I am not an attorney, but I have been forced over the past year or so to read up on bankrutpcy law, in order to understand the various issues that LTW holders may be facing.
For what is is worth, here is my understanding of the legal arguments that WMI's attorneys are making in WMI's 43rd Omnibus Objection to the Dime LTW Claims, and my rebuttal of those arguments.
WMI's major arguments are as follows:
1. Under the Bankruptcy Code, equity securities are not "claims" but rather "equity interests". That makes the LTWs part of the lowest priority (about the same as common stock) in a distribution, so that the chance of recovery is minimized. To support this treatment, WMI contends that under Section 101(16) of the Bankrutpcy Code, an "equity security" is:
"(C) warrant or right, other than a right to convert, to purchase, sell, or subscribe to a share, security, or interest of a kind specified in subparagraph (A) or (B) of this paragraph."
Based on this subsection (C), and the fact that in the LTW's Amended Agreement issued by WMI in March 2003, the term "entitle the Holder to purchase the number of shares of Common Stock..." is used, WMI contends that the LTWs are "equity securities".
REBUTTAL: A "purchase" may be defined as "an exchange of an asset for money or value". Under the Amended Agreement issued by WMI, the LTWs were to be "purchased" for a ZERO exercise price. Thus, following the definition of "purchase", the use of the term "purchase" in the Amended Agreement is legally incorrect and invalid. So why was this term used? Obviously, the term in the Amended Agreement was copied from the original prospectus issued by Dime Bancorp in December 2000. However, its use in that context was correct because, but in that original, the LTWs were to be purchased for an exercise price of $0.01 per share.
In essence, WMI (in March 2003) altered the LTWs from what would have clearly been an "equity security" into a "convertible security" that meets the exception in Section 101 (16C) of the Bankruptcy Code.
2. WMI also contends that, even if the LTWs do not meet the requirement to be classified as an "equity security", they should nevertheless be subordinated to WMI's unsecured creditors. They rely on Section 510(b) of the Bankruptcy Code which deals with "(A) claims arising from rescission of a purchase or sale of a security.....and (B) damages arising from the purchase or sale of a security...."
WMI makes the contention that Third Circuit case law has applied this section broadly to all kinds of circumstances involving securities.
REBUTTAL: The section of the Bankruptcy Code referred to above is clearly intended to apply to claims where sales or purchases of securities have occurred. In the case of the LTWs, no prior sale or purchase of securities issued by DIME or WMI is applicable. The original issue of the LTWs did not involve a sale -- the LTWs were issued gratis to all then existing DIME shareholders. Thanks to WMI's Amended Agreement, the LTWs are to be converted to WMI common stock in a cashless transaction, and thus no "purchase" is involved.
In summary, the case law cited by WMI is not relevant or can be distinguished from the LTW situation. So unless I am missing something in the above analysis, or unless judges have taken it upon themselves to make new laws, LTW holders should prevail on both points.
The trickier situation is what should happen now, since WMI is also reserving the right to "adjust" the claims at will (even if they lose on both points above). I don't know enough bankruptcy law to figure out what legal theory we can use to defeat that attempt. So we have to hope that the Broadbill and other equity firms who are employing attorneys to defend the LTW claims can figure out the correct legal angle to save the day for us all.
Knixx99
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