Nantahala Capital Partners, LP v. Washington Mutual, Inc. (In re Washington Mutual, Inc.)

• Decision Date: 03 January 2012
• Docket Number: Bankruptcy No. 08–12229 (MFW).,Adversary No. 10–50911 (MFW).
• Citation: 55 Bankr.Ct.Dec. 258,464 B.R. 656
• Parties: In re WASHINGTON MUTUAL, INC., et al., Debtors.Nantahala Capital Partners, LP, et al., Plaintiffs, v. Washington Mutual, Inc., Defendant.
• Court: U.S. Bankruptcy Court — District of Delaware

464 B.R. 656

55 Bankr.Ct.Dec. 258

In re WASHINGTON MUTUAL, INC., et al., Debtors.Nantahala Capital Partners, LP, et al., Plaintiffs,

v.Washington Mutual, Inc., Defendant.

Bankruptcy No. 08–12229 (MFW).

Adversary No. 10–50911 (MFW).

United States Bankruptcy Court, D. Delaware.

Jan. 3, 2012.

Arthur Steinberg, King & Spalding LLP, Jonathan L. Hochman, Schindler Cohen & Hochman LLP, New York, NY, Brian L. Arban, Frederick Brian Rosner, Julia B. Klein, Scott J. Leonhardt, The Rosner Law Group LLC, Wilmington, DE, for Plaintiffs.

Chun I. Jang, Julie A. Finocchiaro, Mark D. Collins, Travis A. McRoberts, Tyler D. Semmelman, Richards, Layton & Finger, P.A., Wilmington, DE, for Defendant.

Michael Murphy, pro se.William Reed, Jr., pro se.Thomas Leppert, pro se.Stephen Chazen, pro se.Stephen Frank, pro se.Regina Montoya, pro se.Phillip Mattews, pro se.Orin Smith, pro se.Margaret Osmer McQuade, pro se.James Stever, pro se.David Bonderman, pro se.Charles Lillis, pro se.

OPINION ¹

MARY F. WALRATH, Bankruptcy Judge.

Before the Court is the complaint of Nantahala Capital Partners, LP, ² individually and on behalf of all holders of Litigation Tracking Warrants (the “LTW Holders”) seeking a declaration that they hold debt, not equity, instruments and therefore are entitled to treatment as creditors under any plan of reorganization filed by Washington Mutual, Inc. (“WMI”). After trial and briefing, the Court concludes that judgment in favor of WMI is warranted for the reasons stated below.

I. BACKGROUND

On July 6, 1994, Anchor Savings Bank, FSB (“Anchor”) and Dime Bancorp, Inc. (“Dime”) entered into an agreement to merge. (JX 46.) ³ In early 1995, Anchor commenced a lawsuit against the federal government alleging breach of contract and taking of property without compensation as a result of the statutory change in treatment of supervisory goodwill that Anchor had previously realized when it acquired certain failing savings and loan associations (the “Anchor Litigation”). (JX 282.) As a result of the merger with Anchor, Dime became entitled to the proceeds, if any, from the Anchor Litigation.

In early 2000, Dime became the subject of a hostile takeover attempt by North Fork Bank. (JX 193 at 19; JX 195 at 21; JX 194 at 19; Tr. 9/12/11 at 63.) In an effort to remain independent, the Dime board of directors obtained an investment from Warburg Pincus for approximately 20% of its equity. (JX 193 at 22; JX 195 at 21, 22, 28–29; Tr. 9/12/11 at 63.) Because that equity infusion did not give sufficient value to the Anchor Litigation, and to provide value to shareholders, the Dime board decided to issue certificates to its existing shareholders representing the value of the Anchor Litigation. (JX 193 at 26–28; JX 195 at 57, 63–64; JX 194 at 33–35, 38–40.) On December 22, 2000, Dime issued Litigation Tracking Warrants (the “LTWs”) to its shareholders pursuant to a Warrant Agreement and Registration Statement. (JXs 1, 6 & 7.)

On June 25, 2001, Dime entered into an agreement to merge with WMI. (JXs 12, 15, 16, 17 & 18.) WMI was a savings and loan holding company, which held, inter alia, all of the stock of Washington Mutual Bank (“WMB”). The LTW Warrant Agreement was modified in Amended and Restated Warrant Agreements dated January 7, 2002, and March 11, 2003, between WMI and Mellon Bank, as warrant agent. (JXs 3 & 4.) ⁴ Pursuant to the Amended Warrant Agreements, WMB was to prosecute and control the Anchor Litigation and, upon receipt of any recovery, the LTW Holders were entitled to receive common stock of WMI with a value representing 85% of the net recovery. (JXs 3 & 4.)

On July 17, 2008, the Court of Federal Claims entered judgment in favor of the plaintiffs in the Anchor Litigation in the amount of $356 million. (JX 283.) Cross appeals were filed. (JXs 284 & 285.) On March 10, 2010, the Court of Appeals for the Federal Circuit affirmed the ruling of the Court of Federal Claims in part and remanded for further determination of damages, suggesting that the damages award be increased by $63 million. (JX 278.) The Court of Federal Claims has not ruled yet on the remand.

In the interim, on September 25, 2008, the Office of Thrift Supervision (“OTS”) seized WMB and appointed the Federal Deposit Insurance Corporation (the “FDIC”) as receiver. (JX 102.) 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 $1.8 billion and assumption of certain of WMB's liabilities. (JX 103.) On September 26, 2008, WMI filed a voluntary petition under chapter 11 of the Bankruptcy Code, together with its affiliate, WMI Investment Corp.

On April 12, 2010, this adversary proceeding was commenced by the filing of a complaint seeking a declaratory judgment relating to the rights of the LTW Holders. On June 16, 2010, WMI filed Omnibus Objections to claims filed by some of the LTW Holders asserting they were really equity interests not claims and/or should be subordinated pursuant to section 510(b). The Court approved a stipulation certifying the adversary as a class action on behalf of all LTW Holders.

On October 29, 2010, WMI filed a motion for summary judgment on the Amended Complaint. The motion was denied on January 7, 2011, because the Court found that there were disputed issues of material fact. Trial was held on September 12–14 and 20, 2011. Post-trial briefs were filed and oral argument was heard on November 23, 2011. The matter is ripe for decision.

II. JURISDICTION

This Court has jurisdiction over this adversary, which is a core proceeding pursuant to 28 U.S.C. §§ 1334 & 157(b)(2)(A), (B), (C), & (O).

III. DISCUSSIONA. Are the LTWs Debt or Equity?

The threshold issue presented in the Amended Complaint is whether the LTWs are debt or equity. WMI in its summary judgment motion argued that the issue could be easily addressed by considering the plain language of the Warrant Agreement, as amended after the merger with Dime, which provides that the LTW Holders are only entitled to WMI common stock. The LTW Holders contended, however, that other provisions of the Warrant Agreement, and subsequent events, demonstrate that they are entitled to receive cash instead of simply stock. (JX 1 at §§ 4.2 & 4.3.) The LTW Holders also argued that WMI (and its board of directors) are required to assure that their rights are protected. ( Id. at § 4.2(d).)

In the summary judgment decision, the Court found that there were genuine issues of disputed fact surrounding the intent of the parties and the language of the Warrant Agreements because WMI itself submitted extrinsic evidence regarding the intent of the parties in issuing the LTWs and an expert opinion which referenced similar securities issued by other banks at the time the LTWs were issued. This caused the LTW Holders to seek discovery and the opportunity to present their own expert witness on the relevant issues.

1. Language of the Agreements

The documents issued in connection with the LTWs lend support to WMI's position that the LTWs were intended to represent equity, not debt, interests. The original and Amended Warrant Agreements and the Registration Statements plainly state that the LTWs are warrants representing the right to purchase shares of common stock. (JX 1 at 1; JX 3 at 1; JX 4 at 1; JX 6 at 1; JX 7 at 1.) The Warrant Agreements also confirm that the Anchor Litigation belonged to the bank, not to the LTW Holders. (JX 1 at § 6.3; JX 3 at § 6.3; JX 4 at § 6.3.) Thus, any settlement or judgment paid would go to the bank, not the LTW Holders. (JX 193 at 113.) All of the Warrant Agreements and the Prospectuses confirmed that the LTW Holders would be entitled to exercise the warrant, and receive stock, only upon receipt of a recovery by the bank and regulatory approval allowing the issuance of the stock. (JX 1 at Art. III; JX 3 at Art. III; JX 4 at Art. III; JX 6 at 2–3; JX 7 at 2.)

The LTW Holders contend, however, that under the terms of the Warrant Agreement, their rights changed at the time of the Dime/WMI merger in 2001. As part of the merger, Dime shareholders were entitled to elect to receive their pro rata share of the $1.4 billion in cash and 92.3 million shares of WMI common stock paid for Dime. (JX 17 at 2.) ⁵ As a result of the merger consideration paid to the Dime shareholders, the LTW Holders contend that under section 4.2 of the Warrant Agreement, the LTW Holders are entitled to the same treatment.⁶

The Court finds that the Warrant Agreements, when considered together with documents issued at the time, are ambiguous. SEC filings state that “Holders of Dime's litigation tracking warrants will not be affected by the merger, except that, upon any exercise of the litigation tracking warrants in accordance with their terms, holders of litigation tracking warrants will be entitled to receive shares of Washington Mutual common stock instead of Dime common stock on similar terms as prior to the merger.” (JX 19 at 2–3; JX 20 at 2–3.) WMI argues that this meant that only common stock of WMI would be issued to the LTW Holders and that they did not have any right to receive cash. The LTW Holders argue, in contrast, that it simply means that WMI common stock will be substituted for Dime common stock but that their other rights (including the right to receive what the Dime shareholders received, i.e. cash) were preserved.

WMI argues that any ambiguity, however, was clarified by a notice sent to the LTW Holders which expressly stated that they will not be getting the same consideration as the Dime shareholders:

Following the closing of the Merger, each outstanding LTW will entitle its holder to receive, upon exercise of such LTW in accordance with the terms of the Warrant Agreement, shares of Washington Mutual common stock. Under the terms of the Merger Agreement, each share of Dime common stock will be converted into either shares of Washington Mutual common stock or cash, in each case subject to...