Washington Mutual, Inc. (“WMI”) was a savings and loan holding company, which held inter alia, all of the stock of Washington Mutual Bank (“WMB”). In February 2006, a subsidiary of WMB, University Street, Inc. (“University”) created a new subsidiary called Washington Mutual Preferred Funding LLC (“WMPF”). University and WMB then transferred to WMPF portfolios of home equity and other mortgage loans in exchange for all the WMPF common stock and WMPF preferred securities, respectively. WMPF then transferred the loan assets to statutory trusts in exchange for certificates entitling it to payments of principal and interest on the loans. The WMPF preferred securities paid dividends based on distributions from the trusts. In five similarly-structured issuances between March 2006 and October 2007, the trusts issued approximately $4 billion in Trust Preferred Securities (the “TPS”) which were sold to qualified institutional buyers pursuant to private placements. Each series of TPS was evidenced by a global certificate registered in the name of and held by a custodian of the Depository Trust Company.
Each series of TPS had a feature that provided that if the Office of Thrift Supervision (the “OTS”) determined that WMB had become undercapitalized or would become undercapitalized in the near term or that WMB had been placed in a receivership or conservatorship (defined as an “Exchange Event”), then the OTS could direct that the TPS be transferred to WMI in exchange for new Depositary Shares (the “Conditional Exchange”). (McIntosh Decl. at Exs. 3A & 4A.) The Depositary Shares were to be issued to WMI in exchange for WMI Preferred Shares. (Id.) In order to obtain the agreement of the OTS to the issuance of the TPS and their treatment as core capital for WMB, WMI agreed that if it acquired the TPS as a result of a Conditional Exchange, then WMI would contribute the TPS to WMB. (Id. at Exs. 5C, 5E, 5G, 5H.)
On September 7, 2008, as its financial condition worsened, WMB entered into a memorandum of understanding with the OTS (the “MOU”) pursuant to which the OTS explicitly limited WMB’s ability to declare a dividend. (Id. at 7A, §2(B).) On September 25, 2008, the OTS concluded that based on the MOU’s limitations on WMB’s ability to pay dividends, an Exchange Event had occurred and directed the Conditional Exchange of the TPS. (Id. at Ex. 6A.) WMI responded to that directive on September 25, 2008, advising that it would issue a press release on September 26, 2008, announcing that the Conditional Exchange would occur as of 8:00 a.m. Eastern time on that date. (Id. at Ex. 6B.) WMI also executed an assignment to WMB of all of WMI’s entitlements to the TPS. (Id. at Ex. 7B.)
On that same day, September 25, 2008, the OTS seized WMB and appointed the Federal Deposit Insurance Corporation (the “FDIC”) as receiver. Immediately after its appointment as receiver, the FDIC sold substantially all of the assets of WMB to JPMorgan Chase Bank, N.A. (“JPMC”) for approximately $1.9 billion and assumption of certain of WMB’s liabilities. (Id. at Exs. 7C & 7D.)
At 7:45 a.m. Eastern time on September 26, 2008, WMI issued a press release announcing, inter alia, that an Exchange Event had occurred and that consequently the Conditional Exchange would occur at 8:00 a.m. Eastern time on that date resulting in the automatic exchange of the TPS for Depositary Shares tied to WMI Preferred Shares. (Id. at Ex. 6C.)
Later that same day, September 26, 2008, WMI filed a petition for relief under chapter 11 of the Bankruptcy Code. During the course of the bankruptcy case, disputes arose between WMI and JPMC regarding the ownership of certain assets, including the TPS. Ultimately a Global Settlement was reached between them (and the FDIC and other parties) which has been incorporated into the Debtors’ Sixth Amended Joint Plan of Reorganization (the “Plan”).
After the announcement of the Global Settlement, the Plaintiffs filed a complaint against WMI and JPMC seeking, inter 2 alia, a declaration that the TPS were still owned by the investors and did not belong to WMI or JPMC. On September 7, 2010, the Court stayed litigation of certain of the counts of the Complaint and permitted the parties to conduct discovery and file dispositive motions with respect to Counts I through VI. The parties agreed that those counts had to be determined (by dispositive motions or trial) before the Debtors could proceed with confirmation of the Plan. The parties filed cross motions for summary judgment which were fully briefed by November 24, 2010. The matter is ripe for decision.
