Judge Walrath’s September Opinion in the Wamu Case Covers a Wide Range of Issues Including the Valuation of NOLs and the Now Infamous Insider Trading Claims
Last month, Judge Walrath issued a terrifically thorough 139-page decision denying the Wamu debtors’ “Modified Sixth Amended Joint Plan of Affiliated Debtors.” Judge Walrath’s opinion has become the topic of much debate and discussion, mainly due the fact that it addresses the Equity Committee’s claims of insider trading against four major creditors (collectively, the Settlement Noteholders). Those insider trading claims were first raised by individual equity-holder Nate Thoma back in January of this year. However, Mr. Thoma raised the issue in an improper form, relying on inadmissible hearsay to make his argument. More recently, the Equity Committee filed a motion asking the Judge to find that the committee has standing to file an adversary proceeding against the alleged insider-culprits. In the September opinion, the Judge found that the committee does have standing, but is requiring the parties to enter mediation prior to the filing of any new adversary action.
In addition to discussing the Section 10b and Rule 10b-5 claims, the Judge also addressed important tax issues in great detail. The main tax issue arises in a valuation context. The parties have been arguing over how to value the debtors’ net operating losses (“NOLs”), which are very valuable to companies that have current operating gains that can be offset by the NOLs. In particular, the Court’s discussion focused on section 269 of the Internal Revenue Code, which allows the IRS to disallow the use of NOLs by any company that obtains them in a transaction that was set up for the sole purpose of evading taxes. Any reorganization plan confirmed in this case that transfers control of the Wamu NOLs to any other entity may be scrutinized by the IRS under section 269. The Court found that the current valuations of the debtors must factor in the risk that the NOLs will be disallowed by the IRS, and could therefore be worthless.
In terms of the insider trading claims, this case could be groundbreaking. The Equity Committee basically is arguing that four major creditors obtained material non-public information (“MNPI”) during settlement negotiations with the the Wamu debtors and JP Morgan Chase, and then traded on that information in violation of fiduciary duties owed to shareholders. In part, the committee is claiming that the knowledge the four creditors had that settlement talks were taking place was in and of itself MNPI. If the committee does go forward with its suit, the committee will likely be fighting an uphill battle. However, the impact of a committee victory here could permanently change the way that distressed debt is traded. Needless to say, everyone is interested in the outcome here.
In discussing the insider trading issue, the Court quoted the following language from the landmark case of Pepper v. Litton (380 U.S. 311 (1939)):
“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.”
These issues are far from decided and the case appears to be far from its conclusion.
September 18, 2011
Paulson & Co.-Controlled Hotel Group Seeks to Extend Its Exclusivity Period Through January - Is the 18-Month Limitation a Good Idea?
Paulson-controlled hotel group MSR Resorts, which has been operating in bankruptcy for a while now will ask a bankruptcy court on Tuesday to extend its exclusivity period, the timeframe under which only the debtor may propose a chapter 11 plan of reorganization, through the end of January 2012. Every time this issue comes up, the parties are transported back to October of 2005, when the BAPCPA amendments installed a strict limitation of 18 months on a debtor’s exclusivity period.
Prior to the BAPCPA amendments, the debtor had an initial exclusivity period of 120 days and the judge had the ability to grant extensions as he or she saw fit. Put another way, there were not strict limitations on the amount of time a judge could grant the debtor to come up with a viable plan. However, once Congress enacted the amendments, which were largely creditor-friendly, the time frame became limited strictly to 18 months.
People familiar with this issue have heard famed debtors’ counsel Harvey Miller and others discussing the deleterious effects this strict timeframe has had on large corporations operating in chapter 11. While 18 months may seem like a long time to individuals, in many cases of complex corporations, that 18-month period is just not enough time to figure out the best operating plan. Once the period is up, creditors may file competing plans that have the creditors’ best interest at the heart. This is not always good for the debtor and this is not always good for certain other creditors. It will be interesting to see if MSR can make it work within the set parameters.
The case is MSR Resort Golf Course LLC, et al., case no. 11-10372 in the SDNY.
August 24, 2011
In the Headlines: 8/24/11
- Thanks to Lehman Bros., bankruptcy claims trading is at a 12-month high. According to Market Watch, $50B in claims in the Lehman case have traded since 2008. LBHI’s claims are currently trading for between 20 to 25 cents on the dollar, which is a significant improvement over those in the recent past. [Market Watch]
- SpectrWatt, Inc., a closely-held maker of solar products backed by Intel and Goldman has filed a chapter 11 petition in the SDNY. The case was filed in Poughkeepsie, New York, which is about an hour outside of the City. [Bloomberg]
- Rhode Island issued AA+ rated bonds yesterday with what it calls “aggressive pricing” despite its poorest city’s muni bankruptcy filed on August 1st. [Bloomberg]
- New York bankruptcy filings have dropped about 8% in the first half of 2011 over the same period in 2010. Long Island bankruptcy lawyer Andrew Doktofsky claims that the drop is due to easier access to credit and consumers taking on less debt. Whether those claims are true remains to be seen. [Yahoo/PR Web]
- Los Angeles Dodgers exclusive merchandise vendor, Facility Merchandising Inc., lost its motion asking Delaware Bankruptcy Judge Kevin Gross to force the Dodgers to assume or reject its merchandise contract earlier than required under section 365. Under section 365(d)(2), debtors in possession generally have until plan confirmation to decide whether to assume or reject executory contracts such as this one. [Washington Post]
August 24, 2011
Back From the Dead
I am back from the dead and will hopefully be posting more regularly, as a lot is going on in the corporate bankruptcy world. Sometimes life gets in the way of this computer stuff.
July 19, 2011
New Dialogue with Elizabeth Warren in the Latest Issue of National Mortgage Professional Magazine
Fresh on the heels of President Obama’s selection of former Ohio Attorney General Richard Cordray to head the new Consumer Financial Protection Bureau, bureau founder, consumer advocate, and Harvard bankruptcy professor Elizabeth Warren makes her case for regulatory change, yet again, in the July issue of National Mortgage Professional Magazine. You can read the entire article for free here.
The jury is still out on the issue of whether the bureau will be able to effectuate any real financial regulatory change. While the goal of Warren and the bureau appears to be an admirable one (to stop banks and mortgage lenders from using tricks and traps to rip off unsuspecting consumers), those institutions have spent an unprecedented amount of time, effort, and money making sure that nothing changes.
July 18, 2011
"We were all working hard towards a different outcome, but the headwinds we have been facing for quite some time, including the rapidly changing book industry, eReader revolution, and turbulent economy, have brought us to where we are now…."
— Borders Group President Mike Edwards in a statement released today explaining that Borders has abandoned its reorganization plans and instead will liquidate. The company will begin winding down its remaining 399 stores this Friday.
July 8, 2011
In the Headlines: 7/07/11
- Delaware Bankruptcy Judge Kevin Gross denied Frank McCourt’s motion seeking to force Major League Baseball to turn over a wide array of documents prior to a July 20th hearing in the Los Angeles Dodgers case. Judge Gross also ruled that MLB commissioner Bud Selig does not have to submit to a deposition. At the July 20th hearing, Judge Gross will decide if Dodger’s owner Frank McCourt can use his own source of funding or whether he will have to accept the MLB’s offer to finance the team post-petition. [NY Post] [LA Times]
- Ambac Financial has filed a plan of reorganization in its chapter 11 case in the SDNY. Many of the documents in the case can be found here. [Yahoo Finance].
- New York Bankruptcy Judge Sean Lane approved a deal under which Dish Network will acquire mobile communications provider TerreStar out of bankruptcy for $1.38 billion. After a failed chapter 11 plan that would have given communications mogul Echo-Star an ownership stake in TerreStar, Dish became the stalking-horse bidder in a 363 auction. Dish won approval to buy TerreStar when no other bidders emerged. [Bloomberg]
- A hearing is set for July 20th in the Lehman Bros. case to address issues with the new liquidation plan Lehman filed about a week ago. [Yahoo/Reuters]
June 27, 2011
"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 Article. We conclude today that Congress, in one isolated respect, exceeded that limitation in the Bankruptcy Act of 1984. The Bankruptcy Court below lacked the constitutional authority to enter a final judgment on a state law counterclaim that is not resolved in the process of ruling on a creditor’s proof of claim. Accordingly, the judgment of the Court of Appeals is affirmed."
— Supreme Court Chief Justice John Roberts writing for the majority in a 5-4 decision holding that the bankruptcy court did not have the constitutional authority to determine a state law counterclaim in the infamous case involving the heirs of J. Howard Marshall and Anna Nicole Smith. Click here to see a PDF of the opinion.
