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UNITED STATES BANKRUPTCY COURT
DISTRICT OF DELAWARE
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:
In re
:
:
WASHINGTON MUTUAL, INC., et al.,1
:
:
Debtors.
:
:
:
:
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Chapter 11
Case No. 08-12229 (MFW)
(Jointly Administered)
Re: Docket Nos. 11341, 11360, 11373, 11377, 11380
11381, 11382, 11383, 11384, 11385, 11386, 11387, 11388
11389, 11390
Hearing Date: September 24, 2013 at 10:30 a.m. (ET)
REPLY OF WMI LIQUIDATING TRUST IN
FURTHER SUPPORT OF MOTION FOR AN ORDER,
PURSUANT TO SECTION 502(C) OF THE BANKRUPTCY
CODE AND SECTION 26.2 OF THE SEVENTH AMENDED PLAN,
ESTIMATING THE MAXIMUM AMOUNT OF CERTAIN EMPLOYEE CLAIMS
WMI Liquidating Trust (“WMILT” or the “Trust”), as successor in interest to
Washington Mutual, Inc. (“WMI”) and WMI Investment Corp., formerly debtors and debtors in
possession (collectively, the “Debtors”), hereby files this reply (the “Reply”) in further support
of the Motion of WMI Liquidating Trust for an Order, Pursuant to Section 502(c) of the
Bankruptcy Code and Section 26.2 of the Seventh Amended Plan, Estimating the Maximum
Amount of Certain Employee Claims, dated August 21, 2013 [D.I. 11341] (the “Motion”),2 and
in response to objections interposed (collectively, the “Objections” and those Claimants who
filed the Objections, the “Objecting Claimants”), and respectfully represents as follows:
1
The Debtors in these chapter 11 cases along with the last four digits of each Debtor’s federal tax identification
number are: (i) Washington Mutual, Inc. (3725); and (ii) WMI Investment Corp. (5395). The principal offices of
WMILT, as defined herein, are located at 1201 Third Avenue, Suite 3000, Seattle, Washington 98101.
2
Capitalized terms used and not defined herein shall have the meaning ascribed to such terms in the Motion.
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PRELIMINARY STATEMENT
1.
Salient and pertinent facts and applicable law—these are the two concepts
that WMILT has followed throughout. In doing so, WMILT and the Debtors before it have
advocated for the prompt resolution of Disputed Claims and the resultant distribution of monies
to holders of Allowed Claims. Incredibly, virtually all objections to claims except those of the
Claimants have been expeditiously disposed. The Motion, consistent with applicable law, the
Plan and the documents approved by the Court (and to which no Claimant objected), is the
logical step to achieve such goal, as the litigation associated with the Claimants’ claims is
unlikely to be resolved in the near term. Indeed, experience to date with these Claimants
suggests that it is unlikely that such claims will be resolved by a Final Order for a significant
period. Creditors holding Allowed Claims must not be made to wait for recoveries while former
senior executives clamber for huge paydays.
2.
The Objections fall primarily into three categories: (i) estimation of the
CIC Claims is inappropriate in these circumstances, (ii) Section 502(b)(7) does not apply to the
CIC Claims, and (iii) even if Section 502(b)(7) were to apply, the cap amounts provided by the
Trust are inaccurate. The Objecting Claimants offer scant or no legal support for their assertions,
but, instead, rely on the general notion that it is unfair for the Trust to even attempt to distribute
money to any other creditors except the Claimants, notwithstanding that such other creditors hold
Allowed Claims and that the face amounts of the CIC Claims greatly exceed any amounts
possibly permissible under the Bankruptcy Code.
3.
Pursuant to the Plan, confirmed by the Bankruptcy Court, and that certain
WMI Liquidating Trust Agreement, dated as of March 16, 2012 (as amended, the “LTA”), the
form of which was approved by the Bankruptcy Court, the Trust and the Trust Advisory Board
2
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are duty-bound to distribute funds to the over two thousand (2,000) remaining Liquidating Trust
Beneficiaries (as defined in the Plan) as promptly as possible. These Liquidating Trust
Beneficiaries include unsecured creditors who, upon consummation of the Plan and, thereafter,
received Liquidating Trust Interests on account of their Allowed Claims. It is these Liquidating
Trust Beneficiaries, among other creditors, who are unduly prejudiced by the inordinate reserves
held in the Disputed Claims Reserve on account of the CIC Claims.3 The Objecting Claimants’
argument that they would be prejudiced if their CIC Claims were estimated in accordance with
the limitation imposed by Section 502(b)(7) is absurd. There cannot possibly be any prejudice in
not receiving payment for an amount that is impermissible under law.
4.
Importantly, although the Trust is obligated to distribute available funds to
creditors holding valid claims, the Trust is not trying to prejudice the employee Claimants by
estimating their claims and releasing excess reserves. Indeed, the Trust objected to the CIC
Claims on the basis of Section 502(b)(7) because such claims fall squarely within applicable law.
Consequently, it is futile to reserve any funds in excess of the maximum allowable amounts of
the CIC Claims and, thus, any delay in distributions to valid creditors that is caused by the
reserve of such excess funds constitutes “undue delay” sufficient to warrant estimation.
Accordingly, the legal cap imposed by Section 502(b)(7) is an appropriate and, indeed, efficient
way for the Court to estimate the CIC Claims based on their legal merit, and granting the Motion
will enable the Trust to reduce the current reserves to amounts that reflect a best-case scenario
for the Claimants while distributing excess funds to other creditors. Despite the many
protestations, the Motion is not an “end-run” around the Scheduling Order or the Omnibus
Objections. Rather, the Motion balances the interests of all creditors while acknowledging that it
3
As illustrated below, Liquidating Trust Beneficiaries are the Debtors’ creditors (pari passu with the Claimants) and
not, as posited by some Objecting Claimants, equity interest holders.
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is inappropriate to require the Trust to reserve on account of the filed amount of the CIC Claims
given the limits to recovering on such claims required by Section 502(b)(7).
5.
As evidence of the Trust’s efforts to effectuate the Plan and get funds “out
the door” to creditors holding Allowed Claims while the employee claims litigation is pending,
while also not prejudicing the employee Claimants, for purposes of estimation only, the Trust
is willing to agree to increase the originally proposed cap amounts to include the Claimants’
historical bonus amounts, as detailed in the companies’ books and records and, where applicable,
the Claimants’ proofs of claim. As a result of using the revised cap amounts, the Trust would
still be able to release reserves of approximately $40 million to Liquidating Trust Beneficiaries,
instead of the approximately $67 million originally proposed, thus leaving an additional
$27 million in the Disputed Claims Reserve on account of the CIC Claims included in the
Motion.4 As set forth in more detail below, the Trust does not concede that any bonus amounts
should ultimately be included in the Section 502(b)(7) cap calculations should the Trust be held
liable with respect to the CIC Claims and other Disputed Claims held by the Claimants, and fully
reserves its rights to challenge the inclusion of any and all bonuses in the cap calculations at a
later time in connection with the litigation on the merits of the Claims.
6.
The Trust’s replies to the remaining Objections are set forth in detail
below.
ARGUMENT
I.
Estimation of the Disputed CIC Claims Is Appropriate
7.
The Objecting Claimants have argued, among other things, that
(i) estimation is inappropriate because Section 502(c) is limited to estimation of contingent and
4
The Trust will provide the Claimants with their respective revised cap numbers in advance of the hearing on
September 24, 2013.
4
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unliquidated claims, (ii) estimation is inappropriate to the extent the Omnibus Objections are
pending, (iii) no other creditors awaiting distributions have expressed concern over the delay in
payment on account of their claims, and (iv) the Trust has offered insufficient evidence in
support of the Motion.
8.
The Trust submits that, not only does the Plan control estimation of the
Disputed Claims at issue, but also, the Plan is clear with respect to the Court’s authority to
estimate such claims and release excess reserves regardless of whether the Omnibus Objections
are pending. See Plan, §§ 1.93, 26.2, 26.3. In particular, Section 26.2 of the Plan plainly
permits this Court “to estimate for final distribution purposes any contingent, unliquidated or
Disputed Claim pursuant to section 502(c) of the Bankruptcy Code regardless of whether the
Debtors previously objected to or sought to estimate such Claim[s]” and to determine the
amount of “liquidating trust assets” that WMILT should be required to reserve for the Disputed
Claims. Plan, § 26.2 (emphasis added). Indeed, Section 26.2 of the Plan further provides that
the Court “will retain jurisdiction to consider any request to estimate any [c]laim at any time
during litigation concerning any objection to any [c]laim, including, without limitation, during
the pendency of any appeal relating to any such objection.” Plan, § 26.2 (emphasis added).
Section 38.1 of the Plan also provides that the Court “shall retain and have exclusive jurisdiction
over any matter arising under the Bankruptcy Code, arising in or related to the Chapter 11 Cases
or the Plan” including, among other things, “to ensure that distributions to holders of Allowed
Claims are accomplished as provided [in the Plan].” Plan, § 38.1(d). The Objecting Claimants’
attempts to parse the Plan language and claim grammatical errors fall short of challenging the
Court’s very clear authority with regard to the estimation of Disputed Claims and reserve
requirements pursuant to the Plan and Confirmation Order. See Plan, §§ 26.2, 26.3, 38.1; see
5
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also Confirmation Order, at ¶ 40 (“The holdback for Disputed Claims provided for in Section
26.3 of the Plan and the terms thereof are hereby approved in their entirety . . . .”). In addition,
the inclusion of authority in WMI’s Plan for the Court to estimate Disputed Claims is neither
extraordinary nor uncommon. Indeed, this Court and other bankruptcy judges in this district
routinely confirm chapter 11 plans that include almost identical language. See, e.g., In re Buffets
Restaurants Holdings, Inc., No. 12-10237 (MFW), Debtors’ Second Amended Joint Plan of
Reorganization under Chapter 11 of the Bankruptcy Code [D.I. 743]5; In re Special Devices,
Inc., No. 08-13312 (MFW), Debtors Second Amended Plan of Reorganization Pursuant to
Chapter 11 of the United States Bankruptcy Code [D.I. 469]6; In re New Page Corporation, No.
11-12804 (KG), Debtors’ Modified Fourth Amended Joint Chapter 11 Plan [D.I. 2904].7
9.
None of the cases cited by the Objecting Claimants are relevant or
controlling here because none of them speak to whether disputed claims can be estimated
5
“[T]he Reorganized Debtors, or the Litigation Trustee, as applicable, may at any time, request that the Court
estimate any Disputed Claim pursuant to section 502(c) of the Bankruptcy Code regardless of whether the Debtors,
the Reorganized Debtors, or the Litigation Trustee have previously objected to such Claim. The Court will retain
jurisdiction to estimate any Claim at any time, including during proceedings concerning any objection to such
Claim.” Debtors’ Second Amended Joint Plan of Reorganization under Chapter 11 of the Bankruptcy Code, Art.
VII ¶ H [D.I. 743] (emphasis added).
6
“[T]he Reorganized Debtor, may, at any time, request that the Bankrupt Court estimate (a) any Disputed Claim
pursuant to applicable law . . . including, without limitation, section 502(c) of the Bankruptcy Code, regardless of
whether the Debtor or the Reorganized Debtor has previously objected to such Claim or whether the Bankruptcy
Court has ruled on any such objection, and the Bankruptcy Court shall retain jurisdiction under 28 U.S.C. §§ 157
and 1334 to estimate any Disputed Claim . . . including during the litigation concerning any objection to any
Claim . . . .” Debtors Second Amended Plan of Reorganization Pursuant to Chapter 11 of the United States
Bankruptcy Code, Art. VII § (A)(3) [D.I. 469] (emphasis added).
7
“The Debtors and/or the Reorganized Debtors . . . may at any time request that the Bankruptcy Court estimate for
final Distribution purposes any contingent, unliquidated or Disputed Claim pursuant to section 502(c) of the
Bankruptcy Code or other applicable law, regardless of whether the Debtors or the Reorganized Debtors previously
objected to that Claim or whether the Bankruptcy Court has ruled on the objection, and the Bankruptcy Court will
retain subject matter jurisdiction to consider any request to estimate any Claim at any time, including during the
pendency of any related appeal.” Debtors’ Modified Fourth Amended Joint Chapter 11 Plan, ¶ 7.7 [D.I. 2904]
(emphasis added).
Because of the voluminous nature of these documents, they have not been attached hereto. Copies of the full
documents are available upon request to the Trust’s counsel.
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pursuant to a confirmed chapter 11 plan and confirmation order. See In re Ford, 967 F.2d 1047
(5th Cir. 1992) (declining to estimate claim related to two promissory notes pursuant to section
502(c), where the only uncertainty surrounding the claim was whether the debtor, if liable, would
receive contribution from co-makers on the notes); In re Continental Airlines, 981 F.2d 1450
(5th Cir. 1993) (reversing and remanding estimation of claims because of judge’s reversible error
of not recusing himself); In re Stone & Webster, Inc., 279 B.R. 748 (Bankr. D. Del. 2002)
(deciding to treat an evidentiary hearing as an estimation hearing rather than a final adjudication
of a claim); In re Federal-Mogul Global, Inc., 330 B.R. 133 (D. Del. 2005) (finding that
estimation of pending and future asbestos-related personal injury claim was warranted).
10.
Moreover, as set forth in the Motion, courts in the Third Circuit and others
have held that estimation of disputed claims is appropriate pursuant to Section 502(c) of the
Bankruptcy Code where, as here, a debtor’s confirmed plan provides for the estimation of
disputed claims. See, e.g., In re Chemtura Corp., 448 B.R. 635, 648-52 (Bankr. S.D.N.Y. 2011)
(estimating claims for reserve purposes “in accordance with a provision in the Debtors’ Plan of
Reorganization” and pursuant to Section 502(c)); JPMorgan Chase Bank v. U.S. Nat’l Bank
Assoc’n (In re Oakwood Homes Corp.), 329 B.R. 19, 22 (D. Del. 2005) (holding that bankruptcy
court’s decision to set reserve at $0 for a disputed claim pursuant to a provision of the plan “was
not erroneous”); In re Enron Corp., No. 01-16034, 2006 WL 544463, at *2 (Bankr. S.D.N.Y.
2006) (estimating disputed claims for reserve purposes where plan provision “authorize[d] the
Court to estimate claims pursuant to § 502(c)”); In re Wallace’s Bookstores, Inc., 317 B.R. 720,
724 (Bankr. E.D. Ky. 2004) (applying estimation under Section 502(c) to disputed claims
pursuant to provision of governing plan and Section 502(c)).
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For example, in In re Wallace’s Bookstores, Inc., 317 B.R. 720, 722
(Bankr. E.D. Ky. 2004), the court held that estimation of disputed claims was appropriate
pursuant to the debtor’s plan and considered and rejected several of the same arguments made
here by the Objecting Claimants. Id. Similar to the Plan here, in Wallace’s Bookstores, the
debtor’s plan of reorganization provided that:
[T]he Debtors . . . or the Liquidating Supervisor . . . shall have the
right, at any time, to seek an order of the Bankruptcy
Court . . . estimating a Disputed Claim pursuant to section 502(c)
of the Bankruptcy Code, irrespective of whether an Objection to
such Claim has been filed or the Bankruptcy Court has ruled on
any such Objection. If the Bankruptcy Court estimates any
contingent, Disputed or unliquidated Claim, that estimated amount
will constitute either the Allowed Amount of such Claim or a
maximum limitation on such Claim, as determined by the
Bankruptcy Court.
Id. at 723. In response to the claimants’ arguments that estimation should not be permitted for
purposes of making a distribution to other creditors, the court explained that Ҥ 502(c) does not
control; rather the Liquidating Supervisor’s right to estimation of Disputed Claims is
governed by Section 7.4 of the Plan, which expands considerably on § 502(c).” Id. (emphasis
added). The court noted that, while the delay in addressing the disputed claims would not, as in
most estimation cases, prolong the plan confirmation process or present a risk of putting the
debtor out of business, the “need for expedition in this case is limited to the desire to move
forward in getting additional funds into the hands of creditors,” which, as the court explained,
was not an inconsequential desire given that the plan specifically “bestowed on creditors a right
and expectation of prompt distributions.” Id. at 724. Accordingly, estimation of the disputed
claims was appropriate. Id. at 725. Similarly, here, estimation is appropriate pursuant to the
terms of the Plan and Confirmation Order.
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Furthermore, as set forth in the Motion, the Court has broad authority
under sections 1142(b) and 105(a) of the Bankruptcy Code over the property of the estate
administered under the Plan and to issue any order necessary to implement the provisions of the
Plan and the Bankruptcy Code. See 11 U.S.C. § 1142(b) (“The court may direct the debtor and
any other necessary party to execute or deliver or to join in the execution or delivery of any
instrument required to effect a transfer of property dealt with by a confirmed plan, and to
perform any other act . . . that is necessary to the consummation of the plan”); id. § 105(a) (“The
court may issue any order, process, or judgment that is necessary or appropriate to carry out the
provisions of this title.”); see also In re Tristar Fire Prot., Inc., 466 B.R. 392, 406 (Bankr. E.D.
Mich. 2012) (“Section 105(a) arguably provides sufficient authority to estimate Local 704’s
administrative expense claim . . . .”); In re Enron Corp., No. 01-16034 (AJG), 2006 WL 538552,
at *7 (Bankr. S.D.N.Y. Jan. 6, 2006 (“[P]ursuant to 11 U.S.C. §§ 105(a), 502(c), and 1142 and
Section 21.2 of the Plan, the Debtor’s Motion is granted and the Affected Claim is hereby
estimated at a value of $0.”).
13.
The Trust further submits that it is irrelevant that the Omnibus Objections
are pending at the same time as the Motion and, notably, the Objecting Claimants have failed to
offer any legal support for their assertion that the Motion cannot be heard because the Omnibus
Objections are pending. In fact, estimation is used for the very purpose of allowing the debtor to
take action with respect to a claim or related reserves while further or final determination of such
claim remains pending. See Plan, § 26.2; see also Future Asbestos Claimants v. Asbestos
Property Damage Comm. (In re Fed.-Mogul Global, Inc.), 330 B.R. 133, 154 (D. Del. 2005)
(internal quotation marks omitted) (Estimation “avoid[s] the need to await the resolution of
outside lawsuits to determine issues of liability or amounts owed by means of anticipating and
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estimating the likely outcome of these actions” and promotes a fair distribution to creditors.); In
re Chicago Inv., LLC, 470 B.R. 32, 101 (Bankr. D. Mass. 2012) (“Estimation of claims is
designed to avoid delay by estimating the likely outcome of lawsuits to determine liability and
‘to promote a fair distribution to creditors through a realistic assessment of uncertain claims.’”)
(quoting O’Neill v. Cont’l Airlines, Inc. (In re Cont’l Airlines), 981 F.2d 1450, 1461 (5th Cir.
1993)); In re Adelphia Bus. Solutions, Inc., 341 B.R. 415, 422 (Bankr. S.D.N.Y. 2003)
(“Estimation, authorized under section 502(c) of the Code, provides a means for a bankruptcy
court to achieve reorganization, and/or distributions on claims, without awaiting the results of
legal proceedings that could take a very long time to determine.”). The purpose of estimation
here is so that other creditors holding valid claims unrelated to the disputed employee claims will
not have to wait until the final determination of such disputed claims in order to receive their
distributions. Requiring the other creditors to wait for a final resolution of the lengthy employee
claims litigation, which has yet to begin, constitutes “undue delay” where there is zero likelihood
that the Claimants will recover the filed amount of their claims. Regardless of the outcome of
any litigation with the FDIC and others regarding “golden parachute payments,” the Claimants
cannot evade application of Section 502(b)(7) to their CIC Claims (among other Claims). And,
the need for estimation is even more compelling here, where distributions to certain of those
unrelated creditors—the PIERS holders, with which this Court is already quite familiar—are
reduced with every day that these cases are prolonged due to the accrual of postpetition interest
with respect to some senior claims that remain unpaid. Thus, despite the Objecting Claimants’
contention that the Court cannot decide any issue with regard to Section 502(b)(7) in the context
of estimation because this issue is raised in the pending Omnibus Objections, estimation based
on Section 502(b)(7) is reasonable in these circumstances because it will enable the Court to
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determine the Claimants’ probability of recovering the filed amount of the CIC Claims based on
the legal merits of such claims.
14.
Furthermore, notwithstanding the Objecting Claimants’ conclusory and
unsupported assertions, the Scheduling Order that is currently in place (and in the process of
being re-negotiated at the Court’s direction) in connection with the claims litigation is irrelevant
to the Motion. First, Section 502(b)(7) is a limited legal issue for the Court to decide, and
making such a determination now has no impact on the factual discovery that remains ongoing,
and will continue to remain ongoing, in these cases. The Trust has expressed no intention or
desire for, nor does it expect, the Motion to interfere with any future discovery schedule leading
up to an eventual hearing on the “change in control” liability issue and subsequent issues.
Second, the Motion should not be denied merely because, at one point in October, 2012, the
parties contemplated (though it was never ordered) that Section 502(b)(7) would come later in a
series of hearings in connection with the employee claims litigation. In fact, the October 2012
Scheduling Order, even as subsequently amended, does not set a hearing schedule for any issues
beyond the initial “change in control” hearing. Moreover, the October 2012 Scheduling Order is
virtually obsolete given the intervening events—including, without limitation, the filing of
certain Claimants’ amended proofs of claim, the legal determination reached by the FDIC in its
July 16, 2013 letter, and the Court ordering the declaratory judgment action demanded by the
Claimants—which is precisely why the parties are attempting to negotiate a third amended
scheduling order. Furthermore, there is no compelling reason why the applicability of Section
502(b)(7) to the CIC Claims cannot be decided for purposes of establishing reserves and
facilitating distributions to unrelated creditors before the other issues in the employee claims
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litigation have been heard and resolved. The Objecting Claimants’ assertion that the Motion is
an “end-run” around the Omnibus Objections and Scheduling Order is misplaced.
15.
The Objecting Claimants also have asserted, remarkably, that “there is no
reason why the Trust should be acting to the[] benefit” of creditors in Tranches 3, 4a and 4b,
“who have not come forward to complain.” The Trust and the Trust Advisory Board of the
Trust, were established pursuant to the Plan and the LTA expressly and solely for purposes of
distributing funds to Liquidating Trust Beneficiaries (as defined in the Plan), who are holders of
Allowed Claims, including holders of Liquidating Trust Interests in Tranches 3, 4a and 4b. See
Plan, § 1.138 (defining “Liquidating Trust” as “[t]he Entity to be created on or after the
Confirmation Date in accordance with the provisions of Article XXVII hereof and the
Liquidating Trust Agreement, for the benefit of (i) holders of Allowed Senior Notes Claims,
Allowed Senior Subordinated Notes Claims, Allowed General Unsecured Claims, Allowed
CCB-1 Guarantees Claims, Allowed CCB-2 Guarantees Claims, Allowed PIERS Claims, [etc.]”)
(emphasis added); id. § 1.141 (defining “Liquidating Trust Beneficiaries” as “[t]he holders of
Allowed Senior Notes Claims, Allowed Senior Subordinated Notes Claims, Allowed General
Unsecured Claims, [etc.]”); LTA, ¶ E (“The Liquidating Trust is being created on behalf of, and
for the benefit of, the Liquidating Trust Beneficiaries.”); id. § 1.2 (“The sole purpose of the
Liquidating Trust is to implement the Plan on behalf of, and for the benefit, of the Liquidating
Trust Beneficiaries . . . .”) (emphasis added). The Trust and the Trust Advisory Board have a
fiduciary obligation to holders of Liquidating Trust Interests to make distributions on account of
such interests. The Trust Advisory Board members are acutely aware of their fiduciary duties to
all creditors – including a duty to make prompt distributions to allowed creditors and to not
maintain excessive reserves for asserted claim amounts that plainly exceed legal permissibility.
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Moreover, the members of the Trust Advisory Board include individuals nominated by the
Official Committee of Unsecured Creditors (including the PIERS Trustee and representatives on
account of holders of Senior Floating Rate Notes in Tranches 4a and 4b, respectively). It is just
plain wrong to say that holders of Allowed Claims are not concerned about the delay in their
unpaid distributions, especially when recoveries to such holders are abated as these cases are
prolonged.8
16.
Additionally, the Objecting Claimants’ arguments with respect to the lack
of evidence to support the Motion are weak at best. A bankruptcy court has wide discretion in
estimating claims. See Bittner v. Borne Chemical Co., Inc., 691 F.2d 134, 135-37 (3d Cir. 1982);
In re Windsor Plumbing Supply Co., 170 B.R. 503, 520 (Bankr. E.D.N.Y. 1994). Accordingly, a
bankruptcy court should use “whatever method is best suited for the circumstances.” In re
Thomson McKinnon Sec., Inc., 143 B.R. 612, 619 (Bankr. S.D.N.Y. 1992). Here, the Court
should rule on the Motion based upon the pleadings filed in connection with the Motion. The
threshold issue of whether Section 502(b)(7) applies is a question of law. Because the Court has
access to the employment contracts at issue, the Court has ample information to make an
informed ruling. Moreover, the Trust is not aware of any rule requiring an affidavit to support an
estimation motion. To the extent the Objecting Claimants are claiming a need for discovery in
connection with the Motion solely for purposes of turning the Motion into a flow-blown trial,
such Objections and requests are inappropriate and should be overruled. See id. (“The estimation
process is an expedient method for setting the amount of a claim that may receive a distributive
share from the estate.”) (emphasis added) (citing Addison v. Langston (In re Brints Cotton
Marketing, Inc.), 737 F.2d 1338, 1341 (5th Cir. 1984)); Bittner, 691 F.2d at 135 (noting that a
8
Moreover, the argument implies, without any justification, that the Board members are ignoring their duties.
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full jury trial for estimation would be “rare” and “usually will run counter to the efficient
administration of the bankrupt’s estate”).
II.
The CIC Claims Are Subject to Section 502(b)(7)
17.
The Objecting Claimants have asserted that Section 502(b)(7) does not
apply to their CIC Claims because, among other things (i) the CIC Agreements are not
“employment contracts” within the meaning of Section 502(b)(7), (ii) the CIC Claims are not
asserting prospective compensation, but rather, they assert claims for compensation already
earned as of the Petition Date, (iii) application of Section 502(b)(7) is limited to contracts of key
executives, rather than mid-level managers, (iv) creditors in these chapter 11 cases will receive
100% recoveries, and, solely with respect to certain Objecting Claimants whose CIC Claims
were included in the Fifth Omnibus Objection (as amended) or Sixth Omnibus Objection (as
amended) and the Seventy-Ninth Omnibus Objection (as amended), (v) the Trust is procedurally
barred from asserting Section 502(b)(7) with respect to their CIC Claims because such objection
was not properly included in the applicable Omnibus Objection as applied to their CIC Claim.
Such assertions have no merit.
The CIC Agreements Are Employment Contracts
18.
The Objecting Claimants’ assertion that the CIC Agreements are not
employment contracts strains credulity. First, as set forth more fully in the Motion,
notwithstanding the title of some of the documents, the substantive provisions of the CIC
Agreements overwhelmingly support that such agreements are “employment contracts” within
the meaning of Section 502(b)(7). For example, Section 1 of the WMB Agreements clearly
states that “[WMB] hereby employs Employee, and Employee hereby accepts employment, on
the terms in this Agreement.” (emphasis added). Section 1 of the WMI CIC Agreements also
clearly states that “[WMI] agrees to, and does hereby, employ Employee, and Employee agrees
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to, and does hereby, accept such employment, on the terms in this Agreement.” (emphasis
added). Additionally, among other things, the CIC Agreements are non-assignable (see WMI
CIC Agreement §16(f); WMB CIC Agreement §13(f)), they outline the Claimants’ compensation
and benefits, including termination of benefits upon the death of the employee (see WMI CIC
Agreement § 8 (“If Employee should die or become disabled at any time during his or her
employment hereunder, neither Employee nor anyone claiming by, through or under him or her
shall be entitled to any further compensation or other sum under this Agreement . . . .”); WMB
CIC Agreement § 6), they preclude the employee from becoming “actively associated with or
engaged in any business or activity during the term of [the] Agreement other than that of [WMI
or WMB, as applicable]” (WMI CIC Agreement § 5(c); WMB CIC Agreement § 4), and they set
forth certain additional restrictions such as non-solicitation provisions (see WMI CIC Agreement
§ 14; WMB CIC Agreement § 10) and a confidentiality provision (see WMI CIC Agreement § 9
(“Employee agrees that information not generally known to the public to which Employee has
been or will be exposed as a result of the Employee’s employment by the Company is
confidential information that belongs to the Company or its Subsidiaries.”); WMB CIC
Agreement § 7).9
19.
Moreover, the fact that the employment relationship pursuant to the CIC
Agreements is “at will” does not change the Section 502(b)(7) analysis. Various courts have
applied Section 502(b)(7) to at-will employment contracts with no fixed duration. See, e.g., In
re VeraSun, 467 B.R. 757, 760 (Bankr D. Del. 2012); Belson v. Olson Rug Co., 483 B.R. 660,
663 (N.D. Ill. 2012).
9
At least some of the Objecting Claimants have admitted that their CIC Agreements are employment contracts. See
Objection of Edward F. Bach to the Motion [D.I. 11390] at ¶ 39; Response and Objection of Andrew Eschenbach
[D.I. 11377] at ¶ 5.
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The CIC Claims Pursuant to the CIC Agreements Assert Damage Claims for
Prospective Compensation Resulting From the Termination of Such Agreements
20.
The CIC Agreements provide for prospective compensation because they
provide for severance benefits upon a change in control. See, e.g., WMI CIC Agreement
§ 6(c)(1) (explaining that employees are entitled to receive “three times Employee’s annual
compensation” upon a change in control and providing that such severance payments must be
offset to the extent the employee received similar payments from the “Company or any acquired
company” pursuant to a severance or change in control agreement); id. § 6(e) (referring to the
payments pursuant to Section 6(c) as “Severance Payments”); see VeraSun, 467 B.R. at 765-66
(“Unlike wages that are paid for services rendered, severance is meant as compensation for the
injury and losses resulting from the employer’s decision to terminate the employment
relationship.”) (internal quotation marks omitted). The cases cited by the Objecting Claimants
are inapposite. For example, the Objecting Claimants cite Folsom v. Prospect Hill Res., Inc. (In
re Prospect Hill Res., Inc.), 837 F.2d 453 (8th Cir. 1988), for the proposition that claims for
which “bargained-for consideration ha[s] already been given” fall outside the scope of Section
502(b)(7). Notably, however, the claimants in Prospect Hill were retired employees, not
terminated employees, and the damages they sought were vested retirement benefits, not
severance payments. Id. at 455.
21.
In fact, as set forth more fully in the Motion, courts have consistently
found that claims seeking payments in the nature of severance constitute damages resulting from
the termination of an employment contract within the meaning of Section 502(b)(7). See
VeraSun, 467 B.R. at 765-66; In re Protarga, 329 B.R. 451, 465-66 (Bankr. D. Del. 2005)
(same); Harrington v. Dornier Aviation (N. Am.), Inc. (In re Dornier Aviation, Inc.), 305 B.R.
650, 654 (E.D. Va. 2004) (discussing policy behind cap and observing it “clearly limits an
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employee’s claim for severance pay, as this is in effect a claim for prospective compensation that
is accelerated as a result of the termination.”); In re Cincinnati Cordage & Paper, Co., 271 B.R.
264, 269 (Bankr. S.D. Ohio 2001); In re Uly-Pak, Inc., 128 B.R. 763, 769 (Bankr. S.D. Ill.
1991).
Application of Section 502(b)(7) Is Not Exclusive to Claims of Senior Executives
22.
The argument that application of Section 502(b)(7) is limited to claims of
key executives under long term employment contracts is misguided. Of course, here, the
Claimants were among the most senior executives and employees of WMI and WMB (as
applicable), including individuals designated with “senior leader” status and members of WMI’s
Executive Committee, and they are asserting contractual entitlements to significant “change in
control” payments pursuant to the CIC Agreements—payments, in some instances, in the
millions of dollars. But, even if they were not all key executives and employees, Section
502(b)(7) would still apply because the statute is not limited to the claims of key executives.
See Belson v. Olson Rug Co., 483 B.R. 660, 670 (N.D. Ill. 2012) (“[N]othing in the language of
section 502(b)(7) supports limiting its scope” to apply only to “key executives” with “long-term
contracts calling for substantial remuneration.”) (internal quotation marks omitted). Like the
appellants in Belson, the Objecting Claimants have offered no reason why the scope of Section
502(b)(7) should be limited beyond the plain language of the statute itself. See id. Indeed,
courts have applied Section 502(b)(7) to collective bargaining agreements covering various
levels of non-executive, and even non-corporate employees. See, e.g., L.P.P. Claimants v.
Continental Airlines Holdings, Inc. (In re Continental Airlines, Inc.), 257 B.R. 658, 663 (Bankr.
D. Del. 2000); In re N & T Assoc., Inc., 78 B.R. 285, 287 (Bankr. D. Nev. 1987).
23.
Certain Objecting Claimants who also have employment agreements (the
“Providian Agreements”) arising from their former employment with Providian Financial
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Corporation or its affiliates and subsidiaries (collectively, the “Providian Claimants”) have
asserted certain additional arguments with respect to their CIC Agreements. In particular, the
Providian Claimants have asserted that their CIC Agreements are not their “employment
contracts” pursuant to Section 502(b)(7) and, therefore, their CIC Claims should not be estimated
pursuant to the Motion. Instead, such Claimants assert that their Providian Agreements are their
employment agreements.
24.
The Trust submits that the Providian Claimants’ CIC Agreements are
“employment contracts” within the meaning of Section 502(b)(7), both standing on their own
and because they are integrated into the Providian Agreements. As noted in the Motion, courts
have held that multiple contracts, taken together, can serve as one employment contract for
purposes of Section 502(b)(7). See, e.g., VeraSun, 467 B.R. at 763-64 (where the employees and
the debtor were both parties to two separate agreements, although such agreements were
“physically separate documents and signed at different times, they clearly relate[d] to the same
subject matter: the Executive’s employment at [the debtor]”); Protarga, 329 B.R. at 467-68.
Here, for the reasons set forth above and in the Motion with respect to all of the other CIC
Agreements, the CIC Agreements of the Providian Claimants are, standing on their own,
“employment contracts” for purposes of the Section 502(b)(7) analysis.
25.
Alternatively, the Providian Agreements and the CIC Agreements should
be construed together as one “employment contract” for purposes of Section 502(b)(7). See Cal.
Civ. Code § 1642 (“Several contracts relating to the same matters, between the same parties, and
made as parts of substantially one transaction, are to be taken together.”); Brookwood v. Bank of
America, 45 Cal. App. 4th 1667 (Cal. App. 1996) (applying § 1642 and finding that three
agreements were parts of substantially one transaction and should be construed as one
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employment agreement). First, by the Providian Claimant’s own admission, the Providian
Agreements are the Claimants’ employment contacts. See, e.g., Opposition of Mary Beth Davis
et al. [D.I. 11382] ¶ 16 (“The Claimants were each a party to a comprehensive employment
agreement with WMI in the form of the Change of Control Employment Agreement with
Providian Financial Corporation . . . that became effective as an employment agreement with
Washington Mutual on October 1, 2005 when Washington Mutual acquired Providian.” );
Opposition of Michele Grau-Iversen et al. [D.I. 11385] ¶ 26. Second, the contracts are between
the same parties: the respective Providian Claimant and WMB. Cf. Fillpoint, LLC v. Maas, 208
Cal. App. 4th 1170, 1181 (Cal. App. 2012) (two agreements were between the same parties;
although the one agreement was entered into by a former employer and the other by its acquirer).
Third, the agreements are each part of substantially one transaction—the Providian merger and
the terms of the Providian Claimants’ employment with WMB following such merger.
26.
Indeed, as noted by the Providian Claimants, the Providian Agreements
and the CIC Agreements were to exist side-by-side and simultaneously govern, among other
things, the termination of the Providian Claimants’ employment. Like the “change in control”
agreement in VeraSun, the CIC Agreements here do more than just “passingly refer to a preexisting employment relationship.” In re VeraSun, 467 B.R. at 764-65. The CIC Agreements set
forth new terms and conditions that affected the employment relationship between the parties,
including, without limitation, a non-solicitation provision, a confidentiality provision, and
provisions governing termination of employment following a “change in control” (as such term
is defined in the CIC Agreements). In addition, the CIC Agreements and Providian Agreements
were interrelated. For example, if a termination event triggered severance benefits under both
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agreements, the Claimants would only be entitled to benefits pursuant to the termination
provisions found in one of the agreements.
27.
Based on all of the foregoing, even if the CIC Agreements alone are not
“employment contracts” for purposes of Section 502(b)(7), which the Trust submits that they are,
the CIC Agreements and the Providian Agreements should be construed together as one contract
for purposes of applying Section 502(b)(7). Nevertheless, in an effort to streamline the Motion
and facilitate prompt distributions to creditors, the Trust is seeking to release only the reserves
held on account of the Providian Claimants’ CIC Agreements at this time. The Trust reserves its
right to further brief this issue in connection with the Motion or the employee claims litigation,
and reserves all rights to assert additional theories with respect to the relationship of the CIC
Agreements and Providian Agreements, in connection with Section 502(b)(7) or otherwise.
These Are Not 100% Recovery Cases
28.
The Objecting Claimants are simply incorrect when they assert that all
unsecured creditors in these cases have or will receive one hundred per cent (100%) recoveries.
In fact, paying the CIC Claims in full would be at the expense of unsecured creditors, including
holders of CCB-1and CCB-2 Guarantees Claims, PIERS Claims, Floating Rate Notes Claims
and other general unsecured claims, who currently hold Liquidating Trust Interests on account of
their Allowed Claims. Notably, the value of the unpaid Liquidating Trust Interests continues to
grow with each day that these cases are prolonged, as Allowed Claims continue to accrue
postpetition interest. Furthermore, subordinated creditors in Class 18 pursuant to the Plan have
yet to even receive any Liquidating Trust Interests or other distributions.
29.
Importantly, contrary to the erroneous assertions of certain of the
Objecting Claimants, no Liquidating Trust Interests have been distributed to holders of Equity
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Interests in the Debtors’ estates, and no monies released from the Disputed Claims Reserve
pursuant to the Motion would be distributed to holders of Equity Interests. Rather, the reserves
released pursuant to the Motion will be distributed to Liquidating Trust Beneficiaries, none of
whom are Equity Interest holders.
The Trust Is Not Procedurally Barred From Asserting That Section 502(b)(7) Applies
to the CIC Claims of Claimants Included In The Fifth Omnibus Objection or Sixth
Omnibus Objection and Seventy-Ninth Omnibus Objection
30.
In the Original Fifth Omnibus Objection and Original Sixth Omnibus
Objection (together, the “Original Fifth and Sixth Omnibus Objections”), the Debtors
specifically reserved their rights to further object to the claims included therein and also
requested “to the extent they are liable, [that] they be allowed to seek to impose on the
[applicable claims included therein] any applicable claim amount cap prescribed by the
Bankruptcy Code.” See Original Fifth Omnibus Objection [D.I. 1233], ¶ 20 (emphasis added);
Original Sixth Omnibus Objection [D. I. 1234], ¶ 20 (emphasis added). Later, but still prior to
the deadline to file all objections to claims pursuant to the Plan, on August 15, 2012, the Trust
filed objections to certain additional CIC Claims that were substantially similar to those included
on the Original Fifth and Sixth Omnibus Objections, and further included the CIC Claims from
the Original Fifth and Sixth Omnibus Objections, among other claims, on Exhibit A-1 to the
Original Seventy-Ninth Omnibus Objection. The Original Seventy-Ninth Omnibus Objection
indicated that all objections included therein were incorporated by reference into the Original
Fifth and Sixth Omnibus Objections with respect to such claims listed on Exhibit A-1.
31.
The Objecting Claimants included on the Original Fifth and Sixth
Omnibus Objections and the Original Seventy-Ninth Omnibus Objection (by virtue of Exhibit A1 thereto) now assert that estimation of their CIC Claims pursuant to Section 502(b)(7) is not
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appropriate because the Trust never asserted Section 502(b)(7) with respect to their CIC Claims.
Notably, virtually all of the Objecting Claimants who asserted this argument amended their
original proofs of claim (that were included in the Original Fifth and Sixth Omnibus Objections)
to either add additional amounts pursuant to their CIC Claims and/or to assert additional theories
of recovery against the Debtors’ estates. In accordance with the Court’s orders granting such
Claimants permission to file their amended proofs of claim, the Trust amended the Original Fifth
and Sixth Omnibus Objections and the Original Seventy-Ninth Omnibus Objection, among other
objections, and asserted Section 502(b)(7) with respect to the Amended Claims.
32.
Based on all of the foregoing, the Trust submits that it is not precluded
from arguing that Section 502(b)(7) applies to these Objecting Claimants’ CIC Claims, or the
claims of any other Claimants included on the Original Fifth and Sixth Omnibus Objections,
because the Debtors reserved their rights to, among other things, impose any applicable statutory
cap on the applicable claims included therein. And, the Trust did, in fact, further object to such
claims on the basis of the cap in the Original Seventy-Ninth Omnibus Objection, prior to the
Plan-governed deadline for the Debtors to object to any Disputed Claims. Accordingly,
estimation of such CIC Claims pursuant to Section 502(b)(7) also is appropriate.
III.
Calculation of the Section 502(b)(7) Cap
33.
As set forth more fully in the Motion, the Trust calculated the Section
502(b)(7) cap amounts by adding the Claimants’ annual salary (as set forth in the companies’
books and records as well as the Claimants’ own proofs of claim) and an estimate of their fringe
benefits. Notwithstanding that the Motion clearly states which elements of compensation were
included in the cap calculation, the Objecting Claimants have argued that the Trust’s calculation
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of the applicable cap amounts is (i) unclear, and (ii) wrong because the Trust failed to include the
Claimants’ annual bonus amounts.
34.
Notably, almost all of the Objecting Claimants appear to agree with the
annual salary and fringe benefit numbers provided by the Trust. The Objecting Claimants’
primary issue with the Trust’s calculation of their cap amounts is the Trust’s failure to include
their respective bonus amounts in the calculation. For numerous reasons, the Trust does not
agree with the Objecting Claimants’ assertion that their annual bonuses or any other bonuses are
properly included in the calculation of their Section 502(b)(7) cap amounts pursuant to their
respective CIC Agreements, or, alternatively, asserts that, even if such bonuses are included, the
proper amount to include for such annual bonuses for 2008 would be zero dollars ($0).
35.
As an initial matter, the Objecting Claimants’ reliance on Section 6(d) and
Section 5(e) of the WMI and WMB CIC Agreements, respectively, to calculate their respective
cap amounts is misplaced. The process for calculating the allowable amount of a claim pursuant
to Section 502(b)(7) has two steps: (i) the calculation of damages and (ii) the calculation of the
cap amount. Only if damages exceed the cap amount is the cap applied. See, e.g., In re
Protarga, 329 B.R. 451, 465 (Bankr. D. Del. 2005) (noting that the claimant’s position “fails to
make the distinction contained in § 502(b)(7) between ‘damages resulting from the termination’
and the ‘compensation’ provided for the one year period. To the extent the former exceeds the
latter, the latter controls.”). As applied here, Sections 6(d) and 5(e) of the WMI and WMB CIC
Agreements, respectively, set forth the formula for calculating the “change in control”
termination damages pursuant to such agreements. Thus, it is proper to look to such provisions
when engaging in the first step of the Section 502(b)(7) analysis (the calculation of damages),
but this damages formula has no bearing in the second step (calculation of the cap itself).
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Rather, here, “the compensation provided by such contract,” as such phrase is used in Section
502(b)(7), is governed by Section 3 of each form of CIC Agreement, which describes base salary
compensation pursuant to each such agreement. See Section 502(b)(7) (capping the claim of an
employee resulting from the termination of an employment contract to the extent such claim
exceeds “the compensation provided by such contract, without acceleration . . . .”) (emphasis
added); WMI CIC Agreement § 3 (“During Employee’s employment under this Agreement,
Employee shall receive base salary compensation in the amount determined by the Board’s
Human Resources Committee . . . .”); WMB CIC Agreement § 3. In fact, the plain language of
Sections 6(d) and 5(e) specifically states that the definition of “annual compensation” in each
respective section is to be used solely “for the purposes of Section 6(c) [or, in the case of the
WMB CIC Agreements, Section 5(c)],” which sections set forth a formula for calculating the
accelerated damages due to the employee upon a change in control.
36.
Moreover, the Trust submits that, to the extent the Claimants’ annual
bonuses should be included in the calculation of the cap amount, the amount included for such
bonuses should be zero dollars ($0). First, upon information and belief, the annual bonuses were
determined and paid, in whole or in large part, based upon the respective employers’
achievement of specified financial goals. See, e.g., WMI CIC Agreement § 3 (“Employee is
entitled to participate in Washington Mutual’s bonus plan for executives as adopted by the
Human Resources Committee, under which Employee may receive, subject to the terms of the
plan, a bonus based on [WMI’s] achievement of specified financial goals.”). As discussed more
fully in the Motion, the one year term for measuring compensation pursuant to Section
502(b)(7)(A) is a forward-looking concept that starts at the earlier of the date of termination or
the petition date, and ends 365 days from such date (the “One Year Period”). Id. at 465 (“This
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concept is a forward looking one that focuses on what the employee would have earned if he
continued his position for the next 365 days.”). As the Court and the Claimants are well aware,
in September, 2008, WMB was downgraded to a regulatory composite CAMELS rating of 4,
indicating that it was in “troubled condition,” and ultimately was seized by the OTS in what is
the largest bank failure in the nation’s history. Shortly thereafter, WMI filed for chapter 11
relief. It would be incredulous to think that either WMI or WMB would have been able to meet
any “specified financial goals” in the One Year Period (September 26, 2008 – September 26,
2009) following such calamitous events. Accordingly, the respective annual bonuses would have
been $0 in the One Year Period. Cf. In re Integrated Health Servs., Inc., No. 00-389 (MFW),
2001 WL 1820426, at *2 n.4 (Bankr. D. Del. Jan. 3, 2001) (“Although [the employee] ha[d]
a bonus provision in his agreement, there was no evidence that the Debtors would meet the
earnings threshold required for him to earn that bonus in 2000.”); In re Interact Med. Techs.
Corp., No. 98-42912, 2003 Bankr Lexis 2276, at *10-11 (Bankr. Mass. Aug. 4, 2003) (finding
that employee was not entitled to bonus predicated on certain performance goals where there was
no evidence of the existence of such metrics and whether the employee reached them).
37.
Additionally, upon information and belief, WMI passed a resolution in
2008 canceling the annual incentive bonus program for some or all members of the Executive
Committee due to, among other things, the optics of paying large executive bonuses at a time
when the bank was suffering financial distress. Accordingly, for any member of the Executive
Committee to whom such resolution applied, the annual bonus amount included in his or her
respective cap amount indisputably should be $0. Cf. Protarga, 329 B.R.at 465 (holding that
bonus should not be included in the cap where Board of Directors adopted a resolution declaring
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that there would be no bonuses with respect to the fiscal year preceding the employee’s
termination).
38.
Notwithstanding all of the foregoing, for purposes of facilitating the
estimation of the CIC Claims and achieving the goal of promoting a fair and timely distribution
to other creditors, the Trust is willing to agree, for purposes of estimation only, that the
Claimants’ bonus amounts, as detailed in the companies’ books and records and, where
applicable, the Claimants’ proofs of claim, may be included in the cap amounts. The Trust fully
reserves its rights to challenge the inclusion of any and all bonuses in the cap calculations at a
later time in connection with the full litigation of the CIC Claims and other Claims (including
Amended Claims) of the Claimants.
39.
The Trust reserves its right to assert additional replies to the Objections at
the hearing or in subsequent briefing should such briefing be required. Furthermore, although
the Trust does not believe that any discovery is necessary with respect to the Motion or the
Objections, the Trust reserves its right to take discovery should the Claimants request and be
granted the right to do so.
WHEREFORE WMILT respectfully requests that the Court enter the Proposed
Order (i) estimating, or, where applicable, partially estimating the maximum amount of the CIC
Claims, (ii) authorizing the Trust to release excess reserves in the next scheduled distribution
pursuant to the Plan and (iii) granting WMILT such other and further relief as is just.
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Dated: Wilmington, Delaware
September 19, 2013
/s/ Amanda R. Steele
Mark D. Collins, Esq. (No. 2981)
Paul N. Heath, Esq. (No. 3704)
Amanda R. Steele, Esq. (No. 5530)
RICHARDS, LAYTON & FINGER, P.A.
One Rodney Square
920 North King Street
Wilmington, Delaware 19801
Telephone: (302) 651-7700
Facsimile: (302) 651-7701
– and –
Brian S. Rosen, Esq.
WEIL, GOTSHAL & MANGES LLP
767 Fifth Avenue
New York, New York 10153
Telephone: (212) 310-8000
Facsimile: (212) 310-8007
Attorneys for WMI Liquidating Trust
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