washington mutual (wmi) - transcript of oral closing arguments 8/24/11

1

2 UNITED STATES BANKRUPTCY COURT

3 DISTRICT OF DELAWARE

4 Case No. 08-12229 (MFW)

5 - - - - - - - - - - - - - - - - - - - - -x

6 In the Matter of:

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8 WASHINGTON MUTUAL, INC., ET AL.,

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10 Debtors.

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14 U.S. Bankruptcy Court

15 824 North Market Street

16 Wilmington, Delaware

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18 August 24, 2011

19 9:35 AM

20

21 B E F O R E:

22 HON. MARY F. WALRATH

23 U.S. BANKRUPTCY JUDGE

24

25 ECR OPERATOR: STEPHEN GRANT

VERITEXT REPORTING COMPANY212-267-6868 www.veritext.com 516-608-2400

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2 Modified Sixth Amended Joint Plan of Affiliated Debtors

3 Pursuant to Chapter 11 of the United States Bankruptcy Code

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5 Motion for an Order Authorizing the Official Committee of

6 Equity Security Holders to Commence and Prosecute Certain

7 Claims of Debtors' Estates (Filed Under Seal)

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25 Transcribed by: Dena Page


1

2 A P P E A R A N C E S :

3 WEIL, GOTSHAL & MANGES LLP

4 Attorneys for Debtors

5 BY: BRIAN ROSEN, ESQ.

6 JOHN MASTANDO, ESQ.

7 ADAM STROCHAK, ESQ.

8 DIANE ENG, ESQ.

9 KELLY DIBLASI, ESQ. (TELEPHONICALLY)

10

11

12 RICHARDS, LAYTON & FINGER, P.A.

13 Attorneys for Debtors

14 BY: MICHAEL MERCHANT, ESQ.

15

16

17 AKIN GUMP STRAUSS HAUER & FELD LLP

18 Attorneys for Creditors' Committee

19 BY: FRED HODARA, ESQ.

20 ROBERT A. JOHNSON, ESQ.

21 ROBERT J. BOLLER, ESQ. (TELEPHONICALLY)

22 CHRISTOPHER W. CARTY, ESQ. (TELEPHONICALLY)

23 BRIAN M. ROTHSCHILD, ESQ. (TELEPHONICALLY)

24 DAVID SIMONDS, ESQ. (TELEPHONICALLY)

25


1

2 ARENT FOX LLP

3 Attorneys for Wilmington Trust Co. as Indenture Trustee

4 BY: RONNI ARNOLD, ESQ.

5 JEFFREY ROTHLEDER, ESQ. (TELEPHONICALLY)

6

7

8 ARKIN KAPLAN & RICE LLP

9 Attorneys for TPS consortium

10 BY: HOWARD KAPLAN, ESQ.

11 JOSEPH MATTEO, ESQ.

12 DEANA DAVIDIAN, ESQ.

13

14

15 ASHBY & GEDDES, P.A.

16 Attorneys for Equity Committee

17 BY: BILL BOWDEN, ESQ.

18 STACY NEWMAN, ESQ.

19

20

21 BLANK ROME LLP

22 Attorneys for Appaloosa, Owl Creek, Centerbridge,

23 Aurelius

24 BY: TORI GUILFOYLE, ESQ.

25


1

2 BROWN RUDNICK


4 BY: ROBERT J. STARK, ESQ.

5 JEREMY B. COFFEY, ESQ.

6 MARTIN S. SIEGEL, ESQ.

7

8

9 CAMPBELL & LEVINE, LLC


11 BY: MARK T. HURFORD, ESQ.

12

13

14 DAY PITNEY, LLP

15 Attorneys for KeyStone Holdings Partners

16 BY: JAMES J. TANCREDI, ESQ. (TELEPHONICALLY)

17

18

19 DLA PIPER

20 Attorneys for FDIC

21 BY: THOMAS R. CALIFANO, ESQ.

22

23

24

25


1

2 FOX ROTHSCHILD LLP

3 Attorneys for WMI Noteholders

4 BY: JEFF SCHLERF, ESQ.

5

6

7 FOX ROTHSCHILD LLP

8 Attorneys for Wells Fargo, as Indenture Trustee

9 BY: SETH NIEDERMAN, ESQ.

10

11

12 FRIED, FRANK, HARRIS, SHRIVER & JACOBSON LLP

13 Attorneys for Appaloosa, Owl Creek, Centerbridge

14 BY: MICHAEL B. DE LEEUW, ESQ.

15 SHANNON LOWRY NAGLE, ESQ.

16

17

18 GRANT & EISENHOFER P.A.

19 Attorneys for WMB Noteholders

20 485 Lexington Avenue

21 New York, NY 10017

22

23 BY: MATTHEW P. MORRIS, ESQ.

24

25


1

2 GREER, HERZ & ADAMS, L.L.P.

3 Attorneys for ANICO Plaintiffs

4 BY: JAMES ROQUEMORE, ESQ.

5

6

7 KING & SPALDING

8 Attorneys for LTWS

9 BY: ARTHUR J. STEINBERG, ESQ.

10

11

12 KRAMER LEVIN NAFTALIS & FRANKEL LLP

13 Attorneys for Aurelius

14 BY: KENNETH H. ECKSTEIN, ESQ.

15 JEFFREY TRACHTMAN, ESQ.

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17

18 LANDIS RATH & COBB LLP

19 Attorneys for JPMorgan Chase Bank, N.A.

20 BY: ADAM G. LANDIS, ESQ.

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25


1

2 LATHAM WATKINS

3 Attorneys for Centerbridge

4 BY: RICHARD OWENS, ESQ.

5 MARK A. BROUDE, ESQ.

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8 LOEB & LOEB LLP

9 Attorneys for Wells Fargo, as Indenture Trustee

10 BY: VADIM RUBINSTEIN, ESQ.

11 WALTER CURCHACK, ESQ.

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14 LOWENSTEIN SANDLER P.C.

15 Attorneys for Securities Plaintiffs

16 BY: IRA M. LEVEE, ESQ.

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19 MONZACK, MERSKY, MCLAUGHLIN & BROWDER, P.A.

20 Attorneys for Kerry Killinger

21 BY: RACHEL B. MERSKY, ESQ.

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2 MORRIS JAMES LLP

3 Attorneys for Law Debenture

4 BY: COURTNEY HAMILTON, ESQ.

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7 PACHULSKI STANG ZIEHL & JONES LLP

8 Attorneys for Bond Holders Bank

9 BY: JEREMY RICHARDS, ESQ. (TELEPHONICALLY)

10 DEAN A. ZIEHL, ESQ. (TELEPHONICALLY)

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12

13 PAUL HASTINGS LLP

14 Attorneys for Appaloosa

15 BY: BARRY SHER, ESQ.

16 MARIA E. DOUVAS, ESQ.

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19 PATTERSON BELKNAP WEBB & TYLER LLP

20 Attorneys for Law Debenture Trust Company of NY

21 BY: DANIEL LOWENTHAL, ESQ.

22 CRAIG DENT, ESQ.

23 BRIAN GUINEY, ESQ. (TELEPHONICALLY)

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25


1

2 PEPPER HAMILTON LLP

3 Attorneys for Creditors' Committee

4 BY: DAVID STRATTON, ESQ.

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7 PILLSBURY WINTHROP SHAW PITTMAN LLP

8 Attorneys for Bank of New York Mellon

9 BY: LEO CROWLEY, ESQ.

10 MARGOT P. ERLICH, ESQ. (TELEPHONICALLY)

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12

13 POLSINELLI SHUGHART, P.C.

14 Attorneys for Wilmington Trust Co. as Indenture Trust

15 BY: SHANTI KATONA, ESQ.

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18 ROSENTHAL MONHAIT & GODDESS, P.A.

19 Attorneys for Bank of New York Mellon

20 BY: TED ROSENTHAL, ESQ.

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1

2 SCHULTE ROTH & ZABEL LLP

3 Attorneys for Owl Creek

4 BY: ALAN GLICKMAN, ESQ.

5 BRIAN PFEIFFER, ESQ.

6 WILLIAM GUSMAN, JR., ESQ.

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9 SUSMAN GODFREY LLP

10 Attorneys for Equity Committee

11 BY: PARKER C. FOLSE, III, ESQ.

12 EDGAR G. SARGENT, ESQ.

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15 SULLIVAN & CROMWELL LLP

16 Attorneys for JPMorgan Chase Bank, N.A.

17 BY: ROBERT A. SACKS, ESQ.

18 BRIAN GLUECKSTEIN, ESQ.

19 BRUCE CLARK, ESQ. (TELEPHONICALLY)

20 HYDEE R. FELDSTEIN, ESQ. (TELEPHONICALLY)

21 JOSHUA FRITSCH, ESQ. (TELEPHONICALLY)

22 BRENT J. MCINTOSH, ESQ. (TELEPHONICALLY)

23 DAVID POSSICK, ESQ. (TELEPHONICALLY)

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1

2 UNITED STATES DEPARTMENT OF JUSTICE

3 Office of the United States Trustee

4 BY: JANE LEAMY, ESQ.

5

6

7 WHITE & CASE LLP

8 Attorneys for WMI Noteholders

9 BY: GREG STARNER, ESQ.

10 GERARD UZZI, ESQ.

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12

13 YOUNG CONAWAY STARGATT & TAYLOR, LLP

14 Attorneys for FDIC

15 BY: M. BLAKE CLEARY, ESQ.

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17

18 ALSO PRESENT:

19 MORITHIA BARR, Equity Committee Member

20 JAMES BERG, Pro Se

21 LAWRENCE N. CHANEN, JPMorgan Chase Bank, N.A.

22 BRYCE FRASER, Fortress Investment Group

23 HAL F. GOLTZ, Anchorage Advisors

24 JOEL HAWKINS, Carval Investors

25 JASON C. KLEIN, JPMorgan Chase Bank, N.A.


1 THOMAS KORSMAN, Wells Fargo Bank

2 BEN MASON, Pro Se

3 ANDERS MAXWELL, The Peter J. Solomon Company

4 MICHAEL O'HARA, The Blackstone Group

5 DANIEL PINE, Marathon Asset Management

6 MICHAEL C. SCOTT, Venor Capital

7 MITCHELL E. SUSSMAN, Stone Lion Capital

8 NATE THOMA, Pro Se

9 WILLIAM VRATTES, York Capital Management

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WASHINGTON MUTUAL, INC., ET AL.

1 P R O C E E D I N G S

2 THE COURT: Good morning.

3 MR. ROSEN: Good morning, Your Honor. Brian Rosen,

4 Weil, Gotshal & Manges. I'm here with my partners, Adam

5 Strochak and John Mastando on behalf of Washington Mutual,

6 Inc., the debtor.

7 Your Honor, when we were here on August 12th, we had a

8 brief status conference at the conclusion of the omnibus

9 hearing, and at that time, the Court so ordered that every

10 party who was going to be speaking for the parties would be

11 limited in their presentation, and of course, at that time, the

12 Court said there was no need to use the full amount that you

13 might be allotted.

14 The Court also asked us to try and work this out with

15 the other parties on both a process and an order for the

16 presentations, and we attempted to do so and we actually

17 attempted to reach the Court with respect to that last week.

18 In the absence of having a status conference, then,

19 with the Court asking us to file a notice of oral argument, we

20 did, Your Honor, last week, file a notice of oral argument and

21 what the debtors' proposed schedule was for that oral argument.

22 As part of that and as part of the earlier discussions last

23 week, Your Honor, we had suggested that any outstanding issues

24 that might be there for evidentiary or anything else that the

25 parties would say should be included in their thirty minutes



1 that the Court had suggested.

2 Your Honor, we do realize that some people have a

3 different perspective, and that's why we suggested a status

4 conference last week or a chamber conference. And so when we

5 filed the notice with the court, we put down our proposed

6 schedule as to what we thought would be appropriate,

7 specifically having the debtors, the committee, JPMorgan and

8 the FDIC going first in support of a plan followed by the

9 parties who were objectors to the plan, and also parties

10 alleging that there would be inequitable conduct on the part of

11 the settlement noteholders. Then that would be followed by the

12 four settlement noteholders making a presentation to rebut

13 those issues that were raised by the objectors or the parties

14 claiming that there was inequitable conduct.

15 We also included in the notice, Your Honor, that any

16 party who felt that they had a different perspective on the

17 proposed schedule or felt that they wanted additional time or

18 felt that they wanted to argue evidentiary issues separate and

19 not include them in the thirty minutes that we thought would be

20 appropriate, they should have an opportunity to be here and

21 that the Court would then take guidance and lay out for the

22 benefit of all of us prior to the commencement of the oral

23 arguments right now what schedule the Court wanted us to

24 follow.

25 So Your Honor, with all that being as a predicate, we



1 would suggest that we go forward with the schedule as we laid

2 it out and that everything be included in the oral argument.

3 THE COURT: Well, let's hear if anybody disagrees.

4 MR. ROSEN: Agreed, Your Honor, because that will

5 guide what I say when I start out.

6 MR. FOLSE: Good morning, Your Honor. It's Parker

7 Folse from Susman Godfrey for the equity committee. Mr.

8 Rosen's correct that we did not join in this schedule. We

9 believe the more sensible way to do this and a way that's more

10 fair is to have all of the people who want to speak in support

11 of the plan, including the settlement noteholders, to go first,

12 and then to have plan opponents go second. It is the burden of

13 the debtors to prove to the Court that the plan should be

14 confirmed, and stacking two hours' worth of argument by the

15 settlement noteholders at the end of the day after everyone

16 else -- after all the plan objectors have made their arguments

17 does not strike us as fair or reasonable.

18 The second issue I wanted to raise, Your Honor, when

19 we were here at the end of the plan confirmation hearing, in an

20 effort to cooperate in developing a schedule for written

21 closing arguments and then if the Court wanted oral closing

22 arguments, I said that the equity committee, with respect to

23 the motion for leave to commence an adversary case against

24 Aurelius and Centerbridge, that we would give up our right to

25 file a written reply to the written objections that would be



1 forthcoming if we would have a chance at an oral argument to

2 give our reply orally. At that time, we didn't know how the

3 oral argument was going to shape up.

4 We now see that we have thirty minutes, and Your

5 Honor, I'm concerned that we will not do an adequate job both

6 in addressing what we would like to discuss on plan

7 confirmation and also reply to well over a hundred pages of

8 oppositions to our motion for leave to commence the adversary

9 proceeding in the thirty minutes that I have. So I would ask

10 the Court to do one of two things with respect to our motion,

11 and that is either to put oral argument over to the next

12 omnibus hearing, at which point we would give our oral reply as

13 originally planned, or not to do that but to give us an

14 opportunity to file a written reply sometime very soon so that

15 we -- and we would not then address it either here or at a

16 subsequent hearing. So those are the two requests that I have,

17 Your Honor.

18 MR. KAPLAN: Good morning, Your Honor. Howard Kaplan

19 from Arkin Kaplan & Rice. We, on the proposed schedule, we are

20 listed with Brown Rudnick as a combined thirty minutes.

21 THE COURT: Yes.

22 MR. KAPLAN: And we request, obviously, a full thirty

23 minutes for ourself. We don't think it's fair. I, of course,

24 we have an overlap in clients, but I represent separate

25 interests. There was no overlap at the trial between what



1 Arkin Kaplan did and what Brown Rudnick did. The issues are

2 completely different. And frankly, Your Honor, the issues are

3 complex. There was 225 pages of briefing put in by the

4 settlement noteholders, and as it has developed, we believe

5 that these issues are central to this hearing. So to limit us

6 to ten minutes, fifteen minutes to reply to 225 pages of briefs

7 while at the same time the settlement noteholders are being

8 given a full two hours, and as I understand it, there will be

9 other parties speaking on their behalf as well, so maybe they

10 have two and a half hours, we will have ten or fifteen minutes.

11 It's just not fair, Your Honor, so we request a full thirty

12 minutes.

13 THE COURT: And you share that, Mr. Stark?

14 Okay, Mr. Steinberg?

15 MR. KAPLAN: Well, I --

16 UNIDENTIFIED SPEAKER: Come on up.

17 MR. STEINBERG: Your Honor, the only thing I would say

18 in addition to the comments that are made is that in the

19 debtors' schedule, that there is a fifteen minutes after the

20 end of all arguments for the debtors' special opportunity to

21 reply. And it may be that I have nothing to reply about, but

22 if there's going to be a reply, it should be opened up to

23 everybody. Otherwise, most people here thought they could rest

24 on their written submissions, so they should rest on their

25 minutes of oral argument with no opportunity to reply.



1 MR. STARK: Real quickly, Your Honor. On the

2 evidentiary issues, we do have a few evidentiary issues still

3 pending before Your Honor. The record should close before the

4 oral arguments start and that may require a little bit of

5 argument, but if it does, I don't think we should be taxed for

6 the discussion about those evidentiary issues against our

7 thirty minutes.

8 MR. SACKS: Good morning, Your Honor. Robert Sacks

9 for JPMorgan Chase. I rise only to object to Mr. Kaplan's

10 request. It's the same issue we had at the beginning of this

11 hearing. They represent the same people. Mr. Kaplan

12 represents five of the ten groups that Mr. Stark represents.

13 It's not a question of overlap; he represents a subset. To

14 give them an hour to address the issues the debtor is doing in

15 thirty minutes to address every issue in the case is not just

16 unfair but is burdensome to everybody. We've all agreed to

17 limitations on our time. It will be no different than if I

18 were to split the argument with Mr. Landis or somebody else and

19 split the issues that we're addressing in the same way. They

20 can confine themselves to thirty minutes the way everybody else

21 can. And the fact that they have two firms or two different

22 lawyers doing the argument is not a justification for the same

23 client having double the time as everybody else. Thank you.

24 MR. ECKSTEIN: Your Honor, good morning. Kenneth

25 Eckstein on behalf of Aurelius. Briefly just responding to



1 some of the points that were raised by the equity committee and

2 TPS.

3 With respect to the order, Your Honor, as I'm sure you

4 can anticipate, we agree with the debtor in terms of the order,

5 but we think it actually makes sense and is consistent with the

6 way the case, in general, was presented. The debtor has a

7 whole array of confirmation issues that are going to be

8 addressed affirmatively. What the settlement noteholders are

9 really doing are responding to objections and allegations that

10 have been lodged, and we are very much in the position of

11 defending, and that was the logic for the settlement

12 noteholders following the presentations by the equity committee

13 and the TPS. So we think that the order actually does make

14 sense.

15 In terms of the motion to authorize, I think Mr. Folse

16 and I both had anticipated that we were going to fold it into

17 today's argument, and I know in my case, there's a lot of

18 overlap. I will briefly discuss the motion to authorize

19 issues, but I think logically speaking, they're going to

20 overlap significantly. And so to the extent possible, we would

21 urge that we continue to cover the issues today and if there

22 are specific concerns with respect to that, I guess the Court

23 can address that.

24 And in terms of bifurcating out individual parties, I

25 mean, many of us have views on a lot of different issues and



1 filed pleadings that cover not just the objection to the

2 trading issues but to other confirmation issues, and I think

3 the burden on all of us is to try to keep it to the thirty

4 minutes and we would urge the Court to maintain that schedule.

5 MR. ROSEN: Your Honor, Mr. Eckstein is correct. The

6 way we set up the schedule was the way that the equity

7 committee and others had agreed to conduct the confirmation

8 which is in the three tranches or pods that we talked about.

9 And we did view the settlement noteholders as being responsive

10 to allegations, and that's why we put them at the end.

11 With respect to the effort to get the additional

12 thirty minutes, as I indicated to some people yesterday, in

13 preparation for this, Your Honor, I feel like that man in the

14 old FedEx commercials who has to speed talk to get through all

15 of the issues within thirty minutes. And --

16 THE COURT: Well, do you? Because I don't want to

17 hear you repeating your brief.

18 MR. ROSEN: And Your Honor, I don't want to repeat the

19 brief. And as we told you last week --

20 THE COURT: Yes.

21 MR. ROSEN: -- and we told you at the conclusion of

22 the confirmation hearing, as Mr. Folse said as well, we would

23 have been happy not to have this day in court, Your Honor. We

24 thought --

25 THE COURT: Then you can sit down and not say



1 anything.

2 MR. ROSEN: That's nice, though, Your Honor --

3 THE COURT: That's an option.

4 MR. ROSEN: -- I appreciate that, but if you're going

5 to be giving it to everybody, we want our equal share. And

6 that's the way, I think, a lot of other people view it, as

7 well. So if you're giving people an hour to present the

8 arguments that other people are being forced to present in

9 thirty minutes, we think that's inequitable.

10 THE COURT: All right, let me rule.

11 Again, I don't want to hear anybody just repeating

12 what's in their briefs. I read the briefs. I'm a long way

13 towards issuing a decision. I've read the cases that the

14 parties have cited, so I'm familiar with the issues. I want

15 people to be concise and hit what they think are the main

16 points of their arguments only.

17 I agree with the parties; there will be no replies.

18 Nobody should be surprised by what anybody else says. You've

19 all seen their briefs; you know what their issues are. I will

20 require the settlement noteholders to go first, though.

21 They're on the side of supporting the plan as it is written, so

22 I think they have to put their argument forward.

23 While initially, I would have suggested that the

24 settlement noteholders only have a half an hour for all four, I

25 agree that there are specific issues unique to each settlement



1 noteholder that they want to address. But similarly, I think

2 that the two TPS groups have different issues they want to

3 emphasize, and I will give each of them twenty minutes in

4 recognition of that.

5 I do want to hear argument on the motion to authorize

6 by the equity committee, though. I would hope they could do it

7 within the half an hour that they have, but if they need

8 additional time, I will hear them on that. Although there were

9 a hundred pages, I think the issues were not worthy of a

10 hundred pages, and they do strongly or extensively overlap with

11 the issues that I heard at the confirmation hearing.

12 So with that, the evidentiary issues, what have you

13 not agreed upon?

14 MR. SIEGEL: Good morning, Your Honor. Martin Siegel

15 on behalf of the TPS consortium. There are, I guess, two

16 different evidentiary issues that appear to be open. One of

17 them, frankly, we thought was not open, and that's with regard

18 to the excerpts of the Senate report and what we believe Your

19 Honor has ruled you would allow as a response and our motion to

20 strike the response that was actually submitted.

21 The second one relates to Exhibit 301B which is

22 labeled "Waterfall Impact of Applying Contract and Federal

23 Judgment Rate". So unless Your Honor has a preference, if I

24 may just first address the one we think you've already ruled

25 on --



1 THE COURT: Okay.

2 MR. SIEGEL: -- hopefully that will be shorter.

3 Your Honor will recall at the hearing, the TPS

4 consortium sought to introduce the entire Senate report, and we

5 believe in what can only be construed as a ruling, Your Honor

6 stated you would allow the Senate report to come in, but only a

7 ten-page excerpt. And the TPS consortium submitted that ten-

8 page excerpt. We don't think you should revisit -- the debtor

9 has sort of invited you to revisit that issue in their response

10 to our motion to strike. We don't think that you should, and

11 so I'm not going to address that unless Your Honor says that

12 you will do so.

13 The issue, then, becomes what exactly were the parties

14 permitted to submit and when, under your ruling, and we think

15 it's fairly clear if you look at two separate pages of

16 transcript from the July 21st hearing. First, it starts on

17 pages 296 through 299, and Your Honor states, starting on 296,

18 "But I do agree that to the extent the issue of what is the

19 value of those claims is an issue that I have to consider, I

20 will allow you to give me a summary of it. And if the findings

21 on TPS fines are a summary of that report or if there is a

22 short summary no longer than ten pages, I would allow that to

23 be included as a public record." We think that is a ruling,

24 and while we're not going to argue law of the case, Your

25 Honor --



1 THE COURT: Okay.

2 MR. SIEGEL: -- because we think -- we've already put

3 in a brief that says until a case is over, you're allowed to

4 reconsider issues --

5 THE COURT: Well, let me hear --

6 MR. SIEGEL: -- on this issue, I don't think you

7 should.

8 THE COURT: Let me hear the response.

9 MR. SIEGEL: Okay, if I may just continue just for one

10 moment more, Your Honor. The issue, then, becomes our motion

11 to strike what they did submit. Instead of submitting cross-

12 designations from that transcript, they put in some pleadings

13 in a case brought by the FDIC against officers and directors of

14 the bank. And we don't think that that's not only within your

15 ruling, but because your ruling was fairly clear -- and if I

16 can quote you from 298, Mr. Coffey stated, "Your Honor, might I

17 suggest that if Mr. Rosen has a problem with what we submit,

18 perhaps he should submit a counterdesignation of things he

19 think are relevant." And then you stated, "From the report."

20 Mr. Rosen then got up and said, "That's the problem,

21 Your Honor. The report didn't look at the difficulties

22 associated with the claims." And then we think Your Honor

23 ruled when you said, "Then you can save that for argument."

24 And again on the same page, page 299, you stated, "I

25 don't know what you're going to put into the record. I'm



1 allowing them to put this in," and you continue, "the findings

2 of this report to the extent it doesn't exceed ten pages." And

3 Mr. Rosen's, although he interrupted that, "We think that

4 that's a clear ruling."

5 And again on page 333, Your Honor, when Mr. Stark

6 stated -- I'm sorry it was in the context of Mr. Rosen stated,

7 "You said they could put in their excerpts and we could do the

8 same?" you then stated in response to Mr. Stark's comment, Mr.

9 Stark stated, "Your Honor, I guess we could do that; I really

10 don't have a problem. To me, it comes down to the fact that

11 we're going to take some quotes out of a report and put it

12 before Your Honor. They should take some quotes that they

13 think they like and put it before Your Honor." Your Honor then

14 stated, "Right."

15 So we think that the fact that Mr. Rosen said, well,

16 Judge, we might want to consider some other pleadings and some

17 other things, we believe that you've already ruled that to the

18 extent that they want to submit any of those things, they

19 should save it for argument and put it in in that context.

20 I'll save my remarks as to if you do visit that

21 ruling, why it's improper.

22 THE COURT: Thank you.

23 MR. SIEGEL: Thank you.

24 MR. STROCHAK: Good morning, Your Honor. Adam

25 Strochak, Weil, Gotshal & Manges for the debtors.



1 We're certainly not seeking to reargue the evidentiary

2 ruling the Court made. The Court determined that it would

3 admit excerpts of the PSI report for the purposes that the

4 Trust Preferred Consortium asked for them, that is, as a data

5 point in assessing what value, if any, those claims might have.

6 We made it very clear on the record at the confirmation hearing

7 that we thought, under the circumstances, where this evidence

8 was offered on the last day of the confirmation hearing with no

9 notice to us, with no inclusion of this document, the PSI

10 report on the parties' exhibit list prior to the confirmation

11 hearing, that we thought that we were going to need to put

12 something additional into the record to respond to it, and that

13 was the motions to dismiss the claims that have, in fact, been

14 brought by the FDIC. So we offered that in our response, we

15 offered some argument in our response, asserting why we believe

16 that the admission of this document, this report from a

17 Congressional investigatory committee required additional

18 information to put it in context for the purpose that was being

19 offered. And of course, it was met with the motion to strike

20 what we had filed. So for the reasons we stated on the record,

21 at the confirmation hearing, we think the Court should take

22 judicial notice of the fact that the defendants have, in fact,

23 under the standards applicable, under Rule 11, have, in fact,

24 moved to dismiss as a matter of law the claims that have been

25 asserted. It's one more data point. It puts in context the



1 information that the Trust Preferred Consortium is asking the

2 Court to recognize for purposes of assessing these claims. And

3 I think that's all I need to say on that point, Your Honor.

4 Mr. Siegel did not argue the Exhibit 301. I don't

5 know if he intended to offer additional argument on that point.

6 I can speak to that now.

7 THE COURT: Yes, he does.

8 Well, I'm not inclined to -- I am inclined to grant

9 the motion to strike. I don't think it's appropriate. We

10 closed the record. I don't think it's necessary to be

11 considered.

12 MR. STROCHAK: Thank you, Your Honor.

13 Is counsel going to address --

14 THE COURT: Yes, he's going to --

15 MR. STROCHAK: -- Exhibit 301?

16 THE COURT: Yes.

17 MR. SIEGEL: Thank you, Your Honor. Exhibit 301B is

18 on a different footing. You'll recall, Your Honor, that there

19 were two issues that were raised. 301A which was the period

20 for bringing up for a further period the federal judgment rate,

21 apparently there is no objection.

22 301B came about, Your Honor, because, fortunately

23 because of a comment Your Honor made during our attempt to

24 introduce an earlier version or a version of that same chart

25 through Mr. Maxwell, that it would be helpful to have a chart



1 and not testimony of a witness. So we prepared a chart. And

2 it's admissible, in our view, before I get to the objections

3 which, at best, go to the weight of the document, because it's

4 a summary of matters that are already in evidence. Since

5 there's no objection to 301A, you have in evidence the federal

6 judgment rate, and you also have in evidence Mr. Goulding's

7 declaration, the waterfall analysis that's attached to that,

8 even some portions of his testimony, and what was done was

9 taking those facts that are in evidence and applying the same

10 procedures as set forth in the chart. So we think that before

11 we get to arguments that go to the weight of the document, we

12 should be permitted to put in a chart, pursuant to a couple of

13 Rules Of Federal Evidence, 611 and 1006; both permit the

14 inclusion of charts or other matters that will be helpful to

15 the Court's consideration.

16 Now we get to the objections. And they don't directly

17 deal with the fact that the chart is just a summary of matters

18 that are already in evidence. There are basically five

19 objections. The first is that there was no notice. And that

20 day was kind of hectic, Your Honor. We thought we had notified

21 everybody. We had given a copy of the chart to the debtor; we

22 thought we had handed it out to everybody, and the creditors'

23 committee said that they didn't know what the chart was. If

24 anything, it was because of the hectic nature of the last day

25 of the hearings. Certainly, we intended to hand the chart to



1 everybody.

2 The second issue, which we find somewhat ironic, is

3 they object because we didn't have a witness. Well, we tried

4 to have a witness; we sought to have Mr. Maxwell testify to it.

5 They objected, and the Court said instead of having a witness,

6 it would be more helpful to have a chart. That's what we did;

7 we don't think the Court should take the fact that we then

8 didn't recall Mr. Maxwell or have another witness as anything

9 since it's of the debtors' own making that we didn't have a

10 witness.

11 The third, and perhaps what goes to the substance of

12 the issue here is they argue that the chart's prejudicial and

13 misleading because it doesn't deal with -- it doesn't show the

14 effect of contractual subordination. And that's because there

15 are legal arguments before Your Honor about how you should

16 apply contractual subordination and there already is evidence

17 in the record based on Mr. Goulding's initial chart in which he

18 did apply contractual subordination. So we think in order for

19 the Court to understand the effect of the arguments that are

20 made in the briefs, our objection that you can't apply

21 contractual subordinations the way they're doing it, the chart

22 just takes that evidence and shows you what would happen if you

23 ruled on the legal points that we say that you have to apply --

24 the federal judgment rate, they don't get a double dip on

25 subordination, and the federal judgment rate should be applied



1 as of the confirmation date.

2 And I might add, the argument about prejudicial should

3 fall on deaf ears because we didn't just show the numbers that

4 we think should be applied. We showed what would happen if the

5 contract rate of interest was applied, what happened if it's

6 the federal judgment rate as of the date of the petition, and

7 what happens if it's the federal judgment rate as of

8 confirmation. And we think -- there's no jury here -- Your

9 Honor is perfectly capable of understanding the arguments that

10 they've made in their presentation, and that doesn't make our

11 chart prejudicial because we don't include everything that they

12 want Your Honor to find.

13 The next issue is that it's hearsay. Well, Your

14 Honor, we don't believe it's hearsay because it's based on

15 evidence that's already in the record, and if I may quote you

16 from -- we cited in our brief which you said you read

17 Weinstein, Corn & Miller which clearly says in response to

18 objections that a chart's hearsay, it's not hearsay if the

19 evidence upon which the chart is based is already on the

20 record.

21 And then last, the creditors' committee only makes

22 three additional arguments. One, that the federal judgment

23 rate is not at issue. Well, Your Honor's January opinion we

24 think has a different view. And certainly, there was lots of

25 evidence as to what the federal judgment rate -- whether it



1 should be applied, and if so, what rate.

2 Two, that they argue that the federal judgment rate,

3 if you consider it at all, it should be only as a petition

4 date. That's a matter of law, and I think the briefs

5 adequately address that. It certainly doesn't go to the

6 admissibility of our chart.

7 And third, they say that it doesn't give any effect to

8 class 18 subordinated creditors. And Your Honor, I refer you

9 to page 296 of the transcript which Mr. Coffey already

10 addressed that argument, one, in their thirty-second objection

11 to claims, they said that those claims are worthless, and then

12 the debtor made a -- in their motion to estimate, they said you

13 should estimate those claims at zero. So at prior times during

14 this case, Your Honor, the debtor has said that those claims in

15 class 18 are worthless. Now, when it comes time to determine

16 whether there could be value or would be value to the TPS,

17 they've now given it value. I think just putting it in that

18 context tells you all you need to know about that argument.

19 Thank you very much, Your Honor.


21 MR. SIEGEL: Oh, just one more point. Because of the

22 time limitations imposed and how you're ruling today, there was

23 an alternate suggestion is that we didn't need it in evidence

24 because we could just argue it, do it during closing arguments.

25 Given the time constraints, Your Honor, we think --



1 THE COURT: Okay.

2 MR. SIEGEL: -- the chart would be much better served

3 with having you look at it in the record. Thank you.

4 MR. STROCHAK: Adam Strochak for the debtors, Your

5 Honor.

6 I need to do a little brief windup, here, just to put

7 this in context, these arguments. Before the confirmation

8 hearing started, we had a call with counsel for all the

9 objectors to go over and see if we could reach agreements on

10 what evidence would be stipulated to be introduced at the

11 confirmation hearing. The response that we got from the equity

12 committee and the objectors was that they would not stipulate

13 to admission of any document; they would insist on a proper

14 foundation at the trial through testimony before they would

15 agree to the admission of any documents. And we proceeded with

16 the confirmation hearing with the understanding that's exactly

17 what we would do. And we tried to do that with respect to all

18 of our evidence.

19 The Trust Preferred Consortium did not offer any

20 liquidation analysis to us. There was no exhibit on their

21 exhibit list. They offered no expert testimony on this issue.

22 They proffered no witness on this testimony. What they did at

23 the trial was try to use the equity committee's expert, Mr.

24 Maxwell, who was proffered as an expert on other issues who did

25 not include any liquidation analysis in his report and who we



1 did not have an opportunity to depose on his preparation of a

2 liquidation analysis or a waterfall analysis. They tried to

3 offer that, I believe, on redirect on Mr. Maxwell's testimony,

4 and my partner, Mr. Mastando, rose to object on exactly those

5 grounds. And Your Honor suggested that if this was a simple

6 matter of math, that an exhibit could be submitted doing the

7 calculation.

8 And what we eventually got was Exhibit 301B. So the

9 notice issue, Your Honor, goes away because it's the debtors

10 and the plan proponents who had no notice that this was going

11 to be offered in this case.

12 The idea that there was no witness, we're not trying

13 to have it both ways, Your Honor, precluding the witness from

14 testifying about it and then suggesting that it should not be

15 admitted because there was no foundation. The problem, Your

16 Honor, is that we didn't have any opportunity to even prepare

17 to examine the witness on this document. So it's not that they

18 failed to offer a witness; it's they failed to offer a witness

19 who would have complied with the necessary pre-trial

20 disclosures in order to make it fair for us to cross-examine

21 and explore what was going on in this calculation.

22 The contractual subordination argument, Your Honor, is

23 a red herring. I wish that all I had to do was file an

24 objection in order to eliminate what we believe to be billions

25 of dollars of improper claims against the estate. I don't get



1 to make those decisions. I get to make the objection and Your

2 Honor gets to make those decisions. And until those decisions

3 are made, until those claims are adjudicated on the merits or

4 otherwise disallowed on the merits, we don't have the luxury of

5 simply ignoring them. And that completely makes the

6 contractual subordination claims argument go away. Not the

7 contractual subordination; the class 18 subordinated claims.

8 On the contractual subordination issue, it really

9 becomes a relevance issue. The exhibit that they have offered

10 complete ignores contractual subordination, and it's not simply

11 a summary of evidence. It is argument; the arguing with this

12 document that contractual subordination should be ignored.

13 Now, they can make those legal arguments, but what it really

14 becomes is a relevance issue. It becomes a 402 issue because

15 Section 510(a) of the Code tells the Court that we can't simply

16 ignore contractual subordination. So they've ignored Section

17 501(a) of the Code and offered an exhibit into evidence that

18 they are going to try and use to argue shows that there should

19 be 280 million dollars of excess value of the federal judgment

20 rate, as they suggest, should be used.

21 Now, we think it's wrong for all the reasons that

22 we've laid out in our brief, but the real prejudice here, the

23 real harm in admitting this document into evidence is not that

24 Your Honor's going to get it wrong. It's that they're going to

25 point to it in some appellate tribunal if this case ever makes



1 it there, and they're going to say to the appellate tribunal,

2 look, there was record evidence that if you apply the federal

3 judgment rate there would have been 280 million dollars of

4 value left to go to their constituents. And that would be

5 categorically wrong to be able to make that argument. And

6 that's why this document should not be admitted into evidence,

7 because it's not a proper summary of the evidence that's in the

8 record. It's argument. And if they want to use it as a

9 demonstrative, we don't have any objection to that, and make

10 their arguments from it and use it to illustrate their point to

11 the Court that Section 510(a) of the Code should be completely

12 ignored. But it should not be admitted as record evidence of

13 these proceedings.

14 Thank you, Your Honor.


16 MR. JOHNSON: Your Honor, Robert Johnson from Akin

17 Gump on behalf of the creditors' committee. We also filed an

18 objection, and Mr. Strochak has already gone through the same

19 arguments that we have. We join in that objection. We believe

20 that this document is misleading. It contains hearsay. It is

21 not relevant. And also the TPS consortium is just wrong with

22 respect to Rule 1006; this chart is not a summary of voluminous

23 writings which cannot be conveniently examined in court. It is

24 argument and it should be excluded. Thank you.

25 THE COURT: Well, let me rule. I do agree that it at



1 most is admissible as a demonstrative only to assist the Court

2 to consider, in the event that I determine that contractual

3 subordination is not applicable, what the effect may be. And

4 I'll let the parties argue that.

5 All right? Shall we start the argument?

6 MR. ROSEN: Your Honor, again, Brian Rosen, Weil,

7 Gotshal & Manges.

8 Your Honor, how did we get here? Almost a year ago,

9 the debtors filed this sixth amended plan, Your Honor, and that

10 was premised upon the initial global settlement agreement which

11 was an agreement among the debtors, JPMorgan, FDIC, the

12 creditors' committee, and certain constituencies, and that was

13 settling many claims and causes of action among the parties.

14 We had a confirmation hearing last December, and on January 7th

15 of this year, the Court ruled that that initial global

16 settlement agreement was fair and reasonable in the best

17 interest of the debtors and the debtors' estates, and that the

18 Court identified certain modifications that would be required

19 before the Court would confirm the sixth amended plan.

20 We followed that up, Your Honor, with a status

21 conference on January 20th, wherein the Court stated very

22 clearly that the findings in the opinion and the determinations

23 constituted the law of the case and were not subject to

24 relitigation or reconsideration, and we discussed very briefly

25 at that time the issues or provisions associated with the plan



1 that the Court had identified in the opinion.

2 The debtors, on February 8th, filed the modified sixth

3 amended plan and attached to it, Your Honor, the second amended

4 and restated global settlement agreement which contained all

5 the substantive economic points that the Court had originally

6 found to be fair and reasonable, and it also provided

7 modifications to that settlement agreement and to the plan

8 consistent with the opinion and as laid out by the Court at the

9 January 20th status conference.

10 We looked at it, Your Honor, and we saw nine issues.

11 On the slide in front of the Court right now are three of them:

12 releases, injunctions, and exculpation. And on the right side,

13 Your Honor, is a detail going through how they were addressed

14 in the plan and to the extent necessary, in the global

15 settlement agreement.

16 The next slide, Your Honor, talks about the six

17 remaining issues: the rate of post-petition interest, Dime

18 warrants classification, a rights offering, stock elections,

19 post-confirmation process, and the payment of fees. And again,

20 on the right side, Your Honor, it lays out how the modified

21 plan addressed each and every one of these points consistent

22 with the opinion and consistent with the January 20th status

23 conference.

24 So what does the modified plan actually do, Your

25 Honor? It is a waterfall, plain and simple. And it provides



1 for the distribution of assets that are already in the estate

2 and those assets that are going to come to the estate as part

3 of the global settlement agreement. And consistent with the

4 testimony and the evidence before the Court, it provides for

5 how that money is going to go through the waterfall and then

6 get paid back up pursuant to the contractual subordination

7 provisions. And unfortunately, as we lay out here, Your Honor,

8 the debtors project, based upon the claims and the assets, that

9 the waterfall is going to run out of water somewhere in the

10 PIERS level.

11 The Court's determination, Your Honor, about the

12 global settlement agreement being fair and reasonable is not

13 subject to relitigation. It was the law of the case, it is the

14 law of the case, and in fact, the equity committee's counsel

15 stood up here and said, yes, Your Honor, I agree, it's the law

16 of the case and we're not going to relitigate it. That was on

17 January 20th. So now, Your Honor, the equity committee

18 attempts to avoid this bar by arguing that it's merely

19 asserting an objection to the good-faith proposal of the

20 modified plan, but that is foiled, Your Honor, by the equity

21 committee's focus in large part on the allegations surrounding

22 the negotiation of the global settlement agreement itself.

23 There is no new evidence the global settlement

24 agreement, Your Honor. Everything that the Court is being

25 asked to look at here, it's the same information, the same



1 documents, the same arguments that were raised in the December

2 confirmation hearing, talked about as part of the opinion, or

3 could have been raised at the December confirmation hearing and

4 not by the equity committee.

5 The fact that the settlement noteholders were involved

6 in the negotiation was known, and in fact, they're signatories

7 to the global settlement agreement. The equity committee had

8 access to the depository. And in fact, many of the things that

9 they sought to introduce and did introduce here in the July

10 confirmation hearing, they actually brought up and used in the

11 December confirmation hearing. The conspiracy hearing about

12 how the debtors and the settlement noteholders stopped when

13 they thought there was an appropriate level of recovery and

14 didn't try to get a distribution down to equity was repeatedly

15 addressed at that first one and rejected, Your Honor.

16 Likewise, the conflict of interest issue was rejected.

17 The two other issues on this slide, Your Honor, about

18 ANICO and the PSI report, we don't believe have any relevance

19 to what we're talking about here today, Your Honor.

20 But what happens, Your Honor? We have a modified plan

21 that satisfies 1129. And in fact, most of the provisions were

22 uncontested, and as to the balance, Your Honor, we believe that

23 they are easily overcome. On this chart, Your Honor, you see

24 all of the provisions of 1129 that were not contested at the

25 confirmation hearing, and I won't go through them. The



1 modified plan, however, as to those that were contested, it

2 satisfies 1122 as to the classification of claims and 1123 as

3 to the content of a plan. And 1122 is clearly evidenced by --

4 and largely uncontested, and that was set forth in the Goulding

5 declaration. For some reasons, Your Honor, we find that the

6 Dime warrant holders, they're clinging to this theory, though,

7 that the PIERS claims are not properly classified. We can't

8 understand it, Your Honor. In March, when we were here for the

9 disclosure statement hearing, we put forth in the record at

10 that time all of the evidence associated with it. We did it

11 again to show that they were, in fact, debt and not equity

12 claims. But yet again, Your Honor, what we have here, the

13 PIERS claims, their holders, they own preferred securities in a

14 trust.

15 The only issue that was outstanding in the Court's

16 opinion, Your Honor, was whether or not there had been a merger

17 of the trust and WMI. We came forth here, Your Honor, and we

18 showed that the trust is, in fact, a separate legal entity and

19 has never been merged into WMI. And WMI guaranteed payment to

20 the holders of the PIERS preferred securities.

21 Your Honor, this was a demonstrative that we used at

22 court to show that, in fact, the corporate and capital

23 structure here, to show the separateness of the two entities.

24 And this was another demonstrative, Your Honor, that we put out

25 there that clearly shows that these PIERS claims have always



1 been set forth as debt on the books of WMI.

2 There's been an allegation, Your Honor, about

3 there's -- no value -- there's been an argument about the

4 warrant component and no value is being distributed to those

5 preferred holders, Your Honor, on account of the warrant

6 component. And in fact, there was a statement about OID, and

7 again, Your Honor, that was just wrong and a misrepresentation

8 to the Court. There is no -- it does not represent a return on

9 account of the warrant component. And the distribution to

10 holders of the PIERS preferred securities of value that's

11 otherwise distributable to WMI as the PIERS common is

12 consistent with 510(a) and it would result, anyway, if such

13 funds were instead cycled through the waterfall that we showed

14 you earlier, Your Honor.

15 1129(a)(1), Your Honor, the modified plan clearly --

16 it complies with other applicable provisions. 1123 is

17 supported by the evidence and is largely uncontested. The

18 releasing stock collections, they do not violate the same

19 treatment requirement because people had the opportunity, the

20 option, and in fact, as note here in the middle bullet, Your

21 Honor, the Court so found that in the opinion at page 85.

22 Likewise, the provision of additional distributions by

23 JPMorgan to the holders of the REIT series was something that

24 the Court already addressed in the opinion, and it found that

25 it did not violate 1123(a)(4).



1 Your Honor, good faith requires some relation between

2 the Chapter 11 plan and the reorganization-related purposes of

3 Chapter 11. The modified plan achieves that. It achieves a

4 reorganization of the debtors and an equitable distribution of

5 value to stakeholders based upon their respective priorities

6 through implementation of the arm's-length provisions of the

7 global settlement agreement.

8 Your Honor, there's been allegations here that the

9 debtors have permitted a lot of people inside the tent

10 unnecessarily or unjustifiably, but those allegations,

11 obviously, are being made without really thinking about what

12 Congress intended and what we're supposed to do. We are

13 supposed to be getting as many people involved in the

14 resolution process. We're supposed to get people involved in

15 the negotiation of a plan. We're supposed to do that, Your

16 Honor. Congress said that; it's set forth. The concepts are

17 in the plan. Multiple stakeholders, not just the settlement

18 noteholders have participated in the negotiations. The

19 creditors' committee and other parties took part in the

20 process. There has been no evidence to support this bald

21 assertion that the creditors' committee was dominated by the

22 settlement noteholders. The people on the committee represent

23 many different people, not just the settlement noteholders, and

24 they have a fiduciary duty to all unsecured creditors.

25 Mr. Kosturos testified, Your Honor, that the



1 settlement noteholders did not dominate the negotiations and,

2 in fact, were excluded many times from the negotiation process.

3 The debtors negotiated to achieve the maximum recovery for all

4 stakeholders, but the debtors were never required to reject the

5 settlement because it did not reach all the way down to the

6 equity holders. And in fact, the Court made that finding in

7 the opinion.

8 Again, the opinion, Your Honor. The settlement was

9 reasonable and it confirms the debtors' decision that the

10 settlement was made in good faith. The debtors, in conjunction

11 with the creditors' committee -- there's been some talk about

12 the preservation of claims and causes of action. The debtors,

13 in conjunction with the two committees, equity and the

14 creditors' committee, have sought to preserve the claims that

15 they believe have value for the estate.

16 Additionally, Your Honor, we have the argument about

17 not doing something with respect to WMMRC, although currently

18 in run-off mode, Your Honor, the business of the reorganized

19 debtors after the effective date is the determination of that

20 new board. It is not something that we can do, Your Honor.

21 And if they remain in run-off because the reorganized debtors

22 continue to engage, even though they remain in run-off, Your

23 Honor, or if they do, because the debtors will continue to

24 engage in business after the consummation, the reorganization

25 is legitimate.



1 With respect to the best interest test, Your Honor,

2 regardless of which interest rate is applied to the post-

3 petition claims, based upon the delay, expense, and loss value

4 that would result from the conversion of these cases,

5 recoveries in a Chapter 7 liquidation would be significantly

6 less than those available pursuant to the plan, except with

7 respect to those stakeholders who would receive nothing in

8 either scenario.

9 There've been some allegations, Your Honor, which we

10 believe are just completely meritless. The Dime warrant

11 holders presented no evidence to the contrary regarding the

12 value of WMMRC, and they misconstrued what the debtor said the

13 value was. And contrary to their arguments, there was full

14 disclosure of the tax implications about the liquidating trust

15 structure. Likewise, Your Honor, contrary to arguments made,

16 there was complete disclosure in the disclosure statement

17 itself about the agreement that had been reached with the bank

18 bondholders on the 335 million dollar agreement.

19 With respect to litigation recoveries, Your Honor,

20 there was testimony about that, but as the law clearly points

21 out, litigation recoveries are speculative and may be excluded

22 from liquidation analyses, especially when they're going to

23 exist in both the 7 and 11 situation. It's the debtors' view,

24 Your Honor, that interest at the contract rate satisfies the

25 best interest test. As the Court decided or stated in its



1 opinion on pages 92 to 94, payment of the post-petition

2 interest at the federal judgment rate is appropriate only if

3 the parties engage in equitable conduct or it is warranted

4 based upon the equities of the case. Your Honor, we don't see

5 any reason in this situation why there is -- we haven't found

6 any inequitable conduct; we don't think the testimony shows

7 that there was any inequitable conduct. And the parties'

8 attempts to construe the applicable otherwise with respect to

9 Coram and the other decisions is unconvincing.

10 Your Honor, as we clearly laid out, there were five

11 periods of negotiation. The commencement date to March 9, the

12 first confidentiality period, the summer of '09, the November

13 confidentiality period, and then the post confidentiality

14 period, the essential 12/31 through 2010 period. There is no

15 dispute the debtors did not share any nonpublic information

16 with settlement noteholders in the first or third periods.

17 They did share nonpublic information during the two

18 confidentiality periods, and they did not share any nonpublic

19 information during the last period before a deal was struck

20 with JPM, the FDIC, and the bank bondholders and publicly

21 disclosed.

22 The debtors entered into a confidentiality agreement

23 with counsel to the settlement noteholders, Your Honor.

24 There's no debate about that. These agreements required shared

25 information to be kept confidential and not shared with anyone



1 who did not agree to a similar confidentiality agreement. The

2 debtors were free to share every bit of information,

3 documentation with those parties, and the debtors have seen

4 nothing, and no one has presented any evidence that such

5 confidentiality agreements with Fried Frank, with White & Case,

6 or with any other party that had one executed was breached by

7 any of those counsel. The debtors required the settlement

8 noteholders to enter into confidentiality agreements as a

9 condition to participation in settlement negotiations. Indeed,

10 Your Honor, the debtors refused to share nonpublic information

11 with settlement noteholders with them or anyone else absent a

12 confidentiality agreement. And we talked on the record, Your

13 Honor, about three particular instances, and these clearly

14 illustrate how the debtors regarded about this.

15 The May 6th, '09 meeting between Quinn Emanuel, the

16 debtors, their counsel, settlement noteholders and others, it

17 began the meeting by indicating that no nonpublic information

18 would be shared. And none was shared. In fact, the meeting

19 turned, Your Honor, with the settlement noteholders saying the

20 problems that they had with the process and sharing their

21 litigation strategy. The debtors provided nothing.

22 At a January 12th, 2010 meeting between the debtors,

23 their counsel, Fried Frank, and the settlement noteholders,

24 counsel to the debtors again indicated no nonpublic info would

25 be shared, and none was.



1 A subsequent meeting in February, the same thing. The

2 agenda was put forth here as an exhibit, Your Honor, and it was

3 talked about how the debtors, in response by e-mail, said we're

4 not going to talk about those things. If you want to talk

5 about them, it's going to be outside the earshot of your

6 clients, and in fact, that's what happened. Clients were

7 excused from the meeting, and a subsequent conversation was

8 held with counsel who were subject to a confidentiality

9 agreement.

10 About materiality, Your Honor, because that's an

11 argument that they're making to try to get around the fact that

12 there's no breach. The debtors and JPMorgan were hundreds of

13 millions if not billions of dollars apart. All of the

14 participants in the negotiations agree that as of the end of

15 '09, they were very far apart. And we have some testimony here

16 that was cited, Your Honor, that says that there was no

17 semblance of a deal. There were no active terms. They were so

18 far apart. And in fact, at that point in time, Your Honor, the

19 FDIC and the bank bondholders were not even involved, and as

20 Mr. Kosturos testified, without them and based upon where the

21 negotiations were with JPMorgan, there couldn't be an

22 agreement.

23 These slides, Your Honor, just go through the March

24 confidentiality agreement, and they show how at the expiration

25 of those periods, not only were they very far apart, but



1 JPMorgan filed the lawsuit and they were actively litigating

2 the very issues. In November, Your Honor, the same issue.

3 Very far apart; resetting the bookends. And the final

4 proposals made during this period illustrated that while the

5 gap may have been narrowed, they were still billions of dollars

6 apart, and the FDIC and the bank bondholders were not there.

7 Your Honor, the settlement negotiations were not

8 material, nonpublic information. The information is material

9 only if there's a substantial likelihood that a reasonable

10 investor would consider it important in making an investment

11 decision. And it's important to note, and as we say it here in

12 the bottom point, Your Honor, neither the equity committee nor

13 the TPS consortium cite a single case holding the back and

14 forth of settlement negotiations to be material for the

15 purposes of Rule 10(b)(5), and for good reason. A rule

16 requiring companies to disclose interim settlement offers,

17 especially when the parties are far apart in negotiations,

18 would lead to uncertainty for companies and confusion for

19 investors.

20 Your Honor, the cases cited by the TPS consortium in

21 this regard, Dunning v. Bush, is just wrong. And in fact,

22 these negotiations were never --

23 THE COURT: Well, I think the rule would not be that

24 you have to disclose settlement negotiations. But the question

25 would be, if some investors have that information, is that



1 material. That's the 10(b)(5) issue, isn't it?

2 MR. ROSEN: Your Honor, we think that based upon the

3 distance between them, the fact that they had information that

4 showed that the parties were so far apart makes it immaterial.

5 THE COURT: But you said generally. Companies are

6 not required to disclose settlement negotiations and that it

7 would --

8 MR. ROSEN: I was stating a general rule, Your Honor,

9 yes, but in this particular situation, because the parties were

10 so far apart, it was immaterial. That is our point, Your

11 Honor.

12 THE COURT: Okay.

13 MR. ROSEN: The Dunning v. Bush case, Your Honor, we

14 believe is inappropriate because in that case, it talked about

15 drawing to a conclusion, and here, Your Honor, as we say, these

16 were nowhere near conclusion. Not only were they billions of

17 dollars apart, we didn't even have the right parties at the

18 table. It wasn't square. It wasn't triangular. We didn't

19 know what shape the table should be, Your Honor. Not enough

20 people were there.

21 This is a little bit more of the same, Your Honor,

22 because it shows how the parties were not anywhere near a

23 resolution. And the parties, or at least the equity committee,

24 attempts to say that you use the word "agreed", you used

25 "agreement". Well, Your Honor, that just wasn't the case. And



1 the testimony was so clear and Mr. Kosturos says it and we cite

2 it there, Your Honor, that the testimony showed that an

3 agreement on any single issue was contingent upon reaching a

4 global agreement on all issues. And the parties were free to

5 change the positions at any particular time, and in fact, they

6 did do that.

7 Your Honor, we point out here how the equity committee

8 really played fast and loose with the evidence that the Court

9 had. First, as we say here, Your Honor, the committee in their

10 brief says, "While giving lip service to the goal and duty to

11 advance the interest of all, the debtors, in fact, abandon the

12 interest of WMI shareholders allowing these key creditors who

13 had amassed blocking positions and impaired classes of junior

14 debt to drive the settlement negotiations far enough to achieve

15 the returns they sought on those securities but not far enough

16 to achieve recovery for equity." That's really interesting,

17 Your Honor, because as Mr. Kosturos testified, the settlement

18 noteholders went way beyond where the debtor was even prepared

19 to go with the first offer to JPMorgan. So if they were

20 looking to hold themselves back and to a limited recovery, why

21 did they go so far beyond what the debtor was willing to

22 achieve?

23 Similarly, Your Honor --

24 THE COURT: I want to point out, you have ten minutes

25 left, so.



1 MR. ROSEN: Thank you, Your Honor. I'll be skipping a

2 lot later on.

3 THE COURT: Okay.

4 MR. ROSEN: Your Honor, the equity committee's

5 assertions about how the settlement noteholders controlled only

6 to cover -- excuse me -- a JPMorgan e-mail about what decisions

7 were -- or where they were going to come out on certain issues,

8 that's belied by the actual evidence there. JPMorgan filed a

9 complaint against the debtors claiming that it owned

10 everything. The global settlement was entered into on terms

11 far different from those in March 18th, 2009.

12 They talk, again, Your Honor, about an e-mail and they

13 assert that the debtors, themselves, have concluded about

14 certain information being material and nonpublic; that wasn't

15 the case at all. The e-mail merely suggested that information

16 was confidential. No document or testimony stated that the

17 debtors thought that the information was material. And the

18 only evidence is that the debtors thought exactly the opposite.

19 As we cite Mr. Kosturos' testimony, the debtor and its advisors

20 and attorneys determined that there was no additional material,

21 nonpublic info that needed to be disclosed.

22 Your Honor, there was no fiduciary obligation imputed

23 to the settlement noteholders by virtue of their participation.

24 And the fact that the debtors gave them information does not,

25 in itself, create a fiduciary relationship. The settlement



1 noteholders were included in the negotiations because they held

2 significant portions of the WMI debt, not because they were

3 viewed as representing any other creditors. And the settlement

4 noteholders participated in discussions in addition to and not

5 instead of the creditors' committee. And as we said before,

6 Your Honor, sometimes they were excluded.

7 The equities of the case, Your Honor, warrant

8 application of the contract rate. There've been years and

9 years of delay, here, and in fact, delay not caused by the

10 debtors or the settlement noteholders, and the estate, in fact,

11 has been improved by their participation and the creditors'

12 committee participation, other creditors' constituencies'

13 participation. The application of the judgment rate would

14 cause unintended consequences, including, as the evidence

15 showed, increasing recoveries for the PIERS but diminishing

16 recoveries for general unsecured creditors. And it's not

17 appropriate to use that rate as a mechanism to make things more

18 fair for shareholders who took a known risk when they purchased

19 the stock that they would be subordinated to all debt claims.

20 And very importantly, Your Honor, as Mr. Goulding testified to,

21 even if the judgment rate were applied, there would still be a

22 shortfall of ninety to a hundred million dollars.

23 The PIERS claims, Your Honor, likewise, are that

24 holders are receiving more than payment in full. Your Honor,

25 here, the modified plan provides for the trickle-down effect.



1 It provides for the valuation of stock reducing recoveries on a

2 dollar-for-dollar basis. There is no grossing up.

3 With respect to class 18, Your Honor, we heard it very

4 briefly at the outset of today's arguments; they can't be

5 ignored. There are claims. And while we hope that they will

6 be zero, as Mr. Strochak said, we can't be sure. And in fact,

7 somebody who's going to stand up later on today is going to be

8 asserting that he has two billion dollars' worth of claims

9 against the estate for bank bondholder subordination claims.

10 They haven't been litigated; we don't know what they are. But

11 it's irrelevant, Your Honor, because pursuant to the plan, any

12 excess value will flow down, whether to preferred or to the

13 common equity holders, Your Honor.

14 We've talked about this already, Your Honor. The

15 Court found that the class 19 treatment did not violate

16 anything.

17 With respect to the cramdown provisions, Your Honor,

18 we believe that the plan satisfies each and every one of those.

19 And this is the part that I really think it's more of a

20 sideshow, and as I said to some other folks, it's almost like

21 the carny act at the sideshow because people are trying to make

22 a lot about the valuation associated with WMMRC when it really

23 has no effect on the plan itself. People can talk about it as

24 an objection, but as I said, Your Honor, based upon the dollar-

25 for-dollar reduction of claims based upon the value for



1 reorganized debtors' stock, it doesn't really matter.

2 This slide merely talks about, Your Honor, what WMMRC

3 was, and the Court knows about it very well.

4 And this slide, Your Honor, is something else -- this

5 was the Blackstone valuation summary. It's not in dispute.

6 And why do I say that? Because on the next slide, Your Honor,

7 we go through Mr. Maxwell. Mr. Maxwell agreed that the Court

8 should value the stock consistent with the Blackstone numbers.

9 He agreed with the Blackstone analysis, as to the value of the

10 run-off business. His report is not meant to challenge the

11 debtors or the Blackstone valuation. And contrary to the

12 equity committee's assertion, Mr. Maxwell did not believe that

13 Blackstone undervalued reorg WMI.

14 Again, however, we have the fast and loose or the

15 misrepresentations, Your Honor. The equity committee said that

16 it should be valued at 275. Mr. Maxwell said no. 130 to 135.

17 Mr. Maxwell testified he did not perform a conventional

18 valuation. He admitted his critique is not a valuation

19 normally relied upon. He said that he did not perform a

20 valuation of WMMRC. He admitted that if he were doing a

21 valuation report, it would have been done with a little bit

22 more due diligence than he did. He admitted that the debt and

23 equity raised is just a scenario and cannot tell the Court the

24 likelihood of raising the debt or equity.

25 So what does the equity committee do? They say that



1 Mr. Maxwell's assumptions are far from speculative. But what

2 does Mr. Maxwell say? He postulates scenarios. He speculates.

3 He agreed that his scenario is creating a whole new business

4 and taking credit for the value he assumes could be created.

5 Again, they then go off on the NOLs, Your Honor, that

6 they should be valued at 358. What does Mr. Maxwell do? He

7 testifies it's not his expert opinion that the NOLs have values

8 that are discussed in his critique. He admits that he didn't

9 value the NOLs separately. And there was no confirmation

10 testimony that the NOL will be fully utilized. And Owl Creek

11 testified that it wasn't sure that you could even use the NOL

12 at all. Thus, Mr. Maxwell simply assumes a significant

13 investment of at least a billion dollars. And, of course, Your

14 Honor, when we -- he doesn't know, as we say on this slide,

15 slide 46, that there's anybody out there who would ever do

16 that. And in fact, the people who he thinks would do it

17 because they have the means to do it, the settlement

18 noteholders, we cite two of them right here, he says they don't

19 even want it. They don't even want to invest; they won't do

20 the stock.

21 What does Mr. Maxwell really do? He creates a house

22 of cards, Your Honor. Although he cannot assess the likelihood

23 that any of his assumptions will be realized, Mr. Maxwell

24 baselessly assumes that reorganized WMI is transformed into a

25 going concern; that a debt raise of -- there will be a debt



1 raise of 160 million dollars; that there would be an equity

2 raise of 140 million dollars with an additional debt raise of

3 fifty-six million dollars; that a 15.8 to twenty percent after

4 tax return would be employed; a six percent cost of debt would

5 be used; a substantial additional investment of at least a

6 billion dollars. He assumes that reorganized WMI will generate

7 sufficient income to fully utilize a 2.725 billion NOL. He

8 assumes there's a better and materially different rosy future

9 ten years down the road. He assumes an immediate

10 implementation of his scenario on day 1. He assumes that there

11 are no costs associated with converting reorg WMI into a going

12 concern. He assumes that there are no execution risks. He

13 assumes that there's no tax risk under 269 of the Internal

14 Revenue Code. All of his assumptions, Your Honor, do this: it

15 falls. This is a house of cards and there's nothing to support

16 all of the assumptions that he had in his document or that he

17 said on the witness stand.

18 Your Honor, there's a lot that we talked about in our

19 pleading about the corporate opportunity involving the NOL.

20 And we think, of course, that the testimony by Mr. Zelin and

21 Mr. Reinhold got it right. And all of the characterizations by

22 the equity committee are merely efforts to diffuse what really

23 was correct. And I don't want to belabor the point, Your

24 Honor, but really what happens here is that they didn't want to

25 look at 269. There was a lot of testimony about it. And what



1 I'd like to do is just talk very briefly about Mr. Anderson.

2 Mr. Anderson, the other actor in the Carney show, he

3 conceded that he looked at the documents involving the initial

4 acquisition of control under the modified plan. But then when

5 he did his work, he didn't do anything with them. He said,

6 nah. The initial acquisition, that's not relevant. Instead,

7 what he did is he only looked at something about potential

8 future acquisitions. And, Your Honor, we believe that his

9 failure to do that just shows how inadequate Mr. Anderson's

10 analysis truly is. And that it just furthers the points that

11 were made by Mr. Zelin and Mr. Reinhold when they took all of

12 this into account and they came up with what they thought was

13 the appropriate valuation for the NOLs.

14 Just briefly, Your Honor, because --

15 THE COURT: You better turn the jurisdictional issue,

16 I think.

17 MR. ROSEN: Okay. Your Honor, I was going to touch

18 one slide about standing because you asked us to talk about the

19 motion. But, Your Honor, we believe there is no colorable

20 claim. It's not a recognized cause of action under the Code.

21 And the equity committee cannot establish that colorable claim.

22 We believe that all of the information that's on the record

23 about inequitable conduct, Your Honor, further establishes

24 that. And in this particular one, Your Honor, we will rely and

25 rest upon our papers that we filed on the standing issue.



1 THE COURT: Well, you don't think Pepper v. Litton is

2 still relevant?

3 MR. ROSEN: I think it's a relevant case, Your Honor.

4 I just don't think it's the right case for this situation.

5 Your Honor, jurisdictionally, two arguments were

6 interposed by the TPS consortium, neither which we think makes

7 any sense. The first, Your Honor, is that the Court was

8 divested of jurisdiction because they chose to file an appeal

9 of the Court's summary judgment opinion. And contrary to those

10 arguments, Your Honor, we believe the Court still has

11 jurisdiction to consider and approve the global settlement and

12 the modified plan. Bankruptcy rule 8005 talks about, Your

13 Honor, how the Court may suspend or order the continuation of

14 proceedings. Here, the Court ordered the continuation of the

15 confirmation proceedings by approving the supplemental

16 disclosure statement. And the Court certainly has jurisdiction

17 to enforce an unstayed order or judgment. And by confirming

18 the modified plan, Your Honor, you are not doing anything other

19 than enforcing. You're not expanding or altering your

20 determination that the TPS holders hold depository shares tied

21 to the WMI preferred equity interest.

22 The divestiture rule, Your Honor, was judge made. It

23 was a prudential rule and that should not be applied when to do

24 so would defeat its purpose of achieving judicial economy. And

25 here, Your Honor, we can't see any judicial economy being saved



1 as the Court has already completed the confirmation hearing.

2 The cases cited by the consortium are clearly

3 distinguishable. In Whispering Pines, the Court was

4 effectively modifying a confirmation order while an appeal was

5 pending. And DeMarco was a Chapter 13 plan where approval of

6 the plan would have revisited a previous ruling. And in

7 Bialik, Your Honor, it was a plan that purported to modify the

8 Court's order that was on appeal. They're seeking a stay

9 without doing all the work necessary for it, Your Honor. And I

10 don't want to go through all those points but that's really

11 what's going on here.

12 Your Honor, Stern v. Marshall -- it's the latest and

13 the greatest argument. And as we talked about it last time, it

14 was the argument du jour. And we believe, Your Honor, that

15 Stern v. Marshall by its own terms is an extremely narrow

16 decision. And it really has nothing to do with what is before

17 the Court. And I think as this Court noticed on July 28th,

18 bankruptcy courts clearly have jurisdiction over an issue that

19 stems from the bankruptcy itself or would necessarily be

20 resolved in the claims allowance process. Likewise, Stern does

21 not limit the ability of a bankruptcy court to consider a

22 settlement under Bankruptcy Rule 9019. And that is a Southern

23 District of Texas case. Congress has the constitutional power

24 to decide where bankruptcy matters are to be heard. Everything

25 before the Court in approving the global settlement agreement



1 and confirming the modified plan arises under Title 11. We

2 have 1129 for confirmation; we have 363. We have 1123(b)(3)

3 explicitly contemplating a plan based upon a settlement of

4 claims; and we have Federal Bankruptcy Rule 9019.

5 So, Your Honor, evaluation of the settlement under all

6 the requisite provisions, we believe, fits and that Stern v.

7 Marshall is the red herring that, as I said, is the topic du

8 jour that's being thrown out there to try and stop things

9 rather than something that's effectively being used to try and

10 move the process forward. We believe that the Court has

11 jurisdiction because all of these things are embedded in the

12 Bankruptcy Code, certainly something in 1129. And we believe

13 that the Court has jurisdiction to approve a settlement under

14 9019 because it doesn't even go, Your Honor, to the underlying

15 counterclaims that are the focus of that. And it is not making

16 an adjudication on the merits of those; rather, it's merely

17 adjudicating the settlement that is before the Court.

18 THE COURT: All right.

19 MR. ROSEN: Your Honor, for everything that's set

20 forth in our pleadings and as set forth in the presentation

21 that we have today, we ask the Court to confirm a plan.


23 MR. FOLSE: Your Honor, Parker Folse. Was the Court

24 given a copy of these slides?

25 THE COURT: I was.



1 MR. FOLSE: I understand that the debtors have refused

2 to provide my co-counsel a copy because this looks more like a

3 supplemental brief than an aide to oral argument. Could you

4 direct that they give us one, please?

5 THE COURT: Yes. I think you do have to --

6 MR. ROSEN: Yeah. I don't think we refused. We said

7 we didn't have one here. So we'll make copies for you.

8 MR. FOLSE: Is that -- that's the whole --

9 MR. ROSEN: Sure.


11 MR. HODARA: Good morning, Your Honor. Fred Hodara of

12 the official committee of unsecured creditors from Akin, Gump,

13 Strauss, Hauer & Feld together with my co-counsel, David

14 Stratton, at the Pepper Hamilton firm. Mr. Stratton and I will

15 be sharing our argument today, Your Honor. I will be arguing

16 the issues that go to certain of the confirmation standards,

17 particularly pertaining to the entitlement to interest and a

18 rate of interest that should be paid. Mr. Stratton will

19 address the insider trading issues.

20 THE COURT: Okay.

21 MR. HODARA: And Mr. Johnson will help me with certain

22 exhibits on the Elmo --

23 THE COURT: Okay.

24 MR. HODARA: -- demonstratives.

25 Your Honor, creditors of the debtors have waited



1 nearly three years for any recovery on their billions of

2 dollars of claims. The debtors' modified plan as Mr. Rosen

3 just went through in detail addresses each and every concern

4 that was raised by Your Honor in the January 7 opinion.

5 Nevertheless, the equity committee and a host of other parties

6 have raised a series of objections in what we believe is a

7 final phase of a last ditch attempt to derail confirmation of

8 the plan and distribution of the seven billion dollars of value

9 that's amassed here. What I'm going to try to do in my

10 argument today in keeping with Your Honor's admonition that we

11 not simply repeat what's in our papers is to focus on the

12 specific arguments of those objecting parties. And I'm going

13 to go out on a limb because in saying what I'm about to say, I

14 think I'll be put to the test of demonstrating that, in fact,

15 our arguments, we believe --

16 THE COURT: Okay.

17 MR. HODARA: -- are thoroughly principled, supported

18 by Supreme Court case law, other controlling case law and case

19 law of senior courts. And the arguments on the other hand that

20 are put up by the objecting parties, we believe, are result-

21 oriented arguments and are not supported by case law or by the

22 statutes themselves.

23 So let's start with 1129(a)(7), the best interest of

24 creditors test, and the entry point to the statute that has had

25 so much discussion and focus in this case which is 726(a),



1 distribution of property of the estate, of course in a Chapter

2 7 case, but we look to it because of the best interest of

3 creditors test. And we find here in 726(a), not as graphic as

4 Mr. Rosen presented his waterfall, but another waterfall or

5 priority scheme, this one established by Congress for the order

6 in which creditors and then other parties are entitled to

7 receive payment.

8 And we find that in the fifth level of priorities is

9 the entitlement to interest in those unusual cases in Chapter 7

10 liquidations where the estate proves to be solvent and all of

11 the kinds of claims senior to interest have been paid in full.

12 And then we have the argument that's put forward here

13 in this case by the WMB noteholders. And in fact, it appears

14 now that we are at the final stages. They're the only party

15 that has put forward this argument in a material way. I think

16 one other party has joined with them. So we have one party,

17 one joinder, saying that a 510(b) subordinated claim has to

18 come ahead of the entitlement to payment of interest that is

19 with respect to claims that everyone -- I think the WMB

20 noteholders themselves -- would agree are in every other

21 respect recognized to be senior. And how can it be, they say,

22 that we have a "claim" and yet, interest would come ahead of

23 that claim. And the answer, we think, is actually pretty

24 simple. And it's right here on the Elmo projector at the very

25 top of Section 726. It's the first words: "Except as provided



1 in Section 510 of this title, property of the estate shall be

2 distributed."

3 And so, in order to really parse the argument of the

4 WMB noteholders, we need to go to Section 510.

5 And, Mr. Johnson, if you go ahead and put that up.

6 So, in Section 510, it is (b) of Section 510 that the

7 WMB noteholders focus on. And they seize on the language that

8 "A 510(b) claim shall be subordinated to all claims or interest

9 that are senior to or equal to the claim or interest

10 represented by such security." And they attempt to argue that

11 in using the phrase "claim" that Congress didn't mean

12 "interest". I'm using interest, obviously, in the different

13 form than the word here which is presumably an equity interest.

14 So they're saying by using the word "claim", Congress meant to

15 somehow split apart the entitlement of an otherwise recognized

16 to be senior creditor in its interest of a claim from its

17 interest in interest. And they make what I believe is a fatal

18 flaw in arguing that the way you get to the solution they need

19 to make a recovery -- and, Mr. Johnson, please put back 726 --

20 is to add a new provision to 726: "at Section 727(a)2.1, as it

21 were".

22 So, in other words, for the WMB noteholders to prevail

23 in their argument, we have to actually read into the statute an

24 entire new provision. Now, we all know that in this era, the

25 idea of plain meaning of a statute has precedence. And the



1 idea that we will read into a statute words that are not there

2 to defeat words that are clear on their face is anathema. And

3 yet, nevertheless, they build their entire house of cards on

4 the idea that we need to read in 726(a)2.1 "as it were".

5 But we can go back to the actual language of 510

6 because 726 tells us we need to look to 510 in the first

7 instance. And let's look at the exact phrase on which they

8 focus. In the middle of 510(b): "shall be subordinated to all

9 claims or interests". Now, what did Congress mean when they

10 used the words "all claims"? And what did they mean in using

11 those words when you compare it to 510(c) which deals with

12 equitable subordination? And there Congress used the phrase

13 "allowed claim".

14 Well, I'm going to focus for a moment on a bankruptcy

15 case from 1997 in the Western District of Louisiana. The case

16 is called The Seasons Apartments Limited Partnership. That

17 case dealt with the question under Section --

18 THE COURT: What's the case?

19 MR. HODARA: It's called Seasons Apartments Limited

20 Partnership, 215 B.R. 953, a bankruptcy decision of the Western

21 District of Louisiana. In that case, the Court was considering

22 how to construe the word "claim" and "allowed claim" under

23 Section 1124 of the Bankruptcy Code. And first, the Court

24 stated the proposition that we all know so well because it's a

25 direct quote from the Supreme Court case in BFP v. Resolution



1 Trust Corporation, which is 511 U.S. 531. "It is generally

2 presumed that Congress acts intentionally and purposefully when

3 it includes particular language in one section of a statute but

4 omits it in another." And so, the Court, in the Seasons case,

5 looked at the language in 1124 where in one portion of the

6 statute, Congress used the phrase "claim" and in the other

7 portion, used the phrase "allowed claim". And the Court said

8 "The combination of 'allowed' and 'claim' must mean something

9 more than the word 'claim' by itself."

10 And that, Your Honor, is the same situation that we

11 have here. There really, in our view, can be no doubt that

12 Congress intended that all attributes of a claim come ahead of

13 the junior parties' interests. Otherwise, we're defeating the

14 intention --

15 THE COURT: Well, but the definition of "claim" in the

16 Bankruptcy Code includes only pre-petition interest. Isn't

17 that true?

18 MR. HODARA: The definition itself includes only pre-

19 petition --

20 THE COURT: Right.

21 MR. HODARA: -- interest. But you get to the question

22 under 510 in connection with subordination as to whether a

23 party who is going to be subordinated for all purposes by the

24 Code somehow can get this layer cake approach that's argued by

25 the WMB noteholders that they can sandwich their claim in



1 between the base claim of the senior creditor and the

2 attributes of it.

3 Let me focus on this final aspect of their argument

4 which I think has to blow away any chance that inserting the

5 new provision into 726 can be countenanced. And that is, this

6 Court has already made a finding with respect to late-filed

7 claims.

8 Let's put 726 back on the screen.

9 For the WMB noteholders' argument, Your Honor, to

10 carry the day, we'd have to find that their claims come ahead

11 of late-filed claims. That's what they argue. They ask for a

12 new provision to be read into the statute at (a)2.1. That puts

13 them ahead of late-filed claims. This is another outcome

14 determinative argument. It's not a principled argument. It's

15 the only way that the WMB noteholders can fashion some form of

16 words to try to get them an interest to be recognized to be

17 paid in this case unless we are lucky and Mr. Rosen's waterfall

18 produces more cash flowing in the ordinary down the line in

19 respect of their claims.

20 Your Honor made the point about the use of the word

21 "claim" and how it's defined in the Bankruptcy Code. Let me

22 make one more point with respect to 510(b) and what we believe

23 is the policy rationale for why Congress inserted the entire

24 510 scheme into the Bankruptcy Code and why it expressly made

25 726 subject to 510.



1 It's highlighted in numerous cases that a junior

2 creditor or equity holder must not receive a windfall at the

3 expense of a nonsubordinated creditor. And the Third Circuit

4 in the 2002 case, In re Telegroup, held that. Now, Telegroup

5 was a case that dealt with shareholder interest. So claims

6 arising from the purchase or sale of an equity security. And

7 so --

8 THE COURT: Yeah.

9 MR. HODARA: -- a party can ask, well, does that

10 finding of the Court apply with equal weight in the case of

11 claims arising from debt security such as those of the WMB

12 noteholders. And in fact, there is plenty of case law that

13 says it does including right here in the District of Delaware.

14 The case of In re Mid-American Waste Systems, which is a 1999

15 case of the District of Delaware bankruptcy court, has the

16 following statement: "Congress did not limit the application

17 of 510(b) to equity securities. In plain terms, Section 510(b)

18 is intended to apply to both debt holders and equity holders.

19 It would simply be a flouting of Congress' intent to allow this

20 form, any form, of 510(b) or any 510 subordinated claim to come

21 ahead of the entitlements in the strict waterfall that's set

22 forth by Congress in Section 726."

23 Let move on then, Your Honor, to the question of if

24 creditors here are, as we say, entitled to interest, what's the

25 appropriate rate of interest to be paid on their claims. And



1 I'm going to start, Your Honor, with a strict legal argument.

2 And I'm going to start with the law in this case.

3 Your Honor stated the basic principle governing

4 determination of the appropriate rate of interest in your

5 January 7 opinion. You said there "This Court has considered

6 this issue before", alluding to the Coram case, "and concluded

7 that the federal judgment rate was the minimum that must be

8 paid. And the Court, of course, referenced the Coram case and

9 the Dow II case. Those cases, like the Sixth Circuit in Dow,

10 emphasized that federal judgment rate is the minimum that's to

11 be paid where interest is due. And nevertheless, the objecting

12 parties line up here in a series of disparate objection. Their

13 objections are not actually all the same and we'll get to that.

14 And they say that the use of the phrase "legal rate" in the

15 statute absolutely positively can only mean the federal

16 judgment rate.

17 Now, in my argument here, Your Honor, in December on

18 this very subject, you interrupted me when I got into my

19 discussion of 726(a)(5) and you said, at what rate. And I

20 responded then, and we are consistent today, the case law says

21 that the Court has discretion in determining whether the legal

22 rate should be the contract rate, should be the federal

23 judgment rate or should be perhaps the various state rates that

24 might obtain under different relevant contracts in the case.

25 And again today, Your Honor, we stand by that statement. The



1 use of the phrase "legal rate" in 726(a)(5) gives this Court

2 discretion.

3 Now, we believe strongly based on the law and the

4 facts of the case that there's no basis in this case for

5 diverting from the typical approach of providing contract rate.

6 But let's focus first on the objections of the various parties

7 where they say that legal rate was expressly intended by

8 Congress to mean the federal judgment rate. Because, again, if

9 Congress meant legal rate to mean federal judgment rate, would

10 it not have said so?

11 And so, we did a thorough search of the entire United

12 States Code, all of the statutes that are currently on the book

13 and put there by Congress. And the first thing that we find --

14 and this is the slide that's on the screen now -- is that when

15 Congress intended to mean the federal judgment rate in any

16 context, it said it in black and white. And it said it in

17 exactly the same way every time they did it. They did it by

18 specific reference to "the rate specified in Section 1961 of

19 Title 28". That statute, Your Honor, which is titled

20 "Interest", is the only place in the Bankruptcy Code where

21 Congress set forth what the federal judgment rate means. So

22 when we say federal judgment rate -- when anybody says federal

23 judgment rate, they're referring to the statute 28 U.S.C.

24 Section 1961. And you can see the four instances that we

25 found, the only instances that we found, where Congress chose



1 to mandate use of the federal judgment rate.

2 So we then wanted to see all the instances where

3 Congress used the phrase "legal rate" and defined it as

4 "federal judgment rate". And not surprisingly, since the last

5 slide showed all the places where Congress used the concept of

6 "federal judgment rate", when you check "legal rate", exactly

7 zero instances are found where Congress used the phrase "legal

8 rate" to mean "federal judgment rate".

9 However, Congress has used the phrase "legal rate" we

10 found six times including, of course, in 726(a)(5). And what

11 we find in each of those six times is that in not a single one

12 of them did Congress mean legal rate to mean federal judgment

13 rate. Sometimes it's tied to something specific. The first

14 one shows a rate prescribed by the administration. Other

15 times, a rate which is established by the administrat -- the

16 small business administration. But never is it federal

17 judgment rate. And why is that? Because as the cases have

18 found, the Congress meant for the Courts to have discretion in

19 this regard.

20 Okay. So if the Courts have discretion, why should it

21 be contract rate that's applied? And I start here, Your Honor,

22 again with the Supreme Court precedent in the case of Butner v.

23 the United States, a case that is cited over and over for the

24 proposition that contract rights should be upheld unless the

25 Bankruptcy Code explicitly provides otherwise. And, of course,



1 there are specific places in the Bankruptcy Code where Congress

2 has said your basic contract right is going to be abridged or

3 abridged for a while. And one might say, well, okay, but

4 Butner is a case that dealt with a secured creditor. But

5 Butner has been followed and echoes the same principle that we

6 find in case after case in the solvent debtor scenario. And

7 so, whether it's the Chicago Milwaukee St. Paul Pacific

8 Railroad case out of the Seventh Circuit where the Court

9 said -- and this is a solvent debtor case -- "The task of the

10 bankruptcy court is simply to enforce creditors' rights

11 according to the tenor of the contracts that created those

12 rights." Or the Dow court in the Sixth Circuit: "Absent

13 compelling equitable considerations, when a debtor is solvent,

14 it is the role of the bankruptcy court to enforce the

15 creditors' contractual rights."

16 So these are cases, Your Honor, which actually answer

17 another question that you put to me back in December. And you

18 said, Mr. Hodara, when you tell me that another principle here

19 is that unless Congress specifically said they wish to vary

20 from pre-Bankruptcy Code precedent, we are to follow pre-Code

21 precedent. And Your Honor said to me, were those cases with

22 respect to unsecured claims. And I said, I believe they are,

23 Your Honor. Well, so, today, having had the time to go back

24 and carefully study these cases, I can say with certainty that

25 the cases I just referenced, Consolidated Rock, International



1 Hydroelectric Systems and various other of these cases, are

2 specifically pre-Code solvent debtor cases where the contract

3 rate was found to be the appropriate rate.

4 THE COURT: How much time do you want to save for Mr.

5 Stratton?

6 MR. HODARA: As much as possible. So let me very --

7 THE COURT: He barely has ten. So --

8 MR. HODARA: Okay. So let me very quickly then get to

9 the second set of reasons why contract rate is appropriate and

10 why this welter of arguments that we hear from the objecting

11 parties seeking not just federal judgment rate but federal

12 judgment rate at any date other than the petition date can't

13 possibly make sense and are unprincipled arguments.

14 First, all the cases that say there are facts here

15 that require federal judgment rate seem to say we will do that

16 as of the petition date. These are the cases that the

17 objecting parties cite. And they include here in the Third

18 Circuit, the bankruptcy court in the Eastern District of

19 Pennsylvania, in the Chiapetta case. Since a claim is like a

20 judgment entered at the time of the bankruptcy filing, the

21 applicable rate should be the federal judgment rate in effect

22 at the time of the filing. We have a Supreme Court case to

23 that same effect. If there are grounds for federal judgment

24 rate, it should be at the petition date.

25 And so -- let's have the Goulding cite. So why is it



1 that these parties now, unlike in December when none of them

2 made this argument, why is it that now they say it's got to be

3 at some other rate. Again, it's an outcome determinative

4 approach. As Mr. Goulding testified in black and white -- at

5 least, on the screen it's in black and white -- at federal

6 judgment rate at the petition date, nothing trickles down in

7 any projected scenario to the other parties. So they try to

8 argue that we should use -- well, the equity committee. Let's

9 take them. They say we should use a blended rate. I've not

10 seen that in any case law. But they say for post-petition

11 interest at the average federal judgment rate in effect during

12 the pendency of the bankruptcy case. Now, is that a principled

13 reading of what Congress wanted in the Bankruptcy Code or of

14 any of the case law?

15 Let's read their principled explanation for why we

16 should be using federal judgment rate in the first place. And

17 this is at page 78 of their post-hearing brief. Here they say,

18 "In violation of their fiduciary obligations to all claimants,

19 the debtors manage the WMI estate for the benefit of the major

20 creditors to the exclusion of equity. Because all

21 creditors" -- and here's where they're clearly just trying to

22 shoehorn into Your Honor's Coram decision and the facts of that

23 case. "Because all creditors benefited from this bias, it's

24 fair and reasonable that all creditors receive post-judgment

25 interest at the lower rate."



1 So for this Court to conclude that the equity

2 committee is right and that we shouldn't use contract rate,

3 it's being asked by the equity committee to conclude that the

4 debtors breached their fiduciary duty. I don't think we've

5 seen a shred of evidence in all the piles of paper and seven

6 days of hearing that supports that.

7 Normandy Hill. They say, no, no, no. If we're going

8 to have federal judgment rate then we need to abridge Section

9 510(a) of the Bankruptcy Code and not have the PIERS have to

10 pay up at the contractual rate. So they want to actually

11 abrogate 501(a) of the Bankruptcy Code.

12 Then we have the subset of the TPS, the Arkin Kaplan

13 group. Again, in an attempt to shoehorn into the facts of

14 Coram, they say that because all noteholders -- so they

15 distinguish noteholder unsecured creditors -- because all

16 noteholders are only getting payment in full under the plan

17 because of the alleged bad acts of the settlement noteholders,

18 that's why we should use a lower federal judgment rate. Now,

19 they don't even argue that general unsecured creditors who have

20 contracts should get the lower federal judgment rate. Again,

21 these are just unprincipled arguments not full thought through.

22 We have the floating rate noteholders. They argue

23 that they want the federal judgment rate because it's higher

24 than the rate on their floating rate notes under contract.

25 It's opening up a Pandora's box, Your Honor, if we go



1 down that path. I will rest there --


3 MR. HODARA: -- and let Mr. Stratton address the final

4 issue that deals with these points. Thank you.

5 MR. STRATTON: Good morning, Your Honor. David

6 Stratton. Mr. Steinberg agreed to give me ten of his minutes.

7 So --

8 THE COURT: Okay.

9 MR. STRATTON: I thought that was very generous of him

10 and I want to thank him publicly for that if he's -- no, he is

11 in the courtroom. Good.

12 Your Honor, I'm going to address three issues.

13 THE COURT: Well, you do have ten minutes.

14 MR. STRATTON: And I will try to do it in less than

15 ten minutes. First, whether the plan's been proposed in good

16 faith; secondly, the insider trading and inequitable conduct

17 issues; and then, very briefly, I'll touch on the standing

18 motion.

19 With respect to the good faith proposal or the

20 submission of the plan to the Court in good faith, if you look

21 at the equity committee's brief, what they're really arguing

22 about is that they don't like the settlement. And I say that

23 because if you look at the actual arguments and the words they

24 use, it's pretty clear where they're going. They start the

25 argument out with a caption that says "The modified plan is not



1 being offered in good faith because the debtors unduly favor

2 powerful creditors and disregarded the interest of equity."

3 Well, I'm not so sure the evidence supports any of that, but

4 they go on to say, paragraph 203: "No one involved in this

5 process was looking out for the interest of shareholders or

6 genuinely attempting to maximize the value of the estate for

7 the benefit of all the parties." Mr. Gropper's testimony was

8 directly contradictory to that. Paragraph 200: "The equity

9 committee alleges that the debtors deferred significantly to

10 the settlement noteholders." And then in paragraph 201: "They

11 allege that the debtors allow the settlement noteholders to

12 exercise powerful influence over the future of these estates."

13 What that all goes to is they don't like the

14 settlement. Your Honor dealt with those issues in connection

15 with your January 7 decision. And you found that the debtors

16 had acted consistent with their duties and had done their best

17 job to get the best settlement they could. And you also found

18 that just because they couldn't get enough to reach down to the

19 equity did not mean the settlement shouldn't be approved. And

20 what they want to do through this good faith rubric is ask Your

21 Honor to relitigate the issue or to reconsider the issue which

22 we would submit Your Honor should not do.

23 With respect to the insider trading issue, Your Honor,

24 and the inequitable conduct issue, I'll get to those in a

25 second. But I do think it's appropriate to note that the



1 equity committee in their pretrial objection took the committee

2 to task and made some allegations about our conduct in this

3 case and the fact that certain powerful -- they seem to like

4 that word -- creditors controlled certain members of the

5 committee. Those allegations completely untrue. The record in

6 the seven days of trial completely devoid of any evidence

7 whatsoever that anyone controlled the committee or that the

8 committee didn't do what you would expect the committee should

9 have done in this case. In fact, all the testimony was to the

10 contrary.

11 With respect to the insider trading and inequitable

12 conduct claims, Your Honor, I'm going to leave most of that to

13 the four settlement noteholders. I'm sure they'll develop the

14 issues thoroughly. But I'd like to give you our perspective on

15 those issues.

16 We've participated in discovery. We looked at

17 documents. We looked at the law. We sat through trial

18 including five days that was dedicated strictly to the insider

19 trading issue. We've read all the briefs. We looked at the

20 cases. We looked at the transcripts again. I will note, Your

21 Honor, that in comparing what was said in the equity

22 committee's brief and the TPS brief to what was actually in the

23 transcripts, I found a number of instances where I just

24 couldn't match up what they were saying. But Your Honor will,

25 I'm sure, sort that out.



1 We don't believe there is a plausible claim for

2 insider trading or for equitable disallowance or equitable

3 subordination. But -- and this is an important but -- it

4 doesn't matter. It's not a basis to deny confirmation of the

5 plan. The debtors acted in good faith. Mr. Kosturos'

6 testimony put that issue to rest both back in December and

7 again in July. And I would note in passing, Your Honor, that

8 the equity committee ignores almost everything he says. And

9 the reason I think that is, is that it was pretty damaging

10 testimony and there's no response to it.

11 With respect to the elements of an insider trading

12 claim, Your Honor, the equity committee and the TPS would like

13 you to focus on material nonpublic information, that single

14 element of the three-part test. Your Honor doesn't need to get

15 to that element. And as I'll explain in a minute, even if you

16 do, I don't think that the settlement offers that were being

17 traded back and forth over the course of a year were material

18 nonpublic information.

19 The reason you don't need to get to that, Your Honor,

20 is simple. First, they can't show that any of the settlement

21 noteholders breached a duty. And second, they can't establish

22 that the settlement noteholders acted intentionally or

23 recklessly.

24 With respect to the duty issue, Your Honor, the

25 evidence is uncontradicted that any time any of the settlement



1 noteholders were under a duty not to trade or to establish an

2 ethical or informational wall, they did that. And they didn't

3 begin their trading until that duty ended. And so, what does

4 the equity committee do to get around that? Well, they make up

5 facts. And the facts they make up are or the argument they

6 make us is that the settlement noteholders were temporary

7 insiders under the securities laws or nonstatutory insiders

8 under the Bankruptcy Code. There's no evidence to support

9 that. There is none whatsoever. And so, in making that

10 argument, I think they concede effectively that unless you can

11 reach that far out beyond the facts, they can't prove duty.

12 With respect to scienter, what I saw and what I heard

13 and what I think the evidence shows, Your Honor, is that the

14 settlement noteholders made a good faith effort to avoid

15 trading on material nonpublic information. They used a number

16 of devices to do that. I'm not going to belabor the record

17 today by going through them. They're in our brief. But the

18 TPS and the equity committee's argument is this. You can't get

19 around your duty by relying on the debtor to disclose material

20 nonpublic information. You have to make your own

21 determination. Well, if you look at the record, each witness

22 for each of the settlement noteholders said with respect to

23 each period, both periods, that they made an independent

24 determination that the settlement offers that had been

25 exchanged during those periods were not material nonpublic



1 information. And on that basis, plus the debtors' disclosure

2 plus the debtors' confirmation that they were free to trade,

3 they resumed trading. So the three legs of the stool, they

4 can't meet the test as to the first two.

5 With respect to materiality, I think what they're

6 arguing, Your Honor, is once they saw the first term sheet from

7 JPMorgan, it said we're willing, if we can get a deal done, to

8 give you back the deposit which JPMorgan had said publicly in

9 this case very early on that they could never trade again

10 because their position is that was material nonpublic

11 information. They had it for the whole case; you're done.

12 Well, that's not the law and those aren't the facts.

13 What really happened is this. The evidence shows that --

14 THE COURT: Well, I don't think they're suggesting you

15 can't trade.

16 MR. STRATTON: Well --

17 THE COURT: They're suggesting the ethical law had to

18 stay out. They could not trade on that information.

19 MR. STRATTON: Your Honor --

20 THE COURT: And then they disclosed that information

21 to their traders. That was the violation.

22 MR. STRATTON: Well, interesting point. And I

23 apologize for talking over you. They said in their initial

24 papers, they said that's all they needed to do. It's that

25 simple. First of all, I'm not sure it's that simple for these



1 entities to create a wall and maintain it for the better part

2 of fourteen months. But put that --

3 THE COURT: Really? 'Cause a lot of people do in

4 bankruptcy cases.

5 MR. STRATTON: Your Honor, my experience with the

6 issue would be with respect to committee members but I'm not so

7 sure with respect to --

8 THE COURT: And how long do cases last --

9 MR. STRATTON: Well --

10 THE COURT: -- where committee members have

11 established ethical walls? Years. It is possible.

12 MR. STRATTON: It is possible, Your Honor. But I'm

13 not aware of anything that says if you want to trade in the

14 debtors' securities, you have to maintain an ethical wall. If

15 you want to if the debtor asks you to participate in settlement

16 discussions.

17 THE COURT: No. If you want material nonpublic

18 information.

19 MR. STRATTON: Yeah. And in this case, the debtor was

20 very clear to do two things. Only to give them -- and they

21 only accepted a very limited amount of material nonpublic

22 information and the debtor disclosed what was material. And

23 the reason why these settlement offers that flew back and

24 forth -- and the TPS says they're eight and nine, if you count

25 some of the amended plans, I think it goes up to, like, twelve



1 or thirteen -- settlement discussions lasted a year. They

2 stopped; they started. Parties resorted to litigation. When

3 the negotiations didn't go any place, they pulled offers off

4 the table. They changed their position sometimes without rhyme

5 or reason. The negotiations started out as a two-party deal.

6 It morphed into a three-party deal because the FDIC and the WMB

7 bondholders inserted themselves into the discussion. And --

8 and this is really important -- very, very significant items

9 with very big dollar signs attached to them moved around from

10 one offer to the next.

11 The TPS and the equity committee's argument, I don't

12 believe, is supported by the facts. First, the TPS says that

13 settlement was inevitable. I don't think anybody in this case

14 thought it was inevitable. And something that takes over a

15 year to accomplish, I think, I would submit to Your Honor, it

16 was not inevitable.

17 Second, there's no evidence in this case that any of

18 the parties in this bankruptcy, the debtor, JPMorgan, the FDIC,

19 the WMB bondholders, the creditors' committee or any of the

20 individual noteholders were not prepared to litigate these

21 issues and a settlement couldn't be achieved. So to say today,

22 I'll give you this and you tell me no, doesn't mean tomorrow

23 I'm not going to resort to my litigation rights which is

24 exactly what happened in April and early May when the debtors

25 filed their turnover action in their 2004 motion.



1 And I think that really is the point on the insider

2 trading claim.

3 With respect to inequitable conduct, Your Honor, I'm

4 going to skip most of this but I'm just going to cut right to

5 the heart of it. These people -- the settlement noteholders

6 are not insiders; they're not fiduciaries. The equity

7 committee actually -- an interesting point, in their pretrial

8 objection, they complain -- at the end of their complaint, they

9 claim the settlement noteholders are fiduciaries. Your Honor

10 had determined they weren't. And in their post-trial brief,

11 they abandon that argument. They rely on the insider theory.

12 There is nothing in this record that would establish a

13 grounds for equitable disallowance or equitable subordination.

14 There is no evidence of egregious conduct by any of the

15 settlement noteholders that would warrant denying confirmation

16 of the plan, imposition of a different interest rate especially

17 an interest rate as to the creditors that aren't the settlement

18 noteholders which is the equity committee's position which I

19 find just astounding.

20 With respect to the standing motion, Your Honor, three

21 points. One, you asked the question about Pepper v. Litton.

22 And I don't think you need to reach the question in this case

23 because we don't have those facts. We don't have an insider

24 and we don't have egregious conduct. If you read Pepper v.

25 Litton, if you read Citicorp, if you read these cases, they all



1 involve insiders and they all involve really bad things. Those

2 aren't the facts here.

3 Two, two different estate fiduciaries, the debtors and

4 the committee, have looked at the claims, the draft complaint,

5 the facts and they've concluded that there is no merit to the

6 claims and that it would not benefit the estate to pursue them.

7 I would submit, Your Honor, that that's more than enough to

8 establish or to meet the test that the debtors' refusal to

9 bring the claim is justified or unjustified.

10 Finally, regardless of what Your Honor does, we would

11 implore you if you grant the motion to require the equity

12 committee to put its money where its mouth is, not to burden

13 this estate further with litigation costs chasing meritless

14 claims. And if they want to pursue it, let them do it on a

15 contingent fee basis.

16 If Your Honor has any questions, I'd be happy to

17 address them.

18 THE COURT: No, thank you.

19 MR. STRATTON: Thank you.

20 MR. SACKS: Good morning, Your Honor. Again, Robert

21 Sacks for JPMorgan Chase. Nobody's given me any of their time

22 but I hopefully will not take all of mine and I'll take some

23 bids to sell it --

24 THE COURT: Okay.

25 MR. SACKS: -- to the highest bidder. Maybe reduce



1 some of the cost of this settlement to JPMorgan Chase.

2 And that is where I want to start. I do want to start

3 and bring us -- I'm going to address a few very limited points,

4 Your Honor. But I do want to bring us back to the fact that we

5 are dealing with a plan that has as its core the global

6 settlement agreement which Your Honor considered at length in

7 the first hearing found to be fair and reasonable. And I think

8 the evidence showed is a fairly remarkable settlement involving

9 many, many, many different claims that would have to be

10 litigated in several different courts involving many different

11 parties providing seven plus billions of dollars to the

12 debtors' estate largely as a result of compromises by my client

13 of claims and including the waiver of thirty plus billion

14 dollars in claims that they have asserted against the estate.

15 And while we've spent the second confirmation hearing dealing

16 with some different issues, I think we need to go back and

17 remember what is at the core of this confirmation process since

18 we have been really -- broken it up into two separate hearings.

19 I'm going to address first the jurisdictional issues

20 which Mr. Rosen addressed very briefly at the end. I'm going

21 to address them somewhat differently. I'll address the

22 divestiture rule. I'm going to touch for perhaps less than a

23 minute on the insider trading claims. And then I will briefly

24 address three other points that relate to my client in one way

25 or another.



1 First, let's talk about jurisdiction and the Stern v.

2 Marshall argument that's been made here. And the preferred

3 equity people who call themselves the TPS consortium have

4 argued that Stern v. Marshall prevents this Court from

5 approving any settlement that would include a release of the

6 debtors' claims that would be beyond the jurisdiction of this

7 Court to adjudicate on their merits because this Court is a

8 non-Article 3 court. So, in other words, because the

9 settlement is a full settlement among the parties, it has among

10 it, for example, the business tort claim that could be brought

11 because that's a state law tort claim and, under Stern v.

12 Marshall, undoubtedly would have to be brought in a different

13 court, not this court. Therefore, somehow this Court has no

14 jurisdiction to consider a settlement.

15 And followed to its conclusion, therefore, their

16 argument is, in essence, that a bankruptcy court lacks

17 jurisdiction to approve any settlement of a debtor's claims

18 that are property of estate as long as the bankruptcy court

19 would not have the power to, in fact, adjudicate those claims.

20 That's not what Stern provides for. But you don't

21 need to get into a nuanced discussion of Stern to address it

22 because the argument and the objection is founded upon a

23 fundamental flaw which is it misses the distinction between

24 adjudication of a claim and settlement of a claim. And the

25 power -- it presumes improperly in the objection that the Court



1 is adjudicating a claim in the process of approving a

2 settlement.

3 That's not the case. And we've cited to Your Honor

4 two cases which I think are dispositive of the issue. A Third

5 Circuit case, Grimes, and the Supreme Court's case in

6 Matsushita v. Epstein which involved the analogous issue,

7 really the identical issue, in the context of state law

8 determining and granting full releases of settlements including

9 federal securities law claims that the state court had no power

10 to adjudicate on their merits. And in both of those cases, the

11 Third Circuit and the Supreme Court, found that a Court

12 approving those settlements had the power to grant full

13 releases to the parties where the parties were properly before

14 the Court, within the personal jurisdiction of the Court and

15 the Court had jurisdiction over the case in which they were in

16 front of the Court even if the Court could not adjudicate those

17 claims. And those cases begin with the fundamental proposition

18 which is overlooked by the TPS consortium which is that in

19 approving a settlement, the Court is not adjudicating the

20 merits of a claim.

21 Let me just give you a little bit of language. This

22 is from Matsushita. "Approval of a settlement does not call

23 for findings of fact regarding the claims to be compromised.

24 The Court is concerned only with the likelihood of success or

25 failure. The actual merits of the controversy are not to be



1 determined."

2 Again, Matsushita, the Supreme Court again talking

3 about what the Court does in the context of approving a

4 settlement. It is not exercising judicial power to adjudicate

5 the claims. It's a fundamental distinction that is just not

6 addressed by the TPS plaintiffs who presume incorrectly by

7 citing cases on res judicata and preclusive effect that a

8 judgment which releases claims have that there is an

9 adjudication of those claims. But that's exactly what the

10 Supreme Court addressed in Matsushita and the Third Circuit

11 addressed in Grimes.

12 If their claim were correct, you could never finally

13 resolve claims between a debtor and a third party because you

14 would never have the power to do so even though all claims of

15 the debtor are subject to approval of the bankruptcy court for

16 compromising those claims. It makes no sense.

17 In Grimes and in Matsushita, the Supreme Court and the

18 Third Circuit explain the reasons for this rule. This is not a

19 difficult or a novel proposition. While it hasn't arisen in

20 the bankruptcy context before, it is fully resolved by these

21 two cases. A Court has the power to release claims as part of

22 a judgment even if it doesn't have the power to adjudicate

23 them.

24 If you'll apply the rule here, even though the Court

25 could not adjudicate some of the claims that the debtor wants



1 to bring, it has, like the business tort claim, and I'll use

2 that as the most obvious example, it has the power to issue a

3 release as part of a compromise of those claims, as part of a

4 compromise of all of the disputes between the debtor and, in

5 this case, JPMorgan Chase and/or the FDIC. The Court has

6 jurisdiction over the parties. It has jurisdiction over the

7 debtors and JPMorgan Chase and of the underlying controversy

8 and power over the case. The parties have negotiated a full

9 compromise of all of their disputes. And the Courts found that

10 to be reasonable in accordance with the standards that Courts

11 properly apply for approving settlement. There is clear

12 authority and Stern v. Marshall in no way, shape or form

13 affects the authority of the Court to do that.

14 As Mr. Rosen indicated, one Court has found that to be

15 the case already, the Okwanna case from the Southern District

16 of Texas. And again, the TPS consortium simply misses the

17 point in not recognizing that a settlement is different than

18 adjudication of the merits with which Stern is concerned.

19 Let me turn to the divestiture rule and address that

20 very briefly if I could. The divestiture rule which Your Honor

21 is familiar with and I've argued to you about in the past is a

22 judge-made rule and it doesn't in any way, shape or form

23 prevent the Court here from confirming the plan. It's

24 prudential rule, not one of subject matter jurisdiction. And

25 it holds at its core that a Court is prevented while a matter



1 is on appeal from modifying or changing an order or doing

2 something to -- that is contrary to that order while a case is

3 on appeal. But there is nothing in the divestiture rule, even

4 if applied, that would prevent the Court from, in the words of

5 one Court, "enforcing, implementing or otherwise treating as

6 valid" its orders. And in this case, all the Court is doing is

7 treating as valid its order entered in the TPS adversary

8 proceeding on summary judgment that has been appealed. Now,

9 the TPS plaintiffs have not sought a stay of that order. The

10 order is in effect and it can be enforced. The Court is doing

11 nothing but enforcing that order to the extent it is treating

12 the plan as something that treats these people as preferred

13 equity which is what was found to be the case. They could have

14 sought a stay but they didn't. The plan doesn't modify, vacate

15 or in any way disturb the issues that were incorporated within

16 your order that has been the subject of appeal. They have no

17 interest in TPS but own preferred equity. This doesn't affect

18 that. It doesn't do anything other than implement the Court's

19 order.

20 TPS consortium retains whatever rights they still have

21 to continue with that appeal or, as would have been the case

22 and would have been originally the case had you confirmed the

23 plan at the same time you granted summary judgment appealing

24 from an order confirming the plan. They can do that. There's

25 nothing here that prevents them from doing that. And they can



1 seek a stay if they want to. But the divestiture rule is not a

2 basis to give them leave to avoid the need to seek a stay in a

3 case like this.

4 Courts have recognized, of course, the divestiture

5 rule is a prudential rule as I indicated, so it's not a per se

6 rule. And it's a rule that is applied logically and in a way

7 to create judicial efficiency. And Courts have been wary to

8 apply it in situations where it is being used for abuse. And

9 if you look at the facts here, I think it's pretty clear that

10 the TPS holders, or the TPS consortium as they call themselves,

11 are using it in a way to exploit a situation to the detriment

12 of everybody else in the most inequitable way in a way that is

13 contrary to judicial efficiency. For example, the TPS order

14 has been in place for seven months and they never sought a stay

15 from this Court or from the district court of that order. The

16 TPS plaintiffs delayed in bringing their claim. They waited

17 until after the settlement agreement had been filed. They

18 could have brought their claim two years earlier. They

19 understood the issues that were in dispute. They never

20 intervened in the dispute between JPMorgan Chase and the

21 debtors that raised ownership of the TPS and the automatic

22 exchange. They could have intervened in that case but they sat

23 back, did nothing and waited until after the settlement

24 agreement was filed and we are into the plan confirmation

25 process.



1 And finally, the TPS consortium are a bunch of

2 entities that, with one or two exceptions, didn't even own

3 these securities until after the bankruptcy petition had been

4 filed. They bought them for pennies on the dollar with

5 knowledge of what they were doing. They continued to do it as

6 they litigated the case. They continued to do it even as the

7 summary judgment hearing was being heard. And they indeed --

8 some of them continued to do it even since your order

9 determining that they don't own trust preferred securities.

10 And so, if you look at the equities and the reason for

11 the --

12 THE COURT: Well, I'm not sure any of that is in the

13 record as far as --

14 MR. SACKS: Oh, it is --

15 THE COURT: -- their bias.

16 MR. SACKS: It is in the 2019, Your Honor. They filed

17 2019s which indicate --

18 THE COURT: Recently?

19 MR. SACKS: Yes. Since that time in July and August.

20 And those show changes in ownership including increases in

21 ownership by some of them.

22 THE COURT: Okay.

23 MR. SACKS: So it is in the record, Your Honor.

24 Finally, while it doesn't apply, if you were to

25 determine that the divestiture rule applies, you still, as you



1 know, have the ability to say I'm not going to apply it because

2 I believe their appeal is frivolous. And I would suggest if

3 there were ever an indication where you could make a finding

4 that an appeal is frivolous, this is one based upon your

5 hearing of the record and disposition of the appeal on summary

6 judgment.

7 Mr. Rosen dealt briefly with the cases that were cited

8 by the TPS plaintiffs. They don't cite very many cases in

9 support of their position. Whispering Pines, Bialik are the

10 first two cases they cite, the only two appellate cases they

11 cite, are both cases where the Court -- the second order

12 changed the first order. So it's exactly what would be

13 precluded. And the third case, In re DeMarco is a less clear

14 case. We don't know what that says. It's the case that

15 admittedly would be closest to this one but two things, Your

16 Honor. First, the Court described it as the unique facts of

17 the case. And we don't know when that case, which is a

18 bankruptcy decision from the Middle District of Florida --

19 exactly how important the IRS' claim was to the total assets of

20 the estate. The suggestion would appear to be that it was a

21 principal part of the Chapter 13 liquidation at issue there.

22 But you don't know from the case and so how do you --

23 particular equities and unique facts as the Court found them

24 justify doing what the Court did there in deciding that it was

25 without power to change -- to issue the second order. We don't



1 know.

2 Second, to the extent it is applicable in the way the

3 TPS plaintiffs argue it's applicable, it's just wrong. It's

4 not what the -- that's not what the rule is and the Court

5 doesn't have it right there. So I think you should dispose of

6 it on either of those bases.

7 Finally, the TPS proposal that you -- what they say

8 ring-fence the TPS and presumably all of the assets that

9 related to them, that's not viable here. The settlement

10 agreement is dependent upon it. It's an exchange of value as

11 part of an integrated exchange. If this isn't part of it,

12 there is no settlement. And if there is no settlement, there

13 is the risk of loss of seven plus billion dollars to the

14 estate. And as all the testimony has shown, we can all go

15 litigate for three or four or five years in multiple forms to

16 figure it out.

17 Briefly on insider trading, Your Honor, I am not -- we

18 have not expressed any view on the underlying merits of the

19 allegations as to whether people are -- or did or did not

20 engage in insider trading. We leave that to others. But only

21 on the issue of remedy, Your Honor, there's no reason based

22 upon the evidence that you've heard or in the facts here to

23 hold the plan hostage, you have determined that the settlement

24 agreement that was negotiated at the core of this is fair and

25 reasonable compromise of the myriad disputes involving all



1 these parties. And that should be effectuated. And it should

2 be effectuated in a plan. And you can address -- you have the

3 power. The equity committee has moved for standing to seek

4 either a disallowance or presumably equitable subordination of

5 the claims of these four entities. If Your Honor has any

6 belief that they have engaged in inappropriate conduct, you

7 should address that conduct with respect to them and their

8 interest but not everyone else who is an innocent party who is

9 not involved in any of that trading activity. So again, while

10 I don't say --

11 THE COURT: Well, does the debtors' plan allow that in

12 your opinion?

13 MR. SACKS: I think they do. I do think so, Your

14 Honor. If you were to find that the equity committee has the

15 authority to pursue this claim, I believe that you could

16 address the question through disallowance or equitable

17 subordination after confirming this plan.

18 THE COURT: All right. Thank you.

19 MR. SACKS: Finally, as to the other objections, Your

20 Honor -- but again, I'm not suggesting there was insider

21 trading. I leave --

22 THE COURT: I understand.

23 MR. SACKS: -- that to the people on both sides of me

24 to shoot out between them.

25 The other objections briefly. The ANICO appeal. I



1 guess it's the equity committee and then the TPS joined --

2 suggested that the ANICO appeal, which was a reversal, is a

3 reason to, I guess, revisit the entirety of the global

4 settlement agreement because that's what they're seemingly

5 asking, of course. That in no way, shape or form is that --

6 relevant to that. The ANICO decision for a lot of -- it's an

7 ancillary question. The case down there doesn't make any --

8 have any bearing on the strength of the business tort claim

9 that the debtors were considering bringing in this particular

10 case. The case involved claims by bondholders of the bank not

11 of WMI. All the WMI bondholder claims were dismissed. Didn't

12 address the substance of any of the claims. Didn't address

13 whether there was any evidence to support any of the claims.

14 Didn't even address the plaintiffs' standing in that case to

15 address those claims. The Court was clear that to the extent

16 that the P&A agreement or the conduct of the FDIC is in any way

17 involved in the claim. It is subject to the FIRREA claims

18 process. But if you try to craft a very narrow claim that is

19 totally divorced from those issues then you can steer clear of

20 the FIRREA claims process.

21 No evidence was submitted, Your Honor, in this

22 confirmation hearing or in the prior confirmation hearing that

23 suggests that the business tort claim, even on its merits, has

24 any basis or probable likelihood of success. And, Your Honor,

25 in your decision addressing that claim earlier and finding the



1 settlement to be fair and reasonable, the existence of the

2 ANICO appeal, while it was mentioned in the dismissal, was

3 hardly the primary basis for your conclusion that there wasn't

4 a lot of value in that particular case.

5 If you were to -- and I'm not suggesting Your Honor said

6 you won't open it up, but, I mean, looking at the chain of

7 circumstances here, Your Honor, you heard testimony here about

8 how the significant value that made the settlement agreement

9 come about came about because JPMorgan Chase concerned about

10 the uncertainty of recovery or receipt of these extended tax

11 benefits, basically put in several billion dollars of value

12 that enabled the settlement to happen. Well, those tax

13 benefits are undeniably WMB's tax benefit, almost a hundred

14 percent of them. You've heard that testimony. That

15 uncertainty doesn't exist today. Those benefits are sitting in

16 the bank. So if you were to renegotiate today, that's two plus

17 billion dollars that's sitting there that I don't think anyone

18 would reasonably say you would give away because you're worried

19 about it ever being recovered. So while you should just not

20 take the -- to look at the ANICO appeal as a basis for

21 reconsideration, you can't look at it in isolation either.

22 Finally, releases -- those are still in the objections

23 here today. Your Honor decided that. Your Honor made clear

24 people are objecting to the fact that the essential third party

25 releases are if you want your distribution you have to give a



1 release. Your Honor addressed that in the original order and

2 the plan was modified to conform to Your Honor's order. And

3 those are just rehashing of arguments that Your Honor has

4 addressed before. There's no question that the plan as

5 modified, settlement as modified, complies with Your Honor's

6 order.

7 Finally, last issue is the REIT series, the class 19. And

8 again, this is still being asserted as an objection of the TPS

9 people who are suggesting that there is something wrong and

10 there's discrimination because JPMorgan Chase refused to offer

11 what it offered to people to settle the claims rather than

12 litigate those claims. I believe Your Honor addressed this

13 fully in connection with the disclosure statement hearing. You

14 rejected in March the TPS consortium's argument that there was

15 a requirement to resolicit these people. It's the same issue.

16 It's just being rehashed again and again. If there were ever

17 an issue here, Your Honor, we just wouldn't make the payment to

18 anybody. At least, it's not a payment coming from the debtor.

19 It's not the debtors' money. It's not part of the estate.

20 It's a settlement that while it's being implemented as part of

21 the plan here, it's JPMorgan Chase's settlement with people who

22 agreed to settle claims and not litigate them with JPMorgan

23 Chase.

24 Your Honor, I would urge you to confirm the plan as

25 quickly as possible and allow it to be consummated. Thank you



1 very much.


3 MR. SACKS: And I'll be taking bids for my remaining

4 time.

5 THE COURT: Well, there is eight minutes of it. So --

6 MR. CALIFANO: Good morning, Your Honor. Tom

7 Califano, DLA Piper, on behalf of the FDIC. Your Honor, thank

8 you for reserving fifteen minutes for the FDIC but I will only

9 need a small portion of it because the most recent round of

10 objections do not directly implicate the FDIC. I would like,

11 however, to give the Court the FDIC's perspective on these

12 cases and on the proceedings before Your Honor.

13 Your Honor, in September 2008, these Chapter 11 cases

14 were filed as a result of the largest bank failure in the

15 history of the United States. Almost immediately upon filing,

16 the Court and the participants were faced with litigation in a

17 number of courts on a variety of claims which posed significant

18 jurisdictional issues relating to the two parallel

19 insolvencies, the one going on in this court and the one being

20 conducted by the FDIC receiver as receiver of Washington Mutual

21 Bank which, in itself, had billions of dollars of creditors'

22 claims. And, Your Honor, the FDIC, for precedential and for

23 other reasons, especially at that period of time, had every

24 motivation to protect those jurisdictional issues.

25 The litigation also presented issues posed by two



1 federal statutory schemes, one embodied in the Bankruptcy Code

2 and one embodied in FIRREA which were not at all times in sync.

3 And once again, Your Honor, based on the times we were at, the

4 FDIC had every institutional motivation to protect that

5 statute.

6 Because of the importance of these issues and the

7 dollars at stake, if a consensual resolution was not reached,

8 the parties faced literally years of litigation. The

9 settlement itself was complicated by the number of parties and

10 the numerous claims raised by these parties. And it took a

11 significant time to achieve. Yet, in May 2010, a global

12 settlement was reached. That settlement was found by this

13 Court to be fair and reasonable. And, Your Honor, I would

14 submit that based on the jurisdictional, the statutory and the

15 monetary issues, the FDIC's participation in that settlement

16 was essential.

17 In May 2010, it was believed by the parties that by

18 reaching this compromise, they avoided for the estate not just

19 the uncertainty of litigation but the cost to the estate

20 through professional fees and the accrual of interest.

21 However, here we are fifteen months later, Your Honor. We do

22 not have a confirmed plan, a confirmed plan which is an

23 essential element of this settlement agreement. This delay has

24 been caused by out of the money constituencies, Your Honor, who

25 have raised a series of specious arguments each of which has



1 been shown to be meritless, one after the other. And each time

2 one of these arguments is knocked down, Your Honor, these

3 parties raise new, novel and sometimes inconsistent positions.

4 This delay is taking away some of the basic considerations

5 behind the settlement agreement.

6 Now, these parties have had more than their day in

7 Court, Your Honor. There is no reason to hold hostage the

8 recoveries to which creditors are entitled, including the FDIC

9 based on these claims any further. The time has come for this

10 plan to be confirmed, for creditors to receive their

11 distribution and for this case to be resolved. So unless Your

12 Honor has any other questions, that's the FDIC's position.


14 MR. CALIFANO: Thank you, Your Honor.

15 THE COURT: All right. Should we take a short break

16 and then we'll start with the settlement noteholders? Thank

17 you.

18 (Recess from 11:47 a.m. until 11:57 a.m.)

19 THE COURT: Please be seated.

20 Given the time, do we want to break now for lunch and

21 have all the settlement noteholders together, or break up the

22 settlement noteholders?

23 Mr. Eckstein isn't here.

24 UNIDENTIFIED SPEAKER: He is now.

25 MR. ECKSTEIN: Your Honor, it's obviously up to Your



1 Honor, but I'm prepared to go now, and it probably would allow

2 us to complete the process today if we essentially go to 1, and

3 then maybe break in the middle of the settlement noteholders

4 presentation, if that acceptable.

5 THE COURT: Well, maybe we'll break after you and

6 hopefully the others can be shorter after they see how --

7 MR. ECKSTEIN: That would --

8 THE COURT: -- much you've accomplished.

9 MR. ECKSTEIN: That is fine, Your Honor, and

10 obviously, whenever Your Honor wants to break --


12 MR. ECKSTEIN: -- is acceptable to us. And Your

13 Honor, I will, since I'm leading off, probably spend the most

14 time going through the record, and I think others will avoid

15 repeating material that I'm going to cover. In addition, Your

16 Honor, I am going to have a series of slides are going to be

17 put up by Ms. Otari (ph.) as I go through my presentation, and

18 I will make those available to the other parties after we

19 break.


21 MR. ECKSTEIN: Your Honor, thank you very much for

22 giving us the opportunity to summarize what we believe are the

23 high points of the Aurelius presentation and the settlement

24 noteholder presentation in this case.

25 As Your Honor, knows, since January of 2011, Aurelius



1 and the other investment funds that are referred to in this

2 case as the settlement noteholders have had to contend with and

3 defend claims that they traded illegally and improperly

4 dominated and controlled the plan process and this

5 reorganization. These claims have been spearheaded by the

6 official committee of equity holders wearing the mantle of an

7 estate fiduciary and by certain investment fund holders of

8 trust preferred securities. Both constituencies, as we know,

9 are not receiving distributions under the debtors' plan, and

10 both are seeking, for a second time, to block confirmation of

11 the plan in this case. This time, rather than attacking the

12 debtors and JPMorgan Chase, the settlement noteholders have

13 become the prime target of the challenge.

14 Just as the Court concluded the last time that the

15 plan opponents failed to carry their burden to show bad faith

16 conduct injuring the estates, the objectors, here, have again

17 failed to carry their burden to substantiate their aggressive

18 charges. Nevertheless, these accusations have exacted a heavy

19 toll on each of the noteholders already. Each fund has

20 incurred millions of dollars in legal fees over the past eight

21 months contending with the litigation and defending these

22 allegations, senior officials for each fund have dedicated

23 significant amounts of their time and attention dealing with

24 the extensive document discovery preparing for and submitting

25 to depositions, reconstructing events that took place nearly



1 two years ago, reviewing lengthy pleadings, preparing for a

2 week-long trial, giving live testimony, and enduring intense

3 cross-examination. This process has had all of the burdens of

4 a full-blown insider trading trial. There have been inquiries

5 from concerned investors who have demanded explanations about

6 these proceedings, and indeed, these allegations threaten the

7 fund's existence and reputations and careers of their

8 principals.

9 The equity committee and the TPS are ignoring the

10 views of the debtors and the creditors' committee, neither of

11 which has any conflict and both of which would have every

12 incentive to pursue valid claims if they existed. Both have

13 stated to this Court that these claims have no merit and have

14 forcefully urged the equity committee and TPS to cease this

15 campaign. The position of the debtor and the creditors'

16 committee have not been heeded.

17 We submit that the record in this case is unequivocal.

18 These clams have no factual or legal basis. We submit that the

19 plan should be confirmed and the motion to authorize

20 prosecution of further claims against Aurelius and Centerbridge

21 should be denied.

22 Your Honor, the overarching theme of the equity

23 committee and the TPS accusations is that the settlement

24 noteholders and the debtors did not act in good faith and acted

25 inequitably or in bad faith to control the case and the



1 reorganization plan. Lack of good faith is the foundation of

2 the claims to equitably disallow the noteholders' claims and

3 reduce the rate of post-petition interest. Whether the

4 noteholders' actions were in good faith cuts across all of the

5 claims in this case, and we would submit, is the prism through

6 which the record should be reviewed.

7 Aurelius submits that unlike the Coram and Citicorp

8 Ventures cases, where lack of good faith was obvious and

9 prominent, the record here demonstrates in compelling fashion

10 that all of the actions in this case taken by the settlement

11 noteholders, were taken reasonably and in good faith. The

12 equity committee and the TPS objections brazenly and repeatedly

13 assert that the settlement noteholders controlled the debtors

14 and the Chapter 11 case, exercised undue influence over the

15 plan and the reorganization process, including the global

16 settlement, and used that influence to obtain material

17 nonpublic information to engage in improper trading.

18 But the record does not support these allegations and

19 compels a finding that the debtors and the settlement

20 noteholders acted in good faith. A brief review of the record

21 makes this conclusion clear.

22 Each settlement noteholder is totally independent and

23 only came together as clients of the Fried Frank firm in

24 November 2009, more than a year after the commencement of these

25 cases. Mr. Dan Gropper of Aurelius testified that the



1 settlement noteholders had no business or contractual

2 arrangements between or among themselves. Aurelius had

3 absolutely no pre-existing relationship with the debtors, and

4 are merely holders of the debtors' securities.

5 The equity committee and TPS labor in their closing

6 briefs and in their arguments to spin a nefarious conspiracy of

7 domination and control. Their theories are completely refuted

8 by the record. Number one, Aurelius was one of many creditors

9 who participated in this case. The White & Case group had more

10 than thirty members and a seven-person steering committee.

11 Appaloosa and Centerbridge were separately represented by Fried

12 Frank. Also, there were many other creditors playing active

13 and visible roles in settlement negotiations, such as JPMC, the

14 creditors' committee, the FDIC, Paulson, the bank bond holders,

15 and other holders of claims.

16 The record is clear that until March 2009, Aurelius

17 had no involvement in any settlement or plan negotiations and

18 had no access to nonpublic information. We do not believe that

19 issue is in dispute.

20 The March confi period. Aurelius' first involvement

21 with settlement negotiations in this case was March 2009. As a

22 predicate to becoming involved, Aurelius entered into a

23 confidentiality agreement with the debtors. That agreement was

24 carefully negotiated by counsel for both parties. The parties

25 focused in advance on how they were going to handle nonpublic



1 information during and at the conclusion of the confidentially

2 period, and relied specifically on other confidentiality

3 agreements that had been used successfully in other large

4 reorganization cases.

5 The parties negotiated specific procedures for

6 disclosure of material nonpublic information at the conclusion

7 of the confidentiality period. Each of these items are

8 elements of good faith and careful attention to the rules

9 governing investing. What happened during this period?

10 The record confirmed that all parties complied with

11 the terms of the confidentiality agreement that was negotiated

12 and put in place. The debtor communicated confidential

13 information concerning the tax refund range in March of 2009,

14 and on April 30th, toward the conclusion of the confidentiality

15 period, the debtors, in its monthly operating report, disclosed

16 specific material nonpublic information, including the first

17 tax refund range of 2.6 to 3 billion dollars.

18 The debtors testified specifically, they did not

19 communicate many other items to the noteholders, precisely

20 because they did not want an obligation to publicly disclose

21 the information at the conclusion of the period. Great care

22 was given to what was disclosed and what was not disclosed.

23 And this contrasts importantly with the manner in which a

24 debtor typically communicates with a creditors' committee,

25 where this is complete and unfettered disclosure, no cleansing



1 during the case, and therefore no trading by committee members.

2 And I recognize, Your Honor, there is a contrast

3 between the conduct of the settlement noteholders in this case,

4 and the way in which committee members typically conduct

5 themselves. And it was anticipated consciously and negotiated

6 that a different standard was going to be applied. And all

7 parties understood, in good faith, and reasonably, the

8 different standards that were going to apply to the

9 noncommittee members as compared to committee members.

10 Aurelius maintained an ethical wall during the

11 confidentiality period. The other noteholders did not trade.

12 What is remarkable about this situation is that there is not

13 even a suggestion by the objectors that these restrictions were

14 not respected by the noteholders. We're not dealing with a

15 situation where there is a claim that the confidentiality

16 agreement and procedures were violated. Again, these are

17 indicia of good faith by the parties.

18 The noteholders engaged in one round of settlement

19 negotiations in March. The equity committee and TPS cynically

20 criticize and try to cast the settlement noteholders as seizing

21 control of the negotiations and the debtors caving in to them

22 and allowing them to push a proposal on JPMC. Mr. Kosturos'

23 testimony dispelled this suggestion.

24 The irony is, that had JPMC accepted the March

25 proposal recommended by the noteholders, the equity would have,



1 in fact, been in the money. Indeed, every time the noteholders

2 were involved in the plan or negotiation process, they pushed

3 the debtor to maximize the value of the estate. A prime

4 example is Mr. Gropper's April 30th e-mail. The equity

5 committee tried to use it to show control and ill will.

6 However, it is clear on the face of this e-mail that Mr.

7 Gropper was pushing the debtor for more value for all

8 stakeholders, as the e-mail states. This was the consistent

9 goal of the settlement noteholders. There is no evidence or

10 basis to infer that the noteholders sought to harm the estate

11 or its stakeholders during this period.

12 At the end of the first confi period, the record is

13 clear, the debtors disclosed the material nonpublic information

14 that had been provided to the creditors, including the four

15 noteholders. And there were many other parties other than the

16 four noteholders who signed confidentiality agreements and

17 received material nonpublic information.

18 The testimony is that the debtors took seriously their

19 obligation to evaluate and disclose what was determined to be

20 material nonpublic information. The debtors specifically

21 considered whether it was necessary to disclose details of the

22 settlement negotiations that took place during this

23 confidentiality period, and determined they were not required

24 to do so.

25 Mr. Kosturos testified that he consulted with his



1 counsel, Weil, Gotshal & Manges, one of the most highly

2 regarded firms in the restructuring and securities fields.

3 They made a judgment that in April 2009, the settlement

4 negotiations with JPMC were not material and did not need to be

5 disclosed. These were decisions that were being made real

6 time, in the middle of the case, in context, rather than two

7 years later in hindsight.

8 Mr. Gropper and others, for their part, independently

9 analyzed the information they received during the six-week

10 period, and they also confirmed with the debtors' conclusion

11 that all material nonpublic information was disclosed. Your

12 Honor, I believe, on this point, you have clear,

13 noncontradicted testimony that both the debtors and the

14 settlement noteholders made independent evaluations and acted

15 reasonably and in good faith.

16 Mr. Kosturos and Mr. Gropper confirmed that the

17 parties were approximately four billion dollars apart on the

18 March proposals that the settlement noteholders knew about. In

19 fact, the parties were still billions of dollars apart, even

20 after JPMC made its additional counterproposal in April, which

21 Aurelius testified they never learned of, despite insinuations

22 by the objectors to the contrary.

23 All of this provides clear indicia, again, that the

24 parties acted in good faith in determining what information

25 needed to be disclosed. These facts cannot support an insider



1 trading charge.

2 Mr. Owens will discuss later on today the elements of

3 insider trading law in more detail. But it should be clear

4 from the record that Aurelius: 1) did not breach any duty;

5 2) did not act deceptively; and 3) did not act with knowledge

6 or reckless disregard that it had material nonpublic

7 information. These are all basic elements of an insider

8 trading claim. And the claim fails, even without getting to

9 the materiality of the settlement proposals.

10 Consideration of Aurelius' actual pattern of trading

11 during and around the first confidentiality period, further

12 undercuts any claim and confirms that the settlement proposals,

13 in fact, were not material. I'm going to quickly review the

14 trading at that point in time by Aurelius.

15 The TPS and the equity committee argue that the

16 trading pattern in the senior notes evidences that the

17 settlement negotiations in March 2009 were material. This is

18 unsupported by the record. Mr. Gropper testified that his

19 firm's research at the outset of the cases led Aurelius to

20 conclude that the four billion dollar deposit belonged to the

21 estate. Mr. Gropper also testified that his view was

22 consistent with the stipulation that JPMC was prepared to enter

23 into in November 2008. And this testimony is supported by

24 Aurelius' purchases of senior notes during the first several

25 months of the case.



1 So if Your Honor goes back and looks at the trading

2 records, Your Honor will see that from its first purchase of

3 senior notes on October 3, 2008 through January 5, 2009, all

4 during which time Aurelius had no access to any confidential

5 information, Aurelius' net purchase of senior notes was 104.6

6 million dollars.

7 Aurelius continued to purchase senior notes from March

8 to May, during the period the ethical wall was up. And from

9 March 31 to May 8th, while the wall was in place, Aurelius had

10 net purchases of seniors of only 10 million dollars, going from

11 99.6 million to 109.6 million dollars. After the wall came

12 down, Aurelius continued to purchase senior notes, but on a

13 more modest scale. Net purchases from May 12th through July

14 20th, which is about seventy days after the confidentiality

15 period expired, there were only 4 million dollars of net

16 purchases of senior notes. From the time the wall came down to

17 mid-July, Aurelius' position in seniors grew by a mere 3.65

18 percent.

19 Contrary to the allegations, this is simply not

20 evidence that Aurelius had access to and acted on some valuable

21 piece of nonpublic information following the first

22 confidentiality period. The purchase of senior notes was

23 consistent and regular throughout this entire time period.

24 In addition, Your Honor, Aurelius also testified to a

25 number of factors influencing the investment environment at



1 this time, starting with publication of the tax information on

2 April 30th, which itself justified an optimistic view on value.

3 In addition, Aurelius was taking in new capital, learned it

4 would not have to make material cash redemptions to its

5 investors, and the market itself, as Your Honor will recall,

6 was highly volatile; all factors that justify increasing their

7 purchases in both seniors and subnotes, and belying the

8 suggestion that there was any suspicious trading following the

9 first confidentiality period that revolved around access to

10 what was learned in settlement negotiations in March of 2009.

11 The next period was the period of May 2009 to November

12 2009. This period is simple from our perspective. Aurelius

13 had no involvement with the plan or settlement negotiations

14 with the debtor for six months; seven, if you factor in the

15 fact that Aurelius had no involvement in the debtors' April

16 negotiations. Given this fact, the allegation of domination

17 and control of this debtor and this Chapter 11 case and the

18 plan process, seems irresponsible.

19 There was absolutely no involvement whatsoever that is

20 evidenced by Aurelius in this case for a seven-month period.

21 And it's remarkable to me that there can be actually a

22 suggestion of domination and control of this case.

23 The next period is November 2009 to December 30th,

24 2009, which is the next confidentiality period. The equity

25 committee and TPS push very hard on this period. They again



1 manipulate the documents, the testimony and the trading records

2 to cobble together a distorted theory that the settlement

3 noteholders were improperly influencing the plan process and

4 taking unfair advantage of nonpublic settlement negotiations.

5 Again, this is not true.

6 Aurelius signed a second confidentiality agreement

7 with the debtors on November 16, 2009. Like the first period,

8 the parties acted at arm's length and put in place similar

9 contractual agreements involving maintaining information during

10 the period and release of information at the conclusion. After

11 signing the confidentiality agreement, the debtors disclosed

12 new confidential tax information, the 2.6 billion dollar second

13 tax refund, which the testimony said, was in fact material and

14 new information.

15 The debtor also advanced a new offer to JPMC in

16 November of 2009. The facts are as follows. JPMC initially

17 told the debtor that it might be willing to split the first tax

18 refund on a seventy-thirty basis. The debtor, with noteholder

19 support, made an offer to split the first tax refund on a

20 sixty-one thirty-nine basis. JPMC responded at the beginning

21 of December with a new construct. They replied with a proposal

22 that the first tax refund go to JPMC, the second tax refund go

23 to the estate, plus they took an aggressive position on many

24 other open issues.

25 Mr. McCree himself, the lead negotiator for JPMC, said



1 in his cover e-mail, "We are far apart." This was the

2 information that the parties had at the beginning of December.

3 Mr. Kosturos said that the JPMC proposal was resetting the

4 bookends. There was frustration on all sides.

5 The record from this point is simple and

6 straightforward. Mr. Kosturos wanted to make a new proposal.

7 Aurelius knew that Mr. Kosturos would deliver a seventy-thirty

8 proposal. That's what Aurelius was told. But the evidence

9 confirmed that that was the end of Aurelius' involvement during

10 this confidentiality period and beyond. The testimony is that

11 JPMC's lead negotiator, Mr. McCree, went on a skiing vacation

12 in the middle of December, and the confidentiality period ended

13 without any further discussions or progress that the

14 noteholders knew about.

15 Despite efforts by the equity committee and TPS to

16 twist the testimony to the contrary, Mr. Gropper testified that

17 he was not involved and didn't know what happened after early

18 December. He did not know whether Mr. Kosturos conveyed an

19 offer, and he certainly did not know if there was a response.

20 This is crucial testimony that was confirmed by each of the

21 witnesses and was not contradicted. The equity committee

22 distorts the record beyond recognition when it writes in its

23 post-hearing brief, that the settlement noteholders knew in

24 January 2010 that there was an "agreement in principal". This

25 is a misrepresentation of the record. The record is clear,



1 Aurelius did not know any such thing.

2 Despite insinuations, there is no evidence that

3 Aurelius was ever included in confidential negotiations during

4 the first quarter of 2010 or had any material nonpublic

5 information about the emerging settlement before it was

6 announced in open court on March 12, 2010.

7 The trading patterns in the fall of 2009 and early

8 2010 are instructive. The evidence could not be clearer that

9 Aurelius' PIERS accumulation, which was the fulcrum security at

10 the time, tracked the ebbs and flows of the NOL look-back

11 legislation, and was unrelated to any information it had about

12 negotiations.

13 A brief review of the PIERS trading bears this point

14 out. After the first confidentiality period, when the equity

15 committee suggests Aurelius had inside information about a

16 deal, Aurelius reduced its PIERS position from 51.4 million to

17 24.6 million by the end of August 2009. This is borne out by

18 the trading records. This is a time when the tax legislation

19 seemed to be stalling. From September 16th through November

20 16th, prior to the signing of the second confidentiality

21 agreement, Aurelius increased its PIERS position back from 24.6

22 million to 102.5 million. This accumulation closely tracked

23 the rise of the legislation and demonstrates and increase of

24 77.9 million during that time period.

25 There was no trading during the confidentiality



1 period. So for about six weeks, there was no trading in the

2 PIERS. After disclosure of the new tax information on December

3 30th, which was the most significant piece of tax information

4 in the case, and an increase in the price of the PIERS by 165

5 percent since Aurelius stopped trading, Aurelius then resumed

6 purchasing PIERS, and purchased approximately 30 million

7 dollars of PIERS on the 31st of December. This was after the

8 market had digested the new information and the price of the

9 PIERS had gone up by 165 percent.

10 This transaction is entirely consistent with its

11 pattern of trades prior to the confidentiality period, and

12 reflects nothing extraordinary, notwithstanding strenuous

13 attempts to argue to the contrary. Significantly, Aurelius

14 sold a substantial amount of PIERS on March 8, 2010, four days

15 before the settlement terms were announced in open court and

16 the price of the PIERS shot up. Indeed, the sale of the PIERS

17 in March is strong evidence that Aurelius didn't know the terms

18 of the settlement in the first quarter of 2010.

19 After the announcement of the first tentative

20 settlement on March 12th, the price of PIERS went up by several

21 dollars, making the sale of PIERS on March 8th, an incorrect or

22 not-advantageous transaction for anybody who would have known

23 what was likely to occur. That was an innocent transaction by

24 a party that did not have access to anything that was not

25 otherwise in the marketplace.



1 Your Honor, when I started discussing the record, I

2 asked the Court to focus on the issue of good faith as a prism

3 through which to view the record. And upon review of the

4 record, I submit, it is clear that Aurelius and all the other

5 noteholders acted in this case, reasonably and in good faith.

6 With the time I have remaining, I'd like to now

7 briefly talk about the equity committee's motion to authorize

8 the right to prosecute a complaint for equitable disallowance

9 or other relief against Aurelius and Centerbridge. In

10 objecting -- in addition to objecting to confirmation, the

11 equity committee has another strategy that would allow it to

12 continue to litigate against Aurelius and Centerbridge post-

13 confirmation. It has filed a motion for authority to prosecute

14 a complaint to equitably disallow the noteholder claims on

15 behalf of the estate.

16 This motion is essentially a replica of the

17 confirmation objection, and if the Court rejects the equity

18 committee TPS objections and confirms the plan, we would submit

19 that the Court should simultaneously deny the motion. First it

20 would be highly prejudicial to leave this claim hanging over

21 the settlement noteholders' heads after all of the time that

22 has already elapsed. Having already tried these claims,

23 following extensive discovery, the Court should not permit a

24 separate action to go forward unless it's prepared to send a

25 message that it believes that securities laws were violated.



1 That could have a severe impact on these funds, and as I stated

2 in the outset, actually threatens the existence of investment

3 funds in this type of environment.

4 This is not a casual request that's being made. This

5 is an action after a public trial to proceed with an insider

6 trading litigation beyond what's already taken place. This

7 Court has already had the benefit of live testimony from all of

8 the key witnesses who would testify at trial, and there is no

9 suggestion from the record in this case, that there are lurking

10 smoking guns that would emerge, even if the equity committee

11 were given the opportunity for some further discovery.

12 There is nothing in the record right now that would

13 lead the Court to be suspicious of what took place. I believe

14 the Court knows full well what took place and has heard the key

15 witnesses.

16 Furthermore, if this adversary proceeding is allowed

17 to go forward, Aurelius submits that the estate will be

18 required to reserve hundreds of millions of dollars or more in

19 connection with administrative claims that will arise out of

20 what we believe would be a breach by the debtors of the

21 confidentiality agreements, we believe, making it impossible to

22 consummate the plan and the distributions as consummated (sic).

23 There are consequences to having to defend a claim

24 like this. And the potential implications of this claim are

25 monumental and could have implications that go to the



1 fundamental existence of the Aurelius funds. Because this

2 reservation would seriously interfere with projected

3 distributions, we don't believe, as a practical matter, that

4 the suggestion that was alluded to earlier, that the Court

5 should confirm the plan and simply let these claims continue,

6 is a viable suggestion.

7 The debtors, in fact, recognize the seriousness of

8 this claim in their own brief, and acknowledge the potential

9 impact it likely would have on their ability to consummate the

10 plan. In addition, there will invariably be many, many

11 millions of dollars of additional cost that all parties,

12 including the estate, will have to bear if this litigation is

13 actually tried at the level and along the lines of what's being

14 suggested by the equity committee.

15 We believe all of these factors should be taken into

16 account in assessing the reasonableness of the debtors'

17 determination that it was not reasonable and appropriate to

18 proceed with this litigation.

19 There are a number of other legal issues that we lay

20 out in detail in our brief, which I'm only going to briefly

21 highlight at this point in time. The Third Circuit recognizes

22 two independent elements applicable to this type of motion. As

23 Your Honor is well aware, a claim sought to be prosecuted must

24 be colorable, and the Court must find that the debtor

25 unjustifiably refused to prosecute the claim.



1 Your Honor, on the record already before this Court,

2 we think you clearly should find that there are no colorable

3 claims that should be prosecuted in this case. But even

4 without going back and reviewing the substance, I think it's

5 important for the Court to consider how this claim would be

6 treated from a legal standpoint.

7 Ordinarily, I believe that this Court would look at

8 this motion from the standpoint of a motion to dismiss. Here,

9 as Your Honor well knows, the Court already tried the claims,

10 and indeed, the equity committee has invited the Court to

11 consider its pleadings in the context of the full record. And

12 the Court, I believe said, that it would do so.

13 Therefore, the simple motion to dismiss standard is

14 not the standard to apply here, but rather the Court should

15 consider the fact that essentially the trial's already been

16 heard. And we think that the Court should apply a much

17 stricter standard than it would simply apply when there has

18 just been mere allegations and an attempt for the first time to

19 pursue discovery and to have witnesses testify before the

20 Court. There is simply no evidence that Aurelius improperly

21 dominated the debtors or traded improperly. And there is

22 nothing in the record that would lead to a conclusion that more

23 discovery would lead to a different outcome or result in a

24 trial.

25 There are other points. Your Honor heard reference to



1 the fact that the motion should be denied because the basic

2 claim that is being raised here, equitable disallowance, is no

3 longer a viable theory under law. And I understand that there

4 are different views on that. What I would submit, Your Honor,

5 is number one, Pepper v. Litton is still good law. And the

6 legislative history expressly recognizes that Pepper v. Litton

7 is still good law. And it allows the Court to apply equity to

8 the extent it would be consistent with state law.

9 But the fact of the matter is that, at least in this

10 circuit, the courts permit equitable subordination and

11 equitable recharacterization. The courts are clear, equitable

12 subordination does not permit subordination of claims to

13 equity. And equitable recharacterization is a very specific

14 basis to disallow a claim on the basis that the claim really

15 was equity and not debt. Neither of those factors apply here.

16 Section 502(b) lists out nine elements for disallowing

17 claims. And the Supreme Court in Travelers instructs that we

18 should apply the Bankruptcy Code provisions without inserting

19 new equitable provisions that go beyond the statute.

20 THE COURT: Well, let me ask you a question. Doesn't

21 502(b)(1) incorporate any defenses one would have outside of

22 the bankruptcy context? And if in fact there was insider

23 trading, you wouldn't have a claim, would you?

24 MR. ECKSTEIN: Your Honor, to the ex --

25 THE COURT: Certainly, at least to the profits.



1 MR. ECKSTEIN: -- to the extent there was insider

2 trading, there is ample basis in well-established law, for an

3 insider trading litigation to be brought. That gets really to

4 a separate question, which is, should insider trading

5 litigation be the province of debtors or creditors' committees

6 on behalf of debtors in bankruptcy cases, or should it be left

7 to the parties who traded with the buyer or the seller of the

8 securities?

9 Your Honor, I believe it comes back to the issue of

10 good faith. If Your Honor believes that there was no good

11 faith, there are remedies. Whether disallowance is the

12 appropriate remedy, I have questions about. And I do not

13 believe that the Court merely can disallow the claims. Because

14 if there was insider trading, then I think to the extent there

15 was evidence that actually somebody was harmed, none of which

16 is in the record here -- none of which is in the record here --

17 THE COURT: Well, but insider trading posits there's a

18 harm to the issuer.

19 MR. ECKSTEIN: That's correct, and --

20 THE COURT: So harm to the estate might be the

21 basis --

22 MR. ECKSTEIN: -- and --

23 THE COURT: -- for insider --

24 MR. ECKSTEIN: -- and clearly, Your Honor, you have to

25 go through all the standards of insider trading, including



1 duty, and whether there was scienter, and whether parties acted

2 recklessly.

3 THE COURT: I understand that.

4 MR. ECKSTEIN: Again -- and I'm not going to repeat

5 that -- I believe, Your Honor, if Your Honor were to determine

6 that all of the elements of the insider trading claim were

7 present, I have no doubt that Your Honor can find a remedy and

8 apply that remedy.

9 THE COURT: But equitable disallowance isn't one of

10 those?

11 MR. ECKSTEIN: I don't -- I don't think we have to

12 necessarily get bogged down today on whether it is or isn't

13 still a viable theory. I believe --

14 THE COURT: But --

15 MR. ECKSTEIN: -- I believe that there is a very, very

16 compelling line of case law that would lead to the conclusion

17 that equitable disallowance specifically is not a remedy that's

18 available to a debtor. I --

19 THE COURT: There's also case law to suggest it might

20 still be --

21 MR. ECKSTEIN: That is correct --

22 THE COURT: -- there.

23 MR. ECKSTEIN: And --

24 THE COURT: The Third Circuit hasn't said it's not

25 there.



1 MR. ECKSTEIN: I agree with Your Honor. The Third

2 Circuit has not said -- but I believe what the Third --

3 THE COURT: But they suggested they disagree with the

4 district court who held that it wasn't available, so.

5 MR. ECKSTEIN: That is correct. But I believe, what

6 the Third Circuit has said is, you can equitably subordinate or

7 you can equitably recharacterize. And I don't believe either

8 of those are applicable here. But even if equitable

9 disallowance is viable, I think what the Third Circuit says,

10 and I think what Judge Gerber says in Adelphia is, that is a

11 remedy that should be applied even more sparingly than

12 equitable subordination.

13 And in essence, what the courts say is that unless

14 Your Honor is prepared to find that Aurelius and Centerbridge

15 were insiders and fiduciaries -- and I don't believe there is

16 any legal basis for those conclusions -- Your Honor is going to

17 have to find that to justify equitable disallowance, that there

18 was fraud. And that is what the case law says, that there was

19 fraud or the equivalent of fraud. And respectfully, Your

20 Honor, I don't believe even the equity committee is suggesting

21 that there was fraud in this case. At most, they're suggesting

22 that in hindsight, parties made a misjudgment. I don't believe

23 that a misjudgment was made.

24 But if all we're talking about is a misjudgment, that

25 something was material, notwithstanding the debtors' conclusion



1 with the advice of counsel that it wasn't material,

2 notwithstanding the independent determination by the

3 noteholders at the time that it wasn't material, that is not a

4 basis to equitably subordinate or disallow claims. And I think

5 that is, in fact, the law in the Third Circuit, whether

6 disallowance is or is not a viable theory.

7 So I would believe, Your Honor, that even if you

8 conclude that equitable disallowance is still potentially

9 viable, I would submit that Your Honor would dismiss this

10 complaint on a motion to dismiss, because it is not a remedy

11 that's available to the equity committee, because I don't

12 believe that they've demonstrated requisite damage to the

13 estate. B) I don't believe that they can prosecute a claim on

14 behalf of individual equity holders. That's not what they're

15 trying to do. They're trying to prosecute a claim that the

16 debtor would have. And I don't believe that they can, simply,

17 by using catch phrases, essentially try to take viable creditor

18 claims and subordinate them to equity.

19 Your Honor says, maybe there are -- maybe there are

20 remedies that some creditor could raise in this case that they

21 were somehow put upon in terms of trading. I've never heard

22 that suggestion, and that that would go to disallowing profits.

23 But that's not what this case is about. This case, I believe,

24 is about good faith, and it's about whether or not the elements

25 of insider trading have been satisfied here. And I believe



1 that for a whole host of reasons that we lay out as a legal

2 matter, this claim would be dismissed before Your Honor even

3 gets back to the question of whether the facts do or do not

4 support the conclusion that a particular settlement negotiation

5 might have been material.

6 Your Honor, in conclusion, we think that the record

7 here is comprehensive. We think that the record here is

8 remarkable in its consistency. Your Honor heard five

9 witnesses, none of whom sat and listened to the others'

10 testimony. And what I think we take away from the testimony is

11 the remarkable fact that under intense cross-examination, each

12 of the parties testified consistently. We're not talking about

13 fundamentally disparate stories here. Your Honor knows the

14 story already. Your Honor knows what happened. The parties

15 believed they were following a procedure that made sense.

16 Now, I heard Your Honor raise a question earlier, and

17 the question is, is the right rule in bankruptcy cases that if

18 parties want to engage in settlement negotiations, they should

19 stop trading? And I can respect that as a legitimate question.

20 But respectfully, Your Honor, that was not the process that was

21 applicable in this case and in many, many other, large, complex

22 reorganization cases.

23 Now, there are very good reasons why large creditors

24 are encouraged to participate in settlement negotiations. And

25 we can debate about what is the appropriate mechanism upon



1 which parties should or should not participate. I would

2 expect, Your Honor, that if a rule is made that if a party

3 participates in settlement negotiations they have to agree to

4 become restricted for the duration of the case, that that is

5 going to limit willingness of many parties to participate.

6 That might be acceptable. But for purposes of this

7 trial, Your Honor --

8 THE COURT: Well --

9 MR. ECKSTEIN: -- sorry.

10 THE COURT: -- I suggest just an ethical wall.

11 MR. ECKSTEIN: Your Honor, respectfully, an ethical

12 wall is quite complicated. There's a lot of cost to it. And

13 most funds -- most funds believe that an ethical wall is the

14 equivalent to not trading. And my experience is that parties

15 generally are not able or prepared as a business matter to

16 maintain ethical walls for unlimited periods of time, sometimes

17 more than a year.

18 And you know, realistically, that is the reason why so

19 few holders are actually willing to serve on creditors'

20 committees. And that -- again, that may or may not be good

21 policy. But I think what's relevant in this case is the

22 parties believed that there was a set of rules. They

23 negotiated the set of rules with the debtor. Those rules were

24 documented in writing. They were handled by counsel. They

25 were very, very specific. And they were complied with.



1 And we would submit that it is not appropriate to

2 penalize or punish the parties who complied with their

3 contractual agreements and with what was demonstrated to be the

4 practice in the marketplace, two years later, because the

5 equity committee is trying to object to confirmation in this

6 case. We believe that good faith is the right standard, and we

7 believe that it's been demonstrated, and there is no basis at

8 this point in time, regardless of what the right policy is, to

9 penalize the parties who participated in the case, and where

10 there is no evidence that they harmed this estate. And that's

11 important.

12 Notwithstanding what they said, they always pushed for

13 more value, not less. And candidly, the evidence shows that

14 had the noteholders not been here, the settlement probably

15 wouldn't even have been as favorable, because the noteholders

16 were always pushing for the most value for the estate. They

17 can't control how much ultimate value there is. But they

18 pushed for more, not less. And there's no suggestion that they

19 harmed the estate. Thank you, Your Honor.


21 All right, well, let's take a break and come back at

22 1:30 then.

23 (Recess from 12:38 p.m. until 1:34 p.m.)

24 THE CLERK: All rise. You may be seated.

25 THE COURT: Before we proceed, I do have one question



1 for Mr. Eckstein. I'm sorry to put you on the spot. But I

2 didn't see anything in your papers regarding the TPS assertion

3 that I don't have jurisdiction to enter a final order. What is

4 your opinion on that, and do I have a jurisdiction to decide

5 the issue that you're asking me to decide specifically?

6 MR. ECKSTEIN: Your Honor, with respect to

7 confirmation of the plan, we believe that the Court clearly has

8 jurisdiction to resolve that issue. And we do not believe that

9 the Stern case in any way undermines that. This is -- we

10 believe that confirmation issues are core issues. They are

11 clearly within the Court's jurisdiction. They don't involve

12 counterclaims --

13 THE COURT: Even the good faith issue.

14 MR. ECKSTEIN: Good faith is clearly -- you know,

15 1129(a)(3) speaks to good faith. I don't think there's any

16 doubt that the Court has the ability to determine whether the

17 plan should be confirmed.

18 THE COURT: Okay.

19 MR. ECKSTEIN: I'm not speaking to in the hypothetical

20 scenario where the Court were to permit an action to proceed,

21 based on insider trading. I think that's a different question.

22 I don't want to get to that right now. But I don't think

23 that's the issue that they're raising. I think the question is

24 whether the Court has the right to determine whether the plan

25 should be confirmed. And I believe the Court has the



1 jurisdiction to do that, and I believe all the parties to the

2 settlement have submitted to the Court's jurisdiction, and the

3 Court can rely upon that and 1129(a)(3) which speaks to good

4 faith.

5 THE COURT: All right. Thank you. All right.

6 MR. GLICKMAN: Good afternoon, Your Honor. Alan

7 Glickman; Schulte Roth & Zabel, for Owl Creek Asset Management.

8 Your Honor I took the Court's admonition to heart over the

9 lunch break and went over my nice typed outline with pencil and

10 tried to cut it back to shape what's been said. So I'll beg

11 the Court's indulgence in the places where I can't read my

12 handwriting.

13 THE COURT: Okay.

14 MR. GLICKMAN: Owl Creek joins in all the points that

15 have been made with respect to the fact that there's no basis

16 to claim that any of the so-called settlement noteholders

17 traded on the basis of material nonpublic information or

18 hijacked the settlement process. But we also take the Court's

19 admonition that each of Owl Creek, Aurelius, Appaloosa and

20 Centerbridge, is entitled to have its own behavior

21 independently assessed.

22 In its post-hearing brief, the equity committee

23 broadly asserts that the settlement noteholders engaged in

24 insider trading. But in its objection to the plan, which is

25 what framed its claims, the equity committee made no insider



1 trading allegations as to Owl Creek nor did it include Owl

2 Creek in its motion for standing to seek equitable disallowance

3 based on purported insider trading.

4 The trust preferred holders got the benefit of the

5 same discovery that the equity committee got, and they've never

6 made any insider trading allegations as to Owl Creek, including

7 in their post-hearing brief. None of this is surprising.

8 Owl Creek's involvement in the settlement process was

9 limited. It never negotiated with JPMC or the FDIC or the WMB

10 bondholders. It was only involved in the settlement

11 negotiations with the debtors during two periods. Both were

12 covered by confidentiality agreements. There's no dispute that

13 Owl Creek adhered to their terms. It didn't trade on the basis

14 of material nonpublic information and didn't hijack the

15 settlement process.

16 Both the equity committee and the TPS have cited

17 authority that you can look at trading patterns in considering

18 whether there's been improper trading on the basis of material

19 nonpublic information. Owl Creek did not buy WMI securities

20 after it supposedly got secret good news about the settlement

21 process. Once the confidentially periods ended, it principally

22 sold or didn't trade at all. And I'll get into that in a

23 little bit more detail.

24 In fact, as the Court will hear more of later, the

25 settlement noteholders had widely diverging trading patterns.



1 And given that they're all sophisticated funds, that strongly

2 suggests that the information that they received wasn't

3 indicative of anything at all.

4 I want to make a couple of general points first.

5 First, with respect to the standard. The equity committee

6 argues that because -- that the securities laws should not be

7 the basis of the judge's determination here, and that the

8 parties could have acted inequitably regarding trading even if

9 they didn't violate the securities laws. But, Your honor, the

10 securities laws set the standard for what is and isn't

11 appropriate when it comes to trading. Those rules have been

12 extensively developed over the decades, and they indisputably

13 govern the industry.

14 Both the EC and the TPS refer to them extensively.

15 They should be the standard here. And even if the Court didn't

16 apply them, the same facts that show no securities law

17 violation, make clear that there was no inequity, particularly

18 on the issue of good faith.

19 Now, let me talk about the standard for a moment. We

20 agree with Your Honor that if the settlement noteholders had a

21 duty not to trade, and if they had material nonpublic

22 information, then they shouldn't have been trading without an

23 ethical wall. We agree. But the question is, did they have a

24 duty and did they have material nonpublic information? Now, I

25 want to go to some of the statements that the equity committee



1 made in its papers, which were filed simultaneously, so we

2 didn't have a chance to address all of them.

3 The equity committee is no longer trying to claim that

4 the confidentiality agreements imposed continuing obligations

5 after their termination dates. You can look at paragraphs 69

6 and 171 of their papers. They say nothing in the

7 confidentiality agreements prohibited the settlement

8 noteholders from immediately trading on the basis of the

9 information they had learned. They had no choice but to make

10 that concession. The confidentiality agreements had definitive

11 end points and said that they expired unless expressly

12 preserved, which they were not. And Mr. Kosturos confirmed

13 that that was his understanding.

14 So now, instead of claiming that there was a

15 continuing obligation, the EC is criticizing the debtor for

16 allowing the settlement noteholders to trade after what it

17 calls arbitrarily measured windows. But these windows served a

18 clear purpose. They provided a period of sharing information;

19 and at the end, they provided a cleansing mechanism for the

20 disclosure of any material nonpublic information.

21 What does the equity committee's concession that there

22 was no restriction at the end of these periods mean? It means

23 that there can't be a claim of misappropriation under the

24 securities laws, full stop, game over. Misappropriation is one

25 of the two bases for finding a duty that's the sine qua non of



1 an insider trading claim. Now, what's the other basis? That's

2 the so-called classical theory, and Mr. Owens will go into that

3 more. But fundamentally, it requires you to be an insider or a

4 tipee.

5 Now, they don't claim that the debtors were tipping us

6 under the confidentiality agreements. You won't see that

7 anywhere in their brief. We're not temporary insiders. We're

8 not nonstatutory insiders, for all the reasons that people have

9 previously told you. I will not go there again.

10 Now, without a duty, there's no insider trading claim,

11 you don't even get to materiality. But now, let's get to

12 materiality for a moment. Just because information was

13 provided under the confidentiality agreements, and therefore

14 was deemed confidential information under the terms of the

15 confidentiality agreements, does not mean it was material

16 nonpublic information. That is precisely why those agreements

17 provided for a period at the end for the debtor to consider

18 whether there, in fact, was any material nonpublic information

19 revealed during that time.

20 Now, we don't contend that for this Court to conclude

21 that for settlement discussions to be material there has to be

22 a signed deal, as some people have suggested we claim, or even

23 an agreement in principle. This Court does not have to reach

24 the question of where the line is or even whether there's a

25 line, because during the time that the settlement noteholders



1 participated in settlement, the parties weren't even close.

2 You've heard about that before.

3 This isn't remotely a situation, Your Honor, like a

4 merger, where the very fact that a company is discussing

5 selling itself could be material. The market expects

6 participants in a bankruptcy to be discussing settlement. It

7 doesn't expect Microsoft to be making a bid for Apple.

8 So what does the equity committee and the TPS do?

9 They try to argue that because the parties got closer over

10 time, it was clear that there would be a deal. But first of

11 all, it's not true that they were getting closer. The parties

12 backed off positions from time to time. And in any event,

13 getting closer doesn't mean it's likely that there's going to

14 be a deal, if there is still very significant differences.

15 Deals go nowhere all the time after having gotten closer.

16 Let me also mention, under the securities law, the

17 standard of scienter and good faith. Even if there's a duty

18 and even if the information is material, you still have to show

19 scienter, meaning that Owl Creek knew or was reckless in not

20 knowing that it was acting improperly. That can't be shown

21 here. For all the reasons that Mr. Eckstein talked about good

22 faith, I'll talk it in terms of my client.

23 There is no dispute that Owl Creek took careful

24 measures to avoid trading while in the possession of material

25 nonpublic information. It had detailed policies and procedures



1 with respect to insider trading. It regularly trained its

2 employees with respect to the insider trading rules. It

3 periodically restricted its trading in WMI securities during

4 March and November during the confi agreements and afterwards

5 when it received drafts of plans or disclosure statements.

6 It required the debtors to disclose any material

7 nonpublic information that was provided under the confis and to

8 confirm that they had done so. And at the end of the confis,

9 it independently satisfied itself that the debtors had

10 disclosed all material nonpublic information. It also required

11 its counsel and debtors' counsel not to reveal material

12 nonpublic information at times that it was trading.

13 Let me very quickly go through the various periods,

14 focusing specifically on Owl Creek and on some of the claims

15 that have been made in the EC's and the TPS's papers. Let's

16 start with the January 2009 White & Case term sheet. There's

17 no dispute that Owl Creek's first involvement in anything

18 relating to settlement was a term sheet that that group

19 prepared in January of 2009. It was sent to the Fried Frank

20 group and the debtors in late January. The equity committee

21 and the TPS mention the term sheet, but neither one argues that

22 it was material nonpublic information or that Owl Creek's or

23 any of the settlement noteholders' trading surrounding the

24 generation of the term sheet was improper.

25 And it's no wonder. The term sheet was a wish list



1 prepared by parties on the same side of the negotiating table.

2 There's no evidence that it ever went to JPMC or was ever the

3 subject of negotiation and bore no resemblance to anything that

4 followed.

5 Owl Creek's trading, at the time the White & Case term

6 sheet was prepared and sent also doesn't suggest that it

7 constituted material nonpublic information. Throughout January

8 of 2009, Owl Creek continued the same trading pattern it had

9 coming out of 2008. After the term sheet was sent to the

10 debtors on January 29th, Owl Creek made no trades in WMI

11 securities for almost a month. All of the settlement

12 noteholders were aware of the term sheet, but they had

13 divergent trading patterns, which again, doesn't suggest any

14 directionality.

15 The first confidentiality period in March. You've

16 heard a lot about it. I'll do in shorthand, again, focusing on

17 Owl Creek. It's the first actual settlement negotiations Owl

18 Creek was involved in. And Owl Creek was at the meeting at

19 Sullivan & Cromwell along with many other creditors. It never

20 met with JPMorgan then or afterward. Like others, it signed

21 the confidentiality agreement that you've heard a lot about.

22 Now, ultimately, the debtors and JPMC exchanged term

23 sheets that have been described as light years apart. And I

24 won't go into the specifics of the two sides. Your Honor's

25 already heard that.



1 Now, what the equity committee argues is that it's

2 significant that JPMC supposedly agreed to relinquish the

3 deposit accounts. But there's no dispute that there was no

4 agreement on anything unless the whole package was agreed to.

5 And there has been no challenge whatsoever to the testimony of

6 Owl Creek's Dan Krueger that Owl Creek concluded back in 2008

7 that the deposits belonged to the estate, based on public

8 information. And Owl Creek's own quarterly investor letter

9 that Mr. Krueger was shown on cross-examination, confirms this

10 was the case. And Owl Creek put its money where its mouth was

11 by buying substantial amounts of senior notes and other WMI

12 securities back in 2008, based on that public information.

13 Now, less than a week after JPMorgan responded to the

14 debtors' proposal, as the Court is aware, major litigation

15 ensued. Now, the equity committee focuses on what happened in

16 April. In April, the debtors and JPMC did exchange proposals.

17 But there's no dispute that the debtor did this without the

18 knowledge or involvement of Owl Creek or other settlement

19 noteholders.

20 Now, the equity committee says the evidence strongly

21 suggests that the settlement noteholders, or at least Aurelius,

22 soon found out the terms of the April 16 proposal that the

23 debtors made to JPMC, if not the terms of the JPMC proposal.

24 There is no basis for that claim as to Owl Creek or Aurelius,

25 for that matter. It's based purely on the fact that Mr.



1 Gropper of Aurelius was upset after he learned the exchange

2 took place and that there was a meeting held afterward. But

3 there's no testimony and there's no document that says that the

4 substance of those settlement negotiations were disclosed, and

5 it wouldn't matter if they had been disclosed. They didn't

6 come close to resulting in a deal. As Mr. Kosturos testified,

7 the parties were well over three billion apart.

8 Then the confi agreement terminates on May 8th. Owl

9 Creek takes the steps that I described to ensure that it had no

10 material nonpublic information. It asked for confirmation from

11 the debtors that the debtors had disclosed any material

12 nonpublic information, as the debtors were required to do under

13 the confi agreement. And Owl Creek got confirmation through

14 White & Case that the debtors said they had done so. And Owl

15 Creek independently attested to the fact that it considered

16 whether it had nonpublic information that was material before

17 it resumed trading.

18 Now, let's look at the trading after that period. The

19 TPS claims that the purchase of senior bonds would be

20 suspicious after the first confi period based on what went on.

21 Well, we don't agree that this is indicative of insider

22 trading. But in any event, Owl Creek did not do it. Owl Creek

23 only sold senior bonds for several months after the first confi

24 period. It didn't make purchases of any WMI securities until a

25 week and a half after the confi period ended. And it wasn't



1 senior notes. It was a relatively small amount of PIERS over

2 two days. Nothing unusual about that. Owl Creek had been

3 buying PIERS since before the confi period started.

4 It's also significant once again here, as you'll hear

5 in more detail, that the trading patterns of the settlement

6 noteholders substantially diverged. Let's move to the next

7 stage.

8 The summer of 2009. That's a short story. Owl Creek

9 did not participate in settlement discussions after the first

10 confi agreement until the second one was signed in November.

11 There's no dispute about that. Two other settlement

12 noteholders had some settlement negotiations with JPMC in the

13 summer. That went nowhere. No issue. Owl Creek was not

14 involved.

15 Now, the equity committee says that there's a dispute

16 about whether Owl Creek learned about these negotiations

17 afterward when it joined the Fried Frank group. And there's

18 testimony that Owl Creek may have been apprised in late October

19 of the fact that there had been negotiations. But there is no

20 testimony, and there is no document, that Owl Creek ever

21 learned the terms. The equity committee says they must have

22 known it, because now they were a member of the Fried Frank

23 group, and the people who were doing the negotiations had been

24 a member of the Fried Frank group.

25 But as Mr. Melwani of Centerbridge testified, the



1 Fried Frank group didn't have a master plan or book of secrets

2 to give Owl Creek when it joined. And in fact, there's

3 extensive evidence that the four noteholders did things

4 independently even after they joined. There were meetings that

5 some attended that others didn't. There were communications

6 that some had and that others didn't. They were not a

7 monolithic unit.

8 In any case, as you'll hear in more detail, I'm sure,

9 from those who were involved, the summer negotiations were not

10 material. By the time Owl Creek learned of the fact that there

11 had been negotiations, two months had passed since Appaloosa

12 and Centerbridge last met with JPMorgan. And by September 2nd,

13 JPMorgan had completely withdrawn its offer.

14 So now let's move to the next stage, the so-called

15 second confidentiality period that began in November. That's

16 Owl Creek's next involvement, and it was a limited involvement.

17 Mr. Bolin of Appaloosa testified that during this period

18 Kosturos, Centerbridge and Appaloosa were having the primary

19 discussions with JPMorgan. Owl Creek entered into the second

20 confidentiality agreement that's been described to the Court.

21 The terms are similar to the first. And it's undisputed that

22 Owl Creek did not trade during the term of that confidentiality

23 agreement, just as it did not trade during the term of the

24 first one.

25 Now, the equity committee makes a big deal out of a



1 November 20, 2009 e-mail from JPMC to the debtors that said

2 that JPMC was ready to engage in substantive negotiations at a

3 thirty-seventy split of taxes. The debtors forwarded that to

4 two other settlement noteholders, not us. There's no evidence

5 that Owl Creek ever saw or knew of that e-mail. And if you

6 look at the cites that they give for that proposition, you will

7 not see any reference to Owl Creek.

8 But in any case, that e-mail wasn't material. As Mr.

9 Kosturos said, the debtors would not enter into an agreement

10 with JPMC at this level, because the proposal had to be

11 broadened into a three-way or four-way discussion, given the

12 demands that the WMB bondholders were making. And JPMC was

13 seeking only a two-way agreement.

14 November 23rd, the debtors send a settlement proposal.

15 That's been covered. JPMC responds on November 30th, and

16 that's the resetting of the bookends response that the Court

17 has heard plenty about. I won't go into the terms as to why it

18 reset the bookends. There's extensive testimony on that. JPMC

19 critically refused to contribute to a settlement with the WMB

20 bondholders and wanted a hundred percent of the first refund.

21 Now, the December settlement discussions which the

22 equity committee makes a big deal of also. On December 8,

23 2009, debtors sent JPMorgan a new settlement term sheet. Both

24 the equity committee and the trust preferreds claim that the

25 settlement noteholders participated in drafting the December



1 8th term sheet, and were involved in furthering negotiations in

2 December.

3 There is no evidence, none, that Owl Creek was

4 involved in preparing the proposal or was part of the

5 discussions. If Your Honor looks at the citations, there is no

6 reference to Owl Creek.

7 Now, in any event, there was nothing material about

8 the December proposal or anything else in December for that

9 matter. As you've heard, JPMC's lead negotiator was on

10 vacation, and JPMorgan didn't even submit a response to the

11 December 8th proposal until over a month later on January 12th.

12 And no one is arguing that any of the settlement noteholders

13 saw that response.

14 The WMB bondholders, at the end of December, were

15 asserting a claim to billions of dollars. And Mr. Kosturos

16 made clear that it hadn't even been possible in December to

17 have negotiations with them. Even the equity committee

18 concedes that by the end of December, the parties had still not

19 yet agreed on how to handle the cost of the WMB bondholders'

20 claims, which is highly significant.

21 Termination of the second confidentiality period.

22 Now, at the request of one of the settlement noteholders, the

23 second confidentiality agreement terminated a day early -- we

24 heard a lot about that at the trial -- on December 30th.

25 There's nothing insidious about that. But in any event, Owl



1 Creek didn't make the request, and Owl Creek didn't trade on

2 December 31st.

3 Before taking WMI off its restricted list, Owl Creek

4 went through the same process it had gone through before. It

5 asked that the debtors confirm that they'd disclosed any

6 material nonpublic information provided during the

7 confidentiality period, as the debtors were required to do. It

8 got that confirmation. And it specifically and independently

9 considered the material nonpublic information question

10 independently.

11 Now, let's look at its trading after the second

12 confidentiality period. Here again, according to the TPS, the

13 purchase of PIERS would be indicative of something wrong. Now,

14 we don't agree with that. But in any event, Owl Creek didn't

15 purchase anything between the end of the confidentiality period

16 on December 30, 2009 and the announcement of a deal on March

17 12th. Owl Creek only sold WMI securities. On January 5th and

18 6, it sold senior notes. On January 7 and 11 it sold

19 subordinated notes. And on January 12th, it sold PIERS. And

20 it didn't do any trading at all after January 12th, prior to

21 the March 12th announcement. And once again, as you'll hear,

22 the settlement noteholders all had divergent trading patterns

23 during this period.

24 All right. Next unit of time. End of the second

25 confidentiality period to March 12th. Owl Creek was not



1 involved in settlement negotiations during this period. The

2 equity committee doesn't challenge this. Mr. Kosturos

3 testified that the settlement noteholders had no involvement in

4 negotiations during this period. The only exception was one

5 meeting in March that one settlement noteholder had with JPMC,

6 and that settlement noteholder was not trading.

7 The first time that Owl Creek learned the terms of the

8 deal was when it was announced on March 12th. That was the

9 testimony of Mr. Krueger, and it stands undisputed.

10 The only involvement of the settlement noteholders

11 during this period was preparing a proposed form plan of

12 reorganization in early 2010 to have a mechanism in place if

13 there ever was a settlement. It was sent to the debtors. It

14 was discussed at a January 12th meeting and a February 25th

15 meeting. And the debtors had no interest in it.

16 During this period, as others, Owl Creek relied on its

17 counsel to act as a screen. The equity committee doesn't

18 dispute this. And it comes up with a whole new theory. Not

19 communicating with the settlement noteholders constituted

20 material nonpublic information. Check paragraphs 127 and 185

21 of their brief.

22 Now, why is that? Supposedly because if talks were

23 faltering, the settlement noteholders would have expected to be

24 told. Your Honor, with due respect, that's complete nonsense.

25 Settlement talks faltering in this case was nothing new. And



1 plus, the equity committee's argument that this would be news,

2 assumes their conclusion, which is that the SNH believed the

3 settlement was around the corner. Silence is not material


5 But even beyond that, even Fried Frank wasn't involved

6 in settlement discussions that the debtors were having with the

7 FDIC for most of this period until late February. That's the

8 testimony of Mr. Kosturos. And in any case, let's look at the

9 trading again. Owl Creek make no trades in WMI securities

10 during virtually all of this period. Didn't trade at all after

11 January 12th, as I've mentioned, until after a deal was

12 announced. That means it stopped trading almost a month before

13 the settlement noteholders' reorganization proposal was sent to

14 the debtors.

15 Now, the equity committee says, well, wait a minute.

16 Appaloosa restricted itself after the February 25th meeting.

17 Nobody else did. But no restriction was required. There was

18 nothing discussed at that meeting that was material nonpublic

19 information. The debtors specifically refrained from doing

20 that. And Appaloosa never said it was required to restrict

21 itself. And in any event, Owl Creek was not trading at that

22 time.

23 There's nothing in the record as to whether that was

24 as a result of a restriction or not. The equity committee

25 didn't ask, and it doesn't matter. You can't trade on the



1 basis of inside information if you don't trade.

2 So the equity committee throws in another theory.

3 It's improper not to trade. It's improper not to trade,

4 because it means you're consciously deciding that your holdings

5 are valuable. Your Honor, with all due respect, that is truly

6 scraping the bottom of the barrel. There is absolutely no

7 basis for a claim that not trading somehow constitutes a

8 violation of the insider trading laws.

9 Last period: the events after March 12, 2010.

10 There's no evidence that Owl Creek was involved in settlement

11 negotiations between that time and October 6, 2010 when the

12 sixth amended plan was filed. It received draft plans and

13 disclosure statements in advance, but it restricted its trading

14 and only removed WMI from the restricted list after documents

15 were filed.

16 Now, the equity committee says on March 23rd, the

17 settlement noteholders received waterfall information that was

18 not disclosed on March 26th. In fact -- and this is in our

19 brief; I won't go into it in detail -- but amounts of allowable

20 claims in the waterfall that they got do match up with the

21 disclosure statement exhibits. They say that various items

22 such as cash were not disclosed. But these figures were either

23 illustrative plugs or were small compared to the seven billion

24 that the debtor did disclose or were derivable from public

25 information or some combination of the above.



1 The equity committee has no theory as to how this

2 supposed information would actually have affected trading

3 decisions. And even the TPS holders don't make any claim that

4 any of this was material nonpublic information. And there's no

5 basis to conclude from Owl Creek's trading after March 26th,

6 after the disclosure statement, that it had material nonpublic

7 information. It continued its prior pattern of selling senior

8 notes. Its only purchase was the subordinated notes on April

9 21st, more than three weeks after the supposedly deficient

10 disclosure statement was filed and Owl Creek resumed trading.

11 After April 21st, Owl Creek stopped trading entirely in WMI

12 securities.

13 Now, obviously, Owl Creek is focused on issues of

14 insider trading and hijacking, but the equity committee also

15 did try to use Owl Creek to support its claim that the debtors

16 undervalued reorganized WMMRC. And they cite Owl Creek's

17 valuation models that apply a twenty-percent probability of the

18 utilizing NOL carry-forwards. Short answer to that is that the

19 equity committee totally ignores the more recent Owl Creek

20 valuations that assigned a zero probability to the NOLs, and it

21 ignores that Owl Creek didn't opt to take any more equity in

22 WMMRC than it had to. There's no better proof that Owl Creek

23 doesn't believe there's no hidden value there.

24 In conclusion, Your Honor, the record shows that Owl

25 Creek did not hijack the negotiations or trade on the basis of



1 material nonpublic information and neither did any of the other

2 settlement noteholders. Its involvement in the settlement

3 discussions was limited and appropriate. It took its

4 obligations under the securities laws very seriously;

5 suspending its trading when it had material nonpublic

6 information, and its trading patterns are directly at odds with

7 any theory of insider trading put forth in this case. Thank

8 you.


10 MS. DOUVAS: Good afternoon, Your Honor. Maria Douvas

11 from Paul Hastings, on behalf of Appaloosa Management.

12 Your Honor, when we were here in February first

13 responding to these speculations of wrongdoing, we told the

14 Court that the evidence would show that Appaloosa had done

15 nothing wrong, that any speculations to the contrary were

16 demonstrably false, and that Appaloosa had complied with all

17 the applicable bankruptcy and securities laws at all times.

18 Well, now after months of investigation and a seven-day

19 hearing, the evidence is now in.

20 And what we told Your Honor back in February is

21 exactly what the evidence has shown. The evidence has shown

22 that Appaloosa conducted itself ethically, legally, and with

23 integrity throughout the course of these proceedings; that

24 Appaloosa never traded when it was legally required not to and

25 that Appaloosa even took steps to voluntarily refrain from



1 trading during periods when it thought it was prudent to

2 refrain. In fact, Your Honor has seen in many of the briefs,

3 including from some of our adversaries, that Appaloosa is used

4 as a model of conservative and appropriate behavior; so much so

5 that the equity committee and the TPS have used Appaloosa's

6 trading decisions as examples of the right thing to do.

7 Your Honor, the evidence has also shown that

8 Appaloosa's decisions whether or not to trade; they weren't

9 made in isolation or in secret. To the contrary, Appaloosa was

10 always clear with the debtors about whether and when it wanted

11 to receive restricting information. And in those instances

12 when Appaloosa did tell the debtors that it wanted to receive

13 information that would restrict itself, it did not resume

14 trading until after it had confirmed with the debtors that it

15 was free to do so. And Your Honor, those facts alone should

16 end this insider trading inquiry as a matter of law.

17 Supreme Court precedent dictates that where an

18 investor discloses his or her intent to trade in the securities

19 of an issuer that that is fatal to a claim of insider trading

20 under the misappropriation theory. And continuing this inquiry

21 would not only be contrary to Supreme Court law, but to the

22 facts, to equity, and really to common decency. Your Honor has

23 seen throughout this proceeding the equity committee distort

24 the record and rely on gross speculation and innuendo that a

25 number of well respected professionals, including Fried Frank,



1 White & Case, Alvarez & Marsal, Weil, Gotshal, all abdicated

2 their professional responsibility and committed crimes so that

3 a few hedge funds could make some money on their investments.

4 Your Honor, I submit that that theory is not only

5 offensive and lacking in good faith, it's absurd. And there

6 are a couple of examples that make this readily apparent and

7 show that those who seek to vilify certain creditors in this

8 proceeding are really doing so based on smoke and mirrors and

9 not on the facts and not on the law.

10 I want to first talk about the equity committee's

11 theory with respect to the two confidentiality periods and what

12 did and did not happen during those periods. The equity

13 committee's theory is essentially that those who participated

14 in the negotiations received materially positive information

15 that the debtors didn't disclose, and that theory's just plain

16 wrong. Here are the facts which are not in dispute. Number

17 one; Appaloosa did not trade during either confidentiality

18 period. That's not in dispute. Number two; during the first

19 and second confidentiality period Appaloosa received the

20 debtors' estimate of the first and second NOL that was material

21 information and that was disclosed to the public prior to the

22 end of the confidentiality periods. That's not in dispute.

23 It's also not in dispute that Appaloosa did not lift

24 its trading restrictions until it had independently verified

25 that the proper disclosures had been made and had confirmed



1 with the debtors that in the debtors' view Appaloosa no longer

2 had materially public info -- nonpublic information and was

3 free to trade. It's also not in dispute that a deal was not in

4 fact reached during either the first or the second

5 confidentiality period or that the ultimate signatories of the

6 global settlement agreement included the FDIC. And that's an

7 important fact because the FDIC was very minimally involved, if

8 at all, in March of 2009. And there is no evidence that the

9 FDIC even received these term sheets in November or December of

10 2009, let alone had approved of them.

11 All these facts are not in dispute. So what's left

12 here is the equity committee's theory is that these failed

13 discussions between the debtors and JPMorgan in March of 2009

14 and then later in November of 2009 constituted materially

15 positive information. And that theory rests on the notion that

16 the settlement noteholders were somehow able to discern the so-

17 called good news that JPMorgan was just going to give up four

18 billion dollars in deposits and give up some portion of the

19 taxes in order to reach a settlement. And what the equity

20 committee says about that is that the settlement noteholders

21 were able to use this so-called information to engage in a

22 shopping spree, and that's the equity's committees words; a

23 shopping spree of the debtors' securities.

24 Well, Your Honor, that theory, even with just a

25 cursory review of the facts, especially with respect to



1 Appaloosa, is just plain wrong and is contradicted by the

2 evidence. In both May of 2009, which is after the first

3 confidentiality period ends, and January of 2010, which is

4 after the second confidentiality period ends, Appaloosa is a

5 net seller of the debtors' securities, not a buyer. So this

6 notion that Appaloosa engaged in some sort of shopping spree of

7 the debtors' securities is just plain wrong.

8 The facts are simple, and they're this. In May of

9 2009, Appaloosa had two trades. It had a small buy of the

10 senior subordinated notes with a face value of two million

11 dollars, and that buy was followed eight days later by a sale

12 of the senior notes with a face value of five million dollars.

13 So it had a small buy and a small sale in May. Later, in

14 January of 2010, it only sold. There were no purchases by

15 Appaloosa in the debtors' securities in January of 2010. So

16 the notion that Appaloosa thought it had materially positive

17 information really doesn't make any sense at all, and it

18 doesn't make any sense, Your Honor, because it is simply not

19 true.

20 The other distortion that I think is worth mentioning

21 is the equity committee talks about the period of late March

22 2010 after the plan and the disclosure statement and the global

23 settlement all had been disclosed. And what the equity

24 committee says about that time period is that the settlement

25 noteholders somehow knew that the debtors had more assets in



1 the estates than that which was disclosed to the rest of the

2 public; a fact which obviously, if it were true, would have

3 inured to the benefit of preferred equity holders, and once

4 disclosed would have made the stock price go up, not down. And

5 since Appaloosa sold its shares of preferred equity on March

6 29th and March 30th, that argument really doesn't make any

7 sense and should be rejected. But the reason why I'm

8 mentioning it is because I think it best exemplifies how the

9 equity committee has, in certain instances, distorted the

10 record and made up facts in properly fit into its theory of

11 insider trading.

12 At the hearing, Your Honor, you may recall that the

13 equity committee tried to improperly insinuate that the debtors

14 had not disclosed the subordination matrix in the March 26th

15 filings. And then you saw on redirect that that argument was

16 just plainly false and lacking in good faith because despite

17 the equity committee's attempt at sleight of hand in showing

18 Mr. Bolin the blank place holder for the liquidation analysis,

19 which is something Appaloosa had never received prior to its

20 disclosure, the subordination matrix itself was in fact

21 disclosed. And that was in Exhibit H. So then on recross,

22 rather than at least concede error on that point the theory

23 shifted. And what Your Honor saw was that they showed the May

24 disclosure statement to Mr. Bolin, and the equity committee

25 tried to insinuate that Appaloosa knew back in March that the



1 estates would have 7.7 billion dollars worth of assets.

2 Well, Your Honor, that theory, too, was lacking in

3 good faith because Appaloosa didn't know in March that the

4 estates would have 7.7 billion dollars, and the settlement

5 noteholders didn't know that in March the estates would have

6 7.7 billion dollars. And indeed, the debtors didn't know it,

7 because it turns out that that money came from later

8 concessions by the FDIC. So that theory was just plain wrong.

9 And now, for the first time, in their post-hearing

10 brief we have a new theory. And this theory is that Appaloosa

11 knew that there was 7.3 billion dollars in the estates. And

12 that theory, Your Honor, really fares no better than the other

13 two. Here's why: first, the settlement noteholders did not

14 know precisely how much cash there were -- there was in the

15 estates. And there's no evidence that it did. The exhibit

16 that the equity committee points to in EC-43 is simply a model

17 waterfall analysis that has a hypothetical distribution of 5.2

18 billion dollars. It's not a disclosure of the amounts of the

19 cash that's in the estates. And as Your Honor knows, the

20 amount of the cash that's in the estates is nearly a subset of

21 the total amount of proceeds, and the total amount of proceeds

22 were in fact disclosed.

23 But in addition to that, Your Honor, what the equity

24 committee does in order to create this impression that

25 Appaloosa and the settlement noteholders didn't have a key



1 piece of information is they essentially ignore the public

2 filings that had been made. And if you look at the public

3 filings they're very informative, because in the January 2010

4 monthly operating report, which was filed in late February,

5 there is a schedule of cash receipts which discloses 4.85

6 billion dollars in cash. In addition, in that same monthly

7 operating report, it values the intercompany investments at 180

8 million dollars. So already in that one monthly operating

9 report alone you have over five billion dollars.

10 Then, in March, when it files its disclosure

11 statement, the debtors disclose that it intends to receive

12 fifty million dollars because of the Visa shares and an

13 additional fifty million dollars from the vendor claims. So

14 when you add up all these public disclosures that the equity

15 committee fails to mentions what you get to is approximately

16 the same 5.1 to 5.2 billion dollars of cash they're complaining

17 about. Addition -- additionally to that -- I'm just going to

18 repeat the point -- that all of this is subsumed by the

19 statement by the debtors that the estates had an excess of

20 approximately seven billion dollars in total distribution -- in

21 proceeds for total distribution.

22 Secondly, Your Honor, as with regard -- as the same

23 point as with regard to the equity committee's theory on this

24 shopping spree, the claim that Appaloosa somehow knew that

25 there were additional assets in the estates and trade on the



1 basis of that information makes no sense where Appaloosa sold

2 equity shares. They didn't buy preferred equity. They sold

3 them. And it did so at a time when the public knew, based on

4 the debtors' filings, that there was simple not enough proceeds

5 in the estates to cover the debt claims. and again, Your Honor

6 saw this during the confirmation hearing itself when we walked

7 with Mr. Bolin the disclosure statement and how it showed that

8 there were approximately 7 billion dollars in assets, there

9 were over 7.25 billion dollars in debt, and the subordination

10 matrix, which was disclosed, showed that once those 7 billion

11 flowed through the waterfall there was simply no recovery left

12 for preferred equity. And that's a fact that has never

13 changed.

14 So this theory that Appaloosa did anything at all

15 improper with respect to its sales of preferred equity on March

16 29th and March 30th can be rejected. Your Honor, at the end of

17 the day the evidence with respect to the insider trading is

18 clear. From the beginning of these proceedings and throughout

19 the case Appaloosa complied with the securities laws and did

20 not commit insider trading. And the Court should reject any

21 arguments to the contrary.

22 Now, before I sit down I just want to talk briefly

23 about the second of the equity committee's arguments, and

24 that's namely that the settlement noteholders somehow hijacked

25 the settlement process and forced all sorts of powerful parties



1 to enter into a settlement agreement that was beneficial to the

2 settlement noteholders and the settlement noteholders at all.

3 Your Honor, respectfully, that argument is pure fiction. As

4 with respect to the insider trading argument, if one puts aside

5 all of the gross speculation and the innuendo, there is simply

6 no evidence that Appaloosa or anyone else for that matter

7 asserted any undue influence on the debtors or their

8 professionals. In fact, all of the evidence has shown just the

9 opposite.

10 The evidence has shown that at all times the debtors

11 controlled this process, and they conducted this bankruptcy in

12 a manner in which they believed would be most beneficial to the

13 estates. And you heard from Mr. Bolin, and he told you that at

14 times the debtors took litigation strategies and positions that

15 differed from what Appaloosa would do and over the objections

16 of Appaloosa. For example, Mr. Bolin testified that Appaloosa

17 pressed the debtors to take the turnover action to judgment.

18 And the debtors didn't do that. He also testified that the

19 debtors gave the FDIC more money in the global settlement

20 agreement over Appaloosa's objections. And perhaps most

21 importantly, Your Honor, you heard from Mr. Kosturos. And Mr.

22 Kosturos made it absolutely clear that the debtors made their

23 own decisions about what to do, and they did not take direction

24 from anybody else, including from the settlement noteholders,

25 that Mr. Kosturos did not feel compelled to involve the



1 settlement noteholders, and especially Appaloosa, in all

2 aspects of the negotiations for the case.

3 And Your Honor saw that in fact the debtors didn't

4 include Appaloosa and the settlement noteholders in all aspects

5 of the negotiations, including the most critical ones that took

6 place in the first quarter of 2010. Appaloosa didn't even

7 heard the terms of the settlement agreement until after the

8 debtors and the FDIC and JPMorgan and the creditors' committee

9 they all had agreed. It was then handed to Appaloosa as a fait

10 accompli. So, you know, what's the basis for the equity

11 committee's claims that Appaloosa or anyone else somehow

12 hijacked the process? There is none. There is no evidence

13 that Appaloosa dominated the settlement process or controlled

14 the debtors. Zero.

15 Similarly, the evidence is clear that Appaloosa only

16 acted on its own behalf. It never acted as fiduciaries, which

17 is something Your Honor has already found. And it tried to

18 maximize the value to the estates and bring a resolution to

19 these proceedings. By participating in the process, Appaloosa

20 tried to expedite, not delay a resolution. And in fact,

21 Appaloosa's participation helped facilitate a successful

22 resolution that according to the debtors enhanced the estates

23 by billions of dollars. Your Honor, this type of behavior

24 should be encouraged, not penalized.

25 Appaloosa did nothing wrong. It comported itself



1 professionally and with integrity throughout these proceedings.

2 There is no evidence to support the equity committee's

3 allegations against it. And now that the evidence is in, the

4 Court can see that those allegations, just like some of the

5 other pro se shareholders' allegations against Appaloosa, are

6 baseless and wholly lacking in substance. We respectfully ask

7 that these objections be denied. Thank you, Your Honor.


9 MR. OWENS: Good afternoon, Your Honor. Richard Owens

10 from Latham & Watkins, for Centerbridge.

11 I will try to keep my remarks as brief as possible.

12 Much of my thunder has been stolen by the many fine lawyers who

13 have spoken before me and whose arguments I would hope have

14 been persuasive to the Court. But I may not have the luxury of

15 assuming they were persuasive enough that I can just sit down

16 and put the rest of my time up for bid to the audience behind

17 me.

18 So I will charge ahead, and let me do so by jumping

19 right into the elements of 10(b)(5), because I think to hit the

20 nail on the head that although the equity committee has styled

21 its claims as inequitable conduct, in the absence of being able

22 to demonstrate a violation of 10(b)(5) there is no equitable

23 conduct here. and the reasons for that are several fold, but

24 the most important of which it's hard to imagine how one could

25 reach a decision that the trading activity of the settlement



1 noteholders, and that's all I really understand to be

2 fundamentally at issue here is their trading activity, could be

3 inequitable if it was lawful, how it could be inequitable if

4 there was no deception, how it could be inequitable if there

5 was no unfair gain or advantage over the debtor or others who

6 were participants in the market.

7 And to answer those questions, the questions that I

8 just outlined about whether or not there would be harm or

9 unfair advantage to the settlement noteholders over the market

10 place, we have a ready and able and clear guide. And that

11 guide is Section 10(b)(5), Rule 10(b)(5) in the case law

12 interpreting them. So let me turn now to the elements of a

13 10(b)(5), because I think a straight forward application of the

14 elements of 10(b)(5) to the facts here leads us fairly quickly

15 and fairly simply to a conclusion that there was no

16 inappropriate activity.

17 The elements are first that there be trades in a

18 security. Well, that's obviously present here. Second, that

19 the trade occurred by someone while that person in possession

20 of material nonpublic information. That is not clear, but I'll

21 come back to that later. Third, that the information was

22 obtained pursuant to a fiduciary duty or a duty of

23 confidentiality owed to the source of the information. That's

24 very important that the duty is owed to the source of the

25 information, not a third party, and that the trades were done



1 with scienter. And that is specifically with an intent to

2 defraud or deceive.

3 That last element, the requirement of scienter, the

4 requirement of deception is the touchstone of a 10(b)(5)

5 violation. And in its absence, there can be no violation of

6 10(b)(5). Now, the principle claim by the objectors is that

7 the settlement noteholders became privy to various settlement

8 proposals that were engaged back and forth. It is entirely

9 clear and undisputed that the only source of that that's

10 relevant here was the debtor and that the debtor knew that the

11 settlement noteholders were going to trade on that information,

12 or rather trade while in possession of that information after

13 the expiration of the confidentiality periods.

14 And that, I think, Your Honor, ends the inquiry. And

15 it is, I think, very accurately or forcefully shown if we

16 compare the words of Justice Ginsburg with the words of Mr.

17 Kosturos. Pardon me for the technology. And I have copies for

18 the -- of these and other slides that I'm going to use for the

19 Court and for the other parties that I'm happy to hand out

20 later. But O'Hagan is the leading Supreme Court and most

21 recent Supreme Court case dealing with the misappropriation

22 theory of insider trading, but its holdings are equally

23 applicable here. And they are, as Justice Ginsburg said, if

24 the fiduciary discloses to the source that he plans to trade on

25 the nonpublic information, there's no deceptive device, and



1 therefore no 10(b)(5) violation.

2 And if we compare that with what we know from the

3 record and what Mr. Kosturos told us that he knew that after

4 the expiration of the confidentiality period settlement

5 noteholders would be free to trade, there is just no deception,

6 Your Honor. There's no deception of the source of the

7 information and no 10(b)(5) violation. We don't need to reach

8 the issue of materiality --

9 THE COURT: Well, what about the classic theory? This

10 isn't a defense on that point, is it?

11 MR. OWENS: It --

12 THE COURT: The classic theory is --

13 MR. OWENS: It is certainly a defense on the classic

14 theory --

15 THE COURT: Really?

16 MR. OWENS: -- Your Honor.

17 THE COURT: I thought that was a --

18 MR. GLICKMAN: That is --

19 THE COURT: -- O'Hagan was just a misappropriation

20 case.

21 MR. OWENS: O'Hagan is a misappropriation case, but

22 the language of 10(b)(5) is the same whether it's a

23 misappropriation or a classic theory. And in both -- under

24 both theories, the requirement is that there be a deceptive

25 devise or contrivance, some means of defrauding, i.e., some



1 deception. The difference is in the classical theory the

2 deception that courts found, and we can look to Dirks for

3 guidance on this --

4 THE COURT: Um-hum.

5 MR. OWENS: -- the deception there is the fiduciary

6 obligation of an officer of the corporation to its shareholders

7 in the context where the officer is trading on the other side

8 of a trade from the shareholders, and therefore the officer has

9 a duty -- a fiduciary duty not to take advantage of a

10 shareholder by reason of an inequitable and advantage of

11 information. It is the fiduciary obligation of the officer to

12 the shareholder as the counterparty that is the element of

13 deception on which the classical theory is premised. That

14 doesn't apply here for a number of reasons.

15 First, we are not insiders. The objectors have

16 attempted to suggest that we are somehow became temporary

17 insiders, but there are two responses to that that are very

18 important. First, factually, it's wrong. Second, even if we

19 were somehow temporary insiders, there is still no deception to

20 our source of information, which is the debtor. Now, let me

21 talk about each of those in turn. The first question is

22 factually did we become temporary insiders. That, as a matter

23 of jurisprudence, is a category that has been reserved for

24 people who become involved in a clearly fiduciary capacity or

25 consulting capacity in the affairs, in the business, in the



1 day-to-day operations of an issuer, so, for example,

2 underwriters, investment bankers, lawyers, accountants,

3 consultants, who work for the company, who are its employees or

4 its agents or its consultants.

5 None of the settlement noteholders, certainly

6 Centerbridge, fits into any of those categories. So concluding

7 that Centerbridge or the settlement noteholders were temporary

8 insiders here would be a substantial advancement of the law

9 from where it stands now. So what is the equity committee

10 marshal to suggest that the law ought be expanded to cover

11 third party creditors? Very little, Your Honor. They more or

12 less just articulated and move as if that somehow saves them

13 from the need to show deception where there was none.

14 But let me take it further and posit well, what were

15 the things that happened here that could possibly have led to

16 that and show you why they didn't. First, the settlement

17 noteholders were creditors. That's clearly not enough on its

18 own to make them temporary insiders any more than any other

19 creditor or any other stakeholder. Second, they entered into

20 confidentiality agreements. Several of the cases cited by Mr.

21 Rosen at the beginning of the day show that that alone is not

22 enough, nor it should be especially where that confidentiality

23 agreement is a contractual obligation rather than a fiduciary

24 obligation, because otherwise you end up conflating fiduciary

25 and contractual obligations.



1 If a contractual obligation is enough or a contractual

2 obligation of confidentiality were enough to make one a

3 fiduciary, then the concept would be sweeping far too broadly.

4 Next, their involvement in the settlement

5 negotiations. But there again there's no evidence that the

6 settlement noteholders acted in a way that was particularly

7 different in a meaningful way from other participants who

8 engaged from time-to-time in the settlement negotiations like,

9 for example, JPMorgan or the FDIC. And no one seems to think

10 that they have become temporary insiders of the debtors' estate

11 or the many other creditors who, from time-to-time, executed

12 confidentiality agreements, participated on a limited basis,

13 made their own proposals, which were rejected, and then stepped

14 back when the confidentiality periods ended.

15 So that's a long way of saying, Your Honor, that the

16 equity committee's argument that we somehow became temporary

17 insiders is not supported in the existing case law of what it

18 takes to become a temporary insider and not supported by the

19 facts here of the limitations on their involvement in the

20 debtors' affairs. And the equity committee can't seek refuge

21 in the temporary insider context to avoid the need to show some

22 deceptive conduct in order to make out a 10(b)(5) claim.

23 But then again, to return to the legal issue, even if

24 we were temporary insiders there is still no deception. And

25 let me explain why that is. There is no deception because as



1 temporary -- even if we were temporary insiders, and, again,

2 we're not, our source of the information was the debtor. So

3 our obligation is to the debtor. And who knew that we were

4 going to be trading after the end of the confi periods? The

5 debtor. There -- so there again, there is no deception. The

6 only way that theory would work, Your Honor, as a matter of

7 clear law is if we were somehow involved in a conspiracy with

8 the debtor to defraud other stakeholders in the enterprise.

9 And this comes back to a point that I think many of my

10 fellow counsel, who are supporting the plan, have made, which

11 is that our conduct and the debtors' conduct in this regard was

12 very much in good faith. It was very much in good faith

13 because we negotiated clear confidentiality agreements before

14 receiving material nonpublic information. We built into those

15 agreements a mechanism to permit us to be -- to resume trading

16 and a requirement on the debtor that the debtor make the

17 disclosures. We relied, in good faith, on the debtor and made

18 our own determinations that sufficient disclosures had been

19 made before we resumed trading after each confidentiality

20 period. During the confidentiality periods, we did not trade.

21 It's hard on those facts, Your Honor -- even looking

22 back -- to say that somehow we did not act in good faith.

23 Unless there is some allegation -- and there's clearly no

24 evidence to support it if there were -- that there was some

25 conspiracy between us and the debtor to hide information from



1 other creditors. Or some evidence that notwithstanding the

2 debtors' conclusion and the conclusion of the debtors' counsel

3 and the conclusions reached by all of the settlement

4 noteholders, that they did not believe in good faith that the

5 settlement proposals were not material at the time they traded.

6 So, Your Honor, the no deception point, again, ends the inquiry

7 under 10b-5 and in my view should end the inquiry here in terms

8 of the challenges to our conduct.

9 But let me turn now to materiality. It's been

10 discussed at great length here, and I won't revisit the

11 arguments that have been made before. So I want to focus

12 instead on Centerbridge's trading and Centerbridge's trading in

13 relation to the trading of other noteholders. The TPS group

14 argues that scienter can be shown from our trading. How they

15 think an intent to deceive or defraud can be divined from our

16 trading is not clear to me. The cases that they cite for that

17 proposition are cases where the trading activity is used to

18 prove knowledge that an insider breached his or her fiduciary

19 obligations in tipping the trader. That's not the factual

20 situation here, and it's hard to see how our trading is

21 relevant to scienter from that perspective.

22 I do, however, think our trading is quite relative

23 from the perspective of materiality. Because I think if you

24 look closely at our trading and the trading of the other

25 settlement noteholders it puts to rest the claim that any of



1 the settlement noteholders thought that this bid and the ask of

2 the proposals that they received while the negotiations were

3 ongoing -- or rather after the confi periods expired were

4 material.

5 Let me start by focusing first on an argument made by

6 the TPS group that I think needs to be responded to. The TPS

7 group says that the best evidence of our scienter is to be

8 shown by the fact that before the first confidentiality period

9 we were selling, and after the second -- and afterwards we were

10 buying. First off, I think there are a couple of factual

11 issues that need to be corrected here. And I will note what I

12 think is probably not the best way to look at this. If you

13 look at the heading on the chart, it says "Centerbridge's

14 trades and senior floating rate bonds".

15 Now, fair enough, we traded in senior floating rate

16 bonds, but there were lots of other types of senior bonds that

17 we were trading in at the same time. When we look at

18 Centerbridge's trading activity in all senior notes in this

19 time period we see a very different picture. I'm going to try

20 to illustrate that by writing on the chart. And this is not to

21 scale, but I think it's important to note that if you look at

22 all of our trading you get a different picture. And the

23 different picture is when you net both the senior floating

24 rates and the senior fixed rates, there's a lot less selling

25 before and there's a lot less buying afterwards.



1 So I think the picture that the TPS group has tried to

2 present is not accurate and it's distorted. Because to see how

3 Centerbridge viewed the materiality or the importance of the

4 settlement discussions you have to look at the broader context,

5 not isolate trading in a particular security; you need to look

6 at entire classes of securities. And in addition, Your Honor,

7 you need to look -- and I'll put another chart up -- at the

8 trading as a whole and in relation to their overall position.

9 If you look here you see that the trades that occurred

10 after May -- or in May after the period are by no means a

11 significant increase in Centerbridge's position. They are --

12 in relation to the trades that occurred before and also to note

13 before -- in contrast to the TPS chart which just showed the

14 senior floating rates, if you look at Centerbridge's trading in

15 the senior subs at the same time you see while they were

16 selling seniors they were buying senior subs in February. And

17 while they were selling a little bit of seniors in March, they

18 were buying a little bit in March. And then they were buying

19 seniors again in May.

20 This is not a picture that suggests that Centerbridge

21 had some great concerns about its investments before the

22 confidentiality period and learned something about the

23 settlement discussions afterwards that caused them to go out

24 and make a huge bet based on material nonpublic information.

25 Instead this shows regular trading patterns based on what was



1 obviously material information that was publicly disclosed in

2 the beginning of May, which was the estimates of the first tax

3 return.

4 I think the picture becomes even clearer, Your Honor,

5 if we start to look at the trading of Centerbridge in

6 comparison to other settlement noteholders. This may be a

7 little hard to see, so if Your Honor doesn't mind I'll -- can I

8 hand up a copy?

9 THE COURT: You may.

10 MR. OWENS: I've handed up two charts, Your Honor.

11 The first chart shows the net trading of the settlement

12 noteholders after the first confidentiality period. And what

13 it shows is that the settlement noteholders were trading in

14 different directions after the confi period expired and they

15 were permitted by the debtor to resume trading.

16 So for example, if we look at -- and just to explain

17 how the chart is laid out, the first column shows the trading

18 in the first week, the second column week 2, et cetera, and

19 then the net trading activity at the end and then there's a

20 record cite to the trading records. The sales are reflected in

21 the chart in red and in parentheses purchases are in black

22 font, and then no trades are indicated by the word "no trades"

23 or "did not trade". So what you see from this is in the first

24 month -- and indeed, in the weeks following the announcement of

25 the first tax return -- the settlement noteholders are trading



1 in different directions.

2 Now, the equity committee and the TPS group argue that

3 well, there must have been some material nonpublic information

4 available to the settlement noteholders because they knew the

5 bid and the ask, and they knew what JPMorgan was willing to do

6 and not willing to do. If that were accurate, Your Honor, one

7 would expect them to all be trading in the same direction.

8 Instead, what this shows is that it corroborates what the

9 witnesses from each of the settlement noteholders told you on

10 the witness stand under oath. Which was they did not view

11 those settlement proposals as material information because they

12 were miles apart and the outcome was still too uncertain to

13 put -- to borrow a phrase -- any stock in those proposals, and

14 to buy or sell in the same direction. The disparate directions

15 that they transacted in these securities is very powerful

16 corroboration for their testimony that they did not believe it

17 was material. It's also -- standing in its own right --

18 powerful evidence that that information was not material.

19 The second chart that I handed up to you, Your Honor,

20 shows their trading after the second confi period. And this

21 requires a little more discussion and thought. Let's start --

22 instead of going from the top down, let's go from the bottom

23 up. If we look at the trading in the REIT preferreds we see

24 that they are trading in different directions. If we look at

25 the trading in the PIERS we see there's trading in different



1 directions. If we look at the trading in the senior subs we

2 see inconsistent trading. If we look at the trading in the

3 seniors we see that everyone sold.

4 So here the point's a little different. Here the

5 point is that why if what the equity committee says in its

6 brief is accurate -- namely that the settlement noteholders all

7 knew that settlement discussions were converging to a bigger

8 and better deal. If they all knew that the deal was getting

9 better and the pot was getting sweeter, a deal was imminent,

10 why are they all selling the seniors? I think the answer to

11 that is no one had that view because the discussions that they

12 knew about didn't lead to that conclusion, because those

13 discussions were still too uncertain to be material and to be

14 the basis of a trade.

15 So instead, when you look at the remainder of the

16 trading what you see is, again, the settlement noteholders are

17 trading in lots of different directions. It just belies common

18 sense, Your Honor, to conclude that four sophisticated -- very

19 sophisticated market participants all knowing the same alleged

20 material nonpublic information are trading in different

21 directions during the same period. Unless, of course, you

22 conclude that that information was in fact not material and was

23 not the basis of any trades because it was far too uncertain to

24 trade on as each individual who testified testified, as the

25 debtors' counsel determined before it determined that it didn't



1 need to be disclosed, as the debtor itself determined before it

2 decided it didn't need to disclose that information, and as

3 Centerbridge for the reasons Mr. Melwani described to you,

4 reached the same conclusion.

5 I think a similar picture can be seen by looking at

6 Centerbridge's trading, which we did at some length during Mr.

7 Melwani's deposition over the course of the bankruptcy. Let me

8 see if I can get another copy of this to hand up to Your Honor.


10 MR. OWENS: You know what, Your Honor, how about I'll

11 hand this one up to you and I've got one with some chicken

12 scratching on it that I'll put up for the audience.

13 THE COURT: Okay.

14 MR. OWENS: There are a couple of points to be made

15 here. Again, let's go back to the objectors' argument that

16 over the course of the settlement noteholders in-and-out

17 participation in the settlement discussions, through their

18 review and access to the settlement proposals they somehow

19 should have seen or could have seen or did see that a deal was

20 building, a deal was getting close, the terms were getting

21 better and it was a great time to be buying and capitalizing on

22 that information in the market. Centerbridge's overall

23 holdings belie that story. And we see that by looking at the

24 trend of its -- the percentage of its holdings in the debtor

25 over time after the confi periods.



1 And what you see -- as Mr. Melwani explained -- was

2 their holdings peaked in May as a percentage of the overall

3 assets under management. Their holdings peaked in February and

4 March of 2009, before they were ever involved in any settlement

5 discussions, before they were every privy to any proposals back

6 and forth between the debtor or anyone else. One would think

7 that if the equity committee was right -- one would think that

8 if Centerbridge in fact did come into possession of material

9 nonpublic information after they began participating in those

10 conversations you'd see their overall holdings grow over time,

11 but you don't. That's the peak; the peak is before.

12 Afterwards there is a sharp drop -- as Mr. Melwani

13 explained in June -- when a bunch of new assets come under

14 management. So I don't want to leave the Court with the

15 impression that there was a big sell-off, there was not a big

16 sell-off in the month of May and June and July. More assets

17 came into management, and so they began rebuilding the position

18 again. But again, it never gets as high as it was before their

19 participation. And also -- what's also I think very compelling

20 is the next highest point after March of 2009 is in January and

21 February -- I'm sorry, is in December of 2009. And from that

22 point forward their holdings begin to decrease again.

23 And that, Your Honor, shows the following. Again, if

24 they had material nonpublic information about discussion

25 between the debtor acquired during the confi period you would



1 be expecting that in the periods following the expiration --

2 from January, February and March -- their holdings to be

3 increasing; instead what you see is that they were net sellers.

4 In fact, throughout -- if you look at the senior notes

5 throughout 2010 they are net sellers of senior notes in every

6 month in which they traded in senior notes. They buy some

7 senior subs and they buy some PIERS, they sell all of their

8 REIT preferreds -- that's just not trading that's consistent

9 with the notion that they somehow in that period had material


11 The other point that I would note about the PIERS and

12 to explain the chicken scratching on what I've put up on the

13 board here is although sold a large number of PIERS in August

14 and September, those sales were prices ranging from

15 approximately 7 dollars -- 7.30 to 8.20 dollars per share.

16 They bought them back after January at prices of -- you know,

17 ranging from 21 to 25, 25 to 26, et cetera. It again belies

18 commonsense that someone who is privy to material nonpublic

19 information is making such poor trades -- that they are selling

20 low and buying it back at almost three times the price.

21 And that's especially significant, I think, in the

22 context here where if you do the math and you thought that

23 those settlement agreements and proposals -- or not agreements,

24 but those proposals were actually illustrative or predictive of

25 the future and therefore material, the conclusions that you



1 would have reached would be that they would be most impactful

2 to the value of the PIERS. And yet, what are the securities

3 that Centerbridge is trading and losing the most in but PIERS.

4 Again, Your Honor, all of this goes, I think very

5 powerfully, to corroborate not just what my colleagues have

6 said about the fact that the negotiations were far too far

7 apart to be material, it corroborates what the witnesses said

8 about that very fact and shows that their trading was not

9 trading premised on secret information about secret undisclosed

10 settlement negotiations that was valuable or meaningful. Their

11 trading was trading that they did based on what they knew

12 publicly in the marketplace, and the settlement negotiations

13 were -- at the time the confidentiality periods expired -- just

14 more noise in the background of no relevance and of no

15 predictive capacity, and not sufficient basis for trading.

16 Because if it were the trading that would be demonstrated would

17 have been very, very different.

18 I'd like to turn now to the arguments that have been

19 raised about our participation in settlement discussions with

20 JPMorgan. As Your Honor heard at the hearing during the summer

21 of 2009, Centerbridge and Aurelius got together and fashioned

22 their own settlement proposal that they made to JPMorgan -- I'm

23 sorry, Appaloosa's witness explained that for prudential

24 reasons they did not trade after that proposal was delivered to

25 JPMorgan. Mr. Melwani testified that Centerbridge continued to



1 trade after that proposal was given to JPMorgan.

2 That conduct cannot be a 10b-5 violation for the

3 reasons that we talked about earlier, and the reason for that

4 is if we remember that it has to be trading while in possession

5 of material nonpublic information obtained under a fiduciary

6 duty or duty of confidentiality owed to the source of the

7 information. The proposal was Centerbridge's together

8 Appaloosa's, it was their information, they could do with it

9 what they want, they could trade on it if they wanted to. It's

10 one book insider trading law, you can trade on information you

11 own. If you don't owe a duty to someone else that restricts

12 the dissemination of that information and you didn't acquire it

13 as a fiduciary you can trade on it. Centerbridge was free to

14 trade.

15 When JPMorgan responded in August with a

16 counterproposal of their own Centerbridge stopped trading. We

17 could debate -- but we don't need to -- whether or not that

18 counterproposal was material, given the limited number of

19 parties at the table, given the fact that the debtor wasn't

20 involved and the FDIC wasn't involved. But we don't need to

21 because Centerbridge at point, for prudential reasons,

22 determined not to trade until they had sufficient time to think

23 about the offer and determine whether or not it was one that

24 was acceptable to them.

25 They did not resume trading -- as their trading



1 records show and as Mr. Melwani explained -- until after they

2 met with JPMorgan a second time and JPMorgan withdrew the

3 offer. So whether or not JPMorgan's counteroffer was material,

4 whether or not there was any duty of confidentiality attendant

5 to it, none of those questions are significant because the

6 offer was withdrawn. If anything should be clear, the

7 conclusion is clear that a withdrawn offer is not material.

8 I want to turn briefly now --

9 THE COURT: I think you're out of time. What other

10 issue do you have?

11 MR. OWENS: I was going to very briefly, Your Honor,

12 address the motion for standing to bring a claim. And I do

13 want to stress the following point.

14 Your Honor asked a question of Mr. Eckstein, and I

15 have to disagree with Mr. Eckstein's answer respectfully about

16 whether or not the issuer -- in this case the debtor -- if

17 there were a 10b-5 violation would have a remedy under 10b-5.

18 The answer to that is no. The issuer has no remedy for a 10b-5

19 insider trading violation under 10b-5. That's made clear by

20 the case law, it's also made clear by Section 20(a) of the '34

21 Act, which provides a private right of action for insider

22 trading violations of 10b-5.

23 There is a very unique and limited class of people who

24 can seek damages under 10b-5; that class is the people who are

25 contemporaneous traders in the market. Those claims could not



1 be brought by the debtor. They could only be brought by

2 contemporaneous purchasers or sellers of Centerbridge in the

3 market at the time of the trades identified to have been made

4 in violation of 10b-5. I think that's relevant to the debtors'

5 standing argument. I think it's also relevant to the 502B

6 analysis because I don't think 10b-5 is a defense to my

7 clients' claims.

8 Now, I hope I have left Your Honor convinced that

9 there are no merits to the 10b-5 claims. And I'm not -- I

10 don't want Your Honor to think I'm resting my case on the

11 limitations of who has a right of action, but I did want to

12 clear that up. Section 28 makes it clear the debtor as the

13 issuer does not have a right of a cause of action for insider

14 trading damages under 10b-5. I won't belabor the Court's

15 patience further. Thank you.


17 All right. Let's take a break, and then I guess we go

18 to the equity committee -- the objectors.


20 THE CLERK: All rise. Be seated.

21 MR. CURCHACK: Your Honor, I think we're switching the

22 order around a little bit yet again at the request of some of

23 the plan objectors. They've asked the two indentured trustees

24 who intend to speak this afternoon --

25 THE COURT: Okay.



1 MR. CURCHACK: -- and are obviously supporters of the

2 plan to go first.

3 THE COURT: Okay.

4 MR. CURCHACK: So we've agreed to do that.

5 Before I begin, we sort have the informal

6 understanding with the debtor to try to limit ourselves to five

7 minutes, but there's another plan proponent who's a holder of

8 our class -- not one of the settlement noteholders -- who in

9 fact has ceded their time to me for real. So I may go a little

10 bit beyond my allotted five minutes, but I'll try to keep it as

11 short as I can.

12 THE COURT: Okay.

13 MR. CURCHACK: And I'm Walter Curchack, Loeb & Loeb on

14 behalf of Wells Fargo, and I rise on behalf of the indentured

15 trustee for all the PIERS creditors to address an issue that

16 affects that entire class.

17 Your Honor, this has been a unique case. The debtors

18 have brought in huge recoveries, but there are still hungry

19 mouths here to be fed. And as the fulcrum security the PIERS

20 have had a unique and painful perspective. Senior creditors

21 unhappy with the hundred percent plus recovery want our noncash

22 stock distribution paid over to them on day 1. The

23 subordinated creditors and equity holders don't want us to have

24 any recovery at all in hopes that some value may flow down the

25 waterfall to them.



1 We've addressed most of their respective arguments in

2 our filings, so I want to use my limited time today to speak to

3 a very few important issues not already covered that highlight

4 the interplay of the subordination issues and the consequences

5 of Your Honor's ultimate decision on what interest rate to

6 allow the estates to pay.

7 I want to start in a very bad way by respectfully

8 disagreeing with something I believe Your Honor said this

9 morning during your colloquy with Mr. Hodara, and that relates

10 to the question of where the 510(b) claims fall in the 726

11 waterfall. I believe Your Honor said that the definition of

12 claim in the Code only includes pre-petition interests.

13 Respectfully, I think Your Honor misspoke. And I apologize for

14 not having pretty slides, but I'll assume has a copy of the

15 Code in front of them.

16 I'd like to start by looking at the definition of

17 claim, Section 101(5) of the Code, and I'll read it. "The term

18 claim means right to payment, whether or not such right is

19 reduced at judgment, liquidated, unliquidated, fixed,

20 contingent, matured or unmatured, disputed, undisputed," et

21 cetera. I believe the confusion comes from -- and Your Honor

22 was probably thinking of Section 502(b)(2), which deals with

23 the claim allowance process.


25 MR. CURCHACK: And let's turn to that section. 502



1 allowance of claims or interests, 502(b), acceptance provided

2 in the following subsections and so on, "claims shall be

3 allowed except to the extent that" -- in subsection T --

4 subsection 2, excuse me -- "such claim is for unmatured

5 interest". So 502(b) does not say that unmatured interest is

6 not included in a claim, it simply says that if it's included

7 in the claim the unmatured interest component must be

8 disallowed.

9 THE COURT: Okay.

10 MR. CURCHACK: And put another way, if unmatured

11 interest was not part of a claim there wouldn't be anything to

12 disallow. So a claim certainly does go beyond an allowed

13 claim, and that I think is the holding of the Seasons case that

14 Mr. Hodara was referring to in his argument.

15 So let's go back to 726, which I think everyone agrees

16 is subject to 510 of the Code, and then turn in turn to Section

17 510. 510(b) says for purposes of a distribution under this

18 title -- a 510(b) claim as we're referring to them, and I'll

19 read -- "shall be subordinated to all claims or interests that

20 are senior to or equal to such claim".

21 THE COURT: Um-hum.

22 MR. CURCHACK: Now, 510(c) on the other hand says

23 under principles of equitable subordination the Court may

24 subordinate "all or part of an allowed claim". So for the r --

25 again, as Mr. Hodara said this morning, I'm going to repeat it,



1 there's a difference. Claims and allowed claims -- 510(b)

2 claims are subordinate to all claims, not to just allowed

3 claims.

4 THE COURT: Okay.

5 MR. CURCHACK: Okay. Next I want to turn briefly to

6 our intramural squabble with the senior noteholders.

7 Your Honor, we don't contest that the PIERS are

8 subordinated debt instruments. The WMI noteholders, however,

9 would argue that that's the end of the story until they're paid

10 in cash in full the amount of their principle and contract rate

11 interest. And we have three problems with that argument, Your

12 Honor.

13 First, in their reply brief after, I think, the

14 confirmation hearing, they rely heavily on the WestPoint

15 Stevens case for the proposition that until the senior

16 creditors are paid in full in cash the junior creditor gets

17 nothing. Your Honor, in that case that's exactly correct, and

18 that's what happened -- most importantly because that's what

19 the credit instruments and the intercreditor agreement in that

20 case said -- paid in full in cash. So there was no question.

21 The problem is that that's not what the PIERS

22 indenture says -- or even frankly what their own senior

23 indenture says. In fact, quite the opposite, if you turn to

24 Section 6.1(a) of the junior subordinated indenture -- which,

25 Your Honor, is Exhibit DX-297 -- I have a copy if you'd like us



1 to hand one in.

2 THE COURT: No, that's fine.

3 MR. CURCHACK: Okay. It says, "the holders of senior

4 indebtedness shall be entitled first to receive payment of the

5 full amount due thereon in respect of all such senior

6 indebtedness and all other amounts due or provision shall be

7 made for such amount in cash, or other payment satisfactory to

8 the holders of senior indebtedness" and so on, before the

9 junior gets paid.

10 But Your Honor, what does that mean here? Provision

11 is made for payment in cash. Well, because of the claims

12 reserves, because not all the debtors' assets have been

13 assembled yet, it seems probable that the senior notes will not

14 get paid in full on day 1 of this case. However, the senior

15 holders will -- if they don't get paid in full -- receive the

16 senior interest in the liquidating trust. No one is

17 challenging the debtors' projected recoveries; the seniors will

18 get paid in cash and first once those assets become available.

19 And no one has questioned the debtors' projected assets are

20 real. In fact, the only challenge has been that they have been

21 understated.

22 There's a second issue of which, going back to the

23 indenture, infers or other payments satisfactory to holders of

24 senior debtedness.

25 Now, the White & Case group has argued that payments



1 satisfactory to the holders refers also to the language that --

2 the first part of that sentence, talking about the other

3 provision for payment in cash, Your Honor, we believe that

4 under the well-established contract interpretation rule, called

5 the rule of last antecedent, the satisfactory to the holders

6 only refers to the other payments which, in this case, would be

7 the stock. Now, senior creditors had to elect to take stock in

8 this case so it's very hard to imagine them arguing that it

9 wasn't satisfactory to them, since they made the affirmative

10 election to take it.

11 And with respect to the provision shall be made, as we

12 said earlier -- sorry, as I've just indicated, we don't believe

13 that the holders have a consent right with respect to that, it

14 simply requires that provisions be made for such payments in

15 cash, which is what we believe the plan does. No one else is

16 going to get that cash until they do and that cash is there or

17 will be there.

18 So, because -- but the rule of antecedent -- the last

19 antecedent says is we have a comma, as you do here before the

20 word or other payments, you limit what the proviso, in this

21 case the satisfaction of holders of senior indebtedness applies

22 to. And that's our response to that point.

23 Frankly, Your Honor, even if that rule of contract

24 interpretation didn't apply here, 99.99 percent in amount and

25 99.8 percent in number of the senior holders voted to approve



1 the plan. And their own indenture, which is Exhibit WMG-1

2 says, in section 15.11 which is the subordination provision of

3 that indenture, that the rights -- I'll read it. "The rights

4 and obligations are subject to power of court. The rights of

5 holders of senior debt and the obligations of the trustee and

6 the holders of securities are subject to the power of a court

7 of competent jurisdiction to make other equitable provision

8 reflecting the rights conferred in this indenture upon the

9 senior debt and the holders thereof, with respect to the

10 securities and in coupons appertaining thereto, and the holders

11 thereof, by a plan of reorganization under applicable

12 bankruptcy law." Which, Your Honor, I believe means that

13 sections puts to rest any argument that their indenture is

14 inconsistent with the plan, once Your Honor has approved the

15 plan.

16 Moving on. Your Honor, Mr. Hodara also addressed the

17 Pandora's box of issues that arise here from possibly not

18 applying the contract rate of interest. I won't repeat all of

19 the ones that he cited to but there are a couple of points I'd

20 like to make.

21 We address, in our papers, the role of explicitness

22 and I don't think there's any question that that rule, as a

23 rule of contract interpretation if not a rule of law in the

24 Third Circuit, is still effective. And as Your Honor knows, we

25 have taken the position that our indenture, while it does



1 recognize that we are subordinate to post-petition interest, is

2 not clear that -- as to what rate of interest.

3 And the logic behind the rule of explicitness is that

4 you need to know what you're subordinate to. We don't -- the

5 question of how that clause would be interpreted if this were

6 an insolvent debtor is not before this Court. So you don't

7 need to worry about that issue. The point here, Your Honor, is

8 that you are going to set an interest rate in this case and if

9 the rate you agree to --- allow the debtor to pay is the

10 contract rate, as the plan provides, we're fine, end of story.

11 But if, for equitable reasons, you choose a lower rate, you

12 also have to recognize, for equally important equitable

13 reasons, the consequences and the need for the subordination

14 provision to be applied at the same rate.

15 Your Honor I'd like to turn, very briefly, to a couple

16 of points regarding some of the, even junior to me, creditors

17 in this case. The TPS argue that Your Honor should pick the

18 lowest interest rate possible because that will allow value to

19 flow down to equity. Your Honor even if it would, and that's

20 not clear given the still unresolved claims' pool, the cases

21 are clear that Equity's hopes for recovery are not a relevant

22 consideration.

23 The TPS would have Your Honor establish what no court

24 has ever done, at least to my knowledge, set a bright line test

25 that the court must adopt the lowest rate possible, and not



1 only is that absurd on its face, Your Honor, both in the Quorum

2 case and in your decision in January, has already said quite

3 the opposite.

4 The Court's role here is to enforce the contractual

5 rights of the parties, not redistribute those rights to achieve

6 some perceived fairness, and I refer Your Honor to the Urban

7 Communicators case which we cite in our papers. And in a case

8 like this, I would ask what is the fairness if the result of

9 that decision is to strip creditors, here the innocent PIERS

10 holders, of any recovery in the process in order, simply, to

11 provide a recovery to equity, which brings me back, full

12 circle, to the fact that the PIERS are a whole class of

13 holders, not the four settlement noteholders.

14 I urge the Court to remember the teachings of the

15 Supreme Court in the Nolan case, and not cause innocent class

16 members to be punished by the alleged misconduct of others.

17 There was some discussion this morning of whether the

18 plan could be confirmable, if Your Honor still had issues

19 concerning the insider trading allegations and I'd ask Your

20 Honor to keep this in mind; the claims at issue in the plan are

21 debt obligations of the debtors. The allowed claims of the

22 funded debt were filed by the respective indentured trustees,

23 and consistent with long-standing practice, distributions will

24 be made nominally through those trustees and the DTC system to

25 their respective holders, that's how the plan works.



1 Even if there was misconduct, and we are by no means

2 saying that we think there was, it does not affect the

3 liability of the debtor generally for its debts and certainly

4 not its obligation to all the holders of those debts.

5 And for all the reasons the Court is aware of; the

6 cash burn, the time delays, et cetera, failure to confirm the

7 plan now for the sake of a contingent, legally speculative

8 witch hunt is a likely death sentence for the entire PIERS

9 class and likely for the CCBs as well. There's simply no need

10 and not time for a do-over.

11 Unless Your Honor has any questions, I would step

12 down.


14 MR. CURCHAK: Thank you, Your Honor.

15 MR. CROWLEY: Hi, Your Honor. Good afternoon. My

16 name is Leo Crowley. I represent the Bank of New York Mellon

17 as a trustee for the senior notes.

18 Your Honor, just to put it in context who I am and

19 what I represent, there are billions of dollars of senior note

20 claims held by over a thousand creditors, over a thousand

21 ballots were filed on the senior notes class that are purely

22 innocent victims caught in the crossfire between the

23 allegations between the equity committee and the settlement

24 noteholders. And I don't think too much for those allegations

25 but whatever happens, it should not affect the recoveries or



1 the timing of recoveries to the billions of dollars and senior

2 noteholders who are effectively innocent victims here.

3 I want to follow up on one comment Mr. Curchak made on

4 behalf of the PIERS trustee that I respectfully disagree with,

5 which is that he raised the question of what happens if the

6 Court concludes that post-petition interest should accrue at

7 some lower rate than the contract rate and then you have to

8 face the question of what interest rate should be applied in

9 enforcing the subordination clauses in the indenture. And

10 respectfully Your Honor, that's a completely hypothetical issue

11 at this point. The only plan in front of you that you have to

12 rule on, up or down, is a plan that calls for the accrual of

13 post-petition interest at the contract rate.

14 If, hypothetically, Your Honor does not confirm that

15 plan, then we can sit around and speculate as to what happens

16 next and what the next plan looks like, and hopefully we have a

17 solvent estate but maybe we don't have a solvent estate, in

18 which case Mr. Curchak make get what he asked for which,

19 although I don't think it's what he wants, which is a situation

20 in which you no longer have to worry about the interplay

21 between accrual of interest against the estate versus accrual

22 of interest on the intercreditor claims, you know, I'm just

23 going to accrue interest on the intercreditor claims at the

24 contract rate I'm entitled to. But the point is it's

25 hypothetical, you don't need to worry about it now and we don't



1 think you should.

2 Thank you.


4 MR. LOWENTHAL: Good afternoon, Your Honor. Daniel

5 Lowenthal, Patterson, Belknap, Webb & Tyler. We represent Law

6 Debenture Trust Company of New York and the indentured trustee

7 for the senior, subordinated noteholders.

8 Your Honor, we filed two briefs in support of

9 confirmation and we heard Your Honor loud and clear this

10 morning when you said you did not want us to repeat the

11 arguments in the briefs and the case law set forth therein.

12 And we briefed a lot of issues, including such issues as the

13 PIERS' trustee's arguments about subrogation, the senior

14 floating rate noteholders' arguments about what rate of

15 interest they think they should get.

16 There's been a lot of briefing about the rule of

17 explicitness in all of the case law that's come under that over

18 the last several decades. But there are, and I won't go into

19 those arguments in any detail but we will rest upon our papers.

20 But there are three sets of arguments that I would like to

21 touch upon briefly and I expect that my remarks will take five

22 minutes or less. Those are remarks made by counsel for the

23 creditors committee and arguments made by Normandy Hill and the

24 PIERS trustee and then finally a couple of arguments made by

25 the WMI senior noteholders.



1 Mr. Hodara, for the creditors' committee, made several

2 points that affect us directly and I mention them because I

3 submit that his analysis was spot on and I just want to

4 incorporate them by reference very quickly. He explained why,

5 with respect to post-petition interest, the contract rate and

6 not the federal judgment rate should apply and he also

7 correctly detailed why claims held by 510(b) claim holders

8 should be subordinated to post-petition interest claim payments

9 to other creditors and I think Mr. Curchak clarified the --

10 several concepts with respect to that as well and support what

11 he said.

12 Now, with respect to Normandy Hill and the PIERS

13 trustee, Your Honor, they urged the Court to apply the federal

14 judgment rate to the pay-over of post-petition interest by the

15 PIERS to more senior creditors should Your Honor rule that the

16 debtors should pay post-petition interest at the federal

17 judgment rate and Mr. Crowley just addressed this and indicated

18 there was at least one flaw with this argument, which I

19 wholeheartedly agree, which is it's really a timing issue,

20 that's not the plan before the Court.

21 But even if Your Honor were to consider this argument,

22 we submit that it really reflects an incorrect reading of the

23 PIERS indenture and applicable law. If the debtors are

24 required to pay the federal judgment rate, that doesn't mean

25 that the contractual language in the PIERS indenture can be



1 disregarded and that the PIERS would no longer have to pay the

2 contract rate.

3 Whether a creditor -- excuse me -- whether a debtor in

4 any particular case has to pay post-petition interest and the

5 rate at which that interest must be paid, is not relevant -- is

6 not relevant to a subordinated creditors' obligation to pay

7 over post-petition interest in accordance with the terms of the

8 subordination agreement.

9 Now, Mr. Curchak said, just several minutes ago, that

10 we are not dealing with an insolvent estate so we don't have to

11 deal with that. But in fact all he's doing is asking Your

12 Honor to wish away the logic that undermines his argument

13 because otherwise taken to the extreme, if a debtor doesn't

14 have to pay post-petition interest when an estate is insolvent,

15 then by their argument a subordinated creditor would not have

16 to pay over post-petition interest, but that's not how

17 subordination agreements work.

18 Now, Your Honor, finally, with respect to the WMI

19 senior noteholders; they assert that the senior subordinated

20 noteholders agreed, in their indenture, to subordinate their

21 right to post-petition interest in favor of senior noteholders

22 based on the phrase "Payment in full" in the senior

23 subordinated noteholders' indenture. But we submit that the

24 senior -- the WMI senior noteholders analysis is flawed and

25 they ignore the substance of the key reported decisions dating



1 back to the Time Sales case in the mid-'70s, the southeast

2 decision in the Eleventh Circuit, the Bank of New England

3 decision up on the First Circuit. I indicated I won't go into

4 those in any detail but we do believe if you follow the thread

5 of the cases, Your Honor, the key issue is you look to

6 underline New York contract principles and these indentures are

7 governed by New York law, and it's clear that the phrase

8 payment in full, the exact language that is in our indenture,

9 is insufficient as a matter of law for the Court to conclude

10 that the senior subordinated noteholders agreed to subordinate

11 receipt of post-petition interest in favor of the senior

12 noteholders.

13 Your Honor, the WMI senior noteholders also take issue

14 with the debtors' subordination model. They have issues with

15 how tranche 1 and tranche 2 are set up and the flow of funds

16 there. We detail, in our brief, why we think the debtors are

17 right and why the senior subordinated noteholders have it wrong

18 and we'll rely on our papers for that argument as well.

19 So unless Your Honor has any questions in closing, we,

20 on behalf of Law Debenture Your Honor, respectfully submit that

21 the plan should be confirmed.

22 Thank you.

23 MS. ARNOLD: Good afternoon, Your Honor. Ronni Arnold

24 from Arent Fox representing Wilmington Trust Company in its

25 capacity as indentured trustee for certain CCB1 and CCB2 claim



1 holders. Wilmington Trust Company is also a member of the

2 creditors' committee.

3 Your Honor, Wilmington Trust Company strongly supports

4 confirmation of the modified sixth amended plan in its current

5 form and supports the expeditious resolution of these cases so

6 that the global settlement can be implemented and creditors can

7 receive their distributions.

8 Wilmington Trust Company believes the plan, the

9 evidence adduced at the confirmation hearing and the written

10 submissions filed in support of the plan all properly address

11 the objections raised before the Court and Wilmington Trust

12 Company respectfully requests that the Court overrule the plan

13 objections and confirm the plan.

14 Thank you.


16 MR. UZZI: Your Honor, Gerard Uzzi of White & Case on

17 behalf of the WMI noteholders group.

18 Your Honor, I'd like to be heard or we wish to be

19 heard with respect to two issues. First, to make clear that we

20 support confirmation of plan and urge that the Court confirm

21 the plan and I just have a few remarks with respect to that.

22 Second, there is a limited objection with respect to

23 whether the plan appropriately reflects the enforcement of

24 contractual subordination rights. We briefed that in our

25 papers and we're prepared to rest on our papers, but we did



1 want to make ourselves available to answer any questions the

2 Court may have and to the extent does my colleague, Greg

3 Starner, will handle those questions, Your Honor.

4 THE COURT: No. I understand your position.

5 MR. UZZI: All right. Thank you, Your Honor.

6 With respect to the plan itself, Your Honor, since the

7 announcement of the global settlement, which is about a year

8 and a half ago, the Court has heard an awful lot from the

9 equity holders and has heard an awful lot from and about junior

10 stakeholders. You haven't really heard all that much from the

11 senior noteholders since that time. And the senior noteholders

12 happen to also be the majority of the creditors in this case.

13 And why -- well, I'm here Your Honor because I thought

14 it might be helpful to the Court to hear the perspective of the

15 other side of the capital structure and in thinking about it,

16 you know, why is it that you really haven't heard from us all

17 that much in the last year to year and a half. Well, Your

18 Honor, we've been sidelined. We've been sidelined principally

19 on the premise that because there's a deal on the table that

20 purports to pay us in full, that our views are relatively

21 unimportant. And I might be willing to accept that premise if

22 there were relative certainty that we were actually going to

23 get paid in full but that certainty just doesn't exist today.

24 The deal with JPM and the FDIC is simply not a done

25 deal yet and there are no assets in the estate available to pay



1 us in the event that deal goes away. Now, we are relieved that

2 neither JPM nor the FDIC has made any efforts to walk from the

3 deal since it was first announced or even to retrade the deal

4 since it's first announced and frankly I think they should be

5 commended for that. But nobody's willing to give us any

6 assurances and frankly they can't give us any assurances that

7 if this deal isn't consummated now that it's not going to go

8 away or that it's not going to be retraded in some way that's

9 detrimental to us.

10 So we do, in fact, have a substantive, direct

11 substantive view here, Your Honor, and this does impact us.

12 It's not just a timing issue. In fact our entire recoveries

13 are in jeopardy right now.

14 Now, moreover, what has happened in the last year and

15 a half since the global settlement was first announced? Well,

16 interest has continued to accrue and administrative costs have

17 continued to be incurred at a substantial rate that we went

18 from mere certainty to being paid in full under any

19 circumstance to a substantial likelihood that there's going to

20 be a shortfall, depending upon how Your Honor rules,

21 ultimately, on the subordination issues.

22 Now, I raise these points, Your Honor, not to whine or

23 complain or to stamp my feet about being sidelined, that's not

24 the point. The point I want to get across, Your Honor, is that

25 the continued opposition and the continued delay, in particular



1 to the consummation of the global settlement, is not free.

2 There's a cost to it and that cost is being borne by my

3 clients.

4 Now, in that regard Your Honor, what exactly is the

5 opposition? Well, as I understand the argument Your Honor,

6 there's a group of stakeholders who participated substantially

7 with the debtors in the formulation of the global settlement.

8 There's an allegation that certain of those stakeholders used

9 information that they learned during the formulation process to

10 their own advantage with respect to the trading of securities.

11 And that trading was inappropriate and then because of that,

12 that somehow this settlement is now tainted.

13 Well, if we just think about that and break that down

14 for a second, Your Honor, mere participation by major

15 stakeholders of course cannot be inappropriate. In fact the

16 code encourages participation in the process. With respect to

17 the allegations of using information for their own gain, we

18 certainly don't believe the record supports a finding of

19 inappropriate conduct but from our perspective that is, with

20 respect to plan confirmation and approval of the settlement we

21 really question the relevancy of it. That is, you know, almost

22 so what Your Honor. And I analogize that to a harmless error,

23 where is the harm? How is the harm being demonstrated? What

24 we have here, Your Honor, at its core is a plan that's based

25 upon a global settlement. Now, that global settlement was



1 independently validated on the merits by an examiner and Your

2 Honor went through the first confirmation hearing in a recent

3 decision and independently validated the merits of the

4 settlement itself, based upon the litigation risks.

5 What the settlement noteholders may or may not have

6 done with respect to their trading activities, we don't

7 believe, bears or has any relevance or at least little

8 relevance with respect to the legitimacy of the settlement

9 itself and therefore whether this plan should be confirmed.

10 Now, what the equity committee would ask you to do,

11 Your Honor, is to draw an inference that because the settlement

12 noteholders were weighted in the junior securities they must

13 have asserted undue influence on the debtors and caused the

14 debtors to settle too cheaply. That is but for the settlement

15 noteholders' influence, there was more money to get. Well,

16 Your Honor, I think it's dangerous to draw inferences but I can

17 give you a set of facts on the record and I can give you the

18 180 degree inference that can be drawn. And when we started

19 this case, Your Honor, my firm, White & Case, represented a

20 group of noteholders, the WMI noteholders group and that group

21 had substantial positions, material positions in all tranches

22 of the debt, both the senior debt and the two junior tranches

23 of the debt.

24 Around the fall of 2009, before the equity committee

25 was even formed, the members holding the junior portions of the



1 debt were asked to leave the group. What's the inference that

2 could be drawn from that? Simply Your Honor, that the senior

3 noteholders that thought that the junior noteholders were

4 holding out for too much. Said another way, but for the junior

5 noteholders the debtors would have settled for far less, far

6 earlier and we would have been paid far earlier.

7 Now, Your Honor, again, I raise that only to show and

8 demonstrate that you can draw lots of inferences and I think

9 that that's dangerous. I think what I've asked the Court to

10 focus on is, again, the harm. There's been an allegation of

11 inequitable conduct but does that inequitable conduct taint the

12 plan itself. To deny confirmation of the plan, Your Honor, we

13 believe that there needs to be some direct causal link that is

14 simply absent here. There needed to be new evidence that would

15 demonstrate that on the merits the settlement's not reasonable.

16 Said another way, there needed to be new evidence to have the

17 Court conclude that the debtors settled too cheaply because in

18 absence of that, Your Honor, what's the point of denying

19 confirmation of the plan based upon the settlement noteholders'

20 participation. Where do we in fact go from here if we don't

21 conclude that the settlement is unreasonable?

22 Your Honor, we sympathize with the plight of Equity.

23 They're out of the money and they're simply not going to

24 participate in any plan. You know, before Armstrong World

25 perhaps there was something that could be done about that but



1 where the state of the law is and just given how large this

2 capital structure is, there's just not practical prospect for a

3 settlement here. So if a plan's going to get done in this

4 case, Your Honor, I'd submit that the only way it's going to

5 get done is the old fashioned way, through a cramdown.

6 Your Honor, we respectfully urge the Court to confirm

7 the plan. Unless you have question of me, on my remarks or on

8 the subordination issues, I have nothing further, Your Honor.


10 MR. UZZI: Thank you.

11 MR. ROSEN: Your Honor, I don't know -- I think that

12 concludes the people who were going to speak in support of the

13 plan. There are two gentlemen here, Mr. Whistler and Mr.

14 Spence, who represent people who filed an objection, some

15 directors and officers, and they asked me just to report to the

16 Court that they are prepared to rest on their papers and there

17 is no need for them to make an oral presentation. And with

18 that, I think, they could leave the courtroom.

19 THE COURT: Okay.

20 MR. MORRIS: Good afternoon, Your Honor. Matthew

21 Morris from Grant & Eisenhofer for the WMB noteholders.

22 Your Honor, as you know, we filed an objection to the

23 plan based on a number of grounds. The principal one was the

24 plan's proposed treatment of post-petition interest and it's

25 payment of post-petition interest ahead of our client's allowed



1 subordinated, unsecured claims based on their direct

2 misrepresentation claims in connection with debt securities of

3 Washington Mutual Bank. That is the principal point, with

4 respect to all the other points in our objection; we'll rely on

5 our papers. But I do want to say, just a little bit, on that

6 post-petition interest point.

7 I'm very mindful of what Your Honor said about not

8 repeating our arguments and I know that we laid out for Your

9 Honor, I hope clearly, whether or not you accept it or not but

10 I hope clearly our understanding of the interplay between

11 Section 726 and 510.

12 THE COURT: Well, do you want to respond to their

13 suggestion that it's claims, not allowed claims, to which you

14 are subordinated?

15 MR. MORRIS: Yes, Your Honor. I think -- if I

16 understood and I've just looked very briefly at the Seasons

17 Apartment case and I wasn't able to fully hear Mr. Crookshank

18 (sic) from the bank of the room, but my understanding is that

19 the view is that we are subordinated not just to allowed claims

20 under 510(b) but to all claims. And I think, Your Honor,

21 clearly you can have a claim for interest. But I think, as the

22 El Paso case that we cited in our initial objection points out,

23 the claim for interest is different from the claim. It's an

24 equitable claim that gives -- comes up if the estate possess

25 sufficient assets to pay interest after all other claimants



1 have been paid in full.

2 Now, if we were to prevail on our misrepresentation

3 claims, there can be no dispute that we will have an allowed

4 unsecured claim, albeit subordinated, which will be an allowed

5 claim just like a 782 -- 726(a)(2) claim would be but for the

6 fact of subordination.

7 If any claim for interest, post-petition interest,

8 were somehow senior to those claims, there would be no need for

9 a payment of interest under 726(a)(5) or all of the A1, A2, A3,

10 A4 categories under 726 would include a proviso that interest

11 was to be included in payment of those claims.

12 I think to view that a claim for interest somehow

13 attaches to the claim for post-petition interest attaches to

14 the claim itself so that it falls under that clause senior but

15 equal to, really is a rewriting of the Code. You would have to

16 rejigger all of the sections referencing post-petition interest

17 in Section 726.

18 A theme that's been struck in the various responses to

19 our objection was that the WMB noteholders just ignored the

20 fact that 726 was subject to 510. And I think, as we've

21 stressed repeatedly, we don't ignore that, we acknowledge it

22 but you really have to look at the way 510 operates. And when

23 you look at the clause, the claim shall be subordinated to all

24 claims or interest senior or equal to, it really places us

25 squarely at -- in the bottom of the 726(a)(2) category.



1 Now, I know Mr. Hodara pointed out that in effect we

2 were the ones who appeared to be rewriting the Code by coming

3 up with this new category 726(a)(2.1) and, you know, maybe that

4 was not the happiest phraseology, Your Honor, but it really was

5 meant to show that given the nature of our claims, where we

6 fall on that senior but equal to -- under that senior but equal

7 to paradigm, is really at the bottom of (a)(2) or at the top of

8 (a)(3). It's an illustrative vehicle, I hope, to show where we

9 fall. And the .1, you know, we're certainly not attempting to

10 rewrite the Code or suggest a new category, it's just to show

11 where we have fallen. I think any other interpretation, that's

12 where the rewriting is required, either by striking 510's

13 reference to senior or equal to or by striking 726(a)(5)'s

14 payment of interest at that level or by including references to

15 payment of post-petition interest in the other categories.

16 That's where the significant rewriting occurs.

17 I think our interpretation is the only one that really

18 would allow the Court to treat the payment of post-petition

19 interest, vis-a-vis a general unsecured claims and subordinated

20 general unsecured claims as Congress and the Code intended.

21 Finally, Your Honor, just to address, you know, what I

22 kind of lump together as the parade of horribles that have also

23 been suggested by the various responses, if you were to find in

24 favor of setting aside interest pending ultimate resolution on

25 our direct misrepresentation claims that the -- whether it be



1 delay or sending the drafters of the plan back to the drawing

2 board, upsetting market expectations and the subordinated debt

3 market and so on, all of those are essentially equity based

4 arguments that even if the interpretation were to go our way,

5 this is what will happen if Your Honor finds for us. I just

6 want to spend a moment speaking about equity, Your Honor.

7 I mean our clients represent insurance companies who

8 bought WMB notes at face value; in many cases, years before the

9 filing. They have what they believe to be meritorious direct

10 misrepresentation claims. They are entitled to pursue those

11 claims. I mean clearly, they're not going to be resolved in

12 the next few months; this will take some time. But it's not

13 unprecedented to require funds to be set aside pending the

14 outcome of litigation.

15 If we don't prevail in the claims, it's a moot issue.

16 The money's distributed out. But if we do prevail, we are

17 then, we have a subordinated allowed general unsecured claim

18 and I think we're entitled to have the funds set aside for us

19 for payment on that claim as 510 and 726 provide. This was

20 not -- the drafting of the plan and the provision that class 18

21 where we fall will be paid only after payment of all post-

22 petition interest wasn't our phraseology. The drafters could

23 have provided that it would be paid as ordered by the Court or

24 in accordance with the Code allowing the plan to go forward

25 even if Your Honor reviewed -- found for us. And the potential



1 impact and the subordinated debt market, that's the deal that

2 they struck, Your Honor. I mean if I understand it correctly,

3 the subordinated peers claimants contracted to pay the post-

4 petition interest of the senior noteholders out of their own

5 distribution on their general unsecured claims. That's the

6 agreement they struck; we didn't strike that. And for better

7 or worse, I think that was the consequences of that. Whether

8 it upsets the markets and dashes expectations, I don't know;

9 I'm not in position to say. I think given everything that's

10 happening in the overall financial markets now that would

11 probably be more of a blip than anything truly significant.

12 Finally, Your Honor, just bearing in mind that again,

13 and this is Mr. Hodara's last comment where he suggested --

14 where he pointed out that 510 it deals with both debt and

15 equity securities, we don't disagree with that either. That as

16 Your Honor noted, we are a debt security -- our claims are

17 based on debt securities. Section 510 clearly differentiates

18 between those two in how they will be paid. And they -- the

19 senior but equal to language with respect to debt securities is

20 contrasting very sharply with that with respect to an equity

21 security which is treated just as common stock.

22 So, Your Honor, if you're -- unless you have any

23 questions, those are all the points I wanted to address.


25 MR. MORRIS: Thank you.



1 MR. ROQUEMORE: Good afternoon, Your Honor. James

2 Roquemore, I represent the ANICO plaintiffs.

3 Your Honor, I rise to ask the Court to include

4 specific language in the plaintiff confir -- in the order with

5 respect to the plan of confirmation. Your Honor, we submitted

6 a written submission in this case outlining four points -- four

7 specific points that we're asking for.

8 Your Honor, the prior plan confirmation hearing, we

9 had some issues with regard to releases and with regard to the

10 ownership of the claims. Your Honor did issue a ruling

11 confirming that the claims in the ANICO litigation were not

12 being released and that no determination of ownership was being

13 made by Your Honor with regard to the claims asserted therein.

14 THE COURT: Are you saying the modified plan doesn't

15 have that language?

16 MR. ROQUEMORE: Your Honor, the modified plan does

17 have that language. We're asking the Court to include that in

18 the order confirming or however you decide with regard to this

19 confirmation hearing.

20 Your Honor, in addition after the disclosure hearing,

21 there was a -- the ANICO decision reversing the previous

22 dismissal was issued and that Court identified several issues

23 to be resolved at the outset upon remand regarding standing of

24 the ANICO plan to pursue these claims. Your Honor, we ask for

25 a specific language in the order with regard to maintaining the



1 status quo in the District of Columbia court in order resolve

2 those issues also.

3 Your Honor, we believe that it's important to have

4 language in the order because of clarity. One of the things

5 that the debtors are required to do is to come to the District

6 of Columbia, file a stipulation of some sort. The court in the

7 District of Columbia is going to be looking to the order to

8 figure out what specifically the Court here ruled and we would

9 feel much more comfortable having a court order laying out the

10 four points that we believe that outline what the Court's

11 already ruled just for guidance for the Court and with regard

12 to -- our position and our stake in this litigation.


14 MR. ROQUEMORE: Thank you.


16 MR. FOLSE: Thank you, Your Honor. Parker Folse on

17 behalf of the equity committee.

18 One of the reasons why I agreed in July and wanted to

19 file a written closing argument was so that we could do what we

20 did and that was to take the fairly extensive record of the

21 plan confirmation hearing in this case and put the evidence

22 together and lay it out as a story of what actually happened in

23 the development of the global settlement agreement and the plan

24 of confirmation and to do it in a way that was careful, that

25 was meticulously cited so that we would not have to worry about



1 people standing up and telling the Court there is no evidence

2 of A, B, C. It is undisputed that X, Y, Z and, of course you

3 heard that today. And the problem with hearing that if you

4 haven't done what we did is you're confronted with a feeling

5 that you need to go in and start pulling out pieces of the

6 record in a compressed period of time in trying to answer it

7 and I'm not going to try to do that. Because I think the Court

8 has read what we've done, we stand by our description of what

9 the evidence says, and I think it sets out quite clearly that

10 in this very unusual case in which parties were permitted to

11 look behind the curtain in a way that almost never happens in a

12 bankruptcy case about how a major bankruptcy transaction

13 actually took place. We know that now. At least we know part

14 of it. And that evidence reveals, in our view, a fundamental

15 inequity that has tainted this bankruptcy with the knowledge

16 and the cooperation of the debtors.

17 It shows four large hedge funds buying a veto position

18 over plan confirmation, then using that position to obtain

19 entry into the most critical negotiations concerning the

20 outcome of this case with concomitant access to material

21 nonpublic information while continuing to trade while in

22 possession of that information and at the same time playing a

23 pivotal role in the negotiation of the settlement that would

24 determine the ultimate worth of those investments. And they

25 did that with the knowledge and with the enablement of the



1 debtors. Now, that is what we think the evidence shows in a

2 nutshell. There aren't, that I have seen, any reported

3 decisions that address this kind of specific factual

4 circumstance. Not because the outcome should be in doubt but

5 because it is so unusual to have a Court allow people to

6 conduct discovery and to develop the evidence in a hearing that

7 shows something like this. I don't know how often it goes on.

8 I hope it doesn't go on often but we know what happened here

9 and based on the facts of this case, we strongly believe that

10 the Court can't turn a blind eye to it. It doesn't matter that

11 people come up and complain about how long the bankruptcy case

12 has taken, about how estate expenses are continuing to mount

13 because we didn't cause that problem. The debtors caused that

14 problem as they have in the past and the settlement noteholders

15 caused that problem. I'm mainly going to talk about legal

16 issues.

17 The first concerns the grounds for the existence of a

18 duty on the part of the settlement noteholders not to trade and

19 there are two grounds that I want to talk about. The first is

20 the temporary insider doctrine and that applies when a

21 confidential relationship between an outsider and the issuer of

22 the securities is created and gives rise to a duty by the

23 outsider not to use material nonpublic information that it

24 obtains as a result of that relationship to the disadvantage of

25 other outsiders.



1 The case law, contrary to what you've been told today

2 in the briefing, does not hold that such relationships only

3 exist when the outsider is someone who works for the issuer

4 such as an attorney or an accountant or a consultant. And I'll

5 give the Court an example of a case that we found actually

6 after we filed our post-hearing brief and so I'll need to

7 provide the name of the citation. It's a 1999 Second Circuit

8 decision called Simon DeBartolo Group v. Richard E. Jacobs

9 Group and it's reported at 186 F.3d. 157. It focused on the

10 conduct of an outside investor who entered into negotiations

11 with an issuer about a potential major transaction for the

12 acquisition of the issuer's assets. The outsider obtained

13 nonpublic information about the issuer pursuant to a

14 confidentiality agreement which provided that the outsider

15 would use the information for purposes of the contemplated

16 transaction. Very much like the confidentiality agreement in

17 this case where it very clearly talked about the agreement

18 being entered into for the limited purpose of providing

19 reasonable and necessary information for the use in developing

20 a proposed plan.

21 In that case, the outsider then acquired shares in the

22 issuing corporation while in position of this publicly

23 nondisclosed information. And the Second Circuit held that

24 those facts were sufficient to state a claim for insider

25 trading. And I quote a little bit from pages 171 to 172 of the



1 Court's opinion.

2 "Appellants were not obliged to demonstrate a

3 fiduciary relationship between DeBartolo and the defendants in

4 order to establish this duty." DeBartolo being another

5 potential transaction partner who was complaining. "Under the

6 traditional theory of the insider trading, appellants merely

7 were required to demonstrate a fiduciary or similar

8 relationship of trust and competence between the defendants and

9 RPT's shareholders generally. Such a relationship may arise,

10 as noted previously, where an outside party is given access to

11 material nonpublic information by an issuer 'solely for

12 corporate purposes in the context of "a special confidential

13 relationship'". Appellants by alleging that RPT provided the

14 defendants and other Grand Slam parties" -- that was the name

15 of the group -- "with material nonpublic information to be used

16 confidentially and solely for purposes of formulating Project

17 Grand Slam, appeared to have placed the defendants squarely

18 within this limited category of corporate outsiders subject to

19 the prohibition on insider trading as outlined in Chestman and

20 Dirks. Appellants, therefore, at least arguable alleged facts

21 sufficient to establish the requisite duty to disclose or to

22 abstain."

23 In that case, the outsider was not acting as an agent

24 of the issuer, it was receiving information to further its own

25 interest in negotiating an arm's length transaction with the



1 issuer and yet the Court found the existence of a special

2 confidential relationship in which the issuer was providing its

3 nonpublic information to this outsider in furtherance of its

4 corporate purposes. And understanding that, the acquirer of

5 the information was restricted in what they could do with it

6 and we believe exactly the same thing is true here.

7 The settlement noteholders no doubt were pursuing

8 their own selfish ends but the information they were given

9 access to by inserting themselves with the debtors' permission

10 into this process was being shared with them not for their own

11 selfish purposes, not for them to go out and make more

12 intelligent trading decisions, but for the purposes of

13 developing or attempting to develop an agreement that would

14 provide the resolution of this case in the best interest of the

15 entire estate. They were given access to nonpublic information

16 pursuant to the confidentiality agreements which so stated that

17 that was the reason why they were being given the information.

18 And even though, Your Honor, it was entirely foreseeable by the

19 debtors and the settlement noteholders that they were, they

20 could, and would be allowed to trade while in possession of

21 that information, the debtors weren't bringing them under the

22 tent in order to make that easier for them. That was not the

23 purpose for which they were there. Beyond that, in this case

24 the settlement noteholders were not negotiating, even unlike

25 the DeBartolo case, they weren't negotiating a private



1 transaction with themselves. They were directly and

2 immediately participating in negotiations over the terms and

3 agreement between the debtors and third parties that would

4 materially affect the estates as a whole. They put themselves

5 in that position. Like they insisted that they be allowed to

6 be in that position and that gave them access to information

7 that other people trading in the markets did not have. They

8 functioned as a sort of super creditors' committee without

9 joining the official committee and thereby subjecting

10 themselves to the duties and restrictions that committee

11 membership would have entailed. They did that quite

12 consciously.

13 And Your Honor heard testimony about -- from each of

14 the settlement noteholder witnesses explaining the supposed

15 care they took in making their own determinations about whether

16 the information they learned was or wasn't material. If they

17 genuinely thought, as they've been up here telling you today,

18 as they said in the brief, if they genuinely thought they had

19 no duty to refrain from trading outside the confidentiality

20 periods, then why were they making these determination?

21 If you accept that testimony, it strongly implies that

22 even the settlement noteholders knew that they had assumed a

23 duty not to engage in insider trading which went beyond the

24 temporal limits of those confidentiality agreements and went

25 beyond even the debtors' own determinations of what was and



1 wasn't material, they are here trying to have their cake and

2 eat it too. They wanted and got a seat at the table with

3 access to material nonpublic information about the settlement

4 discussions and ultimately about the terms around which an

5 agreement would likely coalesce but they wanted complete

6 freedom to continue to trade while having that information.

7 And now, they're asking the Court to hold -- and this is their

8 legal position -- even if you conclude that the information

9 they had was material, not known to the public, they want you

10 to say they had no duty to do anything but trade as they saw

11 fit. And I can't imagine that the Court should embrace that

12 kind of legal proposition. It would undermine public

13 confidence in the bankruptcy system and our view it'd be

14 fundamentally at odds with core equitable principles of

15 bankruptcy law.

16 There is another source of duty which we've referred

17 to in our briefing. It's when an outsider becomes a

18 nonstatutory insider. There are persons who don't fall within

19 the enumerated categories of Section 10131 of the Bankruptcy

20 Code. That section does not provide an exhaustive list of

21 insiders. It uses the word "including." The settlement

22 noteholders argue that to be considered an insider under 10131

23 that we have to prove that they possessed and exercise

24 managerial control over the debtors. But as discussed in the

25 Third Circuit's decision in In re Winstar, that is incorrect.



1 In fact, if actual control were required, then that would make

2 a creditor a statutory insider and it would render meaningless

3 the decision of Congress to provide a nonexhaustive list of

4 insiders. And so, instead, the legal test is whether there is

5 a close relationship between the creditor and the debtor and

6 any other factors which suggest that the parties were not

7 dealing strictly at arm's length but that the creditor

8 exercised significant influence over the debtor and we believe

9 that is well established on this record.

10 They did that not only through the acquisition of

11 their blocking positions, which they were quick to remind the

12 debtors that they had, but you can see over the course of the

13 negotiations the extent of deference that the debtors paid to

14 them not just to being involved in the process but in the

15 actual negotiation, the substance of the negotiation itself.

16 And so, they allowed the settlement noteholders to formulate

17 offers, to decide what would and wouldn't be acceptable. And

18 to pick out one example of Mr. Kosturos' December 11, 2009 e-

19 mail to Mr. McCree at Morgan explicitly referring to what his

20 major creditors would and wouldn't accept. And I don't think

21 I'll ever forget that e-mail because that's the one where Mr.

22 Kosturos suggested maybe he was just lying to Morgan about that

23 as opposed to actually having talked to the creditors.

24 The noteholders argue that their sole duty to refrain

25 from trading is found in the confidentiality agreements. And



1 when those agreements expire, they were free to trade

2 indiscriminately. In other words, as long as the issuer knows

3 we're going to be able to trade as agreed to it and there could

4 be no possible duty to refrain from trading which is not the

5 law. And, in fact, the settlement noteholders didn't even

6 believe that. They testified they made their own

7 determinations.

8 They were quite aware that they had obligations under

9 the securities laws that the debtors could not absolve them of

10 that they've tried to place a little landmine which they're now

11 trying to explode by saying that if the Court allows claims

12 against them to go forward, they're going to have an

13 administrative claim against the estate. We will deal with

14 that if and when that comes. No such claim has been asserted

15 at this time. Frankly, Your Honor, I think that would be the

16 height of inequity.

17 On the subject of materiality, the cases make clear

18 this is a highly fact-specific issue; I was amazed to see the

19 flat out statements in the briefing submitted to you, that

20 stale offers and preliminary negotiations are immaterial as a

21 matter of law, and that begs the questions in the first

22 place -- because whether something is genuinely stale depends

23 on the facts or it's just wrong; because it's clear that even

24 preliminary negotiations can be material, bearing in mind what

25 materiality is. Is it the kind of information that would be



1 sufficiently important that it would alter the mix for a

2 reasonable investor in deciding whether to buy or sell

3 securities.

4 And this could not have been made more clear than the

5 Supreme Court made it, in Basic v. Levinson which we cited,

6 which explicitly rejected a rule that would make merger

7 discussions material only after an agreement in principal had

8 been reached; and anything leading up to an agreement of

9 principal immaterial as a matter of law, and the Court said,

10 no. Because the issue is not whether the information conveys

11 certainty, but whether it's significant enough that a

12 reasonable investor would consider it important. And in that

13 context, I'd remind the Court, when the debtors gave Fried

14 Frank the terms of the debtors' and JPMorgan's exchange of

15 offers of April, 2009, and advised Fried Frank not to share

16 them with the settlement noteholders, that was still within the

17 first contractual confidentiality period; there's only one

18 possible reason why the debtors took that position, and it's

19 because they even considered those offers, in April of 2009, to

20 be material. And yet we know -- although we have no

21 explanation for it in the record -- that Fried Frank

22 subsequently gave that precise exchange of offers to Appaloosa

23 and Centerbridge in July.

24 Now, this case doesn't involve merger negotiations as

25 Basic did, but the transaction that was being negotiated here



1 was just as vital to the life of this case and the outcome of

2 this case and the future of Washington Mutual, as a merger is

3 in the life of most corporations.

4 We don't agree, by the way, Your Honor, with -- well,

5 you heard a significant part of the time today used by the

6 settlement noteholders going over their trading records, and

7 arguing that it was proof or confirmation that the information

8 they had was not material. And we don't agree with the

9 conclusions they're drawing from those trading records, we've

10 given certainly counter-examples in our brief; it's not enough

11 to say, well, we bought here and we sold here. For example,

12 the last attorney who presented the chart from Centerbridge,

13 showed that they were selling massive numbers of senior notes

14 in the early part of 2010. And they argued that's contrary to

15 what someone would be doing if they were in possession of

16 material inside information. Well, this is just one example

17 where you might want to know one other piece of information,

18 which was, what was the price at which they were selling the

19 senior notes at that time? They were virtually at par. There

20 was no more upside left in them. What they were also doing at

21 the same time, was buying more junior levels of debt; that's

22 just one example, Your Honor. My point though is, that what

23 happened today was extremely frustrating to me, we were

24 deprived of discovery about internal documents, valuation

25 models, information that really would more immediately shed



1 light on why they did or didn't buy or sell at different points

2 of time; what their cost basis was in certain securities; what

3 else was going on in the market or in the life of their own

4 firms that might have played into it, because it's not required

5 to show insider trading if the inside information be the sole

6 determinant of the decision, that much is also clear in the

7 law; it's clear in Aurelius' own internal manual, which is in

8 evidence, where they said SEC rules adopted in 2000, provide

9 that any purchase or sale of a security while having awareness

10 of inside information, is illegal without regard to whether the

11 information was the motivating factor in making a trade.

12 So we're in this situation where they convince the

13 Court not to let us get access to internal information that

14 would shed light on why they were trading and what role this

15 information they got in the settlement negotiations played, and

16 the Court sustained objections when they tried to get witnesses

17 to give that testimony, so instead they get up here today and

18 just argue it. It is just as inappropriate today as it would

19 have been during the hearing. I think implicit in the Court's

20 discovery ruling is that the decision on materiality will turn

21 on whether the information would be considered important by a

22 hypothetical reasonable investor; that's the Court's decision,

23 is going to turn on that. And they can get up here all day

24 long and give you unproven assertions trying to imply about

25 whether their clients did or didn't do things that were



1 reflective of the materiality of the information, that is

2 inappropriate.

3 Next on the issue of scienter. A fiduciary is -- I

4 think the Court was able to get counsel to admit -- someone

5 that has a fiduciary duty to a class, for example the estates

6 in this case, and trades on the basis of nonpublic

7 information -- that it knew or should have known was

8 material -- that satisfies -- in our view should satisfy -- a

9 showing of scienter, because it is inherently deceptive when an

10 insider, someone who is even a temporary insider, and subject

11 to the duties for example of a corporate officer, trades in

12 possession of material nonpublic information, knowing that the

13 information is material. And, so I think that's a critical

14 point given we're not arguing a misappropriation theory, Your

15 Honor; we are resting on the two grounds that I've argued here

16 today.

17 But I should also say, Your Honor, this is not a

18 10(b)(5) suit brought by the government or a civil fraud damage

19 suit; the issue in this case is whether the settlement

20 noteholders engaged in inequitable conduct and if they did,

21 what consequences should flow from that. Once again, we should

22 not be subjected to a burden of attempting to prove actual

23 subjective intent to defraud or to manipulate, in part because

24 that is not the issue, the issue is one of equity, the issue is

25 one of whether or not these parties, by engaging in the conduct



1 they engaged in, disadvantaged other creditors of the estate

2 who are out there in the market buying and selling securities,

3 having manipulated the settlement process in a way that enabled

4 them to play a deep and vital role in it, and yet continue to

5 trade except during these limited and defined periods of time.

6 And the further reason why the Court should not be

7 imposing a strict requirement of proof of scienter at this

8 point goes back to the discovery problem that I mentioned

9 before. We were not allowed the opportunity to conduct the

10 kind of full discovery that we would have conducted in order to

11 establish the actual subjective reasons and processes that went

12 on within these hedge funds that underlie the trades they

13 engaged in. It is again, completely unfair in that

14 circumstance, which they brought upon themselves by the

15 positions they took in discovery, to get up here today and

16 argue that we have to have the kind of scienter evidence that

17 would be expected in some sort of a government criminal case.

18 They make this an argument of good-faith by virtue of

19 the fact that they engaged in discussions with the debtor, they

20 explicitly negotiated for these confidentiality agreements.

21 That takes me into the debtors' breach of their own duty. The

22 debtors' breached their fiduciary duties to the estates through

23 the way in which they negotiated this agreement, and the

24 closely related bankruptcy plan. They enabled this powerful

25 group of creditors to trade while in possession of material



1 nonpublic information. They repeatedly deferred to the

2 judgment of this limited group of constituents in the

3 negotiation of the settlement. They involved them in critical

4 settlement negotiations of a period of approximately a year

5 while exceeding to their demands that no restrictions be placed

6 on their ability to trade, except during those arbitrarily

7 defined time periods.

8 The debtors even purported to accept responsibility

9 for disclosing material nonpublic information revealed during

10 those negotiating sessions. What purposes of the estate did

11 that serve? If the debtors wanted to find out the views the

12 settlement noteholders about what they would like to see in a

13 settlement, that could be done without involving them in the

14 process, it could be done without sharing any information about

15 what the debtors' settlement positions were or JPMC's

16 settlement positions were; instead, they invite them into the

17 tent and they accept these obligations on behalf of the estate

18 in a confidentiality agreement that serves no estate interest

19 at all. They did all that without advising the Court, they did

20 not come to the Court as has happened in some other cases, and

21 proposed a confidentiality agreement, proposed a regime in an

22 unusual situation like this, where you have non committee

23 members essentially functioning as a committee, they did not do

24 that; no one knew this was happening.

25 The debtors failed to classify the nonpublic



1 information we identified in our briefing as material when they

2 plainly should have done so. The settlement noteholders knew

3 all of this, of course; everyone knew, and nobody admits it on

4 the stand, but it is common sense; no one was going to publicly

5 disclose the back and forth of these settlement negotiations,

6 because that would kill the negotiations. The debtors never

7 intended to give a public press release about the offers they

8 made to JPMC or what JPMC made back to them or how close they

9 were getting; everyone knew that was not going to happen

10 because there would have been no settlement discussions. So if

11 you're going to embark in this process, the answer is not to

12 disclose, the answer is, if you want to be involved, then

13 you've got to put up an ethical wall; you've got to do what

14 people on creditors' committees do if you want to play that

15 role. And the debtors' didn't insist on it. And the result is

16 what we have.

17 And the evidence of this entire story is directly

18 relevant to their good-faith in negotiating the settlement and

19 in proposing the plan that embodies it. And the debtors' have

20 repeatedly asserted that they owe fiduciary duties to the

21 estates as a whole to the interest of shareholders as well as

22 creditors, but they did not serve those interests. They

23 repeatedly favored the interest of one constituency -- and

24 we'll repeat what I said in our brief, Your Honor, because I do

25 think it's the truth -- is they sought only what was necessary



1 to get the votes they needed to confirm the plan, given that

2 the settlement noteholders, particularly by the fall of 2009,

3 held somewhere between sixty and seventy-five percent of all

4 the value in the subordinated note in PIERS classes. And they

5 didn't care about getting anything more than that, nor did the

6 settlement noteholders of course, and so at the time they're

7 going through this show in court, at exactly the same time,

8 saying we need another Rule 2004 authorization to conduct

9 further discovery into these business tort claims, because as

10 fiduciaries we need to know more about these claims, instead,

11 they were -- we know what they were doing now; and that's what

12 the public thought was going on, which is why I think there was

13 a great deal of shock in March when this settlement was

14 announced, so soon after the debtor had told this Court that

15 they needed more information in order to determine the

16 viability of the claims against Morgan.

17 We do believe that the plan should not be confirmed

18 under these circumstances. It is not enough to allow us to go

19 forward with the claim for equitable disallowance; we do want

20 the authority to do that of course, but we believe what has

21 happened in this process renders the plan unconfirmable as

22 well. It's no answer to say well, the result of this process,

23 the settlement agreement, was found fair and reasonable by the

24 Court. There is a range of potential settlement outcomes in

25 any negotiation and this range got artificially truncated as a



1 result of the interactions that we've described between the

2 debtors and the settlement noteholders.

3 There is a fairly low bar for the Court to approve a

4 settlement as reasonable; that does not mean the process that

5 led to it has received this Court's blessing as one that

6 operated in the way the Bankruptcy Code envisioned, or that was

7 done in good faith.

8 I will very quickly turn to that motion, Your Honor,

9 that we have, I think the main argument -- the main legal

10 argument -- that's been advanced as to why the claim is not

11 colorable, is that there is no such thing as a cause of action

12 for equitable disallowance. That's the legal issue I want to

13 spend a minute or two talking about.

14 The parties who argue that, say that it's not a ground

15 recognized in Section 502(b) of the Code, and therefore it

16 doesn't exist; and they rely on the Supreme Court's decision in

17 the Travelers case, they don't deny that the Supreme Court's

18 decision in Pepper v. Litton is still good law. And I don't

19 know how they could deny that, but they do -- they sort of

20 insist that it's not really good law any more, after the

21 passage of the Bankruptcy Code and the decision in Travelers.

22 Where the Travelers case, as I'm sure the Court knows, was not

23 addressing the equitable powers of the Bankruptcy Court at all,

24 it's specific holding was limited to the rejection of this

25 court-made rule, providing that attorneys' fees weren't



1 recoverable for litigating issues peculiar to bankruptcy law.

2 And in fact the Travelers court expressly limited its ruling to

3 the grounds for disallowance that were presented in the case.

4 In the second part of the Supreme Court's opinion,

5 they recognized that there might be other grounds for

6 disallowance which weren't raised in the cert petition, and

7 I'll quote this, page 1208: "Accordingly we express no opinion

8 with regard to whether following the demise of the Fobian rule,

9 other principles of bankruptcy law might provide an independent

10 basis for disallowing Travelers' claim for attorneys' fees".

11 We've cited the Court to Judge McKenna's decision in

12 Adelphia v. Bank of America, which issued after the Travelers'

13 decision, expressly discusses Travelers, and rejects the

14 argument that it did away with the Pepper v. Litton doctrine of

15 equitable subordination. And I know the Court is familiar with

16 that opinion as well, but to me it was a very persuasive

17 discussion of the legislative history, which is not at all

18 clear one way or the other, but what is clear is the principle

19 that we are not to presume that Congress has altered a

20 fundamental precept of bankruptcy law and its enactments,

21 unless it does so very explicitly, which it did not do with

22 respect to equitable disallowance.

23 Beyond that, I think we have all sorts of arguments

24 that the debtors' refusal to pursue these claims is justified

25 because of the expense, because the claim is not meritorious



1 and so forth. But it will obviously be up to the Court to

2 decide whether there is merit. We didn't avail ourselves of

3 the law which says in determining whether a claim is colorable,

4 look at the pleadings, and that's all -- treat it as a motion

5 to dismiss.

6 We wanted the Court to hear the evidence because we

7 know that pursuing this claim is going to take some time; it is

8 going to cost some money. We didn't want the Court to take

9 that step without a very good look at whether the claim has

10 merit. We think you have had that look. So, whether you

11 believe the claim is colorable, it is on a pretty well-

12 developed record, I'm not at all suggesting that it is a

13 complete record by any stretch, and if there isn't more to be

14 learned about what happened during this process, because I

15 think there is.

16 The only other point I want to talk about on the

17 unjustified refusal, is that the debtor makes the argument that

18 if a colorable claim exists on behalf of the estates, then it

19 is the debtors, or perhaps the liquidating trust, that should

20 be granted the authority to pursue the claims and in any case,

21 to retain the authority to settle them. And I hope the Court

22 doesn't take that suggestion seriously. The evidence shows

23 that the debtors were complicit in permitting the settlement

24 noteholders to engage in the conduct that's the focus of the

25 equitable disallowance claim, they facilitated it, they have



1 repeatedly characterized the claims of insider trading as

2 frivolous, meritless and ludicrous. They cannot be trusted to

3 pursue or settle those claims as estate fiduciaries, and as for

4 the liquidating trust as it's currently constituted, the

5 trustee is the same Mr. Kosturos who was an unabashed advocate

6 for the positions of the settlement noteholders in his

7 testimony at the July hearing; even going so far to suggest as

8 I mentioned, that he had lied to JPMorgan in an effort to try

9 to excuse the significance of a document that was damaging to

10 the noteholders' position. And the advisory board of the

11 liquidating trust as I understand it, is going to be dominated

12 by representatives selected by the creditors' committee, the

13 equity committee will have one person. So, we do not believe

14 that either allowing the debtors or the liquidating trust to

15 pursue these claims means that they are going to be pursued

16 with diligence and in good faith.

17 And there are many other issues that have been

18 discussed today, Your Honor, but I'm confident I'm out of time,

19 but I'll open myself for any questions you may have.

20 THE COURT: I have one question; I think your motion

21 and proposed complaint only mentions two settlement

22 noteholders. Is your request to be able to pursue all four or

23 only those two?

24 MR. FOLSE: We do request -- we put in there at the

25 time it was filed, I want -- this requires a little explanation



1 because people have tried to take advantage of it, to suggest

2 that that means we do not believe that either Owl Creek or

3 Appaloosa engaged in insider trading, that's not true; we've

4 been very clear both at the hearing and in our briefing that

5 all four of them were in possession of material nonpublic

6 information, that all four of them traded in differing amounts

7 and at differing times, but traded while in possession of that

8 information. We have argued that as a basis for rejecting plan

9 confirmation.

10 When we filed the motion for leave to file the

11 adversary proceeding, we explicitly stated in there that we

12 reserve the right to ask for permission to pursue claims --

13 additional claims -- against the two parties that were named in

14 the proposed complaint at the time, as well as against other

15 parties. And to be honest, Your Honor, we wanted to see what

16 came out at the plan confirmation hearing. But Your Honor, we

17 do reserve the right -- and I suspect it's likely we have not

18 discussed this with the equity committee, one thing at a time,

19 it's an issue that obviously requires the Court to decide that

20 the case will be able to go forward at all -- but that is

21 definitely an issue we want to reserve on, and we may well be

22 coming back to the Court if the case is permitted to proceed,

23 with a request to amend it for that purpose.

24 THE COURT: All right, thank you.

25 Let's take a short break.




2 THE CLERK: All Rise. Be seated.

3 MR. KAPLAN: Your Honor, Howard Kaplan, Arkin, Kaplan

4 & Rice on behalf of certain TPS holders. We obviously join in

5 Mr. Folse's arguments and I think he covered a lot of ground

6 which is good and allows me to focus just on a couple of

7 points. One of them, I think, Your Honor, which is the one I

8 would like to focus on principally is materiality. And if I

9 might, we've had a lot of discussion about that and a mention

10 of Basic v. Levinson but I don't think we've actually had the

11 standard clearly stated.

12 Under Basic v. Levinson, the Court must balance the

13 probability that the event will occur and the anticipated

14 magnitude of the event in light of the totality of the company

15 activity. That case specifically rejected any bright-line

16 rule, any rule that said settlement discussions had to be

17 advanced, had to be close, had to be near. It all has to be

18 assessed and balanced. And the magnitude is what has been

19 missing mostly today, Your Honor. In a bankruptcy case,

20 particularly this one, we submit that a settlement with

21 JPMorgan is something that was of the greatest magnitude.

22 We've had some comment here today that in bankruptcy

23 cases, everyone knows there's settlement discussions. I'm sure

24 that's true but, Your Honor, that makes it more important, more

25 relevant and not less. If everybody knows there are settlement



1 discussions, everyone is trading in the debtors' securities and

2 there are secret settlement discussions going on, that certain

3 of those traders are involved in, they have material nonpublic

4 information.

5 Your Honor, I wanted to just talk about one or two

6 cases. I think an important case here which illustrates the

7 basic standard is United States v. Shapiro which is a Second

8 Circuit case. It's a criminal case. In that case, the

9 defendants were hired to find a merger partner for their

10 client, a company called Ridge. They found a company called

11 Harvey. They received information from Ridge, their client,

12 which they used to put together a pro forma and the pro forma

13 showed that Harvey's earnings were going to go through the roof

14 if this merger happened. They presented this data to a Harvey

15 board member who expressed an interest in the deal and then

16 they went out and bought stock in Harvey. That alone was

17 sufficient for a conviction. That alone was sufficient for a

18 criminal charge in a conviction and criminal intent in that

19 case.

20 There was no term sheet. There was nothing more than

21 a discussion and an expression of interest. There was some

22 financial data coming from their own client. They didn't even

23 get it from Harvey, the company they were buying securities in.

24 And the Court specifically held as follows, I'd like to quote

25 this, "Although the negotiations had not yet gelled to the



1 point where a merger was probable, the possibility was not so

2 remote that when considered in light of a projected increase of

3 at least six hundred percent in Harvey's earning per share, it

4 might not have influenced a reasonable investor". Magnitude

5 versus likelihood, Your Honor.

6 And in here, if I may just talk a little bit about Mr.

7 Melwani's testimony, the traders, the funds that we're talking

8 about, their job is to assess the types of risk that we're

9 talking about here. Their job is to assess the likelihood of

10 settlement agreements of litigation. Their job is to assess

11 the potential outcomes of litigation. As Mr. Melanie

12 testified, his job was to apply subjective judgment to all of

13 these matters and as part of his subjective judgment, as we'll

14 see as we go through the chronology, Your Honor, he had in his

15 mind the progression of the settlement discussions with

16 JPMorgan.

17 Now, Your Honor, just a moment on that. We keep

18 hearing how far apart the settlement discussions were. There's

19 a lot of money we're talking about here, billions of dollars.

20 In April, those term sheets in April which came a few weeks

21 after the March term sheets, the parties were one billion

22 dollars closer. So while Mr. Kosturos is saying hey, we're

23 three billion dollars apart, the parties had moved one billion

24 dollars closer and that's the progression that continued. A

25 little bit, ten percent, five percent in this case is 500



1 million dollars, is a billion dollars. The progression of

2 these term sheets very clearly was giving more and more value.

3 JPMorgan was making greater concessions at every turn

4 including, right through the end of the year and the estate,

5 based on these was going to get more value.

6 At the same time that's going on, and I want to get to

7 the trading records, I just want to move right to that, the two

8 settlement noteholders that we address in our brief,

9 Centerbridge and Aurelius, they're trading. They're trading a

10 lot. They're doing a lot of different trades but they're

11 moving lower in the capital structure. Every time there's a

12 step forward, they move down; senior bonds, subordinated bonds

13 and PIERS. And Centerbridge has argued that they had more

14 money coming into their fund. Well, what they did with that

15 money is the important thing, not whether the money was there.

16 They kept going in lower and lower, as they found out more and

17 more about the settlement discussions and JPMorgan's

18 negotiating position.

19 If I could, Your Honor, these are still I think under

20 seal, so we have just put together a book of our

21 demonstratives, if I may approach?


23 MR. KAPLAN: Pardon, Your Honor. Starting with the

24 March time period, exchange of term sheets. No doubt this was

25 a contentious settlement negotiation. It was contentious



1 throughout the period but there are certain things that never

2 changed; one of them is the principle, not the enforceable

3 agreement, the principle that the debtors were going to get

4 back the four billion in their deposits and JPMorgan was going

5 to get the trust preferred securities. That was in the very

6 first term sheet and it was in the very last term sheet and the

7 settlement agreement. Here is a principle that stayed

8 throughout the whole set of negotiations.

9 There was some negotiations in April, as the Court has

10 heard. I will get to that a little bit more. The testimony

11 there is that Mr. Melwani and Mr. Gropper did not know of those

12 discussions, although there are documents that indicate we

13 believe that Mr. Gropper did, in fact, know the terms of those

14 discussions but in the end when you look at what the trading

15 was right after that, the trading really tells the story in our

16 view, Your Honor. And if you turn to TPS-7, which is the

17 Aurelius trading activity, for the period just before and just

18 after the confidentiality period ends, we have the April 30,

19 2009 monthly operating report filed by the debtor. We have the

20 internal trading by Aurelius. There's about fifteen million

21 dollars in purchases. That's without Mr. Gropper's input. The

22 confidentiality period ends and Aurelius then buys fifty-four

23 million in securities including the subordinated bonds, as

24 well.

25 And if we turn to, Your Honor, TPS-2, this is the one



1 that Mr. Owens drew on. I don't have his drawing but he cut us

2 down a little bit but the fact remains, Your Honor, that what

3 we had and what Centerbridge did before and after this

4 confidentiality period, is they sold the floating rate bonds,

5 approximately forty-four million and then immediately after the

6 confidentiality period ends, they buy thirty-two million back,

7 a complete reversal of strategy in those bonds.

8 We submit, Your Honor, this clearly suggests that the

9 information that these --

10 THE COURT: Which exhibit are you on?

11 MR. KAPLAN: TPS-2, Your Honor.

12 THE COURT: Okay.

13 MR. KAPLAN: Now, Your Honor, at this point in time

14 the debtor had filed their monthly operating report which --

15 TC-25, which disclosed the amount of the tax refund as $2.6 to

16 three billion. Then, of course, it says that JPMorgan may seek

17 to claim all or a portion of the refund and at this point in

18 time, litigation had already been filed and in the litigation,

19 JPMorgan claimed ownership of the deposits, as well.

20 So to the public's knowledge, JPMorgan was claiming

21 everything. JPMorgan claimed they were entitled to all of

22 these assets but what Centerbridge and Aurelius knew was that

23 JPMorgan was willing to engage in a settlement discussion and

24 had already right out of the box, agreed to give the deposits

25 back. Now, even though this is at the beginning, you might say



1 this is at the beginning of the settlement process, this is a

2 significant fact. Would an investor have wanted to know that?

3 We submit, of course. It seems self-evident, Your Honor.

4 Moving forward to the summer, Fried Frank -- this is

5 when Fried Frank -- I'd like to put these documents up, Your

6 Honor. Fried Frank forwards the July -- summaries of the April

7 term sheets on July 1. When the term sheets, the April term

8 sheets were first disclosed to Fried Frank in April 2009 and

9 I'm going to ask my colleague, Mr. Matteo to work the ELMO

10 which I couldn't possibly do -- no, that's the wrong one.

11 THE COURT: What exhibit number is it?

12 MR. KAPLAN: This is TC-10. When these term sheets

13 are forwarded to Fried Frank in April of 2009 by Mr. Rosen, he

14 writes, "WMI considers this and the counter proposal to be

15 confidential and should not be provided to, or the contents

16 shared with, parties that have executed a light confidentiality

17 agreement", which is Aurelius and Centerbridge because it was

18 going to end.

19 Now, Your Honor, Fried Frank had a separate

20 confidentiality agreement with the debtor which is DX-408 and

21 under their confidentiality agreement, this highlighted portion

22 here, Fried Frank agreed not to disclose any such confidential

23 information to any party including the holders, their clients.

24 They could disclose it to their clients if their clients had

25 entered into separate agreements. Fried Frank then forwards



1 the summaries on July 1, 2009 to Appaloosa and Centerbridge.

2 Now, Your Honor, there is no evidence in the record

3 about how this happened. There's certainly no evidence in the

4 record that the debtor approved this and if I may, I'll spend a

5 moment on this in a little bit, but if I may just disagree with

6 my colleague, Mr. Folse --

7 THE COURT: And what exhibit is this?

8 MR. KAPLAN: This one, Your Honor, is EC-215;

9 apologies.


11 MR. KAPLAN: Your Honor, what happens next is that

12 Centerbridge trades with knowledge of this information. In our

13 view, Your Honor, my disagreement, my small disagreement with

14 Mr. Folse, this is a misappropriation. This falls squarely

15 within the misappropriation theory of insider trading. This

16 information was not supposed to go to Centerbridge and

17 Appaloosa and we submit that the disclosure violates the

18 agreement signed by Fried Frank. This was protected

19 confidential information. Nobody else had this.

20 Now, Your Honor, if you could turn to TPS-1, we have

21 in the middle of the page, July 1 -- our dots are not quite

22 lined up properly in this one but the -- right in the middle of

23 the page, there's the July 1, 2009 summary and then

24 Centerbridge after receiving that in July, goes out and buys

25 some thirty million in subordinated bonds and sixty million in



1 senior bonds.

2 Now, Your Honor, we've heard many, many times about

3 how the settlement discussions died. They came to a screeching

4 halt after each of these events. But here we have a situation

5 where Centerbridge gets the April term sheets, Centerbridge

6 obviously is formulating its own proposal which is submitted to

7 JPMorgan on July 29; so now we're talking about the month of

8 July, knowing that settlement discussions are going to continue

9 because they're going to make the proposal, they go out and

10 trade. Can't get more material than that, Your Honor.

11 And just to add the point which I think is already

12 clear, during this period Appaloosa restricted itself from

13 trading.

14 Now, Your Honor, just sticking with that chart, there

15 was some testimony about a September 2 meeting and according to

16 Mr. Melwani, at that September 2 meeting, the settlement offer

17 was withdrawn or some such thing. I can't remember the

18 testimony exactly but that's essentially what he said.

19 Now, Your Honor, we think that under the circumstances

20 it's just not a credible set of facts. July 29 there's a

21 settlement proposal given to JPMorgan by Centerbridge and

22 Appaloosa. And by the way, the settlement is of course on

23 behalf of the debtor, even though the debtor is not involved

24 because this is all to settle claims between the debtor and

25 JPMorgan. So Centerbridge makes a proposal to JPMorgan.



1 JPMorgan comes back with a proposal, not surprisingly on August

2 18 where they make very big move. In fact, they hit the

3 midpoint on the tax sharing between where they were, fifteen

4 percent and the forty percent.

5 Centerbridge and Appaloosa don't make a counteroffer

6 on September 2. They don't disclose this to the debtor for a

7 few weeks and they conclude nonetheless, that settlement

8 negotiations are done. It's just not credible. This had to go

9 to the debtor which it eventually did and what happened after

10 that was the debtor took the term sheet and the debtor then

11 went and made a proposal and had a negotiation. There was

12 nothing over. There was nothing done here. This was a

13 continuous set of negotiations.

14 Your Honor, just briefly if I might, going to now the

15 second confidentiality period. There was a lot of testimony,

16 there seemed to be a lot of frustration at this time both with

17 the debtors' 6139 proposal and then JPMorgan came back offering

18 to give the new tax refunds, the new NOL carry back to the

19 debtor and to take the rest and so forth. But in the end,

20 Centerbridge got an e-mail in November which said that JPMorgan

21 was willing to settle at thirty-seventy; thirty for the debtor,

22 seventy for JPMorgan on the tax sharing on the first tax

23 refund. After all the frustration and whatever happened there,

24 that was the deal that everyone knew Mr. Kosturos was going

25 back.



1 Now, Mr. Melwani said he didn't remember that. Mr.

2 Gropper, he testified that he did remember that. He knew that

3 the debtor was going back with that thirty-seventy and he

4 knew -- and he modeled and so he knew the waterfall that would

5 flow from that. Mr. Melwani said he didn't remember but we saw

6 from some of the e-mails that it was one of his partners that

7 actually was involved in the discussions and not him.

8 That goes out to JPMorgan. Everybody claims that the

9 period ended and nobody knew what was going on and we just

10 forgot about it but here, these people knew, Your Honor, that

11 JPMorgan wanted a thirty-seventy share and the debtor was

12 willing to do it. The debtor was willing to do it. That's the

13 deal that was struck a month later. And immediately upon

14 termination of the second confidentiality period, both

15 Centerbridge and Aurelius go out into the market and they buy

16 PIERS, right at the bottom of the capital structure. They know

17 there's a deal coming. They know what it is. Aurelius modeled

18 it and they go and start buying PIERS and, in fact, Your Honor,

19 if you turn to TPS-3 -- I'm sorry, TPS-9 first, Aurelius on

20 December 31, which is the day after the end of the

21 confidentiality period, buys 590,000 shares of PIERS.

22 Aurelius, which is on -- I mean Centerbridge, which was on TPS-

23 3, you can see throughout January buys 814,000 shares of PIERS.

24 Now, Your Honor, what did the public know? Is this

25 material, nonpublic information? The public had the



1 disclosure, the monthly operating report which discloses the

2 amount, the estimated amount of the additional NOL carry back

3 period refund, which was 2.6 billion dollars, and again there's

4 a disclosure that says there are competing claims to ownership.

5 Now here, Your Honor, in light of where the parties

6 were in the negotiations and how far along it was, this

7 certainly from a trading perspective was a misleading

8 disclosure. This disclosure says that there are competing

9 claims of ownership with no other explanation when in fact what

10 we had here was almost, almost, a done deal; certainly on the

11 deposits, four billion dollars, the trust preferreds, 4 billion

12 dollars, the 2.6 to 3 billion dollar sharing, split thirty-

13 seventy. And the discussion, I believe was ongoing still with

14 the NOL carry backs which ended up being fifty-fifty.

15 And so what we had in our view, Your Honor, is a

16 misleading disclosure by the debtor, knowledge on behalf of

17 Centerbridge and Aurelius and trading while in possession of

18 that nonpublic knowledge, the status of those negotiations.

19 Your Honor, if I may just make a couple of comments on

20 the duty issue and the temporary insider issue. When someone

21 is an insider, like an officer or a director, who clearly has a

22 fiduciary duty to the company, and they have information, they

23 can't trade. They have to abstain from trading and they can

24 only trade when the company discloses all material nonpublic

25 information. That can't be waived, Your Honor. The company



1 can't say okay, you now can trade today. They have to make the

2 disclosure. It's no different when someone becomes a temporary

3 insider to a company.

4 So if the Court finds that Centerbridge and Aurelius

5 became temporary insiders because of their involvement in these

6 settlement negotiations, the debtor can't waive, the debtor

7 can't say to them you're good to go. The debtor can't do that.

8 The fiduciary duty runs to the market. It runs to the

9 creditors. It runs to the shareholders.

10 And so this whole argument that we have here about how

11 the debtor had a contractual obligation to disclose, it may be

12 there's a breach of the contract; I don't know. I mean it's --

13 I don't know how anyone would be able to sue the debtor or have

14 a claim for that but in the end, on an insider trading basis,

15 the debtor can't waive that. The only thing the debtor can do

16 once someone has material nonpublic information is disclose it

17 because you're out there trading and the whole basis -- under

18 O'Hagan, it's very clear -- the whole basis of the insider

19 trading laws is to not let people trade with an imbalance of

20 information. Not let people have corporate information and use

21 it to benefit themselves.

22 Just one comment on the misappropriation theory, Your

23 Honor. We do think that that is a pretty clear

24 misappropriation, what happened with Centerbridge in July and

25 August. The duties -- I don't know that we need to talk much.



1 I think from the Court's questions, the Court understands the

2 different duties but the duty here quite clearly is owed to the

3 debtor through Fried Frank and through that confidentiality

4 agreement.

5 One last point, Your Honor, if I may, on scienter.

6 The law is very clear that trading with knowledge of material

7 nonpublic information is scienter. If you knowingly have

8 material nonpublic information and you trade, that is scienter.

9 And if might just point the Court to another Second Circuit

10 case, U.S. v. Teicher, this is another criminal case and I just

11 want to read as a final point a part of this case. "One who

12 trades while knowingly possessing material inside information

13 has an informational advantage over other traders. Because the

14 advantage is in the form of information, it exists in the mind

15 of the trader. Unlike the loaded weapon which may stand ready

16 but unused, material information cannot lay idle in the human

17 brain. The individual with such information may decide to

18 trade upon that information, to alter a previously decided upon

19 transaction, to continue with a previously planned transaction

20 even though publicly available information would now suggest

21 otherwise, or simply do nothing".

22 But this court found that -- this is the awareness

23 standard and this court found that awareness, knowing awareness

24 of material nonpublic information and trading violates the

25 securities laws.



1 Your Honor, one last point. I deal with these issues

2 a lot outside the bankruptcy context and I've heard some

3 arguments here which I think need to be commented on. The

4 notion that it's difficult to set up an ethical wall is not a

5 valid reason for not doing it, it's what people do all the time

6 or you don't trade. That's the way the rules work. You're not

7 allowed to trade with material nonpublic information.

8 If the firms are too small, I am not quite sure -- we

9 didn't get into why that's so difficult. It doesn't seem that

10 difficult except that it sounds like the firms want to do

11 exactly what's not allowed which is the person who is trying to

12 negotiate the settlement is the person that wants to also be

13 doing the trading but that is truly the answer to much of this

14 type of situation.

15 Otherwise, Your Honor, what we have here and what I

16 have heard today is an argument that settlement negotiations in

17 a bankruptcy context are really never material. I think that's

18 the ruling that the settlement noteholders are asking the Court

19 to give which is that settlement discussions in a bankruptcy

20 are never material. It's too complicated. There are too many

21 people involved. There's too much going on. No one can figure

22 it out.

23 Well you know what? People can figure it out and

24 people do understand how to use this information and people

25 make judgments on where things are going to settle. And it's



1 just not fair to the market, it's just not. And this case,

2 this case shows the abuse of the process that can come from

3 allowing powerful funds like these, and they are powerful and

4 they're big and they acquired very large positions, in order to

5 get their influence in this case to allow them in under the

6 tent, I think someone used that term which I think is a very

7 good term, and to allow them to trade when they're under the

8 tent and they know what the debtor is thinking and they hear

9 what JPMorgan is saying and they know these settlement

10 discussions and they know what these back and forth term sheets

11 are; it's not fair, Your Honor and it shouldn't be allowed.

12 And people should not just be allowed to make their

13 trades at all costs and make their money at all costs. I am

14 not going to disclose the numbers here. We put it in our brief

15 how much we calculated these firms have made just in realized

16 trading, Your Honor. It's a huge amount of money. And that's

17 just in actual trading. That's not even what they stand to get

18 out.

19 And so we agree with the equity committee. I'm not

20 going to go through the remedies. I think we agree with the

21 equity committee's request and I think if you have any further

22 questions about that, Your Honor, Mr. Stark probably will be

23 able to answer that. Thank you.


25 MR. ECKSTEIN: Your Honor, I apologize for just



1 interjecting for a moment. I didn't want to interrupt in the

2 middle of Mr. Kaplan's remarks but Mr. Kaplan did use the

3 charts and there was supposed to be an understanding that the

4 charts were going to be in a form agreed to before they were

5 used. I advised Mr. Kaplan last week of our suggested

6 corrections. They were not accepted. Unfortunately, the

7 charts that were presented were just simply misleading.

8 And I just want to point out, TPS-7, Mr. Kaplan did

9 not include in the chart the sales. He footnoted it, did not

10 mention it. It's not visible and he argued strenuously from it

11 about materiality.

12 TPS-9, it's headed, "Aurelius' Purchases of PIERS"

13 knowing full well and it's even there, that there's a sale, a

14 significant sale on the chart. We pointed out those specific

15 corrections to Mr. Kaplan last week. They were ignored and

16 they were argued and I simply could not allow the issue to pass

17 without mentioning it.

18 MR. KAPLAN: Your Honor, we added the word sale on

19 that chart at Kramer Levin's request. That's what we did.

20 MR. ECKSTEIN: The heading says "Aurelius'

21 Purchases --

22 MR. KAPLAN: That was there. That was --

23 MR. ECKSTEIN: The heading says "Aurelius' Purchases

24 of PIERS".

25 MR. KAPLAN: This is -- listen, listen. Your Honor,



1 first of all, we got their -- we gave them these charts at the

2 confirmation hearing, number one. Number two, they didn't give

3 us comments until after we filed our brief but even then we

4 talked to them. We listened to them and we did make one change

5 on TPS-9 where the bright red says sale. I don't think there's

6 any confusion there and I don't think the Court is confused.

7 MR. ECKSTEIN: The heading is very clear.

8 MR. KAPLAN: On TPS-7 --


10 MR. KAPLAN: Anyway, on TPS-7, I just want to point

11 out the footnote says the information that Mr. Eckstein is

12 complaining about. Thank you.


14 UNIDENTIFIED SPEAKER: Howie, did you buy any time

15 from anyone?

16 MR. KAPLAN: What?

17 UNIDENTIFIED SPEAKER: Did you buy time from anyone?

18 MR. KAPLAN: Yeah, Mr. Sacks. JPMorgan loaned me --

19 UNIDENTIFIED SPEAKER: No, I don't think I am loaning

20 the TPS folks any time. Certainly not Mr. Stark, Your Honor.

21 MR. STARK: Why do they want to keep me from the

22 podium so badly? Good afternoon, Your Honor.

23 THE COURT: Good afternoon.

24 MR. STARK: Robert Stark from Brown Rudnick on behalf

25 of the TPS consortium. I'm just going to --



1 THE COURT: Despite your colleague taking more time, I

2 will give you twenty minutes.

3 MR. STARK: Thank you. I will do my best. We can

4 talk about Stern for twenty hours but let me delve into the

5 divestitures quickly. Notwithstanding Mr. Sacks' view of our

6 appeal, we believe it in 110 percent. There's already

7 substantial briefing before Judge Sleet. We're going to go

8 full forward with that appeal. The law has an obligation on

9 this court to enable that process to move along.

10 The divestiture rule says this court's jurisdiction is

11 circumscribed. This is a court of limited jurisdiction. You

12 can confirm a plan. You can enable case advancement but you

13 can't disable his appeal. You can't approve a plan that moots

14 it. That would exceed the reaches of your jurisdictional

15 authority and the cases are clear on this. This principle

16 isn't all that convoluted. It's not even controversial. It's

17 just inconvenient to their case strategy and that's no rebuttal

18 in the eyes of the law.

19 THE COURT: Well, I don't think it says you can't moot

20 the appeal. It says I cannot enter an order that changes my

21 prior order, enlarges or modifies.

22 MR. STARK: It actually says beyond that, Your Honor.

23 The applicable quote that Judge Shannon cites in VII Holdings

24 which is replete within all of these cases and if Your Honor

25 will allow me, a court may quote, "enforce an order or judgment



1 appealed because in implementing an appealed order, the Court

2 does not disrupt the appellate process so long as its decision

3 remains intact for the appellate court to review" closed quote.

4 Your Honor, right now what they want to do is take the

5 TPS securities, hand them over to JPMorgan, give them a 363(m)

6 excuse that says we can no longer ever get it back if Judge

7 Sleet reverses Your Honor. That is exactly contrary to what

8 every case -- and there's many cases talking about -- and the

9 binding precedent of cases talk about what the divestiture rule

10 says. The enforcement exception does not swallow the rule.

11 That issue is now his, his alone. Your jurisdiction is now --

12 is enabled on plan stuff but those TPS securities must be

13 reserved in an escrow pending the ultimate resolution of that

14 appeal.

15 THE COURT: Without a stay pending appeal.

16 MR. STARK: Your Honor, a stay for what? Your

17 Honor's --

18 THE COURT: Let me posit the situation --

19 MR. STARK: Sure.

20 THE COURT: -- that I face every day and that is a

21 dispute, whether the debtor owns property of the estate that it

22 proposes to sell in a 363 sale.

23 MR. STARK: But I don't see how that's a divestiture.

24 THE COURT: I just --

25 MR. STARK: Oh, I am sorry -- oh, if it's appealed?



1 Excuse me.

2 THE COURT: Yes.

3 MR. STARK: So you enter an order and then that's

4 appealed.

5 THE COURT: Right.

6 MR. STARK: Your Honor, but that's different.

7 THE COURT: How?

8 MR. STARK: Okay. Well, yes, do you know what?

9 THE COURT: I've decided this is property of the

10 estate that can be sold.

11 MR. STARK: Right. And then while it's up on

12 appeal --

13 THE COURT: Yes.

14 MR. STARK: -- if it's on appeal, at that moment in

15 time the issue must be ring-fenced for the decision ultimately

16 for Judge Sleet or Judge Robinson to make a decision on that

17 particular moment. Your Honor can no longer say that

18 particular piece of property at this moment in time belongs to

19 whoever the seller is. The cases are clear on that point.

20 THE COURT: Why? I've decided it belongs to the

21 seller and I'm simply --

22 MR. STARK: Well, for the --

23 THE COURT: -- enforcing that order.

24 MR. STARK: To the buyer or to the seller? Excuse me.

25 THE COURT: To the seller.



1 MR. STARK: The seller.

2 THE COURT: I've decided it belongs --

3 MR. STARK: The debtor sold --

4 THE COURT: -- to the debtor.

5 MR. STARK: Forgive me, Your Honor. The debtor has a

6 piece of property. It sells it to a buyer.

7 THE COURT: I first decide it's debtors' -- it's

8 property of the estate.

9 MR. STARK: Accurate. Okay. And then some --

10 THE COURT: An appeal of that decision doesn't mean

11 that I can't authorize the debtor to sell that, consistent with

12 my prior order.

13 MR. STARK: Your Honor, I respectfully disagree with

14 that. I think the cases are very, very clear on that. That

15 issue if it's on appeal --

16 THE COURT: Is there any case that holds that?

17 MR. STARK: All of the cases that I've cited in the

18 opinion, Your Honor, I think the Strawberry's --

19 THE COURT: They're distinguishable. The facts of

20 your cases are distinguishable.

21 MR. STARK: Your Honor, I don't think so at all. Your

22 Honor, we have an issue and it's a very live issue as to

23 whether or not this estate owns the TPS securities. Their plan

24 gives it to somebody else and says it's theirs. They can have

25 it. And I have on appeal before Judge Sleet whether or not



1 Your Honor's ruling as to whether or not the estate even owns

2 it, is accurate. If this plan has in it about stealing my

3 house or Your Honor's house or somebody else's house and hands

4 it off to somebody else and exceeds the bounds of the

5 jurisdiction of -- excuse me, exceeds the legitimate Butner

6 interests under state law as to whether or not this estate

7 actually owns it, and hands it off to somebody else, that's not

8 the way the system works. There's now a reviewing court that's

9 going to decide whether or not that underlying decision is

10 right and it can't be mooted out.

11 The fact that there's an equitable mootness doctrine

12 is after the fact. It's after the fact. I have to ask Your

13 Honor for a stay with respect to whether or not you can enter

14 an order on something you don't have jurisdiction over anymore.

15 THE COURT: No, I do have jurisdiction to enter a stay

16 of my ruling on the TPS issue. That's clear. Your first

17 request has to come to me for a stay pending appeal and then

18 you go to the district court.

19 MR. STARK: Well, Your Honor, again respectfully, I

20 don't think that's the law at all. I think once the issue has

21 been handed over to Judge Sleet to decide to review your

22 decision, you've lost jurisdiction. I would be asking you for

23 a stay of something you cannot do. I don't need to. It's

24 automatic.

25 Your Honor, I think the cases are about as clear as



1 clear can be on that. And what would that stay look like? I

2 would be asking Your Honor for an injunction from anybody doing

3 anything in this case, filing any plan at all, that exceeds the

4 bounds of your jurisdiction. It's --

5 THE COURT: No, you're asking for a stay of my

6 decision finding that the debtors are the owners of that

7 property.

8 MR. STARK: Your Honor, respectfully, I have read all

9 of the cases --

10 THE COURT: That would be the effect of it. If I

11 stayed that ruling, then yes, the debtors could not put

12 together a plan that included selling that property if my

13 ruling that they owned it was stayed.

14 MR. STARK: Your Honor, I don't know what divestiture

15 rule then means. From the Supreme Court in Grimes to the Third

16 Circuit in Venen, to the many cases, not just the three that we

17 cited in the post-trial brief, but all the ones we cited before

18 and all the ones they've cited, they all say the same thing.

19 It's not a convoluted or controversial doctrine. It's all

20 very, very clear.

21 If there's an issue as to whether or not the estate

22 owns a piece of property and there's a contest over that and

23 that issue is now put before the district court on appeal, that

24 issue cannot -- Your Honor has no jurisdiction --

25 THE COURT: Except -- I have jurisdiction to enforce



1 the order.

2 MR. STARK: Only to the --

3 THE COURT: How else could I have jurisdiction over

4 that order?

5 MR. STARK: You have to read the end of the sentence

6 in all of these cases, Your Honor. You have jurisdiction to

7 enforce it, only so long as in the enforcement action, you

8 don't otherwise disturb the issues on appeal.

9 So, for example, Your Honor, it's a -- we could talk

10 about any of the cases that you like but that's the wording in

11 all of them. So long as you don't disturb the issues that are

12 before Judge Sleet, you don't have the power, you don't have

13 the jurisdiction to moot an appeal before Judge Sleet. That's

14 what Strawberry Square says in about as clear terms as can be.

15 You can't touch the issue on appeal, even on other issues, so

16 as to disable him to reverse.

17 Your Honor, I only have twenty minutes, so I am going

18 to move to Stern but we can talk about it as much as you'd

19 like. Whereas I think that issue is very clear, I think this

20 one's very hard. Maybe Your Honor will think this one's a

21 whole lot easier.

22 There's no dispute anymore that Your Honor can't

23 adjudicate the underlying causes of action. You heard Mr.

24 Sacks say I don't agree to the Court's jurisdiction to

25 adjudicate the matter. So the question is only whether or not



1 the Court can approve the hotly contested settlement of the

2 noncore actions. And in my articulation, as I read Stern, the

3 question is, is the stuff of Article III district court

4 litigation or is it the stuff of bankruptcy administration.

5 They use the sort of agency rubric of public rights. Is this

6 sort of an agency administrative function and the stuff of

7 bankruptcy?

8 And it's not an easy call. It's a really hard call.

9 It's something that I know Judge Amber would love to get his

10 hands on and perhaps there isn't a bright-line test. Let's

11 talk about that fact there isn't a bright-line test. Of course

12 the Court has core jurisdiction to confirm plans generally. It

13 would be silly to suggest otherwise.

14 But also axiomatic, not every plan has in it

15 provisions that fall within the Court's jurisdiction. If this

16 plan had an active -- a declaration of war against Canada, Your

17 Honor could not approve that plan because it would exceed the

18 bounds of your jurisdiction. It would encroach upon the

19 executive branch. I know I am being a little bit --

20 THE COURT: Extreme.

21 MR. STARK: -- extreme, but the concept is the same.

22 Plans, just because you put the word plan on the coverage,

23 doesn't mean that its provisions can't necessarily exceed the

24 bounds of Your Honor's jurisdiction. You have to look at it a

25 little bit more bright-lined. There's a continuum and it's a



1 continuum with respect to settlement approvals that are within

2 the plan.

3 If this was a case where you had a company that was

4 rehabilitated, you had jobs at stake, you had money being

5 involved, you were increasing an enterprise value, you were

6 doing all the things that Chapter 11 wants us to be doing,

7 rehabilitating and restructuring companies for the benefit of

8 everyone and you had a smaller settlement in there that frankly

9 wasn't sort of the heart of the plan, I don't know that it

10 wouldn't fall within normal bankruptcy administration and well

11 within your court's jurisdiction to approve that kind of a plan

12 but this case is different.

13 This case is very different because in this case,

14 there is no business. This case has nothing other than rights

15 of recovery against various different people including the

16 government and third parties and this plan is essentially

17 nothing more than a way to effectuate the settlement and impose

18 it upon lots and lots of people who don't like it. There's

19 other bells and whistles associated but it's the heart and the

20 vital organs of this plan is that settlement agreement.

21 It does analogize very well, Your Honor, to the

22 magistrate judge, the other Article I judge, who is being asked

23 to approve a fairness -- make a fairness determination on

24 general class action. Article I magistrates can't do that, nor

25 can this court do that here. That's really the stuff of



1 litigation.

2 So if this plan had more to it, that felt like it was

3 a real bankruptcy plan of reorganization, was really doing

4 something that we normally do here, I'd say on the continuum, a

5 very decent argument probably could be made. It fits within

6 the agency concept, the public rights concept of bankruptcy

7 administration but not this plan.


9 MR. STARK: Not what it's trying to do.

10 THE COURT: But isn't the norm in plans today

11 liquidation and certainly Chapter 11 plans can be liquidations.

12 MR. STARK: They certainly can but it's certainly not

13 my experience that the norm is liquidation plans. I've been --

14 every case that I'm involved in besides this one is all

15 reorganization, Your Honor. I hope that's the way we go

16 forward.

17 THE COURT: I guess you're lucky.

18 MR. STARK: Matsushita and Grimes, they're completely

19 irrelevant authorities that were cited. These are cases that

20 dealt with two federal statutes and the only issue is which one

21 trumps the other. And it's issues as to whether or not a state

22 court adjudication has binding authority under the federal

23 statutory regime. Well, state courts are not courts under the

24 constitution of limited jurisdiction. It's not a

25 constitutional question. It's an interpretation of statute;



1 which statute trumps the other.

2 This issue here is whether or not this court, this

3 court of limited jurisdiction has constitutional power to do

4 what Stern says is not something that's an easy decision to

5 make. It's completely irrelevant, Your Honor.

6 And Okwanna, Your Honor, I think there's two aspects

7 of Okwanna; one I think is just plain wrong and one makes it

8 inapplicable. Okwanna relies upon the idea that it's --

9 because it's a 9019 Federal Rule, somehow we get past Stern. I

10 think Stern made it pretty clear that a statute or a rule

11 doesn't make something constitutional. It's also an issue over

12 five thousand dollars. And what makes it sort of inapplicable

13 or irrelevant is it dealt with whether or not the person was

14 going to be able to have an exemption right of property, okay?

15 Whether or not that five thousand dollars in the settlement of

16 an insurance issue would go back and would enable the fresh

17 start philosophy.

18 THE COURT: Uh-huh.

19 MR. STARK: And so I would say that along my continuum

20 idea, that is bankruptcy administration. You are enabling a

21 person's fresh start. And so I think Okwanna is different than

22 this particular circumstance.

23 Here, I think the Supreme Court would say if they

24 looked at this case that they are asking Your Honor to do more

25 than what is bankruptcy administration. It feels like and it



1 is an end run around litigation, the big causes of action and

2 letting those judges who are now dealing with those causes of

3 action, approve the settlement. This plan isn't the stuff of

4 bankruptcy. It's the stuff of litigation.

5 With that, I think that takes us to the third point,

6 that's post-petition interest, Your Honor. I think this is

7 another Judge Ambro decision but again, I don't think it's all

8 that hard. I really don't either. 726(a)(5) instructs Your

9 Honor to act like a court of law, notwithstanding what Mr.

10 Hodara says, you've got discretion. You're acting like a court

11 of law, the legal rate. There's a rate, apply it and it's not

12 the contract rate because 506(b) says contract rate and this

13 doesn't. It's the federal judgment rate for all those other

14 reasons that Your Honor knows about and has written about.

15 There is judicial discretion in the context of post-

16 petition interest but it's confused in all of the arguments

17 that's being brought before Your Honor. It doesn't exist under

18 726(a)(5). It exists under 1129(b) in the fair and equitable.

19 That is where the Court is being asked, not to act as a court

20 of law, but to act as a court of equity. It says it; fair and

21 equitable.

22 And that's where case circumstance plays a part and

23 that's the distinction between Dow I and Dow II and Coram was a

24 situation where the equity committee says we've got this great

25 plan idea and we're going to cram it on those unsecured



1 creditors and Your Honor said I've got discretion and my

2 discretion arises as to whether or not you, equity committee

3 plan, is fair and equitable. Okay? But that's not this plan.

4 That's not this case. There's no creditors cramdown

5 contemplated in this case. This is only whether or not what

6 the equity is entitled to under federal judgment rate of

7 interest has been taken away from them. And that's the

8 beginning and the end of the analysis on this plan. On this

9 plan that value, you calculate what the post-petition interest

10 would be using the federal judgment rate and if there's value

11 that goes to equity, they have to get it and if they don't get

12 it, then the plan fails 726(a)(5). It fails best interest

13 test.

14 And what's more, the Court need not worry in this case

15 about a situation where I think Dow sort of alluded to it,

16 where no plan works. You can't find a way to stretch the value

17 that the equity's entitled to and at the same time, you can't

18 figure out how to do it without cramming it on unsecured

19 creditors because the evidence shows enough that there's cash.

20 You can pay off the creditors in full, give them the 726(a)(5)

21 interest still yield substantial cash and all the other value

22 including WMMRC and the causes of action. It means you don't

23 have to value them and that flows down; just natural, ordinary

24 waterfall as Mr. Rosen would like to put nice graphics up

25 there.



1 Admittedly, to get to the level where TPS is in the

2 money using the evidence in the record, you need to find the

3 judgment date is now, is confirmation. It's not the petition

4 date. If it's the petition date, then it would be some ninety-

5 odd million before we're in the money which again in the grand

6 scheme of seven-odd billion dollars is as I said before, they

7 put their hand over equity, it was a penny less than paying

8 them off in full and so that's kind of where we are. It's a

9 penny less than paying them off in full.

10 But let's talk a minute about how we use the interest

11 reference date. Is it the petition date? Is it today? And we

12 cite a whole lot of authority in our pleading that talk about

13 the fact that as a matter of logic, as a matter of law, there's

14 that Second Circuit case, that it really ought to be calculated

15 as of today. The plan supporters say well, that flies into the

16 face of the cases that are out there, including cases that I

17 cited that say federal judgment rate is determined as of the

18 petition date. None of them are binding precedent and I've

19 got -- I really want to talk to Your Honor about why I think

20 that that conclusion in those cases should not be followed

21 here.

22 First, there's limited if any, analysis. Most of

23 those cases just sort of say; say we'll use federal judgment

24 rate. It will be the petition date. And I think in most

25 cases, the issue has always been historically do I use the



1 contract date, do I do the federal judgment rate and if I got

2 the federal judgment rate, wherever you sort of peg the date,

3 I'm happy because the VIG is significant. So I presume in all

4 of these -- most of these cases, nobody ever litigated the

5 issue. It wasn't analytically put before the judge.

6 There is one or two cases where there is a little

7 explanation. I'll give you a quote from the Chiapetta case,

8 "Since a claim is like a judgment entered at the time of the

9 bankruptcy filing, the applicable rate should be the federal

10 judgment rate in effect at the time of the bankruptcy filing"

11 and that's closed quote.

12 But that's not correct at all. Bankruptcy doesn't

13 equal judgment from a court. Bankruptcy equals default and

14 acceleration. It means the claim can be asserted, not that a

15 court has said you now must pay it.

16 And the last time I checked, the definition of claim

17 includes contingent and unliquidated claims. So you're sort of

18 in this weird theoretical idea that the judgment date is the

19 date before a court has ultimately determined whether the

20 contingencies exist and what the liquidated amount of the claim

21 would be. So it's a theoretical conundrum to say that the

22 petition date is the judgment date.

23 THE COURT: But isn't that the conundrum Congress

24 wrote --

25 MR. STARK: I don't believe so, Your Honor.



1 THE COURT: -- that we view everything as of the

2 petition date?

3 MR. STARK: What the petition date is the date that

4 somebody files a proof of claim and says I'm entitled to

5 payment. It's the same as filing a complaint in federal civil

6 litigation. It's not appealable. It's not something that's

7 otherwise -- an appeal is what -- defines what a judgment is as

8 we said in the brief. Filing the petition -- filing the claim

9 on the petition date says I am entitled to pay. Now, people

10 can come in and say I disagree. I can object to that claim and

11 then there will be an adjudication thereafter and that's when

12 the judgment happens.

13 THE COURT: But in Chapter 11, you don't even have to

14 file a claim.

15 MR. STARK: I don't have to file a claim?

16 THE COURT: Yes, in many cases you don't have to even

17 file --

18 MR. STARK: If I'm a secured creditor, I don't have to

19 file a claim but if I am an unsecured creditor, I do.

20 THE COURT: Not unless I enter an order setting a bar

21 date, for example. So, I mean --

22 MR. STARK: I think 502 says that I have to file a

23 proof of claim, if I am going to assert a claim unless they

24 schedule it or I'm a secured creditor and then I assert the

25 right of payment. Someone can then object, as they can defend



1 in a cause of action. Then we have an adjudication and then

2 the determination is made, is the claim allowed or not allowed.

3 And the plan will then decide what's being paid.

4 THE COURT: So you're suggesting that the interest

5 rate day is different for every claim.

6 MR. STARK: No. No, no, no, no, no. I'm saying that

7 the petition date does not analogize at all to the judgment

8 date which is the date by which you determine what's the

9 prevailing federal judgment rate. The petition date --

10 THE COURT: So you're suggesting that for each claim,

11 I have to determine the judgment date to determine the

12 effective --

13 MR. STARK: Well, the judgment --

14 THE COURT: -- federal judgment rate on that date.

15 MR. STARK: What the cases say -- well I will give you

16 an -- we'll do a different analogy. You've got -- when there's

17 a Chapter 11 case that converts to a 7, the cases don't say

18 that the petition date is the reference date for determining

19 post-petition interest. It's the conversion date. It's when

20 there's a date that actually is determining the judgment. They

21 view that as the judgment date at that moment in time because

22 there's no plan anymore. At that moment in time, it's a

23 straight up liquidation. And there's a fair amount of analysis

24 and all of those cases decided as to why that's the case and

25 not the petition date. It's a hotly litigated issue and the



1 cases are almost uniform now and extensive appellate analysis

2 that it's the date by which -- of the conversion, not the

3 petition date. There's a gap period otherwise and if you say

4 today that the judgment is the petition date as a matter of

5 law, then you fly in the face of all those other cases. It

6 must be something else in the bankruptcy case.

7 We cited the Second Circuit's decision in Preferred

8 Prescriptions, quote, "The confirmation of a plan in a Chapter

9 11 proceeding is an event comparable to the entry of a final

10 judgment in an ordinary civil proceeding" closed quote.

11 It seems pretty clear, at least to the Second

12 Circuit's decision and analysis that the filing of the plan is

13 the judgment and that's the date that should be determined but

14 I am going to move on. Let's just say for the sake of argument

15 that Your Honor determines the petition date. We're ninety

16 million dollars, give or take, out of the money. The plan

17 still can't be confirmed and I think this is really important.

18 You've heard none of -- nothing on this today. Okay? And this

19 is the death trap discussion and it's also how you value estate

20 causes of action.

21 There are two forms of value being distributed in this

22 case. You've got cash proceeds and you've got a liquidation

23 trust and there's things being put into that liquidation trust

24 including, among other things, all of these estate causes of

25 action that are not being settled; D's & O's, we heard Mr.



1 Goulding talk about. There's at least 250 million. There's

2 litigation against potentially other Wall Street participants,

3 rating agencies, appraisal firms. This is Washington Mutual.

4 This is the epicenter of the nation's macroeconomic decline.

5 There's lot of people that were involved in WaMu's decline and

6 all of that is going in this liquidation trust.

7 And they talk about the flow down. They have a really

8 nice graphic about how it all flows down and it will be what it

9 will be but that's not accurate because since we didn't tender

10 a release to JPMorgan and thereby give up our appellate rights,

11 we're deprived of participation in that trust vehicle. We've

12 been death-trapped. Now, death traps, I suppose, are legal

13 under the cases just so long as I don't otherwise have

14 entitlement to the thing that's being taken away from me, okay?

15 It's effectively a gift, okay? The gift is available. I don't

16 want it. That's fine. But they have to prove I don't

17 otherwise have entitlement to value that they're pulling it

18 away. Otherwise, it would be violative of best interest in the

19 fair and equitable test and that's MCorp Financial. We quoted

20 that at length in our brief.

21 So they've now foisted on themselves a huge

22 evidentiary burden and we've heard nothing about it today.

23 That the causes of action that are going to be vested in the

24 trust now have to be worth according to their plan and to

25 enable it to be confirmed, has to be worth less than ninety



1 million dollars as a matter of law. They have to prove it to

2 you. It's not part of the settlement. It's not a canvassing

3 of an issue. This is part of the plan itself. It's value

4 allocation. It's been deprived to us and so whatever is in the

5 trust must be worth less than the ninety million that otherwise

6 would get me whole.

7 And Judge Posner, Circuit Judge Posner, told us how

8 they were supposed to do it in the Polis case that we cite.

9 They were supposed to come to this court and tell us who will

10 be sued, under what theories, how much will be demanded and

11 what's the likelihood of success.

12 As in December, we have an utter failure of proof.

13 They gave us absolutely no information. They essentially admit

14 that they don't know who they're going to sue. They don't know

15 what they're going to get. And only now getting around to

16 investigating it by hiring Klee, Tuchin to do that

17 investigation for them.

18 But where there is relevant evidence, it forcefully

19 suggests that trust will hold claims that vastly exceed the

20 ninety million dollars, perhaps by billions of dollars. You

21 have Mr. Goulding and Mr. Kosturos who have testified that

22 there's an intention right now to invest tens of millions of

23 dollars to fund this trust. It simply defies credibility to

24 believe that these sophisticated parties will spend tens of

25 millions of dollars to pursue less than ninety.



1 You heard Mr. Kosturos talk about 250 million dollars

2 of potential D & O coverage. I didn't hear insured versus

3 insured once in any of that discussion. Rather, I heard that

4 that 250 million dollars may be sitting and waiting for the

5 trust's taking. And then you have the Senate report. The

6 quotes given were intended by us, we selected them because they

7 seemed to us pure fact finding. They say here's what happened

8 at corporate headquarters. Here's what happened at the

9 investment banks. Here's what happened at the rating agencies

10 and at the appraisal firms. And they forcefully suggest that

11 tens of millions of dollars invested in these causes of action

12 is a very, very good investment, yielding again perhaps

13 billions of dollars.

14 Frankly, on this point alone, I simply don't see how

15 the plan can be confirmed. They offered this court nothing to

16 shelter the legal and evidentiary infirmity which is clearly

17 and utterly stated in the law.

18 Now, we talk also in our brief about the governance

19 structure. We have an entitlement here. It's being taken away

20 but let's say Your Honor tells them in your next opinion give

21 them the proper participation they deserve. Well, then we get

22 into the governance structure of it, okay?

23 Here you have indentured trustees controlling trust

24 governance, indentured trustees whose bondholders are being

25 paid off. 1127(a)(3) says governance must be consistent with



1 the interests of the trust beneficiaries, in effect. It

2 shouldn't be allocated as political patronage. Trustee's

3 representing claims paid off under the plan, don't represent

4 beneficial interests anymore. Those should go to those who are

5 going to be the trust beneficiaries; TPS and equity. Here too,

6 I think the plan facially violates the law. You've heard

7 nothing about it today and you've heard no evidence along the

8 way.

9 I know Your Honor doesn't really want me to talk too

10 much about the global settlement, so I'll touch on it briefly,

11 if only for establishing the record. We don't believe there's

12 any law of the case rule here. There wasn't a final opinion.

13 The December record is being incorporated by the reference and

14 they're asking again for approval of the global settlement.

15 And if there was, in fact, a final order on that, which there

16 isn't, I think we'd still have 60(b) rights, coming back and

17 say reconsideration by subsequent developments.

18 But with that, I just want to make sure that we

19 understand one another about my prior objection in December

20 about what their settlement burden is under TMT Trailers. I

21 take it as a given that issues like tax refunds, deposits,

22 BOLI/COLI, things like that; those are legal issues. Those are

23 issues that have been briefed and Your Honor's been given the

24 contracts and Your Honor probably can with that evidentiary

25 record make a determination as to the fairness of the



1 settlement. We don't contest that.

2 The problem we have are with the fact intensive ones;

3 the business torts and the avoidance actions. These are not

4 legal. These are pure fact driven causes of action and they've

5 been asserted in complaints and in other pleadings before Your

6 Honor, substantial complaints in other pleadings before Your

7 Honor, seeking in excess of, I think it was as much as 6.5

8 billion or exceeding.

9 Prima facie claims were asserted in a complaint, a

10 lengthy one and the evidentiary record supports the prima facie

11 case. You have Debtors' Exhibit 68, Debtors' Exhibit 70,

12 Debtors' Exhibit 44, Debtors' Exhibit 32, Debtors' Exhibit 48

13 and all of the attachments to those 2004 motions; all the e-

14 mails that were tendered by JPMorgan, all substantiating

15 further investigation and an ability for the debtors' to sue.

16 And these claims are admittedly being given up for nothing.

17 And absolutely no evidence was put before Your Honor as to why

18 that's appropriate and there was perhaps reason for this back

19 in December. You had ANICO. They put the stock market trading

20 in front of you, prepetition capitalization, and said that,

21 under some Third Circuit authority, can be a -- is a prima

22 facie defense of solvency. And then ANICO said you haven't

23 exhausted your administrative remedies and the debtor didn't

24 assert the claims. Okay?

25 Well again, I don't know that they actually did put



1 the market capitalization in front of Your Honor but we don't

2 see anywhere in the record any evidence on any of these claims

3 and now with the record that's being augmented by the Senate

4 report, which would strongly suggest that the OTS was not

5 monitoring WaMu and the public didn't know it, and therefore --

6 and also that the operations there were not being disclosed

7 appropriately and were not being run appropriately, there's a

8 pretty good argument that in fact it was insolvent and that

9 market capitalization was fraudulently induced. On top of

10 that, ANICO has been reversed.

11 THE COURT: Well, doesn't that mean there is no injury

12 to be recovered for a business?

13 MR. STARK: I don't -- no, I don't.

14 THE COURT: No damages?

15 MR. STARK: First of all, it's a fraudulent

16 conveyance. It could be a fraudulent conveyance onto itself, a

17 substantial fraudulent conveyance about the 6.5 billion.

18 There's intercompany claims and other sorts of assertions that

19 have been made about that. I appreciate that Your Honor said

20 in your prior opinion that they're mutually exclusive and I

21 guess this gets us back into the whole theoretical deepening

22 insolvency kind of a regime. If the company otherwise was

23 worth X dollars but it was insolvent then, and it became worth

24 a whole lot less as a result of the activities because the

25 company's still been damaged, I would contend, Your Honor, I



1 think pretty competently that the answer is yes,

2 notwithstanding the fact that there's no deepening insolvency

3 anymore. If this company became worth 6.5 billion dollars less

4 or it became more insolvent by 6.5 billion dollars, I think a

5 business tort claim will survive that.

6 I raise all this, I know I am rehashing a little bit

7 from my prior argument, but I do believe that if Your Honor

8 agrees with me with respect Stern v. Marshall and we're going

9 to deliver proposed findings of fact and conclusions of law

10 to -- which by the way, we'd solve the divestiture problem, too

11 because it puts both issues before Judge Sleet at the same

12 time.

13 THE COURT: How does that mesh with your request for a

14 direct appeal? Aren't you the one who raised that?

15 MR. STARK: Oh, Your Honor, I requested an appeal of

16 the issue before Judge Sleet. I've been waiting for oral

17 argument. I've been trying to move that case along. He's the

18 one who has told me I have to wait. If Your Honor puts the

19 proposed findings of fact and conclusions of law before Judge

20 Sleet, I'll gleefully argue to him, let's do it all together.

21 So you'll solve two problems at once.

22 But, Your Honor, I think if you're going to do

23 proposed findings of fact and conclusions of law, I think you

24 should turn to Mr. Rosen and say give me a draft and in that

25 draft identify with specificity where in the evidentiary record



1 there is support for a sweeping of these claims under the rug

2 as they have been asserted in a lawsuit and they've otherwise

3 been substantiated in other pleadings brought before Your Honor

4 with the e-mails attached. Excuse me.

5 And I think when that's done, when that direction is

6 given to the debtors, then I pick up where Mr. Folse left off.

7 The negotiations then will mature to their proper place. This

8 case is not -- is only half matured in its negotiations. They

9 will then have to do what I thought Your Honor sort of

10 suggested they did in your last opinion which is negotiate with

11 these people.

12 Your Honor, I'm going to conclude only with this. To

13 confirm this plan is not a small thing. It's a very big thing

14 in the eyes of the law. These are very big and difficult legal

15 questions you've been asked to look at and a lot of people are

16 going to be looking at them after you render your ruling. Many

17 of these issues, I think this case not only -- not only this

18 case, but all of us frankly, would really benefit from a Third

19 Circuit decision, the Court's jurisdictional bounds; Stern v.

20 Marshall and constitutional powers, calculating post-petition

21 interest, death traps, when are they legal, valuation of estate

22 causes of action, methodologically, post-consummation trust

23 governance, TMT Trailers and its evidentiary standard when

24 you've merged both legal issues that are being settled and fact

25 intensive ones in the same hearing and what the debtor must



1 show. Your Honor, I respectfully urge that you deny

2 confirmation for our post-trial brief.

3 Any questions for me?

4 THE COURT: No, thanks.

5 MR. STEINBERG: Good afternoon, Your Honor. Arthur

6 Steinberg on behalf of the esoteric security, the Dime

7 Litigation tracking warrant. Unlike the people who are

8 opposing the plan who preceded me, we are not out of the money.

9 In fact, there's a mechanism there to put us in the money. So

10 the real question is why is someone who is in the money and

11 it's been asked before, why is someone opposing this plan?

12 And we've decided that if we don't have a deal in

13 place or a firmly litigated resolution, that we would litigate

14 to make sure that the people who I believe have treated the LTW

15 holders unfairly would not be in charge post-confirmation or

16 through representation on the litigation oversight board. They

17 would not have an unfettered budget with little court oversight

18 as to what they would do. And those who were responsible for

19 depriving the Litigation tracking warrant holders for what they

20 were entitled to get would only be able to get under this plan

21 what they were legally responsible to be paid and nothing more.

22 And it's for those reasons why we are objecting to the plan.

23 And part of what I say will come out as sounding a

24 little paranoid and some of it will come out and sound like I'm

25 arguing for the inequitable conduct but I want to be clear, the



1 inequitable conduct that I will be arguing will have a relation

2 to the type of interest that should be paid to the PIERS

3 holders and the settlement noteholders and I am not wading into

4 the controversy over whether there was insider trading or not.

5 And when we were here in December talking about the

6 global settlement, the key word as people were talking about

7 the division of the Litigation tracking warrant, the key word

8 was it was Mr. Goulding's testimony about the holistic way upon

9 which the debtor approached the settlement. There was a

10 massive value that it was giving to the -- JPMorgan and it was

11 going to keep a massive value back for itself.

12 But when you look at the brief filed by the equity

13 committee as to actually how the Anchor litigation ended up

14 with JPMorgan as part of the global settlement, the first

15 person who gave it away was two of the settlement noteholders

16 who did that in the context of a direct settlement offer that

17 they made with JPMorgan. And then they convinced the debtors'

18 management to allow that offer to stay and ultimately, the

19 board I guess was worried about being sued but wasn't paying

20 any attention to the fact that the LTW rights have been shifted

21 but this starts with the settlement noteholders giving it away

22 in the context of an offer that was made.

23 The second thing, Your Honor, is that -- and not to

24 lose sight of it -- is that Aurelius has been waffling about

25 whether they like the global settlement, whether they don't



1 like the global settlement. They filed their brief saying they

2 don't like it. Then after everything was argued, they say

3 let's withdraw it. I didn't really mean it that much.

4 The argument that they said as to why they objected to

5 the global settlement is significant in that they said that I

6 thought I had a deal and would confirm at the beginning of

7 January of this year. Now it's going to wait until August.

8 That's way too long. I've suffered by the delay and the burn

9 rate in this case.

10 If you multiply the burn rate for the months that they

11 said tipped the settlement from their support to their

12 opposition, it's less than the Anchor litigation that is going

13 over to JPMorgan by a significant degree.

14 This thing, according to Aurelius, missed the lowest

15 point in the range of reasonableness by a very, very small

16 fraction of a number and then -- and that number was the value

17 that JPMorgan got of the Anchor litigation. If you did thirty

18 million times seven, it's 210 million dollars. We have a

19 reserve in this case for 337 million dollars.

20 This global settlement was structured to, in effect,

21 damage the Litigation tracking warrant holders. They could

22 have done a 9019 settlement and said we claim this. JPMorgan

23 claimed that. This is how we're dividing it up. No, that

24 wasn't good enough. They needed to say I'm doing this with a

25 Section 363 framework. I'm selling my interest. I'm doing it



1 free and clear. I want a finding from the Court that that's

2 going to happen. And the only thing that they said

3 specifically that they were going to sell free and clear was

4 free and clear of the Litigation tracking warrant position.

5 The only liability --

6 THE COURT: No, I think they mentioned that as to the

7 TPS, as well.

8 MR. STEINBERG: I don't think so.

9 THE COURT: Don't they?

10 MR. STEINBERG: I don't think so, not in the

11 disclosure statement. And I think that the only liability that

12 they said really didn't follow the asset that JPMorgan was

13 getting was the liability owed to the Litigation tracking

14 warrant holders and JPMorgan got the Anchor litigation.

15 And while the debtor says that we tried to be

16 inclusive, our goal is try to get as many people involved in

17 the process on this particular situation, they didn't get the

18 Litigation tracking warrant holders involved at all. They

19 tried to do this around the Litigation tracking warrant

20 holders. They didn't think it was a good idea to notify them

21 even of the bar date before in this case either. They were

22 excluded from the process and we've been running upstream to

23 try to be able to get ourselves back in the position that we

24 should have been all along. That's why we fought for the

25 reserve where they only wanted to reserve for Broadbill.



1 That's why we fought when Mr. Goulding forgot 100 million

2 dollars for the gross-up amount. That's what we fought at the

3 trial on expenses when we pointed out that Mr. Goulding was

4 reviewing recreated bills by Jones Day. That's why we fought

5 when the debtor put a summary judgment motion in on a draft

6 Golden State document instead of the final document. And after

7 it was pointed out to the debtor, the debtor still refused to

8 withdraw it and it was up to us to make a motion to strike it.

9 That's why we fought when they tried to introduce the

10 Chamberlain report while there was a pending summary judgment

11 motion and we said that you can't do that to us on the day

12 before the confirmation hearing and Your Honor properly struck

13 it. We've been fighting because it's been an unfair fight and

14 we've been fighting to maintain our position.

15 And, Your Honor, that's what you have here now and

16 that's what I am going to try to elicit in this closing as to

17 what I still think is unfair. On page 32 of the debtors'

18 brief, they ask Your Honor to in effect make a finding that the

19 global settlement was not a transfer of substantially all of

20 the assets of the debtors. They said we need to do that

21 because 1123(b)(4) has a provision that says that the plan may

22 have that, substantially all the assets and we'll ask the Court

23 to make a finding that this was a sale but not a sale of

24 substantially all the assets.

25 Now, why do I point that out? Because our argument in



1 the trial to take place next week is, one of our claims is

2 based on the fact that the global settlement constitutes a

3 combination. A combination is defined as a sale of

4 substantially all the assets of the debtor and here the debtor

5 is trying to sneak in a finding that they then will cite as the

6 law of the case against us.

7 Well, I looked to see what was your basis for saying

8 that it's not a sale of substantially all the assets? And they

9 said, we cite to the Goulding declaration. There it was

10 interesting at confirmation, we had a declaration but that was

11 only half the direct and then we had the direct and then we had

12 the cross. Well, what does Goulding's declaration say why it's

13 not a sale of substantially all the assets? He doesn't say

14 anything. He just makes the statement. So it's either pencils

15 down or you try to challenge the statement.

16 Well, I will argue this next month at the trial. I

17 certainly don't want anything that Your Honor does in the

18 confirmation hearing to prejudice that right but if one wanted

19 to say what's in this record now to say why that finding would

20 be absolutely false, is that part of the global settlement

21 JPMorgan got the tax refund, which Your Honor has said was more

22 likely than it probably belonging to the debtor. That was a

23 couple of billion dollars. They got the trust preferred

24 interest. That was four billion value. They got the

25 intellectual property. That had some significant value. They



1 got the Anchor litigation which is 600 million dollars if you

2 did the gross up of the full amount.

3 And what does the debtor have left? 160 million

4 dollars, I think that was the number that they used. So I got

5 four or five, six billion dollars being transferred to

6 JPMorgan. The debtor is holding back 160 million dollars. I

7 don't think it should count its deposits. It's their cash. I

8 don't think if you have cash, it doesn't mean you're not

9 liquidating the rest of your assets. That would be our view as

10 to why there was a sale of substantially all the assets. That

11 would be our view as to why Mr. Goulding is wrong. And that

12 would be our view why Your Honor shouldn't have to make this

13 finding, this finding which is unnecessary for anything in the

14 context of a plan.

15 There's been a lot of discussion about the litigation.

16 I think some of it has been touched upon, some of it really

17 hasn't been touched upon. Mr. Kosturos, I think said that he

18 was not in the business of valuing litigations. Okay. But do

19 you know what? Someone should. Someone should be telling

20 people what these litigations are and they should do it because

21 it has a significant or as the death trap, as Mr. Stark talked

22 about, it has a significance, as to whether other people are in

23 the money.

24 What do we know? We know that there's -- the debtor

25 has 150 tolling agreements of some people. The debtor is



1 scurrying around to get tolling agreements signed right before

2 the confirmation and it has also a relevance, Your Honor, as to

3 who should be bringing these lawsuits.

4 There is a very compelling argument that the debtor

5 who tried to get rid of a lot of these claims through the sixth

6 plan should not be the person in charge of litigating these

7 claims as part of the sixth modified plan.

8 But why also are these litigation claims relevant?

9 Because there's a tax ramification on anybody who has a

10 membership interest in the litigating trust. You need to value

11 the litigations in order to say what someone's tax basis is in

12 the membership interest. That exercise has to be done and that

13 valuation exercise is significant for purposes of the best

14 interest test because the tax ramifications of using the

15 litigation trust structure which is only in the Chapter 11

16 scenario but not the Chapter 7 scenario, could have an impact

17 on creditors. That's why I asked Mr. Goulding at his

18 testimony, who is valuing the litigations. He said somebody

19 who works for me. What are they doing? I don't know. And Mr.

20 Kosturos had the opportunity to testify to that and he didn't

21 want to talk about it.

22 But it is relevant because it is significant on the

23 best interest test by itself as to whether the litigation trust

24 structure works and is better than what the Chapter 7

25 alternative is.



1 We also talked about that the fees for the people

2 overseeing the liquidating trusts, they have to be disclosed.

3 That's an 1129(a)(4) requirement. If they're insiders,

4 payments to the people who will be running the reorganized

5 debtor. We know that the in-house counsel is going to be one

6 of the directors there. That had to be disclosed. That wasn't

7 disclosed, as well.

8 Let me talk a little about post-petition interest.

9 For the life of me, I cannot figure out why the debtor bets its

10 entire case as to being right on the issue of contract rate

11 versus federal judgment rate. It warned by myself at the

12 disclosure statement hearing that they should put in a blue

13 line, so that if they're wrong, their plan could otherwise be

14 confirmed. They chose not to do that. Even White and Case in

15 their objection to the disclosure statement thought that was

16 the right result. So they've bet the entire case on being

17 right on an issue that they're wrong about.

18 And the arguments that have been raised which is,

19 Judge, if you decide in favor of federal judgment rate, think

20 of all the further damage that will be done to those people who

21 have to waive further in this case. Well, that's the Abe

22 Lincoln lawyer story where he's defending someone who has

23 killed his parents and is throwing himself on the mercy of the

24 Court on the grounds that he's an orphan. You created the

25 mess. You created your own problem that you're now saying



1 please don't fault me on when you were forewarned about it.

2 And I heard Mr. Hodara, I have a new word instead of

3 holistic, I'm going to principle reading. Mr. Hodara said I

4 took a principle reading of the statute for purposes of

5 interpreting whether it's contract rate versus federal judgment

6 rate. Well, I'm going to call to issue and ask everybody on

7 the debtors' side, the committee's side, who said that the

8 confirmation opinion says that the contract rate applies unless

9 the equities dictate otherwise. I'm going to ask them to take

10 a principle reading of pages 90 to 94 and produce where those

11 words are. And why they would want to cite Your Honor's

12 opinion and misquote Your Honor's opinion beats the hell out of

13 me.

14 The confirmation opinion does not say there's a

15 presumption of the contract rate, so when the debtor has on

16 page 124 of its post-confirmation brief, a whole section on the

17 law of the case, that that's the law that should be applied

18 here, that's wrong. And the confirmation opinion did not say

19 that the contract rate would apply unless there was insider

20 trading of the settlement noteholders.

21 We correctly cited what the confirmation opinion says.

22 I think Mr. Stark is right, that generally the equities of the

23 case comes up in the context of a cramdown discussion as to

24 what the appropriate interest rate is but the majority of the

25 cases clearly are that the federal judgment rate should apply.



1 And when Mr. Hodara says we're going to take a

2 principle reading and we should interpret what Congress said,

3 well he can show where the federal judgment rate is not used a

4 lot in the Bankruptcy Code but clearly the Bankruptcy Code uses

5 the word contract rate and Section 506(b). Clearly, the

6 Bankruptcy Code talks about rights for -- contract rights that

7 people have in 569 and Section 560 of the Bankruptcy Code.

8 Clearly, the Bankruptcy Code talks about protecting contractual

9 rights under Section 1110 where their claim, airplane secured

10 lenders and it doesn't say it in Section 726(a)(5).

11 So on a principle reading of the section, it can't be

12 right that it must mean the contractual right. And some of the

13 cases draw the distinction and I'll just repeat it, they say it

14 says the legal rate not a legal rate. The must mean a uniform

15 rate and that's where they say it can't be something like the

16 contract rate. Under the debtors' formulation, by the way, if

17 the contract rate is used, it doesn't mean that every unsecured

18 creditor gets the contract rate. It means the people in the

19 committee will get the contract rate but there's a whole bunch

20 of unsecured creditors that will get the legal rate.

21 And it was interesting that when the debtor did its

22 best interest test as to the post-petition interest that the

23 PIERS would get, they gave him post-petition interest, not just

24 on their coupon which was five and three-eighths percent, they

25 gave them post-petition interest on what Mr. Goulding called



1 the accretion of the OID which wasn't interest but was akin to

2 interest. So that -- and when you applied the federal judgment

3 rate instead of the contract rate, guess what? You didn't get

4 the akin interest. It was something different. I guess when

5 you're not interest but only akin to interest, you don't get it

6 on the federal judgment rate when there's a uniformed rate. So

7 it does have a difference here.

8 And what's the significance of contract rate versus

9 interest rate? It is amusing to me that when people are saying

10 I want the contract rate when if you believe the debtors'

11 numbers, then they would probably do better with the federal

12 judgment rate.

13 But the reason why they're urging the contractual rate

14 is because using the federal judgment rate puts a cap on what

15 the PIERS could otherwise get and the only reason why you care

16 about that issue is if you think the debtor is going to push

17 through that cap because it's numbers are underestimated. And

18 the reason why it would be underestimated is because they

19 haven't even talked about what their litigation claims are.

20 And that's why knowing what the litigation claims are does have

21 a relevance.

22 When someone wants to talk about the equities of this

23 case, and someone wants to say we should not visit this harm on

24 the settlement noteholders because they've been pushing for the

25 result all along and they've been stymied, let me just remind



1 everybody the plan proponents lost at confirmation in December.

2 They proffered a plan that was patently unconfirmable on its

3 face. They put in that plan releases for third parties like

4 the settlement noteholders who were not paying any

5 consideration and asking everybody and trying to cram that

6 result on everybody.

7 If there's been a delay in this case, look in the

8 mirror. You caused it. If you want to talk about the equities

9 of the case and why this case has dragged on, it's not because

10 the plan opponents have been brilliant, it's because proponents

11 have been shooting themselves in their foot.

12 Now, none of the cases that they cite for a contract

13 rate issue involve a public company whose shareholders were

14 innocent victims of the debtors' blatant mismanagement. And I

15 know Mr. Uzzi said that I feel sorry, representing the senior

16 noteholders, that we can't give anything to the equity and then

17 cites the Armstrong case that say it was impossible to do that.

18 If I was an equity holder, I would throw up with that

19 statement. But I would just simply point out to the fact that

20 if that truly was the case, then what was anybody doing with

21 regard to the Seventh Amendment plan which was going to give

22 value to the equity? Why did they delay this confirmation and

23 spend money if it wasn't to try to give some result that was

24 going to be satisfactory to the equity holders that would get

25 by Armstrong? And if he thought that was a blatant waste of



1 time, well why didn't he say something instead of saying I'm

2 sitting on the sidelines?

3 Let me talk a little about the best interest test.

4 There, the debtor said essentially through Mr. Goulding that

5 there were two variables that separated Chapter 11 from Chapter

6 7; the value of WMMRC and the incremental cost of the Chapter

7 11. WMMRC was valued as a liquidating entity. I have no clue

8 as to why those numbers shouldn't be exactly the same. The

9 postulation was that WMMRC has no employees, no new business.

10 It was going to run off their insurance book. The only thing

11 that Mr. Goulding said is the reason why I'm separating the

12 value is that he got two unsolicited offers more than two years

13 ago in the height of the financial crisis which the debtors

14 turned down and that was his benchmark for valuing what it was

15 on a liquidation basis. Debtors never marketed WMMRC.

16 Blackstone never did it. He even testified, Mr. Zelin, that

17 the value of WMMRC has actually gone up because you're now

18 closer to the run off period. But no one ever updated their

19 analysis and on page 144 of Mr. Goulding's testimony, he

20 assumed that the tax attributes go because you would be forced

21 to sell it right away and then you would lose it. So that was

22 scintillating.

23 Let's talk about his analysis on the incremental cost

24 of a Chapter 11. He says that there were delays that would

25 cause the extension and how did he factor what the delays were?



1 Well, he extrapolated off a Chapter 11 run rate which was being

2 incurred during the confirmation process when it was the height

3 of running up expenses and the debtor had just recently run up

4 expenses.

5 He decided that I'm going to include the expenses of

6 the creditors committee and the equity committee in the Chapter

7 7 scenario because he somehow thought that they would survive

8 in a Chapter 7. He was just wrong about that.

9 He assumed that nobody who has been paid fifty million

10 dollars in this case would assist in any kind of transition

11 because they would be owed some Chapter 11 administrative

12 expense money and that would be a disabling conflict for them

13 to try to help out a Chapter 7 trustee. He assumed the Chapter

14 7 trustee would get a windfall fee as contrasted to what the

15 litigation trustee might charge and the only testimony that

16 they had as to what the litigation trustee might charge was, I

17 don't know, we're going to reserve around fifty, seventy-five

18 million dollars. That was the number that was thrown around.

19 But no one was able to sort of contrast why the Chapter 7

20 trustee couldn't do something more efficiently.

21 They exaggerated the cost of the claims resolution

22 because they said there was fifty-five billion dollars of

23 disputed claims but when under cross-examination, if a global

24 settlement was approved, it falls under a billion dollars and

25 it backed out my client's claims, we were basically trying to



1 figure out how to reduce 500 million dollars of claims to the

2 debtors' estimate of 375 million dollars.

3 One would assume that a Chapter 7 trustee could

4 revisit what happened in Chapter 11. No one seems to be

5 looking at anybody else's fees and maybe he'd bring a tighter

6 rein to the subject. But the real heart of why a Chapter 7

7 trustee may actually be better than not, is the information

8 that you didn't get. The Chapter 7 trustee would be

9 supervising the litigations; the litigations that no one has

10 really talked about, the litigations that we know the debtor

11 tried to bury as part of the sixth plan, vis-a-vis officers and

12 the directors. And we know that the officers and directors are

13 paying a significant sum of money in connection with the ANICO

14 settlement. They've been sued by the FDIC. Mr. Kosturos said

15 that probably the 2007 D&O policy may have been used up without

16 him ever trying to capture that value but he thinks there's

17 value on the 2008. So the issue is whether Mr. Kosturos is the

18 right person to be heading up the liquidating trust efforts on

19 these unspecified litigations.

20 The debtors' explanation for not including the

21 litigations in its liquidation analysis makes no sense. They

22 said well, you know, it's the same in Chapter 11 as Chapter 7,

23 so why bother? Well, almost every asset was the same in

24 Chapter 11 as Chapter 7, except for the two variables and you

25 do put it in because you need to analyze it from a tax basis



1 and from a disclosure viewpoint that creditors should know

2 what's -- creditors and equity holders should know what's

3 involved in this case. And I will call out the fact that when

4 the debtor announced that they were going to do the seventh

5 plan, they were going to fund somebody twenty-five million

6 dollars to sue somebody. That must mean that the debtor

7 thought that there was some value to sue somebody for at least

8 getting more than twenty-five million dollars but that didn't

9 come up.

10 Let me talk a little about the PIERS claim. The

11 source of my information for why the PIERS claims are being

12 compensated on their equity warrant is the debtors' disclosure

13 statement and the debtors' confirmation brief. I don't have a

14 great deal of additional analysis from that. From page 22 of

15 the debtors' post-confirmation brief, the PIERS units were

16 issued at an initial purchase price of fifty dollars, with

17 $32.33 allocated to the PIERS preferred securities, and the

18 balance, $17.67 attributable to original issued discount

19 related to the value of the aforementioned warrant, which is

20 the equity warrant. And then they said they made monthly

21 accounting entries to accrete the discount and increase the

22 balance over time.

23 So when the PIERS were issued in 2001, there was 400

24 million dollars of value given to the warrant. The PIERS were

25 issued with an OID. The OID was preferable to the warrant and



1 between 2001 and 2008, there was an accretion of the OID which

2 was the warrant component. That's where I get my information

3 from.

4 Mr. Goulding testified well, that's wrong. There was

5 an accretion and the PIERS are really entitled to something

6 with a rate of return of closer to over eight percent. But the

7 coupon that they were getting paid on a quarterly basis, I

8 think it was, was five and three-eighths percent. So I never

9 quite understood that testimony. And I don't care what their

10 overall rate of return promise was. I cared what their

11 interest rate was and I cared whether -- that there was a

12 valuation -- whether there was a compensation on the warrant.

13 And why do I think that that's true? It ties into the

14 argument that we've made that the PIERS is Tier 1 capital.

15 Generally subdebt is Tier 2 capital. This was Tier 1 capital.

16 This money was issued by an investment trust, wholly owned by

17 Washington Mutual, Inc. and that investment trust raised the

18 money to do acquisitions, I think according to its prospectus

19 and to boost the regulatory capital of WaMu, Inc. -- of WaMu

20 Bank, rather. And when the debtor attaches references the 2001

21 10K and on page 24 of its brief it says that the consolidated

22 statement of stockholder equity went up by 398 million dollars

23 for the value of the warrants. This PIERS instrument was a

24 hybrid instrument. It was part equity and it was part debt.

25 It was done for regulatory purposes and it was done for tax



1 purposes. When the debtor says in its quotations to Your Honor

2 that it was clear that -- and everybody always understood this

3 to be debt, when they quote in their brief on that issue,

4 they're quoting from an excerpt from the Heller Ehrman tax

5 opinion. When they get to the debt part and they got dot, dot,

6 dot, what they leave off from the dot, dot, dot is for federal

7 tax purposes. They're saying it's debt for federal tax

8 purposes. That has a consequence. That's not necessarily that

9 it's debt for all purposes. And if the debtor wants to

10 establish the rule of law is that if it's also debt for GAP

11 purposes, that's the end of the story, then that's fine because

12 I'll have a trial in September and I'll make the showing that

13 LTW should have been treated as liabilities for GAP purposes

14 and we'll have a very short trial.

15 But the fact of the matter is is that nobody ever,

16 ever went to try to challenge the PIERS claims, not because

17 there was a merger or not but you had a hybrid instrument,

18 something that was due in forty years, something that you could

19 have a deferral of dividends for I think five years and somehow

20 say is that -- something that was Tier 1 capital and someone

21 saying is that equity or not.

22 The argument on the PIERS common securities is based

23 on the fact that this was a business trust and on page 105 of

24 their post-confirmation brief, they say that in a business

25 trust, that the owners of the securities really have the



1 beneficial interest in the actual asset of the trust which was

2 the debenture. So if the common security holder which was

3 Washington Mutual had the beneficial interest in the debenture,

4 then that portion of the debenture referable to the common

5 security was Washington Mutual paying itself. And that's what

6 we argue should not have been allowed.

7 I don't care if there was a subordination. The fact

8 of the matter is that portion of debenture which is held by

9 Washington Mutual, Inc., I believe is Washington Mutual paying

10 itself. I believe that there's been an overpayment of the

11 PIERS security and that it should be adjusted for it.

12 Now, with regard to reorganized WMI, seventy-seven

13 percent is going to be owned by the PIERS. Many of them

14 elected for it. If they didn't elect for it, they got it by

15 default, then they did it in a plan which they voted to approve

16 which allowed them to get it as a default. So it was

17 convenient that they did it. Mr. Goulding testified that

18 someone who elects stock believes that the value of stock was

19 actually greater than the cash and the stock was undervalued.

20 And really when you go through all the experts, at the

21 end of the day what they disagreed about was how to value the

22 five billion dollars of the corporate opportunity of the NOL.

23 They both essentially agreed that a wind down of WMMRC was

24 going to be the same and they both essentially agreed that the

25 value of the NOL used to shield the WMMRC gain was going to be



1 around the same.

2 And why did they differ, is because the Wilkie Farr

3 expert said Section 269 was critical and that you needed to be

4 able to respect Section 269 and if you respected Section 269,

5 you implicitly put a cap on the amount of money that could be

6 raised by organized WMI because he was saying you can't do it

7 for more than the value of WMMRC and WMMRC was valued at

8 somewhere like 120 million dollars which essentially meant that

9 most of the NOLs would never be utilized. And that's where

10 their major difference was.

11 Well two things; one as I pointed out at the cross-

12 examination under Section 1129(v) of the Bankruptcy Code, the

13 same 269 concern is the 1129(v) concern. There's the purpose

14 of this plan, principle purpose of the plan, tax avoidance.

15 The debtor on page 78 of their post-confirmation brief asks you

16 to make a finding that the principle purpose is not tax

17 avoidance and highlights that no governmental official objected

18 to the plan on that basis.

19 And it was interesting that when Mr. Zelin testified,

20 he said that it's not raising money afterwards that's the

21 problem. You could raise as much money as you want. It's by

22 raising a lot of money because of this 269, it casts doubt as

23 to what happened originally as part of the plan process that's

24 the issue.

25 But, Your Honor, they're asking you to make the 269



1 finding now and there's nothing in this reorganization of WMI

2 that puts a cap on how much money they could raise in the

3 future. It's an unlimited cap and they could do whatever they

4 want.

5 We also raised the issues about that we think you had

6 a valuable asset which was fritted away, which was steered

7 towards the people who were going to naturally elect to take

8 the shares and therefore, to actually try to do a stock

9 election when you don't say who is going to be running the

10 reorganized WMI, when you don't have any real minority

11 protection knowing that you'll be a minority holder, so you

12 don't know really how you're going to get out your money

13 without disclosing how you are going to actually raise money

14 which was a feature of the six plan which had a rights offering

15 and was the feature of the seventh plan which had the 100

16 million dollar offering to be supplied by the settlement

17 noteholders to the debtor. Without that, you basically took

18 what Your Honor said had to be given which is a stockholder

19 election, and you basically made it a worthless right. And we

20 think that that was unfair and it also means that the debtor

21 may not have fully exploited its asset.

22 The late filed claims issue, Your Honor, is to some

23 extent a nonissue but I am going to dwell on it a second

24 because I think the reasoning that's been supplied as to why

25 someone's raising it is faulty. And I think it illustrates



1 some of the inconsistent arguments in the case.

2 I have no quibble with the debtor. The debtor

3 actually has said that were they in class 12 or class 21, not

4 class 12(a). So from the debtors' plan, they're not saying the

5 late filed claims affects my client. I could stop there but I

6 am not.

7 Aurelius has raised this as an issue but Aurelius

8 defines in its objection on page 3, note 2, that a late filed

9 claim is a claim that's not filed as of the confirmation date,

10 not the bar date but the confirmation date. While the class

11 action complaint could be filed, it was filed months, months

12 before the confirmation hearing. So even under the Aurelius

13 standard, I would be okay as well, too.

14 But what is it that causes me to talk about this any

15 further than that? And the reason is is that Aurelius has

16 asked Your Honor to revisit that issue and say that

17 notwithstanding your confirmation opinion, that post-petition

18 interest should get paid ahead of late filed claims. My

19 response to them is why don't you just look at the sections of

20 your brief which talk about the law of the case and that you

21 can't revisit the law of the case as you talk to the global

22 settlement and just apply it -- just say it to yourself. And

23 then if that's not enough, then think about the circumstance

24 where you're actually objecting to a plan and I adopt Mr.

25 Crowley's sound logic which is this is the plan that the debtor



1 proffered consistent with Your Honor's opinion. If it doesn't

2 work, then you're just objecting to the plan and that's just

3 going to undo your desire to get something done sooner rather

4 than later.

5 And two other quick things just to dwell on it a

6 little further. There's a cross reference in Aurelius'

7 argument here that Section 502(b)(9) is support for their

8 theory and I look to Section 502(b)(9) and taking a principle

9 reading of Section 502(b)(9), it cross references Section

10 726(a)(3) which is late filed claims. So I don't know why they

11 cited it but it's supportive of my position, not their

12 position.

13 And frankly, if they want to continue to argue that

14 the Banco Latino case has some relevance to this circumstance,

15 then I don't think they should ignore the fact that the issue

16 came up, not in the context of a confirmation hearing with best

17 interest but the issue was raised six years after confirmation.

18 They may think that's a fact without relevance. I certainly

19 think it's a significant fact.

20 And here's where I am going to agree with Mr. Hodara.

21 I actually think that post-petition interest does come ahead of

22 the subject subordinated claims and that to the extent that

23 Section 726(b)(4) is clearly an issue that -- let me strike

24 that. I apologize.

25 Your Honor, this is in connection with the argument



1 that they raised that the subordinated claims come ahead of

2 late filed claims. I'll just point out that any late filed

3 claim of the case gets converted to Chapter 7. There's a new

4 time period to file claims in that case and you'll come as a

5 726(3)(a)(3) creditor ahead of any kind of subordinated

6 creditor and you'll be a timely filed creditor, so that

7 argument wouldn't work.

8 Your Honor, I briefly -- I have talked about this ad

9 nauseum and I won't do it again. The debtor came close to

10 carving out and being consistent with your opinion on third

11 party releases. The thing that I quibble with is that Your

12 Honor didn't say put a one year sunset provision so that if you

13 don't give a release by that point in time, you've waived your

14 rights. That wasn't in the opinion and I obviously have the

15 concern that our rights would not be fully adjudicated within

16 the one year of confirmation and that under that circumstance,

17 we would be forced to potentially give a release without

18 knowing whether we did anything under a plan. And I don't

19 think that that's fair or consistent with Your Honor's ruling.

20 With regard to the --

21 THE COURT: You're way over.

22 MR. STEINBERG: Am I way over?

23 THE COURT: Yes.

24 MR. STEINBERG: Okay. So let me just wrap up. My

25 wrap-up is really simple. I didn't know whether I'd be giving



1 this closing argument over a telephone on a cruise ship or a

2 telephone in Alaska, whether it was through the act of God,

3 Your Honor or my counsel, they've allowed me to give this oral

4 argument in person and I thank whoever is responsible for that.

5 THE COURT: All right. Thank you. Who do we have

6 left?

7 MR. MASON: Your Honor, I believe it would only be pro

8 se.


10 MR. MASON: Your Honor, Ben Mason, pro se. Is that

11 close enough?

12 THE COURT: It is.

13 MR. MASON: Thank you. I'll try not to talk too

14 quickly. I submitted a post hearing memorandum of basically

15 the NOL values to the Court. Do you have a copy of that, Your

16 Honor?

17 THE COURT: Not here, but I have received it.

18 MR. MASON: Okay. And then also my written objection,

19 also. I didn't know if you had a copy of that. That was

20 timely filed. It was docketed the 12th but I did docket it on

21 time. Just kind of real briefly, the -- I have to -- I know

22 that there are other people that want to talk and we've been

23 here a long time but I am representing myself and, of course,

24 other people situated which are typically retail shareholders.

25 At the disclosure statement hearing, Your Honor asked for a



1 full disclosure of the NOLs and that wasn't included within the

2 disclosure statement hearing and so I e-mailed the debtors.

3 Actually, I e-mailed Weil Gotshal and requested that and it was

4 not given to me.

5 And basically, I believe that the reason was, and I

6 could submit that to the Court, was that the disclosure

7 statement was approved and so that was sufficient because at

8 the time, I kind of anticipated that there might be fourteen

9 billion or so in actual true NOL value. Now moving forward, we

10 get to the confirmation hearings and we've learned from Mr.

11 Carreon there's an additional 600 million dollars at the

12 company level, there's the 5.5 billion dollars that's related

13 to stock abandonment. And also he stated there's another four

14 billion or so that's related to other payments according to the

15 plan. This is related to what -- he said according to our dug

16 diligence, we have determined there's another four billion

17 dollars.

18 So it looks like we're coming together. We're not in

19 the middle yet but it appears to me that there's actually even

20 more money to be made there that's actually in this plan. And

21 so, the stock abandonment is an area of real, I guess, concern

22 for retail shareholders for one, because we're afraid there are

23 going to be losses, like a loss of right of suit that are

24 related to stock abandonment, I personally don't know whether

25 or not that's true or not but also because it's not really



1 necessary according to this plan. This plan is basically a

2 run-off plan that purports that the whole company is only worth

3 125 million. The 600 million in holding company losses are

4 sufficient to meet all of those tax needs. That anything in

5 this plan -- that's stock abandonment. Anything above that is

6 essentially outside the plan. They're saying that we -- this

7 is all it's worth. This is all we're going to be able to use.

8 Well, then don't abandon -- then don't use those NOLs.

9 And so of that four billion, I'm not sure what it is,

10 it could be that the 335 million dollars in payment to the WMB

11 could be the 3.5 billion or so in payments to JPMorgan, the

12 FDIC, as considered a capital contribution. It could be

13 related to the four billion in TPS assets but I do know that at

14 the disclosure statement hearing and we discussed this, it was

15 on Blackstone, figured out that there was an additional 4.6

16 billion dollars that wasn't disclosed. Now, they say this

17 wasn't going to be used but there's this proration rule that I

18 believe that now we're up to like fourteen billion dollars.

19 Now, if they don't need all the additional NOLs that are

20 related to the stock abandonment, if that 600 is actually all

21 you need, then there's no need to abandon. That way then they

22 can stick to their plan and just use this company as a runoff

23 company.

24 And also, I actually went in much more detail within

25 my memorandum and I don't want to go into that for you too much



1 more because there are other people here and I know it would

2 take a lot of time.

3 So I guess the other part is, I guess -- the other

4 part of my discussion is really, I guess, the representation

5 that we are getting here from Weil Gotshal and Alvarez &

6 Marsal. I'm sure they're very nice people at home. I'm not

7 sure -- well, I'm not really sure but I think so. And so

8 here's -- this is from the second confirmation hearing

9 testimony. Mr. Kosturos, "I would say I was the lead

10 negotiator. I would say that Weil Gotshal drafted a lot of

11 documents as well as Quinn Emanuel after they were hired, also

12 had input. And within this -- does this work? Yes, it does.

13 These are the layers of relationship between Alvarez & Marsal

14 and JPMorgan Chase. Now, one is always going to be there. The

15 far right is always going to be there which is the holder has

16 held an economic interest in this case but the other four

17 has -- is currently advising or has previously advised creditor

18 client of an A&M's field, yes. Significant equity holder of

19 A&M's client, yes. Members of -- is currently advising or has

20 previously advised members of an unofficial committee, yes.

21 So our primary negotiator and the restructurer that

22 was making decisions on this is heavily conflicted with our

23 primary adversarial party and so -- and I said in my actual

24 written argument that this suggests a firm that's in business

25 with the primary adversary on every possible level. That's not



1 quite true, it's close.

2 THE COURT: Well, wasn't this addressed at the first

3 confirmation hearing and I did decide that issue?

4 MR. MASON: Did you, Your Honor?

5 THE COURT: I did.

6 MR. MASON: Did you see this really, really good table

7 that I put together because I'm going to tell you when you put

8 that table up there, it looks really good. Okay.

9 THE COURT: No, but I think all the information I

10 had --

11 MR. MASON: Okay.

12 THE COURT: -- others presented it.

13 MR. MASON: Well, okay, so I will -- well I guess that

14 makes me a little sad but I'll keep going. The business tort

15 claims; now that's really interesting because they were just

16 discussing the business tort claims and one of the issues

17 was -- it's from the deposition, page 262, line 22:

18 "Q. During discussions, did you discuss the business tort

19 claim with JPMorgan?

20 "A. Not in any detail."

21 This is one of the biggest claims in this case and

22 they didn't even discuss it.

23 And so that's also, I'm not going to deal with third

24 parties because that was already dealt with and I also have

25 another really, really good table but I am not going to show



1 you that one because it's related to the same topic.

2 But this actually directly relates to what was just

3 being discussed by both Mr. Steinberg and also Mr. Stark. Your

4 goal during -- this is from Mr. Kosturos:

5 "Q. Your goal during this negotiation period was to pay off

6 your creditors; is that right?

7 "A. No, my goal was to maximize the values of the estate."

8 And then he went on in the same hearing, "One of the

9 things about the fraudulent conveyance is it has real tension

10 with the business cores and the fraudulent conveyance are

11 trying to prove insolvency to look back to try to recover, you

12 know, potential capital contributions and business torts. We

13 tried doing the opposite. So there's a natural tension that

14 makes it difficult to really proceed with".

15 And this argument was also included in the Court's

16 rejection of the first confirmation but this is only partly

17 true and here's why. First of all, I understand that they say

18 they have to make a choice but they didn't really make a choice

19 because all of the stuff that could be reclaimed, all went

20 there and essentially -- I did another table -- essentially

21 when you take a look at these capital contributions, 6.5

22 billion, the TPS asset pool was worth over ten billion dollars,

23 and that's when you include both the TPS themselves and also

24 the assets back then, that's ten billion, and that was the day

25 after filing those went over to JPMorgan Chase. And so --



1 UNIDENTIFIED SPEAKER: That's a settlement agreement.

2 MR. MASON: And also, this is a settlement agreement,

3 that's right. That's right. That is a settlement agreement.

4 Essentially all of these things that we talk about that if

5 you're going to try to prove insolvency, you want to try to

6 pull back to the estate, they're all going. Everything on that

7 insolvency side is going away. And so, that's of course a big

8 concern, okay?

9 We understand now that the NOLs are a pretty big

10 carrot for the settlement noteholders; this is a really big

11 carrot. I guess the sort of follow-up question is was there a

12 stick associated with it and it seems to me that it's, of

13 course, pretty troubling, I'm trying to deal in facts, that's

14 why I used lots of tables because you can only use facts in

15 tables, but when you are talking about what your concerns are,

16 my fear in this case is that when on August 24, 2009 when

17 JPMorgan filed their 2019 discovery motion, they basically

18 talked about their concerns about noteholders accumulating

19 claims during these proceedings. And so that to me is of a

20 concern since these were the same individuals who crafted the

21 settlement. We had this big carrot which was the NOLs and we

22 have this big stick which is potentially getting called out for

23 inside trading. Now, we know that -- so did that stick mean

24 nothing? Well, it meant something because it was enough to

25 bring them back to the table to maybe work out some kind of



1 deal with it. So it had some value, at least to them, okay?

2 The GSA renewal, I asked during the Goulding

3 deposition, I asked was that an Alvarez & Marsal decision. He

4 said it's a decision that's made by the team. So I asked was

5 that a board decision that was voted on and he didn't know.

6 And I requested board minutes and they didn't give it to me and

7 I understand. They wanted me to sign a really long

8 confidentiality agreement and to be fair, those are really

9 precarious in this case. So I said well just -- can you just

10 tell me who was there. Can you just tell me who came and like

11 when and they said it was unduly burdensome. So I understand

12 that.

13 But my concern is that as members of the board have

14 left, they have been replaced by Alvarez & Marsal as they

15 leave. So now this really works out a whole lot better if you

16 believe what I believe which is that they really weren't

17 pursuing recovery from JPMorgan Chase due to their status is

18 not as a disinterested person, then -- but if you don't, then

19 it doesn't necessarily come into play. But it does come into

20 play with have things changed? Since that case, Colonial's

21 come down the pike and in Colonial, they exited with their

22 claims intact and they got their tax deposits and the refunds.

23 Meritor came down the pike in that time. In Meritor, they said

24 yes you can sue the FDIC. And the FDIC had the option to take

25 that all the way to the Supreme Court to say no, we are not an



1 arm of the government, you cannot sue us. So far, my

2 understanding is that they have chosen not to do so. So

3 Meritor, to me -- before you renew a GSA, you have to at least

4 talk about this. Why are we giving them a billion dollars?

5 Okay?

6 And I am going to -- because of the conflict talk,

7 basically the discussion on conflicts, I am going to move all

8 the way to the very end of my presentation and talk about one

9 other section and that was with the business tort claims. If

10 you have a choice, either going after the fraudulent conveyance

11 as which they never -- none of those things were ever returned

12 back to the estate within the settlement, or the other one

13 which is to pursue the business torts, there is a tension. But

14 according to the FDIC, there was only one conforming bid and

15 that was JPMorgan Chase but JPMorgan Chase had signed this

16 contract that you're not going to buy us from anybody else.

17 They signed it the same month that they hired Weil Gotshal in

18 March of 2008. And they signed this contract that says we're

19 not going to -- it will be eighteen months. We're not going to

20 buy you -- from anyone else but you; right? And so what

21 happens if they don't submit a bid? This is at the sort of

22 central tentative contract law with the sufficient breach.

23 What happens if you don't? Well, you have to go to a

24 nonconforming bid and one of the nonconforming bids -- I've

25 also learned from this that I am very poor highlighter -- is



1 this bid from Wells Fargo. I'm going to read it because I just

2 realized nobody's going to be able to read that at length.

3 Wells Fargo offered a nonconforming bid on the day of seizure,

4 that morning. They offered it to Sheila Bair. And it stated

5 that we would like to -- Wells Fargo would assume all deposit

6 liabilities --

7 THE COURT: Is this in the record?

8 MR. MASON: No, it is not.


10 MR. MASON: Oh, no. You mean the actual -- this?

11 Here's what happened, Your Honor. I mentioned examiner's

12 materials and I tried to submit this into the record but

13 because the examiner's materials all have confidential, only to

14 be used --


16 MR. MASON: -- they were not allowed to be docketed.


18 MR. MASON: And so I was at a quandary for being able

19 to discuss this. This was directly from the examiner's

20 materials and he has already released them.

21 THE COURT: Well, that doesn't mean it's part of the

22 record. Was there a witness and an exhibit offered at the

23 seven days of the confirmation hearing that I had?

24 MR. MASON: Well, let me see. I have a courier.

25 Would you like me to submit something to the Court?



1 THE COURT: No. I mean it's too late.

2 MR. MASON: Okay. There's got to be something else I

3 can say to that, Your Honor. If it's part of -- essentially is

4 it part of the public record if it's already been submitted by

5 the examiner?

6 THE COURT: No.

7 MR. MASON: Okay.

8 THE COURT: No.

9 MR. MASON: All right. Well, if you'll please indulge

10 me and let me finish just one last thing. There's a fifty to a

11 hundred billion dollar offer and that fifty to a hundred

12 billion dollar offer was only contingent upon a sixty day.

13 We'll protect all deposits and we would like sixty days. And

14 that low end offer is enough to satisfy every constituency here

15 and remember, we never even discussed it. We never addressed

16 it. They didn't talk about it with them. And that to me is

17 like more importantly, the biggest concern of this case for

18 counsel. Thank you, Your Honor.


20 MR. BERG: Your Honor, I'm James Berg, a series R

21 preferred and WMI common shareholder appearing pro se. After a

22 recent ruling, I became concerned that you might consider some

23 of my written arguments to be hearsay. In reality, they're

24 based on solid, verifiable facts obtained from official

25 documents in the public domain. There can be no dispute that



1 the FDIC corporate and the FDIC's receiver are separate,

2 legally distinct entities since that is the way they

3 represented themselves in this court and in Judge Collier's

4 court. A search of the claims register confirms that FDIC

5 receiver has filed claim 2140 and that FDIC corporate has filed

6 no claim against the estate. Most of WMI's most significant of

7 claims against the FDIC must be attributed to FDIC corporate

8 since FDIC's receiver only came into existence at seizure.

9 Given Your Honor's earlier ruling that releases will

10 not be provided without consideration, it is clear that FDIC

11 corporate should not be provided a release as the debtors

12 propose. I used two different methods to analyze the value of

13 WMI's counterclaims against JPMorgan, each of which came out to

14 approximately 45 billion dollars and the market value method I

15 obtained, a 13.8 billion in WMB liabilities from the September

16 30, 2008 WMB receivership balance sheet. WMI's liabilities

17 were obtained from the debtors' June monthly operating report

18 on August 1, 2011, docket number 8358.

19 For the accounting gains method, I obtained the

20 thirty-one billion dollar write-down from JPMorgan's September

21 30, 2008 10-Q filed on November 7, 2008. The same 10-Q reports

22 that the negative goodwill at 581 million dollars but it must

23 be increased by JPMorgan's third quarter 2008 operating loss

24 resulting in the 1.9 billion dollar figure I used in my written

25 argument.



1 Page 122 of JPMorgan's March 31, 2009 10-Q provides

2 confirmation that JPMorgan has calculated 21.9 billion dollars

3 in accretable yield which will be used to write up the value of

4 WaMu's loans over time. In that filing, JPMorgan states, "The

5 accretable yield represents the excess of cash flows expected

6 to be collected over the fair value of the purchase credit

7 impaired loans". This amount is not reported on the firm's

8 consolidated balance sheets but is accreted into interest

9 income at a level rate of return over the term of the

10 underlying loans. For additional detail and conclusions,

11 please see my written argued filed in docket 8407.

12 For the remainder of my presentation today, I'd like

13 to address the debtors and their fiduciary duty to all

14 stakeholders. In paragraph 30 of their motion to disband the

15 equity committee, docket number 2132, filed January 11, 2010,

16 the debtors state, "To date in these cases there have been no

17 assertions by any party that the debtors or the creditors

18 committee are doing anything but discharging their respective

19 fiduciary duties to the estates and the estate's creditors". I

20 believe that this statement is no longer true and I'd like to

21 use quotes from this confirmation hearing transcript to prove

22 my point.

23 From the July 18, 2011 transcript, Mr. Gropper of

24 Aurelius, page 66, lines 2 through 7:

25 "A. And then after we obtained the information we could from



1 Mr. Kosturos, a bunch of us did a bunch of analysis, mainly on

2 legal pads attempting to come up with the consensus inside at

3 least the creditors side of the house, an appropriate proposal

4 to make to JPMorgan because the debtors -- we thought the

5 debtors had not asked for enough".

6 One would think that Mr. Gropper may have thought that

7 the debtors were not taking appropriate steps to maximize value

8 to the estate. One page 70, line 23 through page 71, line 11.

9 "A. Additionally, there were 6.5 billion dollars of downstream

10 transfers that were made within one year of the filing, 2.5

11 billion dollar of which were made within ninety days. Well, I,

12 you know -- we've been involved in a lot of fraudulent

13 conveyance cases. We were involved in Tribune earlier this

14 year, very involved in the TOUSA bankruptcy case, and so we've

15 done a lot of work applying our knowledge from those cases to

16 this one. We thought they were very solid fraudulent

17 conveyance claims and they were being settled for under this

18 proposal zero. Additionally, there were hundreds of millions

19 of dollars of preference claims which could be assertable

20 against either the WMB estate or JPMorgan. Again, those were

21 being settled for zero".

22 My commentary, Mr. Gropper appears to be suggesting

23 that the debtors ignored viable claims in order to obtain a

24 quick resolution to these cases.

25 On page 70, line 23 through page 71, line 11. Wait.



1 Sorry, Judge. Do that -- maybe not. I'm sorry. Additionally,

2 there were 6.5 billion dollars of downstream transfers that

3 were made within one year of the filing. This looks like what

4 I just did. I'm sorry. I thought so. I don't know how I got

5 that in there. I'm sorry. Okay. I know what I did wrong.

6 I'm sorry. I'm sorry, Your Honor.

7 The other thing that I wanted to point out to them --

8 oh, page 75 rather, lines 3 through 21. "The other thing that

9 I wanted to point out to them is that I was concerned that the

10 debtors were receiving pressure from the holders of senior

11 bonds who obviously had different goals in the context of the

12 case than the holders of subordinated bonds, junior

13 subordinated bonds and preferred stock, which we were at the

14 time. And so I wanted to make sure the debtors weren't going

15 to try to -- weren't going to assent to the desires of those

16 group (sic) and look to make a quick deal but rather that the

17 debtors get a recovery that was commensurate with the rights of

18 WMI in these cases."

19 "Q. And where did point this out in this letter?

20 "A. If you look at the last sentence in the penultimate

21 paragraph, I said quote, 'As fiduciaries, I am sure that you

22 are desirous of maximizing value for all stakeholders.' Note

23 that I said stakeholders".

24 And then he quotes again, "rather than just those who are

25 simply looking for a quick deal that compromises significant



1 value for the estate" end quote.

2 And Mr. Eckstein replied:

3 "Mr. Eckstein: Your Honor, I would like to move

4 Aurelius' Exhibit 22 into evidence".

5 Here Mr. Gropper is pointing out to the debtors their

6 fiduciary duty to all stakeholders. He would have had no

7 reason to do so unless he felt the debtors were not maximizing

8 the value of the estates.

9 On page 70, lines 7 through 32:

10 "A. The purchase and sale agreement provided, it said nothing

11 about whether or not the tax assets were transferred to

12 JPMorgan and it was a pretty big asset. So, you know, one

13 would think that there may be a mention of it but the only

14 claim the subsidiary had to the tax assets of the holding

15 company were pursuant to a tax sharing agreement. That's a tax

16 sharing agreement that we reviewed. It was publicly filed as

17 an exhibit to the 10-K and it's -- and so the only way the

18 subsidiary could get at those tax assets was to exercise its

19 right under the tax sharing agreement. Well, that's an

20 intercompany claim and the purchase and sale agreement

21 specifically carved out intercompany claims. So from our

22 perspective, speaking just from Aurelius', our approach to

23 analyzing that dispute we said, well gee, it's pretty clear

24 that in our view, JPMorgan didn't in fact buy the tax asset".

25 On page 109, lines 21 through 23:



1 "A. And lastly, there was a provision in the bill as passed by

2 Congress that did not allow TARP recipients to benefit from the

3 passage of that bill."

4 My summary, "Mr. Gropper appears to be suggesting that

5 JPMorgan is not entitled to any tax refunds. As confirmed in

6 my written argument, I agree with that suggestion".

7 From the July 20, 2011 hearing transcript, Mr. Bolin,

8 speaking on pages 288, lines 3 through 9:

9 "Q. Wouldn't you agree with me though, sir, that the

10 resolution of the division of the tax refund is really the

11 primary focus of these settlement negotiations?

12 A. It was a big focus; yes. The only other thing I know is

13 it's a big number, three billion dollars. So when you talk

14 about twenty percent on three billion dollars, that's a lot of

15 money".

16 Here Mr. Bolin appears to be suggesting that the

17 claims may not have been settled on their merits but on whether

18 they provide a lot of money to the estate. When dealing with

19 many billions in claims, that may be settling too cheaply.

20 Your Honor, you had the foresight to appoint an equity

21 committee despite the debtors insisting that over one hundred

22 billion dollars in claims were outstanding, that equity was

23 adequately represented and that others were looking out for our

24 best interest. At the first confirmation hearing, you had the

25 wisdom to listen to Mr. Thoma's documented facts, combined with



1 hearsay and use them to determine that discovery of the

2 settlement noteholders was warranted.

3 The debtors and the settlement noteholders fought

4 tooth and nail to avoid public disclosure of their confidential

5 information and now we know why. The knowledge of the facts

6 and the timeline they fit into paint a very unflattering

7 picture of themselves and the debtors and bring into question

8 the most fundamental assumptions which were used to form the

9 debtors' business judgment which resulted in a global

10 settlement agreement. Despite additional monies flowing into

11 the estates due to the extended five year tax look back,

12 equity's position never changed. Due to the negotiating skills

13 of the debtors, we were always just barely out of the money.

14 Too many in this case are so blinded by dollar signs that they

15 cannot see how many people their actions are hurting. Thank

16 you, Your Honor. Without you, we would never have learned

17 these ugly truths or had this opportunity to set things right.

18 Thank you again for having the wisdom and courage needed to do

19 the right thing.

20 Your Honor, given -- I do have copies of the

21 receivership balance sheet and excerpts of the JPMorgan

22 September 30, 2008 and March 31, 2009 quarterly SEC filings, if

23 you would like to review them. I am guessing probably not.

24 They're likely too late given what you've --

25 THE COURT: Ruled previously --



1 MR. BERG: Yes.

2 THE COURT: I think it's too late.

3 MR. BERG: Thank you, Your Honor. I'd be happy to

4 answer any questions you have at this time.

5 THE COURT: No questions. Thank you.

6 MR. BERG: Thank you.

7 MR. THOMA: Good evening, Your Honor. Nate Thoma, pro

8 se. Out of deference to the late hour, I'm just going to try

9 to hit bullet points. I know the debtors still have to go and

10 hopefully the equity committee can have their motion addressed

11 tonight.

12 I don't know if the Court recalls at the last

13 confirmation hearing the issues surrounding the rights offering

14 and I guess a lot of people's confusion as to whether that was

15 legitimate or not. I can briefly go into that. Back further

16 on when the debtors first submitted their plan and disclosure

17 statements, docket number 3713, Wells Fargo's indentured

18 trustee for the PIERS objected to the deficiencies in the

19 debtors then proposed disclosure statement saying, "Further,

20 the current eligibility threshold substantially limits the

21 universe of those PIERS noteholders who are able to participate

22 in the rights offering".


24 MR. THOMA: Therefore, the debtors should also

25 disclose the reason for imposing an eligibility threshold at



1 all but the debtors believe that restricting the eligible

2 participants in the matter they propose, does not violate

3 Section 1123(a)(4) of the Bankruptcy Code which requires the

4 same treatment for all claims in a particulate class.

5 And apparently the debtors weren't forthcoming as the

6 PIERS trustee later filed docket number 4406 which stated, "In

7 particular, the PIERS trustee is troubled by the structure of

8 the rights offering and its apparent discriminatory treatment

9 of certain holders of PIERS claims". They go on to say,

10 "Debtors failure to address these issues adequately could lead

11 to a serious question regarding confirmability of the plan in

12 light of the apparently discriminatory treatment of creditors

13 within a single class".

14 So, you know, the PIERS trustee later dropped the

15 objection which seemed an anomalous given the suggested gravity

16 of the issue and I inquired with them as to the rationale and

17 their response was much the same as was received by fellow

18 PIERS holder, Michael Rozenfeld, who in his objection to the

19 current plan confirmation docket number 7496, Exhibit C -- I'm

20 just going to cite the relevant section, quote "Even though

21 certain PIERS noteholders may not be able to participate in the

22 rights offering, the plan is structured to assure that all

23 PIERS noteholders receive the same value under the plan,

24 regardless of whether they elect to purchase common stock by

25 participating in the rights offering, if they are eligible,



1 choose to receive their entire distribution in cash or in

2 accordance with Section 20.2 of the plan, chose to --"

3 THE COURT: Well, hasn't that issue been resolved

4 because there is no longer a rights offering?

5 MR. THOMA: Yes, there is no rights offering anymore

6 but, you know, I understand. I'm not bringing up the rights

7 offering for any reason other than to give context. I

8 originally took all of those explanations at face value and I

9 originally wasn't even going to bring it up at the confirmation

10 at the time and I really assumed that the reasons I was

11 getting, the parties who were representing my interest would

12 have no reason to give me anything what the actual legal

13 conclusion was in that matter.

14 But the response obviously from Mr. Curchack and the

15 immediate response was that -- was an intimation that the terms

16 of the rights offering had been modified, a response it

17 conveniently neglected to point out that there was still a two

18 million dollar threshold for participation. I found that

19 curious but even more curious was the debtors' subsequent

20 offering of the rationalization that this was necessary to

21 somehow comply with federal securities law which was a

22 completely different reason than was given previously.

23 So, it struck me at that point that in conjunction

24 with just the strangeness of the cap with PIERS, the

25 strangeness of the appearance and the withdrawal of these



1 objections, and multiple other things, the plan, who was

2 actually going to be in charge of the reorganized debtor -- and

3 for the record that would be the four representatives from each

4 of the representative noteholders, including a representative

5 from Wells Fargo as trustee for the PIERS -- you know, all

6 these things in conjunction made it really obvious to me that

7 this isn't as a lot of the rhetoric here seems to suggest a

8 question of in the money versus out of the money interest or

9 even creditors versus equity but it's really about the debtors

10 and their favored class of creditors versus literally everybody

11 else. I think that pretty much covers that.

12 This is a little more esoteric. I have a difficult

13 time understanding at the time of the last confirmation

14 hearing, it was projected that there would be a December --

15 late December of 2010 emergence from bankruptcy. At that

16 point, it was projected that the PIERS were to receive seventy-

17 three percent of their prepetition claims which would be a

18 total shortfall of roughly 170 million and maybe there's some

19 legal reason for this but I am just using simple math. The

20 forty million dollar burn rate that everybody bandies about

21 here at every hearing, if you step backwards just a few months,

22 all of the sudden that 170 million dollar shortfall disappears.

23 What's more interesting me is that in October of 2010,

24 the estate decided in its own best business judgment that 390

25 million dollar should be given to the settling noteholders to I



1 guess expunge that set of claims that the debtors maintained

2 had no value, which to me suggests that at some point probably

3 around July of 2010, there should have been enough in the

4 estate to not only pay off the PIERS prepetition claims but the

5 post-petition interests at the contract rate, as well. So I

6 don't know if somebody has some kind of explanation about the

7 chronology that I am somehow missing but I would be interested

8 to hear what the basis was for that.

9 It's kind of unfortunate because it seems like over

10 the past -- I'm being a little hard on the debtors but I feel

11 as though the global settlement was pretty much known about in

12 early March. It was announced in late March. There were still

13 negotiations ongoing into May but I really feel like they could

14 have had a plan that was more robust than the one they offered

15 in December, probably much earlier in the year. And had that

16 actually happened and all this money had actually been back in

17 the estate, we wouldn't be having any discussions about the

18 contract rates of interest that the PIERS would have been paid

19 in full.

20 But in addition, I mean since about that time, it's

21 just apparent that the estate spent over a billion dollars

22 trying to reorganize around what the debtors continue to insist

23 is only 150 million dollar cap to reinsurance business and

24 runoff mode. So that's a massive discrepancy that I can't seem

25 to reconcile. I don't know if anybody can.



1 Here we are, however, at this point, I would imagine

2 the debtors would strive to maximize the future potential of

3 the reorganized company and again, the actions of the debtors

4 seem a little schizophrenic. Early, very early on in the

5 proceedings, they filed a motion to restrict transfers of

6 certain interest in the debtors. That was docket number 156

7 and specifically, they called out the trust preferred

8 securities, the R series preferred, common stock and any

9 options or warrants for the same. And the reason they gave was

10 the debtors estimate that there could remain available multi-

11 billion dollar net operating losses that would be adversely

12 affected and could be eliminated by a subsequent ownership

13 change, thereby resulting in a potential loss of value. And

14 the Court granted that and I agree with both the Court and the

15 debtors, that's definitely a worthy aim to preserve, billions

16 of potential net operating losses. But the subsequent kind of

17 refusal I think by the debtors to try to avail themselves of

18 this and the reorganized debtor of this benefit, that's

19 obviously a pet peeve of mine.

20 I realize my objectives here are vastly different from

21 those that have whittled away the estate's subsidiaries and

22 assets into relatively nothing but I'm more than content to

23 suffer any upfront dilution that would be incurred by the

24 inclusion of any class of securities, whether they be CCB

25 claims or equity interests that would allow for multiple



1 billions of forward looking tax benefits to be available to the

2 reorganized debtor in a wholly unrestricted capacity. The safe

3 harbor provisions under 382(l)(5) would be satisfied and no

4 ownership could occur as -- as far as my understanding goes,

5 that could still be the case with the CCB claims. But in any

6 instance, I'll move on.

7 It's my understanding that provisions for payment of

8 the ad hoc committee's counsel, the fees are included in the

9 plan of reorganization. I find it extremely difficult to

10 reconcile the idea of the estate paying these fees with the

11 Court's January opinion determining that these parties were

12 acting in their own self-interest. I don't have the benefit of

13 the equity committee's 2004 discovery materials or a very deep

14 understanding of securities laws. I originally wasn't going to

15 comment very much. I think the equity committee appears to

16 have done a very thorough job analyzing, I guess the activities

17 here.

18 But I do have to comment on a common sense level,

19 question the propriety of any sales or purchases of securities

20 within days of the debtors March 12 announcing purporting to

21 outline the terms of the global settlement. The question of

22 materiality is easily determined here as another shareholder

23 pointed out a while back because we have an empirical metric

24 that would actually determine materiality. The market actually

25 reacted quite drastically and quite negatively to the terms the



1 debtors outlined that day.

2 And I keep hearing about this immaterial gap of

3 billions. It seems incongruous with testimony suggesting that

4 as the recovery of the senior notes became more certain, some

5 parties sold some of the senior notes and quote, "moved down

6 the ladder" end quote, as it were.

7 Statements by the debtors through February of 2010

8 suggested that the recovery of these bonds was still uncertain

9 and faced with up to 100 billion dollars in claims but both the

10 senior note and the subordinate notes traded at or near par,

11 shortly beginning December of 2009, all the way to the

12 announcement of the global settlement.

13 For whatever reason, the market appeared to have a

14 much more accurate assessment of the ultimate recovery of these

15 instruments we received and even the debtors and that wasn't a

16 small debt. That was 4.8 billion worth of senior notes that

17 were trading at or above par and roughly 1.7 billion of

18 subordinate notes likewise.

19 So, likewise I've come to realize that there are

20 certain terms or phrases that carry a legal meaning that

21 doesn't necessarily correspond to the literal common usage of

22 the same words. So while I am unsure as to the precise meaning

23 of undue influence, I do have to question the propriety of the

24 revelation that the debtors accelerated publication of

25 information for the benefit of some parties to allow them to



1 trade in debtors' securities. I think other people brought

2 that up.

3 I did want to actually respond, and I have to

4 apologize, I didn't catch counsel's name but counsel for

5 Centerbridge earlier was showing graphs, I guess, of the

6 trading history and position size of Centerbridge's positions

7 throughout these proceedings and the different classes of debt.

8 And he, I believe, suggested that somehow those actions

9 indicated the behavior of a party that would be doing the exact

10 opposite of acting on material or nonpublic information. While

11 I can't really comment from a securities law standpoint, I can

12 comment as an investor standpoint and that is I think what

13 counsel was missing is that the total amount for each class of

14 securities, basically halves; you have roughly 4.8 billion of

15 senior notes, 1.7 subordinate notes, and around 740 million

16 worth of PIERS claims.

17 The objective here was obviously not to profit because

18 of the four settlement noteholders, all but Appaloosa, so

19 neglecting Appaloosa, Owl Creek, Aurelius and Centerbridge, all

20 purchased the subordinate notes above par at the high watermark

21 and according to their 2019 statements, that was docket number

22 3761. I believe the prices were one of three cents on the

23 dollar, one of four cents on the dollar and one of six cents on

24 the dollar. So, you know, I think it's strains credibility to

25 suggest that there was some kind of serious return they were



1 expecting buying bonds of a bankrupt company at par at that

2 stage in the game and the obvious answer is that it wasn't

3 about profit from the movement of prices in securities, it was

4 about obviously control of the classes' vote. If you note the

5 2019 statements of settlement noteholders, again docket number

6 3761, the collective holdings for all four capped out at around

7 sixty-six to seventy percent of the PIERS and subordinate

8 notes. If they saw fit to purchase these subordinate notes

9 above par for so long, they could have bought them all above

10 par, you know. They could have continued buying to this day

11 above par but they obviously had a certain threshold that they

12 were trying to meet.

13 And again, the fact that the positions, the actual

14 total value of the position that they had in WMI securities

15 decreased, is also belied by the fact that seventy percent of

16 four billion is going to be a lot more than seventy percent of

17 1.7 billion and seventy percent of 700 million. So it was

18 obviously not about the movement and the price of securities

19 but control of the vote.

20 I think -- and this gets into a bunch more of kind of

21 naive stuff. I am just kind of amazed at some of the things

22 that have gone on here and I realize that this is everybody's

23 daily grind in some cases but I think what struck me the most

24 is how closely this resembles what I understand to be the state

25 of a bankruptcy process pre-Chandler Act. We have large



1 investment firms dominating the process, unequal treatment of

2 similar interests, greater returns for consenting parties

3 compared with nonconsenting parties, i.e., releases, lock-up of

4 stakeholder securities, self-interest interfering with

5 representation and absence of full disclosure of the amount of

6 securities held and the times of acquisition.

7 And to be fair, there have been a lot of creative

8 rationalizations and slight twists of the comparisons aren't

9 obviously direct and all the concepts like compliance with the

10 Federal Securities laws, we need to have releases, the DTCC

11 requires that the securities be tendered and so forth but the

12 net results seems eerily similar.

13 I think many of us who fall into the naive category

14 have gotten a pretty good look at how the sausage gets made

15 here and at this point, everyone's just wondering if it will

16 pass inspection.

17 As a result of the foregoing, I'd like to request that

18 the Court consider carving out any provisions for the ad hoc

19 committee's fees to be paid. I may have misinterpreted this

20 but I gathered from one of the UCC filings that they didn't

21 feel equitable subordination is a remedy that's available to

22 the Court. I disagree and to the extent that the Court finds

23 that inequitable conduct has occurred here, I would hope that

24 that's the least relief the Court would consider granting.

25 I will leave the FTAR discussion. You know,



1 everybody's pretty much done that to death but regarding FTAR

2 and equitable subordination and disallowance and all these

3 other things, to the extent that the Court deems any of these

4 things that would finally bring money back over what the

5 debtors estimate the creditors' claims would be, I just ask

6 that if the Court has the ability to by any means possible try

7 to preserve the forward looking tax benefits under 382(l)(5).

8 I don't know if the Court has that capability. And I create --

9 THE COURT: I can't write the debtors' plan.

10 MR. THOMA: Okay. Yes. Okay. I don't know any

11 better on it. I have to reiterate my reluctance to suggest

12 appointment of a trustee and liquidate. Obviously, I have a

13 crisis of confidence in our current representation though and I

14 still as in December, I still don't know what to request of the

15 Court in that regard. At this point, I could be wrong but it

16 appears as though the estate has been horribly, irrevocably

17 compromised. I'm not aware of any other remedies that might

18 exist that could somehow undo that damage. So the standard

19 boilerplate of any other relief that the Court deems

20 appropriate will have to do. Thank you, Your Honor.

21 THE COURT: Is that all? No, one more.

22 MS. BARR: Your Honor, may I speak a few seconds? I

23 would just close it out. We've all been here a long time

24 today, so if I could just read into the record a simple

25 statement.



1 THE COURT: Okay. Who are you?

2 MS. BARR: Dorothea Barr, former member of the equity

3 committee and I want to thank you for the equity committee at

4 the same time.


6 MS. BARR: In January of 2010, the U.S. Trustee

7 appointed me to serve on the Washington Mutual Equity Committee

8 when the formation of the committee approved by this bankruptcy

9 court. Just about every party presenting here today opposed

10 the formation of the committee including the UCC, JPM, the

11 FDIC, and the debtor. In fact, the debtor claimed that a key

12 factor was that equity's interests were already well-

13 represented by them and their legal representatives.

14 As you heard in closing arguments and in evidence

15 produced by counsel for the equity committee, there is a

16 significant question about whether any other -- anyone other

17 than the equity committee ever considered equity's interests as

18 settlements were being negotiated. Claims traded away with

19 little or no consideration -- for little or no consideration.

20 Assets potentially hidden and remained as estate values hoarded

21 by parties whose claims could otherwise be satisfied.

22 In fact, much of what has been recently discovered by

23 equity committee counsel is news to me, as the debtor made

24 considerable efforts to keep any of these -- any of that case

25 status from being shared with the equity committee, even



1 though -- I can't read my handwriting -- it was the Court's

2 sanctioned official committee and a party of interest in these

3 bankruptcy proceedings.

4 When I became a member of the equity committee, I was

5 required by the debtor and the U.S. trustee to sign a

6 confidentiality agreement related to these proceedings which

7 included terms prohibiting me from trading at any time while I

8 was on the committee or at any subsequent time as long as I was

9 holding nonpublic information.

10 As I just alluded, the information I or any of my

11 colleagues was privy to was well short of what we now know the

12 settlement noteholders had access to. By not being able to

13 trade during my ten months on the committee, I watched in

14 surprise and agony, as at times the preferred and common equity

15 shares swung wildly. It was bad enough that I lost money when

16 Washington Mutual initially sought bankruptcy protection, now

17 it appears that these shares may also have subsequently been

18 traded by those who had material nonpublic information and

19 benefited by that information while my portfolio and those of

20 my equity committee colleagues, former by the way, and all the

21 shareholders we represented were materially harmed a second

22 time.

23 Should this court find that there were, in fact,

24 issues with the way the bankruptcy proceedings were handled, I

25 respectfully request that this court also determine an



1 equitable way to insure that those parties most hurt by the

2 machinations are fairly protected and compensated for this

3 court does make -- for if this court does make a determination

4 regarding federal judgment rates -- I've got to find my last

5 page -- equitable disallowance or similar measures, I fear that

6 absent such direction, the debtor will find a way to direct

7 those funds from those parties who have been most harmed by the

8 actions that this court takes issue with.

9 And I would like to say further that I was here for

10 the hearings in July and the one thing that we did hear on the

11 stand from the many witnesses is that many of the parties that

12 are here today in this room who are paid to be here, did not

13 have equity's interest at heart at any time.

14 And we have heard today that this is a good and fair

15 plan, that this is a good and fair offer. How can it be a good

16 and fair offer when, in fact, fiduciary responsibilities were

17 breached? Isn't that the basis of good and fair? Thank you,

18 Your Honor.


20 MS. BARR: Oh, I respectfully request that you decline

21 this. Thank you.

22 THE COURT: Don't confirm is what you want. Thank

23 you. All right. That's it? Well, thanks to the parties. I'm

24 not sure it brings me any closer to a decision but --

25 MR. OWENS: Your Honor, very briefly, I would like to



1 request leave of court to submit a very brief letter

2 distinguishing the DeBartolo case which Mr. Folse mentioned in

3 his oral argument but had not cited in his brief and we've not

4 had a chance to respond to.

5 THE COURT: Don't you think I can read it and decide

6 the -- what's applicable?

7 MR. OWENS: Well, I would still like to be heard by

8 the Court on why I think it's readily distinguishable and

9 doesn't stand for the proposition it cited and so I would ask

10 for an opportunity to submit a very brief letter to the Court

11 in the next few days.


13 MR. OWENS: Thank you, Your Honor.

14 THE COURT: Can you do it by Monday?

15 MR. OWENS: Yes, Your Honor.

16 THE COURT: All right. We will stand adjourned then.

17 Thank you.

18 (Whereupon these proceedings were concluded at 7:14 PM)

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2 I N D E X

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4 RULINGS

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6 Motion to strike additional evidence granted 28 8

7 Exhibit 301B to be allowed into the record 36 25

8 only as a demonstrative

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1

2 C E R T I F I C A T I O N

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4 I, Dena Page, certify that the foregoing transcript is a true

5 and accurate record of the proceedings.

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8 ______________________________________

9 DENA PAGE

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11 Veritext

12 200 Old Country Road

13 Suite 580

14 Mineola, NY 11501

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16 Date: August 26, 2011

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washington mutual (wmi) - transcript of oral closing arguments 8/24/11

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