In re Washington Mutual, Inc.

• Citation: 461 B.R. 200,55 Bankr.Ct.Dec. 113
• Decision Date: 13 September 2011
• Docket Number: No. 08–12229 (MFW).,08–12229 (MFW).
• Parties: In re WASHINGTON MUTUAL, INC., et al., Debtors.
• Court: U.S. Bankruptcy Court — District of Delaware

461 B.R. 200

55 Bankr.Ct.Dec. 113

In re WASHINGTON MUTUAL, INC., et al., Debtors.

No. 08–12229 (MFW).

United States Bankruptcy Court, D. Delaware.

Sept. 13, 2011.

Mark D. Collins, Esquire, Chun I. Jang, Esquire, Lee E. Kaufman, Esquire, Richards, Layton & Finger, P.A., Wilmington, DE, Brian S. Rosen, Esquire, Marcia L. Goldstein, Esquire, Michael F. Walsh, Esquire, Weil Gotshal & Manges, LLP, New York, NY, for Debtors.

Rafael X. Zahralddin–Aravena, Esquire, Neil R. Lapinski, Esquire, Shelley A. Kinsella, Esquire, Elliott Greenleaf, Wilmington, DE, Peter E. Calamari, Esquire, Michael B. Carlinsky, Esquire, Susheel Kirpalani, Esquire, David Elsberg, Esquire, Quinn Emanuel Urquhart & Sullivan, LLP, New York, NY, Special Litigation and Conflicts Counsel for Debtors.

Robert S. Brady, Esquire, M. Blake Cleary, Esquire, Jaime N. Luton, Esquire, Young Conaway Stargatt & Taylor, LLP Wilmington, DE, Thomas R. Califano, Esquire, John J. Clark, Jr., Esquire, DLA Piper LLP, New York, NY, for FDIC–Receiver.Jeffrey M. Schlerf, Esquire, Eric M. Sutty, Esquire, Fox Rothschild LLP, Wilmington, DE, David S. Rosner, Esquire, Adam L. Shiff, Esquire, Paul M. O'Connor, Esquire, Seth A. Moskowitz, Esquire, Kasowitz, Benson, Torres & Friedman LLP, New York, NY, for Washington Mutual, Inc. Noteholders' Group.David B. Stratton, Esquire, Evelyn J. Meltzer, Esquire, Pepper Hamilton LLP, Wilmington, DE, Fred S. Hodara, Esquire, Robert A. Johnson, Esquire, Akin Gump Strauss Hauer & Feld LLP, New York, NY, for Official Committee of Unsecured Creditors.Jane M. Leamy, Esquire, Office of the United States Trustee, Wilmington, DE.Adam G. Landis, Esquire, Matthew B. McGuire, Esquire, Landis, Rath & Cobb, LLP, Wilmington, DE, Robert A. Sacks, Esquire, Stacey R. Friedman, Esquire, Brian D. Glueckstein, Esquire, Sullivan & Cromwell LLP, New York, NY, Brent J. McIntosh, Esquire, Sullivan & Cromwell LLP, Washington, DC, for JP Morgan Chase Bank, N.A.Bernard G. Conaway, Esquire, Marla Rosoff Eskin, Esquire, Kathleen Campbell Davis, Esquire, Campbell & Levine LLC, Wilmington, DE, Sigmund S. Wissner–Gross, Esquire, Robert J. Stark, Esquire, Katherine S. Bromberg, Esquire, Brown Rudnick LLP, New York, NY, James W. Stoll, Esquire, Jeremy B. Coffey, Esquire, Jennifer M. Recht, Esquire, Ryan S. Moore, Esquire, Daniel J. Brown Esquire, Brown Rudnick LLP, Boston, MA, for TPS Holders.Mark E. Felger, Esquire, Cozen O'Connor, Wilmington, DE, Co–Counsel for Broadbill Investment Corp.Paul N. Silverstein, Esquire, Jeremy B. Reckmeyer, Esquire, Andrews Kurth LLP, New York, NY, for Broadbill Investment Corp.Scott J. Leonhardt, Esquire, Frederick B. Rosner, Esquire, The Rosner Law Group LLC, Wilmington, DE, Arthur Steinberg, Esquire, King & Spalding, Jonathan Hochman, Esquire, Schindler Cohen & Hochman LLP, New York, NY, for Nantahala Capital Partners LP and Blackwell Capital Partners LLC.David P. Primack, Esquire, Drinker Biddle & Reath LLP, Jay W. Eisenhofer, Esquire, Geoffrey C. Jarvis, Esquire, Christine M. Mackintosh, Grant & Eisenhofer P.A., Wilmington, DE, Jeffrey M. Schwartz, Esquire, Chicago, IL, for WMB Noteholders.Michael P. Migliore, Esquire, Smith, Katzenstein & Jenkins LLP, Wilmington, DE, Andrew J. Mytelka, Esquire, Frederick E. Black, Esquire, Tara B. Annweiler, Esquire, James M. Roquemore, Esquire, Galveston, TX, for North America National Insurance Company, American National Property and Casualty Company, Farm Family Life Insurance Company, Farm Family Casualty Insurance Company, and, National Western Life Insurance Company.Philip Schnabel (Pro se), Radeberg, Germany, Objector to Confirmation.Ronald S. Gellert, Esquire, Byra M. Keilson, Esquire, Eckert Seamans Cherin & Mellott, LLC, Wilmington, DE, Matthew Feldman, Esquire, Robin Spigel, Esquire, Willkie Farr & Gallagher LLP, New York, NY, for Truck Insurance Company and Fire Insurance Company.

Edward W. Ciolko, Esquire, Joshua C. Schumacher, Esquire, Barroway Topaz Kessler Meltzer & Check, LLP, Radnor, PA, for Objectors to Confirmation, Robert Alexander & James Lee Reed.William P. Bowden, Esquire, Gregory A. Taylor, Esquire, Stacy L. Newman, Esquire, Ashby & Geddes, P.A., Wilmington, DE, Stephen D. Susman, Esquire, Seth D. Ard, Esquire, Susman Godfrey, L.L.P., New York, NY, Parker C. Foise, Esquire, Edgar Sargent, Esquire, Justin A. Nelson, Esquire, Susman Godfrey, L.L.P., Seattle, WA, for the Official Committee of Equity Security Holders of Washington Mutual, Inc., et al.Jeffrey S. Schultz (Pro se), Vice President/Trust Investment Officer, American National Bank, Wichita Falls, TX, Objector to Confirmation.Nate Thoma (Pro se), Wenonah, NJ, Objector to Confirmation.Donna L. Harris, Esquire, Pinckney, Harris & Weidinger, LLC, Wilmington, DE, Robert T. Scott, Esquire, Axicon Partners, LLC, New York, NY, for Sonterra Capital Partners and Sonterra Capital LLC.

OPINION ¹

MARY F. WALRATH, Bankruptcy Judge.

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 nation's 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 WMI's asset portfolio to decline in value. By September 2008, in the midst of a global credit crisis, the ratings agencies had significantly downgraded WMI's and WMB's credit ratings. A bank run ensued; over $16 billion in deposits were withdrawn from WMB in a ten-day period beginning September 15, 2008.

On September 25, 2008, WMB's primary regulator, the Office of Thrift Supervision (the “OTS”), seized WMB and appointed the Federal Deposit Insurance Corporation (the “FDIC”) as receiver. The FDIC's takeover of WMB marked the largest bank failure in the nation's history. On the same day, the FDIC sold substantially all of WMB's assets, including the stock of WMB's 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 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 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. In re Wash. Mut., Inc., 442 B.R. 297, 304 (Bankr.D.Del.2011). In another Opinion and Order issued that day, the Court held that it was unable to grant WMI's 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. 308, 313–14 (Bankr.D.Del.2011). Trial on the LTW Adversary 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 Court's concerns expressed in the January 7 Opinion. (D 255; D 253.) ⁶ The Modified Plan is supported by the Debtors, JPMC, the FDIC, the 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 PIERS ⁷ (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 creditors ¹⁰ (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.

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)(...