1) Background and Anchor Litigation Claim from Plan of Reorganization
a. Goodwill Litigation.
On August 9, 1989, the Financial Institutions Reform, Recovery and Enforcement Act was enacted (“FIRREA”). Among other things, FIRREA raised the minimum capital requirements for savings institutions and required a phase-out of the amount of supervisory goodwill that could be included in satisfying certain regulatory capital requirements. FIRREA represented an abrupt change in federal policy. The exclusion of supervisory goodwill from the regulatory capital of many savings institutions led them to take actions to replace the lost capital either by issuing new qualifying debt or equity securities or to reduce assets. A number of these institutions and their investors subsequently sued the United States Government seeking damages based on breach of contract and other theories (collectively, the “Goodwill Lawsuits”). To date, trials have been concluded and opinions have been issued in a number of Goodwill Lawsuits in the United States Court of Federal Claims.
(i) American Savings Bank, F.A.
In December 1992, American Savings Bank, F.A. (“ASB”), Keystone Holdings, Inc. (“Keystone”), and certain related parties (the “American Savings Plaintiffs”) filed suit against the United States Government, alleging, among other things, breach of contract as a result of the passage of FIRREA and its implementing regulations as related to their acquisition of ASB. Keystone and its subsidiaries were thereafter acquired by WMI and, WMI or its subsidiaries succeeded to all of the rights of ASB, Keystone, and the related parties in such litigation and will, as a result, receive any recovery from the litigation.
After many years of litigation, on December 18, 2006, the United States Court of Federal Claims entered a partial judgment against the United States in the approximate amount of $55 million (the “American Savings Judgment”). See American Savings Bank, F.A. v. United States, No. 92-872C, currently pending in the United States Court of Federal Claims (the “American Savings Litigation”). The judgment was appealed but ultimately affirmed by the United States Court of Appeals for the Federal Circuit on March 6, 2008. On September 12, 2008, over the Government’s objection, the Federal Claims Court entered the American Savings Judgment as a partial final judgment in accordance with the Federal Circuit’s affirming order.
In the JPMC Adversary Proceeding, filed on March 24, 2009, JPMC asserted, among other things, that WMB and, consequently, JPMC, which purchased certain assets of WMB, is the rightful beneficiary of the American Savings Judgment rather than WMI. WMI disputes JPMC’s ownership interest in the American Savings Judgment.
On January 6, 2009, the United States filed a motion for an order lifting the automatic stay to allow the Government to setoff the American Savings Judgment against amounts allegedly owed by WMI to the Internal Revenue Service (the “Setoff Motion”). The Debtors opposed the Setoff Motion and on February 16, 2009, the Bankruptcy Court ordered the American Savings Judgment be paid into the Bankruptcy Court’s registry (the “Registry Funds”), until the proper recipient could be determined.
Pursuant to the Proposed Global Settlement Agreement, JPMC, the FDIC Receiver, and FDIC Corporate have agreed to waive and release any and all rights and claims associated with the American Savings litigation, including, without limitation, any rights and claims to (A) the Registry Funds, and (B) any funds held in escrow pursuant to that certain Escrow Agreement, dated December 20, 1996, by and among WMI, Keystone Holdings Partners, L.P., Escrow Partners, L.P. and The Bank of New York.
(ii) Anchor Savings Bank FSB.
In January 1995, Anchor Savings Bank FSB (“Anchor”), filed suit against the United States Government for breach of contract arising out of FIRREA and for unspecified damages involving supervisory goodwill related to its acquisition of several troubled savings institutions from 1982-1985. The Dime Savings Bank of New York, FSB (“Dime Bank”) acquired Anchor shortly after the case was commenced and Dime Bank assumed the rights under the litigation against the Government. Dime Bancorp, Inc. (“Dime Inc.”), the parent company to Dime Bank, distributed a Litigation Tracking Warrant™ (an “LTW”) for each share of its common stock outstanding on December 22, 2000 to each of its shareholders on that date based on the value of the recovery in the Anchor litigation. In January 2002, Dime Bank and Dime Inc. merged into WMB and WMI, respectively.
As a result of these mergers, the LTWs are now, when exercisable, exchangeable for shares of WMI’s common stock. Prior to the Commencement Date, the LTWs traded on the Nasdaq National Market under the symbol “DIMEZ.” On October 30, 2008, WMI received a notice from Nasdaq delisting the LTWs and the LTWs ceased trading on November 6, 2008. WMI filed a Form 25-NSE with the SEC on November 14, 2008 which removed the LTWs from listing and registration on the Nasdaq.
In a series of decisions issued in 2002, the United States Court of Federal Claims
concluded that FIRREA breached the government’s supervisory goodwill contracts with Anchor. Thereafter, in a decision dated March 14, 2008, the United States Court of Federal Claims, held that Anchor was entitled to recover lost profits and other damages in the amount of approximately $382 million, plus an undetermined amount for a gross-up of tax liabilities. On July 16, 2008, the court reduced the judgment to approximately $356 million. On March 10, 2010, the Federal Circuit Court of Appeals affirmed the judgment of approximately $356 million, and also remanded the case to the Court of Federal Claims for further determination of whether that court had made a calculation error and should increase the damage award by as much as an additional $63 million.
Similar to the American Savings Judgment, in the JPMC Adversary Proceeding, JPMC has asserted that it is entitled to the damage award relating to Anchor, rather than WMI. Pursuant to the Proposed Global Settlement Agreement and sections 363 and 365 of the Bankruptcy Code, WMI will be deemed to have sold, transferred and assigned to JPMC any and all right, title and interest it may have in the Anchor litigation, free and clear of any liens, claims, interests and encumbrances, including, without limitation, any liens, claims, interests and encumbrances of holders of the LTWs, and the FDIC Receiver and FDIC Corporate will be deemed to have waived and released any and all rights and claims associated with the claims, causes of action, damages, liabilities and recoveries associated with the Anchor Litigation.
PROVISION FOR TREATMENT OF DIME WARRANTS (CLASS 20)
24.1 Cancellation of Dime Warrants: Holders of Dime Warrants shall receive no distribution under the Plan. On the Effective Date, all Dime Warrants shall be deemed extinguished and the certificates and all other documents representing such Equity Interests shall be deemed cancelled and of no force and effect.
Comments:
In an order issued by the court 2/16/09 in regard to the partial payment from the American Savings Bank litigation or $55,000,000, the court ordered that:
“Any party, other than the debtors, asserting an ownership interest in the funds must bring its claim before the Bankruptcy Court through the commencement of an adversary proceeding in accordance with Rule 7001 of the Federal Rules of Bankruptcy Procedure….”
It would appear that the burden is on JPM to prove that it actually owns the litigation claims and that they currently reside in the bankruptcy estate which may explain why they aren’t demanding the proceeds from the ASB litigation in the settlement. As far as JPM getting the Anchor litigation the motivation is clear…If it were to remain in the creditor pool the current group of unsecured creditors would have to contend with the claims of the LTW holders.
2) LTW holders’ Claim
Items in Italics taken directly from the amended warrant agreement dated 2003
On September 25, 2008, while WMI was pursuing these alternatives, the OTS appointed the FDIC as receiver for WMB and advised that the receiver was immediately taking possession of WMB. The receiver sold substantially all assets of WMB to JPMC pursuant to the Purchase and Assumption Agreement dated the same day. On the day following the Bank Receivership, the Debtors filed these chapter 11 cases to preserve their assets and maximize the value of their estates for the benefit of their creditors.
"Combination" means an event in which the Company consolidates with, merges with or into, or sells all or substantially all its property and assets to another Person.
4.2 Combination. (a) Except as provided in Section 4.2(c), in
the event of a Combination, the Holders will have the right to receive upon exercise of each Warrant the number of shares of capital stock or other securities or an amount of property equal to the Adjusted Litigation Recovery divided by the Maximum Number of Warrants divided by the aggregate Adjusted Stock Price of the capital stock, other securities or property that 1.1232 shares of Common Stock were exchanged for or converted into as a result of such Combination.
March 12 (Bloomberg) -- Washington Mutual Inc. will collect at least $5.95 billion, less than the $20 billion estimated by shareholders, in a proposed settlement of the bankrupt company’s yearlong battle with federal regulators and JPMorgan Chase & Co.
c) In the event of a Combination where consideration is payable to holders of Common Stock in exchange for their shares solely in cash,
the Holders will have the right to receive upon exercise of each Warrant cash in an amount equal to the Adjusted Litigation Recovery divided by the Maximum Number of Warrants, less the Exercise Price (if any). In case of any Combination described in this Section 4.2(c), the surviving or acquiring Person will promptly after the occurrence of the Trigger deposit with the Warrant Agent the funds necessary to pay to the Holders of the Warrants the amounts to which they are entitled as described above. After such funds and the surrendered Warrant Certificates are received, the Warrant Agent is hereby instructed to make payment to the Holders by delivering a check in such amount as is appropriate to such Person or Persons as it may be directed in writing by the Holders surrendering such Warrants. No interest will accrue to the Holders or the surviving or acquiring Person on such funds.
4.4 Other Events. If any event occurs as to which the foregoing provisions of this Article IV are not strictly applicable or, if strictly applicable, would not, in the good faith judgment of the Board, fairly and adequately protect the purchase rights of the Holders of the Warrants in accordance with the essential intent and principles of such provisions, then the Board may make, without the consent of the Holders, such adjustments to the terms of this Article IV, in accordance with such essential intent and principles, as will be reasonably necessary, in the good faith opinion of such Board, to protect such purchase rights as aforesaid.
4.5 Notice of Certain Transactions. In the event that the
Company will publicly announce a plan (a) to effect any reclassification, redesignation or reorganization of its shares of Common Stock, (b) to effect any capital reorganization, consolidation or merger or (c) to effect the voluntary or involuntary dissolution, liquidation or winding-up of the Company, the Company will within 5 calendar days after such public announcement send to the Warrant Agent and the Warrant Agent will within 5 Business Days after receipt of such notice thereof and the form of notice of action, send the Holders a notice(in such form as will be furnished to the Warrant Agent by the Company) of such proposed action, such notice to be mailed by the Warrant Agent to the Holders at their addresses as they appear in the Certificate Register, which notice will specify the expected date that such issuance or event is to take place and the expected date of participation therein by the holders of Common Stock and will briefly indicate the effect of such action on the Common Stock and on the number and kind of any other shares of stock and on other securities or property, if any, and the number of shares of Common Stock and other securities or property, if any, purchasable upon exercise of each Warrant and the Exercise Price after giving effect to any adjustment which will be required as a result of such action.
To my knowledge there has been no communication whatsoever between the agent and the warrant holders since the filing.
(d) The Company hereby represents and warrants that any
Successor Company will enter into, and the Company will provide, an agreement with the Warrant Agent confirming the Holders’ rights pursuant to this Section 4.2 and providing for adjustments, which will be as nearly equivalent as may be practicable to the adjustments provided for in this Article IV.
6.3 Control of Litigation. The Bank will retain sole and
exclusive control of the Litigation and will retain 100% of any recovery from the Litigation. The Holders will not have any right to control or manage the course or disposition of the Litigation or the proceeds of any recovery therefrom or any rights against the Company for any decision regarding the conduct of the Litigation or disposition of the Litigation for an amount less than the amount claimed in damages in the Litigation, regardless of the effect on the value of the Warrants.
Comments:
I am not a lawyer but see highlighted text and draw your own conclusions
3) Determination of ultimate LTW claim value
Lost Profit Attributable to forced sale of RFC $111,619,000 Order Correcting Clerical Mistake 7/16/08
Expectation damages from reduced stock proceeds $42,000,000 Opinion and Order 3/14/08
Mitigation costs of lost benefit from forced sale of RFC $185,900,000 Opinion and Order 3/14/08
Damages Due to Branch Sales $8,146,125 Opinion and Order 3/14/08
Wounded Bank damages $4,133,227 Opinion and Order 3/14/08
Increased FDIC Insurance Premiums $4,656,559 Opinion and Order 3/14/08
Total Before Gross-ups and additional awards $356,454,911 Order Correcting Clerical Mistake 7/16/08
Additional cost of lost benefit from forced sale of RFC* $14,010,167
Gross up* * $161,273,444
Litigation Expenses -$30,000,000 Estimate
Total Before Federal Taxes $501,738,522
Net After Federal Taxes $301,043,113
LTW Recovery $2.26
* My estimate of the portion of the additional $63,000,000 award using the courts original methodology and retained earnings of $144,000,000 for NAMCO as of June 30, 1997 (Source: Edgar Filings)
**See Opinion and Order 3/14/08 Page 159 for explanation and sample Gross-up calculation. I used a tax rate of 40% for simplicity.
Comments:
Range of values is $2.16 (No additional award) to $2.63 ($63,000,000 additional award). Disclosure: This is my estimate and actual award may vary significantly
4) Time horizon
Taken from Warrant agreement:
"Trigger" means the occurrence of all of the following events:
(a) receipt by the Bank of the Amount Recovered in full,
(b) determination by the Bank of the amount of the Adjusted Litigation Recovery and
(c) receipt of all regulatory approvals necessary to issue the shares of Common Stock to be issued upon the exercise of the Warrants, including without limitation, the effectiveness of a registration statement relating to the issuance of the Warrant Shares under the Securities Act.
Comments:
Although there may be an opportunity to realize a percentage of the claim value upon a favorable ruling in bankruptcy court, based on the language in the agreement there is a chance the award wouldn’t be paid out until the court finalized the award. Additionally, there would be complications involved in LTW’s claims treated as unsecured creditors. Although there is an award it hasn’t been paid out yet and probably will not until the lower court determines the additional award, if any. Secondly, is the ultimate award figure is unknown and may still be before confirmation of the plan.
The most likely scenario provided the rights of LTW holders is upheld may be an amendment of the warrant agreement ultimately payable in JPM stock.
5) Proof of Claim requirements
In a motion filed dated October 2, 2008, WMI waived requirements to provide notice of the chapter 11 case (Rule 2002(d) to equity security holders. WMI further submitted that if it becomes necessary for such equity holders to file a claim they will be notified.
“16. WMI is a public company and, as of the Commencement Date, had approximately 1.7 billion shares of common stock and approximately 3 million shares of preferred stock outstanding. The Debtors submit that preparing a list of WMI’s equity security holders with last known addresses and sending notices to all parties on such list will be expensive and time consuming and will serve little or no beneficial purpose. The Debtors further submit that, if it becomes necessary for such equity security holders to file proofs of interest, the Debtors will provide them with notice of the bar date and an opportunity to assert their interests. Thus, equity security holders will not be prejudiced.”What exactly is an equity security holder? The US Bankruptcy code has the following definition:
“An equity security holder is a holder of an equity security of the debtor. Examples of an equity security are a share in a corporation, an interest of a limited partner in a limited partnership, or a right to purchase, sell, or subscribe to a share, security, or interest of a share in a corporation or an interest in a limited partnership.”
It would seem to me that in spite of the fact we are senior to other equity for claim reasons, we would fall under the category of an “equity security holder”. Additionally, the company never instructed the warrant agent to notify the LTW holders as outlined below so it would seem to me that having not filed a claim before the bar date will probably not be an issue.
4.5 Notice of Certain Transactions. In the event that the
Company will publicly announce a plan (a) to effect any reclassification, redesignation or reorganization of its shares of Common Stock, (b) to effect any capital reorganization, consolidation or merger or (c) to effect the voluntary or involuntary dissolution, liquidation or winding-up of the Company, the Company will within 5 calendar days after such public announcement send to the Warrant Agent and the Warrant Agent will within 5 Business Days after receipt of such notice thereof and the form of notice of action, send the Holders a notice(in such form as will be furnished to the Warrant Agent by the Company) of such proposed action, such notice to be mailed by the Warrant Agent to the Holders at their addresses as they appear in the Certificate Register, which notice will specify the expected date that such issuance or event is to take place and the expected date of participation therein by the holders of Common Stock and will briefly indicate the effect of such action on the Common Stock and on the number and kind of any other shares of stock and on other securities or property, if any, and the number of shares of Common Stock and other securities or property, if any, purchasable upon exercise of each Warrant and the Exercise Price after giving effect to any adjustment which will be required as a result of such action.
6) Valuation
1) Assign a probability to a favorable court outcome and weigh the corresponding payoff. If we assume 33% probability, the payoff becomes .33 X $2.26 = $.75
2) Discount the cash flow over the appropriate time horizon. I am assuming a payoff upon final judgement by the court and have chosen 2 years. Although one may make the case that the appropriate discount rate is lower, I am using 20%.
$.75/ (1.2)^2 = $.52
If one were to use this methodology for valuation a price of $.52 or less since should generate a return of 20% or more. Obviously a lower price would increase the return to 20%+ (provided my assumptions concerning time horizon and payoff proved correct).
