Bankruptcy Court Denies Confirmation of WaMu's Plan of Reorganization

Sending the debtors back to the drawing board after almost three years in bankruptcy, the bankruptcy court has for the second time denied confirmation of the Plan of Reorganization for Washington Mutual, Inc. (“WaMu”). It is hard to recall a bankruptcy case of a similar magnitude to that of WaMu being denied confirmation, let alone twice, but that was just the beginning. The bankruptcy court's 139-page opinion has caused a fair degree of consternation (indeed, it has been something akin to a shot heard around the bankruptcy world) among financial institutions by ruling that:

• Bondholders and lenders that receive material non-public information from a debtor in settlement negotiations as part of the process to agree on a consensual plan of reorganization must either not trade, or must have established a “wall” between the individuals receiving the information and those trading claims; and
• Bondholders and other unsecured creditors in a solvent estate are never entitled to postpetition accrued interest at the coupon or contract rate, and, instead, can only receive interest on their claims at the federal judgment rate.

As if those blockbuster rulings were not enough, in denying confirmation, the bankruptcy court also determined that an equityholders' committee had stated “colorable claims” of insider trading by certain noteholders during the bankruptcy case, and, as a result, the claims of those noteholders against WaMu could be subject to “equitable disallowance” of their entire claims, and not just disgorgement of any profits obtained as a result of any insider trading. In other words, noteholders would face claims that could mean they would receive a zero recovery on their claims in favor of lower priority common stockholders. Among other things, this would constitute a far harsher penalty for insider trading than would be faced by someone who had engaged in insider trading of a security not in bankruptcy.