Bankruptcy Court Denies WaMu’s Plan of Reorganization Confirmation

In September 2011, Washington Mutual, Inc. (WaMu) had to start over on a plan of reorganization about three years in bankruptcy. The Bankruptcy Court for the second time denied confirmation of the Plan of Reorganization for WaMu. WaMu was the owner of the largest savings bank seized by the FDIC.

The Bankruptcy Court decided an equityholders’ committee had stated “colorable claims” of insider trading by certain noteholders during the bankruptcy. The claims of the noteholders against WaMu could be subject to “equitable disallowance.” The Bankruptcy Court directed the parties engage in mediation to see if they could settlement on issues and avoid litigation.

In mediation, the parties meets with a neutral third party who has no decision making power, but has experience to call out issues for discussion to draw the parties to a settlement between themselves. The parties usually split the cost of the mediator. Sometimes the mediator charges for time to be prepared on a case even when a mediation does not take place. A mediation may not take place if the parties decide not to settle or if they settle before the mediation. In a mediation, party representatives with decision making power to settle may be required to show up in person.

WaMu filed for bankruptcy on September 26, 2008, one day after the FDIC seized its banking unit and sold it to JPMorgan. In the case, there were disputes among the debtors, the FDIC, and JPMorgan about ownership of assets and claims that the parties asserted against each other. The disputes were resolved in a settlement incorporated in the proposed reorganization plan. Some parties who will receive little or nothing under the proposed plan objected to confirmation of the reorganization plan.

The Bankruptcy Court held that a creditor who receives non-public material information from a debtor must either not trade or establish a “wall” between the persons receiving the inside information and those trading claims. A creditor trading on inside information received from a debtor could end up in “equitable disallowance” of the creditor’s claim, and subordination or disallowance of a claim.

Those who objected to the WaMu plan asserted certain noteholders, while engaging in settlement talks, received material information on the debtors, engaged in trading activity, resulting in insider trading. The Bankruptcy Court found the plan objectors established “colorable claims” that insider trading occurred.

It appears from this case decision that any settlement discussions with debtors could be considered material non-public information. Any trading should be restricted, unless there is a wall between analysts and traders.

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