Ihub Post
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Good morning, all. One of my associates is an attorney, who (like me) is invested in post-U's and P's. After Don provided info on Walrath's Coram decision, I sent over her opinion to my associate, in the hopes we can identify clues as to how she's thinking. Below is his email back to me. I hope it helps:
Interesting. Here are possible clues:
1. Confirming POR without third-party releases:
Walrath in Coram: "[A]s we noted in Zenith, the provision of a plan of reorganization which purports to grant a release of claims by third parties against a non-debtor cannot be approved under the above standards. 241 B.R. at 111. The Trustee (and the Court) do not have the power to grant a release of the Noteholders on behalf of third parties."
This means that in WaMu, she can't release claims by the EC against FDIC and JPM. I don't know if any such claims, none of which have yet filed by the EC, are now time barred by, e.g., FIRREA. But if not, this is encouraging.
However, I fear that if she confirms the POR without granting releases by the EC, the EC may be on its own to fund class action litigation against FDIC and JPM, and may lack the funds to go forward.
2. No need to value litigation claims:
Walrath in Coram: "Under the [accepted] Trustee's Plan, the Debtors are not being sold to an outside buyer. Instead, the Noteholders are acquiring the Debtors. Therefore, we must determine what assets the Noteholders are acquiring and what their value is to the Noteholders. However, contrary to the Equity Committee's suggestion, we conclude that the valuation should not include the estate's litigation claims against PriceWaterhouseCoopers, Crowley, and the other directors, because the Trustee's Plan specifically provides that these assets will be distributed under the plan to the shareholders, after the unsecured creditors have received post-petition interest (at the federal judgment rate) on their claims. Since these "assets" are not being retained by the Reorganized Debtors (or the Noteholders) it is improper to account for them in the valuation."
She didn't require valuation of litigation claims in Coram because equity was to receive money if those claims were successful and creditors were fully paid.
In WaMu, by contrast, the debtor's POR gives equity nothing. So presumably, she will require valuation of litigation claims, such as bid rigging, fraud, and (we hope) failure of FDIC to pay liquidation value to WMI. (It's a little worrisome that the EC has not, to my knowledge, mentioned this most important latter claim in its briefs.)
3. NOLs alleged to be worthless
Walrath in Coram: "Nonetheless, we do not agree with Deloitte's position that the NOLs are worth $32.9 million. Scott Moeller ("Moeller"), Coram's Director of Taxation, testified that if the IRS challenged the Debtors' position, the NOLs would likely retain no value. ... We conclude that $10 million is a fair valuation of the Debtors' NOLs, which should be added to the value of the Debtors being retained by the Noteholders"
I hope no one is alleging that the WaMu NOLs may be worthless.
4. Shareholders' split preferences for competing PORs:
Walrath in Coram: "The shareholders preferred the Equity Committee's Plan, though not by overwhelming numbers. Three hundred eighty (380) shareholders voted in favor of the Trustee's Plan while four hundred fifty-six (456) voted in favor of the Equity Committee's Plan. One hundred seventy-two (172) expressed a preference for the Trustee's Plan, while two hundred sixty-eight (268) expressed a preference for the Equity Committee's Plan."
So nearly half of Coram's shareholders voted for the Trustee's plan that would wipe out their shares! I assume this must have been because they stood to gain from the litigation claims.
In WaMU, no shareholder wants Rosen's plan, which cuts equity off from any litigation recovery.
5. Gerrymandering votes:
Walrath in Coram: "The Trustee and the Noteholders argue, nonetheless, that the classification in the Equity Committee's Plan is improper because it is used solely to create an accepting impaired class. They assert that the Equity Committee gerrymanders the votes by separately classifying the unsecured creditors, because this is the only way it can obtain an accepting class of impaired creditors. They argue that, if the Equity Committee's Plan properly classified the unsecured creditors in one class, it would not have an accepting class of impaired creditors.
"The Equity Committee responds that the separate classification of unsecured claims is permissible because it is rational and is not designed to gerrymander the votes. The Equity Committee contends that allowing the votes of the trade creditors to be dominated by the Noteholders' opposition to the Equity Committee's Plan would be improper.
...
"Accordingly, we conclude that the Equity Committee's Plan does not properly classify R-Net's claim, but this has no effect on the voting. Further, we conclude that the separate classification of the Noteholders was reasonable."
So while Walrath acknowledges that gerrymandering is unlawful, simply reclassifying creditor classes is OK if it does not affect the voting. In WaMu, the EC alleges that Rosen's reclassification of classes does affect voting. If true, Walrath should see and forbid it.
Jack
