary shares to be delivered to TPS investors; (c) the failure to record the purported transfers of the Trust Preferred Securities from third-party investors to WMI in connection with the purported exchange (as required under Article 8 of the Uniform Commercial Code to effectuate the transfer of uncertificated securities); and (d) the failure to

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deliver the underlying global certificates for the Trust Preferred Securities to WMI in connection with the purported exchange (as required under Article 8 of the Uniform Commercial Code to effectuate the transfer of certificated securities) (together, the Completion Steps). 10. Based on the failure of the Completion Steps, the plaintiffs sought a declaratory

judgment from this Court, including, inter alia, that: The purported conditional exchange of the Trust Preferred Securities for interests in WMI preferred stock did not occur prior to the petition date. The purported conditional exchange of the Trust Preferred Securities for interests in WMI preferred stock could not occur after the petition date. WMI had no right, title or interest in the Trust Preferred Securities. JPMorgan had no right, title or interest in the Trust Preferred Securities. As a result, the Trust Preferred Securities and any claim thereto did not constitute property of WMIs estate. As a result of the failure of the purported exchange, all right, title and interest in the Trust Preferred Securities remained with investors who held the securities immediately prior to the purported exchange or their transferees (other than in connection with the claimed exchange transaction).

See Complaint, pp. 76-77 and 78-79.2 11. Count VI of the TPS Litigation focused on whether, as a result of JPMorgans

knowledge of material non-disclosures associated with the creation, issuance and attempted exchange of the Trust Preferred Securities, JPMorgan could obtain title to the Trust Preferred Securities that would be free from attack by parties harmed by those non-disclosures. Based on JPMorgans knowledge of those material non-disclosures, Count VI sought declarations that: (a) as a result of its knowledge of the fraud in the issuance of the Trust Preferred Securities, JPMC could not be a bona fide purchaser of the Trust Preferred Securities; and (b) as a result of its knowledge of the fraud in the issuance and sale of the Trust Preferred Securities, JPMorgans

Excerpts of the applicable pages of the Complaint are attached hereto at Ex. A.

{D0216082.1 }

claim, if any, to the Trust Preferred Securities would be subject to the fraud claims of investors in the Trust Preferred Securities. See id., p. 87. 12. The parties to the TPS Litigation filed cross-motions for summary judgment, and

the hearing on those requests for summary judgment was held on December 1, 2010, the day prior to commencement of the Courts consideration of the then-current version of the Plan. The Plan was, and as modified remains, based on implementation of a settlement (the Settlement) that, inter alia, depends on WMIs ability to trade the Trust Preferred Securities to JPMorgan in exchange for $4 billion in WMI deposits seized by JPMorgan and a share of billions of dollars in tax refunds WMI previously claimed belonged solely to it. 13. On January 7, 2011, the same day on which the Court delivered its opinion

denying confirmation of the Plan (but indicating it would approve the terms of the Settlement), the Court rendered its decision in the TPS Litigation. In that decision, the Court granted the summary judgment requests of WMI and JPMorgan. More specifically, the Court ruled that, notwithstanding the failure of the Completion Steps, the exchange of the Trust Preferred Securities occurred prior to WMIs chapter 11 filing and those securities belonged to WMI. See TPS Litigation Opinion, at 7-13 (pertaining to Count I) and 13-15 (pertaining to Count II).3 The Court also ruled in favor of the Defendants on Count VI, denying the Plaintiffs challenges to JPMorgans ability to take title to the Trust Preferred Securities free of Plaintiffs claims and as a bona fide purchaser. B. The Appeal Relating To The TPS Litigation. 14. By notice of appeal dated January 13, 2011, the plaintiffs in the TPS Litigation

appealed the Courts ruling on the TPS Litigation. As set forth in the Appellants statement of

The Courts TPS Litigation Opinion is attached hereto at Ex. B. 7

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issues on appeal, the District Court is currently reviewing whether this Court erred in ruling on Count I of the Complaint (pertaining to whether a prepetition exchange of the Trust Preferred Securities for interests in preferred stock of WMI was effected under the terms of the operative agreements), where, inter alia: a. In connection with the purported exchange, the operative agreements imposed on WMI an immediate and unconditional obligation to issue WMI Preferred stock (interests in which were to be exchanged for Trust Preferred Securities) and the undisputed facts establish the WMI preferred stock was never issued; b. This Court held that the occurrence of an Exchange Event and the Office of Thrift Supervisions directive to execute an exchange were the only conditions precedent to such an exchange, notwithstanding the terms of the operative agreements imposing, inter alia, an immediate and unconditional obligation to issue WMI preferred stock in connection with an exchange; c. In connection with the purported exchange, the operative agreements contemplate the creation of depositary shares (representing interests in WMI preferred stock) to be exchanged for the Trust Preferred Securities, and the undisputed facts establish the depositary shares never came into existence; d. In interpreting the operative agreements, this Court failed to distinguish between the concepts of issuance of WMI preferred stock and delivery of depositary shares; e. In ruling on Count I, this Court concluded that certificates representing Trust Preferred Securities were deemed to represent non-existent depositary shares representing un-issued WMI preferred stock; f. Statements, actions and/or judicial admissions of WMI during the bankruptcy proceedings demonstrated that the exchange of Trust Preferred Securities for interests in WMI preferred stock was not accomplished prepetition; and g. As a result of WMIs September 26, 2008 petition for relief under Title 11 of the United States Code, Bankruptcy Code Section 365(c)(2) now prohibits WMIs assumption of the operative agreements pursuant to which the WMI preferred stock was to have been issued.4 15. As set forth in the Appellants statement of issues on appeal, the District Court is

currently reviewing whether this Court erred in ruling on Count II of the Complaint (pertaining to whether a prepetition exchange of Trust Preferred Securities for interests in preferred stock of
4

See Designation of Record and Statement of Issues on Appeal [App. Docket No. 2], at 10.

{D0216082.1 }

WMI was effected in accordance with applicable law), where, inter alia: a. The undisputed facts demonstrate the purported exchange of the Trust Preferred Securities did not comply with the delivery requirements set forth in applicable versions of UCC 8-301(a) or 8-301(b) (including, inter alia, the requirements that the applicable securities registers reflect the transfer and/or the global certificates representing the Trust Preferred Securities have been delivered to WMI); and b. This Court concluded that the operative agreements varied the terms of UCC Article 8 regarding delivery of Trust Preferred Securities when, in fact, the applicable terms of the operative agreements substantially tracked the delivery requirements of UCC 8-301.5 16. As set forth in the Appellants statement of issues on appeal, the District Court is

currently reviewing whether this Court erred in ruling on Count VI (pertaining to whether, as a result of its participation (through a direct subsidiary) in the issuance of certain of the Trust Preferred Securities and its direct knowledge of the misrepresentations underlying the issuance of the Trust Preferred Securities, JPMorgan could be a bona fide purchaser of the Trust Preferred Securities), where, inter alia: a. JPMorgan had at least constructive knowledge of the fraud perpetrated by WMI and its subsidiaries in connection with the issuances of the Trust Preferred Securities; b. JPMorgan also gained direct knowledge of WMIs undisclosed intent to immediately transfer the Trust Preferred Securities to a subsidiary of WMI and the secret nature of that intent; and c. This Courts ruling on Count VI was premised on a lack of any need for equitable relief to effectuate the exchange (based on this Courts conclusion that the exchange occurred prior to WMIs bankruptcy proceedings), but fails to address the impact of JPMorgans knowledge of fraud on its ability to be a bona fide purchaser (as would result upon confirmation of the Plan).6 17. Briefing on the TPS Litigation appeal was completed on May 18, 2011. The

parties await only oral argument and/or the Chief District Court Judge Sleets ruling on

See id. at 11. See id. at 12.

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pleadings.7 C. The Proposed Plans Implication Of The Issues On Appeal. 18. The Plan and Settlement unabashedly implicate the very same issues now on

appeal before Chief Judge Sleet: Issue On Appeal How Implicated By Plan8

The failure to issue the WMI preferred stock Plan Section 36.1(a)(8) provides, as a was fatal to consummation of the exchange. condition precedent to confirmation, for the authorization of the taking of all actions to effectuate the transfer of the Trust Preferred Securities. Moreover, Global Settlement Agreement Section 2.3 authorizes JPMorgan to direct the applicable parties to amend their records to reflect the issuance of the preferred stock.

The failure to deposit newly-issued WMI Plan Section 36.1(a)(8) provides, as a preferred stock with the depositary was fatal to condition precedent to confirmation, for the consummation of the exchange. authorization of the taking of all actions to effectuate the transfer of the Trust Preferred Securities. Moreover, Global Settlement Agreement Section 2.3 authorizes JPMorgan to direct the depositary to amend its records to reflect the deposit of the preferred stock. The failure of the depositary to issue depositary shares (representing newly-issued WMI preferred stock) was fatal to consummation of the exchange. Plan Section 36.1(a)(8) provides, as a condition precedent to confirmation, for the authorization of the taking of all actions to effectuate the transfer of the Trust Preferred Securities. Moreover, Global Settlement Agreement Section 2.3 authorizes JPMorgan to direct the depositary to amend its records to reflect the issuance of those depositary shares.

See Notice of Completion of Briefing and Request for Oral Argument, dated May 18, 2011 [App. Docket No. 42]. Under Plan Section 2.1 prelude, the Global Settlement Agreement is incorporated into and made part of the Plan. Where there is a conflict, the Settlement Agreement controls the Plan. 10

{D0216082.1 }

Issue On Appeal The failure to record on the applicable securities registers any transfer of the Trust Preferred Securities to WMI was fatal to the exchange.

How Implicated By Plan8 Plan Section 36.1(a)(8) provides, as a condition precedent to confirmation, for the authorization of the taking of all actions to effectuate the transfer of the Trust Preferred Securities. Moreover, Global Settlement Agreement Section 2.3 authorizes JPMorgan to direct the applicable registrars to amend their records to reflect the transfer of the Trust Preferred Securities, and to otherwise document the title transfer.

The failure to deliver to WMI the global Plan Section 36.1(a)(8) provides, as a certificates representing the Trust Preferred condition precedent to confirmation, for the Securities was fatal to the exchange. authorization of the taking of all actions to effectuate the transfer of the Trust Preferred Securities. Moreover, Global Settlement Agreement Section 2.3 authorizes JPMorgan to direct the applicable parties to amend their records to reflect the delivery of the Trust Preferred Securities to WMI. As a result of WMIs bankruptcy filing, WMI is precluded by Bankruptcy Code Section 365(c)(2) from assuming and performing the applicable exchange agreements (calling for the issuance of the securities for which the Trust Preferred Securities were to have been exchanged). Plan Section 36.1(a)(8) provides, as a condition precedent to confirmation, for the authorization of the taking of all actions to effectuate the transfer of the Trust Preferred Securities. Moreover, Global Settlement Agreement Section 2.3(c) authorizes the transfer of the Trust Preferred Securities from WMI to WMB. Additionally, Plan Section 41.2 provides for a release and discharge of Class 19 claims and interests asserted against the estates, thus releasing and discharging the contention on appeal that the TPS Securities are not assets belonging to the Debtors estates. Finally, Exhibit D to the Debtors Plan Supplement provides for the assumption of any and all contracts, as and to the extent necessary or required to transfer to JPMorgan any and all rights, title and interest in the Trust Preferred Securities.

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11

Issue On Appeal As a result of its knowledge and/or actions related to the issuance of the Trust Preferred Securities, JPMorgan is precluded from becoming a bona fide purchaser of the securities.

How Implicated By Plan8 Plan Section 2.1(c) provides that, as part of the Global Settlement, the Debtors shall sell, transfer, and assign the TPS Securities to JPMorgan. Moreover, and importantly, Plan Section 36.1(a)(10) provides for an Order directing the transfer of the Trust Preferred Securities free and clear to JPMorgan and designating JPMorgan as a good faith purchaser of the TPS Securities, pursuant to Bankruptcy Code Section 363(m), thus attempting to immunize JPMorgan from disgorgement if Chief Judge Sleet reverses this Courts decision on appeal.

19.

Clearly, the intent of the above Plan provisions is to render the TPS Litigation

appeal equitably moot and to put the Trust Preferred Securities into the hands of JPMorgan (and beyond the reach of this or an appellate Court). Were the intent otherwise, the Debtors and JPMorgan presumably would agree to Plan modifications preserving the TPS Consortiums appellate rights (among other infirmities requiring Plan modification) so as to obviate this groups continued opposition to the Plan. ARGUMENT I. The Divestiture Rule Clearly Precludes Any Action By This Court That Would Impair or Impede The Conduct Of Appellate Review Of The Courts Decision In The TPS Litigation. 20. In the September Opinion, the Court declined to apply the Divestiture Rule to the

version of the Plan then before the Court. As discussed below, the TPS Consortium respectfully submits that the Courts decision in that regard was based on an unduly narrow interpretation and is inconsistent with the well-established purpose of the rule. The TPS Consortium respectfully submits that the Plan does not rest on mere enforcement of an Order on appeal, but, instead, impermissibly seeks to destroy the TPS Consortiums appellate and property rights. This Court

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12

is not permitted to take such action. A. The Court Should Ignore The Inevitable Cries Of Law Of The Case By Plan Supporters Who Would Benefit From An Incorrect Articulation Of The Divestiture Rule. The Debtors and other plan supporters will, undoubtedly, shout law of the case

21.

in hopes the Court will not reassess its articulation of the Divestiture Rule in the September Opinion denying confirmation. Those shouts should be ignored. The law of the case doctrine requires that there be a final Order. For the doctrine to apply, there must be law actually issued in the case binding the parties. See Gander Mountain Co. v. Cabelas, Inc., 540 F.3d 827 (8th Cir. 2008); Council of Alt. Political Parties v. Hooks, 179 F.3d 64, 69 (3d Cir. 1999); Cable v. Millennium Digital Media Sys., L.L.C. (In re Broadstripe, LLC), 435 B.R. 245 (Bankr. D. Del. 2010) (Sontchi, J.). An Order denying confirmation is not a final Order. See Flor v. BOT Fin. Corp. (In re Flor), 79 F.3d 281, 284 (2d Cir. 1996) (holding that denial of confirmation of a Chapter 11 plan, absent dismissal of the petition or conversion to Chapter 7, is not a final order); Zahn v. Fink (In re Zahn), 526 F.3d 1140, 1143 (8th Cir. 2008) (an order denying confirmation of a plan, which does not dismiss the case, is not a final order); WCI Steel, Inc. v. Wilmington Trust Co., 338 B.R. 1, 9 (N.D. Ohio 2005) (same). As such, there is no law binding the parties or the Court. The Court, therefore, is free to address the present assertion of the Divestiture Rule in connection with this latest iteration of the Plan.9

The Court may recall that, in connection with the July confirmation proceedings, the Plan supporters also attempted to invoke the law of the case doctrine to prevent the Court from re-addressing the appropriate rate of postpetition interest (as the Plan supporters asserted the Court had ruled on that issue in the January Opinion denying confirmation). In the September Opinion, the Court correctly noted that it was not precluded by law of the case from revisiting the issue in connection with the revised Plan (as the Court should do with respect to the Divestiture Rule in connection with its consideration of the further revised Plan that is now presented for confirmation). See September Opinion, at 77. And, in any event, in ruling that the federal judgment rate applied, the Court 13

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B.

The Court Incorrectly Articulated The Divestiture Rule In The September Opinion. In the September Opinion, the Court narrowly articulated the Divestiture Rule as

22.

follows: The correct statement of the Divestiture Rule is that so long as the lower court is not altering the appealed order, the lower court retains jurisdiction to enforce it. See September Confirmation Opinion, at 20 (citing In re Dardashti, No. 07-1311, 2008 WL 8444787, at *6 (B.A.P. 9th Cir. Feb. 12, 2008) and In re Hagel, 184 B.R. 793, 798 (B.A.P. 9th Cir. 1995)). Respectfully, that articulation of the Divestiture Rule is unduly narrow and fails to focus on the critical issues presented herein the integrity of the appellate process. 23. As the Supreme Court has held, and numerous courts have echoed, [t]he filing of

a notice of appeal is an event of jurisdictional significance it confers jurisdiction on the [appellate court] and divests the [trial court] of its control over those aspects of the case involved in the appeal. Griggs v. Provident Consumer Disc. Co., 459 U.S. 56, 58 (1982); see also Venen v. Sweet, 758 F.2d 117, 120 (3d Cir. 1985) ([T]he timely filing of a notice of appeal is an event of jurisdictional significance, immediately conferring jurisdiction on a[n appellate court] and divesting a [trial court] of its control over those aspects of the case involved in the appeal.). The Divestiture Rule serves an important role in promoting judicial economy by avoid[ing] the confusion of placing the same matter before two courts at the same time and preserv[ing] the integrity of the appeal process. Whispering Pines Estates v. Flash Island, Inc. (In re

Whispering Pines Estates), 369 B.R. 752, 757 (B.A.P. 1st Cir. 2007) (emphasis added); Karaha Bodas Co. v. Perusahaan Pertambangan Minyak Dan Gas Bumi Negara, No. 02-20, 2002 WL correctly departed from its prior ruling in In re Coram Healthcare to the extent it was inconsistent with the Courts subsequent ruling in the September Opinion. See September Opinion, at 78 n.35. So, too, the Court should use this opportunity to correct its September 2011 articulation of the Divestiture Rule.

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14

1401693, at *1 (D. Del. June 27, 2002) (GMS) (citing Venen, 758 F.2d at 120-21 (Divest means what it says the power to act, in all but a limited number of circumstances, has been taken away and placed elsewhere.)). 24. Chief Judge Sleet has similarly recognized the general principle that a lower Iron Mountain Corp. v. AWC

court is divested of jurisdiction once an appeal is filed.

Liquidation Corp. (In re AWC Liquidation Corp.), 292 B.R. 239, 242 (D. Del. 2003) (GMS). Noting the numerous [] contexts in which the lower court is divested of jurisdiction once an appeal is filed, Chief Judge Sleet recognized the fundamental tenet of federal civil procedure that subject to certain exceptions the filing of a notice of appeal from the final judgment of a trial court divests the trial court of jurisdiction and confers jurisdiction upon the appellate court. This rule applies with equal force to bankruptcy cases. Id. (citing Texas Comptroller of Pub. Accounts v. Transtexas Gas Corp. (In re Transtexas Gas Corp.), 303 F.3d 571, 578-79 (5th Cir. 2002)). Chief Judge Sleet also noted the well established [principle] that the filing of a notice of appeal divests the district court of jurisdiction to rule on the merits of the issues underlying the appeal. Karaha Bodas, 2002 WL 1401693, at *1 (emphasis added). Additionally, the Divestiture Rules application in the present context has been correctly recognized elsewhere on the Delaware Bankruptcy Bench (by Judge Carey): In light of the what I consider to be a black letter rule that the filing of the Notice of Appeal divests the lower court of jurisdiction over those aspects of the case, those issues on appeal. How am I restricted from considering, if at all, in determining the issues raised in the Motions for Reconsideration? In re Tribune Co., Case No. 08-13141 (KJC), Tr. Trans. Nov. 22, 2011, pp. 41:4 41:10 (emphasis added). 25. Once an appeal is taken, a trial court faced with a subsequent request to act must

first determine whether the requested post-appeal action falls within one of the limited

{D0216082.1 }

15

circumstances in which the court retain[s] power to act. Venen, 758 F.2d at 122 (emphasis added). Those limited circumstances include: Where the requested action is to preserve the status quo as of the time of the appeal. See In re Neuman, 67 B.R. 99, 101 (S.D.N.Y. 1986) ([C]ourts have recognized an exception to this rule where action by the lower court is necessary to preserve the status quo as of the time of the appeal . . . .) (citations omitted); Ideal Toy Corp. v. Sayco Doll Corp., 302 F.2d 623, 625 (2d Cir. 1962); McClatchey Newspapers v. Cent. Valley Typographical Union, 686 F.2d 731, 734-35 (9th Cir. 1982), cert. denied, 459 U.S. 1071 (1982). Where the appeal is from a non-appealable order or judgment. See Venen, 758 F.2d at 121 (An appeal from a non-appealable judgment or order is sometimes characterized as a nullity.); Sea Star Line, LLC v. Emerald Equip. Leasing, Inc., No. 05-245, 2009 WL 3805569, at *3 (D. Del. Nov. 12, 2009). Where the appeal is procedurally premature. See Mondrow v. Fountain House, 867 F.2d 798, 800 (3d Cir. 1989); Sea Star Line, 2009 WL 3805569, at *3 ([A] premature appeal does not divest the district court of jurisdiction.). Where the post-appeal relief is not so closely related to the matters on appeal that retention of jurisdiction by the lower court on the matter would impermissibly interfere with the appellants rights. See Liscinski v. Cambridge Mgmt. Gp. (In re Trimble), No. 07-2115, 2008 WL 782581, at *2 n.12 (Bankr. D.N.J. March 18, 2008) (Lyons, B.J.); Whispering Pines, 369 B.R. at 759; In re Bd. of Dirs. of Hopewell Intl Ins. Ltd., 258 B.R. 580, 583 (Bankr. S.D.N.Y. 2001) (trial court divested of jurisdiction by appeal unless it is asked to determine issues and proceedings different from and collateral to those involved in the appeal). Where the post-appeal relief is uniquely separable from the matters on appeal such that its resolution would not affect the appeal. See Pensiero v. Lingle, 847 F.2d 90, 98 (3d Cir. 1988) (allowing motion for Rule 11 sanctions to proceed in trial court while anti-trust action remained on appeal).

In cases where there is any question as to whether the trial court has been divested of jurisdiction, doubt should be resolved in favor of awaiting disposition of the appeal by the appellate court. See Sea Star Line, 2009 WL 3805569, at *3 (considering the exception to the Divestiture Rule associated with premature appeals, and stating [i]n cases in which the answer is less clear, however, doubts as to the legitimacy of the appeal should be resolved in favor of awaiting disposition of the appeal by the court of appeals) (internal quotations omitted). 26. The last two exceptions to the Divestiture Rule (which are the only potentially

{D0216082.1 }

16

applicable exceptions in this situation) focus on the impact of the proposed action on the appellants rights and the appellate process, not just on whether the Court is enforcing an Order. Obviously, the broader nature of bankruptcy proceedings may result in a relatively narrower application of the Divestiture Rule as compared to other types of federal litigation not involving the oversight of an ongoing business or complex restructuring issues. Stated

differently, in bankruptcy proceedings where the Bankruptcy Court is faced with myriad issues (some related to the appeal, and some not), the Divestiture Rule does not prohibit the Bankruptcy Court from proceeding with respect to every matter that might arise in the case while in typical, single-issue litigation, an appeal will result, for all intents and purposes, in the divestiture of the trial courts ability to act with respect to substantially all of the issues before it. See Whispering Pines, 369 B.R. at 758 (As courts have noted, however, a bankruptcy case typically raises a myriad of issues, many totally unrelated and unconnected with the issues involved in any given appeal. The application of a broad rule that a Bankruptcy Court may not consider any request filed while an appeal is pending has the potential to severely hamper a Bankruptcy Courts ability to administer its cases in a timely manner.) (citation omitted). 27. But, it is clear that, the Divestiture Rule applies in bankruptcy proceedings to

prevent the Bankruptcy Court from proceeding on those matters in the bankruptcy case (among the myriad matters that exist) that would affect or impair the appellate courts ability to adjudicate the appeal. See In re Kendrick Equip. Corp., 60 B.R. 356, 358 (Bankr. W.D. Va. 1986) (In order to assure the integrity of the appeal process, it is imperative that the lower court take no action which might in any way interfere with the jurisdiction of the appeal court. . . . This Court should not entertain any request which touches directly or indirectly on the issues presented in the appeal or which might otherwise interfere with the integrity of the appeal

{D0216082.1 }

17

process.) (emphasis added); In re Urban Dev., Ltd., 42 B.R. 741, 743-44 (Bankr. M.D. Fla. 1984) (granting post-appeal relief in a bankruptcy proceeding regarding issues totally unrelated and unconnected with the issues involved in [the] appeal . . . .) (emphasis added); Petrol Stops Nw. v. Contl Oil Co., 647 F.2d 1005, 1010 (9th Cir. 1981) (filing of a notice of appeal transfer[s] jurisdiction over any matters involved in the appeal from the [trial] court to [the appellate] court) (emphasis added); In re Hardy, 30 B.R. 109, 111 (Bankr. S.D. Ohio 1983) (noting that the Divestiture Rule precluded the trial court from taking actions affecting the question presented to the appellate court or that would impinge upon that question, and stating that [i]t would not be just for us to grant the alternative relief sought . . . for this would effectively deprive the [appellant] of the right to an appeal) (emphasis added); In re Strawberry Square Assocs., 152 B.R. 699, 701 (Bankr. E.D.N.Y. 1993) (stating that the bankruptcy court [may not] exercise jurisdiction over those issues which, although not themselves on appeal, nevertheless so impact those on appeal as to effectively circumvent the appeal process) (emphasis added). 28. Here, the Plan proponents are asking the Court to do far more than simply enforce

an Order or preserve the status quo pending appeal. They are requesting that the Court exercise its judicial power to approve a Settlement and a Plan that fully and finally disposes of the Trust Preferred Securities, seeks to remedy the Debtors failure to comply with the parties contracts and applicable law, and otherwise seeks to destroy the TPS Consortiums appellate and property rights. 29. In the September Opinion, the Court suggested that granting the requested

supplemental confirmation-related relief (e.g., compelling performance of the Completion Steps, Ordering the transfer of the Trust Preferred Securities from WMI to JPMorgan free and clear

{D0216082.1 }

18

of issues now on appeal, and/or granting JPMorgan protection under Bankruptcy Code Section 363(m)) would simply be enforcing the TPS Litigation ruling. Respectfully, when the postappeal relief goes so far beyond and outside of the appealed Order, and would serve to vitiate intentionally the appellate process, it cannot be termed enforcement of the original Order. See Cibro Petroleum Prods., Inc. v. Albany (In re Winimo Realty Corp.), 270 B.R. 99, 105-106 (S.D.N.Y. 2001) (Accordingly, courts have recognized a distinction between actions that enforce or implement an order, which are permissible, and acts that expand or alter that order, which are prohibited . . . . Any actions that interfere with the appeal process or decide an issue identical to the one appealed are beyond mere enforcement and are therefore impermissible.) (emphasis added); Bd. of Dir. of Hopewell, 258 B.R. at 583 (same); In re Allen-Main Assoc., LP, 243 B.R. 606, 608 (Bankr. D. Conn. 1998) (same). 30. The cases cited by the Court in the September Opinion are not to the contrary. In

In re Dardashti,10 at issue was the Bankruptcy Courts enforcement of an Order directing the debtor to turn over assets deemed to be property of the estate (the Turnover Order). 2008 WL 8444787, at *1. The debtor did not seek reconsideration or a stay of the Turnover Order, nor did he appeal it. See id. Approximately ten months later, the debtor initiated an adversary

proceeding seeking a declaratory judgment that the property implicated in the Turnover Order was not property of the estate. See id. at *2. The Bankruptcy Court entered an Order dismissing that adversary proceeding (the Dismissal Order), holding that, because it had previously determined the property at issue to be property of the estate in connection with the Turnover
10

The TPS Consortium also notes that the Dardashti decision was determined by its authors as not appropriate for publication and to be of no precedential value. See Dardashti v. Golden (In re Dardashti), No. 07-1311, 2008 WL 8444787, at *1 n.1 (B.A.P. 9th Cir. Feb. 12, 2008) (This disposition is not appropriate for publication. Although it may be cited for whatever persuasive value it may have . . ., it has no precedential value.) (internal citations omitted). 19

{D0216082.1 }

Order (which had not been appealed), the debtor was precluded from further litigating the issue. See id. The debtor then appealed the Dismissal Order. See id. Later, the trustee, seeking to enforce the Turnover Order, filed a motion for an Order to show cause why the debtor should not be held in contempt for failing to abide by the Turnover Order (which, again, had not been appealed), which motion the debtor opposed on the basis, inter alia, that the Dismissal Order had been appealed and the Bankruptcy Court was divested of jurisdiction to act as a result of that appeal. See id. at *3. In connection with an appeal of the resulting Order to show cause, the Bankruptcy Appellate Panel determined that the Bankruptcy Court had not been divested of jurisdiction to enforce the Turnover Order as a result of the debtors appeal of the Dismissal Order. See id. at *6. 31. The Dardashti decision is distinguishable from the case at bar. First, the

Dardashti decision is procedurally distinguishable.

The debtor never appealed the actual

substantive decision determining the estate to be the owner of the disputed property the Turnover Order. Rather, the Debtor appealed the dismissal of a collateral attack on that final, un-appealed Order. Here, the Courts determination of ownership of the Trust Preferred

Securities is the exact issue/matter on appeal before Chief Judge Sleet. Second, the Dardashti court did not authorize a sale of the disputed property to a third party free and clear of the debtors interest therein (effectively putting the disputed property out of the reach of the appellant should he prevail on appeal) such as this Court is being requested to do with respect to the Trust Preferred Securities under the Plan. Rather, the Dardashti Courts post-appeal Order would simply have facilitated bringing the property into the estate and under the Trustees control consistent with the un-appealed Turnover Order (i.e., the post-appeal relief would actually be enforcing the Turnover Order, rather than granting substantively different relief such

{D0216082.1 }

20

as authorizing the sale of the disputed property in a manner that would moot the appeal). Such relief would not have any effect on the debtors appeal rights (unlike the Plan provisions cited above). 32. Finally, and critically, the Dardashti Court noted that the post-appeal relief did not

impair [the appellants] ability to seek review of the Dismissal Order on appeal, and would not have had any appreciable effect on the [appellate courts] consideration of the Dismissal Order. Dardashti, 2008 WL 8444787, at *6. In contrast, here, the post-appeal action sought is approval of a Plan that is obviously, and unabashedly, intended to divert the Trust Preferred Securities beyond the reach of this Court and/or the District Court and set up the Plan supporters arguments that the appeal of the TPS Litigation decision has been rendered equitably moot by this Courts post-appeal actions. 33. In re Hagel is similarly distinguishable. In Hagel, the Bankruptcy Court denied

confirmation of two chapter 13 debtors proposed joint plan for failure to include certain income in their schedules, and ordered the debtors to amend their schedules accordingly by a date certain. See Hagel, 184 B.R. at 795. The denial of confirmation and the determination that social security income had to be included in the calculation of the debtors disposable income were appealed to the Bankruptcy Appellate Panel. The standing trustee subsequently moved for dismissal of the bankruptcy case when the debtors failed to amend their schedules as ordered by the Bankruptcy Court in the original decision. The Court granted the motion and dismissed the case. The debtors challenged the Bankruptcy Courts jurisdiction to Order dismissal given the pendency of the appeal of the denial of confirmation. 34. The Hagel court correctly noted that, once an appeal is filed, the trial court may

not interfere with the appeal process or the jurisdiction of the appellate court. Id. at 798

{D0216082.1 }

21

(emphasis added). And, importantly, the post-appeal relief granted by the Bankruptcy Court (dismissal of the debtors chapter 13 case) did not, in fact, interfere with the appeal process or the Bankruptcy Appellate Panels jurisdiction as demonstrated by the Bankruptcy Appellate Panels continuing ability to deliver its decision on the merits of the debtors underlying appeal. See id. at 799. Here again, a primary purpose of the Plan provisions dealing with the Trust Preferred Securities is to render equitably moot the TPS Consortiums appeal of this Courts ruling as to ownership. Moreover, Hagel teaches that the decision of the lower court must be left intact so as not to disrupt the appellate process. See id. at 798. As discussed above, contrary to the positions taken by the Appellees in the TPS Litigation and adopted by this Court in its ruling thereon e.g., that the failure of the Completion steps was of no moment the Plan proponents seek an Order of this Court compelling, inter alia, completion of substantially all of the Completion Steps in connection with the transfer of the Trust Preferred Securities first to WMI and then to JPMorgan free and clear of claims and appellate rights. As such, rather than leaving intact this Courts ruling in the TPS Litigation, the relief granted in connection with Plan approval would eviscerate that ruling by correcting, by subsequent Order of this Court, the very errors that are the subject of the Movants pending appeal. Finally, to the extent the Hagel Court did intend its articulation of the Divestiture Rule to be as limited as cited in the September Opinion, such a limited reading of the Divestiture Rule would be contrary to binding precedent in this District adopting a more appropriately expansive application of the rule. See AWC Liquidation, 292 B.R. at 242 (noting the general principle that a lower court is divested of jurisdiction once an appeal is filed . . . and explaining the fundamental tenet of federal civil procedure that subject to certain exceptions the filing of a notice of appeal from the final judgment of a trial court divests the trial court of jurisdiction and confers jurisdiction upon the

{D0216082.1 }

22

appellate court. This rule applies with equal force to bankruptcy cases.) (citing Transtexas Gas, 303 F.3d at 578-79); Karaha Bodas, 2002 WL 1401693, at *1 (noting the well established [principle] that the filing of a notice of appeal divests the district court of jurisdiction to rule on the merits of the issues underlying the appeal) (emphasis added). 35. Undoubtedly, the Debtors Plan has been constructed to attempt to deprive

Appellants of appellate review of this Courts decision in the TPS Litigation. Specifically, the Plan seeks an Order from the Bankruptcy Court providing for, inter alia: a) an affirmative injunction requiring completion of the steps necessary to effect the conditional exchange of the Trust Preferred Securities (steps, conveniently, WMI and JPMC argued to this Court, and this Court so held, were unnecessary and/or irrelevant during summary judgment proceedings on the TPS Litigation); b) assumption of the agreements necessary to complete the conditional exchange transaction (in contravention of Bankruptcy Code Section 365(c)(2) another issue on appeal before Chief Judge Sleet); c) transfer of the Trust Preferred Securities to JPMorgan free and clear of claims, accompanied by the bona fide purchaser protections of Bankruptcy Code Section 363(m); and d) affirmative injunctive relief requiring third parties to take steps necessary to effect the transfer of the Trust Preferred Securities to JPMorgan under applicable law (e.g., recordation on the applicable trust registers, transfer of global certificates, etc.). Clearly, these, among other aspects of the requested confirmation-related relief are affirmatively designed to attempt to affect the matters now on appeal before Chief Judge Sleet. As such, this Courts actions to approve (or, indeed, Order) the foregoing would be in clear violation of the Divestiture Rule. 36. And, the actions contemplated by the Plan (none of which were Ordered in this

Courts January 2011 ruling on the TPS Litigation), go far beyond enforcement of the TPS

{D0216082.1 }

23

Litigation ruling. Nowhere in the Courts ruling in the TPS Litigation can it even be argued that this Court Ordered: a) parties (including parties not before this Court) to undertake the Completion Steps; b) that the Trust Preferred Securities be transferred to JPMorgan, free and clear of claims and interests; or c) that the TPS Consortiums claims against JPMC (or any of its affiliates) related to the Trust Preferred Securities be released. Such post-appeal relief cannot be said to be merely enforcing the Courts TPS Litigation ruling. Rather, it clearly would be a significant modification and/or expansion of the ruling now on appeal. As such, the relief requested is prohibited by the Divestiture Rule. C. 37. The Divestiture Rule Is Mandatory And Automatic. In the September Opinion, the Court appears to suggest that the Divestiture Rule

is subject to the same type of discretion afforded under Bankruptcy Rule 8005. The TPS Consortium respectfully submits that Divestiture Rule provides no discretion. Where it applies, the trial Court is forbidden from proceeding even if the trial Court were otherwise inclined to do so. See In re Emergency Beacon Corp., 58 B.R. 399, 402 (Bankr. S.D.N.Y. 1986) (finding that a Bankruptcy Court, once divested of jurisdiction by the filing of a notice of appeal, should [not] be able to vacate or modify an order under appeal, not even a Bankruptcy Court attempting to eliminate the need for a particular appeal) (citations omitted). Bankruptcy Rule 8005, on the other hand, explicitly allows the Court discretion to stay other aspects of the bankruptcy case that are not otherwise mandatorily stayed through proper application of the Divestiture Rule. See Fed. R. Bankr. P. 8005 ([T]he bankruptcy judge may suspend or order the continuation of other proceedings in the case under the Code or make any other appropriate order during the pendency of an appeal on such terms as will protect the rights of all parties in interest.).

{D0216082.1 }

24

38.

No case identified by the TPS Consortium (or, the Plan supporters, for that

matter) stands for the proposition that the promulgation of Rule 8005 and its voluntary stay provisions somehow overturned binding caselaw standing for the proposition that the Divestiture Rule automatically and mandatorily forces the trial court to stay its hand pending appeal. Clearly, where the Divestiture Rule is implicated to preserve matters on appeal, the discretion or desires of the trial Court are irrelevant. Stated simply, Rule 8005 has no place in the discussion of the Divestiture Rule. That the Court, in the September Opinion, suggested that the Divestiture Rule left the Court with the same discretion afforded it under Rule 8005 was error and another reason the Court should adopt a corrected articulation of the Rule in connection with the further revised version of the Plan.11 D. Application Of The Divestiture Rule Would Not Improperly Impede The Debtors Cases From Continuing. The Plan proponents argue that application of the Divestiture Rule in this case

39.

would somehow result in the end of bankruptcy as it is known. They suggest that if this Court declines to disturb aspects of the TPS Litigation now on appeal before Chief Judge Sleet, such a decision would somehow force a freeze of all activity in the Debtors case pending final determination of those appellate matters. That is a straw-man argument this Court should

11

See September Opinion, at 18-19 (discussing the discretionary standard allowed under Rule 8005 in considering whether the Divestiture Rule applied); see also id. at 22 (declining to exercise discretion under Rule 8005 to halt confirmation proceedings under the Divestiture Rule notably, the TPS Consortium had not even sought relief under Rule 8005). Additionally, the TPS Consortium respectfully submits that the Courts citation to the DeMarco Courts decision does not support the proposition that the discretionary standard of Rule 8005 should govern in the instant situation. See id. The DeMarco Court correctly applied the Divestiture Rule, and nowhere in the opinion cited Rule 8005 or discretion. See DeMarco, 285 B.R. at 36.

{D0216082.1 }

25

decline to adopt.12 40. Knowing that the ownership of the Trust Preferred Securities is still subject to

dispute, and that this issue is to be decided by Chief Judge Sleet, the Debtors and JPMorgan nonetheless persist in proposing a Plan that requires the delivery of these Securities to JPMorgan free and clear of all claims (including the TPS Consortiums claims). The TPS Consortium owns approximately $1.5 billion of these Securities. To compromise the TPS Consortiums rights in the interests of expediency raises serious constitutional property and due process issues. 41. Admittedly, because of the case agenda JPMorgan and the Debtors have foisted

upon this Court (basically, it is their deal or no deal), proper application of the Divestiture Rule in this case to prevent an unfettered transfer of the Trust Preferred Securities to JPMorgan would likely preclude near-term consummation of the current version of the Settlement (based on JPMorgans threats to walk away if this Court does not Order the transfer of the Trust Preferred Securities free and clear of claims and the TPS Consortiums appeal rights). But, there is no exception to the Divestiture Rule to facilitate settlements that are claimed by their proponents to be too big to fail. Nor is it appropriate for the Court to contravene the Divestiture Rule out of a desire to limit the scope of matters on appeal (as the Plan supporters hope this Court will do). See Bennett v. Gemmill (In re Combined Metals Reduction Co.), 557 F.2d 179, 201 (9th Cir.

12

Indeed, in the normal course of a bankruptcy case, most Orders are interlocutory and not subject to immediate appeal absent permission. The present situation, in which the Plaintiffs were required to seek relief via a separate adversary proceeding, and the Court entered a final, appealable Order determining state law property rights in connection therewith, is unusual. As such, the Plan supporters doomsday scenarios should be rejected. Instead, this Court should embrace this rare opportunity to facilitate review by an Article III court of this Courts ruling on important property and due process issues. Accord Stern v. Marshall, 131 S.Ct. 2594 (2011) (stressing the importance of Article III review); Butner v. United States, 440 U.S. 48, 54 (1979) (absent actual conflict with Federal law, property rights to be determined in accordance with state law).

{D0216082.1 }

26

1977) (Divesture Rule precludes even actions by the trial court that would eliminate the need for a particular appeal). 42. And while frustration of the Debtors efforts to force approval of the Settlement

(as currently constituted) might be inconvenient to some parties,13 there are still numerous aspects of the Debtors case that could continue notwithstanding this Courts application of the Divestiture Rule to preserve those matters now on appeal before Chief Judge Sleet. For

example, proper application of the Divestiture Rule would not prevent: (a) the Courts consideration and approval of a plan or liquidation scheme not dependent on delivering the Trust Preferred Securities to JPMorgan free and clear of the TPS Litigation appellants rights; (b) the Courts consideration and approval of a revised Plan and Settlement that preserved the TPS Consortiums appellate rights (rather than affirmatively trampling such rights) such as by requiring the Trust Preferred Securities be placed in a disputed claims reserve pending resolution of the TPS Litigation appeal; (c) appointment of a chapter 11 trustee to help bring the Debtors cases to a fair and reasonable conclusion; (d) conversion of the Debtors cases to chapter 7; (e) continuation of litigation over other sources of potentially-significant estate value (e.g., disputed deposits, tax refunds, etc.); or (f) pursuit of estate claims against third parties bearing potential

13

Numerous Courts have aptly noted that avoidance of inconvenience is not sufficient to overcome the jurisdictional mandates of the Divestiture Rule. See Venen, 758 F.2d at 123 (This litigation has been unduly prolonged, unnecessarily burdening this court in this appeal, as it will burden the district court in the proceedings which will undoubtedly follow. Nevertheless, jurisdictional requirements may not be disregarded for convenience sake.) (emphasis added); AWC Liquidation, 292 B.R. at 242-43 (while mindful of the inconvenience caused by application of the Divestiture Rule, inconvenience is not sufficient to overcome the jurisdictional bar); Transtexas Gas, 303 F.3d at 580 ([P]rinciples of flexibility do not permit a bankruptcy court to enter an order addressing a post-judgment motion when the bankruptcy court lacks jurisdiction over the case . . . simply because prompt disposition of the motion might be desirable from an efficiency standpoint. Such pragmatic concerns cannot outweigh a jurisdictional defect.).

{D0216082.1 }

27

responsibility for WMIs collapse (e.g., JPMorgan, investment bankers, ratings agencies, officers and directors, etc.). Such matters clearly can go forward under a proper application of the Divestiture Rule. The aspects of the Plan designed to undermine the TPS Litigation appeal clearly cannot go forward. II. Even If the Court Declines To Recognize Proper Application Of The Divestiture Rule, Confirmation Proceedings Should Be Stayed Pending Appeal. 43. As noted above, given the automatic and mandatory nature of the Divestiture

Rule, the TPS Consortium respectfully submits that a discretionary stay provided by Rule 8005 is not necessary. In any event, Rule 8005s requirements are satisfied easily in this case. Rule 8005 contemplates a discretionary stay pending an appeal of a Bankruptcy Courts Order. See Fed. R. Bankr. P. 8005. Under Rule 8005, a stay pending appeal is appropriate to maintain the status quo. See KOS Pharm., Inc. v. Andrix Corp., 369 F.3d 700, 708 (3d Cir. 2004). In bankruptcy cases, myriad circumstances can occur that would necessitate the grant of a stay pending appeal in order to preserve a partys position. In re Highway Truck Drivers & Helpers Local Union # 107, 888 F.2d 293, 298 (3d Cir. 1989). 44. In evaluating whether a party is entitled to a stay pending appeal, courts consider

(a) the likelihood that the moving party will succeed on the merits; (b) the possibility that the moving party will suffer irreparable harm absent relief; (c) whether the stay will inflict substantial harm on the nonmoving parties; and (d) whether the stay will harm the public interest. See Republic of Philippines v. Westinghouse Elec. Corp., 949 F.2d 653, 658 (3d Cir. 1991) (citing Hilton v. Braunskill, 481 U.S. 770, 776 (1987)). 45. None of these factors is, on its own, outcome determinative. Rather, the Court

must balance all of the factors in order to decide whether or not to grant a stay. Haskell v. Goldman, Sachs & Co. (In re Genesis Health Ventures, Inc.), 367 B.R. 516, 519 (Bankr. D. Del.

{D0216082.1 }

28

2007) (finding all four factors weighed in favor of granting motion to stay proceedings pending appeal) (citation omitted); Meisel v. Armenia Coffee Corp. (In re Hudsons Coffee, Inc.), No. 06-1458, 2008 Bankr. LEXIS 2994, at * 4 (Bankr. D.N.J. Oct. 31, 2008) ([N]o single factor is outcome determinative. Rather, [a court] must balance all of the elements in order to reach an appropriate determination.); see also In re Countrywide Home Loans, Inc., 387 B.R. 467, 479 (W.D. Pa. 2008) (noting that a balancing approach is more appropriate than a somewhat mechanical test). Particularly, the Court should find that the more likely it is that the movant will succeed on appeal, the less strong showing of irreparable harm needs to be, and vice versa. See BEPCO, L.P. v. 15375 Meml Corp. (In re 15357 Meml Corp.), No. 06-10859-KG, 2009 WL 393948 (D. Del. Feb. 18, 2009); see also Hickey v. City of New York (In re World Trade Ctr. Disaster Site Litig.), 503 F.3d 167, 170 (2d Cir. 2007) ([T]he degree to which a factor must be present varies with the strength of the other factors, meaning that more of one [factor] excuses less of the other.) (citations and internal quotations omitted). 46. Here, balancing the four factors weighs strongly in favor of granting a stay of

further confirmation proceedings pending the resolution of the TPS Litigation appeal. Movants have raised substantial, serious and difficult legal issues in their appeal before the District Court, and further raise serious legal issues in this motion, among them the potential deprivation of the TPS Consortiums constitutional due process and Fifth Amendment property rights, as well as the application of the Divestiture Rule to prohibit this Court from granting relief affirmatively designed to deprive Chief Judge Sleet of jurisdiction over the TPS Litigation appeal. These are important and difficult issues warranting maintenance of the status quo pending their resolution). 47. Because the Plan seeks to resolve the ownership of the Trust Preferred Securities

and post-appeal consummation of the steps to the Conditional Exchange, which are central issues

{D0216082.1 }

29

on appeal before the District Court in the TPS Litigation appeal, and the Debtors and other parties will undoubtedly seek to strip the Plaintiffs of any appellate review by claiming, inter alia, that such an appeal would be equitably moot, this is such a case warranting a stay. Absent a stay, Movants will be irreparably harmed through the potential destruction of their property interests in the Trust Preferred Securities, as well as the attempted elimination of any forum for seeking relief from such deprivation.14 Additionally, the stay, if granted, would not injure let alone substantially injure any of the non-moving parties, since the stay of confirmation proceedings would simply maintain the status quo (which is the very purpose of a stay). Finally, the public interest would be furthered through the granting of a stay in that the stay would forestall the Plan proponents efforts to cause this Court to violate the Divestiture Rule and trample on Movants property, appellate and Due Process rights. A. 48. The Movants Are Likely To Succeed On The Merits Of Their Appeals. To prove likely success on the merits, the movant must demonstrate that it has a

substantial issue to raise on appeal. BEPCO, 2009 WL 393948, at *1 (citation and internal quotations omitted). For this prong of a courts analysis, it is often sufficient that a movant show that it seeks to raise issues on appeal that are substantial, serious, and doubtful so as to make them fair ground for litigation. Countrywide, 387 B.R. at 471-72 (citation omitted); see also
14

As noted above, the obvious intent of the Plan provisions pertaining to the Trust Preferred Securities is to give the Plan proponents a basis to claim the TPS Litigation appeal has been rendered equitably moot. In anticipation of that inevitability should the Plan be confirmed, Movants dispute that the facts and circumstances of these cases support application of the equitable mootness doctrine. Moreover, any Order found to have been entered in contravention of the Divestiture Rule will be void ab initio. See, e.g., Padilla v. Neary (In re Padilla), 222 F3d 1184, 1189-90 (9th Cir. 2000) (bankruptcy courts discharge order was null and void as it was entered after the dismissal of the case had been appealed to the bankruptcy appellate panel); Garcia v. Burlington N. R.R., 818 F.2d 713, 720-22 (10th Cir. 1987) (trial courts post-appeal amendment of order awarding damages was vacated because the trial court was divested of jurisdiction when the order was appealed). 30

{D0216082.1 }

Arnold v. Garlock, Inc., 278 F.3d 426, 439 (5th Cir. 2001) (finding that the movant need not always show a probability of success on the merits; instead, the movant need only present a substantial case on the merits when a serious legal question is involved and show that the equities weigh in favor of granting the stay) (citation omitted). Furthermore, the movant need not convince the bankruptcy court it was incorrect in order to warrant a stay to preserve issues for appellate review. In other words, it is not necessary for a court to confess error to grant a request for a stay pending appeal. See Evans v. Buchanan, 435 F. Supp 832, 843 (D. Del. 1977). Rather, a court may stay its own Order or proceedings where there are difficult legal questions and the equities of the case suggest that the status quo should be maintained. See Goldstein v. Miller, 488 F. Supp 156, 172-73 (D. Md. 1980). As Bankruptcy Judge Walsh has explained in granting a stay: Although the cases that Defendants put forward do not sway this Court, that does not mean that Defendants motion should fail. For the purposes of this motion, it does not matter whether this Court believes that Defendants should succeed on appeal. In considering the likelihood of success on the merits, [i]t seems illogical . . . to require that the court in effect conclude that its original decision in the matter was wrong before a stay can be issued. Genesis Health Ventures, 367 B.R. at 521(quoting Evans, 435 F. Supp at 844). 49. Apropos to the current situation, in Adelphia, the plan opponents applied for the

court to stay the enforcement of a confirmation Order while their appeal on issues implicated by that Order was pending. See ACC Bondholder Grp. v. Adelphia Commcns Corp. (In re

Adelphia Commcns Corp.), 361 B.R. 337 (S.D.N.Y. 2007). In analyzing the issues on appeal, the district court found substantial merit in the arguments set forth for appeal and reasoned, in deciding to grant the stay requested, that to do otherwise and [p]ermit[] the Plan to go effective as confirmed thereby distributing the finite estate to the creditors and taking away forever the rights of Movants . . . could be a fundamental violation of Movants constitutional due process 31

{D0216082.1 }

rights. Id. at 358. 50. Movants respectfully submit that they have a high likelihood of prevailing on

their arguments that this Court, as a result of the pendency of the TPS Litigation appeal, has been divested of jurisdiction to approve Plan provisions and related relief designed to impair or impede the District Courts appellate jurisdiction. Moreover, Movants also believe they are highly likely to prevail in obtaining a reversal of the Courts TPS Litigation rulings on appeal. At a minimum, however, Movants have raised serious, significant issues (e.g., pertaining to this Courts jurisdiction and the Court-sanctioned trampling of Movants property rights in the Trust Preferred Securities). As such, the first factor for obtaining a stay under Rule 8005 is clearly satisfied and strongly supports this Courts granting of a stay of further confirmation proceedings on the Plan, as currently constituted. B. The Movants Will Be Irreparably Harmed If The Confirmation Proceedings Are Not Stayed. In considering this Motion, the Court should bear in mind the official role a stay

51.

pending appeal plays, not only in maintaining the status quo, but also in preserving the right to a review on the merits. In re Charles & Lillian Browns Hotel, Inc., 93 B.R. 49, 53 (Bankr. S.D.N.Y. 1988). The Third Circuit has recognized that a party may suffer irreparable harm justifying a stay pending appeal if it faces the possibility that its appeal would be rendered moot if the adverse party relies upon the lower court Order by taking action that cannot be undone. See Highway Truck Drivers, 888 F.2d at 297-98 (discussing the necessity of a stay under Rule 8005 by stating that the consequence of failing to obtain a stay is that the prevailing party may treat the judgment of the [lower] court as final [notwithstanding that an appeal is pending.] . . . Thus, in the absence of a stay, action of a character which cannot be reversed by the court of appeals may be taken in reliance on the lower courts decree. As a result, the court of appeals

{D0216082.1 }

32

may become powerless to grant the relief requested by the appellant.) (internal citations omitted); see also Trone v. Roberts Farms, Inc., 652 F.2d 793, 798 (9th Cir. 1981) (If an appellant fails to obtain a stay after exhausting all appropriate remedies, that well may be the end of his appeal . . . For this reason there is a concomitant obligation on the courts to consider such stay application thoroughly and with full appreciation of the consequences of a denial.); Adelphia, 361 B.R. at 351-52, 352 n.9 (noting that loss of appellate rights is dispositive for the irreparable harm to appellants factor of the stay inquiry). Here, a stay pending appeal is

necessary to prevent irreparable harm to the Movants and their substantial appeal rights, which may be stripped absent a stay.15 52. Absent a stay, the Debtors and creditors certainly will argue that the Movants

appeals, in connection with the TPS Litigation and any subsequently-entered confirmation opinion, will be moot. While this Court has previously stated that an appeal being rendered moot does not itself constitute irreparable harm, In re Trans World Airlines, Inc., No. 01-0056, 2001 WL 1820325, at *10 (Bankr. D. Del. March 27, 2001) (emphasis added), the irreparable harm the Movants would suffer extends beyond just concern over equitable mootness. As discussed, the Movants face an imminent danger of being stripped of their property interests in the Trust Preferred Securities without an opportunity to obtain an Article III courts review of the underlying decision.16 Coupled with the threat that the TPS Litigation appeal might be impaired
15

In the event a stay is not granted, Movants do not concede that substantial consummation of the Plan will moot their appellate rights, and expressly reserve all of their rights in this regard. The Supreme Court of the United States has found that the power of the Bankruptcy Code cannot be used to defeat traditional property interests [because] [t]he bankruptcy power is subject to the Fifth Amendments prohibitions against taking private property without compensation. United States v. Sec. Indus. Bank, 459 U.S. 70, 75 (1982); see In re Introgen Therapeutics, Inc., 429 B.R. 570 (Bankr. W.D. Tex. 2010) (recognizing a property interest in an equity holders right to receive an estate distribution after all 33

16

{D0216082.1 }

and that this Court would exceed its jurisdiction in contravention of the Divestiture Rule, the Movants will be irreparably harmed if confirmation proceedings are allowed to continue. Acknowledging such a threat, the Third Circuit, in discussing the necessity of a stay under Rule 8005, has recognized that in the absence of a stay . . . the court of appeals may become powerless to grant the relief requested by the appellant. Highway Truck Drivers, 888 F.2d at 297-98 (citations omitted); see BEPCO, 2009 WL 393948, at *1 (granting motion to stay proceedings since dismissal . . . has a finality that may well be difficult to un-do). 53. Accordingly, allowing confirmation proceedings to continue and/or entering a

confirmation Order in contravention of the Divestiture Rule would irreparably harm the Movants by stripping them of their property interests in the Trust Preferred Securities without due process of law, potentially rendering moot their appeal before District Court, and by this Court exceeding its jurisdiction at the expense of the Movants appellate rights. C. No Party-In-Interest Will Be Substantially Harmed If The Bankruptcy Proceedings Are Stayed. Granting a stay of further confirmation proceedings on the Plan will not harm

54.

let alone substantially harm any of the nonmoving parties. The very purpose of a stay pending appeal is to maintain the status quo. KOS Pharm., 369 F.3d at 708. By granting the stay, the Court will maintain the status quo while the Movants are afforded an opportunity to pursue their

allowed claims and post-petition interest have been paid in full); Adelphia, 361 B.R. at 358 (to [p]ermit[] the Plan to go effective as confirmed thereby distributing the finite estate to the creditors and taking away forever the rights of Movants . . . could be a fundamental violation of Movants constitutional due process rights). Additionally, the Supreme Court has recognized as paramount [t]he right of a citizen to defend his property against attack in a court . . . . Degen v. United States, 517 U.S. 820, 828 (1996). Here, the Plan provides for the total destruction of the Movants property interests in the Trust Preferred Securities, and does so without providing any compensation or forum for the Movants to litigate the merits of their claim to the Trust Preferred Securities.
{D0216082.1 }

34

rights in the TPS Litigation appeal. The nonmoving parties will remain unaffected, since all eligible parties holding Allowed Claims will continue to accrue post-petition interest on their claims. To the extent, as a result of the Courts September Opinion, junior creditors are required to payover a portion of their recoveries to senior creditors, those junior creditors will simply be subject to the terms of the contractual subordination provisions to which they voluntarily bound themselves and this Courts ruling on post-petition interest and enforceability of subordination agreements. See, e.g., Shellys, Inc. v. Food Concepts of Wisconsin, Inc. (In re Shellys, Inc.), 87 B.R. 931, 935-36 (Bankr. S.D. Ohio 1988) (finding that potential contractual damages do not constitute irreparable harm for purposes of injunctive relief); Eastman Kodak Co. v. Collins Ink Corp., No. 11-6513, 2011 WL 5304059, at *9 (W.D.N.Y. Nov. 4, 2011) (All that this injunction does is require [the non-movant] to continue to perform under the contract . . . . That hardly constitutes a cognizable harm to [the non-movant].); Atlantic City Coin & Slot Serv. Co. v. IGT, 14 F. Supp. 2d 644, 670 (D.N.J. 1998) (noting that the injuries [a party] may suffer by paying higher prices as a result of [its] contractual obligation [are] irrelevant to the balance of the hardship between the litigating parties). 55. There is no evidence to suggest that a delay in implementing the Plan would cause

any non-moving party any harm other than a delayed distribution on their claims. There is no emerging business that would be delayed or harmed if further confirmation proceedings are stayed. The reorganized Debtor is, admittedly, merely a reinsurance runoff business that has been operating in the same manner (i.e., in runoff mode) since the petition date. See Transcript of July 14, 2011 Hearing (Testimony of Steven Zelin), at 251:5-9 (Wimrick (sic) is a captive reinsurance company within WMI. It is currently in a runoff today and has been in runoff frankly since around the time of bankruptcy. Its a business that even prior to bankruptcy was

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35

not an independent reinsurance company . . . .). There is no plan to enter into any new lines of business, nor will any new policies be written. See id. at 277:25 - 278:7 (And today, as reorganized WMI itself is not an ongoing, you know, reinsurance operator that is writing new policies, it would have to go out and make acquisitions . . . . [I]t doesnt have a management team that can execute on those transactions, it does not have a business plan, it does not have the infrastructure in place to employ capital for purposes of making those kinds of acquisitions.). That run-off business can continue to operate the same way that it has been operating for more than three years. Thus, the only harm that the non-moving parties might suffer would be a delay in distribution on their claims and/or continued fulfillment of their contractual subordination rights. Neither is sufficient to outweigh the irreparable harm sought to be inflicted on the Plaintiffs through the Plan. As such, the status quo will not be compromised by a temporary stay of confirmation pending resolution of the TPS Litigation appeal insofar as eligible holders of Allowed Claims will be compensated for the brief delay.17 See In re Coram Healthcare Corp., 315 B.R. 321, 346 (Bankr. D. Del. 2004) (explaining the purpose of post-petition interest is to compensate creditors for the delay between the petition date and the time of payment) (citations omitted); see also In re St. Johnsbury Trucking Co., 185 B.R. 687, 690 (S.D.N.Y. 1995) (finding that, after a two-year confirmation process, a brief delay in the distributions of estate property that would result from a stay of the Confirmation Order did not impose an undue burden on creditors where the stay pending appeal did not mean a lengthy delay); In re Gen. Motors Corp., 409 B.R. 24, 32-33 (Bankr. S.D.N.Y. 2009) (recognizing the line of [c]ases expressing a
17

The parties have completed briefing in the TPS Litigation Appeal and are currently awaiting the scheduling of oral arguments and/or the Courts ruling. See Notice of Completion of Briefing and Request for Oral Argument, dated May 18, 2011 [App. Docket No. 42]. The TPS Consortium is not aware of any reason Chief Judge Sleet would be unable to timely adjudicate the TPS Litigation Appeal. As such, any delay accorded by the requested stay could be quite short. 36

{D0216082.1 }

willingness to grant a brief stay pending expedited appeal as establishing a sound reason for granting such stay, where the stay does nothing more than delay[] distributions to creditors for a little longer). D. 56. Staying Confirmation Proceedings Would Serve The Public Interest. This Court should grant the Movants requested stay because it promotes the

public interest by ensuring the Movants are provided a judicial forum in which to seek appellate review of this Courts ruling in the TPS Litigation. See Charles & Lillian Browns Hotel, 93 B.R. at 53 (recognizing the vital role stays pending appeal play in preserving parties rights, including the right to a review on the merits); see also AT&T v. Winback and Conserve Program, Inc., 42 F.3d 1421, 1427 n.8 (3d Cir. 1994) (As a practical matter, if a plaintiff demonstrates both a likelihood of success on the merits and irreparable injury, it almost always will be the case that the public interest will favor the plaintiff.). Although public policy favors the expedient administration of the bankruptcy estate, parties objecting to [a] settlement and [] distribution scheme have a right to appellate review . . . [and] [d]istribution of the challenged settlement award before its validity has been tested would deprive those parties of that right. Adelphia, 361 B.R. at 349-50 (citations omitted). 57. By granting the Motion, the Court would preserve the Movants right to review of

this Courts TPS Litigation ruling and would, simultaneously, be respecting the constitutional limitations [imposed] upon the power of the courts, even in aid of their own valid processes, to dismiss an action without affording a party the opportunity for a hearing on the merits of his cause. Logan v. Zimmerman Brush Co., 455 U.S. 422, 429 (1982) (quoting Societe

Internationale v. Rogers, 357 U.S. 197, 209 (1958)). Furthermore, the most critical public policy consideration is the correct application of the law. See Americans United for Separation of

{D0216082.1 }

37

Church & State v. City of Grand Rapids, 922 F.2d 303, 306 (6th Cir. 1990) (noting that [t]he public interest lies in the correct application [of the law]). Thus, given the significant issues on which the Movants are likely to prevail on appeal, and the need to ensure that the Movants are not stripped of their property and appellate rights in contravention of the Due Process Clause of the Fifth Amendment and the Divestiture Rule, a stay is clearly in the public interest in this case. III. A Bond Should Not Be Required. 58. A bond is unnecessary in the present case because a stay pending appeal will not

cause any harm. The Court has wide discretion in the matter of requiring security and if there is an absence of proof showing a likelihood of harm, certainly no bond is necessary. Contl Oil Co. v. Frontier Refining Co., 338 F.2d 780, 782 (9th Cir. 1964); see also In re United Merchs. & Mfrs., Inc., 138 B.R. 426, 427 (D. Del. 1992) (a bond for a stay is discretionary and unnecessary when the debtor will not be harmed by the stay). Courts requiring bonds when a stay of confirmation Order is granted typically do so because the stay is likely to cause harm by diminishing the value of an estate or endanger [the non-moving parties] interest in the ultimate recovery. See Adelphia, 361 B.R. at 368 (quotations omitted); see also In re Innovative Commcns, 390 B.R. 184, 189-90, 190-91 (Bankr. D.V.I. 2008) (finding a bond necessary where the stay would cause substantial harm to the creditors); In re Gleasman, 111 B.R. 595, 603 (Bankr. W.D. Tex. 1990) (bond was required to protect appellee against diminution in the value of its collateral pending appeal). 59. Such cases have no application here, as there can be no showing of a likely harm

to be avoided. As set forth above, the only issue would be a delayed distribution. That harm is solved by continued accrual of post-petition interest, and no further compensation is required. Courts will not require appellants to post security for a stay where, as here, little or no injury or

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38

prejudice to appellees will occur. See In re Sphere Holding Corp., 162 B.R. 639, 644-45 (E.D.N.Y. 1994) (holding that bond was not required as a condition to an injunction restraining creditors from collection pending appeal when there was no evidence that the creditors collateral was diminishing in value and little damage would occur); United Merchs., 138 B.R. at 427 (stay of further distributions pursuant to confirmed chapter 11 plan would not be conditioned upon filing of a bond because the debtor would not suffer any loss as a result of the stay pending appeal); In re Columbia Gas Sys., Nos. 91-803, 91-804, 1992 U.S. Dist. LEXIS 3253, at *3, 5-6 (D. Del. Mar. 10, 1992) (no bond required where the debtors and estate could be accommodated under the stay and not be substantially harmed). Accordingly, the Court should not require the Movants to post a bond in connection with this Courts stay of further confirmation proceedings (at least as to the current iteration of the Plan) pending resolution of the TPS Litigation.

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39

CONCLUSION Wherefore, the TPS Consortium respectfully requests (i) that the Court grant the Motion for Stay of Confirmation Proceedings Pending Resolution of Its Adversary Appeal and (ii) any other relief that the Court deems just and proper. Dated: Wilmington, Delaware December 23, 2011 Respectfully submitted, CAMPBELL & LEVINE LLC /s/ Mark T. Hurford Marla Rosoff Eskin, Esq. (DE 2989) Mark T. Hurford, Esq. (DE 3299) 800 North King Street, Suite 300 Wilmington, DE 19809 (302) 426-1900 (302) 426-9947 (fax) mhurford@camlev.com and BROWN RUDNICK LLP Robert J. Stark, Esq. Martin S. Siegel, Esq. Seven Times Square New York, NY 10036 (212) 209-4800 (212) 209-4801 (fax) and Jeremy B. Coffey, Esq. Daniel J. Brown, Esq. Jonathan D. Marshall, Esq. One Financial Center Boston, MA 02111 (617) 856-8200 (617) 856-8201 (fax) Counsel for the TPS Consortium

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40

EXHIBIT A

EXHIBIT B

IN THE UNITED STATES BANKRUPTCY COURT FOR THE DISTRICT OF DELAWARE In re: ) ) WASHINGTON MUTUAL, INC., et al., ) ) Debtors. ) ___________________________________) ) BLACK HORSE CAPITAL LP et al., ) ) Plaintiffs, ) ) v. ) ) JPMORGAN CHASE BANK, N.A. et al. ) ) Defendants. ) ___________________________________) OPINION1 Before the Court are cross motions for partial summary judgment filed by the parties in the above-captioned adversary. For the reasons stated below, the Court will grant the motions of the Defendants and deny the motion of the Plaintiffs for summary judgment. Chapter 11 Case No. 08-12229 (MFW) Jointly Administered

Adv. No. 10-51387 (MFW)

I.

BACKGROUND Washington Mutual, Inc. (WMI) was a savings and loan

holding company, which held inter alia, all of the stock of Washington Mutual Bank (WMB). In February 2006, a subsidiary

of WMB, University Street, Inc. (University) created a new

This Opinion constitutes the findings of fact and conclusions of law of the Court pursuant to Rule 7052 of the Federal Rules of Bankruptcy Procedure.

subsidiary called Washington Mutual Preferred Funding LLC (WMPF). University and WMB then transferred to WMPF portfolios

of home equity and other mortgage loans in exchange for all the WMPF common stock and WMPF preferred securities, respectively. WMPF then transferred the loan assets to statutory trusts in exchange for certificates entitling it to payments of principal and interest on the loans. The WMPF preferred securities paid In five

dividends based on distributions from the trusts.

similarly-structured issuances between March 2006 and October 2007, the trusts issued approximately $4 billion in Trust Preferred Securities (the TPS) which were sold to qualified institutional buyers pursuant to private placements. Each series

of TPS was evidenced by a global certificate registered in the name of and held by a custodian of the Depository Trust Company. Each series of TPS had a feature that provided that if the Office of Thrift Supervision (the OTS) determined that WMB had become undercapitalized or would become undercapitalized in the near term or that WMB had been placed in a receivership or conservatorship (defined as an Exchange Event), then the OTS could direct that the TPS be transferred to WMI in exchange for new Depositary Shares (the Conditional Exchange). Decl. at Exs. 3A & 4A.) (McIntosh

The Depositary Shares were to be issued (Id.) In order to

to WMI in exchange for WMI Preferred Shares.

obtain the agreement of the OTS to the issuance of the TPS and

their treatment as core capital for WMB, WMI agreed that if it acquired the TPS as a result of a Conditional Exchange, then WMI would contribute the TPS to WMB. (Id. at Exs. 5C, 5E, 5G, 5H.)

On September 7, 2008, as its financial condition worsened, WMB entered into a memorandum of understanding with the OTS (the MOU) pursuant to which the OTS explicitly limited WMBs ability to declare a dividend. (Id. at 7A, 2(B).) On September 25,

2008, the OTS concluded that based on the MOUs limitations on WMBs ability to pay dividends, an Exchange Event had occurred and directed the Conditional Exchange of the TPS. 6A.) (Id. at Ex.

WMI responded to that directive on September 25, 2008,

advising that it would issue a press release on September 26, 2008, announcing that the Conditional Exchange would occur as of 8:00 a.m. Eastern time on that date. (Id. at Ex. 6B.) WMI also

executed an assignment to WMB of all of WMIs entitlements to the TPS. (Id. at Ex. 7B.) On that same day, September 25, 2008, the OTS seized WMB and appointed the Federal Deposit Insurance Corporation (the FDIC) as receiver. Immediately after its appointment as receiver, the

FDIC sold substantially all of the assets of WMB to JPMorgan Chase Bank, N.A. (JPMC) for approximately $1.9 billion and assumption of certain of WMBs liabilities. 7D.) At 7:45 a.m. Eastern time on September 26, 2008, WMI issued (Id. at Exs. 7C &

a press release announcing, inter alia, that an Exchange Event had occurred and that consequently the Conditional Exchange would occur at 8:00 a.m. Eastern time on that date resulting in the automatic exchange of the TPS for Depositary Shares tied to WMI Preferred Shares. (Id. at Ex. 6C.)

Later that same day, September 26, 2008, WMI filed a petition for relief under chapter 11 of the Bankruptcy Code. During the course of the bankruptcy case, disputes arose between WMI and JPMC regarding the ownership of certain assets, including the TPS. Ultimately a Global Settlement was reached between them

(and the FDIC and other parties) which has been incorporated into the Debtors Sixth Amended Joint Plan of Reorganization (the Plan). After the announcement of the Global Settlement, the Plaintiffs2 filed a complaint against WMI and JPMC seeking, inter alia, a declaration that the TPS were still owned by the investors and did not belong to WMI or JPMC. On September 7,

2010, the Court stayed litigation of certain of the counts of the Complaint and permitted the parties to conduct discovery and file dispositive motions with respect to Counts I through VI.3 The

The Plaintiffs are approximately 30 institutional investors who acquired the TPS. Most of the acquisitions were made after September 26, 2008. The Plaintiffs have subsequently withdrawn Count III of the Complaint. 4
3

parties agreed that those counts had to be determined (by dispositive motions or trial) before the Debtors could proceed with confirmation of the Plan. The parties filed cross motions

for summary judgment which were fully briefed by November 24, 2010. The matter is ripe for decision.

II.

JURISDICTION This Court has jurisdiction over the adversary, which is a

core proceeding pursuant to 28 U.S.C. 1334 & 157(b)(2)(A), (B), (K), (M) & (O).

III. DISCUSSION A. Standards for Summary Judgment

Rule 7056 of the Federal Rules of Bankruptcy Procedure incorporates Rule 56 of the Federal Rules of Civil Procedure in adversary proceedings. In considering a motion for summary judgment under Rule 56, the court must view the inferences from the record in the light most favorable to the non-moving party. Anderson v. Liberty

Lobby, Inc., 477 U.S. 242, 255 (1986); Hollinger v. Wagner Mining Equip. Co., 667 F.2d 402, 405 (3d Cir. 1981). If there does not

appear to be a genuine issue as to any material fact and on such facts the movant is entitled to judgment as a matter of law, then the court shall enter judgment in the movants favor. See, e.g.,

Celotex Corp. v. Catrett, 477 U.S. 317, 322-24 (1986); Carlson v. Arnot-Ogden Meml Hosp., 918 F.2d 411, 413 (3d Cir. 1990). The movant bears the burden of establishing that no genuine issue of material fact exists. See Matsushita Elec. Indus. Co.

v. Zenith Radio Corp., 475 U.S. 574, 585 n.10 (1986); Integrated Water Res., Inc. v. Shaw Envtl., Inc. (In re IT Group, Inc.), 377 B.R. 471, 475 (Bankr. D. Del. 2007). A fact is material when it Anderson, 477 U.S. at

could affect the outcome of the suit. 248.

Once the moving party has established a prima facie case in its favor, the non-moving party must go beyond the pleadings and point to specific facts showing more than a scintilla of evidence that there is a genuine issue of fact for trial. See, e.g.,

Anderson, 477 U.S. at 252; Matsushita, 475 U.S. at 585-86; Michaels v. New Jersey, 222 F.3d 118, 121 (3d Cir. 2000); Robeson Indus. Corp. v. Hartford Accident & Indem. Co., 178 F.3d 160, 164 (3d Cir. 1999). If the moving party offers only speculation and

conclusory allegations in support of its motion, the burden is not met. See Ridgewood Bd. of Educ. v. N.E. ex rel. M.E., 172 Therefore, when the court

F.3d 238, 252 (3d Cir. 1999).

determines that the non-moving party has presented no genuine issue of fact, summary judgment may be granted. 475 U.S. at 587. In this case, all parties agree that summary judgment is See Matsushita,

appropriate with respect to Counts I and II of the Complaint because they require only the consideration of contract language and legal principles. See, e.g., Amadeus Global Travel Distrib.,

S.A. v. Orbitz, LLC, 302 F. Supp. 2d 329, 334 (D. Del. 2004) (concluding that under Delaware law, the interpretation of contracts is a matter of law for the court to determine.); Quintus Corp. v. Avaya, Inc. (In re Quintus Corp.), 353 B.R. 77, 82 (Bankr. D. Del. 2006) (Summary judgment is proper where contract language is unambiguous and favors the interpretation advanced by the movant.). B. Counts I & II: Conditions Precedent

The Plaintiffs contend that the Conditional Exchange never occurred because of the failure of certain conditions precedent, which were required under the applicable agreements or under Delaware law. The Defendants respond that there were no

conditions precedent to the occurrence of the Conditional Exchange that had not, in fact, occurred. The parties agree that

there are no material issues of fact in dispute and that the determination of this issue depends on an interpretation of the operative agreements and applicable law. Conditions precedent are not favored in contract interpretation because of their tendency to work a forfeiture. AES Puerto Rico, L.P. v. Alstom Power, Inc., 429 F. Supp. 2d 713, 717 (D. Del. 2006) (citing Stoltz v. Realty Co. v. Paul, No. Civ.

S. 94C-02-208, 1995 WL 654152, at *9 (Del. Super. Sept. 20, 1995)). Therefore, conditions precedent must be expressly stated Castle v. Cohen, 840 F.2d 173,

in a contract to be given force. 177 (3d Cir. 1988). 1.

Terms of the Agreements

The Plaintiffs contend in Count I of the Complaint that, under the express terms of the Exchange Agreements, the Conditional Exchange could not occur until (i) WMI issued new Preferred Shares and deposited them with the Depositary, (ii) the Depositary issued new Depositary Shares and transferred the Depositary Shares to WMI and (iii) WMI then exchanged those Depositary Shares for the TPS. The Defendants contend that those

steps were not conditions precedent to the occurrence of the Conditional Exchange but were merely ministerial steps that would a fortiori occur after the Conditional Exchange. Instead, the

Defendants argue that the only actual conditions precedent to the occurrence of the Conditional Exchange were (i) the determination by the OTS that an Exchange Event had occurred and (ii) the direction by the OTS that the Conditional Exchange occur. There is no dispute that an Exchange Event4 occurred on

An Exchange Event was defined in both the Exchange Agreements and the Trust Agreements to include: when . . . WMB becomes undercapitalized under the OTS prompt corrective action regulations . . . , WMB is placed into conservatorship or receivership, or . . . the OTS, in its sole discretion, anticipates WMB becoming undercapitalized in the near term or takes a 8

September 7, 2008, as a result of the MOU whereby WMBs ability to declare a dividend was restricted. Nor is it disputed that

the OTS directed on September 25, 2008, that the Conditional Exchange occur. The Court concludes that under the express terms

of the agreements those were the only conditions that needed to occur for the Conditional Exchange to be effective. The Trust Agreements with respect to each TPS series provided: If the OTS so directs upon the occurrence of an Exchange Event, each [TPS] then outstanding shall be exchanged automatically for a Like Amount of newly issued [Depositary Shares tied to WMI Preferred Shares] (the Conditional Exchange). (McIntosh Decl., Exs. 3A-3E, 4.08(a) (emphasis added).) The Trust Agreements expressly state the effect of the Conditional Exchange and make it clear that it automatically divests the TPS holders of any more rights in the TPS and converts them to interests only in Depositary Shares that reflect WMI Preferred Shares: As of the time of the Conditional Exchange, . . . all rights of the exchanging Holders of [TPS] as beneficiaries of the Trust shall cease, and such Persons shall be, for all purposes, solely holders of [Depositary Shares tied to WMI Preferred Shares], and WMI shall be the holder of all outstanding TPS. (Id. at Ex. 3A-3E, 4.08(b).)

supervisory action that limits the payment of dividends by WMB, and in connection therewith, directs a Conditional Exchange. (Id. at Exs. 3A-3E, 1.01; Exs. 4A-4E at 3.) 9

The Plaintiffs argue, however, that the language of the Trust Agreements is not relevant, because they are not the operative agreements. The Plaintiffs argue instead that the

Exchange Agreements executed by WMI and the Trusts are the operative agreements. The Plaintiffs cite to section 3 of the

Exchange Agreements which they argue provide additional conditions to the occurrence of the Conditional Exchange: If at any time after the issuance and sale of the [TPS], the OTS directs in writing that the [TPS] be exchanged into a like amount of [Depositary Shares tied to WMI Preferred Shares] following the occurrence of an Exchange Event, then: (a) each holder of [TPS] shall be unconditionally obligated to surrender to WMI any certificate representing the [TPS] . . . ; (b) WMI shall immediately and unconditionally issue [WMI Preferred Shares] and deposit such shares with the Depositary; (c) effective on the date and time of the Conditional Exchange, [the registrar] shall record, or cause to be recorded, in the Register WMI as the owner of all of the [TPS] . . . ; and (d) upon receipt of the [WMI Preferred Shares], the Depositary shall issue a like kind of . . . Depositary Shares and, in turn, WMI shall deliver such receipts to the holders of record of the [TPS] upon surrender of the certificates representing the [TPS]. (See id. at Ex. 4A, 3.) Specifically, the Plaintiffs contend that the obligations of WMI to issue new Preferred Shares and exchange them for Depositary Shares were conditions precedent to the occurrence of the Conditional Exchange. Because WMI never issued new Preferred

Shares or exchanged them for Depositary Shares, the Plaintiffs contend that the Conditional Exchange never occurred. 10

The Court disagrees.

Under the express terms of the

applicable Agreements, the Conditional Exchange occurred automatically once the OTS declared that an Exchange Event had occurred and directed that the Conditional Exchange occur. Further, the Depositary Shares are defined in the Trust Agreements as depositary shares issuable upon a Conditional Exchange. . . . (Id. at Ex. 3A, 1.01 (emphasis added).) This

suggests that they would not be issued until after the Conditional Exchange occurred.5 In addition, even the Exchange Agreements on which the Plaintiffs rely specifically contemplate that the Conditional Exchange will be effective without the issuance of the WMI Preferred Shares or the Depositary Shares. The Exchange

Agreements provide that: Until receipts evidencing the . . . Depositary Shares are delivered or in the event such replacement receipts are not delivered, any certificates previously representing the [TPS] shall be deemed for all purposes to represent . . . Depositary Shares. added).) (Id. Ex. 4A, 3 (emphasis

This is consistent with the Trust Agreements which

provide that: Until replacement certificates representative of [Depositary Shares tied to WMI Preferred Shares] are delivered or in the event such replacement certificates

While the WMI Preferred shares were not issued, WMI did designate authorized shares to be issued if and only if a Conditional Exchange occurs. (McCombs Decl., Exs. 2A-2E, 1.) 11

are not delivered, any certificates previously representing [TPS] shall be deemed for all purposes to represent [Depositary Shares tied to WMI Preferred Shares]. (Id. at Ex. 3A, 4.08(c) (emphasis added).) This interpretation of the Agreements is consistent with the language of the offering Circulars for the TPS, which expressly disclosed the automatic and unconditional nature of the exchange on the front cover: If the [OTS] so directs following the occurrence of an Exchange Event as described herein, each [TPS] will be automatically exchanged for [WMI Preferred Shares]. (Id. at Ex. 1A at cover page (emphasis added).) the Circulars, it was disclosed that: once the OTS directs a Conditional Exchange after the occurrence of an Exchange Event, no action will be required to be taken by holders of [TPS], by WMI, by WMB (other than to inform the OTS), by [WMPF] or by WaMu Delaware in order to effect the automatic exchange as of the time of exchange. After the occurrence of the Conditional Exchange, the [TPS] will be owned by WMI. (Id. at Ex. 1A at 64 (emphasis added).) Therefore the Court concludes that there were no conditions precedent to the Conditional Exchange that did not occur. Court finds that all of the operative documents expressly evidence that the Conditional Exchange would occur automatically once the OTS directed that the Conditional Exchange occur, even without the delivery of new WMI Preferred Shares or Depositary Shares tied to the new WMI Preferred Shares. Neither the Trust The Further, inside

12

Agreements nor the Exchange Agreements expressly state that the acts identified by the Plaintiffs were conditions precedent to the effectiveness of the Conditional Exchange. In fact, the acts

could only occur after the Conditional Exchange became effective. Under the plain language of the Trust Agreements, the Conditional Exchange automatically occurred on September 26, 2008. Ex. 3A-3E, 4.08(b); Ex. 6(C).) (Id. at

Therefore, under the express

language of the Trust Agreements and the Exchange Agreements, the Court concludes that the certificates held by the TPS holders are no longer TPS but are deemed to be Depositary Shares tied to WMI Preferred Shares. 4E, 3.) 2. Delaware Law (Id. at Exs. 3A-3E, 4.08(b) & (c); Exs. 4A-

The Plaintiffs contend in Count II of the Complaint that the physical delivery of new certificates of ownership was nonetheless required to effectuate a transfer of the TPS under Delaware law. 6 Del. C. 8-301. Because the TPS certificates

have never been delivered to WMI, the Plaintiffs contend that WMI does not have title to the TPS. The Court disagrees. First, Article 8 does not provide the 6

exclusive means by which ownership of securities can arise. Del. C. 8-302 cmt. 2 (2010) (Article 8 is also not a comprehensive codification of all of the law governing the

creation or transfer of interest in securities.); 17 Williston

13

on Contracts 51:40 (4th ed.) ([W]hile the [UCC] provides that upon delivery, the purchaser acquires the transferors rights, this does not mean that a person can acquire an interest in a security only by delivery. Revised Article 8 is not a

comprehensive codification of all of the law governing the creation or transfer of interests in securities.). See also

Kallop v. McAllister, 678 A.2d 526, 529 (Del. 1996) (noting that Article 8 of the UCC . . . did not preclude the validity of a stock transfer accomplished by methods that are not listed in that article and acknowledging that other methods recognized by law may be used to transfer ownership in securities.). Further, the UCC expressly allows parties to vary its provisions by contract. 6 Del. C. 1-302(a) cmt. 1 (2010)(an

agreement can change the legal consequences that would otherwise flow from the provisions of the Uniform Commercial Code.). In

this case, the Exchange Agreements do exactly that: they provide that the ownership of the TPS will occur automatically, even before delivery of new certificates, upon the direction of the OTS after the occurrence of an Exchange Event. at Ex. 4A , 2 & 3.) (McIntosh Decl.

Therefore, the Court concludes that the

transfer was effective notwithstanding the lack of physical delivery of new certificates of ownership. In addition, section 8-301 on which the Plaintiffs rely does not even apply to the transfer at issue because the transfer was

14

not a sale of a security to a purchaser but instead was an involuntary automatic transfer. 6 Del. C. 8-302 cmt. 2 (2010)

(Article 8 does not apply to transfers by operation of law because they are not voluntary). See also, United States v.

Seattle-First Nat. Bank, 321 U.S. 583, 587-88 (1944) (finding that the transfer of securities by operation of law must be evaluated by the immediate mechanism by which the transfer is effective, not its general background). Therefore, while the

initial issuance and purchase of the TPS might have been a voluntary transaction, it does not result in the Conditional Exchange being voluntary. C. Misrepresentation and Fraud Allegations

The Plaintiffs contend that the Debtors committed a fraud by failing to disclose to the TPS investors that WMI had agreed to transfer the TPS to WMB in the event that they were transferred to WMI as the result of a Conditional Exchange. The Defendants

respond that (1) the Plaintiffs suffered no damages as a result of the alleged failure of disclosure, (2) many of the current TPS holders have no standing to assert this claim because they were not original buyers of the TPS (and in fact bought them after the Conditional Exchange had already occurred), and (3) at most the Plaintiffs would have a subordinated claim equivalent to an equity interest pursuant to section 510(b). The Court agrees with the Defendants that the Plaintiffs can

15

prove no damages resulting from the alleged misrepresentations. It is significant that nowhere in the agreements or offering circulars was there any restriction on what WMI could do with the TPS once it received them on a Conditional Exchange. Specifically absent is any restriction on WMI contributing the TPS to its subsidiary WMB. In fact, the Defendants argue that it

could have been anticipated that if the OTS took the extreme step of directing a Conditional Exchange because WMB was in financial trouble, the OTS would have required that WMI provide financial support to WMB including contribution of the TPS to WMB. Therefore, the Plaintiffs cannot establish that there was any misrepresentation that WMI would retain the TPS if it got them in the Conditional Exchange. Further, the Defendants presented evidence that 26 of the 30 Plaintiffs bought their TPS after the Conditional Exchange occurred. (McIntosh Decl. at Ex. 13A, 3-16.) Therefore, those

Plaintiffs cannot prove that they relied on any alleged representation that the TPS would not be transferred after WMI acquired them or were misled by the failure of WMI to disclose the agreement to contribute the TPS to WMB in the event a Conditional Exchange occurred. The Court agrees further that, even if the Plaintiffs had a claim for fraud or misrepresentations relating to the issuance of the TPS, such claims would be subordinated to the claims of all

16

creditors under section 510(b).

Section 510(b) provides that

a claim arising from rescission of a purchase or sale of a security of the debtor or of an affiliate of the debtor, for damages arising from the purchase or sale of such a security . . . shall be subordinated to all claims or interests that are senior to or equal the claim or interest represented by such security, except that if such security is common stock, such claim has the same priority as common stock. 11 U.S.C. 510(b). Because the claims asserted by the Plaintiffs relate to the purchase and sale of securities, they must be subordinated to the claims of creditors. While the Plaintiffs contend that the

claims relate to the purchase of the TPS, any potential claims that the Plaintiffs have against the Debtors actually relate to the preferred stock that WMI was to issue to them. Therefore,

the Court concludes that the claims, even if the Plaintiffs had any, would have to be subordinated to the level of preferred stock. The Defendants also respond that this count must fail because the Plaintiffs are really asserting that the Conditional Exchange is not valid because the actions of the OTS were unlawful and fraudulent. The Defendants argue that the

Plaintiffs lack standing and cannot sue the OTS for any allegedly improper actions. The Court agrees with the Defendants that the Plaintiffs do not have standing to sue the OTS for any alleged improper actions in declaring an Exchange Event and directing the Conditional 17

Exchange of the TPS.

12 U.S.C. 1464(d)(1)(A) (providing that

only federal savings associations or their officers and directors can sue the OTS to challenge its regulatory decisions). See,

e.g., United Liberty Life Ins. Co. v. Ryan, 985 F.2d 1320, 1327 (6th Cir. 1993) (holding that investors in a banks securities did not have standing to challenge an OTS regulatory decision affecting the bank). The Plaintiffs cannot avoid this result by suing JPMC and WMI instead. See, e.g., Simon v. E. Ky. Welfare Rights Org., 426

U.S. 26, 41-42 (1976) (holding that the Constitution still requires that a federal court act only to redress injury that fairly can be traced to the challenged action of the defendant, and not injury that results from the independent action of some third party not before the court.); Duquesne Light Co. v. U.S. EPA, 166 F.3d 609, 612-13 (3d Cir. 1999) (holding that plaintiffs could not sue federal agency to challenge the regulatory decision of a state agency). Because the Court finds that the Plaintiffs have not proven any claim for misrepresentation or fraud, the Court will grant summary judgment for the Defendants on Count IV of the Complaint. E. Equitable Relief

In Counts V and VI, the Plaintiffs argue that the Defendants have unclean hands and may not now invoke the Courts In

equitable powers to effectuate the Conditional Exchange.

18

addition, the Plaintiffs assert that JPMC was not a bona fide purchaser of the TPS, because it had knowledge of WMIs alleged misrepresentations to the investors. These arguments are based

on the premise that the Conditional Exchange did not occur and that the Defendants are asking the Court to provide equitable relief by permitting the Conditional Exchange to occur now. As stated above, the Court finds that the Conditional Exchange occurred on September 26, 2008. This was a legal

determination based on the interpretation of contract language and application of legal principles.6 any equitable relief. The Court is not granting

Therefore, the Plaintiffs equitable See, e.g., Gen. Dev. Corp. v.

defenses are inapplicable.

Binstein, 743 F. Supp. 1115, 1133-34 (D.N.J. 1990) (finding that equitable defenses, such as unclean hands, are generally not applicable to bar claims seeking legal remedies). The Court

concludes that judgment must be entered in favor of the Defendants on Counts V and VI of the Complaint.

IV.

CONCLUSION For the reasons set forth above, the Court will grant the

Defendants motions for summary judgment and deny the Plaintiffs motion for summary judgment.

At oral argument, Plaintiffs counsel admitted that equity has no place today, and that the issue being determined is a matter of law, and should be resolved as a matter of law. (Hrg Tr. 12/01/2010 at 55.) 19

An appropriate order is attached.

Dated: January 7, 2011

BY THE COURT:

Mary F. Walrath United States Bankruptcy Judge

20

EXHIBIT C

{D0216075.1 }

IN THE UNITED STATES BANKRUPTCY COURT FOR THE DISTRICT OF DELAWARE ____________________________________ ) ) ) WASHINGTON MUTUAL, INC., et al., ) ) Debtors ) ____________________________________) In re: Chapter 11 Case No. 08-12229 (MFW) Jointly Administered Related to Docket Nos. 9178, 9179, 9180 & 9181

ORDER GRANTING THE MOTION OF THE CONSORTIUM OF TRUST PREFERRED SECURITY HOLDERS FOR STAY OF CONFIRMATION PROCEEDINGS PENDING APPEAL Upon consideration of the Motion, dated December 23, 2011, filed by Trust Preferred Security Holders, for the entry of an order staying further confirmation proceedings concerning the Seventh Amended Joint Plan of liquidation, pursuant to Rule 8005 of the Federal Rules of Bankruptcy Procedure, pending final resolution of the appeal of this Court's January 7, 2011 ruling in the adversary proceeding captioned Black Horse Capital, LP, et al. v. JPMorgan Chase Bank, N.A., et al., Adv. Pro. No. 10-51387 (the TPS Litigation); and it appearing that the Court has jurisdiction to consider and determine the Motion; and it appearing that due and proper notice of the Motion has been given; and it appearing that the relief requested in the Motion is appropriate; and after due deliberation and sufficient cause appearing therefore; it is hereby: ORDERED that the Motion is GRANTED; and it is further ORDERED that all further confirmation proceedings concerning the Plan are hereby stayed pending final resolution of the appeal of this Courts January 7, 2011 ruling in the TPS Litigation; and it is further

{D0216045.1 }

ORDERED that this Court shall retain jurisdiction over all matters arising from or related to the interpretation and implementation of this order and any further proceedings with respect to the Motion.

Dated: _________, 2012 Wilmington, Delaware

THE HONORABLE MARY F. WALRATH UNITED STATES BANKRUPTCY JUDGE

{D0216045.1 }

IN THE UNITED STATES BANKRUPTCY COURT FOR THE DISTRICT OF DELAWARE ____________________________________ ) Chapter 11 In re: ) ) Case No. 08-12229 (MFW) WASHINGTON MUTUAL, INC., et al., ) Jointly Administered ) Debtors. ) Objection Deadline: January 4, 2012 @ 4:00 p.m. ____________________________________) Hearing Date: January 11, 2012 @ 2:00 p.m. Related to Docket Nos. 9178, 9179, 9180 & 9181 NOTICE OF MOTION OF THE CONSORTIUM OF TRUST PREFERRED SECURITY HOLDERS FOR STAY OF CONFIRMATION PROCEEDINGS PENDING APPEAL TO: All Parties on the Attached List PLEASE TAKE NOTICE, that on December 23, 2011, the Consortium of Trust Preferred Security Holders filed and served the attached Motion of the Consortium of Trust Preferred Security Holders for Stay of Confirmation Proceedings Pending Appeal (the Motion), with the United States Bankruptcy Court for the District of Delaware, 824 Market Street, 3rd Floor, Wilmington, Delaware 19801. PLEASE TAKE FURTHER NOTICE that any responses to the Motion must be in writing and filed with the Bankruptcy Court on or before January 4, 2012 @ 4:00 p.m. PLEASE TAKE FURTHER NOTICE that at the same time, you must also serve a copy of the response upon the undersigned counsel, so that it is received on or before January 4, 2012 @ 4:00 p.m. IN THE EVENT THAT ANY OBJECTION OR RESPONSE IS FILED AND SERVED IN ACCORDANCE WITH THIS NOTICE, A HEARING ON THE MOTION WILL BE HELD ON JANUARY 11, 2012 @ 2:00 P.M. BEFORE THE HONORABLE MARY F. WALRATH AT THE UNITED STATES BANKRUPTCY COURT FOR THE DISTRICT OF DELAWARE,

{D0216041.1 }

824 MARKET STREET, 5th FLOOR, COURTROOM #4, WILMINGTON, DELAWARE 19801. IF YOU FAIL TO RESPOND IN ACCORDANCE WITH THIS NOTICE, THE COURT MAY GRANT THE RELIEF DEMANDED BY THE MOTION WITHOUT FURTHER NOTICE OR HEARING. Dated: Wilmington, Delaware December 23, 2011 Respectfully submitted, CAMPBELL & LEVINE LLC /s/ Mark T. Hurford Marla Rosoff Eskin, Esq. (DE 2989) Mark T. Hurford, Esq. (DE 3299) 800 North King Street, Suite 300 Wilmington, DE 19809 (302) 426-1900 (302) 426-9947 (fax) mhurford@camlev.com and BROWN RUDNICK LLP Robert J. Stark, Esq. Martin S. Siegel, Esq. Seven Times Square New York, NY 10036 (212) 209-4800 (212) 209-4801 (fax) and Jeremy B. Coffey, Esq. Daniel J. Brown, Esq. Jonathan D. Marshall, Esq. One Financial Center Boston, MA 02111 (617) 856-8200 (617) 856-8201 (fax) Counsel for the TPS Consortium

{D0216041.1 }

IN THE UNITED STATES BANKRUPTCY COURT FOR THE DISTRICT OF DELAWARE -------------------------------------------------------------x : Chapter 11 In re : : Case No. 08-12229 (MFW) 1 WASHINGTON MUTUAL, INC, et al., : Jointly Administered : Hearing Date: Feb. 16, 2012 Debtors. : -------------------------------------------------------------x CERTIFICATION OF DIRECT APPEAL TO THE UNITED STATES COURT OF APPEALS FOR THE THIRD CIRCUIT OF THE TPS CONSORTIUM'S APPEAL FROM THE OPINION AND ORDER CONFIRMING PLAN OF REORGANIZATION A notice of appeal having been timely filed in the above-captioned Chapter 11 cases on February ____, 2012 by the Trust Preferred Securities Holders (hereafter the TPS Consortium) appealing the Opinion and Order Confirming Plan Confirmation entered on February ____, 2012 [Docket No. ________] (the Opinion and Order), copies of which are attached hereto as Exhibit 1 and Exhibit 2; and for the reasons set forth in the TPS Consortiums Request for an Order Certifying Confirmation Order for Direct Appeal to the Court of Appeals for the Third Circuit (the Certification Motion); the Court hereby finds that this certification arises from a timely appeal from a final judgment, order, or decree of the United States Bankruptcy Court for the District of Delaware; this Court hereby further finds that the Opinion and Order involve a question of law as to which there is no controlling decision of the United States Court of Appeals for the Third Circuit (the Third Circuit) or of the Supreme Court of the United States; this Court hereby further finds that the Opinion and Order involves a question of law requiring resolution of conflicting decisions; this Court hereby further finds that the Opinion and Order

The Debtors in these Chapter 11 cases, along with the last four digits of each Debtors federal tax identification number, are: Washington Mutual, Inc. (3725) and WMI Investment Corp. (5396). The Debtors principal offices are located at 1301 Second Avenue, Seattle, Washington 98101.

{D0217988.2 }

involves a matter of public importance; and this Court hereby further finds that an immediate appeal from the Opinion and Order to the Third Circuit will materially advance the progress of the above-captioned Chapter 11 cases; and thus it is hereby: ORDERED that, pursuant to 28 U.S.C. 158(d)(2) and Federal Rule of Bankruptcy Procedure 8001(f), the TPS Consortiums appeal of the Opinion and Order is hereby CERTIFIED for direct appeal to the Third Circuit.

Dated: February ____, 2012 Wilmington, Delaware

_________________________________ The Honorable Mary F. Walrath UNITED STATES BANKRUPTCY JUDGE

{D0217988.2 }

IN THE UNITED STATES BANKRUPTCY COURT FOR THE DISTRICT OF DELAWARE ____________________________________ ) Chapter 11 In re: ) ) Case No. 08-12229 (MFW) WASHINGTON MUTUAL, INC., et al., ) Jointly Administered ) Debtors. ) Objection Deadline: February 16, 2012 @ 10:30 a.m. ____________________________________) Hearing Date: February 16, 2012 @ 10:30 a.m. NOTICE OF REQUEST FOR AN ORDER CERTIFYING CONFIRMATION ORDER FOR DIRECT APPEAL TO THE COURT OF APPEALS FOR THE THIRD CIRCUIT PLEASE TAKE NOTICE, that on February 2, 2012, the consortium of holders of interests (the TPS Consortium"1) filed and served the attached Request for an Order Certifying Confirmation Order for Direct Appeal to the Court of Appeals For The Third Circuit (the Request), with the United States Bankruptcy Court for the District of Delaware, 824 Market Street, 3rd Floor, Wilmington, Delaware 19801. PLEASE TAKE FURTHER NOTICE that any responses to the Request must be in writing and filed with the Bankruptcy Court on or before February 16, 2012 @ 10:30 a.m. PLEASE TAKE FURTHER NOTICE that at the same time, you must also serve a copy of the response upon the undersigned counsel, so that it is received on or before February 16, 2012 @ 10:30 a.m. IN THE EVENT THAT ANY OBJECTION OR RESPONSE IS FILED AND SERVED IN ACCORDANCE WITH THIS NOTICE, A HEARING ON THE REQUEST WILL BE HELD ON FEBRUARY 16, 2012 @ 10:30 A.M. BEFORE THE HONORABLE MARY F. WALRATH AT

The TPS Consortium is comprised of holders of interests (as set forth more fully in the Verified Fifth Amended Statement of Brown Rudnick LLP and Campbell & Levine LLC [Docket No. 9384], as such may be amended) proposed by the Debtors to be treated under Class 19 of the Plan [Docket No. 9178] and described in the Plan and Disclosure Statement as the REIT Series. For the sake of clarity, the TPS Consortium maintains its position that its members continue to hold Trust Preferred Securities as a result of the failed transaction by which those interests were to have been exchanged for REIT Series.

THE UNITED STATES BANKRUPTCY COURT FOR THE DISTRICT OF DELAWARE, 824 MARKET STREET, 5th FLOOR, COURTROOM #4, WILMINGTON, DELAWARE 19801. IF YOU FAIL TO RESPOND IN ACCORDANCE WITH THIS NOTICE, THE COURT MAY GRANT THE RELIEF DEMANDED BY THE REQUEST WITHOUT FURTHER NOTICE OR HEARING. Dated: February 2, 2012 Wilmington, Delaware Respectfully Submitted,

CAMPBELL & LEVINE LLC /s/ Bernard G. Conaway Marla Rosoff Eskin, Esq. (DE 2989) Bernard G. Conaway, Esq. (DE 2856) Mark T. Hurford (DE 3299) Kathleen Campbell Davis, Esq. (DE 4229) 800 North King Street, Suite 300 Wilmington, DE 19809 (302) 426-1900 (302) 426-9947 (fax) bconaway@camlev.com and BROWN RUDNICK LLP Robert J. Stark, Esq. Seven Times Square New York, NY 10036 (212) 209-4800 (212) 209-4801 (fax) and James W. Stoll, Esq. Jeremy B. Coffey, Esq. Daniel J. Brown, Esq. Jonathan D. Marshall, Esq. One Financial Center Boston, MA 02111 (617) 856-8200 (617) 856-8201 (fax) Counsel for the TPS Consortium 2