Page 1 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 ECR OPERATOR: STEPHEN GRANT B E F O R E: HON. MARY F. WALRATH U.S. BANKRUPTCY JUDGE August 24, 2011 9:35 AM U.S.

Bankruptcy Court 824 North Market Street Wilmington, Delaware - - - - - - - - - - - - - - - - - - - - -x Debtors. WASHINGTON MUTUAL, INC., ET AL., UNITED STATES BANKRUPTCY COURT DISTRICT OF DELAWARE Case No. 08-12229 (MFW) - - - - - - - - - - - - - - - - - - - - -x In the Matter of:

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Page 2 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Transcribed by: Dena Page Motion for an Order Authorizing the Official Committee of Equity Security Holders to Commence and Prosecute Certain Claims of Debtors' Estates (Filed Under Seal) Modified Sixth Amended Joint Plan of Affiliated Debtors Pursuant to Chapter 11 of the United States Bankruptcy Code

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A P P E A R A N C E S : WEIL, GOTSHAL & MANGES LLP Attorneys for Debtors BY: BRIAN ROSEN, ESQ. JOHN MASTANDO, ESQ. ADAM STROCHAK, ESQ. DIANE ENG, ESQ. KELLY DIBLASI, ESQ. (TELEPHONICALLY)

RICHARDS, LAYTON & FINGER, P.A. Attorneys for Debtors BY: MICHAEL MERCHANT, ESQ.

AKIN GUMP STRAUSS HAUER & FELD LLP Attorneys for Creditors' Committee BY: FRED HODARA, ESQ. ROBERT A. JOHNSON, ESQ. ROBERT J. BOLLER, ESQ. (TELEPHONICALLY) CHRISTOPHER W. CARTY, ESQ. (TELEPHONICALLY) BRIAN M. ROTHSCHILD, ESQ. (TELEPHONICALLY) DAVID SIMONDS, ESQ. (TELEPHONICALLY)

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Page 4 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 BY: BLANK ROME LLP Attorneys for Appaloosa, Owl Creek, Centerbridge, Aurelius TORI GUILFOYLE, ESQ. BY: ASHBY & GEDDES, P.A. Attorneys for Equity Committee BILL BOWDEN, ESQ. STACY NEWMAN, ESQ. BY: ARKIN KAPLAN & RICE LLP Attorneys for TPS consortium HOWARD KAPLAN, ESQ. JOSEPH MATTEO, ESQ. DEANA DAVIDIAN, ESQ. BY: ARENT FOX LLP Attorneys for Wilmington Trust Co. as Indenture Trustee RONNI ARNOLD, ESQ. JEFFREY ROTHLEDER, ESQ. (TELEPHONICALLY)

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BROWN RUDNICK Attorneys for TPS consortium BY: ROBERT J. STARK, ESQ. JEREMY B. COFFEY, ESQ. MARTIN S. SIEGEL, ESQ.

CAMPBELL & LEVINE, LLC Attorneys for TPS consortium BY: MARK T. HURFORD, ESQ.

DAY PITNEY, LLP Attorneys for KeyStone Holdings Partners BY: JAMES J. TANCREDI, ESQ. (TELEPHONICALLY)

DLA PIPER Attorneys for FDIC BY: THOMAS R. CALIFANO, ESQ.

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FOX ROTHSCHILD LLP Attorneys for WMI Noteholders BY: JEFF SCHLERF, ESQ.

FOX ROTHSCHILD LLP Attorneys for Wells Fargo, as Indenture Trustee BY: SETH NIEDERMAN, ESQ.

FRIED, FRANK, HARRIS, SHRIVER & JACOBSON LLP Attorneys for Appaloosa, Owl Creek, Centerbridge BY: MICHAEL B. DE LEEUW, ESQ. SHANNON LOWRY NAGLE, ESQ.

GRANT & EISENHOFER P.A. Attorneys for WMB Noteholders 485 Lexington Avenue New York, NY 10017

BY:

MATTHEW P. MORRIS, ESQ.

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GREER, HERZ & ADAMS, L.L.P. Attorneys for ANICO Plaintiffs BY: JAMES ROQUEMORE, ESQ.

KING & SPALDING Attorneys for LTWS BY: ARTHUR J. STEINBERG, ESQ.

KRAMER LEVIN NAFTALIS & FRANKEL LLP Attorneys for Aurelius BY: KENNETH H. ECKSTEIN, ESQ. JEFFREY TRACHTMAN, ESQ.

LANDIS RATH & COBB LLP Attorneys for JPMorgan Chase Bank, N.A. BY: ADAM G. LANDIS, ESQ.

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LATHAM WATKINS Attorneys for Centerbridge BY: RICHARD OWENS, ESQ. MARK A. BROUDE, ESQ.

LOEB & LOEB LLP Attorneys for Wells Fargo, as Indenture Trustee BY: VADIM RUBINSTEIN, ESQ. WALTER CURCHACK, ESQ.

LOWENSTEIN SANDLER P.C. Attorneys for Securities Plaintiffs BY: IRA M. LEVEE, ESQ.

MONZACK, MERSKY, MCLAUGHLIN & BROWDER, P.A. Attorneys for Kerry Killinger BY: RACHEL B. MERSKY, ESQ.

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MORRIS JAMES LLP Attorneys for Law Debenture BY: COURTNEY HAMILTON, ESQ.

PACHULSKI STANG ZIEHL & JONES LLP Attorneys for Bond Holders Bank BY: JEREMY RICHARDS, ESQ. (TELEPHONICALLY) DEAN A. ZIEHL, ESQ. (TELEPHONICALLY)

PAUL HASTINGS LLP Attorneys for Appaloosa BY: BARRY SHER, ESQ. MARIA E. DOUVAS, ESQ.

PATTERSON BELKNAP WEBB & TYLER LLP Attorneys for Law Debenture Trust Company of NY BY: DANIEL LOWENTHAL, ESQ. CRAIG DENT, ESQ. BRIAN GUINEY, ESQ. (TELEPHONICALLY)

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Page 10 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 BY: ROSENTHAL MONHAIT & GODDESS, P.A. Attorneys for Bank of New York Mellon TED ROSENTHAL, ESQ. BY: POLSINELLI SHUGHART, P.C. Attorneys for Wilmington Trust Co. as Indenture Trust SHANTI KATONA, ESQ. BY: PILLSBURY WINTHROP SHAW PITTMAN LLP Attorneys for Bank of New York Mellon LEO CROWLEY, ESQ. MARGOT P. ERLICH, ESQ. (TELEPHONICALLY) BY: PEPPER HAMILTON LLP Attorneys for Creditors' Committee DAVID STRATTON, ESQ.

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SCHULTE ROTH & ZABEL LLP Attorneys for Owl Creek BY: ALAN GLICKMAN, ESQ. BRIAN PFEIFFER, ESQ. WILLIAM GUSMAN, JR., ESQ.

SUSMAN GODFREY LLP Attorneys for Equity Committee BY: PARKER C. FOLSE, III, ESQ. EDGAR G. SARGENT, ESQ.

SULLIVAN & CROMWELL LLP Attorneys for JPMorgan Chase Bank, N.A. BY: ROBERT A. SACKS, ESQ. BRIAN GLUECKSTEIN, ESQ. BRUCE CLARK, ESQ. (TELEPHONICALLY) HYDEE R. FELDSTEIN, ESQ. (TELEPHONICALLY) JOSHUA FRITSCH, ESQ. (TELEPHONICALLY) BRENT J. MCINTOSH, ESQ. (TELEPHONICALLY) DAVID POSSICK, ESQ. (TELEPHONICALLY)

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Page 12 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 ALSO PRESENT: MORITHIA BARR, Equity Committee Member JAMES BERG, Pro Se LAWRENCE N. CHANEN, JPMorgan Chase Bank, N.A. BRYCE FRASER, Fortress Investment Group HAL F. GOLTZ, Anchorage Advisors JOEL HAWKINS, Carval Investors JASON C. KLEIN, JPMorgan Chase Bank, N.A.
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UNITED STATES DEPARTMENT OF JUSTICE Office of the United States Trustee BY: JANE LEAMY, ESQ.

WHITE & CASE LLP Attorneys for WMI Noteholders BY: GREG STARNER, ESQ. GERARD UZZI, ESQ.

YOUNG CONAWAY STARGATT & TAYLOR, LLP Attorneys for FDIC BY: M. BLAKE CLEARY, ESQ.

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THOMAS KORSMAN, Wells Fargo Bank BEN MASON, Pro Se ANDERS MAXWELL, The Peter J. Solomon Company MICHAEL O'HARA, The Blackstone Group DANIEL PINE, Marathon Asset Management MICHAEL C. SCOTT, Venor Capital MITCHELL E. SUSSMAN, Stone Lion Capital NATE THOMA, Pro Se WILLIAM VRATTES, York Capital Management

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Page 14 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 THE COURT: MR. ROSEN: P R O C E E D I N G S Good morning. Good morning, Your Honor. Brian Rosen,

Weil, Gotshal & Manges.

I'm here with my partners, Adam

Strochak and John Mastando on behalf of Washington Mutual, Inc., the debtor. Your Honor, when we were here on August 12th, we had a brief status conference at the conclusion of the omnibus hearing, and at that time, the Court so ordered that every party who was going to be speaking for the parties would be limited in their presentation, and of course, at that time, the Court said there was no need to use the full amount that you might be allotted. The Court also asked us to try and work this out with the other parties on both a process and an order for the presentations, and we attempted to do so and we actually attempted to reach the Court with respect to that last week. In the absence of having a status conference, then, with the Court asking us to file a notice of oral argument, we did, Your Honor, last week, file a notice of oral argument and what the debtors' proposed schedule was for that oral argument. As part of that and as part of the earlier discussions last week, Your Honor, we had suggested that any outstanding issues that might be there for evidentiary or anything else that the parties would say should be included in their thirty minutes

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Page 15 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 that the Court had suggested. Your Honor, we do realize that some people have a different perspective, and that's why we suggested a status conference last week or a chamber conference. And so when we

filed the notice with the court, we put down our proposed schedule as to what we thought would be appropriate, specifically having the debtors, the committee, JPMorgan and the FDIC going first in support of a plan followed by the parties who were objectors to the plan, and also parties alleging that there would be inequitable conduct on the part of the settlement noteholders. Then that would be followed by the

four settlement noteholders making a presentation to rebut those issues that were raised by the objectors or the parties claiming that there was inequitable conduct. We also included in the notice, Your Honor, that any party who felt that they had a different perspective on the proposed schedule or felt that they wanted additional time or felt that they wanted to argue evidentiary issues separate and not include them in the thirty minutes that we thought would be appropriate, they should have an opportunity to be here and that the Court would then take guidance and lay out for the benefit of all of us prior to the commencement of the oral arguments right now what schedule the Court wanted us to follow. So Your Honor, with all that being as a predicate, we

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Page 16 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 would suggest that we go forward with the schedule as we laid it out and that everything be included in the oral argument. THE COURT: MR. ROSEN: Well, let's hear if anybody disagrees. Agreed, Your Honor, because that will

guide what I say when I start out. MR. FOLSE: Good morning, Your Honor. It's Parker Mr. We

Folse from Susman Godfrey for the equity committee.

Rosen's correct that we did not join in this schedule.

believe the more sensible way to do this and a way that's more fair is to have all of the people who want to speak in support of the plan, including the settlement noteholders, to go first, and then to have plan opponents go second. It is the burden of

the debtors to prove to the Court that the plan should be confirmed, and stacking two hours' worth of argument by the settlement noteholders at the end of the day after everyone else -- after all the plan objectors have made their arguments does not strike us as fair or reasonable. The second issue I wanted to raise, Your Honor, when we were here at the end of the plan confirmation hearing, in an effort to cooperate in developing a schedule for written closing arguments and then if the Court wanted oral closing arguments, I said that the equity committee, with respect to the motion for leave to commence an adversary case against Aurelius and Centerbridge, that we would give up our right to file a written reply to the written objections that would be

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Page 17 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 forthcoming if we would have a chance at an oral argument to give our reply orally. At that time, we didn't know how the

oral argument was going to shape up. We now see that we have thirty minutes, and Your Honor, I'm concerned that we will not do an adequate job both in addressing what we would like to discuss on plan confirmation and also reply to well over a hundred pages of oppositions to our motion for leave to commence the adversary proceeding in the thirty minutes that I have. So I would ask

the Court to do one of two things with respect to our motion, and that is either to put oral argument over to the next omnibus hearing, at which point we would give our oral reply as originally planned, or not to do that but to give us an opportunity to file a written reply sometime very soon so that we -- and we would not then address it either here or at a subsequent hearing. Your Honor. MR. KAPLAN: Good morning, Your Honor. Howard Kaplan So those are the two requests that I have,

from Arkin Kaplan & Rice.

We, on the proposed schedule, we are

listed with Brown Rudnick as a combined thirty minutes. THE COURT: MR. KAPLAN: minutes for ourself. Yes. And we request, obviously, a full thirty We don't think it's fair. I, of course,

we have an overlap in clients, but I represent separate interests. There was no overlap at the trial between what

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Page 18 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Arkin Kaplan did and what Brown Rudnick did. completely different. complex. The issues are

And frankly, Your Honor, the issues are

There was 225 pages of briefing put in by the

settlement noteholders, and as it has developed, we believe that these issues are central to this hearing. So to limit us

to ten minutes, fifteen minutes to reply to 225 pages of briefs while at the same time the settlement noteholders are being given a full two hours, and as I understand it, there will be other parties speaking on their behalf as well, so maybe they have two and a half hours, we will have ten or fifteen minutes. It's just not fair, Your Honor, so we request a full thirty minutes. THE COURT: And you share that, Mr. Stark?

Okay, Mr. Steinberg? MR. KAPLAN: Well, I -Come on up.

UNIDENTIFIED SPEAKER: MR. STEINBERG:

Your Honor, the only thing I would say

in addition to the comments that are made is that in the debtors' schedule, that there is a fifteen minutes after the end of all arguments for the debtors' special opportunity to reply. And it may be that I have nothing to reply about, but

if there's going to be a reply, it should be opened up to everybody. Otherwise, most people here thought they could rest

on their written submissions, so they should rest on their minutes of oral argument with no opportunity to reply.

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Page 19 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 MR. STARK: Real quickly, Your Honor. On the

evidentiary issues, we do have a few evidentiary issues still pending before Your Honor. The record should close before the

oral arguments start and that may require a little bit of argument, but if it does, I don't think we should be taxed for the discussion about those evidentiary issues against our thirty minutes. MR. SACKS: for JPMorgan Chase. request. hearing. Good morning, Your Honor. Robert Sacks

I rise only to object to Mr. Kaplan's

It's the same issue we had at the beginning of this They represent the same people. Mr. Kaplan

represents five of the ten groups that Mr. Stark represents. It's not a question of overlap; he represents a subset. To

give them an hour to address the issues the debtor is doing in thirty minutes to address every issue in the case is not just unfair but is burdensome to everybody. limitations on our time. We've all agreed to

It will be no different than if I

were to split the argument with Mr. Landis or somebody else and split the issues that we're addressing in the same way. They

can confine themselves to thirty minutes the way everybody else can. And the fact that they have two firms or two different

lawyers doing the argument is not a justification for the same client having double the time as everybody else. MR. ECKSTEIN: Your Honor, good morning. Thank you. Kenneth

Eckstein on behalf of Aurelius.

Briefly just responding to

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Page 20 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 some of the points that were raised by the equity committee and TPS. With respect to the order, Your Honor, as I'm sure you can anticipate, we agree with the debtor in terms of the order, but we think it actually makes sense and is consistent with the way the case, in general, was presented. The debtor has a

whole array of confirmation issues that are going to be addressed affirmatively. What the settlement noteholders are

really doing are responding to objections and allegations that have been lodged, and we are very much in the position of defending, and that was the logic for the settlement noteholders following the presentations by the equity committee and the TPS. sense. In terms of the motion to authorize, I think Mr. Folse and I both had anticipated that we were going to fold it into today's argument, and I know in my case, there's a lot of overlap. I will briefly discuss the motion to authorize So we think that the order actually does make

issues, but I think logically speaking, they're going to overlap significantly. And so to the extent possible, we would

urge that we continue to cover the issues today and if there are specific concerns with respect to that, I guess the Court can address that. And in terms of bifurcating out individual parties, I mean, many of us have views on a lot of different issues and

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Page 21 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 brief. filed pleadings that cover not just the objection to the trading issues but to other confirmation issues, and I think the burden on all of us is to try to keep it to the thirty minutes and we would urge the Court to maintain that schedule. MR. ROSEN: Your Honor, Mr. Eckstein is correct. The

way we set up the schedule was the way that the equity committee and others had agreed to conduct the confirmation which is in the three tranches or pods that we talked about. And we did view the settlement noteholders as being responsive to allegations, and that's why we put them at the end. With respect to the effort to get the additional thirty minutes, as I indicated to some people yesterday, in preparation for this, Your Honor, I feel like that man in the old FedEx commercials who has to speed talk to get through all of the issues within thirty minutes. THE COURT: Well, do you? And -Because I don't want to

hear you repeating your brief. MR. ROSEN: And Your Honor, I don't want to repeat the

And as we told you last week -THE COURT: MR. ROSEN: Yes. -- and we told you at the conclusion of

the confirmation hearing, as Mr. Folse said as well, we would have been happy not to have this day in court, Your Honor. thought -THE COURT: Then you can sit down and not say We

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Page 22 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 anything. MR. ROSEN: THE COURT: MR. ROSEN: That's nice, though, Your Honor -That's an option. -- I appreciate that, but if you're going And

to be giving it to everybody, we want our equal share.

that's the way, I think, a lot of other people view it, as well. So if you're giving people an hour to present the

arguments that other people are being forced to present in thirty minutes, we think that's inequitable. THE COURT: All right, let me rule.

Again, I don't want to hear anybody just repeating what's in their briefs. I read the briefs. I'm a long way

towards issuing a decision.

I've read the cases that the I want

parties have cited, so I'm familiar with the issues.

people to be concise and hit what they think are the main points of their arguments only. I agree with the parties; there will be no replies. Nobody should be surprised by what anybody else says. all seen their briefs; you know what their issues are. require the settlement noteholders to go first, though. They're on the side of supporting the plan as it is written, so I think they have to put their argument forward. While initially, I would have suggested that the settlement noteholders only have a half an hour for all four, I agree that there are specific issues unique to each settlement You've I will

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Page 23 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 noteholder that they want to address. But similarly, I think

that the two TPS groups have different issues they want to emphasize, and I will give each of them twenty minutes in recognition of that. I do want to hear argument on the motion to authorize by the equity committee, though. I would hope they could do it

within the half an hour that they have, but if they need additional time, I will hear them on that. Although there were

a hundred pages, I think the issues were not worthy of a hundred pages, and they do strongly or extensively overlap with the issues that I heard at the confirmation hearing. So with that, the evidentiary issues, what have you not agreed upon? MR. SIEGEL: Good morning, Your Honor. Martin Siegel

on behalf of the TPS consortium.

There are, I guess, two One of

different evidentiary issues that appear to be open.

them, frankly, we thought was not open, and that's with regard to the excerpts of the Senate report and what we believe Your Honor has ruled you would allow as a response and our motion to strike the response that was actually submitted. The second one relates to Exhibit 301B which is labeled "Waterfall Impact of Applying Contract and Federal Judgment Rate". So unless Your Honor has a preference, if I

may just first address the one we think you've already ruled on --

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Page 24 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 THE COURT: MR. SIEGEL: Okay. -- hopefully that will be shorter.

Your Honor will recall at the hearing, the TPS consortium sought to introduce the entire Senate report, and we believe in what can only be construed as a ruling, Your Honor stated you would allow the Senate report to come in, but only a ten-page excerpt. page excerpt. And the TPS consortium submitted that ten-

We don't think you should revisit -- the debtor

has sort of invited you to revisit that issue in their response to our motion to strike. We don't think that you should, and

so I'm not going to address that unless Your Honor says that you will do so. The issue, then, becomes what exactly were the parties permitted to submit and when, under your ruling, and we think it's fairly clear if you look at two separate pages of transcript from the July 21st hearing. First, it starts on

pages 296 through 299, and Your Honor states, starting on 296, "But I do agree that to the extent the issue of what is the value of those claims is an issue that I have to consider, I will allow you to give me a summary of it. And if the findings

on TPS fines are a summary of that report or if there is a short summary no longer than ten pages, I would allow that to be included as a public record." We think that is a ruling,

and while we're not going to argue law of the case, Your Honor --

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Page 25 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 should. THE COURT: MR. SIEGEL: Let me hear the response. Okay, if I may just continue just for one The issue, then, becomes our motion Instead of submitting crossTHE COURT: MR. SIEGEL: Okay. -- because we think -- we've already put

in a brief that says until a case is over, you're allowed to reconsider issues -THE COURT: MR. SIEGEL: Well, let me hear --- on this issue, I don't think you

moment more, Your Honor.

to strike what they did submit.

designations from that transcript, they put in some pleadings in a case brought by the FDIC against officers and directors of the bank. And we don't think that that's not only within your

ruling, but because your ruling was fairly clear -- and if I can quote you from 298, Mr. Coffey stated, "Your Honor, might I suggest that if Mr. Rosen has a problem with what we submit, perhaps he should submit a counterdesignation of things he think are relevant." And then you stated, "From the report."

Mr. Rosen then got up and said, "That's the problem, Your Honor. The report didn't look at the difficulties And then we think Your Honor

associated with the claims."

ruled when you said, "Then you can save that for argument." And again on the same page, page 299, you stated, "I don't know what you're going to put into the record. I'm

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Page 26 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 allowing them to put this in," and you continue, "the findings of this report to the extent it doesn't exceed ten pages." Mr. Rosen's, although he interrupted that, "We think that that's a clear ruling." And again on page 333, Your Honor, when Mr. Stark stated -- I'm sorry it was in the context of Mr. Rosen stated, "You said they could put in their excerpts and we could do the same?" you then stated in response to Mr. Stark's comment, Mr. Stark stated, "Your Honor, I guess we could do that; I really don't have a problem. To me, it comes down to the fact that And

we're going to take some quotes out of a report and put it before Your Honor. They should take some quotes that they Your Honor then

think they like and put it before Your Honor." stated, "Right."

So we think that the fact that Mr. Rosen said, well, Judge, we might want to consider some other pleadings and some other things, we believe that you've already ruled that to the extent that they want to submit any of those things, they should save it for argument and put it in in that context. I'll save my remarks as to if you do visit that ruling, why it's improper. THE COURT: MR. SIEGEL: MR. STROCHAK: Thank you. Thank you. Good morning, Your Honor. Adam

Strochak, Weil, Gotshal & Manges for the debtors.

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Page 27 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 We're certainly not seeking to reargue the evidentiary ruling the Court made. The Court determined that it would

admit excerpts of the PSI report for the purposes that the Trust Preferred Consortium asked for them, that is, as a data point in assessing what value, if any, those claims might have. We made it very clear on the record at the confirmation hearing that we thought, under the circumstances, where this evidence was offered on the last day of the confirmation hearing with no notice to us, with no inclusion of this document, the PSI report on the parties' exhibit list prior to the confirmation hearing, that we thought that we were going to need to put something additional into the record to respond to it, and that was the motions to dismiss the claims that have, in fact, been brought by the FDIC. So we offered that in our response, we

offered some argument in our response, asserting why we believe that the admission of this document, this report from a Congressional investigatory committee required additional information to put it in context for the purpose that was being offered. And of course, it was met with the motion to strike So for the reasons we stated on the record,

what we had filed.

at the confirmation hearing, we think the Court should take judicial notice of the fact that the defendants have, in fact, under the standards applicable, under Rule 11, have, in fact, moved to dismiss as a matter of law the claims that have been asserted. It's one more data point. It puts in context the

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Page 28 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 information that the Trust Preferred Consortium is asking the Court to recognize for purposes of assessing these claims. I think that's all I need to say on that point, Your Honor. Mr. Siegel did not argue the Exhibit 301. I don't And

know if he intended to offer additional argument on that point. I can speak to that now. THE COURT: Yes, he does.

Well, I'm not inclined to -- I am inclined to grant the motion to strike. closed the record. considered. MR. STROCHAK: Thank you, Your Honor. I don't think it's appropriate. We

I don't think it's necessary to be

Is counsel going to address -THE COURT: Yes, he's going to --- Exhibit 301?

MR. STROCHAK: THE COURT: MR. SIEGEL:

Yes. Thank you, Your Honor. Exhibit 301B is

on a different footing.

You'll recall, Your Honor, that there 301A which was the period

were two issues that were raised.

for bringing up for a further period the federal judgment rate, apparently there is no objection. 301B came about, Your Honor, because, fortunately because of a comment Your Honor made during our attempt to introduce an earlier version or a version of that same chart through Mr. Maxwell, that it would be helpful to have a chart

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Page 29 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 and not testimony of a witness. So we prepared a chart. And

it's admissible, in our view, before I get to the objections which, at best, go to the weight of the document, because it's a summary of matters that are already in evidence. Since

there's no objection to 301A, you have in evidence the federal judgment rate, and you also have in evidence Mr. Goulding's declaration, the waterfall analysis that's attached to that, even some portions of his testimony, and what was done was taking those facts that are in evidence and applying the same procedures as set forth in the chart. So we think that before

we get to arguments that go to the weight of the document, we should be permitted to put in a chart, pursuant to a couple of Rules Of Federal Evidence, 611 and 1006; both permit the inclusion of charts or other matters that will be helpful to the Court's consideration. Now we get to the objections. And they don't directly

deal with the fact that the chart is just a summary of matters that are already in evidence. objections. There are basically five And that

The first is that there was no notice.

day was kind of hectic, Your Honor. everybody.

We thought we had notified

We had given a copy of the chart to the debtor; we

thought we had handed it out to everybody, and the creditors' committee said that they didn't know what the chart was. If

anything, it was because of the hectic nature of the last day of the hearings. Certainly, we intended to hand the chart to

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Page 30 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 everybody. The second issue, which we find somewhat ironic, is they object because we didn't have a witness. Well, we tried

to have a witness; we sought to have Mr. Maxwell testify to it. They objected, and the Court said instead of having a witness, it would be more helpful to have a chart. That's what we did;

we don't think the Court should take the fact that we then didn't recall Mr. Maxwell or have another witness as anything since it's of the debtors' own making that we didn't have a witness. The third, and perhaps what goes to the substance of the issue here is they argue that the chart's prejudicial and misleading because it doesn't deal with -- it doesn't show the effect of contractual subordination. And that's because there

are legal arguments before Your Honor about how you should apply contractual subordination and there already is evidence in the record based on Mr. Goulding's initial chart in which he did apply contractual subordination. So we think in order for

the Court to understand the effect of the arguments that are made in the briefs, our objection that you can't apply contractual subordinations the way they're doing it, the chart just takes that evidence and shows you what would happen if you ruled on the legal points that we say that you have to apply -the federal judgment rate, they don't get a double dip on subordination, and the federal judgment rate should be applied

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Page 31 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 as of the confirmation date. And I might add, the argument about prejudicial should fall on deaf ears because we didn't just show the numbers that we think should be applied. We showed what would happen if the

contract rate of interest was applied, what happened if it's the federal judgment rate as of the date of the petition, and what happens if it's the federal judgment rate as of confirmation. And we think -- there's no jury here -- Your

Honor is perfectly capable of understanding the arguments that they've made in their presentation, and that doesn't make our chart prejudicial because we don't include everything that they want Your Honor to find. The next issue is that it's hearsay. Well, Your

Honor, we don't believe it's hearsay because it's based on evidence that's already in the record, and if I may quote you from -- we cited in our brief which you said you read Weinstein, Corn & Miller which clearly says in response to objections that a chart's hearsay, it's not hearsay if the evidence upon which the chart is based is already on the record. And then last, the creditors' committee only makes three additional arguments. rate is not at issue. One, that the federal judgment

Well, Your Honor's January opinion we And certainly, there was lots of

think has a different view.

evidence as to what the federal judgment rate -- whether it

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Page 32 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 should be applied, and if so, what rate. Two, that they argue that the federal judgment rate, if you consider it at all, it should be only as a petition date. That's a matter of law, and I think the briefs It certainly doesn't go to the

adequately address that.

admissibility of our chart. And third, they say that it doesn't give any effect to class 18 subordinated creditors. And Your Honor, I refer you

to page 296 of the transcript which Mr. Coffey already addressed that argument, one, in their thirty-second objection to claims, they said that those claims are worthless, and then the debtor made a -- in their motion to estimate, they said you should estimate those claims at zero. So at prior times during

this case, Your Honor, the debtor has said that those claims in class 18 are worthless. Now, when it comes time to determine

whether there could be value or would be value to the TPS, they've now given it value. I think just putting it in that

context tells you all you need to know about that argument. Thank you very much, Your Honor. THE COURT: MR. SIEGEL: Thank you. Oh, just one more point. Because of the

time limitations imposed and how you're ruling today, there was an alternate suggestion is that we didn't need it in evidence because we could just argue it, do it during closing arguments. Given the time constraints, Your Honor, we think --

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Page 33 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Honor. I need to do a little brief windup, here, just to put this in context, these arguments. Before the confirmation THE COURT: MR. SIEGEL: Okay. -- the chart would be much better served Thank you.

with having you look at it in the record. MR. STROCHAK:

Adam Strochak for the debtors, Your

hearing started, we had a call with counsel for all the objectors to go over and see if we could reach agreements on what evidence would be stipulated to be introduced at the confirmation hearing. The response that we got from the equity

committee and the objectors was that they would not stipulate to admission of any document; they would insist on a proper foundation at the trial through testimony before they would agree to the admission of any documents. And we proceeded with

the confirmation hearing with the understanding that's exactly what we would do. of our evidence. The Trust Preferred Consortium did not offer any liquidation analysis to us. exhibit list. There was no exhibit on their And we tried to do that with respect to all

They offered no expert testimony on this issue. What they did at

They proffered no witness on this testimony.

the trial was try to use the equity committee's expert, Mr. Maxwell, who was proffered as an expert on other issues who did not include any liquidation analysis in his report and who we

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Page 34 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 did not have an opportunity to depose on his preparation of a liquidation analysis or a waterfall analysis. They tried to

offer that, I believe, on redirect on Mr. Maxwell's testimony, and my partner, Mr. Mastando, rose to object on exactly those grounds. And Your Honor suggested that if this was a simple

matter of math, that an exhibit could be submitted doing the calculation. And what we eventually got was Exhibit 301B. So the

notice issue, Your Honor, goes away because it's the debtors and the plan proponents who had no notice that this was going to be offered in this case. The idea that there was no witness, we're not trying to have it both ways, Your Honor, precluding the witness from testifying about it and then suggesting that it should not be admitted because there was no foundation. The problem, Your

Honor, is that we didn't have any opportunity to even prepare to examine the witness on this document. So it's not that they

failed to offer a witness; it's they failed to offer a witness who would have complied with the necessary pre-trial disclosures in order to make it fair for us to cross-examine and explore what was going on in this calculation. The contractual subordination argument, Your Honor, is a red herring. I wish that all I had to do was file an

objection in order to eliminate what we believe to be billions of dollars of improper claims against the estate. I don't get

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Page 35 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 to make those decisions. I get to make the objection and Your And until those decisions

Honor gets to make those decisions.

are made, until those claims are adjudicated on the merits or otherwise disallowed on the merits, we don't have the luxury of simply ignoring them. And that completely makes the Not the

contractual subordination claims argument go away.

contractual subordination; the class 18 subordinated claims. On the contractual subordination issue, it really becomes a relevance issue. The exhibit that they have offered

complete ignores contractual subordination, and it's not simply a summary of evidence. It is argument; the arguing with this

document that contractual subordination should be ignored. Now, they can make those legal arguments, but what it really becomes is a relevance issue. It becomes a 402 issue because

Section 510(a) of the Code tells the Court that we can't simply ignore contractual subordination. So they've ignored Section

501(a) of the Code and offered an exhibit into evidence that they are going to try and use to argue shows that there should be 280 million dollars of excess value of the federal judgment rate, as they suggest, should be used. Now, we think it's wrong for all the reasons that we've laid out in our brief, but the real prejudice here, the real harm in admitting this document into evidence is not that Your Honor's going to get it wrong. It's that they're going to

point to it in some appellate tribunal if this case ever makes

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Page 36 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 it there, and they're going to say to the appellate tribunal, look, there was record evidence that if you apply the federal judgment rate there would have been 280 million dollars of value left to go to their constituents. And that would be And

categorically wrong to be able to make that argument.

that's why this document should not be admitted into evidence, because it's not a proper summary of the evidence that's in the record. It's argument. And if they want to use it as a

demonstrative, we don't have any objection to that, and make their arguments from it and use it to illustrate their point to the Court that Section 510(a) of the Code should be completely ignored. But it should not be admitted as record evidence of

these proceedings. Thank you, Your Honor. THE COURT: MR. JOHNSON: Thank you. Your Honor, Robert Johnson from Akin We also filed an

Gump on behalf of the creditors' committee.

objection, and Mr. Strochak has already gone through the same arguments that we have. We join in that objection. We believe It is

that this document is misleading. not relevant.

It contains hearsay.

And also the TPS consortium is just wrong with

respect to Rule 1006; this chart is not a summary of voluminous writings which cannot be conveniently examined in court. argument and it should be excluded. THE COURT: Thank you. I do agree that it at It is

Well, let me rule.

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Page 37 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 most is admissible as a demonstrative only to assist the Court to consider, in the event that I determine that contractual subordination is not applicable, what the effect may be. I'll let the parties argue that. All right? MR. ROSEN: Gotshal & Manges. Your Honor, how did we get here? Almost a year ago, Shall we start the argument? Your Honor, again, Brian Rosen, Weil, And

the debtors filed this sixth amended plan, Your Honor, and that was premised upon the initial global settlement agreement which was an agreement among the debtors, JPMorgan, FDIC, the creditors' committee, and certain constituencies, and that was settling many claims and causes of action among the parties. We had a confirmation hearing last December, and on January 7th of this year, the Court ruled that that initial global settlement agreement was fair and reasonable in the best interest of the debtors and the debtors' estates, and that the Court identified certain modifications that would be required before the Court would confirm the sixth amended plan. We followed that up, Your Honor, with a status conference on January 20th, wherein the Court stated very clearly that the findings in the opinion and the determinations constituted the law of the case and were not subject to relitigation or reconsideration, and we discussed very briefly at that time the issues or provisions associated with the plan

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Page 38 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Honor? that the Court had identified in the opinion. The debtors, on February 8th, filed the modified sixth amended plan and attached to it, Your Honor, the second amended and restated global settlement agreement which contained all the substantive economic points that the Court had originally found to be fair and reasonable, and it also provided modifications to that settlement agreement and to the plan consistent with the opinion and as laid out by the Court at the January 20th status conference. We looked at it, Your Honor, and we saw nine issues. On the slide in front of the Court right now are three of them: releases, injunctions, and exculpation. And on the right side,

Your Honor, is a detail going through how they were addressed in the plan and to the extent necessary, in the global settlement agreement. The next slide, Your Honor, talks about the six remaining issues: the rate of post-petition interest, Dime

warrants classification, a rights offering, stock elections, post-confirmation process, and the payment of fees. And again,

on the right side, Your Honor, it lays out how the modified plan addressed each and every one of these points consistent with the opinion and consistent with the January 20th status conference. So what does the modified plan actually do, Your It is a waterfall, plain and simple. And it provides

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Page 39 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 for the distribution of assets that are already in the estate and those assets that are going to come to the estate as part of the global settlement agreement. And consistent with the

testimony and the evidence before the Court, it provides for how that money is going to go through the waterfall and then get paid back up pursuant to the contractual subordination provisions. And unfortunately, as we lay out here, Your Honor,

the debtors project, based upon the claims and the assets, that the waterfall is going to run out of water somewhere in the PIERS level. The Court's determination, Your Honor, about the global settlement agreement being fair and reasonable is not subject to relitigation. It was the law of the case, it is the

law of the case, and in fact, the equity committee's counsel stood up here and said, yes, Your Honor, I agree, it's the law of the case and we're not going to relitigate it. January 20th. That was on

So now, Your Honor, the equity committee

attempts to avoid this bar by arguing that it's merely asserting an objection to the good-faith proposal of the modified plan, but that is foiled, Your Honor, by the equity committee's focus in large part on the allegations surrounding the negotiation of the global settlement agreement itself. There is no new evidence the global settlement agreement, Your Honor. Everything that the Court is being

asked to look at here, it's the same information, the same

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Page 40 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 documents, the same arguments that were raised in the December confirmation hearing, talked about as part of the opinion, or could have been raised at the December confirmation hearing and not by the equity committee. The fact that the settlement noteholders were involved in the negotiation was known, and in fact, they're signatories to the global settlement agreement. access to the depository. The equity committee had

And in fact, many of the things that

they sought to introduce and did introduce here in the July confirmation hearing, they actually brought up and used in the December confirmation hearing. The conspiracy hearing about

how the debtors and the settlement noteholders stopped when they thought there was an appropriate level of recovery and didn't try to get a distribution down to equity was repeatedly addressed at that first one and rejected, Your Honor. Likewise, the conflict of interest issue was rejected. The two other issues on this slide, Your Honor, about ANICO and the PSI report, we don't believe have any relevance to what we're talking about here today, Your Honor. But what happens, Your Honor? that satisfies 1129. We have a modified plan

And in fact, most of the provisions were

uncontested, and as to the balance, Your Honor, we believe that they are easily overcome. On this chart, Your Honor, you see

all of the provisions of 1129 that were not contested at the confirmation hearing, and I won't go through them. The

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Page 41 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 modified plan, however, as to those that were contested, it satisfies 1122 as to the classification of claims and 1123 as to the content of a plan. And 1122 is clearly evidenced by --

and largely uncontested, and that was set forth in the Goulding declaration. For some reasons, Your Honor, we find that the

Dime warrant holders, they're clinging to this theory, though, that the PIERS claims are not properly classified. understand it, Your Honor. We can't

In March, when we were here for the

disclosure statement hearing, we put forth in the record at that time all of the evidence associated with it. We did it

again to show that they were, in fact, debt and not equity claims. But yet again, Your Honor, what we have here, the

PIERS claims, their holders, they own preferred securities in a trust. The only issue that was outstanding in the Court's opinion, Your Honor, was whether or not there had been a merger of the trust and WMI. We came forth here, Your Honor, and we

showed that the trust is, in fact, a separate legal entity and has never been merged into WMI. And WMI guaranteed payment to

the holders of the PIERS preferred securities. Your Honor, this was a demonstrative that we used at court to show that, in fact, the corporate and capital structure here, to show the separateness of the two entities. And this was another demonstrative, Your Honor, that we put out there that clearly shows that these PIERS claims have always

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Page 42 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 been set forth as debt on the books of WMI. There's been an allegation, Your Honor, about there's -- no value -- there's been an argument about the warrant component and no value is being distributed to those preferred holders, Your Honor, on account of the warrant component. And in fact, there was a statement about OID, and

again, Your Honor, that was just wrong and a misrepresentation to the Court. There is no -- it does not represent a return on And the distribution to

account of the warrant component.

holders of the PIERS preferred securities of value that's otherwise distributable to WMI as the PIERS common is consistent with 510(a) and it would result, anyway, if such funds were instead cycled through the waterfall that we showed you earlier, Your Honor. 1129(a)(1), Your Honor, the modified plan clearly -it complies with other applicable provisions. 1123 is The

supported by the evidence and is largely uncontested.

releasing stock collections, they do not violate the same treatment requirement because people had the opportunity, the option, and in fact, as note here in the middle bullet, Your Honor, the Court so found that in the opinion at page 85. Likewise, the provision of additional distributions by JPMorgan to the holders of the REIT series was something that the Court already addressed in the opinion, and it found that it did not violate 1123(a)(4).

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Page 43 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Your Honor, good faith requires some relation between the Chapter 11 plan and the reorganization-related purposes of Chapter 11. The modified plan achieves that. It achieves a

reorganization of the debtors and an equitable distribution of value to stakeholders based upon their respective priorities through implementation of the arm's-length provisions of the global settlement agreement. Your Honor, there's been allegations here that the debtors have permitted a lot of people inside the tent unnecessarily or unjustifiably, but those allegations, obviously, are being made without really thinking about what Congress intended and what we're supposed to do. We are

supposed to be getting as many people involved in the resolution process. We're supposed to get people involved in We're supposed to do that, Your The concepts are

the negotiation of a plan. Honor.

Congress said that; it's set forth.

in the plan.

Multiple stakeholders, not just the settlement The

noteholders have participated in the negotiations.

creditors' committee and other parties took part in the process. There has been no evidence to support this bald

assertion that the creditors' committee was dominated by the settlement noteholders. The people on the committee represent

many different people, not just the settlement noteholders, and they have a fiduciary duty to all unsecured creditors. Mr. Kosturos testified, Your Honor, that the

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Page 44 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 settlement noteholders did not dominate the negotiations and, in fact, were excluded many times from the negotiation process. The debtors negotiated to achieve the maximum recovery for all stakeholders, but the debtors were never required to reject the settlement because it did not reach all the way down to the equity holders. the opinion. Again, the opinion, Your Honor. The settlement was And in fact, the Court made that finding in

reasonable and it confirms the debtors' decision that the settlement was made in good faith. The debtors, in conjunction

with the creditors' committee -- there's been some talk about the preservation of claims and causes of action. The debtors,

in conjunction with the two committees, equity and the creditors' committee, have sought to preserve the claims that they believe have value for the estate. Additionally, Your Honor, we have the argument about not doing something with respect to WMMRC, although currently in run-off mode, Your Honor, the business of the reorganized debtors after the effective date is the determination of that new board. It is not something that we can do, Your Honor.

And if they remain in run-off because the reorganized debtors continue to engage, even though they remain in run-off, Your Honor, or if they do, because the debtors will continue to engage in business after the consummation, the reorganization is legitimate.

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Page 45 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 With respect to the best interest test, Your Honor, regardless of which interest rate is applied to the postpetition claims, based upon the delay, expense, and loss value that would result from the conversion of these cases, recoveries in a Chapter 7 liquidation would be significantly less than those available pursuant to the plan, except with respect to those stakeholders who would receive nothing in either scenario. There've been some allegations, Your Honor, which we believe are just completely meritless. The Dime warrant

holders presented no evidence to the contrary regarding the value of WMMRC, and they misconstrued what the debtor said the value was. And contrary to their arguments, there was full

disclosure of the tax implications about the liquidating trust structure. Likewise, Your Honor, contrary to arguments made,

there was complete disclosure in the disclosure statement itself about the agreement that had been reached with the bank bondholders on the 335 million dollar agreement. With respect to litigation recoveries, Your Honor, there was testimony about that, but as the law clearly points out, litigation recoveries are speculative and may be excluded from liquidation analyses, especially when they're going to exist in both the 7 and 11 situation. It's the debtors' view,

Your Honor, that interest at the contract rate satisfies the best interest test. As the Court decided or stated in its

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Page 46 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 opinion on pages 92 to 94, payment of the post-petition interest at the federal judgment rate is appropriate only if the parties engage in equitable conduct or it is warranted based upon the equities of the case. Your Honor, we don't see

any reason in this situation why there is -- we haven't found any inequitable conduct; we don't think the testimony shows that there was any inequitable conduct. And the parties'

attempts to construe the applicable otherwise with respect to Coram and the other decisions is unconvincing. Your Honor, as we clearly laid out, there were five periods of negotiation. The commencement date to March 9, the

first confidentiality period, the summer of '09, the November confidentiality period, and then the post confidentiality period, the essential 12/31 through 2010 period. There is no

dispute the debtors did not share any nonpublic information with settlement noteholders in the first or third periods. They did share nonpublic information during the two confidentiality periods, and they did not share any nonpublic information during the last period before a deal was struck with JPM, the FDIC, and the bank bondholders and publicly disclosed. The debtors entered into a confidentiality agreement with counsel to the settlement noteholders, Your Honor. There's no debate about that. These agreements required shared

information to be kept confidential and not shared with anyone

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Page 47 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 who did not agree to a similar confidentiality agreement. debtors were free to share every bit of information, documentation with those parties, and the debtors have seen nothing, and no one has presented any evidence that such confidentiality agreements with Fried Frank, with White & Case, or with any other party that had one executed was breached by any of those counsel. The debtors required the settlement The

noteholders to enter into confidentiality agreements as a condition to participation in settlement negotiations. Indeed,

Your Honor, the debtors refused to share nonpublic information with settlement noteholders with them or anyone else absent a confidentiality agreement. And we talked on the record, Your

Honor, about three particular instances, and these clearly illustrate how the debtors regarded about this. The May 6th, '09 meeting between Quinn Emanuel, the debtors, their counsel, settlement noteholders and others, it began the meeting by indicating that no nonpublic information would be shared. And none was shared. In fact, the meeting

turned, Your Honor, with the settlement noteholders saying the problems that they had with the process and sharing their litigation strategy. The debtors provided nothing.

At a January 12th, 2010 meeting between the debtors, their counsel, Fried Frank, and the settlement noteholders, counsel to the debtors again indicated no nonpublic info would be shared, and none was.

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Page 48 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 A subsequent meeting in February, the same thing. The

agenda was put forth here as an exhibit, Your Honor, and it was talked about how the debtors, in response by e-mail, said we're not going to talk about those things. If you want to talk

about them, it's going to be outside the earshot of your clients, and in fact, that's what happened. Clients were

excused from the meeting, and a subsequent conversation was held with counsel who were subject to a confidentiality agreement. About materiality, Your Honor, because that's an argument that they're making to try to get around the fact that there's no breach. The debtors and JPMorgan were hundreds of All of the

millions if not billions of dollars apart.

participants in the negotiations agree that as of the end of '09, they were very far apart. And we have some testimony here

that was cited, Your Honor, that says that there was no semblance of a deal. far apart. There were no active terms. They were so

And in fact, at that point in time, Your Honor, the

FDIC and the bank bondholders were not even involved, and as Mr. Kosturos testified, without them and based upon where the negotiations were with JPMorgan, there couldn't be an agreement. These slides, Your Honor, just go through the March confidentiality agreement, and they show how at the expiration of those periods, not only were they very far apart, but

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Page 49 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 JPMorgan filed the lawsuit and they were actively litigating the very issues. In November, Your Honor, the same issue. And the final

Very far apart; resetting the bookends.

proposals made during this period illustrated that while the gap may have been narrowed, they were still billions of dollars apart, and the FDIC and the bank bondholders were not there. Your Honor, the settlement negotiations were not material, nonpublic information. The information is material

only if there's a substantial likelihood that a reasonable investor would consider it important in making an investment decision. And it's important to note, and as we say it here in

the bottom point, Your Honor, neither the equity committee nor the TPS consortium cite a single case holding the back and forth of settlement negotiations to be material for the purposes of Rule 10(b)(5), and for good reason. A rule

requiring companies to disclose interim settlement offers, especially when the parties are far apart in negotiations, would lead to uncertainty for companies and confusion for investors. Your Honor, the cases cited by the TPS consortium in this regard, Dunning v. Bush, is just wrong. these negotiations were never -THE COURT: Well, I think the rule would not be that But the question And in fact,

you have to disclose settlement negotiations.

would be, if some investors have that information, is that

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Page 50 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 material. That's the 10(b)(5) issue, isn't it? MR. ROSEN: Your Honor, we think that based upon the

distance between them, the fact that they had information that showed that the parties were so far apart makes it immaterial. THE COURT: But you said generally. Companies are

not required to disclose settlement negotiations and that it would -MR. ROSEN: I was stating a general rule, Your Honor,

yes, but in this particular situation, because the parties were so far apart, it was immaterial. Honor. THE COURT: MR. ROSEN: Okay. The Dunning v. Bush case, Your Honor, we That is our point, Your

believe is inappropriate because in that case, it talked about drawing to a conclusion, and here, Your Honor, as we say, these were nowhere near conclusion. Not only were they billions of

dollars apart, we didn't even have the right parties at the table. It wasn't square. It wasn't triangular. We didn't Not enough

know what shape the table should be, Your Honor. people were there.

This is a little bit more of the same, Your Honor, because it shows how the parties were not anywhere near a resolution. And the parties, or at least the equity committee,

attempts to say that you use the word "agreed", you used "agreement". Well, Your Honor, that just wasn't the case. And

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Page 51 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 left, so. the testimony was so clear and Mr. Kosturos says it and we cite it there, Your Honor, that the testimony showed that an agreement on any single issue was contingent upon reaching a global agreement on all issues. And the parties were free to

change the positions at any particular time, and in fact, they did do that. Your Honor, we point out here how the equity committee really played fast and loose with the evidence that the Court had. First, as we say here, Your Honor, the committee in their

brief says, "While giving lip service to the goal and duty to advance the interest of all, the debtors, in fact, abandon the interest of WMI shareholders allowing these key creditors who had amassed blocking positions and impaired classes of junior debt to drive the settlement negotiations far enough to achieve the returns they sought on those securities but not far enough to achieve recovery for equity." That's really interesting,

Your Honor, because as Mr. Kosturos testified, the settlement noteholders went way beyond where the debtor was even prepared to go with the first offer to JPMorgan. So if they were

looking to hold themselves back and to a limited recovery, why did they go so far beyond what the debtor was willing to achieve? Similarly, Your Honor -THE COURT: I want to point out, you have ten minutes

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Page 52 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 MR. ROSEN: lot later on. THE COURT: MR. ROSEN: Okay. Your Honor, the equity committee's Thank you, Your Honor. I'll be skipping a

assertions about how the settlement noteholders controlled only to cover -- excuse me -- a JPMorgan e-mail about what decisions were -- or where they were going to come out on certain issues, that's belied by the actual evidence there. JPMorgan filed a

complaint against the debtors claiming that it owned everything. The global settlement was entered into on terms

far different from those in March 18th, 2009. They talk, again, Your Honor, about an e-mail and they assert that the debtors, themselves, have concluded about certain information being material and nonpublic; that wasn't the case at all. was confidential. The e-mail merely suggested that information No document or testimony stated that the And the

debtors thought that the information was material.

only evidence is that the debtors thought exactly the opposite. As we cite Mr. Kosturos' testimony, the debtor and its advisors and attorneys determined that there was no additional material, nonpublic info that needed to be disclosed. Your Honor, there was no fiduciary obligation imputed to the settlement noteholders by virtue of their participation. And the fact that the debtors gave them information does not, in itself, create a fiduciary relationship. The settlement

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Page 53 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 noteholders were included in the negotiations because they held significant portions of the WMI debt, not because they were viewed as representing any other creditors. And the settlement

noteholders participated in discussions in addition to and not instead of the creditors' committee. And as we said before,

Your Honor, sometimes they were excluded. The equities of the case, Your Honor, warrant application of the contract rate. There've been years and

years of delay, here, and in fact, delay not caused by the debtors or the settlement noteholders, and the estate, in fact, has been improved by their participation and the creditors' committee participation, other creditors' constituencies' participation. The application of the judgment rate would

cause unintended consequences, including, as the evidence showed, increasing recoveries for the PIERS but diminishing recoveries for general unsecured creditors. And it's not

appropriate to use that rate as a mechanism to make things more fair for shareholders who took a known risk when they purchased the stock that they would be subordinated to all debt claims. And very importantly, Your Honor, as Mr. Goulding testified to, even if the judgment rate were applied, there would still be a shortfall of ninety to a hundred million dollars. The PIERS claims, Your Honor, likewise, are that holders are receiving more than payment in full. Your Honor,

here, the modified plan provides for the trickle-down effect.

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Page 54 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 It provides for the valuation of stock reducing recoveries on a dollar-for-dollar basis. There is no grossing up.

With respect to class 18, Your Honor, we heard it very briefly at the outset of today's arguments; they can't be ignored. There are claims. And while we hope that they will And in fact,

be zero, as Mr. Strochak said, we can't be sure.

somebody who's going to stand up later on today is going to be asserting that he has two billion dollars' worth of claims against the estate for bank bondholder subordination claims. They haven't been litigated; we don't know what they are. But

it's irrelevant, Your Honor, because pursuant to the plan, any excess value will flow down, whether to preferred or to the common equity holders, Your Honor. We've talked about this already, Your Honor. Court found that the class 19 treatment did not violate anything. With respect to the cramdown provisions, Your Honor, we believe that the plan satisfies each and every one of those. And this is the part that I really think it's more of a sideshow, and as I said to some other folks, it's almost like the carny act at the sideshow because people are trying to make a lot about the valuation associated with WMMRC when it really has no effect on the plan itself. People can talk about it as The

an objection, but as I said, Your Honor, based upon the dollarfor-dollar reduction of claims based upon the value for

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Page 55 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 reorganized debtors' stock, it doesn't really matter. This slide merely talks about, Your Honor, what WMMRC was, and the Court knows about it very well. And this slide, Your Honor, is something else -- this was the Blackstone valuation summary. And why do I say that? It's not in dispute.

Because on the next slide, Your Honor, Mr. Maxwell agreed that the Court

we go through Mr. Maxwell.

should value the stock consistent with the Blackstone numbers. He agreed with the Blackstone analysis, as to the value of the run-off business. His report is not meant to challenge the And contrary to the

debtors or the Blackstone valuation.

equity committee's assertion, Mr. Maxwell did not believe that Blackstone undervalued reorg WMI. Again, however, we have the fast and loose or the misrepresentations, Your Honor. it should be valued at 275. The equity committee said that 130 to 135.

Mr. Maxwell said no.

Mr. Maxwell testified he did not perform a conventional valuation. He admitted his critique is not a valuation He said that he did not perform a He admitted that if he were doing a

normally relied upon. valuation of WMMRC.

valuation report, it would have been done with a little bit more due diligence than he did. He admitted that the debt and

equity raised is just a scenario and cannot tell the Court the likelihood of raising the debt or equity. So what does the equity committee do? They say that

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Page 56 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Mr. Maxwell's assumptions are far from speculative. does Mr. Maxwell say? He postulates scenarios. But what

He speculates.

He agreed that his scenario is creating a whole new business and taking credit for the value he assumes could be created. Again, they then go off on the NOLs, Your Honor, that they should be valued at 358. What does Mr. Maxwell do? He

testifies it's not his expert opinion that the NOLs have values that are discussed in his critique. value the NOLs separately. He admits that he didn't

And there was no confirmation And Owl Creek

testimony that the NOL will be fully utilized.

testified that it wasn't sure that you could even use the NOL at all. Thus, Mr. Maxwell simply assumes a significant And, of course, Your

investment of at least a billion dollars.

Honor, when we -- he doesn't know, as we say on this slide, slide 46, that there's anybody out there who would ever do that. And in fact, the people who he thinks would do it

because they have the means to do it, the settlement noteholders, we cite two of them right here, he says they don't even want it. the stock. What does Mr. Maxwell really do? of cards, Your Honor. He creates a house They don't even want to invest; they won't do

Although he cannot assess the likelihood

that any of his assumptions will be realized, Mr. Maxwell baselessly assumes that reorganized WMI is transformed into a going concern; that a debt raise of -- there will be a debt

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Page 57 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 raise of 160 million dollars; that there would be an equity raise of 140 million dollars with an additional debt raise of fifty-six million dollars; that a 15.8 to twenty percent after tax return would be employed; a six percent cost of debt would be used; a substantial additional investment of at least a billion dollars. He assumes that reorganized WMI will generate He

sufficient income to fully utilize a 2.725 billion NOL.

assumes there's a better and materially different rosy future ten years down the road. He assumes an immediate He assumes that there

implementation of his scenario on day 1.

are no costs associated with converting reorg WMI into a going concern. He assumes that there are no execution risks. He

assumes that there's no tax risk under 269 of the Internal Revenue Code. falls. All of his assumptions, Your Honor, do this: it

This is a house of cards and there's nothing to support

all of the assumptions that he had in his document or that he said on the witness stand. Your Honor, there's a lot that we talked about in our pleading about the corporate opportunity involving the NOL. And we think, of course, that the testimony by Mr. Zelin and Mr. Reinhold got it right. And all of the characterizations by

the equity committee are merely efforts to diffuse what really was correct. And I don't want to belabor the point, Your

Honor, but really what happens here is that they didn't want to look at 269. There was a lot of testimony about it. And what

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Page 58 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 I think. MR. ROSEN: Okay. Your Honor, I was going to touch I'd like to do is just talk very briefly about Mr. Anderson. Mr. Anderson, the other actor in the Carney show, he conceded that he looked at the documents involving the initial acquisition of control under the modified plan. he did his work, he didn't do anything with them. nah. The initial acquisition, that's not relevant. But then when He said, Instead,

what he did is he only looked at something about potential future acquisitions. And, Your Honor, we believe that his

failure to do that just shows how inadequate Mr. Anderson's analysis truly is. And that it just furthers the points that

were made by Mr. Zelin and Mr. Reinhold when they took all of this into account and they came up with what they thought was the appropriate valuation for the NOLs. Just briefly, Your Honor, because -THE COURT: You better turn the jurisdictional issue,

one slide about standing because you asked us to talk about the motion. claim. But, Your Honor, we believe there is no colorable It's not a recognized cause of action under the Code.

And the equity committee cannot establish that colorable claim. We believe that all of the information that's on the record about inequitable conduct, Your Honor, further establishes that. And in this particular one, Your Honor, we will rely and

rest upon our papers that we filed on the standing issue.

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Page 59 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 THE COURT: still relevant? MR. ROSEN: I think it's a relevant case, Your Honor. Well, you don't think Pepper v. Litton is

I just don't think it's the right case for this situation. Your Honor, jurisdictionally, two arguments were interposed by the TPS consortium, neither which we think makes any sense. The first, Your Honor, is that the Court was

divested of jurisdiction because they chose to file an appeal of the Court's summary judgment opinion. And contrary to those

arguments, Your Honor, we believe the Court still has jurisdiction to consider and approve the global settlement and the modified plan. Bankruptcy rule 8005 talks about, Your

Honor, how the Court may suspend or order the continuation of proceedings. Here, the Court ordered the continuation of the

confirmation proceedings by approving the supplemental disclosure statement. And the Court certainly has jurisdiction And by confirming

to enforce an unstayed order or judgment.

the modified plan, Your Honor, you are not doing anything other than enforcing. You're not expanding or altering your

determination that the TPS holders hold depository shares tied to the WMI preferred equity interest. The divestiture rule, Your Honor, was judge made. It

was a prudential rule and that should not be applied when to do so would defeat its purpose of achieving judicial economy. And

here, Your Honor, we can't see any judicial economy being saved

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Page 60 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 as the Court has already completed the confirmation hearing. The cases cited by the consortium are clearly distinguishable. In Whispering Pines, the Court was

effectively modifying a confirmation order while an appeal was pending. And DeMarco was a Chapter 13 plan where approval of And in

the plan would have revisited a previous ruling.

Bialik, Your Honor, it was a plan that purported to modify the Court's order that was on appeal. They're seeking a stay And I

without doing all the work necessary for it, Your Honor.

don't want to go through all those points but that's really what's going on here. Your Honor, Stern v. Marshall -- it's the latest and the greatest argument. And as we talked about it last time, it And we believe, Your Honor, that

was the argument du jour.

Stern v. Marshall by its own terms is an extremely narrow decision. the Court. And it really has nothing to do with what is before And I think as this Court noticed on July 28th,

bankruptcy courts clearly have jurisdiction over an issue that stems from the bankruptcy itself or would necessarily be resolved in the claims allowance process. Likewise, Stern does

not limit the ability of a bankruptcy court to consider a settlement under Bankruptcy Rule 9019. District of Texas case. And that is a Southern

Congress has the constitutional power Everything

to decide where bankruptcy matters are to be heard.

before the Court in approving the global settlement agreement

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Page 61 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 and confirming the modified plan arises under Title 11. have 1129 for confirmation; we have 363. We

We have 1123(b)(3)

explicitly contemplating a plan based upon a settlement of claims; and we have Federal Bankruptcy Rule 9019. So, Your Honor, evaluation of the settlement under all the requisite provisions, we believe, fits and that Stern v. Marshall is the red herring that, as I said, is the topic du jour that's being thrown out there to try and stop things rather than something that's effectively being used to try and move the process forward. We believe that the Court has

jurisdiction because all of these things are embedded in the Bankruptcy Code, certainly something in 1129. And we believe

that the Court has jurisdiction to approve a settlement under 9019 because it doesn't even go, Your Honor, to the underlying counterclaims that are the focus of that. And it is not making

an adjudication on the merits of those; rather, it's merely adjudicating the settlement that is before the Court. THE COURT: MR. ROSEN: All right. Your Honor, for everything that's set

forth in our pleadings and as set forth in the presentation that we have today, we ask the Court to confirm a plan. THE COURT: MR. FOLSE: Thank you. Your Honor, Parker Folse. Was the Court

given a copy of these slides? THE COURT: I was.

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Page 62 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 MR. FOLSE: I understand that the debtors have refused

to provide my co-counsel a copy because this looks more like a supplemental brief than an aide to oral argument. direct that they give us one, please? THE COURT: MR. ROSEN: Yes. Yeah. I think you do have to -I don't think we refused. So we'll make copies for you. We said Could you

we didn't have one here. MR. FOLSE: MR. ROSEN: THE COURT: MR. HODARA:

Is that -- that's the whole -Sure. All right. Good morning, Your Honor. Fred Hodara of

the official committee of unsecured creditors from Akin, Gump, Strauss, Hauer & Feld together with my co-counsel, David Stratton, at the Pepper Hamilton firm. Mr. Stratton and I will I will be arguing

be sharing our argument today, Your Honor.

the issues that go to certain of the confirmation standards, particularly pertaining to the entitlement to interest and a rate of interest that should be paid. address the insider trading issues. THE COURT: MR. HODARA: Okay. And Mr. Johnson will help me with certain Mr. Stratton will

exhibits on the Elmo -THE COURT: MR. HODARA: Okay. -- demonstratives.

Your Honor, creditors of the debtors have waited

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Page 63 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 nearly three years for any recovery on their billions of dollars of claims. The debtors' modified plan as Mr. Rosen

just went through in detail addresses each and every concern that was raised by Your Honor in the January 7 opinion. Nevertheless, the equity committee and a host of other parties have raised a series of objections in what we believe is a final phase of a last ditch attempt to derail confirmation of the plan and distribution of the seven billion dollars of value that's amassed here. What I'm going to try to do in my

argument today in keeping with Your Honor's admonition that we not simply repeat what's in our papers is to focus on the specific arguments of those objecting parties. And I'm going

to go out on a limb because in saying what I'm about to say, I think I'll be put to the test of demonstrating that, in fact, our arguments, we believe -THE COURT: MR. HODARA: Okay. -- are thoroughly principled, supported

by Supreme Court case law, other controlling case law and case law of senior courts. And the arguments on the other hand that

are put up by the objecting parties, we believe, are resultoriented arguments and are not supported by case law or by the statutes themselves. So let's start with 1129(a)(7), the best interest of creditors test, and the entry point to the statute that has had so much discussion and focus in this case which is 726(a),

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Page 64 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 distribution of property of the estate, of course in a Chapter 7 case, but we look to it because of the best interest of creditors test. And we find here in 726(a), not as graphic as

Mr. Rosen presented his waterfall, but another waterfall or priority scheme, this one established by Congress for the order in which creditors and then other parties are entitled to receive payment. And we find that in the fifth level of priorities is the entitlement to interest in those unusual cases in Chapter 7 liquidations where the estate proves to be solvent and all of the kinds of claims senior to interest have been paid in full. And then we have the argument that's put forward here in this case by the WMB noteholders. now that we are at the final stages. And in fact, it appears They're the only party I think

that has put forward this argument in a material way. one other party has joined with them.

So we have one party,

one joinder, saying that a 510(b) subordinated claim has to come ahead of the entitlement to payment of interest that is with respect to claims that everyone -- I think the WMB noteholders themselves -- would agree are in every other respect recognized to be senior. And how can it be, they say,

that we have a "claim" and yet, interest would come ahead of that claim. simple. And the answer, we think, is actually pretty

And it's right here on the Elmo projector at the very It's the first words: "Except as provided

top of Section 726.

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Page 65 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 in Section 510 of this title, property of the estate shall be distributed." And so, in order to really parse the argument of the WMB noteholders, we need to go to Section 510. And, Mr. Johnson, if you go ahead and put that up. So, in Section 510, it is (b) of Section 510 that the WMB noteholders focus on. And they seize on the language that

"A 510(b) claim shall be subordinated to all claims or interest that are senior to or equal to the claim or interest represented by such security." And they attempt to argue that

in using the phrase "claim" that Congress didn't mean "interest". I'm using interest, obviously, in the different

form than the word here which is presumably an equity interest. So they're saying by using the word "claim", Congress meant to somehow split apart the entitlement of an otherwise recognized to be senior creditor in its interest of a claim from its interest in interest. And they make what I believe is a fatal

flaw in arguing that the way you get to the solution they need to make a recovery -- and, Mr. Johnson, please put back 726 -is to add a new provision to 726: were". So, in other words, for the WMB noteholders to prevail in their argument, we have to actually read into the statute an entire new provision. Now, we all know that in this era, the And the "at Section 727(a)2.1, as it

idea of plain meaning of a statute has precedence.

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Page 66 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 idea that we will read into a statute words that are not there to defeat words that are clear on their face is anathema. And

yet, nevertheless, they build their entire house of cards on the idea that we need to read in 726(a)2.1 "as it were". But we can go back to the actual language of 510 because 726 tells us we need to look to 510 in the first instance. focus. And let's look at the exact phrase on which they "shall be subordinated to all

In the middle of 510(b):

claims or interests".

Now, what did Congress mean when they And what did they mean in using

used the words "all claims"?

those words when you compare it to 510(c) which deals with equitable subordination? "allowed claim". Well, I'm going to focus for a moment on a bankruptcy case from 1997 in the Western District of Louisiana. is called The Seasons Apartments Limited Partnership. case dealt with the question under Section -THE COURT: MR. HODARA: What's the case? It's called Seasons Apartments Limited The case That And there Congress used the phrase

Partnership, 215 B.R. 953, a bankruptcy decision of the Western District of Louisiana. In that case, the Court was considering

how to construe the word "claim" and "allowed claim" under Section 1124 of the Bankruptcy Code. And first, the Court

stated the proposition that we all know so well because it's a direct quote from the Supreme Court case in BFP v. Resolution

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Page 67 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Trust Corporation, which is 511 U.S. 531. "It is generally

presumed that Congress acts intentionally and purposefully when it includes particular language in one section of a statute but omits it in another." And so, the Court, in the Seasons case,

looked at the language in 1124 where in one portion of the statute, Congress used the phrase "claim" and in the other portion, used the phrase "allowed claim". And the Court said

"The combination of 'allowed' and 'claim' must mean something more than the word 'claim' by itself." And that, Your Honor, is the same situation that we have here. There really, in our view, can be no doubt that

Congress intended that all attributes of a claim come ahead of the junior parties' interests. intention -THE COURT: Well, but the definition of "claim" in the Isn't Otherwise, we're defeating the

Bankruptcy Code includes only pre-petition interest. that true? MR. HODARA: petition -THE COURT: MR. HODARA: Right. -- interest.

The definition itself includes only pre-

But you get to the question

under 510 in connection with subordination as to whether a party who is going to be subordinated for all purposes by the Code somehow can get this layer cake approach that's argued by the WMB noteholders that they can sandwich their claim in

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Page 68 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 between the base claim of the senior creditor and the attributes of it. Let me focus on this final aspect of their argument which I think has to blow away any chance that inserting the new provision into 726 can be countenanced. And that is, this

Court has already made a finding with respect to late-filed claims. Let's put 726 back on the screen. For the WMB noteholders' argument, Your Honor, to carry the day, we'd have to find that their claims come ahead of late-filed claims. That's what they argue. They ask for a That puts

new provision to be read into the statute at (a)2.1. them ahead of late-filed claims. determinative argument.

This is another outcome It's

It's not a principled argument.

the only way that the WMB noteholders can fashion some form of words to try to get them an interest to be recognized to be paid in this case unless we are lucky and Mr. Rosen's waterfall produces more cash flowing in the ordinary down the line in respect of their claims. Your Honor made the point about the use of the word "claim" and how it's defined in the Bankruptcy Code. Let me

make one more point with respect to 510(b) and what we believe is the policy rationale for why Congress inserted the entire 510 scheme into the Bankruptcy Code and why it expressly made 726 subject to 510.

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Page 69 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 It's highlighted in numerous cases that a junior creditor or equity holder must not receive a windfall at the expense of a nonsubordinated creditor. And the Third Circuit Now, Telegroup So claims And

in the 2002 case, In re Telegroup, held that.

was a case that dealt with shareholder interest.

arising from the purchase or sale of an equity security. so -THE COURT: MR. HODARA: Yeah. -- a party can ask, well, does that

finding of the Court apply with equal weight in the case of claims arising from debt security such as those of the WMB noteholders. And in fact, there is plenty of case law that

says it does including right here in the District of Delaware. The case of In re Mid-American Waste Systems, which is a 1999 case of the District of Delaware bankruptcy court, has the following statement: "Congress did not limit the application In plain terms, Section 510(b)

of 510(b) to equity securities.

is intended to apply to both debt holders and equity holders. It would simply be a flouting of Congress' intent to allow this form, any form, of 510(b) or any 510 subordinated claim to come ahead of the entitlements in the strict waterfall that's set forth by Congress in Section 726." Let move on then, Your Honor, to the question of if creditors here are, as we say, entitled to interest, what's the appropriate rate of interest to be paid on their claims. And

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Page 70 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 I'm going to start, Your Honor, with a strict legal argument. And I'm going to start with the law in this case. Your Honor stated the basic principle governing determination of the appropriate rate of interest in your January 7 opinion. You said there "This Court has considered

this issue before", alluding to the Coram case, "and concluded that the federal judgment rate was the minimum that must be paid. And the Court, of course, referenced the Coram case and Those cases, like the Sixth Circuit in Dow,

the Dow II case.

emphasized that federal judgment rate is the minimum that's to be paid where interest is due. And nevertheless, the objecting Their

parties line up here in a series of disparate objection.

objections are not actually all the same and we'll get to that. And they say that the use of the phrase "legal rate" in the statute absolutely positively can only mean the federal judgment rate. Now, in my argument here, Your Honor, in December on this very subject, you interrupted me when I got into my discussion of 726(a)(5) and you said, at what rate. And I

responded then, and we are consistent today, the case law says that the Court has discretion in determining whether the legal rate should be the contract rate, should be the federal judgment rate or should be perhaps the various state rates that might obtain under different relevant contracts in the case. And again today, Your Honor, we stand by that statement. The

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Page 71 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 use of the phrase "legal rate" in 726(a)(5) gives this Court discretion. Now, we believe strongly based on the law and the facts of the case that there's no basis in this case for diverting from the typical approach of providing contract rate. But let's focus first on the objections of the various parties where they say that legal rate was expressly intended by Congress to mean the federal judgment rate. Because, again, if

Congress meant legal rate to mean federal judgment rate, would it not have said so? And so, we did a thorough search of the entire United States Code, all of the statutes that are currently on the book and put there by Congress. And the first thing that we find --

and this is the slide that's on the screen now -- is that when Congress intended to mean the federal judgment rate in any context, it said it in black and white. And it said it in They did it by

exactly the same way every time they did it.

specific reference to "the rate specified in Section 1961 of Title 28". That statute, Your Honor, which is titled

"Interest", is the only place in the Bankruptcy Code where Congress set forth what the federal judgment rate means. So

when we say federal judgment rate -- when anybody says federal judgment rate, they're referring to the statute 28 U.S.C. Section 1961. And you can see the four instances that we

found, the only instances that we found, where Congress chose

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Page 72 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 to mandate use of the federal judgment rate. So we then wanted to see all the instances where Congress used the phrase "legal rate" and defined it as "federal judgment rate". And not surprisingly, since the last

slide showed all the places where Congress used the concept of "federal judgment rate", when you check "legal rate", exactly zero instances are found where Congress used the phrase "legal rate" to mean "federal judgment rate". However, Congress has used the phrase "legal rate" we found six times including, of course, in 726(a)(5). And what

we find in each of those six times is that in not a single one of them did Congress mean legal rate to mean federal judgment rate. Sometimes it's tied to something specific. The first Other

one shows a rate prescribed by the administration.

times, a rate which is established by the administrat -- the small business administration. judgment rate. And why is that? But never is it federal Because as the cases have

found, the Congress meant for the Courts to have discretion in this regard. Okay. So if the Courts have discretion, why should it And I start here, Your Honor,

be contract rate that's applied?

again with the Supreme Court precedent in the case of Butner v. the United States, a case that is cited over and over for the proposition that contract rights should be upheld unless the Bankruptcy Code explicitly provides otherwise. And, of course,

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Page 73 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 there are specific places in the Bankruptcy Code where Congress has said your basic contract right is going to be abridged or abridged for a while. And one might say, well, okay, but But

Butner is a case that dealt with a secured creditor.

Butner has been followed and echoes the same principle that we find in case after case in the solvent debtor scenario. so, whether it's the Chicago Milwaukee St. Paul Pacific Railroad case out of the Seventh Circuit where the Court said -- and this is a solvent debtor case -- "The task of the bankruptcy court is simply to enforce creditors' rights according to the tenor of the contracts that created those rights." Or the Dow court in the Sixth Circuit: "Absent And

compelling equitable considerations, when a debtor is solvent, it is the role of the bankruptcy court to enforce the creditors' contractual rights." So these are cases, Your Honor, which actually answer another question that you put to me back in December. And you

said, Mr. Hodara, when you tell me that another principle here is that unless Congress specifically said they wish to vary from pre-Bankruptcy Code precedent, we are to follow pre-Code precedent. And Your Honor said to me, were those cases with And I said, I believe they are,

respect to unsecured claims. Your Honor.

Well, so, today, having had the time to go back

and carefully study these cases, I can say with certainty that the cases I just referenced, Consolidated Rock, International

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Page 74 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Stratton? MR. HODARA: THE COURT: MR. HODARA: As much as possible. He barely has ten. Okay. So let me very -Hydroelectric Systems and various other of these cases, are specifically pre-Code solvent debtor cases where the contract rate was found to be the appropriate rate. THE COURT: How much time do you want to save for Mr.

So --

So let me very quickly then get to

the second set of reasons why contract rate is appropriate and why this welter of arguments that we hear from the objecting parties seeking not just federal judgment rate but federal judgment rate at any date other than the petition date can't possibly make sense and are unprincipled arguments. First, all the cases that say there are facts here that require federal judgment rate seem to say we will do that as of the petition date. objecting parties cite. These are the cases that the And they include here in the Third

Circuit, the bankruptcy court in the Eastern District of Pennsylvania, in the Chiapetta case. Since a claim is like a

judgment entered at the time of the bankruptcy filing, the applicable rate should be the federal judgment rate in effect at the time of the filing. that same effect. We have a Supreme Court case to

If there are grounds for federal judgment

rate, it should be at the petition date. And so -- let's have the Goulding cite. So why is it

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Page 75 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 that these parties now, unlike in December when none of them made this argument, why is it that now they say it's got to be at some other rate. approach. Again, it's an outcome determinative

As Mr. Goulding testified in black and white -- at

least, on the screen it's in black and white -- at federal judgment rate at the petition date, nothing trickles down in any projected scenario to the other parties. So they try to Let's

argue that we should use -- well, the equity committee. take them. They say we should use a blended rate.

I've not

seen that in any case law.

But they say for post-petition

interest at the average federal judgment rate in effect during the pendency of the bankruptcy case. Now, is that a principled

reading of what Congress wanted in the Bankruptcy Code or of any of the case law? Let's read their principled explanation for why we should be using federal judgment rate in the first place. this is at page 78 of their post-hearing brief. And

Here they say,

"In violation of their fiduciary obligations to all claimants, the debtors manage the WMI estate for the benefit of the major creditors to the exclusion of equity. Because all

creditors" -- and here's where they're clearly just trying to shoehorn into Your Honor's Coram decision and the facts of that case. "Because all creditors benefited from this bias, it's

fair and reasonable that all creditors receive post-judgment interest at the lower rate."

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Page 76 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 group. So for this Court to conclude that the equity committee is right and that we shouldn't use contract rate, it's being asked by the equity committee to conclude that the debtors breached their fiduciary duty. I don't think we've

seen a shred of evidence in all the piles of paper and seven days of hearing that supports that. Normandy Hill. They say, no, no, no. If we're going

to have federal judgment rate then we need to abridge Section 510(a) of the Bankruptcy Code and not have the PIERS have to pay up at the contractual rate. So they want to actually

abrogate 501(a) of the Bankruptcy Code. Then we have the subset of the TPS, the Arkin Kaplan Again, in an attempt to shoehorn into the facts of

Coram, they say that because all noteholders -- so they distinguish noteholder unsecured creditors -- because all noteholders are only getting payment in full under the plan because of the alleged bad acts of the settlement noteholders, that's why we should use a lower federal judgment rate. Now,

they don't even argue that general unsecured creditors who have contracts should get the lower federal judgment rate. Again,

these are just unprincipled arguments not full thought through. We have the floating rate noteholders. They argue

that they want the federal judgment rate because it's higher than the rate on their floating rate notes under contract. It's opening up a Pandora's box, Your Honor, if we go

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Page 77 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Stratton. So -THE COURT: Okay. I thought that was very generous of him down that path. I will rest there -Thank you. -- and let Mr. Stratton address the final Thank you. David

THE COURT: MR. HODARA:

issue that deals with these points. MR. STRATTON:

Good morning, Your Honor.

Mr. Steinberg agreed to give me ten of his minutes.

MR. STRATTON:

and I want to thank him publicly for that if he's -- no, he is in the courtroom. Good.

Your Honor, I'm going to address three issues. THE COURT: Well, you do have ten minutes. And I will try to do it in less than

MR. STRATTON: ten minutes.

First, whether the plan's been proposed in good

faith; secondly, the insider trading and inequitable conduct issues; and then, very briefly, I'll touch on the standing motion. With respect to the good faith proposal or the submission of the plan to the Court in good faith, if you look at the equity committee's brief, what they're really arguing about is that they don't like the settlement. And I say that

because if you look at the actual arguments and the words they use, it's pretty clear where they're going. They start the

argument out with a caption that says "The modified plan is not

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Page 78 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 being offered in good faith because the debtors unduly favor powerful creditors and disregarded the interest of equity." Well, I'm not so sure the evidence supports any of that, but they go on to say, paragraph 203: "No one involved in this

process was looking out for the interest of shareholders or genuinely attempting to maximize the value of the estate for the benefit of all the parties." directly contradictory to that. Mr. Gropper's testimony was Paragraph 200: "The equity

committee alleges that the debtors deferred significantly to the settlement noteholders." And then in paragraph 201: "They

allege that the debtors allow the settlement noteholders to exercise powerful influence over the future of these estates." What that all goes to is they don't like the settlement. Your Honor dealt with those issues in connection And you found that the debtors

with your January 7 decision.

had acted consistent with their duties and had done their best job to get the best settlement they could. And you also found

that just because they couldn't get enough to reach down to the equity did not mean the settlement shouldn't be approved. And

what they want to do through this good faith rubric is ask Your Honor to relitigate the issue or to reconsider the issue which we would submit Your Honor should not do. With respect to the insider trading issue, Your Honor, and the inequitable conduct issue, I'll get to those in a second. But I do think it's appropriate to note that the

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Page 79 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 equity committee in their pretrial objection took the committee to task and made some allegations about our conduct in this case and the fact that certain powerful -- they seem to like that word -- creditors controlled certain members of the committee. Those allegations completely untrue. The record in

the seven days of trial completely devoid of any evidence whatsoever that anyone controlled the committee or that the committee didn't do what you would expect the committee should have done in this case. contrary. With respect to the insider trading and inequitable conduct claims, Your Honor, I'm going to leave most of that to the four settlement noteholders. issues thoroughly. those issues. We've participated in discovery. documents. We looked at the law. We looked at I'm sure they'll develop the In fact, all the testimony was to the

But I'd like to give you our perspective on

We sat through trial

including five days that was dedicated strictly to the insider trading issue. cases. We've read all the briefs. We looked at the I will note, Your

We looked at the transcripts again.

Honor, that in comparing what was said in the equity committee's brief and the TPS brief to what was actually in the transcripts, I found a number of instances where I just couldn't match up what they were saying. I'm sure, sort that out. But Your Honor will,

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Page 80 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 We don't believe there is a plausible claim for insider trading or for equitable disallowance or equitable subordination. doesn't matter. plan. But -- and this is an important but -- it It's not a basis to deny confirmation of the Mr. Kosturos'

The debtors acted in good faith.

testimony put that issue to rest both back in December and again in July. And I would note in passing, Your Honor, that And

the equity committee ignores almost everything he says.

the reason I think that is, is that it was pretty damaging testimony and there's no response to it. With respect to the elements of an insider trading claim, Your Honor, the equity committee and the TPS would like you to focus on material nonpublic information, that single element of the three-part test. to that element. Your Honor doesn't need to get

And as I'll explain in a minute, even if you

do, I don't think that the settlement offers that were being traded back and forth over the course of a year were material nonpublic information. The reason you don't need to get to that, Your Honor, is simple. First, they can't show that any of the settlement And second, they can't establish

noteholders breached a duty.

that the settlement noteholders acted intentionally or recklessly. With respect to the duty issue, Your Honor, the evidence is uncontradicted that any time any of the settlement

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Page 81 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 noteholders were under a duty not to trade or to establish an ethical or informational wall, they did that. begin their trading until that duty ended. the equity committee do to get around that? facts. And they didn't

And so, what does Well, they make up

And the facts they make up are or the argument they

make us is that the settlement noteholders were temporary insiders under the securities laws or nonstatutory insiders under the Bankruptcy Code. that. There's no evidence to support And so, in making that

There is none whatsoever.

argument, I think they concede effectively that unless you can reach that far out beyond the facts, they can't prove duty. With respect to scienter, what I saw and what I heard and what I think the evidence shows, Your Honor, is that the settlement noteholders made a good faith effort to avoid trading on material nonpublic information. of devices to do that. They used a number

I'm not going to belabor the record They're in our brief. But the

today by going through them.

TPS and the equity committee's argument is this.

You can't get

around your duty by relying on the debtor to disclose material nonpublic information. determination. You have to make your own

Well, if you look at the record, each witness

for each of the settlement noteholders said with respect to each period, both periods, that they made an independent determination that the settlement offers that had been exchanged during those periods were not material nonpublic

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Page 82 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 stay out. information. And on that basis, plus the debtors' disclosure

plus the debtors' confirmation that they were free to trade, they resumed trading. So the three legs of the stool, they

can't meet the test as to the first two. With respect to materiality, I think what they're arguing, Your Honor, is once they saw the first term sheet from JPMorgan, it said we're willing, if we can get a deal done, to give you back the deposit which JPMorgan had said publicly in this case very early on that they could never trade again because their position is that was material nonpublic information. They had it for the whole case; you're done.

Well, that's not the law and those aren't the facts. What really happened is this. THE COURT: can't trade. MR. STRATTON: THE COURT: Well -The evidence shows that --

Well, I don't think they're suggesting you

They're suggesting the ethical law had to

They could not trade on that information. MR. STRATTON: THE COURT: Your Honor --

And then they disclosed that information That was the violation. Well, interesting point. And I

to their traders.

MR. STRATTON:

apologize for talking over you.

They said in their initial It's that

papers, they said that's all they needed to do. simple.

First of all, I'm not sure it's that simple for these

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Page 83 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 entities to create a wall and maintain it for the better part of fourteen months. THE COURT: bankruptcy cases. MR. STRATTON: Your Honor, my experience with the But put that -Really? 'Cause a lot of people do in

issue would be with respect to committee members but I'm not so sure with respect to -THE COURT: And how long do cases last -Well --

MR. STRATTON: THE COURT:

-- where committee members have Years. It is possible. But I'm

established ethical walls? MR. STRATTON:

It is possible, Your Honor.

not aware of anything that says if you want to trade in the debtors' securities, you have to maintain an ethical wall. If

you want to if the debtor asks you to participate in settlement discussions. THE COURT: information. MR. STRATTON: Yeah. And in this case, the debtor was Only to give them -- and they No. If you want material nonpublic

very clear to do two things.

only accepted a very limited amount of material nonpublic information and the debtor disclosed what was material. the reason why these settlement offers that flew back and forth -- and the TPS says they're eight and nine, if you count some of the amended plans, I think it goes up to, like, twelve And

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Page 84 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 or thirteen -- settlement discussions lasted a year. stopped; they started. They When

Parties resorted to litigation.

the negotiations didn't go any place, they pulled offers off the table. or reason. They changed their position sometimes without rhyme The negotiations started out as a two-party deal.

It morphed into a three-party deal because the FDIC and the WMB bondholders inserted themselves into the discussion. And --

and this is really important -- very, very significant items with very big dollar signs attached to them moved around from one offer to the next. The TPS and the equity committee's argument, I don't believe, is supported by the facts. settlement was inevitable. thought it was inevitable. First, the TPS says that

I don't think anybody in this case And something that takes over a

year to accomplish, I think, I would submit to Your Honor, it was not inevitable. Second, there's no evidence in this case that any of the parties in this bankruptcy, the debtor, JPMorgan, the FDIC, the WMB bondholders, the creditors' committee or any of the individual noteholders were not prepared to litigate these issues and a settlement couldn't be achieved. So to say today,

I'll give you this and you tell me no, doesn't mean tomorrow I'm not going to resort to my litigation rights which is exactly what happened in April and early May when the debtors filed their turnover action in their 2004 motion.

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Page 85 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 points. And I think that really is the point on the insider trading claim. With respect to inequitable conduct, Your Honor, I'm going to skip most of this but I'm just going to cut right to the heart of it. These people -- the settlement noteholders The equity

are not insiders; they're not fiduciaries.

committee actually -- an interesting point, in their pretrial objection, they complain -- at the end of their complaint, they claim the settlement noteholders are fiduciaries. had determined they weren't. they abandon that argument. Your Honor

And in their post-trial brief, They rely on the insider theory.

There is nothing in this record that would establish a grounds for equitable disallowance or equitable subordination. There is no evidence of egregious conduct by any of the settlement noteholders that would warrant denying confirmation of the plan, imposition of a different interest rate especially an interest rate as to the creditors that aren't the settlement noteholders which is the equity committee's position which I find just astounding. With respect to the standing motion, Your Honor, three One, you asked the question about Pepper v. Litton.

And I don't think you need to reach the question in this case because we don't have those facts. and we don't have egregious conduct. We don't have an insider If you read Pepper v.

Litton, if you read Citicorp, if you read these cases, they all

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Page 86 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 involve insiders and they all involve really bad things. aren't the facts here. Two, two different estate fiduciaries, the debtors and the committee, have looked at the claims, the draft complaint, the facts and they've concluded that there is no merit to the claims and that it would not benefit the estate to pursue them. I would submit, Your Honor, that that's more than enough to establish or to meet the test that the debtors' refusal to bring the claim is justified or unjustified. Finally, regardless of what Your Honor does, we would implore you if you grant the motion to require the equity committee to put its money where its mouth is, not to burden this estate further with litigation costs chasing meritless claims. And if they want to pursue it, let them do it on a Those

contingent fee basis. If Your Honor has any questions, I'd be happy to address them. THE COURT: No, thank you. Thank you. Again, Robert

MR. STRATTON: MR. SACKS:

Good morning, Your Honor.

Sacks for JPMorgan Chase.

Nobody's given me any of their time

but I hopefully will not take all of mine and I'll take some bids to sell it -THE COURT: MR. SACKS: Okay. -- to the highest bidder. Maybe reduce

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Page 87 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 some of the cost of this settlement to JPMorgan Chase. And that is where I want to start. I do want to start

and bring us -- I'm going to address a few very limited points, Your Honor. But I do want to bring us back to the fact that we

are dealing with a plan that has as its core the global settlement agreement which Your Honor considered at length in the first hearing found to be fair and reasonable. And I think

the evidence showed is a fairly remarkable settlement involving many, many, many different claims that would have to be litigated in several different courts involving many different parties providing seven plus billions of dollars to the debtors' estate largely as a result of compromises by my client of claims and including the waiver of thirty plus billion dollars in claims that they have asserted against the estate. And while we've spent the second confirmation hearing dealing with some different issues, I think we need to go back and remember what is at the core of this confirmation process since we have been really -- broken it up into two separate hearings. I'm going to address first the jurisdictional issues which Mr. Rosen addressed very briefly at the end. to address them somewhat differently. divestiture rule. I'm going

I'll address the

I'm going to touch for perhaps less than a And then I will briefly

minute on the insider trading claims.

address three other points that relate to my client in one way or another.

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Page 88 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 First, let's talk about jurisdiction and the Stern v. Marshall argument that's been made here. And the preferred

equity people who call themselves the TPS consortium have argued that Stern v. Marshall prevents this Court from approving any settlement that would include a release of the debtors' claims that would be beyond the jurisdiction of this Court to adjudicate on their merits because this Court is a non-Article 3 court. So, in other words, because the

settlement is a full settlement among the parties, it has among it, for example, the business tort claim that could be brought because that's a state law tort claim and, under Stern v. Marshall, undoubtedly would have to be brought in a different court, not this court. Therefore, somehow this Court has no

jurisdiction to consider a settlement. And followed to its conclusion, therefore, their argument is, in essence, that a bankruptcy court lacks jurisdiction to approve any settlement of a debtor's claims that are property of estate as long as the bankruptcy court would not have the power to, in fact, adjudicate those claims. That's not what Stern provides for. But you don't

need to get into a nuanced discussion of Stern to address it because the argument and the objection is founded upon a fundamental flaw which is it misses the distinction between adjudication of a claim and settlement of a claim. And the

power -- it presumes improperly in the objection that the Court

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Page 89 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 is adjudicating a claim in the process of approving a settlement. That's not the case. And we've cited to Your Honor A Third

two cases which I think are dispositive of the issue. Circuit case, Grimes, and the Supreme Court's case in

Matsushita v. Epstein which involved the analogous issue, really the identical issue, in the context of state law determining and granting full releases of settlements including federal securities law claims that the state court had no power to adjudicate on their merits. And in both of those cases, the

Third Circuit and the Supreme Court, found that a Court approving those settlements had the power to grant full releases to the parties where the parties were properly before the Court, within the personal jurisdiction of the Court and the Court had jurisdiction over the case in which they were in front of the Court even if the Court could not adjudicate those claims. And those cases begin with the fundamental proposition

which is overlooked by the TPS consortium which is that in approving a settlement, the Court is not adjudicating the merits of a claim. Let me just give you a little bit of language. is from Matsushita. This

"Approval of a settlement does not call

for findings of fact regarding the claims to be compromised. The Court is concerned only with the likelihood of success or failure. The actual merits of the controversy are not to be

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Page 90 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 determined." Again, Matsushita, the Supreme Court again talking about what the Court does in the context of approving a settlement. the claims. It is not exercising judicial power to adjudicate It's a fundamental distinction that is just not

addressed by the TPS plaintiffs who presume incorrectly by citing cases on res judicata and preclusive effect that a judgment which releases claims have that there is an adjudication of those claims. But that's exactly what the

Supreme Court addressed in Matsushita and the Third Circuit addressed in Grimes. If their claim were correct, you could never finally resolve claims between a debtor and a third party because you would never have the power to do so even though all claims of the debtor are subject to approval of the bankruptcy court for compromising those claims. It makes no sense.

In Grimes and in Matsushita, the Supreme Court and the Third Circuit explain the reasons for this rule. difficult or a novel proposition. This is not a

While it hasn't arisen in

the bankruptcy context before, it is fully resolved by these two cases. A Court has the power to release claims as part of

a judgment even if it doesn't have the power to adjudicate them. If you'll apply the rule here, even though the Court could not adjudicate some of the claims that the debtor wants

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Page 91 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 to bring, it has, like the business tort claim, and I'll use that as the most obvious example, it has the power to issue a release as part of a compromise of those claims, as part of a compromise of all of the disputes between the debtor and, in this case, JPMorgan Chase and/or the FDIC. jurisdiction over the parties. The Court has

It has jurisdiction over the

debtors and JPMorgan Chase and of the underlying controversy and power over the case. The parties have negotiated a full And the Courts found that

compromise of all of their disputes.

to be reasonable in accordance with the standards that Courts properly apply for approving settlement. There is clear

authority and Stern v. Marshall in no way, shape or form affects the authority of the Court to do that. As Mr. Rosen indicated, one Court has found that to be the case already, the Okwanna case from the Southern District of Texas. And again, the TPS consortium simply misses the

point in not recognizing that a settlement is different than adjudication of the merits with which Stern is concerned. Let me turn to the divestiture rule and address that very briefly if I could. The divestiture rule which Your Honor

is familiar with and I've argued to you about in the past is a judge-made rule and it doesn't in any way, shape or form prevent the Court here from confirming the plan. It's And

prudential rule, not one of subject matter jurisdiction.

it holds at its core that a Court is prevented while a matter

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Page 92 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 is on appeal from modifying or changing an order or doing something to -- that is contrary to that order while a case is on appeal. But there is nothing in the divestiture rule, even

if applied, that would prevent the Court from, in the words of one Court, "enforcing, implementing or otherwise treating as valid" its orders. And in this case, all the Court is doing is

treating as valid its order entered in the TPS adversary proceeding on summary judgment that has been appealed. the TPS plaintiffs have not sought a stay of that order. order is in effect and it can be enforced. Now, The

The Court is doing

nothing but enforcing that order to the extent it is treating the plan as something that treats these people as preferred equity which is what was found to be the case. sought a stay but they didn't. They could have

The plan doesn't modify, vacate

or in any way disturb the issues that were incorporated within your order that has been the subject of appeal. interest in TPS but own preferred equity. that. order. TPS consortium retains whatever rights they still have to continue with that appeal or, as would have been the case and would have been originally the case had you confirmed the plan at the same time you granted summary judgment appealing from an order confirming the plan. They can do that. There's They have no

This doesn't affect

It doesn't do anything other than implement the Court's

nothing here that prevents them from doing that.

And they can

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Page 93 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 seek a stay if they want to. But the divestiture rule is not a

basis to give them leave to avoid the need to seek a stay in a case like this. Courts have recognized, of course, the divestiture rule is a prudential rule as I indicated, so it's not a per se rule. And it's a rule that is applied logically and in a way And Courts have been wary to And

to create judicial efficiency.

apply it in situations where it is being used for abuse.

if you look at the facts here, I think it's pretty clear that the TPS holders, or the TPS consortium as they call themselves, are using it in a way to exploit a situation to the detriment of everybody else in the most inequitable way in a way that is contrary to judicial efficiency. For example, the TPS order

has been in place for seven months and they never sought a stay from this Court or from the district court of that order. TPS plaintiffs delayed in bringing their claim. The

They waited They

until after the settlement agreement had been filed. could have brought their claim two years earlier. understood the issues that were in dispute.

They

They never

intervened in the dispute between JPMorgan Chase and the debtors that raised ownership of the TPS and the automatic exchange. They could have intervened in that case but they sat

back, did nothing and waited until after the settlement agreement was filed and we are into the plan confirmation process.

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Page 94 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 the -THE COURT: record as far as -MR. SACKS: THE COURT: MR. SACKS: Oh, it is --- their bias. It is in the 2019, Your Honor. They filed Well, I'm not sure any of that is in the And finally, the TPS consortium are a bunch of entities that, with one or two exceptions, didn't even own these securities until after the bankruptcy petition had been filed. They bought them for pennies on the dollar with They continued to do it as

knowledge of what they were doing. they litigated the case.

They continued to do it even as the And they indeed --

summary judgment hearing was being heard.

some of them continued to do it even since your order determining that they don't own trust preferred securities. And so, if you look at the equities and the reason for

2019s which indicate -THE COURT: MR. SACKS: Recently? Yes. Since that time in July and August.

And those show changes in ownership including increases in ownership by some of them. THE COURT: MR. SACKS: Okay. So it is in the record, Your Honor.

Finally, while it doesn't apply, if you were to determine that the divestiture rule applies, you still, as you

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Page 95 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 know, have the ability to say I'm not going to apply it because I believe their appeal is frivolous. And I would suggest if

there were ever an indication where you could make a finding that an appeal is frivolous, this is one based upon your hearing of the record and disposition of the appeal on summary judgment. Mr. Rosen dealt briefly with the cases that were cited by the TPS plaintiffs. They don't cite very many cases in Whispering Pines, Bialik are the

support of their position.

first two cases they cite, the only two appellate cases they cite, are both cases where the Court -- the second order changed the first order. precluded. case. So it's exactly what would be

And the third case, In re DeMarco is a less clear It's the case that

We don't know what that says.

admittedly would be closest to this one but two things, Your Honor. First, the Court described it as the unique facts of And we don't know when that case, which is a

the case.

bankruptcy decision from the Middle District of Florida -exactly how important the IRS' claim was to the total assets of the estate. The suggestion would appear to be that it was a

principal part of the Chapter 13 liquidation at issue there. But you don't know from the case and so how do you -particular equities and unique facts as the Court found them justify doing what the Court did there in deciding that it was without power to change -- to issue the second order. We don't

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Page 96 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 know. Second, to the extent it is applicable in the way the TPS plaintiffs argue it's applicable, it's just wrong. It's

not what the -- that's not what the rule is and the Court doesn't have it right there. it on either of those bases. Finally, the TPS proposal that you -- what they say ring-fence the TPS and presumably all of the assets that related to them, that's not viable here. agreement is dependent upon it. part of an integrated exchange. there is no settlement. The settlement So I think you should dispose of

It's an exchange of value as If this isn't part of it,

And if there is no settlement, there

is the risk of loss of seven plus billion dollars to the estate. And as all the testimony has shown, we can all go

litigate for three or four or five years in multiple forms to figure it out. Briefly on insider trading, Your Honor, I am not -- we have not expressed any view on the underlying merits of the allegations as to whether people are -- or did or did not engage in insider trading. We leave that to others. But only

on the issue of remedy, Your Honor, there's no reason based upon the evidence that you've heard or in the facts here to hold the plan hostage, you have determined that the settlement agreement that was negotiated at the core of this is fair and reasonable compromise of the myriad disputes involving all

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Page 97 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Honor. these parties. And that should be effectuated. And it should

be effectuated in a plan. power.

And you can address -- you have the

The equity committee has moved for standing to seek

either a disallowance or presumably equitable subordination of the claims of these four entities. If Your Honor has any

belief that they have engaged in inappropriate conduct, you should address that conduct with respect to them and their interest but not everyone else who is an innocent party who is not involved in any of that trading activity. I don't say -THE COURT: your opinion? MR. SACKS: I think they do. I do think so, Your Well, does the debtors' plan allow that in So again, while

If you were to find that the equity committee has the

authority to pursue this claim, I believe that you could address the question through disallowance or equitable subordination after confirming this plan. THE COURT: MR. SACKS: All right. Thank you.

Finally, as to the other objections, Your

Honor -- but again, I'm not suggesting there was insider trading. I leave -THE COURT: MR. SACKS: I understand. -- that to the people on both sides of me

to shoot out between them. The other objections briefly. The ANICO appeal. I

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Page 98 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 guess it's the equity committee and then the TPS joined -suggested that the ANICO appeal, which was a reversal, is a reason to, I guess, revisit the entirety of the global settlement agreement because that's what they're seemingly asking, of course. relevant to that. ancillary question. That in no way, shape or form is that -The ANICO decision for a lot of -- it's an The case down there doesn't make any --

have any bearing on the strength of the business tort claim that the debtors were considering bringing in this particular case. of WMI. The case involved claims by bondholders of the bank not All the WMI bondholder claims were dismissed. Didn't

address the substance of any of the claims.

Didn't address

whether there was any evidence to support any of the claims. Didn't even address the plaintiffs' standing in that case to address those claims. The Court was clear that to the extent

that the P&A agreement or the conduct of the FDIC is in any way involved in the claim. process. It is subject to the FIRREA claims

But if you try to craft a very narrow claim that is

totally divorced from those issues then you can steer clear of the FIRREA claims process. No evidence was submitted, Your Honor, in this confirmation hearing or in the prior confirmation hearing that suggests that the business tort claim, even on its merits, has any basis or probable likelihood of success. And, Your Honor,

in your decision addressing that claim earlier and finding the

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Page 99 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 settlement to be fair and reasonable, the existence of the ANICO appeal, while it was mentioned in the dismissal, was hardly the primary basis for your conclusion that there wasn't a lot of value in that particular case. If you were to -- and I'm not suggesting Your Honor said you won't open it up, but, I mean, looking at the chain of circumstances here, Your Honor, you heard testimony here about how the significant value that made the settlement agreement come about came about because JPMorgan Chase concerned about the uncertainty of recovery or receipt of these extended tax benefits, basically put in several billion dollars of value that enabled the settlement to happen. Well, those tax

benefits are undeniably WMB's tax benefit, almost a hundred percent of them. You've heard that testimony. That

uncertainty doesn't exist today. the bank.

Those benefits are sitting in

So if you were to renegotiate today, that's two plus

billion dollars that's sitting there that I don't think anyone would reasonably say you would give away because you're worried about it ever being recovered. So while you should just not

take the -- to look at the ANICO appeal as a basis for reconsideration, you can't look at it in isolation either. Finally, releases -- those are still in the objections here today. Your Honor decided that. Your Honor made clear

people are objecting to the fact that the essential third party releases are if you want your distribution you have to give a

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Page 100 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 release. Your Honor addressed that in the original order and And

the plan was modified to conform to Your Honor's order. those are just rehashing of arguments that Your Honor has addressed before. There's no question that the plan as

modified, settlement as modified, complies with Your Honor's order. Finally, last issue is the REIT series, the class 19. And

again, this is still being asserted as an objection of the TPS people who are suggesting that there is something wrong and there's discrimination because JPMorgan Chase refused to offer what it offered to people to settle the claims rather than litigate those claims. I believe Your Honor addressed this You

fully in connection with the disclosure statement hearing.

rejected in March the TPS consortium's argument that there was a requirement to resolicit these people. It's just being rehashed again and again. It's the same issue. If there were ever

an issue here, Your Honor, we just wouldn't make the payment to anybody. At least, it's not a payment coming from the debtor. It's not part of the estate.

It's not the debtors' money.

It's a settlement that while it's being implemented as part of the plan here, it's JPMorgan Chase's settlement with people who agreed to settle claims and not litigate them with JPMorgan Chase. Your Honor, I would urge you to confirm the plan as quickly as possible and allow it to be consummated. Thank you

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Page 101 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 time. THE COURT: Well, there is eight minutes of it. Good morning, Your Honor. Tom So -very much. THE COURT: MR. SACKS: Thank you. And I'll be taking bids for my remaining

MR. CALIFANO:

Califano, DLA Piper, on behalf of the FDIC.

Your Honor, thank

you for reserving fifteen minutes for the FDIC but I will only need a small portion of it because the most recent round of objections do not directly implicate the FDIC. I would like,

however, to give the Court the FDIC's perspective on these cases and on the proceedings before Your Honor. Your Honor, in September 2008, these Chapter 11 cases were filed as a result of the largest bank failure in the history of the United States. Almost immediately upon filing,

the Court and the participants were faced with litigation in a number of courts on a variety of claims which posed significant jurisdictional issues relating to the two parallel insolvencies, the one going on in this court and the one being conducted by the FDIC receiver as receiver of Washington Mutual Bank which, in itself, had billions of dollars of creditors' claims. And, Your Honor, the FDIC, for precedential and for

other reasons, especially at that period of time, had every motivation to protect those jurisdictional issues. The litigation also presented issues posed by two

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Page 102 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 federal statutory schemes, one embodied in the Bankruptcy Code and one embodied in FIRREA which were not at all times in sync. And once again, Your Honor, based on the times we were at, the FDIC had every institutional motivation to protect that statute. Because of the importance of these issues and the dollars at stake, if a consensual resolution was not reached, the parties faced literally years of litigation. The

settlement itself was complicated by the number of parties and the numerous claims raised by these parties. significant time to achieve. settlement was reached. And it took a

Yet, in May 2010, a global

That settlement was found by this And, Your Honor, I would

Court to be fair and reasonable.

submit that based on the jurisdictional, the statutory and the monetary issues, the FDIC's participation in that settlement was essential. In May 2010, it was believed by the parties that by reaching this compromise, they avoided for the estate not just the uncertainty of litigation but the cost to the estate through professional fees and the accrual of interest. However, here we are fifteen months later, Your Honor. not have a confirmed plan, a confirmed plan which is an essential element of this settlement agreement. This delay has We do

been caused by out of the money constituencies, Your Honor, who have raised a series of specious arguments each of which has

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Page 103 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 been shown to be meritless, one after the other. And each time

one of these arguments is knocked down, Your Honor, these parties raise new, novel and sometimes inconsistent positions. This delay is taking away some of the basic considerations behind the settlement agreement. Now, these parties have had more than their day in Court, Your Honor. There is no reason to hold hostage the

recoveries to which creditors are entitled, including the FDIC based on these claims any further. The time has come for this

plan to be confirmed, for creditors to receive their distribution and for this case to be resolved. So unless Your

Honor has any other questions, that's the FDIC's position. THE COURT: Thank you. Thank you, Your Honor. Should we take a short break Thank

MR. CALIFANO: THE COURT:

All right.

and then we'll start with the settlement noteholders? you. (Recess from 11:47 a.m. until 11:57 a.m.) THE COURT: Please be seated.

Given the time, do we want to break now for lunch and have all the settlement noteholders together, or break up the settlement noteholders? Mr. Eckstein isn't here. UNIDENTIFIED SPEAKER: MR. ECKSTEIN: He is now.

Your Honor, it's obviously up to Your

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Page 104 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Honor, but I'm prepared to go now, and it probably would allow us to complete the process today if we essentially go to 1, and then maybe break in the middle of the settlement noteholders presentation, if that acceptable. THE COURT: Well, maybe we'll break after you and

hopefully the others can be shorter after they see how -MR. ECKSTEIN: THE COURT: That would --

-- much you've accomplished. That is fine, Your Honor, and

MR. ECKSTEIN:

obviously, whenever Your Honor wants to break -THE COURT: All right. -- is acceptable to us. And Your

MR. ECKSTEIN:

Honor, I will, since I'm leading off, probably spend the most time going through the record, and I think others will avoid repeating material that I'm going to cover. In addition, Your

Honor, I am going to have a series of slides are going to be put up by Ms. Otari (ph.) as I go through my presentation, and I will make those available to the other parties after we break. THE COURT: Thank you. Your Honor, thank you very much for

MR. ECKSTEIN:

giving us the opportunity to summarize what we believe are the high points of the Aurelius presentation and the settlement noteholder presentation in this case. As Your Honor, knows, since January of 2011, Aurelius

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Page 105 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 and the other investment funds that are referred to in this case as the settlement noteholders have had to contend with and defend claims that they traded illegally and improperly dominated and controlled the plan process and this reorganization. These claims have been spearheaded by the

official committee of equity holders wearing the mantle of an estate fiduciary and by certain investment fund holders of trust preferred securities. Both constituencies, as we know,

are not receiving distributions under the debtors' plan, and both are seeking, for a second time, to block confirmation of the plan in this case. This time, rather than attacking the

debtors and JPMorgan Chase, the settlement noteholders have become the prime target of the challenge. Just as the Court concluded the last time that the plan opponents failed to carry their burden to show bad faith conduct injuring the estates, the objectors, here, have again failed to carry their burden to substantiate their aggressive charges. Nevertheless, these accusations have exacted a heavy Each fund has

toll on each of the noteholders already.

incurred millions of dollars in legal fees over the past eight months contending with the litigation and defending these allegations, senior officials for each fund have dedicated significant amounts of their time and attention dealing with the extensive document discovery preparing for and submitting to depositions, reconstructing events that took place nearly

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Page 106 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 two years ago, reviewing lengthy pleadings, preparing for a week-long trial, giving live testimony, and enduring intense cross-examination. This process has had all of the burdens of There have been inquiries

a full-blown insider trading trial.

from concerned investors who have demanded explanations about these proceedings, and indeed, these allegations threaten the fund's existence and reputations and careers of their principals. The equity committee and the TPS are ignoring the views of the debtors and the creditors' committee, neither of which has any conflict and both of which would have every incentive to pursue valid claims if they existed. Both have

stated to this Court that these claims have no merit and have forcefully urged the equity committee and TPS to cease this campaign. The position of the debtor and the creditors'

committee have not been heeded. We submit that the record in this case is unequivocal. These clams have no factual or legal basis. We submit that the

plan should be confirmed and the motion to authorize prosecution of further claims against Aurelius and Centerbridge should be denied. Your Honor, the overarching theme of the equity committee and the TPS accusations is that the settlement noteholders and the debtors did not act in good faith and acted inequitably or in bad faith to control the case and the

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Page 107 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 reorganization plan. Lack of good faith is the foundation of

the claims to equitably disallow the noteholders' claims and reduce the rate of post-petition interest. Whether the

noteholders' actions were in good faith cuts across all of the claims in this case, and we would submit, is the prism through which the record should be reviewed. Aurelius submits that unlike the Coram and Citicorp Ventures cases, where lack of good faith was obvious and prominent, the record here demonstrates in compelling fashion that all of the actions in this case taken by the settlement noteholders, were taken reasonably and in good faith. The

equity committee and the TPS objections brazenly and repeatedly assert that the settlement noteholders controlled the debtors and the Chapter 11 case, exercised undue influence over the plan and the reorganization process, including the global settlement, and used that influence to obtain material nonpublic information to engage in improper trading. But the record does not support these allegations and compels a finding that the debtors and the settlement noteholders acted in good faith. makes this conclusion clear. Each settlement noteholder is totally independent and only came together as clients of the Fried Frank firm in November 2009, more than a year after the commencement of these cases. Mr. Dan Gropper of Aurelius testified that the A brief review of the record

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Page 108 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 settlement noteholders had no business or contractual arrangements between or among themselves. Aurelius had

absolutely no pre-existing relationship with the debtors, and are merely holders of the debtors' securities. The equity committee and TPS labor in their closing briefs and in their arguments to spin a nefarious conspiracy of domination and control. by the record. Their theories are completely refuted

Number one, Aurelius was one of many creditors The White & Case group had more

who participated in this case.

than thirty members and a seven-person steering committee. Appaloosa and Centerbridge were separately represented by Fried Frank. Also, there were many other creditors playing active

and visible roles in settlement negotiations, such as JPMC, the creditors' committee, the FDIC, Paulson, the bank bond holders, and other holders of claims. The record is clear that until March 2009, Aurelius had no involvement in any settlement or plan negotiations and had no access to nonpublic information. issue is in dispute. The March confi period. Aurelius' first involvement As a We do not believe that

with settlement negotiations in this case was March 2009. predicate to becoming involved, Aurelius entered into a confidentiality agreement with the debtors.

That agreement was The parties

carefully negotiated by counsel for both parties.

focused in advance on how they were going to handle nonpublic

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Page 109 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 information during and at the conclusion of the confidentially period, and relied specifically on other confidentiality agreements that had been used successfully in other large reorganization cases. The parties negotiated specific procedures for disclosure of material nonpublic information at the conclusion of the confidentiality period. Each of these items are

elements of good faith and careful attention to the rules governing investing. What happened during this period?

The record confirmed that all parties complied with the terms of the confidentiality agreement that was negotiated and put in place. The debtor communicated confidential

information concerning the tax refund range in March of 2009, and on April 30th, toward the conclusion of the confidentiality period, the debtors, in its monthly operating report, disclosed specific material nonpublic information, including the first tax refund range of 2.6 to 3 billion dollars. The debtors testified specifically, they did not communicate many other items to the noteholders, precisely because they did not want an obligation to publicly disclose the information at the conclusion of the period. Great care

was given to what was disclosed and what was not disclosed. And this contrasts importantly with the manner in which a debtor typically communicates with a creditors' committee, where this is complete and unfettered disclosure, no cleansing

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Page 110 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 during the case, and therefore no trading by committee members. And I recognize, Your Honor, there is a contrast between the conduct of the settlement noteholders in this case, and the way in which committee members typically conduct themselves. And it was anticipated consciously and negotiated And all

that a different standard was going to be applied.

parties understood, in good faith, and reasonably, the different standards that were going to apply to the noncommittee members as compared to committee members. Aurelius maintained an ethical wall during the confidentiality period. The other noteholders did not trade.

What is remarkable about this situation is that there is not even a suggestion by the objectors that these restrictions were not respected by the noteholders. We're not dealing with a

situation where there is a claim that the confidentiality agreement and procedures were violated. indicia of good faith by the parties. The noteholders engaged in one round of settlement negotiations in March. The equity committee and TPS cynically Again, these are

criticize and try to cast the settlement noteholders as seizing control of the negotiations and the debtors caving in to them and allowing them to push a proposal on JPMC. testimony dispelled this suggestion. The irony is, that had JPMC accepted the March proposal recommended by the noteholders, the equity would have, Mr. Kosturos'

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Page 111 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 in fact, been in the money. Indeed, every time the noteholders

were involved in the plan or negotiation process, they pushed the debtor to maximize the value of the estate. example is Mr. Gropper's April 30th e-mail. A prime

The equity

committee tried to use it to show control and ill will. However, it is clear on the face of this e-mail that Mr. Gropper was pushing the debtor for more value for all stakeholders, as the e-mail states. goal of the settlement noteholders. This was the consistent There is no evidence or

basis to infer that the noteholders sought to harm the estate or its stakeholders during this period. At the end of the first confi period, the record is clear, the debtors disclosed the material nonpublic information that had been provided to the creditors, including the four noteholders. And there were many other parties other than the

four noteholders who signed confidentiality agreements and received material nonpublic information. The testimony is that the debtors took seriously their obligation to evaluate and disclose what was determined to be material nonpublic information. The debtors specifically

considered whether it was necessary to disclose details of the settlement negotiations that took place during this confidentiality period, and determined they were not required to do so. Mr. Kosturos testified that he consulted with his

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Page 112 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 counsel, Weil, Gotshal & Manges, one of the most highly regarded firms in the restructuring and securities fields. They made a judgment that in April 2009, the settlement negotiations with JPMC were not material and did not need to be disclosed. These were decisions that were being made real

time, in the middle of the case, in context, rather than two years later in hindsight. Mr. Gropper and others, for their part, independently analyzed the information they received during the six-week period, and they also confirmed with the debtors' conclusion that all material nonpublic information was disclosed. Honor, I believe, on this point, you have clear, noncontradicted testimony that both the debtors and the settlement noteholders made independent evaluations and acted reasonably and in good faith. Mr. Kosturos and Mr. Gropper confirmed that the parties were approximately four billion dollars apart on the March proposals that the settlement noteholders knew about. fact, the parties were still billions of dollars apart, even after JPMC made its additional counterproposal in April, which Aurelius testified they never learned of, despite insinuations by the objectors to the contrary. All of this provides clear indicia, again, that the parties acted in good faith in determining what information needed to be disclosed. These facts cannot support an insider In Your

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Page 113 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 trading charge. Mr. Owens will discuss later on today the elements of insider trading law in more detail. from the record that Aurelius: But it should be clear

1) did not breach any duty;

2) did not act deceptively; and 3) did not act with knowledge or reckless disregard that it had material nonpublic information. trading claim. These are all basic elements of an insider And the claim fails, even without getting to

the materiality of the settlement proposals. Consideration of Aurelius' actual pattern of trading during and around the first confidentiality period, further undercuts any claim and confirms that the settlement proposals, in fact, were not material. I'm going to quickly review the

trading at that point in time by Aurelius. The TPS and the equity committee argue that the trading pattern in the senior notes evidences that the settlement negotiations in March 2009 were material. unsupported by the record. This is

Mr. Gropper testified that his

firm's research at the outset of the cases led Aurelius to conclude that the four billion dollar deposit belonged to the estate. Mr. Gropper also testified that his view was

consistent with the stipulation that JPMC was prepared to enter into in November 2008. And this testimony is supported by

Aurelius' purchases of senior notes during the first several months of the case.

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Page 114 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 So if Your Honor goes back and looks at the trading records, Your Honor will see that from its first purchase of senior notes on October 3, 2008 through January 5, 2009, all during which time Aurelius had no access to any confidential information, Aurelius' net purchase of senior notes was 104.6 million dollars. Aurelius continued to purchase senior notes from March to May, during the period the ethical wall was up. And from

March 31 to May 8th, while the wall was in place, Aurelius had net purchases of seniors of only 10 million dollars, going from 99.6 million to 109.6 million dollars. After the wall came

down, Aurelius continued to purchase senior notes, but on a more modest scale. Net purchases from May 12th through July

20th, which is about seventy days after the confidentiality period expired, there were only 4 million dollars of net purchases of senior notes. From the time the wall came down to

mid-July, Aurelius' position in seniors grew by a mere 3.65 percent. Contrary to the allegations, this is simply not evidence that Aurelius had access to and acted on some valuable piece of nonpublic information following the first confidentiality period. The purchase of senior notes was

consistent and regular throughout this entire time period. In addition, Your Honor, Aurelius also testified to a number of factors influencing the investment environment at

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Page 115 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 2009. this time, starting with publication of the tax information on April 30th, which itself justified an optimistic view on value. In addition, Aurelius was taking in new capital, learned it would not have to make material cash redemptions to its investors, and the market itself, as Your Honor will recall, was highly volatile; all factors that justify increasing their purchases in both seniors and subnotes, and belying the suggestion that there was any suspicious trading following the first confidentiality period that revolved around access to what was learned in settlement negotiations in March of 2009. The next period was the period of May 2009 to November This period is simple from our perspective. Aurelius

had no involvement with the plan or settlement negotiations with the debtor for six months; seven, if you factor in the fact that Aurelius had no involvement in the debtors' April negotiations. Given this fact, the allegation of domination

and control of this debtor and this Chapter 11 case and the plan process, seems irresponsible. There was absolutely no involvement whatsoever that is evidenced by Aurelius in this case for a seven-month period. And it's remarkable to me that there can be actually a suggestion of domination and control of this case. The next period is November 2009 to December 30th, 2009, which is the next confidentiality period. committee and TPS push very hard on this period. The equity They again

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Page 116 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 manipulate the documents, the testimony and the trading records to cobble together a distorted theory that the settlement noteholders were improperly influencing the plan process and taking unfair advantage of nonpublic settlement negotiations. Again, this is not true. Aurelius signed a second confidentiality agreement with the debtors on November 16, 2009. Like the first period,

the parties acted at arm's length and put in place similar contractual agreements involving maintaining information during the period and release of information at the conclusion. After

signing the confidentiality agreement, the debtors disclosed new confidential tax information, the 2.6 billion dollar second tax refund, which the testimony said, was in fact material and new information. The debtor also advanced a new offer to JPMC in November of 2009. The facts are as follows. JPMC initially

told the debtor that it might be willing to split the first tax refund on a seventy-thirty basis. The debtor, with noteholder

support, made an offer to split the first tax refund on a sixty-one thirty-nine basis. JPMC responded at the beginning They replied with a proposal

of December with a new construct.

that the first tax refund go to JPMC, the second tax refund go to the estate, plus they took an aggressive position on many other open issues. Mr. McCree himself, the lead negotiator for JPMC, said

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Page 117 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 in his cover e-mail, "We are far apart." This was the

information that the parties had at the beginning of December. Mr. Kosturos said that the JPMC proposal was resetting the bookends. There was frustration on all sides. The record from this point is simple and straightforward. Mr. Kosturos wanted to make a new proposal.

Aurelius knew that Mr. Kosturos would deliver a seventy-thirty proposal. That's what Aurelius was told. But the evidence

confirmed that that was the end of Aurelius' involvement during this confidentiality period and beyond. The testimony is that

JPMC's lead negotiator, Mr. McCree, went on a skiing vacation in the middle of December, and the confidentiality period ended without any further discussions or progress that the noteholders knew about. Despite efforts by the equity committee and TPS to twist the testimony to the contrary, Mr. Gropper testified that he was not involved and didn't know what happened after early December. He did not know whether Mr. Kosturos conveyed an

offer, and he certainly did not know if there was a response. This is crucial testimony that was confirmed by each of the witnesses and was not contradicted. The equity committee

distorts the record beyond recognition when it writes in its post-hearing brief, that the settlement noteholders knew in January 2010 that there was an "agreement in principal". is a misrepresentation of the record. This

The record is clear,

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Page 118 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 out. Aurelius did not know any such thing. Despite insinuations, there is no evidence that Aurelius was ever included in confidential negotiations during the first quarter of 2010 or had any material nonpublic information about the emerging settlement before it was announced in open court on March 12, 2010. The trading patterns in the fall of 2009 and early 2010 are instructive. The evidence could not be clearer that

Aurelius' PIERS accumulation, which was the fulcrum security at the time, tracked the ebbs and flows of the NOL look-back legislation, and was unrelated to any information it had about negotiations. A brief review of the PIERS trading bears this point After the first confidentiality period, when the equity

committee suggests Aurelius had inside information about a deal, Aurelius reduced its PIERS position from 51.4 million to 24.6 million by the end of August 2009. the trading records. seemed to be stalling. This is borne out by

This is a time when the tax legislation From September 16th through November

16th, prior to the signing of the second confidentiality agreement, Aurelius increased its PIERS position back from 24.6 million to 102.5 million. This accumulation closely tracked

the rise of the legislation and demonstrates and increase of 77.9 million during that time period. There was no trading during the confidentiality

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Page 119 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 period. PIERS. So for about six weeks, there was no trading in the After disclosure of the new tax information on December

30th, which was the most significant piece of tax information in the case, and an increase in the price of the PIERS by 165 percent since Aurelius stopped trading, Aurelius then resumed purchasing PIERS, and purchased approximately 30 million dollars of PIERS on the 31st of December. This was after the

market had digested the new information and the price of the PIERS had gone up by 165 percent. This transaction is entirely consistent with its pattern of trades prior to the confidentiality period, and reflects nothing extraordinary, notwithstanding strenuous attempts to argue to the contrary. Significantly, Aurelius

sold a substantial amount of PIERS on March 8, 2010, four days before the settlement terms were announced in open court and the price of the PIERS shot up. Indeed, the sale of the PIERS

in March is strong evidence that Aurelius didn't know the terms of the settlement in the first quarter of 2010. After the announcement of the first tentative settlement on March 12th, the price of PIERS went up by several dollars, making the sale of PIERS on March 8th, an incorrect or not-advantageous transaction for anybody who would have known what was likely to occur. That was an innocent transaction by

a party that did not have access to anything that was not otherwise in the marketplace.

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Page 120 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Your Honor, when I started discussing the record, I asked the Court to focus on the issue of good faith as a prism through which to view the record. And upon review of the

record, I submit, it is clear that Aurelius and all the other noteholders acted in this case, reasonably and in good faith. With the time I have remaining, I'd like to now briefly talk about the equity committee's motion to authorize the right to prosecute a complaint for equitable disallowance or other relief against Aurelius and Centerbridge. In

objecting -- in addition to objecting to confirmation, the equity committee has another strategy that would allow it to continue to litigate against Aurelius and Centerbridge postconfirmation. It has filed a motion for authority to prosecute

a complaint to equitably disallow the noteholder claims on behalf of the estate. This motion is essentially a replica of the confirmation objection, and if the Court rejects the equity committee TPS objections and confirms the plan, we would submit that the Court should simultaneously deny the motion. First it

would be highly prejudicial to leave this claim hanging over the settlement noteholders' heads after all of the time that has already elapsed. Having already tried these claims,

following extensive discovery, the Court should not permit a separate action to go forward unless it's prepared to send a message that it believes that securities laws were violated.

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Page 121 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 That could have a severe impact on these funds, and as I stated in the outset, actually threatens the existence of investment funds in this type of environment. This is not a casual request that's being made. This

is an action after a public trial to proceed with an insider trading litigation beyond what's already taken place. This

Court has already had the benefit of live testimony from all of the key witnesses who would testify at trial, and there is no suggestion from the record in this case, that there are lurking smoking guns that would emerge, even if the equity committee were given the opportunity for some further discovery. There is nothing in the record right now that would lead the Court to be suspicious of what took place. I believe

the Court knows full well what took place and has heard the key witnesses. Furthermore, if this adversary proceeding is allowed to go forward, Aurelius submits that the estate will be required to reserve hundreds of millions of dollars or more in connection with administrative claims that will arise out of what we believe would be a breach by the debtors of the confidentiality agreements, we believe, making it impossible to consummate the plan and the distributions as consummated (sic). There are consequences to having to defend a claim like this. And the potential implications of this claim are

monumental and could have implications that go to the

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Page 122 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 fundamental existence of the Aurelius funds. Because this

reservation would seriously interfere with projected distributions, we don't believe, as a practical matter, that the suggestion that was alluded to earlier, that the Court should confirm the plan and simply let these claims continue, is a viable suggestion. The debtors, in fact, recognize the seriousness of this claim in their own brief, and acknowledge the potential impact it likely would have on their ability to consummate the plan. In addition, there will invariably be many, many

millions of dollars of additional cost that all parties, including the estate, will have to bear if this litigation is actually tried at the level and along the lines of what's being suggested by the equity committee. We believe all of these factors should be taken into account in assessing the reasonableness of the debtors' determination that it was not reasonable and appropriate to proceed with this litigation. There are a number of other legal issues that we lay out in detail in our brief, which I'm only going to briefly highlight at this point in time. The Third Circuit recognizes As

two independent elements applicable to this type of motion.

Your Honor is well aware, a claim sought to be prosecuted must be colorable, and the Court must find that the debtor unjustifiably refused to prosecute the claim.

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Page 123 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Your Honor, on the record already before this Court, we think you clearly should find that there are no colorable claims that should be prosecuted in this case. But even

without going back and reviewing the substance, I think it's important for the Court to consider how this claim would be treated from a legal standpoint. Ordinarily, I believe that this Court would look at this motion from the standpoint of a motion to dismiss. Here,

as Your Honor well knows, the Court already tried the claims, and indeed, the equity committee has invited the Court to consider its pleadings in the context of the full record. the Court, I believe said, that it would do so. Therefore, the simple motion to dismiss standard is not the standard to apply here, but rather the Court should consider the fact that essentially the trial's already been heard. And we think that the Court should apply a much And

stricter standard than it would simply apply when there has just been mere allegations and an attempt for the first time to pursue discovery and to have witnesses testify before the Court. There is simply no evidence that Aurelius improperly And there is

dominated the debtors or traded improperly.

nothing in the record that would lead to a conclusion that more discovery would lead to a different outcome or result in a trial. There are other points. Your Honor heard reference to

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Page 124 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 claims. the fact that the motion should be denied because the basic claim that is being raised here, equitable disallowance, is no longer a viable theory under law. are different views on that. And I understand that there

What I would submit, Your Honor, And the

is number one, Pepper v. Litton is still good law.

legislative history expressly recognizes that Pepper v. Litton is still good law. And it allows the Court to apply equity to

the extent it would be consistent with state law. But the fact of the matter is that, at least in this circuit, the courts permit equitable subordination and equitable recharacterization. The courts are clear, equitable

subordination does not permit subordination of claims to equity. And equitable recharacterization is a very specific

basis to disallow a claim on the basis that the claim really was equity and not debt. Neither of those factors apply here.

Section 502(b) lists out nine elements for disallowing And the Supreme Court in Travelers instructs that we

should apply the Bankruptcy Code provisions without inserting new equitable provisions that go beyond the statute. THE COURT: Well, let me ask you a question. Doesn't

502(b)(1) incorporate any defenses one would have outside of the bankruptcy context? And if in fact there was insider

trading, you wouldn't have a claim, would you? MR. ECKSTEIN: THE COURT: Your Honor, to the ex --

Certainly, at least to the profits.

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Page 125 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 basis -MR. ECKSTEIN: THE COURT: -- and -MR. ECKSTEIN: -- to the extent there was insider

trading, there is ample basis in well-established law, for an insider trading litigation to be brought. That gets really to

a separate question, which is, should insider trading litigation be the province of debtors or creditors' committees on behalf of debtors in bankruptcy cases, or should it be left to the parties who traded with the buyer or the seller of the securities? Your Honor, I believe it comes back to the issue of good faith. If Your Honor believes that there was no good Whether disallowance is the And I do not Because

faith, there are remedies.

appropriate remedy, I have questions about.

believe that the Court merely can disallow the claims.

if there was insider trading, then I think to the extent there was evidence that actually somebody was harmed, none of which is in the record here -- none of which is in the record here -THE COURT: harm to the issuer. MR. ECKSTEIN: THE COURT: That's correct, and -Well, but insider trading posits there's a

So harm to the estate might be the

-- for insider --- and clearly, Your Honor, you have to

MR. ECKSTEIN:

go through all the standards of insider trading, including

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Page 126 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 there. those? MR. ECKSTEIN: I don't -- I don't think we have to duty, and whether there was scienter, and whether parties acted recklessly. THE COURT: I understand that. Again -- and I'm not going to repeat

MR. ECKSTEIN:

that -- I believe, Your Honor, if Your Honor were to determine that all of the elements of the insider trading claim were present, I have no doubt that Your Honor can find a remedy and apply that remedy. THE COURT: But equitable disallowance isn't one of

necessarily get bogged down today on whether it is or isn't still a viable theory. THE COURT: I believe --

But --- I believe that there is a very, very

MR. ECKSTEIN:

compelling line of case law that would lead to the conclusion that equitable disallowance specifically is not a remedy that's available to a debtor. THE COURT: still be -MR. ECKSTEIN: THE COURT: That is correct -I --

There's also case law to suggest it might

-- there. And --

MR. ECKSTEIN: THE COURT:

The Third Circuit hasn't said it's not

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Page 127 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 MR. ECKSTEIN: I agree with Your Honor. The Third

Circuit has not said -- but I believe what the Third -THE COURT: But they suggested they disagree with the

district court who held that it wasn't available, so. MR. ECKSTEIN: That is correct. But I believe, what

the Third Circuit has said is, you can equitably subordinate or you can equitably recharacterize. of those are applicable here. And I don't believe either

But even if equitable

disallowance is viable, I think what the Third Circuit says, and I think what Judge Gerber says in Adelphia is, that is a remedy that should be applied even more sparingly than equitable subordination. And in essence, what the courts say is that unless Your Honor is prepared to find that Aurelius and Centerbridge were insiders and fiduciaries -- and I don't believe there is any legal basis for those conclusions -- Your Honor is going to have to find that to justify equitable disallowance, that there was fraud. And that is what the case law says, that there was And respectfully, Your

fraud or the equivalent of fraud.

Honor, I don't believe even the equity committee is suggesting that there was fraud in this case. At most, they're suggesting I don't believe

that in hindsight, parties made a misjudgment. that a misjudgment was made.

But if all we're talking about is a misjudgment, that something was material, notwithstanding the debtors' conclusion

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Page 128 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 with the advice of counsel that it wasn't material, notwithstanding the independent determination by the noteholders at the time that it wasn't material, that is not a basis to equitably subordinate or disallow claims. And I think

that is, in fact, the law in the Third Circuit, whether disallowance is or is not a viable theory. So I would believe, Your Honor, that even if you conclude that equitable disallowance is still potentially viable, I would submit that Your Honor would dismiss this complaint on a motion to dismiss, because it is not a remedy that's available to the equity committee, because I don't believe that they've demonstrated requisite damage to the estate. B) I don't believe that they can prosecute a claim on That's not what they're

behalf of individual equity holders. trying to do.

They're trying to prosecute a claim that the And I don't believe that they can, simply,

debtor would have.

by using catch phrases, essentially try to take viable creditor claims and subordinate them to equity. Your Honor says, maybe there are -- maybe there are remedies that some creditor could raise in this case that they were somehow put upon in terms of trading. I've never heard

that suggestion, and that that would go to disallowing profits. But that's not what this case is about. This case, I believe,

is about good faith, and it's about whether or not the elements of insider trading have been satisfied here. And I believe

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Page 129 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 that for a whole host of reasons that we lay out as a legal matter, this claim would be dismissed before Your Honor even gets back to the question of whether the facts do or do not support the conclusion that a particular settlement negotiation might have been material. Your Honor, in conclusion, we think that the record here is comprehensive. We think that the record here is Your Honor heard five

remarkable in its consistency.

witnesses, none of whom sat and listened to the others' testimony. And what I think we take away from the testimony is

the remarkable fact that under intense cross-examination, each of the parties testified consistently. fundamentally disparate stories here. story already. We're not talking about Your Honor knows the The parties

Your Honor knows what happened.

believed they were following a procedure that made sense. Now, I heard Your Honor raise a question earlier, and the question is, is the right rule in bankruptcy cases that if parties want to engage in settlement negotiations, they should stop trading? And I can respect that as a legitimate question.

But respectfully, Your Honor, that was not the process that was applicable in this case and in many, many other, large, complex reorganization cases. Now, there are very good reasons why large creditors are encouraged to participate in settlement negotiations. we can debate about what is the appropriate mechanism upon And

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Page 130 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 which parties should or should not participate. I would

expect, Your Honor, that if a rule is made that if a party participates in settlement negotiations they have to agree to become restricted for the duration of the case, that that is going to limit willingness of many parties to participate. That might be acceptable. trial, Your Honor -THE COURT: Well --- sorry. But for purposes of this

MR. ECKSTEIN: THE COURT:

-- I suggest just an ethical wall. Your Honor, respectfully, an ethical There's a lot of cost to it. And

MR. ECKSTEIN:

wall is quite complicated.

most funds -- most funds believe that an ethical wall is the equivalent to not trading. And my experience is that parties

generally are not able or prepared as a business matter to maintain ethical walls for unlimited periods of time, sometimes more than a year. And you know, realistically, that is the reason why so few holders are actually willing to serve on creditors' committees. policy. And that -- again, that may or may not be good

But I think what's relevant in this case is the They

parties believed that there was a set of rules. negotiated the set of rules with the debtor. documented in writing.

Those rules were They

They were handled by counsel. And they were complied with.

were very, very specific.

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Page 131 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 And we would submit that it is not appropriate to penalize or punish the parties who complied with their contractual agreements and with what was demonstrated to be the practice in the marketplace, two years later, because the equity committee is trying to object to confirmation in this case. We believe that good faith is the right standard, and we

believe that it's been demonstrated, and there is no basis at this point in time, regardless of what the right policy is, to penalize the parties who participated in the case, and where there is no evidence that they harmed this estate. important. Notwithstanding what they said, they always pushed for more value, not less. And candidly, the evidence shows that And that's

had the noteholders not been here, the settlement probably wouldn't even have been as favorable, because the noteholders were always pushing for the most value for the estate. can't control how much ultimate value there is. pushed for more, not less. harmed the estate. THE COURT: They

But they

And there's no suggestion that they

Thank you, Your Honor. Thank you.

All right, well, let's take a break and come back at 1:30 then. (Recess from 12:38 p.m. until 1:34 p.m.) THE CLERK: THE COURT: All rise. You may be seated.

Before we proceed, I do have one question

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Page 132 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 for Mr. Eckstein. I'm sorry to put you on the spot. But I

didn't see anything in your papers regarding the TPS assertion that I don't have jurisdiction to enter a final order. What is

your opinion on that, and do I have a jurisdiction to decide the issue that you're asking me to decide specifically? MR. ECKSTEIN: Your Honor, with respect to

confirmation of the plan, we believe that the Court clearly has jurisdiction to resolve that issue. And we do not believe that This is -- we They are

the Stern case in any way undermines that.

believe that confirmation issues are core issues. clearly within the Court's jurisdiction. counterclaims -THE COURT: Even the good faith issue.

They don't involve

MR. ECKSTEIN:

Good faith is clearly -- you know, I don't think there's any

1129(a)(3) speaks to good faith.

doubt that the Court has the ability to determine whether the plan should be confirmed. THE COURT: Okay. I'm not speaking to in the hypothetical

MR. ECKSTEIN:

scenario where the Court were to permit an action to proceed, based on insider trading. I think that's a different question. But I don't think I think the question is

I don't want to get to that right now. that's the issue that they're raising.

whether the Court has the right to determine whether the plan should be confirmed. And I believe the Court has the

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Page 133 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 jurisdiction to do that, and I believe all the parties to the settlement have submitted to the Court's jurisdiction, and the Court can rely upon that and 1129(a)(3) which speaks to good faith. THE COURT: All right. Thank you. All right. Alan

MR. GLICKMAN:

Good afternoon, Your Honor.

Glickman; Schulte Roth & Zabel, for Owl Creek Asset Management. Your Honor I took the Court's admonition to heart over the lunch break and went over my nice typed outline with pencil and tried to cut it back to shape what's been said. So I'll beg

the Court's indulgence in the places where I can't read my handwriting. THE COURT: Okay. Owl Creek joins in all the points that

MR. GLICKMAN:

have been made with respect to the fact that there's no basis to claim that any of the so-called settlement noteholders traded on the basis of material nonpublic information or hijacked the settlement process. But we also take the Court's

admonition that each of Owl Creek, Aurelius, Appaloosa and Centerbridge, is entitled to have its own behavior independently assessed. In its post-hearing brief, the equity committee broadly asserts that the settlement noteholders engaged in insider trading. But in its objection to the plan, which is

what framed its claims, the equity committee made no insider

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Page 134 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 limited. trading allegations as to Owl Creek nor did it include Owl Creek in its motion for standing to seek equitable disallowance based on purported insider trading. The trust preferred holders got the benefit of the same discovery that the equity committee got, and they've never made any insider trading allegations as to Owl Creek, including in their post-hearing brief. None of this is surprising.

Owl Creek's involvement in the settlement process was It never negotiated with JPMC or the FDIC or the WMB It was only involved in the settlement Both were

bondholders.

negotiations with the debtors during two periods. covered by confidentiality agreements. Owl Creek adhered to their terms.

There's no dispute that

It didn't trade on the basis

of material nonpublic information and didn't hijack the settlement process. Both the equity committee and the TPS have cited authority that you can look at trading patterns in considering whether there's been improper trading on the basis of material nonpublic information. Owl Creek did not buy WMI securities

after it supposedly got secret good news about the settlement process. Once the confidentially periods ended, it principally And I'll get into that in a

sold or didn't trade at all. little bit more detail.

In fact, as the Court will hear more of later, the settlement noteholders had widely diverging trading patterns.

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Page 135 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 And given that they're all sophisticated funds, that strongly suggests that the information that they received wasn't indicative of anything at all. I want to make a couple of general points first. First, with respect to the standard. The equity committee

argues that because -- that the securities laws should not be the basis of the judge's determination here, and that the parties could have acted inequitably regarding trading even if they didn't violate the securities laws. But, Your honor, the

securities laws set the standard for what is and isn't appropriate when it comes to trading. Those rules have been

extensively developed over the decades, and they indisputably govern the industry. Both the EC and the TPS refer to them extensively. They should be the standard here. And even if the Court didn't

apply them, the same facts that show no securities law violation, make clear that there was no inequity, particularly on the issue of good faith. Now, let me talk about the standard for a moment. We

agree with Your Honor that if the settlement noteholders had a duty not to trade, and if they had material nonpublic information, then they shouldn't have been trading without an ethical wall. We agree. But the question is, did they have a Now, I

duty and did they have material nonpublic information?

want to go to some of the statements that the equity committee

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Page 136 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 made in its papers, which were filed simultaneously, so we didn't have a chance to address all of them. The equity committee is no longer trying to claim that the confidentiality agreements imposed continuing obligations after their termination dates. and 171 of their papers. You can look at paragraphs 69

They say nothing in the

confidentiality agreements prohibited the settlement noteholders from immediately trading on the basis of the information they had learned. that concession. They had no choice but to make

The confidentiality agreements had definitive

end points and said that they expired unless expressly preserved, which they were not. that that was his understanding. So now, instead of claiming that there was a continuing obligation, the EC is criticizing the debtor for allowing the settlement noteholders to trade after what it calls arbitrarily measured windows. clear purpose. But these windows served a And Mr. Kosturos confirmed

They provided a period of sharing information;

and at the end, they provided a cleansing mechanism for the disclosure of any material nonpublic information. What does the equity committee's concession that there was no restriction at the end of these periods mean? It means

that there can't be a claim of misappropriation under the securities laws, full stop, game over. Misappropriation is one

of the two bases for finding a duty that's the sine qua non of

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Page 137 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 an insider trading claim. Now, what's the other basis? That's

the so-called classical theory, and Mr. Owens will go into that more. tipee. Now, they don't claim that the debtors were tipping us under the confidentiality agreements. anywhere in their brief. You won't see that We're But fundamentally, it requires you to be an insider or a

We're not temporary insiders.

not nonstatutory insiders, for all the reasons that people have previously told you. I will not go there again.

Now, without a duty, there's no insider trading claim, you don't even get to materiality. materiality for a moment. But now, let's get to

Just because information was

provided under the confidentiality agreements, and therefore was deemed confidential information under the terms of the confidentiality agreements, does not mean it was material nonpublic information. That is precisely why those agreements

provided for a period at the end for the debtor to consider whether there, in fact, was any material nonpublic information revealed during that time. Now, we don't contend that for this Court to conclude that for settlement discussions to be material there has to be a signed deal, as some people have suggested we claim, or even an agreement in principle. This Court does not have to reach

the question of where the line is or even whether there's a line, because during the time that the settlement noteholders

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Page 138 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 participated in settlement, the parties weren't even close. You've heard about that before. This isn't remotely a situation, Your Honor, like a merger, where the very fact that a company is discussing selling itself could be material. The market expects It

participants in a bankruptcy to be discussing settlement. doesn't expect Microsoft to be making a bid for Apple. So what does the equity committee and the TPS do? They try to argue that because the parties got closer over time, it was clear that there would be a deal.

But first of The parties

all, it's not true that they were getting closer. backed off positions from time to time.

And in any event,

getting closer doesn't mean it's likely that there's going to be a deal, if there is still very significant differences. Deals go nowhere all the time after having gotten closer. Let me also mention, under the securities law, the standard of scienter and good faith. Even if there's a duty

and even if the information is material, you still have to show scienter, meaning that Owl Creek knew or was reckless in not knowing that it was acting improperly. here. That can't be shown

For all the reasons that Mr. Eckstein talked about good

faith, I'll talk it in terms of my client. There is no dispute that Owl Creek took careful measures to avoid trading while in the possession of material nonpublic information. It had detailed policies and procedures

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Page 139 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 with respect to insider trading. It regularly trained its It

employees with respect to the insider trading rules.

periodically restricted its trading in WMI securities during March and November during the confi agreements and afterwards when it received drafts of plans or disclosure statements. It required the debtors to disclose any material nonpublic information that was provided under the confis and to confirm that they had done so. And at the end of the confis,

it independently satisfied itself that the debtors had disclosed all material nonpublic information. It also required

its counsel and debtors' counsel not to reveal material nonpublic information at times that it was trading. Let me very quickly go through the various periods, focusing specifically on Owl Creek and on some of the claims that have been made in the EC's and the TPS's papers. start with the January 2009 White & Case term sheet. Let's There's

no dispute that Owl Creek's first involvement in anything relating to settlement was a term sheet that that group prepared in January of 2009. It was sent to the Fried Frank The equity committee

group and the debtors in late January.

and the TPS mention the term sheet, but neither one argues that it was material nonpublic information or that Owl Creek's or any of the settlement noteholders' trading surrounding the generation of the term sheet was improper. And it's no wonder. The term sheet was a wish list

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Page 140 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 prepared by parties on the same side of the negotiating table. There's no evidence that it ever went to JPMC or was ever the subject of negotiation and bore no resemblance to anything that followed. Owl Creek's trading, at the time the White & Case term sheet was prepared and sent also doesn't suggest that it constituted material nonpublic information. Throughout January

of 2009, Owl Creek continued the same trading pattern it had coming out of 2008. After the term sheet was sent to the

debtors on January 29th, Owl Creek made no trades in WMI securities for almost a month. All of the settlement

noteholders were aware of the term sheet, but they had divergent trading patterns, which again, doesn't suggest any directionality. The first confidentiality period in March. heard a lot about it. Owl Creek. You've

I'll do in shorthand, again, focusing on

It's the first actual settlement negotiations Owl And Owl Creek was at the meeting at It never

Creek was involved in.

Sullivan & Cromwell along with many other creditors. met with JPMorgan then or afterward.

Like others, it signed

the confidentiality agreement that you've heard a lot about. Now, ultimately, the debtors and JPMC exchanged term sheets that have been described as light years apart. won't go into the specifics of the two sides. already heard that. And I

Your Honor's

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Page 141 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Now, what the equity committee argues is that it's significant that JPMC supposedly agreed to relinquish the deposit accounts. But there's no dispute that there was no

agreement on anything unless the whole package was agreed to. And there has been no challenge whatsoever to the testimony of Owl Creek's Dan Krueger that Owl Creek concluded back in 2008 that the deposits belonged to the estate, based on public information. And Owl Creek's own quarterly investor letter

that Mr. Krueger was shown on cross-examination, confirms this was the case. And Owl Creek put its money where its mouth was

by buying substantial amounts of senior notes and other WMI securities back in 2008, based on that public information. Now, less than a week after JPMorgan responded to the debtors' proposal, as the Court is aware, major litigation ensued. April. Now, the equity committee focuses on what happened in In April, the debtors and JPMC did exchange proposals.

But there's no dispute that the debtor did this without the knowledge or involvement of Owl Creek or other settlement noteholders. Now, the equity committee says the evidence strongly suggests that the settlement noteholders, or at least Aurelius, soon found out the terms of the April 16 proposal that the debtors made to JPMC, if not the terms of the JPMC proposal. There is no basis for that claim as to Owl Creek or Aurelius, for that matter. It's based purely on the fact that Mr.

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Page 142 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Gropper of Aurelius was upset after he learned the exchange took place and that there was a meeting held afterward. But

there's no testimony and there's no document that says that the substance of those settlement negotiations were disclosed, and it wouldn't matter if they had been disclosed. come close to resulting in a deal. They didn't

As Mr. Kosturos testified,

the parties were well over three billion apart. Then the confi agreement terminates on May 8th. Owl

Creek takes the steps that I described to ensure that it had no material nonpublic information. It asked for confirmation from

the debtors that the debtors had disclosed any material nonpublic information, as the debtors were required to do under the confi agreement. And Owl Creek got confirmation through And Owl

White & Case that the debtors said they had done so.

Creek independently attested to the fact that it considered whether it had nonpublic information that was material before it resumed trading. Now, let's look at the trading after that period. TPS claims that the purchase of senior bonds would be suspicious after the first confi period based on what went on. Well, we don't agree that this is indicative of insider trading. But in any event, Owl Creek did not do it. Owl Creek The

only sold senior bonds for several months after the first confi period. It didn't make purchases of any WMI securities until a And it wasn't

week and a half after the confi period ended.

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Page 143 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 senior notes. two days. It was a relatively small amount of PIERS over Owl Creek had been

Nothing unusual about that.

buying PIERS since before the confi period started. It's also significant once again here, as you'll hear in more detail, that the trading patterns of the settlement noteholders substantially diverged. stage. The summer of 2009. That's a short story. Owl Creek Let's move to the next

did not participate in settlement discussions after the first confi agreement until the second one was signed in November. There's no dispute about that. Two other settlement

noteholders had some settlement negotiations with JPMC in the summer. involved. Now, the equity committee says that there's a dispute about whether Owl Creek learned about these negotiations afterward when it joined the Fried Frank group. And there's That went nowhere. No issue. Owl Creek was not

testimony that Owl Creek may have been apprised in late October of the fact that there had been negotiations. But there is no

testimony, and there is no document, that Owl Creek ever learned the terms. The equity committee says they must have

known it, because now they were a member of the Fried Frank group, and the people who were doing the negotiations had been a member of the Fried Frank group. But as Mr. Melwani of Centerbridge testified, the

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Page 144 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Fried Frank group didn't have a master plan or book of secrets to give Owl Creek when it joined. And in fact, there's

extensive evidence that the four noteholders did things independently even after they joined. some attended that others didn't. There were meetings that

There were communications They were not a

that some had and that others didn't. monolithic unit.

In any case, as you'll hear in more detail, I'm sure, from those who were involved, the summer negotiations were not material. By the time Owl Creek learned of the fact that there

had been negotiations, two months had passed since Appaloosa and Centerbridge last met with JPMorgan. And by September 2nd,

JPMorgan had completely withdrawn its offer. So now let's move to the next stage, the so-called second confidentiality period that began in November. That's

Owl Creek's next involvement, and it was a limited involvement. Mr. Bolin of Appaloosa testified that during this period Kosturos, Centerbridge and Appaloosa were having the primary discussions with JPMorgan. Owl Creek entered into the second

confidentiality agreement that's been described to the Court. The terms are similar to the first. And it's undisputed that

Owl Creek did not trade during the term of that confidentiality agreement, just as it did not trade during the term of the first one. Now, the equity committee makes a big deal out of a

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Page 145 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 November 20, 2009 e-mail from JPMC to the debtors that said that JPMC was ready to engage in substantive negotiations at a thirty-seventy split of taxes. The debtors forwarded that to There's no evidence And if you

two other settlement noteholders, not us.

that Owl Creek ever saw or knew of that e-mail.

look at the cites that they give for that proposition, you will not see any reference to Owl Creek. But in any case, that e-mail wasn't material. As Mr.

Kosturos said, the debtors would not enter into an agreement with JPMC at this level, because the proposal had to be broadened into a three-way or four-way discussion, given the demands that the WMB bondholders were making. seeking only a two-way agreement. November 23rd, the debtors send a settlement proposal. That's been covered. JPMC responds on November 30th, and And JPMC was

that's the resetting of the bookends response that the Court has heard plenty about. reset the bookends. I won't go into the terms as to why it JPMC

There's extensive testimony on that.

critically refused to contribute to a settlement with the WMB bondholders and wanted a hundred percent of the first refund. Now, the December settlement discussions which the equity committee makes a big deal of also. On December 8, Both

2009, debtors sent JPMorgan a new settlement term sheet.

the equity committee and the trust preferreds claim that the settlement noteholders participated in drafting the December

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Page 146 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 8th term sheet, and were involved in furthering negotiations in December. There is no evidence, none, that Owl Creek was involved in preparing the proposal or was part of the discussions. If Your Honor looks at the citations, there is no

reference to Owl Creek. Now, in any event, there was nothing material about the December proposal or anything else in December for that matter. As you've heard, JPMC's lead negotiator was on

vacation, and JPMorgan didn't even submit a response to the December 8th proposal until over a month later on January 12th. And no one is arguing that any of the settlement noteholders saw that response. The WMB bondholders, at the end of December, were asserting a claim to billions of dollars. And Mr. Kosturos

made clear that it hadn't even been possible in December to have negotiations with them. Even the equity committee

concedes that by the end of December, the parties had still not yet agreed on how to handle the cost of the WMB bondholders' claims, which is highly significant. Termination of the second confidentiality period. Now, at the request of one of the settlement noteholders, the second confidentiality agreement terminated a day early -- we heard a lot about that at the trial -- on December 30th. There's nothing insidious about that. But in any event, Owl

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Page 147 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Creek didn't make the request, and Owl Creek didn't trade on December 31st. Before taking WMI off its restricted list, Owl Creek went through the same process it had gone through before. asked that the debtors confirm that they'd disclosed any material nonpublic information provided during the confidentiality period, as the debtors were required to do. got that confirmation. And it specifically and independently It It

considered the material nonpublic information question independently. Now, let's look at its trading after the second confidentiality period. Here again, according to the TPS, the Now,

purchase of PIERS would be indicative of something wrong. we don't agree with that.

But in any event, Owl Creek didn't

purchase anything between the end of the confidentiality period on December 30, 2009 and the announcement of a deal on March 12th. Owl Creek only sold WMI securities. On January 5th and

6, it sold senior notes. subordinated notes.

On January 7 and 11 it sold And

And on January 12th, it sold PIERS.

it didn't do any trading at all after January 12th, prior to the March 12th announcement. And once again, as you'll hear,

the settlement noteholders all had divergent trading patterns during this period. All right. Next unit of time. End of the second Owl Creek was not

confidentiality period to March 12th.

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Page 148 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 involved in settlement negotiations during this period. equity committee doesn't challenge this. Mr. Kosturos The

testified that the settlement noteholders had no involvement in negotiations during this period. The only exception was one

meeting in March that one settlement noteholder had with JPMC, and that settlement noteholder was not trading. The first time that Owl Creek learned the terms of the deal was when it was announced on March 12th. That was the

testimony of Mr. Krueger, and it stands undisputed. The only involvement of the settlement noteholders during this period was preparing a proposed form plan of reorganization in early 2010 to have a mechanism in place if there ever was a settlement. It was sent to the debtors. It

was discussed at a January 12th meeting and a February 25th meeting. And the debtors had no interest in it. During this period, as others, Owl Creek relied on its counsel to act as a screen. dispute this. The equity committee doesn't Not

And it comes up with a whole new theory.

communicating with the settlement noteholders constituted material nonpublic information. of their brief. Now, why is that? Supposedly because if talks were Check paragraphs 127 and 185

faltering, the settlement noteholders would have expected to be told. Your Honor, with due respect, that's complete nonsense. And

Settlement talks faltering in this case was nothing new.

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Page 149 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 plus, the equity committee's argument that this would be news, assumes their conclusion, which is that the SNH believed the settlement was around the corner. nonpublic information. But even beyond that, even Fried Frank wasn't involved in settlement discussions that the debtors were having with the FDIC for most of this period until late February. testimony of Mr. Kosturos. trading again. That's the Silence is not material

And in any case, let's look at the

Owl Creek make no trades in WMI securities Didn't trade at all after

during virtually all of this period.

January 12th, as I've mentioned, until after a deal was announced. That means it stopped trading almost a month before

the settlement noteholders' reorganization proposal was sent to the debtors. Now, the equity committee says, well, wait a minute. Appaloosa restricted itself after the February 25th meeting. Nobody else did. But no restriction was required. There was

nothing discussed at that meeting that was material nonpublic information. that. itself. time. There's nothing in the record as to whether that was as a result of a restriction or not. didn't ask, and it doesn't matter. The equity committee You can't trade on the The debtors specifically refrained from doing

And Appaloosa never said it was required to restrict And in any event, Owl Creek was not trading at that

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Page 150 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 basis of inside information if you don't trade. So the equity committee throws in another theory. It's improper not to trade. It's improper not to trade,

because it means you're consciously deciding that your holdings are valuable. Your Honor, with all due respect, that is truly There is absolutely no

scraping the bottom of the barrel.

basis for a claim that not trading somehow constitutes a violation of the insider trading laws. Last period: the events after March 12, 2010.

There's no evidence that Owl Creek was involved in settlement negotiations between that time and October 6, 2010 when the sixth amended plan was filed. It received draft plans and

disclosure statements in advance, but it restricted its trading and only removed WMI from the restricted list after documents were filed. Now, the equity committee says on March 23rd, the settlement noteholders received waterfall information that was not disclosed on March 26th. In fact -- and this is in our

brief; I won't go into it in detail -- but amounts of allowable claims in the waterfall that they got do match up with the disclosure statement exhibits. such as cash were not disclosed. They say that various items But these figures were either

illustrative plugs or were small compared to the seven billion that the debtor did disclose or were derivable from public information or some combination of the above.

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Page 151 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 The equity committee has no theory as to how this supposed information would actually have affected trading decisions. And even the TPS holders don't make any claim that And there's no

any of this was material nonpublic information.

basis to conclude from Owl Creek's trading after March 26th, after the disclosure statement, that it had material nonpublic information. notes. It continued its prior pattern of selling senior

Its only purchase was the subordinated notes on April

21st, more than three weeks after the supposedly deficient disclosure statement was filed and Owl Creek resumed trading. After April 21st, Owl Creek stopped trading entirely in WMI securities. Now, obviously, Owl Creek is focused on issues of insider trading and hijacking, but the equity committee also did try to use Owl Creek to support its claim that the debtors undervalued reorganized WMMRC. And they cite Owl Creek's

valuation models that apply a twenty-percent probability of the utilizing NOL carry-forwards. Short answer to that is that the

equity committee totally ignores the more recent Owl Creek valuations that assigned a zero probability to the NOLs, and it ignores that Owl Creek didn't opt to take any more equity in WMMRC than it had to. There's no better proof that Owl Creek

doesn't believe there's no hidden value there. In conclusion, Your Honor, the record shows that Owl Creek did not hijack the negotiations or trade on the basis of

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Page 152 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 material nonpublic information and neither did any of the other settlement noteholders. Its involvement in the settlement It took its

discussions was limited and appropriate.

obligations under the securities laws very seriously; suspending its trading when it had material nonpublic information, and its trading patterns are directly at odds with any theory of insider trading put forth in this case. you. THE COURT: MS. DOUVAS: Thank you. Good afternoon, Your Honor. Maria Douvas Thank

from Paul Hastings, on behalf of Appaloosa Management. Your Honor, when we were here in February first responding to these speculations of wrongdoing, we told the Court that the evidence would show that Appaloosa had done nothing wrong, that any speculations to the contrary were demonstrably false, and that Appaloosa had complied with all the applicable bankruptcy and securities laws at all times. Well, now after months of investigation and a seven-day hearing, the evidence is now in. And what we told Your Honor back in February is exactly what the evidence has shown. The evidence has shown

that Appaloosa conducted itself ethically, legally, and with integrity throughout the course of these proceedings; that Appaloosa never traded when it was legally required not to and that Appaloosa even took steps to voluntarily refrain from

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Page 153 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 trading during periods when it thought it was prudent to refrain. In fact, Your Honor has seen in many of the briefs,

including from some of our adversaries, that Appaloosa is used as a model of conservative and appropriate behavior; so much so that the equity committee and the TPS have used Appaloosa's trading decisions as examples of the right thing to do. Your Honor, the evidence has also shown that Appaloosa's decisions whether or not to trade; they weren't made in isolation or in secret. To the contrary, Appaloosa was

always clear with the debtors about whether and when it wanted to receive restricting information. And in those instances

when Appaloosa did tell the debtors that it wanted to receive information that would restrict itself, it did not resume trading until after it had confirmed with the debtors that it was free to do so. And Your Honor, those facts alone should

end this insider trading inquiry as a matter of law. Supreme Court precedent dictates that where an investor discloses his or her intent to trade in the securities of an issuer that that is fatal to a claim of insider trading under the misappropriation theory. And continuing this inquiry

would not only be contrary to Supreme Court law, but to the facts, to equity, and really to common decency. Your Honor has

seen throughout this proceeding the equity committee distort the record and rely on gross speculation and innuendo that a number of well respected professionals, including Fried Frank,

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Page 154 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 White & Case, Alvarez & Marsal, Weil, Gotshal, all abdicated their professional responsibility and committed crimes so that a few hedge funds could make some money on their investments. Your Honor, I submit that that theory is not only offensive and lacking in good faith, it's absurd. And there

are a couple of examples that make this readily apparent and show that those who seek to vilify certain creditors in this proceeding are really doing so based on smoke and mirrors and not on the facts and not on the law. I want to first talk about the equity committee's theory with respect to the two confidentiality periods and what did and did not happen during those periods. The equity

committee's theory is essentially that those who participated in the negotiations received materially positive information that the debtors didn't disclose, and that theory's just plain wrong. Here are the facts which are not in dispute. Number

one; Appaloosa did not trade during either confidentiality period. That's not in dispute. Number two; during the first

and second confidentiality period Appaloosa received the debtors' estimate of the first and second NOL that was material information and that was disclosed to the public prior to the end of the confidentiality periods. That's not in dispute.

It's also not in dispute that Appaloosa did not lift its trading restrictions until it had independently verified that the proper disclosures had been made and had confirmed

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Page 155 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 with the debtors that in the debtors' view Appaloosa no longer had materially public info -- nonpublic information and was free to trade. It's also not in dispute that a deal was not in

fact reached during either the first or the second confidentiality period or that the ultimate signatories of the global settlement agreement included the FDIC. And that's an

important fact because the FDIC was very minimally involved, if at all, in March of 2009. And there is no evidence that the

FDIC even received these term sheets in November or December of 2009, let alone had approved of them. All these facts are not in dispute. So what's left

here is the equity committee's theory is that these failed discussions between the debtors and JPMorgan in March of 2009 and then later in November of 2009 constituted materially positive information. And that theory rests on the notion that

the settlement noteholders were somehow able to discern the socalled good news that JPMorgan was just going to give up four billion dollars in deposits and give up some portion of the taxes in order to reach a settlement. And what the equity

committee says about that is that the settlement noteholders were able to use this so-called information to engage in a shopping spree, and that's the equity's committees words; a shopping spree of the debtors' securities. Well, Your Honor, that theory, even with just a cursory review of the facts, especially with respect to

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Page 156 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Appaloosa, is just plain wrong and is contradicted by the evidence. In both May of 2009, which is after the first

confidentiality period ends, and January of 2010, which is after the second confidentiality period ends, Appaloosa is a net seller of the debtors' securities, not a buyer. So this

notion that Appaloosa engaged in some sort of shopping spree of the debtors' securities is just plain wrong. The facts are simple, and they're this. 2009, Appaloosa had two trades. In May of

It had a small buy of the

senior subordinated notes with a face value of two million dollars, and that buy was followed eight days later by a sale of the senior notes with a face value of five million dollars. So it had a small buy and a small sale in May. January of 2010, it only sold. Later, in

There were no purchases by So

Appaloosa in the debtors' securities in January of 2010.

the notion that Appaloosa thought it had materially positive information really doesn't make any sense at all, and it doesn't make any sense, Your Honor, because it is simply not true. The other distortion that I think is worth mentioning is the equity committee talks about the period of late March 2010 after the plan and the disclosure statement and the global settlement all had been disclosed. And what the equity

committee says about that time period is that the settlement noteholders somehow knew that the debtors had more assets in

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Page 157 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 the estates than that which was disclosed to the rest of the public; a fact which obviously, if it were true, would have inured to the benefit of preferred equity holders, and once disclosed would have made the stock price go up, not down. since Appaloosa sold its shares of preferred equity on March 29th and March 30th, that argument really doesn't make any sense and should be rejected. But the reason why I'm And

mentioning it is because I think it best exemplifies how the equity committee has, in certain instances, distorted the record and made up facts in properly fit into its theory of insider trading. At the hearing, Your Honor, you may recall that the equity committee tried to improperly insinuate that the debtors had not disclosed the subordination matrix in the March 26th filings. And then you saw on redirect that that argument was

just plainly false and lacking in good faith because despite the equity committee's attempt at sleight of hand in showing Mr. Bolin the blank place holder for the liquidation analysis, which is something Appaloosa had never received prior to its disclosure, the subordination matrix itself was in fact disclosed. And that was in Exhibit H. So then on recross,

rather than at least concede error on that point the theory shifted. And what Your Honor saw was that they showed the May

disclosure statement to Mr. Bolin, and the equity committee tried to insinuate that Appaloosa knew back in March that the

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Page 158 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 estates would have 7.7 billion dollars worth of assets. Well, Your Honor, that theory, too, was lacking in good faith because Appaloosa didn't know in March that the estates would have 7.7 billion dollars, and the settlement noteholders didn't know that in March the estates would have 7.7 billion dollars. And indeed, the debtors didn't know it,

because it turns out that that money came from later concessions by the FDIC. So that theory was just plain wrong.

And now, for the first time, in their post-hearing brief we have a new theory. And this theory is that Appaloosa And

knew that there was 7.3 billion dollars in the estates.

that theory, Your Honor, really fares no better than the other two. Here's why: first, the settlement noteholders did not

know precisely how much cash there were -- there was in the estates. And there's no evidence that it did. The exhibit

that the equity committee points to in EC-43 is simply a model waterfall analysis that has a hypothetical distribution of 5.2 billion dollars. It's not a disclosure of the amounts of the And as Your Honor knows, the

cash that's in the estates.

amount of the cash that's in the estates is nearly a subset of the total amount of proceeds, and the total amount of proceeds were in fact disclosed. But in addition to that, Your Honor, what the equity committee does in order to create this impression that Appaloosa and the settlement noteholders didn't have a key

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Page 159 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 piece of information is they essentially ignore the public filings that had been made. And if you look at the public

filings they're very informative, because in the January 2010 monthly operating report, which was filed in late February, there is a schedule of cash receipts which discloses 4.85 billion dollars in cash. In addition, in that same monthly

operating report, it values the intercompany investments at 180 million dollars. So already in that one monthly operating

report alone you have over five billion dollars. Then, in March, when it files its disclosure statement, the debtors disclose that it intends to receive fifty million dollars because of the Visa shares and an additional fifty million dollars from the vendor claims. So

when you add up all these public disclosures that the equity committee fails to mentions what you get to is approximately the same 5.1 to 5.2 billion dollars of cash they're complaining about. Addition -- additionally to that -- I'm just going to

repeat the point -- that all of this is subsumed by the statement by the debtors that the estates had an excess of approximately seven billion dollars in total distribution -- in proceeds for total distribution. Secondly, Your Honor, as with regard -- as the same point as with regard to the equity committee's theory on this shopping spree, the claim that Appaloosa somehow knew that there were additional assets in the estates and trade on the

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Page 160 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 basis of that information makes no sense where Appaloosa sold equity shares. them. They didn't buy preferred equity. They sold

And it did so at a time when the public knew, based on

the debtors' filings, that there was simple not enough proceeds in the estates to cover the debt claims. and again, Your Honor

saw this during the confirmation hearing itself when we walked with Mr. Bolin the disclosure statement and how it showed that there were approximately 7 billion dollars in assets, there were over 7.25 billion dollars in debt, and the subordination matrix, which was disclosed, showed that once those 7 billion flowed through the waterfall there was simply no recovery left for preferred equity. changed. So this theory that Appaloosa did anything at all improper with respect to its sales of preferred equity on March 29th and March 30th can be rejected. Your Honor, at the end of And that's a fact that has never

the day the evidence with respect to the insider trading is clear. From the beginning of these proceedings and throughout

the case Appaloosa complied with the securities laws and did not commit insider trading. arguments to the contrary. Now, before I sit down I just want to talk briefly about the second of the equity committee's arguments, and that's namely that the settlement noteholders somehow hijacked the settlement process and forced all sorts of powerful parties And the Court should reject any

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Page 161 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 to enter into a settlement agreement that was beneficial to the settlement noteholders and the settlement noteholders at all. Your Honor, respectfully, that argument is pure fiction. As

with respect to the insider trading argument, if one puts aside all of the gross speculation and the innuendo, there is simply no evidence that Appaloosa or anyone else for that matter asserted any undue influence on the debtors or their professionals. opposite. The evidence has shown that at all times the debtors controlled this process, and they conducted this bankruptcy in a manner in which they believed would be most beneficial to the estates. And you heard from Mr. Bolin, and he told you that at In fact, all of the evidence has shown just the

times the debtors took litigation strategies and positions that differed from what Appaloosa would do and over the objections of Appaloosa. For example, Mr. Bolin testified that Appaloosa

pressed the debtors to take the turnover action to judgment. And the debtors didn't do that. He also testified that the

debtors gave the FDIC more money in the global settlement agreement over Appaloosa's objections. And perhaps most And Mr.

importantly, Your Honor, you heard from Mr. Kosturos.

Kosturos made it absolutely clear that the debtors made their own decisions about what to do, and they did not take direction from anybody else, including from the settlement noteholders, that Mr. Kosturos did not feel compelled to involve the

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Page 162 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 settlement noteholders, and especially Appaloosa, in all aspects of the negotiations for the case. And Your Honor saw that in fact the debtors didn't include Appaloosa and the settlement noteholders in all aspects of the negotiations, including the most critical ones that took place in the first quarter of 2010. Appaloosa didn't even

heard the terms of the settlement agreement until after the debtors and the FDIC and JPMorgan and the creditors' committee they all had agreed. accompli. It was then handed to Appaloosa as a fait

So, you know, what's the basis for the equity

committee's claims that Appaloosa or anyone else somehow hijacked the process? There is none. There is no evidence

that Appaloosa dominated the settlement process or controlled the debtors. Zero.

Similarly, the evidence is clear that Appaloosa only acted on its own behalf. It never acted as fiduciaries, which And it tried to

is something Your Honor has already found.

maximize the value to the estates and bring a resolution to these proceedings. By participating in the process, Appaloosa And in fact,

tried to expedite, not delay a resolution.

Appaloosa's participation helped facilitate a successful resolution that according to the debtors enhanced the estates by billions of dollars. Your Honor, this type of behavior

should be encouraged, not penalized. Appaloosa did nothing wrong. It comported itself

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Page 163 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 professionally and with integrity throughout these proceedings. There is no evidence to support the equity committee's allegations against it. And now that the evidence is in, the

Court can see that those allegations, just like some of the other pro se shareholders' allegations against Appaloosa, are baseless and wholly lacking in substance. that these objections be denied. THE COURT: MR. OWENS: Thank you. Good afternoon, Your Honor. Richard Owens We respectfully ask

Thank you, Your Honor.

from Latham & Watkins, for Centerbridge. I will try to keep my remarks as brief as possible. Much of my thunder has been stolen by the many fine lawyers who have spoken before me and whose arguments I would hope have been persuasive to the Court. But I may not have the luxury of

assuming they were persuasive enough that I can just sit down and put the rest of my time up for bid to the audience behind me. So I will charge ahead, and let me do so by jumping right into the elements of 10(b)(5), because I think to hit the nail on the head that although the equity committee has styled its claims as inequitable conduct, in the absence of being able to demonstrate a violation of 10(b)(5) there is no equitable conduct here. and the reasons for that are several fold, but

the most important of which it's hard to imagine how one could reach a decision that the trading activity of the settlement

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Page 164 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 security. noteholders, and that's all I really understand to be fundamentally at issue here is their trading activity, could be inequitable if it was lawful, how it could be inequitable if there was no deception, how it could be inequitable if there was no unfair gain or advantage over the debtor or others who were participants in the market. And to answer those questions, the questions that I just outlined about whether or not there would be harm or unfair advantage to the settlement noteholders over the market place, we have a ready and able and clear guide. And that

guide is Section 10(b)(5), Rule 10(b)(5) in the case law interpreting them. So let me turn now to the elements of a

10(b)(5), because I think a straight forward application of the elements of 10(b)(5) to the facts here leads us fairly quickly and fairly simply to a conclusion that there was no inappropriate activity. The elements are first that there be trades in a Well, that's obviously present here. Second, that

the trade occurred by someone while that person in possession of material nonpublic information. come back to that later. That is not clear, but I'll

Third, that the information was

obtained pursuant to a fiduciary duty or a duty of confidentiality owed to the source of the information. That's

very important that the duty is owed to the source of the information, not a third party, and that the trades were done

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Page 165 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 with scienter. And that is specifically with an intent to

defraud or deceive. That last element, the requirement of scienter, the requirement of deception is the touchstone of a 10(b)(5) violation. 10(b)(5). And in its absence, there can be no violation of Now, the principle claim by the objectors is that

the settlement noteholders became privy to various settlement proposals that were engaged back and forth. It is entirely

clear and undisputed that the only source of that that's relevant here was the debtor and that the debtor knew that the settlement noteholders were going to trade on that information, or rather trade while in possession of that information after the expiration of the confidentiality periods. And that, I think, Your Honor, ends the inquiry. it is, I think, very accurately or forcefully shown if we compare the words of Justice Ginsburg with the words of Mr. Kosturos. Pardon me for the technology. And I have copies for And

the -- of these and other slides that I'm going to use for the Court and for the other parties that I'm happy to hand out later. But O'Hagan is the leading Supreme Court and most

recent Supreme Court case dealing with the misappropriation theory of insider trading, but its holdings are equally applicable here. And they are, as Justice Ginsburg said, if

the fiduciary discloses to the source that he plans to trade on the nonpublic information, there's no deceptive device, and

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Page 166 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 case. MR. OWENS: O'Hagan is a misappropriation case, but theory -THE COURT: MR. OWENS: THE COURT: Really? -- Your Honor. I thought that was a -That is -therefore no 10(b)(5) violation. And if we compare that with what we know from the record and what Mr. Kosturos told us that he knew that after the expiration of the confidentiality period settlement noteholders would be free to trade, there is just no deception, Your Honor. There's no deception of the source of the We don't need to reach

information and no 10(b)(5) violation. the issue of materiality -THE COURT:

Well, what about the classic theory?

This

isn't a defense on that point, is it? MR. OWENS: THE COURT: MR. OWENS: It -The classic theory is -It is certainly a defense on the classic

MR. GLICKMAN: THE COURT:

-- O'Hagan was just a misappropriation

the language of 10(b)(5) is the same whether it's a misappropriation or a classic theory. And in both -- under

both theories, the requirement is that there be a deceptive devise or contrivance, some means of defrauding, i.e., some

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Page 167 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 deception. The difference is in the classical theory the

deception that courts found, and we can look to Dirks for guidance on this -THE COURT: MR. OWENS: Um-hum. -- the deception there is the fiduciary

obligation of an officer of the corporation to its shareholders in the context where the officer is trading on the other side of a trade from the shareholders, and therefore the officer has a duty -- a fiduciary duty not to take advantage of a shareholder by reason of an inequitable and advantage of information. It is the fiduciary obligation of the officer to

the shareholder as the counterparty that is the element of deception on which the classical theory is premised. doesn't apply here for a number of reasons. First, we are not insiders. The objectors have That

attempted to suggest that we are somehow became temporary insiders, but there are two responses to that that are very important. First, factually, it's wrong. Second, even if we

were somehow temporary insiders, there is still no deception to our source of information, which is the debtor. talk about each of those in turn. Now, let me

The first question is That, as a matter

factually did we become temporary insiders.

of jurisprudence, is a category that has been reserved for people who become involved in a clearly fiduciary capacity or consulting capacity in the affairs, in the business, in the

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Page 168 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 day-to-day operations of an issuer, so, for example, underwriters, investment bankers, lawyers, accountants, consultants, who work for the company, who are its employees or its agents or its consultants. None of the settlement noteholders, certainly Centerbridge, fits into any of those categories. So concluding

that Centerbridge or the settlement noteholders were temporary insiders here would be a substantial advancement of the law from where it stands now. So what is the equity committee

marshal to suggest that the law ought be expanded to cover third party creditors? Very little, Your Honor. They more or

less just articulated and move as if that somehow saves them from the need to show deception where there was none. But let me take it further and posit well, what were the things that happened here that could possibly have led to that and show you why they didn't. noteholders were creditors. First, the settlement

That's clearly not enough on its

own to make them temporary insiders any more than any other creditor or any other stakeholder. confidentiality agreements. Second, they entered into

Several of the cases cited by Mr.

Rosen at the beginning of the day show that that alone is not enough, nor it should be especially where that confidentiality agreement is a contractual obligation rather than a fiduciary obligation, because otherwise you end up conflating fiduciary and contractual obligations.

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Page 169 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 If a contractual obligation is enough or a contractual obligation of confidentiality were enough to make one a fiduciary, then the concept would be sweeping far too broadly. Next, their involvement in the settlement negotiations. But there again there's no evidence that the

settlement noteholders acted in a way that was particularly different in a meaningful way from other participants who engaged from time-to-time in the settlement negotiations like, for example, JPMorgan or the FDIC. And no one seems to think

that they have become temporary insiders of the debtors' estate or the many other creditors who, from time-to-time, executed confidentiality agreements, participated on a limited basis, made their own proposals, which were rejected, and then stepped back when the confidentiality periods ended. So that's a long way of saying, Your Honor, that the equity committee's argument that we somehow became temporary insiders is not supported in the existing case law of what it takes to become a temporary insider and not supported by the facts here of the limitations on their involvement in the debtors' affairs. And the equity committee can't seek refuge

in the temporary insider context to avoid the need to show some deceptive conduct in order to make out a 10(b)(5) claim. But then again, to return to the legal issue, even if we were temporary insiders there is still no deception. let me explain why that is. And

There is no deception because as

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Page 170 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 temporary -- even if we were temporary insiders, and, again, we're not, our source of the information was the debtor. our obligation is to the debtor. So

And who knew that we were The The

going to be trading after the end of the confi periods? debtor. There -- so there again, there is no deception.

only way that theory would work, Your Honor, as a matter of clear law is if we were somehow involved in a conspiracy with the debtor to defraud other stakeholders in the enterprise. And this comes back to a point that I think many of my fellow counsel, who are supporting the plan, have made, which is that our conduct and the debtors' conduct in this regard was very much in good faith. It was very much in good faith

because we negotiated clear confidentiality agreements before receiving material nonpublic information. We built into those

agreements a mechanism to permit us to be -- to resume trading and a requirement on the debtor that the debtor make the disclosures. We relied, in good faith, on the debtor and made

our own determinations that sufficient disclosures had been made before we resumed trading after each confidentiality period. During the confidentiality periods, we did not trade. It's hard on those facts, Your Honor -- even looking back -- to say that somehow we did not act in good faith. Unless there is some allegation -- and there's clearly no evidence to support it if there were -- that there was some conspiracy between us and the debtor to hide information from

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Page 171 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 other creditors. Or some evidence that notwithstanding the

debtors' conclusion and the conclusion of the debtors' counsel and the conclusions reached by all of the settlement noteholders, that they did not believe in good faith that the settlement proposals were not material at the time they traded. So, Your Honor, the no deception point, again, ends the inquiry under 10b-5 and in my view should end the inquiry here in terms of the challenges to our conduct. But let me turn now to materiality. It's been

discussed at great length here, and I won't revisit the arguments that have been made before. So I want to focus

instead on Centerbridge's trading and Centerbridge's trading in relation to the trading of other noteholders. The TPS group How they

argues that scienter can be shown from our trading.

think an intent to deceive or defraud can be divined from our trading is not clear to me. The cases that they cite for that

proposition are cases where the trading activity is used to prove knowledge that an insider breached his or her fiduciary obligations in tipping the trader. That's not the factual

situation here, and it's hard to see how our trading is relevant to scienter from that perspective. I do, however, think our trading is quite relative from the perspective of materiality. Because I think if you

look closely at our trading and the trading of the other settlement noteholders it puts to rest the claim that any of

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Page 172 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 the settlement noteholders thought that this bid and the ask of the proposals that they received while the negotiations were ongoing -- or rather after the confi periods expired were material. Let me start by focusing first on an argument made by the TPS group that I think needs to be responded to. The TPS

group says that the best evidence of our scienter is to be shown by the fact that before the first confidentiality period we were selling, and after the second -- and afterwards we were buying. First off, I think there are a couple of factual And I will note what I If you

issues that need to be corrected here.

think is probably not the best way to look at this.

look at the heading on the chart, it says "Centerbridge's trades and senior floating rate bonds". Now, fair enough, we traded in senior floating rate bonds, but there were lots of other types of senior bonds that we were trading in at the same time. When we look at

Centerbridge's trading activity in all senior notes in this time period we see a very different picture. to illustrate that by writing on the chart. I'm going to try And this is not to

scale, but I think it's important to note that if you look at all of our trading you get a different picture. And the

different picture is when you net both the senior floating rates and the senior fixed rates, there's a lot less selling before and there's a lot less buying afterwards.

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Page 173 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 So I think the picture that the TPS group has tried to present is not accurate and it's distorted. Because to see how

Centerbridge viewed the materiality or the importance of the settlement discussions you have to look at the broader context, not isolate trading in a particular security; you need to look at entire classes of securities. And in addition, Your Honor,

you need to look -- and I'll put another chart up -- at the trading as a whole and in relation to their overall position. If you look here you see that the trades that occurred after May -- or in May after the period are by no means a significant increase in Centerbridge's position. They are --

in relation to the trades that occurred before and also to note before -- in contrast to the TPS chart which just showed the senior floating rates, if you look at Centerbridge's trading in the senior subs at the same time you see while they were selling seniors they were buying senior subs in February. And

while they were selling a little bit of seniors in March, they were buying a little bit in March. seniors again in May. This is not a picture that suggests that Centerbridge had some great concerns about its investments before the confidentiality period and learned something about the settlement discussions afterwards that caused them to go out and make a huge bet based on material nonpublic information. Instead this shows regular trading patterns based on what was And then they were buying

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Page 174 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 obviously material information that was publicly disclosed in the beginning of May, which was the estimates of the first tax return. I think the picture becomes even clearer, Your Honor, if we start to look at the trading of Centerbridge in comparison to other settlement noteholders. This may be a

little hard to see, so if Your Honor doesn't mind I'll -- can I hand up a copy? THE COURT: MR. OWENS: You may. I've handed up two charts, Your Honor.

The first chart shows the net trading of the settlement noteholders after the first confidentiality period. And what

it shows is that the settlement noteholders were trading in different directions after the confi period expired and they were permitted by the debtor to resume trading. So for example, if we look at -- and just to explain how the chart is laid out, the first column shows the trading in the first week, the second column week 2, et cetera, and then the net trading activity at the end and then there's a record cite to the trading records. The sales are reflected in

the chart in red and in parentheses purchases are in black font, and then no trades are indicated by the word "no trades" or "did not trade". So what you see from this is in the first

month -- and indeed, in the weeks following the announcement of the first tax return -- the settlement noteholders are trading

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Page 175 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 in different directions. Now, the equity committee and the TPS group argue that well, there must have been some material nonpublic information available to the settlement noteholders because they knew the bid and the ask, and they knew what JPMorgan was willing to do and not willing to do. If that were accurate, Your Honor, one

would expect them to all be trading in the same direction. Instead, what this shows is that it corroborates what the witnesses from each of the settlement noteholders told you on the witness stand under oath. Which was they did not view

those settlement proposals as material information because they were miles apart and the outcome was still too uncertain to put -- to borrow a phrase -- any stock in those proposals, and to buy or sell in the same direction. The disparate directions

that they transacted in these securities is very powerful corroboration for their testimony that they did not believe it was material. It's also -- standing in its own right --

powerful evidence that that information was not material. The second chart that I handed up to you, Your Honor, shows their trading after the second confi period. requires a little more discussion and thought. And this

Let's start --

instead of going from the top down, let's go from the bottom up. If we look at the trading in the REIT preferreds we see If we look at

that they are trading in different directions.

the trading in the PIERS we see there's trading in different

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Page 176 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 directions. If we look at the trading in the senior subs we If we look at the trading in the

see inconsistent trading.

seniors we see that everyone sold. So here the point's a little different. Here the

point is that why if what the equity committee says in its brief is accurate -- namely that the settlement noteholders all knew that settlement discussions were converging to a bigger and better deal. If they all knew that the deal was getting

better and the pot was getting sweeter, a deal was imminent, why are they all selling the seniors? I think the answer to

that is no one had that view because the discussions that they knew about didn't lead to that conclusion, because those discussions were still too uncertain to be material and to be the basis of a trade. So instead, when you look at the remainder of the trading what you see is, again, the settlement noteholders are trading in lots of different directions. It just belies common

sense, Your Honor, to conclude that four sophisticated -- very sophisticated market participants all knowing the same alleged material nonpublic information are trading in different directions during the same period. Unless, of course, you

conclude that that information was in fact not material and was not the basis of any trades because it was far too uncertain to trade on as each individual who testified testified, as the debtors' counsel determined before it determined that it didn't

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Page 177 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 here. need to be disclosed, as the debtor itself determined before it decided it didn't need to disclose that information, and as Centerbridge for the reasons Mr. Melwani described to you, reached the same conclusion. I think a similar picture can be seen by looking at Centerbridge's trading, which we did at some length during Mr. Melwani's deposition over the course of the bankruptcy. Let me

see if I can get another copy of this to hand up to Your Honor. THE COURT: MR. OWENS: Thank you. You know what, Your Honor, how about I'll

hand this one up to you and I've got one with some chicken scratching on it that I'll put up for the audience. THE COURT: MR. OWENS: Okay. There are a couple of points to be made

Again, let's go back to the objectors' argument that

over the course of the settlement noteholders in-and-out participation in the settlement discussions, through their review and access to the settlement proposals they somehow should have seen or could have seen or did see that a deal was building, a deal was getting close, the terms were getting better and it was a great time to be buying and capitalizing on that information in the market. holdings belie that story. Centerbridge's overall

And we see that by looking at the

trend of its -- the percentage of its holdings in the debtor over time after the confi periods.

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Page 178 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 And what you see -- as Mr. Melwani explained -- was their holdings peaked in May as a percentage of the overall assets under management. Their holdings peaked in February and

March of 2009, before they were ever involved in any settlement discussions, before they were every privy to any proposals back and forth between the debtor or anyone else. One would think

that if the equity committee was right -- one would think that if Centerbridge in fact did come into possession of material nonpublic information after they began participating in those conversations you'd see their overall holdings grow over time, but you don't. That's the peak; the peak is before.

Afterwards there is a sharp drop -- as Mr. Melwani explained in June -- when a bunch of new assets come under management. So I don't want to leave the Court with the

impression that there was a big sell-off, there was not a big sell-off in the month of May and June and July. More assets

came into management, and so they began rebuilding the position again. But again, it never gets as high as it was before their And also -- what's also I think very compelling

participation.

is the next highest point after March of 2009 is in January and February -- I'm sorry, is in December of 2009. And from that

point forward their holdings begin to decrease again. And that, Your Honor, shows the following. Again, if

they had material nonpublic information about discussion between the debtor acquired during the confi period you would

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Page 179 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 be expecting that in the periods following the expiration -from January, February and March -- their holdings to be increasing; instead what you see is that they were net sellers. In fact, throughout -- if you look at the senior notes throughout 2010 they are net sellers of senior notes in every month in which they traded in senior notes. They buy some

senior subs and they buy some PIERS, they sell all of their REIT preferreds -- that's just not trading that's consistent with the notion that they somehow in that period had material nonpublic information. The other point that I would note about the PIERS and to explain the chicken scratching on what I've put up on the board here is although sold a large number of PIERS in August and September, those sales were prices ranging from approximately 7 dollars -- 7.30 to 8.20 dollars per share. They bought them back after January at prices of -- you know, ranging from 21 to 25, 25 to 26, et cetera. It again belies

commonsense that someone who is privy to material nonpublic information is making such poor trades -- that they are selling low and buying it back at almost three times the price. And that's especially significant, I think, in the context here where if you do the math and you thought that those settlement agreements and proposals -- or not agreements, but those proposals were actually illustrative or predictive of the future and therefore material, the conclusions that you

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Page 180 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 would have reached would be that they would be most impactful to the value of the PIERS. And yet, what are the securities

that Centerbridge is trading and losing the most in but PIERS. Again, Your Honor, all of this goes, I think very powerfully, to corroborate not just what my colleagues have said about the fact that the negotiations were far too far apart to be material, it corroborates what the witnesses said about that very fact and shows that their trading was not trading premised on secret information about secret undisclosed settlement negotiations that was valuable or meaningful. trading was trading that they did based on what they knew publicly in the marketplace, and the settlement negotiations were -- at the time the confidentiality periods expired -- just more noise in the background of no relevance and of no predictive capacity, and not sufficient basis for trading. Because if it were the trading that would be demonstrated would have been very, very different. I'd like to turn now to the arguments that have been raised about our participation in settlement discussions with JPMorgan. As Your Honor heard at the hearing during the summer Their

of 2009, Centerbridge and Aurelius got together and fashioned their own settlement proposal that they made to JPMorgan -- I'm sorry, Appaloosa's witness explained that for prudential reasons they did not trade after that proposal was delivered to JPMorgan. Mr. Melwani testified that Centerbridge continued to

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Page 181 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 trade after that proposal was given to JPMorgan. That conduct cannot be a 10b-5 violation for the reasons that we talked about earlier, and the reason for that is if we remember that it has to be trading while in possession of material nonpublic information obtained under a fiduciary duty or duty of confidentiality owed to the source of the information. The proposal was Centerbridge's together

Appaloosa's, it was their information, they could do with it what they want, they could trade on it if they wanted to. It's

one book insider trading law, you can trade on information you own. If you don't owe a duty to someone else that restricts

the dissemination of that information and you didn't acquire it as a fiduciary you can trade on it. trade. When JPMorgan responded in August with a counterproposal of their own Centerbridge stopped trading. could debate -- but we don't need to -- whether or not that counterproposal was material, given the limited number of parties at the table, given the fact that the debtor wasn't involved and the FDIC wasn't involved. But we don't need to We Centerbridge was free to

because Centerbridge at point, for prudential reasons, determined not to trade until they had sufficient time to think about the offer and determine whether or not it was one that was acceptable to them. They did not resume trading -- as their trading

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Page 182 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 records show and as Mr. Melwani explained -- until after they met with JPMorgan a second time and JPMorgan withdrew the offer. So whether or not JPMorgan's counteroffer was material,

whether or not there was any duty of confidentiality attendant to it, none of those questions are significant because the offer was withdrawn. If anything should be clear, the

conclusion is clear that a withdrawn offer is not material. I want to turn briefly now -THE COURT: issue do you have? MR. OWENS: I was going to very briefly, Your Honor, And I do I think you're out of time. What other

address the motion for standing to bring a claim. want to stress the following point.

Your Honor asked a question of Mr. Eckstein, and I have to disagree with Mr. Eckstein's answer respectfully about whether or not the issuer -- in this case the debtor -- if there were a 10b-5 violation would have a remedy under 10b-5. The answer to that is no. The issuer has no remedy for a 10b-5 That's made clear by

insider trading violation under 10b-5.

the case law, it's also made clear by Section 20(a) of the '34 Act, which provides a private right of action for insider trading violations of 10b-5. There is a very unique and limited class of people who can seek damages under 10b-5; that class is the people who are contemporaneous traders in the market. Those claims could not

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Page 183 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 be brought by the debtor. They could only be brought by

contemporaneous purchasers or sellers of Centerbridge in the market at the time of the trades identified to have been made in violation of 10b-5. standing argument. I think that's relevant to the debtors'

I think it's also relevant to the 502B

analysis because I don't think 10b-5 is a defense to my clients' claims. Now, I hope I have left Your Honor convinced that there are no merits to the 10b-5 claims. And I'm not -- I

don't want Your Honor to think I'm resting my case on the limitations of who has a right of action, but I did want to clear that up. Section 28 makes it clear the debtor as the

issuer does not have a right of a cause of action for insider trading damages under 10b-5. patience further. THE COURT: All right. Thank you. Thank you. Let's take a break, and then I guess we go I won't belabor the Court's

to the equity committee -- the objectors. (Recess from 2:54 p.m. until 3:09 p.m.) THE CLERK: All rise. Be seated.

MR. CURCHACK:

Your Honor, I think we're switching the

order around a little bit yet again at the request of some of the plan objectors. They've asked the two indentured trustees

who intend to speak this afternoon -THE COURT: Okay.

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Page 184 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 MR. CURCHACK: plan to go first. THE COURT: Okay. So we've agreed to do that. -- and are obviously supporters of the

MR. CURCHACK:

Before I begin, we sort have the informal understanding with the debtor to try to limit ourselves to five minutes, but there's another plan proponent who's a holder of our class -- not one of the settlement noteholders -- who in fact has ceded their time to me for real. So I may go a little

bit beyond my allotted five minutes, but I'll try to keep it as short as I can. THE COURT: Okay. And I'm Walter Curchack, Loeb & Loeb on

MR. CURCHACK:

behalf of Wells Fargo, and I rise on behalf of the indentured trustee for all the PIERS creditors to address an issue that affects that entire class. Your Honor, this has been a unique case. The debtors

have brought in huge recoveries, but there are still hungry mouths here to be fed. And as the fulcrum security the PIERS Senior creditors

have had a unique and painful perspective.

unhappy with the hundred percent plus recovery want our noncash stock distribution paid over to them on day 1. The

subordinated creditors and equity holders don't want us to have any recovery at all in hopes that some value may flow down the waterfall to them.

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Page 185 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 We've addressed most of their respective arguments in our filings, so I want to use my limited time today to speak to a very few important issues not already covered that highlight the interplay of the subordination issues and the consequences of Your Honor's ultimate decision on what interest rate to allow the estates to pay. I want to start in a very bad way by respectfully disagreeing with something I believe Your Honor said this morning during your colloquy with Mr. Hodara, and that relates to the question of where the 510(b) claims fall in the 726 waterfall. I believe Your Honor said that the definition of

claim in the Code only includes pre-petition interests. Respectfully, I think Your Honor misspoke. And I apologize for

not having pretty slides, but I'll assume has a copy of the Code in front of them. I'd like to start by looking at the definition of claim, Section 101(5) of the Code, and I'll read it. "The term

claim means right to payment, whether or not such right is reduced at judgment, liquidated, unliquidated, fixed, contingent, matured or unmatured, disputed, undisputed," et cetera. I believe the confusion comes from -- and Your Honor

was probably thinking of Section 502(b)(2), which deals with the claim allowance process. THE COURT: All right. And let's turn to that section. 502

MR. CURCHACK:

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Page 186 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 allowance of claims or interests, 502(b), acceptance provided in the following subsections and so on, "claims shall be allowed except to the extent that" -- in subsection T -subsection 2, excuse me -- "such claim is for unmatured interest". So 502(b) does not say that unmatured interest is

not included in a claim, it simply says that if it's included in the claim the unmatured interest component must be disallowed. THE COURT: Okay. And put another way, if unmatured

MR. CURCHACK:

interest was not part of a claim there wouldn't be anything to disallow. So a claim certainly does go beyond an allowed

claim, and that I think is the holding of the Seasons case that Mr. Hodara was referring to in his argument. So let's go back to 726, which I think everyone agrees is subject to 510 of the Code, and then turn in turn to Section 510. 510(b) says for purposes of a distribution under this

title -- a 510(b) claim as we're referring to them, and I'll read -- "shall be subordinated to all claims or interests that are senior to or equal to such claim". THE COURT: Um-hum. Now, 510(c) on the other hand says

MR. CURCHACK:

under principles of equitable subordination the Court may subordinate "all or part of an allowed claim". So for the r --

again, as Mr. Hodara said this morning, I'm going to repeat it,

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Page 187 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 there's a difference. Claims and allowed claims -- 510(b)

claims are subordinate to all claims, not to just allowed claims. THE COURT: Okay. Okay. Next I want to turn briefly to

MR. CURCHACK:

our intramural squabble with the senior noteholders. Your Honor, we don't contest that the PIERS are subordinated debt instruments. The WMI noteholders, however,

would argue that that's the end of the story until they're paid in cash in full the amount of their principle and contract rate interest. Honor. First, in their reply brief after, I think, the confirmation hearing, they rely heavily on the WestPoint Stevens case for the proposition that until the senior creditors are paid in full in cash the junior creditor gets nothing. Your Honor, in that case that's exactly correct, and And we have three problems with that argument, Your

that's what happened -- most importantly because that's what the credit instruments and the intercreditor agreement in that case said -- paid in full in cash. So there was no question.

The problem is that that's not what the PIERS indenture says -- or even frankly what their own senior indenture says. In fact, quite the opposite, if you turn to

Section 6.1(a) of the junior subordinated indenture -- which, Your Honor, is Exhibit DX-297 -- I have a copy if you'd like us

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Page 188 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 to hand one in. THE COURT: No, that's fine. Okay. It says, "the holders of senior

MR. CURCHACK:

indebtedness shall be entitled first to receive payment of the full amount due thereon in respect of all such senior indebtedness and all other amounts due or provision shall be made for such amount in cash, or other payment satisfactory to the holders of senior indebtedness" and so on, before the junior gets paid. But Your Honor, what does that mean here? is made for payment in cash. Provision

Well, because of the claims

reserves, because not all the debtors' assets have been assembled yet, it seems probable that the senior notes will not get paid in full on day 1 of this case. However, the senior

holders will -- if they don't get paid in full -- receive the senior interest in the liquidating trust. No one is

challenging the debtors' projected recoveries; the seniors will get paid in cash and first once those assets become available. And no one has questioned the debtors' projected assets are real. In fact, the only challenge has been that they have been

understated. There's a second issue of which, going back to the indenture, infers or other payments satisfactory to holders of senior debtedness. Now, the White & Case group has argued that payments

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Page 189 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 satisfactory to the holders refers also to the language that -the first part of that sentence, talking about the other provision for payment in cash, Your Honor, we believe that under the well-established contract interpretation rule, called the rule of last antecedent, the satisfactory to the holders only refers to the other payments which, in this case, would be the stock. Now, senior creditors had to elect to take stock in

this case so it's very hard to imagine them arguing that it wasn't satisfactory to them, since they made the affirmative election to take it. And with respect to the provision shall be made, as we said earlier -- sorry, as I've just indicated, we don't believe that the holders have a consent right with respect to that, it simply requires that provisions be made for such payments in cash, which is what we believe the plan does. No one else is

going to get that cash until they do and that cash is there or will be there. So, because -- but the rule of antecedent -- the last antecedent says is we have a comma, as you do here before the word or other payments, you limit what the proviso, in this case the satisfaction of holders of senior indebtedness applies to. And that's our response to that point. Frankly, Your Honor, even if that rule of contract interpretation didn't apply here, 99.99 percent in amount and 99.8 percent in number of the senior holders voted to approve

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Page 190 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 the plan. And their own indenture, which is Exhibit WMG-1

says, in section 15.11 which is the subordination provision of that indenture, that the rights -- I'll read it. and obligations are subject to power of court. "The rights The rights of

holders of senior debt and the obligations of the trustee and the holders of securities are subject to the power of a court of competent jurisdiction to make other equitable provision reflecting the rights conferred in this indenture upon the senior debt and the holders thereof, with respect to the securities and in coupons appertaining thereto, and the holders thereof, by a plan of reorganization under applicable bankruptcy law." Which, Your Honor, I believe means that

sections puts to rest any argument that their indenture is inconsistent with the plan, once Your Honor has approved the plan. Moving on. Your Honor, Mr. Hodara also addressed the

Pandora's box of issues that arise here from possibly not applying the contract rate of interest. I won't repeat all of

the ones that he cited to but there are a couple of points I'd like to make. We address, in our papers, the role of explicitness and I don't think there's any question that that rule, as a rule of contract interpretation if not a rule of law in the Third Circuit, is still effective. And as Your Honor knows, we

have taken the position that our indenture, while it does

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Page 191 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 recognize that we are subordinate to post-petition interest, is not clear that -- as to what rate of interest. And the logic behind the rule of explicitness is that you need to know what you're subordinate to. We don't -- the

question of how that clause would be interpreted if this were an insolvent debtor is not before this Court. need to worry about that issue. So you don't

The point here, Your Honor, is

that you are going to set an interest rate in this case and if the rate you agree to --- allow the debtor to pay is the contract rate, as the plan provides, we're fine, end of story. But if, for equitable reasons, you choose a lower rate, you also have to recognize, for equally important equitable reasons, the consequences and the need for the subordination provision to be applied at the same rate. Your Honor I'd like to turn, very briefly, to a couple of points regarding some of the, even junior to me, creditors in this case. The TPS argue that Your Honor should pick the

lowest interest rate possible because that will allow value to flow down to equity. Your Honor even if it would, and that's

not clear given the still unresolved claims' pool, the cases are clear that Equity's hopes for recovery are not a relevant consideration. The TPS would have Your Honor establish what no court has ever done, at least to my knowledge, set a bright line test that the court must adopt the lowest rate possible, and not

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Page 192 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 only is that absurd on its face, Your Honor, both in the Quorum case and in your decision in January, has already said quite the opposite. The Court's role here is to enforce the contractual rights of the parties, not redistribute those rights to achieve some perceived fairness, and I refer Your Honor to the Urban Communicators case which we cite in our papers. And in a case

like this, I would ask what is the fairness if the result of that decision is to strip creditors, here the innocent PIERS holders, of any recovery in the process in order, simply, to provide a recovery to equity, which brings me back, full circle, to the fact that the PIERS are a whole class of holders, not the four settlement noteholders. I urge the Court to remember the teachings of the Supreme Court in the Nolan case, and not cause innocent class members to be punished by the alleged misconduct of others. There was some discussion this morning of whether the plan could be confirmable, if Your Honor still had issues concerning the insider trading allegations and I'd ask Your Honor to keep this in mind; the claims at issue in the plan are debt obligations of the debtors. The allowed claims of the

funded debt were filed by the respective indentured trustees, and consistent with long-standing practice, distributions will be made nominally through those trustees and the DTC system to their respective holders, that's how the plan works.

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Page 193 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 down. THE COURT: MR. CURCHAK: MR. CROWLEY: name is Leo Crowley. Thank you. Thank you, Your Honor. Hi, Your Honor. Good afternoon. My Even if there was misconduct, and we are by no means saying that we think there was, it does not affect the liability of the debtor generally for its debts and certainly not its obligation to all the holders of those debts. And for all the reasons the Court is aware of; the cash burn, the time delays, et cetera, failure to confirm the plan now for the sake of a contingent, legally speculative witch hunt is a likely death sentence for the entire PIERS class and likely for the CCBs as well. and not time for a do-over. Unless Your Honor has any questions, I would step There's simply no need

I represent the Bank of New York Mellon

as a trustee for the senior notes. Your Honor, just to put it in context who I am and what I represent, there are billions of dollars of senior note claims held by over a thousand creditors, over a thousand ballots were filed on the senior notes class that are purely innocent victims caught in the crossfire between the allegations between the equity committee and the settlement noteholders. And I don't think too much for those allegations

but whatever happens, it should not affect the recoveries or

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Page 194 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 the timing of recoveries to the billions of dollars and senior noteholders who are effectively innocent victims here. I want to follow up on one comment Mr. Curchak made on behalf of the PIERS trustee that I respectfully disagree with, which is that he raised the question of what happens if the Court concludes that post-petition interest should accrue at some lower rate than the contract rate and then you have to face the question of what interest rate should be applied in enforcing the subordination clauses in the indenture. And

respectfully Your Honor, that's a completely hypothetical issue at this point. The only plan in front of you that you have to

rule on, up or down, is a plan that calls for the accrual of post-petition interest at the contract rate. If, hypothetically, Your Honor does not confirm that plan, then we can sit around and speculate as to what happens next and what the next plan looks like, and hopefully we have a solvent estate but maybe we don't have a solvent estate, in which case Mr. Curchak make get what he asked for which, although I don't think it's what he wants, which is a situation in which you no longer have to worry about the interplay between accrual of interest against the estate versus accrual of interest on the intercreditor claims, you know, I'm just going to accrue interest on the intercreditor claims at the contract rate I'm entitled to. But the point is it's

hypothetical, you don't need to worry about it now and we don't

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Page 195 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 think you should. Thank you. THE COURT: Thank you. Good afternoon, Your Honor. Daniel

MR. LOWENTHAL:

Lowenthal, Patterson, Belknap, Webb & Tyler.

We represent Law

Debenture Trust Company of New York and the indentured trustee for the senior, subordinated noteholders. Your Honor, we filed two briefs in support of confirmation and we heard Your Honor loud and clear this morning when you said you did not want us to repeat the arguments in the briefs and the case law set forth therein. And we briefed a lot of issues, including such issues as the PIERS' trustee's arguments about subrogation, the senior floating rate noteholders' arguments about what rate of interest they think they should get. There's been a lot of briefing about the rule of explicitness in all of the case law that's come under that over the last several decades. But there are, and I won't go into

those arguments in any detail but we will rest upon our papers. But there are three sets of arguments that I would like to touch upon briefly and I expect that my remarks will take five minutes or less. Those are remarks made by counsel for the

creditors committee and arguments made by Normandy Hill and the PIERS trustee and then finally a couple of arguments made by the WMI senior noteholders.

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Page 196 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Mr. Hodara, for the creditors' committee, made several points that affect us directly and I mention them because I submit that his analysis was spot on and I just want to incorporate them by reference very quickly. He explained why,

with respect to post-petition interest, the contract rate and not the federal judgment rate should apply and he also correctly detailed why claims held by 510(b) claim holders should be subordinated to post-petition interest claim payments to other creditors and I think Mr. Curchak clarified the -several concepts with respect to that as well and support what he said. Now, with respect to Normandy Hill and the PIERS trustee, Your Honor, they urged the Court to apply the federal judgment rate to the pay-over of post-petition interest by the PIERS to more senior creditors should Your Honor rule that the debtors should pay post-petition interest at the federal judgment rate and Mr. Crowley just addressed this and indicated there was at least one flaw with this argument, which I wholeheartedly agree, which is it's really a timing issue, that's not the plan before the Court. But even if Your Honor were to consider this argument, we submit that it really reflects an incorrect reading of the PIERS indenture and applicable law. If the debtors are

required to pay the federal judgment rate, that doesn't mean that the contractual language in the PIERS indenture can be

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Page 197 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 disregarded and that the PIERS would no longer have to pay the contract rate. Whether a creditor -- excuse me -- whether a debtor in any particular case has to pay post-petition interest and the rate at which that interest must be paid, is not relevant -- is not relevant to a subordinated creditors' obligation to pay over post-petition interest in accordance with the terms of the subordination agreement. Now, Mr. Curchak said, just several minutes ago, that we are not dealing with an insolvent estate so we don't have to deal with that. But in fact all he's doing is asking Your

Honor to wish away the logic that undermines his argument because otherwise taken to the extreme, if a debtor doesn't have to pay post-petition interest when an estate is insolvent, then by their argument a subordinated creditor would not have to pay over post-petition interest, but that's not how subordination agreements work. Now, Your Honor, finally, with respect to the WMI senior noteholders; they assert that the senior subordinated noteholders agreed, in their indenture, to subordinate their right to post-petition interest in favor of senior noteholders based on the phrase "Payment in full" in the senior subordinated noteholders' indenture. But we submit that the

senior -- the WMI senior noteholders analysis is flawed and they ignore the substance of the key reported decisions dating

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Page 198 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 back to the Time Sales case in the mid-'70s, the southeast decision in the Eleventh Circuit, the Bank of New England decision up on the First Circuit. I indicated I won't go into

those in any detail but we do believe if you follow the thread of the cases, Your Honor, the key issue is you look to underline New York contract principles and these indentures are governed by New York law, and it's clear that the phrase payment in full, the exact language that is in our indenture, is insufficient as a matter of law for the Court to conclude that the senior subordinated noteholders agreed to subordinate receipt of post-petition interest in favor of the senior noteholders. Your Honor, the WMI senior noteholders also take issue with the debtors' subordination model. They have issues with

how tranche 1 and tranche 2 are set up and the flow of funds there. We detail, in our brief, why we think the debtors are

right and why the senior subordinated noteholders have it wrong and we'll rely on our papers for that argument as well. So unless Your Honor has any questions in closing, we, on behalf of Law Debenture Your Honor, respectfully submit that the plan should be confirmed. Thank you. MS. ARNOLD: Good afternoon, Your Honor. Ronni Arnold

from Arent Fox representing Wilmington Trust Company in its capacity as indentured trustee for certain CCB1 and CCB2 claim

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Page 199 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 holders. Wilmington Trust Company is also a member of the

creditors' committee. Your Honor, Wilmington Trust Company strongly supports confirmation of the modified sixth amended plan in its current form and supports the expeditious resolution of these cases so that the global settlement can be implemented and creditors can receive their distributions. Wilmington Trust Company believes the plan, the evidence adduced at the confirmation hearing and the written submissions filed in support of the plan all properly address the objections raised before the Court and Wilmington Trust Company respectfully requests that the Court overrule the plan objections and confirm the plan. Thank you. THE COURT: MR. UZZI: Thank you. Your Honor, Gerard Uzzi of White & Case on

behalf of the WMI noteholders group. Your Honor, I'd like to be heard or we wish to be heard with respect to two issues. First, to make clear that we

support confirmation of plan and urge that the Court confirm the plan and I just have a few remarks with respect to that. Second, there is a limited objection with respect to whether the plan appropriately reflects the enforcement of contractual subordination rights. We briefed that in our

papers and we're prepared to rest on our papers, but we did

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Page 200 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 want to make ourselves available to answer any questions the Court may have and to the extent does my colleague, Greg Starner, will handle those questions, Your Honor. THE COURT: MR. UZZI: No. I understand your position. Thank you, Your Honor.

All right.

With respect to the plan itself, Your Honor, since the announcement of the global settlement, which is about a year and a half ago, the Court has heard an awful lot from the equity holders and has heard an awful lot from and about junior stakeholders. You haven't really heard all that much from the And the senior noteholders

senior noteholders since that time.

happen to also be the majority of the creditors in this case. And why -- well, I'm here Your Honor because I thought it might be helpful to the Court to hear the perspective of the other side of the capital structure and in thinking about it, you know, why is it that you really haven't heard from us all that much in the last year to year and a half. Honor, we've been sidelined. Well, Your

We've been sidelined principally

on the premise that because there's a deal on the table that purports to pay us in full, that our views are relatively unimportant. And I might be willing to accept that premise if

there were relative certainty that we were actually going to get paid in full but that certainty just doesn't exist today. The deal with JPM and the FDIC is simply not a done deal yet and there are no assets in the estate available to pay

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Page 201 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 us in the event that deal goes away. Now, we are relieved that

neither JPM nor the FDIC has made any efforts to walk from the deal since it was first announced or even to retrade the deal since it's first announced and frankly I think they should be commended for that. But nobody's willing to give us any

assurances and frankly they can't give us any assurances that if this deal isn't consummated now that it's not going to go away or that it's not going to be retraded in some way that's detrimental to us. So we do, in fact, have a substantive, direct substantive view here, Your Honor, and this does impact us. It's not just a timing issue. are in jeopardy right now. Now, moreover, what has happened in the last year and a half since the global settlement was first announced? Well, In fact our entire recoveries

interest has continued to accrue and administrative costs have continued to be incurred at a substantial rate that we went from mere certainty to being paid in full under any circumstance to a substantial likelihood that there's going to be a shortfall, depending upon how Your Honor rules, ultimately, on the subordination issues. Now, I raise these points, Your Honor, not to whine or complain or to stamp my feet about being sidelined, that's not the point. The point I want to get across, Your Honor, is that

the continued opposition and the continued delay, in particular

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Page 202 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 to the consummation of the global settlement, is not free. There's a cost to it and that cost is being borne by my clients. Now, in that regard Your Honor, what exactly is the opposition? Well, as I understand the argument Your Honor,

there's a group of stakeholders who participated substantially with the debtors in the formulation of the global settlement. There's an allegation that certain of those stakeholders used information that they learned during the formulation process to their own advantage with respect to the trading of securities. And that trading was inappropriate and then because of that, that somehow this settlement is now tainted. Well, if we just think about that and break that down for a second, Your Honor, mere participation by major stakeholders of course cannot be inappropriate. code encourages participation in the process. In fact the With respect to

the allegations of using information for their own gain, we certainly don't believe the record supports a finding of inappropriate conduct but from our perspective that is, with respect to plan confirmation and approval of the settlement we really question the relevancy of it. so what Your Honor. where is the harm? That is, you know, almost

And I analogize that to a harmless error, How is the harm being demonstrated? What

we have here, Your Honor, at its core is a plan that's based upon a global settlement. Now, that global settlement was

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Page 203 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 independently validated on the merits by an examiner and Your Honor went through the first confirmation hearing in a recent decision and independently validated the merits of the settlement itself, based upon the litigation risks. What the settlement noteholders may or may not have done with respect to their trading activities, we don't believe, bears or has any relevance or at least little relevance with respect to the legitimacy of the settlement itself and therefore whether this plan should be confirmed. Now, what the equity committee would ask you to do, Your Honor, is to draw an inference that because the settlement noteholders were weighted in the junior securities they must have asserted undue influence on the debtors and caused the debtors to settle too cheaply. That is but for the settlement Well,

noteholders' influence, there was more money to get.

Your Honor, I think it's dangerous to draw inferences but I can give you a set of facts on the record and I can give you the 180 degree inference that can be drawn. And when we started

this case, Your Honor, my firm, White & Case, represented a group of noteholders, the WMI noteholders group and that group had substantial positions, material positions in all tranches of the debt, both the senior debt and the two junior tranches of the debt. Around the fall of 2009, before the equity committee was even formed, the members holding the junior portions of the

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Page 204 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 debt were asked to leave the group. could be drawn from that? What's the inference that

Simply Your Honor, that the senior

noteholders that thought that the junior noteholders were holding out for too much. Said another way, but for the junior

noteholders the debtors would have settled for far less, far earlier and we would have been paid far earlier. Now, Your Honor, again, I raise that only to show and demonstrate that you can draw lots of inferences and I think that that's dangerous. I think what I've asked the Court to There's been an allegation of

focus on is, again, the harm.

inequitable conduct but does that inequitable conduct taint the plan itself. To deny confirmation of the plan, Your Honor, we

believe that there needs to be some direct causal link that is simply absent here. There needed to be new evidence that would

demonstrate that on the merits the settlement's not reasonable. Said another way, there needed to be new evidence to have the Court conclude that the debtors settled too cheaply because in absence of that, Your Honor, what's the point of denying confirmation of the plan based upon the settlement noteholders' participation. Where do we in fact go from here if we don't

conclude that the settlement is unreasonable? Your Honor, we sympathize with the plight of Equity. They're out of the money and they're simply not going to participate in any plan. You know, before Armstrong World

perhaps there was something that could be done about that but

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Page 205 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 the plan. where the state of the law is and just given how large this capital structure is, there's just not practical prospect for a settlement here. So if a plan's going to get done in this

case, Your Honor, I'd submit that the only way it's going to get done is the old fashioned way, through a cramdown. Your Honor, we respectfully urge the Court to confirm Unless you have question of me, on my remarks or on

the subordination issues, I have nothing further, Your Honor. THE COURT: MR. UZZI: MR. ROSEN: Thank you. Thank you. Your Honor, I don't know -- I think that

concludes the people who were going to speak in support of the plan. There are two gentlemen here, Mr. Whistler and Mr.

Spence, who represent people who filed an objection, some directors and officers, and they asked me just to report to the Court that they are prepared to rest on their papers and there is no need for them to make an oral presentation. that, I think, they could leave the courtroom. THE COURT: MR. MORRIS: Okay. Good afternoon, Your Honor. Matthew And with

Morris from Grant & Eisenhofer for the WMB noteholders. Your Honor, as you know, we filed an objection to the plan based on a number of grounds. The principal one was the

plan's proposed treatment of post-petition interest and it's payment of post-petition interest ahead of our client's allowed

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Page 206 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 subordinated, unsecured claims based on their direct misrepresentation claims in connection with debt securities of Washington Mutual Bank. That is the principal point, with

respect to all the other points in our objection; we'll rely on our papers. But I do want to say, just a little bit, on that

post-petition interest point. I'm very mindful of what Your Honor said about not repeating our arguments and I know that we laid out for Your Honor, I hope clearly, whether or not you accept it or not but I hope clearly our understanding of the interplay between Section 726 and 510. THE COURT: Well, do you want to respond to their

suggestion that it's claims, not allowed claims, to which you are subordinated? MR. MORRIS: Yes, Your Honor. I think -- if I

understood and I've just looked very briefly at the Seasons Apartment case and I wasn't able to fully hear Mr. Crookshank (sic) from the bank of the room, but my understanding is that the view is that we are subordinated not just to allowed claims under 510(b) but to all claims. And I think, Your Honor, But I think, as the

clearly you can have a claim for interest.

El Paso case that we cited in our initial objection points out, the claim for interest is different from the claim. It's an

equitable claim that gives -- comes up if the estate possess sufficient assets to pay interest after all other claimants

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Page 207 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 have been paid in full. Now, if we were to prevail on our misrepresentation claims, there can be no dispute that we will have an allowed unsecured claim, albeit subordinated, which will be an allowed claim just like a 782 -- 726(a)(2) claim would be but for the fact of subordination. If any claim for interest, post-petition interest, were somehow senior to those claims, there would be no need for a payment of interest under 726(a)(5) or all of the A1, A2, A3, A4 categories under 726 would include a proviso that interest was to be included in payment of those claims. I think to view that a claim for interest somehow attaches to the claim for post-petition interest attaches to the claim itself so that it falls under that clause senior but equal to, really is a rewriting of the Code. You would have to

rejigger all of the sections referencing post-petition interest in Section 726. A theme that's been struck in the various responses to our objection was that the WMB noteholders just ignored the fact that 726 was subject to 510. And I think, as we've

stressed repeatedly, we don't ignore that, we acknowledge it but you really have to look at the way 510 operates. And when

you look at the clause, the claim shall be subordinated to all claims or interest senior or equal to, it really places us squarely at -- in the bottom of the 726(a)(2) category.

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Page 208 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Now, I know Mr. Hodara pointed out that in effect we were the ones who appeared to be rewriting the Code by coming up with this new category 726(a)(2.1) and, you know, maybe that was not the happiest phraseology, Your Honor, but it really was meant to show that given the nature of our claims, where we fall on that senior but equal to -- under that senior but equal to paradigm, is really at the bottom of (a)(2) or at the top of (a)(3). fall. It's an illustrative vehicle, I hope, to show where we And the .1, you know, we're certainly not attempting to

rewrite the Code or suggest a new category, it's just to show where we have fallen. I think any other interpretation, that's

where the rewriting is required, either by striking 510's reference to senior or equal to or by striking 726(a)(5)'s payment of interest at that level or by including references to payment of post-petition interest in the other categories. That's where the significant rewriting occurs. I think our interpretation is the only one that really would allow the Court to treat the payment of post-petition interest, vis-a-vis a general unsecured claims and subordinated general unsecured claims as Congress and the Code intended. Finally, Your Honor, just to address, you know, what I kind of lump together as the parade of horribles that have also been suggested by the various responses, if you were to find in favor of setting aside interest pending ultimate resolution on our direct misrepresentation claims that the -- whether it be

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Page 209 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 delay or sending the drafters of the plan back to the drawing board, upsetting market expectations and the subordinated debt market and so on, all of those are essentially equity based arguments that even if the interpretation were to go our way, this is what will happen if Your Honor finds for us. I just

want to spend a moment speaking about equity, Your Honor. I mean our clients represent insurance companies who bought WMB notes at face value; in many cases, years before the filing. They have what they believe to be meritorious direct They are entitled to pursue those

misrepresentation claims. claims.

I mean clearly, they're not going to be resolved in But it's not

the next few months; this will take some time.

unprecedented to require funds to be set aside pending the outcome of litigation. If we don't prevail in the claims, it's a moot issue. The money's distributed out. But if we do prevail, we are

then, we have a subordinated allowed general unsecured claim and I think we're entitled to have the funds set aside for us for payment on that claim as 510 and 726 provide. This was

not -- the drafting of the plan and the provision that class 18 where we fall will be paid only after payment of all postpetition interest wasn't our phraseology. The drafters could

have provided that it would be paid as ordered by the Court or in accordance with the Code allowing the plan to go forward even if Your Honor reviewed -- found for us. And the potential

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Page 210 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 impact and the subordinated debt market, that's the deal that they struck, Your Honor. I mean if I understand it correctly,

the subordinated peers claimants contracted to pay the postpetition interest of the senior noteholders out of their own distribution on their general unsecured claims. agreement they struck; we didn't strike that. That's the And for better Whether

or worse, I think that was the consequences of that.

it upsets the markets and dashes expectations, I don't know; I'm not in position to say. I think given everything that's

happening in the overall financial markets now that would probably be more of a blip than anything truly significant. Finally, Your Honor, just bearing in mind that again, and this is Mr. Hodara's last comment where he suggested -where he pointed out that 510 it deals with both debt and equity securities, we don't disagree with that either. That as

Your Honor noted, we are a debt security -- our claims are based on debt securities. Section 510 clearly differentiates And they -- the

between those two in how they will be paid.

senior but equal to language with respect to debt securities is contrasting very sharply with that with respect to an equity security which is treated just as common stock. So, Your Honor, if you're -- unless you have any questions, those are all the points I wanted to address. THE COURT: MR. MORRIS: Thank you. Thank you.

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Page 211 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 MR. ROQUEMORE: Good afternoon, Your Honor. James

Roquemore, I represent the ANICO plaintiffs. Your Honor, I rise to ask the Court to include specific language in the plaintiff confir -- in the order with respect to the plan of confirmation. Your Honor, we submitted

a written submission in this case outlining four points -- four specific points that we're asking for. Your Honor, the prior plan confirmation hearing, we had some issues with regard to releases and with regard to the ownership of the claims. Your Honor did issue a ruling

confirming that the claims in the ANICO litigation were not being released and that no determination of ownership was being made by Your Honor with regard to the claims asserted therein. THE COURT: have that language? MR. ROQUEMORE: have that language. Your Honor, the modified plan does Are you saying the modified plan doesn't

We're asking the Court to include that in

the order confirming or however you decide with regard to this confirmation hearing. Your Honor, in addition after the disclosure hearing, there was a -- the ANICO decision reversing the previous dismissal was issued and that Court identified several issues to be resolved at the outset upon remand regarding standing of the ANICO plan to pursue these claims. Your Honor, we ask for

a specific language in the order with regard to maintaining the

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Page 212 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 status quo in the District of Columbia court in order resolve those issues also. Your Honor, we believe that it's important to have language in the order because of clarity. One of the things

that the debtors are required to do is to come to the District of Columbia, file a stipulation of some sort. The court in the

District of Columbia is going to be looking to the order to figure out what specifically the Court here ruled and we would feel much more comfortable having a court order laying out the four points that we believe that outline what the Court's already ruled just for guidance for the Court and with regard to -- our position and our stake in this litigation. THE COURT: All right. Thank you.

MR. ROQUEMORE: THE COURT: MR. FOLSE:

Thank you. Thank you, Your Honor. Parker Folse on

behalf of the equity committee. One of the reasons why I agreed in July and wanted to file a written closing argument was so that we could do what we did and that was to take the fairly extensive record of the plan confirmation hearing in this case and put the evidence together and lay it out as a story of what actually happened in the development of the global settlement agreement and the plan of confirmation and to do it in a way that was careful, that was meticulously cited so that we would not have to worry about

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Page 213 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 people standing up and telling the Court there is no evidence of A, B, C. It is undisputed that X, Y, Z and, of course you And the problem with hearing that if you

heard that today.

haven't done what we did is you're confronted with a feeling that you need to go in and start pulling out pieces of the record in a compressed period of time in trying to answer it and I'm not going to try to do that. Because I think the Court

has read what we've done, we stand by our description of what the evidence says, and I think it sets out quite clearly that in this very unusual case in which parties were permitted to look behind the curtain in a way that almost never happens in a bankruptcy case about how a major bankruptcy transaction actually took place. of it. We know that now. At least we know part

And that evidence reveals, in our view, a fundamental

inequity that has tainted this bankruptcy with the knowledge and the cooperation of the debtors. It shows four large hedge funds buying a veto position over plan confirmation, then using that position to obtain entry into the most critical negotiations concerning the outcome of this case with concomitant access to material nonpublic information while continuing to trade while in possession of that information and at the same time playing a pivotal role in the negotiation of the settlement that would determine the ultimate worth of those investments. And they

did that with the knowledge and with the enablement of the

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Page 214 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 debtors. nutshell. Now, that is what we think the evidence shows in a There aren't, that I have seen, any reported

decisions that address this kind of specific factual circumstance. Not because the outcome should be in doubt but

because it is so unusual to have a Court allow people to conduct discovery and to develop the evidence in a hearing that shows something like this. I don't know how often it goes on.

I hope it doesn't go on often but we know what happened here and based on the facts of this case, we strongly believe that the Court can't turn a blind eye to it. It doesn't matter that

people come up and complain about how long the bankruptcy case has taken, about how estate expenses are continuing to mount because we didn't cause that problem. The debtors caused that

problem as they have in the past and the settlement noteholders caused that problem. issues. The first concerns the grounds for the existence of a duty on the part of the settlement noteholders not to trade and there are two grounds that I want to talk about. The first is I'm mainly going to talk about legal

the temporary insider doctrine and that applies when a confidential relationship between an outsider and the issuer of the securities is created and gives rise to a duty by the outsider not to use material nonpublic information that it obtains as a result of that relationship to the disadvantage of other outsiders.

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Page 215 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 The case law, contrary to what you've been told today in the briefing, does not hold that such relationships only exist when the outsider is someone who works for the issuer such as an attorney or an accountant or a consultant. And I'll

give the Court an example of a case that we found actually after we filed our post-hearing brief and so I'll need to provide the name of the citation. It's a 1999 Second Circuit

decision called Simon DeBartolo Group v. Richard E. Jacobs Group and it's reported at 186 F.3d. 157. It focused on the

conduct of an outside investor who entered into negotiations with an issuer about a potential major transaction for the acquisition of the issuer's assets. The outsider obtained

nonpublic information about the issuer pursuant to a confidentiality agreement which provided that the outsider would use the information for purposes of the contemplated transaction. Very much like the confidentiality agreement in

this case where it very clearly talked about the agreement being entered into for the limited purpose of providing reasonable and necessary information for the use in developing a proposed plan. In that case, the outsider then acquired shares in the issuing corporation while in position of this publicly nondisclosed information. And the Second Circuit held that

those facts were sufficient to state a claim for insider trading. And I quote a little bit from pages 171 to 172 of the

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Page 216 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Court's opinion. "Appellants were not obliged to demonstrate a fiduciary relationship between DeBartolo and the defendants in order to establish this duty." DeBartolo being another "Under the

potential transaction partner who was complaining.

traditional theory of the insider trading, appellants merely were required to demonstrate a fiduciary or similar relationship of trust and competence between the defendants and RPT's shareholders generally. Such a relationship may arise,

as noted previously, where an outside party is given access to material nonpublic information by an issuer 'solely for corporate purposes in the context of "a special confidential relationship'". Appellants by alleging that RPT provided the

defendants and other Grand Slam parties" -- that was the name of the group -- "with material nonpublic information to be used confidentially and solely for purposes of formulating Project Grand Slam, appeared to have placed the defendants squarely within this limited category of corporate outsiders subject to the prohibition on insider trading as outlined in Chestman and Dirks. Appellants, therefore, at least arguable alleged facts

sufficient to establish the requisite duty to disclose or to abstain." In that case, the outsider was not acting as an agent of the issuer, it was receiving information to further its own interest in negotiating an arm's length transaction with the

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Page 217 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 issuer and yet the Court found the existence of a special confidential relationship in which the issuer was providing its nonpublic information to this outsider in furtherance of its corporate purposes. And understanding that, the acquirer of

the information was restricted in what they could do with it and we believe exactly the same thing is true here. The settlement noteholders no doubt were pursuing their own selfish ends but the information they were given access to by inserting themselves with the debtors' permission into this process was being shared with them not for their own selfish purposes, not for them to go out and make more intelligent trading decisions, but for the purposes of developing or attempting to develop an agreement that would provide the resolution of this case in the best interest of the entire estate. They were given access to nonpublic information

pursuant to the confidentiality agreements which so stated that that was the reason why they were being given the information. And even though, Your Honor, it was entirely foreseeable by the debtors and the settlement noteholders that they were, they could, and would be allowed to trade while in possession of that information, the debtors weren't bringing them under the tent in order to make that easier for them. purpose for which they were there. That was not the

Beyond that, in this case

the settlement noteholders were not negotiating, even unlike the DeBartolo case, they weren't negotiating a private

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Page 218 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 transaction with themselves. They were directly and

immediately participating in negotiations over the terms and agreement between the debtors and third parties that would materially affect the estates as a whole. in that position. They put themselves

Like they insisted that they be allowed to

be in that position and that gave them access to information that other people trading in the markets did not have. They

functioned as a sort of super creditors' committee without joining the official committee and thereby subjecting themselves to the duties and restrictions that committee membership would have entailed. consciously. And Your Honor heard testimony about -- from each of the settlement noteholder witnesses explaining the supposed care they took in making their own determinations about whether the information they learned was or wasn't material. If they They did that quite

genuinely thought, as they've been up here telling you today, as they said in the brief, if they genuinely thought they had no duty to refrain from trading outside the confidentiality periods, then why were they making these determination? If you accept that testimony, it strongly implies that even the settlement noteholders knew that they had assumed a duty not to engage in insider trading which went beyond the temporal limits of those confidentiality agreements and went beyond even the debtors' own determinations of what was and

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Page 219 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 wasn't material, they are here trying to have their cake and eat it too. They wanted and got a seat at the table with

access to material nonpublic information about the settlement discussions and ultimately about the terms around which an agreement would likely coalesce but they wanted complete freedom to continue to trade while having that information. And now, they're asking the Court to hold -- and this is their legal position -- even if you conclude that the information they had was material, not known to the public, they want you to say they had no duty to do anything but trade as they saw fit. And I can't imagine that the Court should embrace that It would undermine public

kind of legal proposition.

confidence in the bankruptcy system and our view it'd be fundamentally at odds with core equitable principles of bankruptcy law. There is another source of duty which we've referred to in our briefing. nonstatutory insider. It's when an outsider becomes a There are persons who don't fall within

the enumerated categories of Section 10131 of the Bankruptcy Code. That section does not provide an exhaustive list of It uses the word "including." The settlement

insiders.

noteholders argue that to be considered an insider under 10131 that we have to prove that they possessed and exercise managerial control over the debtors. But as discussed in the

Third Circuit's decision in In re Winstar, that is incorrect.

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Page 220 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 In fact, if actual control were required, then that would make a creditor a statutory insider and it would render meaningless the decision of Congress to provide a nonexhaustive list of insiders. And so, instead, the legal test is whether there is

a close relationship between the creditor and the debtor and any other factors which suggest that the parties were not dealing strictly at arm's length but that the creditor exercised significant influence over the debtor and we believe that is well established on this record. They did that not only through the acquisition of their blocking positions, which they were quick to remind the debtors that they had, but you can see over the course of the negotiations the extent of deference that the debtors paid to them not just to being involved in the process but in the actual negotiation, the substance of the negotiation itself. And so, they allowed the settlement noteholders to formulate offers, to decide what would and wouldn't be acceptable. And

to pick out one example of Mr. Kosturos' December 11, 2009 email to Mr. McCree at Morgan explicitly referring to what his major creditors would and wouldn't accept. And I don't think

I'll ever forget that e-mail because that's the one where Mr. Kosturos suggested maybe he was just lying to Morgan about that as opposed to actually having talked to the creditors. The noteholders argue that their sole duty to refrain from trading is found in the confidentiality agreements. And

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Page 221 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 when those agreements expire, they were free to trade indiscriminately. In other words, as long as the issuer knows

we're going to be able to trade as agreed to it and there could be no possible duty to refrain from trading which is not the law. And, in fact, the settlement noteholders didn't even They testified they made their own

believe that. determinations.

They were quite aware that they had obligations under the securities laws that the debtors could not absolve them of that they've tried to place a little landmine which they're now trying to explode by saying that if the Court allows claims against them to go forward, they're going to have an administrative claim against the estate. that if and when that comes. at this time. We will deal with

No such claim has been asserted

Frankly, Your Honor, I think that would be the

height of inequity. On the subject of materiality, the cases make clear this is a highly fact-specific issue; I was amazed to see the flat out statements in the briefing submitted to you, that stale offers and preliminary negotiations are immaterial as a matter of law, and that begs the questions in the first place -- because whether something is genuinely stale depends on the facts or it's just wrong; because it's clear that even preliminary negotiations can be material, bearing in mind what materiality is. Is it the kind of information that would be

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Page 222 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 sufficiently important that it would alter the mix for a reasonable investor in deciding whether to buy or sell securities. And this could not have been made more clear than the Supreme Court made it, in Basic v. Levinson which we cited, which explicitly rejected a rule that would make merger discussions material only after an agreement in principal had been reached; and anything leading up to an agreement of principal immaterial as a matter of law, and the Court said, no. Because the issue is not whether the information conveys

certainty, but whether it's significant enough that a reasonable investor would consider it important. And in that

context, I'd remind the Court, when the debtors gave Fried Frank the terms of the debtors' and JPMorgan's exchange of offers of April, 2009, and advised Fried Frank not to share them with the settlement noteholders, that was still within the first contractual confidentiality period; there's only one possible reason why the debtors took that position, and it's because they even considered those offers, in April of 2009, to be material. And yet we know -- although we have no

explanation for it in the record -- that Fried Frank subsequently gave that precise exchange of offers to Appaloosa and Centerbridge in July. Now, this case doesn't involve merger negotiations as Basic did, but the transaction that was being negotiated here

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Page 223 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 was just as vital to the life of this case and the outcome of this case and the future of Washington Mutual, as a merger is in the life of most corporations. We don't agree, by the way, Your Honor, with -- well, you heard a significant part of the time today used by the settlement noteholders going over their trading records, and arguing that it was proof or confirmation that the information they had was not material. And we don't agree with the

conclusions they're drawing from those trading records, we've given certainly counter-examples in our brief; it's not enough to say, well, we bought here and we sold here. For example,

the last attorney who presented the chart from Centerbridge, showed that they were selling massive numbers of senior notes in the early part of 2010. And they argued that's contrary to

what someone would be doing if they were in possession of material inside information. Well, this is just one example

where you might want to know one other piece of information, which was, what was the price at which they were selling the senior notes at that time? They were virtually at par. There

was no more upside left in them.

What they were also doing at

the same time, was buying more junior levels of debt; that's just one example, Your Honor. My point though is, that what

happened today was extremely frustrating to me, we were deprived of discovery about internal documents, valuation models, information that really would more immediately shed

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Page 224 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 light on why they did or didn't buy or sell at different points of time; what their cost basis was in certain securities; what else was going on in the market or in the life of their own firms that might have played into it, because it's not required to show insider trading if the inside information be the sole determinant of the decision, that much is also clear in the law; it's clear in Aurelius' own internal manual, which is in evidence, where they said SEC rules adopted in 2000, provide that any purchase or sale of a security while having awareness of inside information, is illegal without regard to whether the information was the motivating factor in making a trade. So we're in this situation where they convince the Court not to let us get access to internal information that would shed light on why they were trading and what role this information they got in the settlement negotiations played, and the Court sustained objections when they tried to get witnesses to give that testimony, so instead they get up here today and just argue it. It is just as inappropriate today as it would I think implicit in the Court's

have been during the hearing.

discovery ruling is that the decision on materiality will turn on whether the information would be considered important by a hypothetical reasonable investor; that's the Court's decision, is going to turn on that. And they can get up here all day

long and give you unproven assertions trying to imply about whether their clients did or didn't do things that were

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Page 225 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 reflective of the materiality of the information, that is inappropriate. Next on the issue of scienter. A fiduciary is -- I

think the Court was able to get counsel to admit -- someone that has a fiduciary duty to a class, for example the estates in this case, and trades on the basis of nonpublic information -- that it knew or should have known was material -- that satisfies -- in our view should satisfy -- a showing of scienter, because it is inherently deceptive when an insider, someone who is even a temporary insider, and subject to the duties for example of a corporate officer, trades in possession of material nonpublic information, knowing that the information is material. And, so I think that's a critical

point given we're not arguing a misappropriation theory, Your Honor; we are resting on the two grounds that I've argued here today. But I should also say, Your Honor, this is not a 10(b)(5) suit brought by the government or a civil fraud damage suit; the issue in this case is whether the settlement noteholders engaged in inequitable conduct and if they did, what consequences should flow from that. Once again, we should

not be subjected to a burden of attempting to prove actual subjective intent to defraud or to manipulate, in part because that is not the issue, the issue is one of equity, the issue is one of whether or not these parties, by engaging in the conduct

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Page 226 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 they engaged in, disadvantaged other creditors of the estate who are out there in the market buying and selling securities, having manipulated the settlement process in a way that enabled them to play a deep and vital role in it, and yet continue to trade except during these limited and defined periods of time. And the further reason why the Court should not be imposing a strict requirement of proof of scienter at this point goes back to the discovery problem that I mentioned before. We were not allowed the opportunity to conduct the

kind of full discovery that we would have conducted in order to establish the actual subjective reasons and processes that went on within these hedge funds that underlie the trades they engaged in. It is again, completely unfair in that

circumstance, which they brought upon themselves by the positions they took in discovery, to get up here today and argue that we have to have the kind of scienter evidence that would be expected in some sort of a government criminal case. They make this an argument of good-faith by virtue of the fact that they engaged in discussions with the debtor, they explicitly negotiated for these confidentiality agreements. That takes me into the debtors' breach of their own duty. The

debtors' breached their fiduciary duties to the estates through the way in which they negotiated this agreement, and the closely related bankruptcy plan. They enabled this powerful

group of creditors to trade while in possession of material

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Page 227 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 nonpublic information. They repeatedly deferred to the

judgment of this limited group of constituents in the negotiation of the settlement. They involved them in critical

settlement negotiations of a period of approximately a year while exceeding to their demands that no restrictions be placed on their ability to trade, except during those arbitrarily defined time periods. The debtors even purported to accept responsibility for disclosing material nonpublic information revealed during those negotiating sessions. that serve? What purposes of the estate did

If the debtors wanted to find out the views the

settlement noteholders about what they would like to see in a settlement, that could be done without involving them in the process, it could be done without sharing any information about what the debtors' settlement positions were or JPMC's settlement positions were; instead, they invite them into the tent and they accept these obligations on behalf of the estate in a confidentiality agreement that serves no estate interest at all. They did all that without advising the Court, they did

not come to the Court as has happened in some other cases, and proposed a confidentiality agreement, proposed a regime in an unusual situation like this, where you have non committee members essentially functioning as a committee, they did not do that; no one knew this was happening. The debtors failed to classify the nonpublic

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Page 228 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 information we identified in our briefing as material when they plainly should have done so. The settlement noteholders knew

all of this, of course; everyone knew, and nobody admits it on the stand, but it is common sense; no one was going to publicly disclose the back and forth of these settlement negotiations, because that would kill the negotiations. The debtors never

intended to give a public press release about the offers they made to JPMC or what JPMC made back to them or how close they were getting; everyone knew that was not going to happen because there would have been no settlement discussions. So if

you're going to embark in this process, the answer is not to disclose, the answer is, if you want to be involved, then you've got to put up an ethical wall; you've got to do what people on creditors' committees do if you want to play that role. And the debtors' didn't insist on it. And the result is

what we have. And the evidence of this entire story is directly relevant to their good-faith in negotiating the settlement and in proposing the plan that embodies it. And the debtors' have

repeatedly asserted that they owe fiduciary duties to the estates as a whole to the interest of shareholders as well as creditors, but they did not serve those interests. They

repeatedly favored the interest of one constituency -- and we'll repeat what I said in our brief, Your Honor, because I do think it's the truth -- is they sought only what was necessary

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Page 229 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 to get the votes they needed to confirm the plan, given that the settlement noteholders, particularly by the fall of 2009, held somewhere between sixty and seventy-five percent of all the value in the subordinated note in PIERS classes. And they

didn't care about getting anything more than that, nor did the settlement noteholders of course, and so at the time they're going through this show in court, at exactly the same time, saying we need another Rule 2004 authorization to conduct further discovery into these business tort claims, because as fiduciaries we need to know more about these claims, instead, they were -- we know what they were doing now; and that's what the public thought was going on, which is why I think there was a great deal of shock in March when this settlement was announced, so soon after the debtor had told this Court that they needed more information in order to determine the viability of the claims against Morgan. We do believe that the plan should not be confirmed under these circumstances. It is not enough to allow us to go

forward with the claim for equitable disallowance; we do want the authority to do that of course, but we believe what has happened in this process renders the plan unconfirmable as well. It's no answer to say well, the result of this process,

the settlement agreement, was found fair and reasonable by the Court. There is a range of potential settlement outcomes in

any negotiation and this range got artificially truncated as a

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Page 230 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 result of the interactions that we've described between the debtors and the settlement noteholders. There is a fairly low bar for the Court to approve a settlement as reasonable; that does not mean the process that led to it has received this Court's blessing as one that operated in the way the Bankruptcy Code envisioned, or that was done in good faith. I will very quickly turn to that motion, Your Honor, that we have, I think the main argument -- the main legal argument -- that's been advanced as to why the claim is not colorable, is that there is no such thing as a cause of action for equitable disallowance. That's the legal issue I want to

spend a minute or two talking about. The parties who argue that, say that it's not a ground recognized in Section 502(b) of the Code, and therefore it doesn't exist; and they rely on the Supreme Court's decision in the Travelers case, they don't deny that the Supreme Court's decision in Pepper v. Litton is still good law. And I don't

know how they could deny that, but they do -- they sort of insist that it's not really good law any more, after the passage of the Bankruptcy Code and the decision in Travelers. Where the Travelers case, as I'm sure the Court knows, was not addressing the equitable powers of the Bankruptcy Court at all, it's specific holding was limited to the rejection of this court-made rule, providing that attorneys' fees weren't

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Page 231 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 recoverable for litigating issues peculiar to bankruptcy law. And in fact the Travelers court expressly limited its ruling to the grounds for disallowance that were presented in the case. In the second part of the Supreme Court's opinion, they recognized that there might be other grounds for disallowance which weren't raised in the cert petition, and I'll quote this, page 1208: "Accordingly we express no opinion

with regard to whether following the demise of the Fobian rule, other principles of bankruptcy law might provide an independent basis for disallowing Travelers' claim for attorneys' fees". We've cited the Court to Judge McKenna's decision in Adelphia v. Bank of America, which issued after the Travelers' decision, expressly discusses Travelers, and rejects the argument that it did away with the Pepper v. Litton doctrine of equitable subordination. And I know the Court is familiar with

that opinion as well, but to me it was a very persuasive discussion of the legislative history, which is not at all clear one way or the other, but what is clear is the principle that we are not to presume that Congress has altered a fundamental precept of bankruptcy law and its enactments, unless it does so very explicitly, which it did not do with respect to equitable disallowance. Beyond that, I think we have all sorts of arguments that the debtors' refusal to pursue these claims is justified because of the expense, because the claim is not meritorious

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Page 232 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 and so forth. But it will obviously be up to the Court to We didn't avail ourselves of

decide whether there is merit.

the law which says in determining whether a claim is colorable, look at the pleadings, and that's all -- treat it as a motion to dismiss. We wanted the Court to hear the evidence because we know that pursuing this claim is going to take some time; it is going to cost some money. We didn't want the Court to take

that step without a very good look at whether the claim has merit. We think you have had that look. So, whether you

believe the claim is colorable, it is on a pretty welldeveloped record, I'm not at all suggesting that it is a complete record by any stretch, and if there isn't more to be learned about what happened during this process, because I think there is. The only other point I want to talk about on the unjustified refusal, is that the debtor makes the argument that if a colorable claim exists on behalf of the estates, then it is the debtors, or perhaps the liquidating trust, that should be granted the authority to pursue the claims and in any case, to retain the authority to settle them. doesn't take that suggestion seriously. And I hope the Court The evidence shows

that the debtors were complicit in permitting the settlement noteholders to engage in the conduct that's the focus of the equitable disallowance claim, they facilitated it, they have

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Page 233 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 repeatedly characterized the claims of insider trading as frivolous, meritless and ludicrous. They cannot be trusted to

pursue or settle those claims as estate fiduciaries, and as for the liquidating trust as it's currently constituted, the trustee is the same Mr. Kosturos who was an unabashed advocate for the positions of the settlement noteholders in his testimony at the July hearing; even going so far to suggest as I mentioned, that he had lied to JPMorgan in an effort to try to excuse the significance of a document that was damaging to the noteholders' position. And the advisory board of the

liquidating trust as I understand it, is going to be dominated by representatives selected by the creditors' committee, the equity committee will have one person. So, we do not believe

that either allowing the debtors or the liquidating trust to pursue these claims means that they are going to be pursued with diligence and in good faith. And there are many other issues that have been discussed today, Your Honor, but I'm confident I'm out of time, but I'll open myself for any questions you may have. THE COURT: I have one question; I think your motion

and proposed complaint only mentions two settlement noteholders. Is your request to be able to pursue all four or

only those two? MR. FOLSE: We do request -- we put in there at the

time it was filed, I want -- this requires a little explanation

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Page 234 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 because people have tried to take advantage of it, to suggest that that means we do not believe that either Owl Creek or Appaloosa engaged in insider trading, that's not true; we've been very clear both at the hearing and in our briefing that all four of them were in possession of material nonpublic information, that all four of them traded in differing amounts and at differing times, but traded while in possession of that information. confirmation. When we filed the motion for leave to file the adversary proceeding, we explicitly stated in there that we reserve the right to ask for permission to pursue claims -additional claims -- against the two parties that were named in the proposed complaint at the time, as well as against other parties. And to be honest, Your Honor, we wanted to see what But Your Honor, we We have argued that as a basis for rejecting plan

came out at the plan confirmation hearing.

do reserve the right -- and I suspect it's likely we have not discussed this with the equity committee, one thing at a time, it's an issue that obviously requires the Court to decide that the case will be able to go forward at all -- but that is definitely an issue we want to reserve on, and we may well be coming back to the Court if the case is permitted to proceed, with a request to amend it for that purpose. THE COURT: All right, thank you.

Let's take a short break.

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Page 235 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 (Recess from 4:28 p.m. until 4:41 p.m.) THE CLERK: MR. KAPLAN: All Rise. Be seated.

Your Honor, Howard Kaplan, Arkin, Kaplan We obviously join in

& Rice on behalf of certain TPS holders.

Mr. Folse's arguments and I think he covered a lot of ground which is good and allows me to focus just on a couple of points. One of them, I think, Your Honor, which is the one I And if I

would like to focus on principally is materiality.

might, we've had a lot of discussion about that and a mention of Basic v. Levinson but I don't think we've actually had the standard clearly stated. Under Basic v. Levinson, the Court must balance the probability that the event will occur and the anticipated magnitude of the event in light of the totality of the company activity. That case specifically rejected any bright-line

rule, any rule that said settlement discussions had to be advanced, had to be close, had to be near. assessed and balanced. It all has to be

And the magnitude is what has been In a bankruptcy case,

missing mostly today, Your Honor.

particularly this one, we submit that a settlement with JPMorgan is something that was of the greatest magnitude. We've had some comment here today that in bankruptcy cases, everyone knows there's settlement discussions. I'm sure

that's true but, Your Honor, that makes it more important, more relevant and not less. If everybody knows there are settlement

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Page 236 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 cases. discussions, everyone is trading in the debtors' securities and there are secret settlement discussions going on, that certain of those traders are involved in, they have material nonpublic information. Your Honor, I wanted to just talk about one or two I think an important case here which illustrates the

basic standard is United States v. Shapiro which is a Second Circuit case. It's a criminal case. In that case, the

defendants were hired to find a merger partner for their client, a company called Ridge. Harvey. They found a company called

They received information from Ridge, their client,

which they used to put together a pro forma and the pro forma showed that Harvey's earnings were going to go through the roof if this merger happened. They presented this data to a Harvey

board member who expressed an interest in the deal and then they went out and bought stock in Harvey. sufficient for a conviction. That alone was

That alone was sufficient for a

criminal charge in a conviction and criminal intent in that case. There was no term sheet. There was nothing more than There was some They didn't even

a discussion and an expression of interest. financial data coming from their own client.

get it from Harvey, the company they were buying securities in. And the Court specifically held as follows, I'd like to quote this, "Although the negotiations had not yet gelled to the

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Page 237 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 point where a merger was probable, the possibility was not so remote that when considered in light of a projected increase of at least six hundred percent in Harvey's earning per share, it might not have influenced a reasonable investor". versus likelihood, Your Honor. And in here, if I may just talk a little bit about Mr. Melwani's testimony, the traders, the funds that we're talking about, their job is to assess the types of risk that we're talking about here. Their job is to assess the likelihood of Their job is to assess As Mr. Melanie Magnitude

settlement agreements of litigation. the potential outcomes of litigation.

testified, his job was to apply subjective judgment to all of these matters and as part of his subjective judgment, as we'll see as we go through the chronology, Your Honor, he had in his mind the progression of the settlement discussions with JPMorgan. Now, Your Honor, just a moment on that. We keep There's

hearing how far apart the settlement discussions were.

a lot of money we're talking about here, billions of dollars. In April, those term sheets in April which came a few weeks after the March term sheets, the parties were one billion dollars closer. So while Mr. Kosturos is saying hey, we're

three billion dollars apart, the parties had moved one billion dollars closer and that's the progression that continued. little bit, ten percent, five percent in this case is 500 A

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Page 238 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 million dollars, is a billion dollars. The progression of

these term sheets very clearly was giving more and more value. JPMorgan was making greater concessions at every turn including, right through the end of the year and the estate, based on these was going to get more value. At the same time that's going on, and I want to get to the trading records, I just want to move right to that, the two settlement noteholders that we address in our brief, Centerbridge and Aurelius, they're trading. lot. They're trading a

They're doing a lot of different trades but they're Every time there's a

moving lower in the capital structure.

step forward, they move down; senior bonds, subordinated bonds and PIERS. And Centerbridge has argued that they had more Well, what they did with that

money coming into their fund.

money is the important thing, not whether the money was there. They kept going in lower and lower, as they found out more and more about the settlement discussions and JPMorgan's negotiating position. If I could, Your Honor, these are still I think under seal, so we have just put together a book of our demonstratives, if I may approach? THE COURT: MR. KAPLAN: You may. Pardon, Your Honor. Starting with the No doubt this was

March time period, exchange of term sheets. a contentious settlement negotiation.

It was contentious

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Page 239 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 heard. throughout the period but there are certain things that never changed; one of them is the principle, not the enforceable agreement, the principle that the debtors were going to get back the four billion in their deposits and JPMorgan was going to get the trust preferred securities. That was in the very

first term sheet and it was in the very last term sheet and the settlement agreement. Here is a principle that stayed

throughout the whole set of negotiations. There was some negotiations in April, as the Court has I will get to that a little bit more. The testimony

there is that Mr. Melwani and Mr. Gropper did not know of those discussions, although there are documents that indicate we believe that Mr. Gropper did, in fact, know the terms of those discussions but in the end when you look at what the trading was right after that, the trading really tells the story in our view, Your Honor. And if you turn to TPS-7, which is the

Aurelius trading activity, for the period just before and just after the confidentiality period ends, we have the April 30, 2009 monthly operating report filed by the debtor. internal trading by Aurelius. dollars in purchases. We have the

There's about fifteen million The

That's without Mr. Gropper's input.

confidentiality period ends and Aurelius then buys fifty-four million in securities including the subordinated bonds, as well. And if we turn to, Your Honor, TPS-2, this is the one

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Page 240 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 that Mr. Owens drew on. I don't have his drawing but he cut us

down a little bit but the fact remains, Your Honor, that what we had and what Centerbridge did before and after this confidentiality period, is they sold the floating rate bonds, approximately forty-four million and then immediately after the confidentiality period ends, they buy thirty-two million back, a complete reversal of strategy in those bonds. We submit, Your Honor, this clearly suggests that the information that these -THE COURT: MR. KAPLAN: THE COURT: MR. KAPLAN: Which exhibit are you on? TPS-2, Your Honor. Okay. Now, Your Honor, at this point in time

the debtor had filed their monthly operating report which -TC-25, which disclosed the amount of the tax refund as $2.6 to three billion. Then, of course, it says that JPMorgan may seek

to claim all or a portion of the refund and at this point in time, litigation had already been filed and in the litigation, JPMorgan claimed ownership of the deposits, as well. So to the public's knowledge, JPMorgan was claiming everything. JPMorgan claimed they were entitled to all of

these assets but what Centerbridge and Aurelius knew was that JPMorgan was willing to engage in a settlement discussion and had already right out of the box, agreed to give the deposits back. Now, even though this is at the beginning, you might say

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Page 241 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 this is at the beginning of the settlement process, this is a significant fact. Would an investor have wanted to know that? It seems self-evident, Your Honor.

We submit, of course.

Moving forward to the summer, Fried Frank -- this is when Fried Frank -- I'd like to put these documents up, Your Honor. Fried Frank forwards the July -- summaries of the April When the term sheets, the April term

term sheets on July 1.

sheets were first disclosed to Fried Frank in April 2009 and I'm going to ask my colleague, Mr. Matteo to work the ELMO which I couldn't possibly do -- no, that's the wrong one. THE COURT: MR. KAPLAN: What exhibit number is it? This is TC-10. When these term sheets

are forwarded to Fried Frank in April of 2009 by Mr. Rosen, he writes, "WMI considers this and the counter proposal to be confidential and should not be provided to, or the contents shared with, parties that have executed a light confidentiality agreement", which is Aurelius and Centerbridge because it was going to end. Now, Your Honor, Fried Frank had a separate confidentiality agreement with the debtor which is DX-408 and under their confidentiality agreement, this highlighted portion here, Fried Frank agreed not to disclose any such confidential information to any party including the holders, their clients. They could disclose it to their clients if their clients had entered into separate agreements. Fried Frank then forwards

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Page 242 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 the summaries on July 1, 2009 to Appaloosa and Centerbridge. Now, Your Honor, there is no evidence in the record about how this happened. There's certainly no evidence in the

record that the debtor approved this and if I may, I'll spend a moment on this in a little bit, but if I may just disagree with my colleague, Mr. Folse -THE COURT: MR. KAPLAN: apologies. THE COURT: MR. KAPLAN: Thank you. Your Honor, what happens next is that In our And what exhibit is this? This one, Your Honor, is EC-215;

Centerbridge trades with knowledge of this information.

view, Your Honor, my disagreement, my small disagreement with Mr. Folse, this is a misappropriation. This falls squarely This

within the misappropriation theory of insider trading. information was not supposed to go to Centerbridge and Appaloosa and we submit that the disclosure violates the agreement signed by Fried Frank. confidential information. This was protected

Nobody else had this.

Now, Your Honor, if you could turn to TPS-1, we have in the middle of the page, July 1 -- our dots are not quite lined up properly in this one but the -- right in the middle of the page, there's the July 1, 2009 summary and then Centerbridge after receiving that in July, goes out and buys some thirty million in subordinated bonds and sixty million in

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Page 243 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 senior bonds. Now, Your Honor, we've heard many, many times about how the settlement discussions died. halt after each of these events. They came to a screeching

But here we have a situation

where Centerbridge gets the April term sheets, Centerbridge obviously is formulating its own proposal which is submitted to JPMorgan on July 29; so now we're talking about the month of July, knowing that settlement discussions are going to continue because they're going to make the proposal, they go out and trade. Can't get more material than that, Your Honor. And just to add the point which I think is already clear, during this period Appaloosa restricted itself from trading. Now, Your Honor, just sticking with that chart, there was some testimony about a September 2 meeting and according to Mr. Melwani, at that September 2 meeting, the settlement offer was withdrawn or some such thing. I can't remember the

testimony exactly but that's essentially what he said. Now, Your Honor, we think that under the circumstances it's just not a credible set of facts. July 29 there's a

settlement proposal given to JPMorgan by Centerbridge and Appaloosa. And by the way, the settlement is of course on

behalf of the debtor, even though the debtor is not involved because this is all to settle claims between the debtor and JPMorgan. So Centerbridge makes a proposal to JPMorgan.

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Page 244 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 JPMorgan comes back with a proposal, not surprisingly on August 18 where they make very big move. In fact, they hit the

midpoint on the tax sharing between where they were, fifteen percent and the forty percent. Centerbridge and Appaloosa don't make a counteroffer on September 2. They don't disclose this to the debtor for a

few weeks and they conclude nonetheless, that settlement negotiations are done. It's just not credible. This had to go

to the debtor which it eventually did and what happened after that was the debtor took the term sheet and the debtor then went and made a proposal and had a negotiation. nothing over. There was nothing done here. There was

This was a

continuous set of negotiations. Your Honor, just briefly if I might, going to now the second confidentiality period. There was a lot of testimony,

there seemed to be a lot of frustration at this time both with the debtors' 6139 proposal and then JPMorgan came back offering to give the new tax refunds, the new NOL carry back to the debtor and to take the rest and so forth. But in the end,

Centerbridge got an e-mail in November which said that JPMorgan was willing to settle at thirty-seventy; thirty for the debtor, seventy for JPMorgan on the tax sharing on the first tax refund. After all the frustration and whatever happened there,

that was the deal that everyone knew Mr. Kosturos was going back.

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Page 245 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Now, Mr. Melwani said he didn't remember that. Gropper, he testified that he did remember that. Mr.

He knew that

the debtor was going back with that thirty-seventy and he knew -- and he modeled and so he knew the waterfall that would flow from that. Mr. Melwani said he didn't remember but we saw

from some of the e-mails that it was one of his partners that actually was involved in the discussions and not him. That goes out to JPMorgan. Everybody claims that the

period ended and nobody knew what was going on and we just forgot about it but here, these people knew, Your Honor, that JPMorgan wanted a thirty-seventy share and the debtor was willing to do it. The debtor was willing to do it. That's the

deal that was struck a month later.

And immediately upon

termination of the second confidentiality period, both Centerbridge and Aurelius go out into the market and they buy PIERS, right at the bottom of the capital structure. there's a deal coming. They know what it is. They know

Aurelius modeled

it and they go and start buying PIERS and, in fact, Your Honor, if you turn to TPS-3 -- I'm sorry, TPS-9 first, Aurelius on December 31, which is the day after the end of the confidentiality period, buys 590,000 shares of PIERS. Aurelius, which is on -- I mean Centerbridge, which was on TPS3, you can see throughout January buys 814,000 shares of PIERS. Now, Your Honor, what did the public know? material, nonpublic information? The public had the Is this

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Page 246 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 disclosure, the monthly operating report which discloses the amount, the estimated amount of the additional NOL carry back period refund, which was 2.6 billion dollars, and again there's a disclosure that says there are competing claims to ownership. Now here, Your Honor, in light of where the parties were in the negotiations and how far along it was, this certainly from a trading perspective was a misleading disclosure. This disclosure says that there are competing

claims of ownership with no other explanation when in fact what we had here was almost, almost, a done deal; certainly on the deposits, four billion dollars, the trust preferreds, 4 billion dollars, the 2.6 to 3 billion dollar sharing, split thirtyseventy. And the discussion, I believe was ongoing still with

the NOL carry backs which ended up being fifty-fifty. And so what we had in our view, Your Honor, is a misleading disclosure by the debtor, knowledge on behalf of Centerbridge and Aurelius and trading while in possession of that nonpublic knowledge, the status of those negotiations. Your Honor, if I may just make a couple of comments on the duty issue and the temporary insider issue. When someone

is an insider, like an officer or a director, who clearly has a fiduciary duty to the company, and they have information, they can't trade. They have to abstain from trading and they can

only trade when the company discloses all material nonpublic information. That can't be waived, Your Honor. The company

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Page 247 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Honor. can't say okay, you now can trade today. disclosure. They have to make the

It's no different when someone becomes a temporary

insider to a company. So if the Court finds that Centerbridge and Aurelius became temporary insiders because of their involvement in these settlement negotiations, the debtor can't waive, the debtor can't say to them you're good to go. The fiduciary duty runs to the market. creditors. It runs to the shareholders. The debtor can't do that. It runs to the

And so this whole argument that we have here about how the debtor had a contractual obligation to disclose, it may be there's a breach of the contract; I don't know. I mean it's --

I don't know how anyone would be able to sue the debtor or have a claim for that but in the end, on an insider trading basis, the debtor can't waive that. The only thing the debtor can do

once someone has material nonpublic information is disclose it because you're out there trading and the whole basis -- under O'Hagan, it's very clear -- the whole basis of the insider trading laws is to not let people trade with an imbalance of information. Not let people have corporate information and use

it to benefit themselves. Just one comment on the misappropriation theory, Your We do think that that is a pretty clear

misappropriation, what happened with Centerbridge in July and August. The duties -- I don't know that we need to talk much.

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Page 248 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 I think from the Court's questions, the Court understands the different duties but the duty here quite clearly is owed to the debtor through Fried Frank and through that confidentiality agreement. One last point, Your Honor, if I may, on scienter. The law is very clear that trading with knowledge of material nonpublic information is scienter. If you knowingly have

material nonpublic information and you trade, that is scienter. And if might just point the Court to another Second Circuit case, U.S. v. Teicher, this is another criminal case and I just want to read as a final point a part of this case. "One who

trades while knowingly possessing material inside information has an informational advantage over other traders. Because the

advantage is in the form of information, it exists in the mind of the trader. Unlike the loaded weapon which may stand ready

but unused, material information cannot lay idle in the human brain. The individual with such information may decide to

trade upon that information, to alter a previously decided upon transaction, to continue with a previously planned transaction even though publicly available information would now suggest otherwise, or simply do nothing". But this court found that -- this is the awareness standard and this court found that awareness, knowing awareness of material nonpublic information and trading violates the securities laws.

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Page 249 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Your Honor, one last point. I deal with these issues

a lot outside the bankruptcy context and I've heard some arguments here which I think need to be commented on. The

notion that it's difficult to set up an ethical wall is not a valid reason for not doing it, it's what people do all the time or you don't trade. That's the way the rules work. You're not

allowed to trade with material nonpublic information. If the firms are too small, I am not quite sure -- we didn't get into why that's so difficult. It doesn't seem that

difficult except that it sounds like the firms want to do exactly what's not allowed which is the person who is trying to negotiate the settlement is the person that wants to also be doing the trading but that is truly the answer to much of this type of situation. Otherwise, Your Honor, what we have here and what I have heard today is an argument that settlement negotiations in a bankruptcy context are really never material. I think that's

the ruling that the settlement noteholders are asking the Court to give which is that settlement discussions in a bankruptcy are never material. people involved. it out. Well you know what? People can figure it out and It's too complicated. There are too many No one can figure

There's too much going on.

people do understand how to use this information and people make judgments on where things are going to settle. And it's

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Page 250 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 just not fair to the market, it's just not. And this case,

this case shows the abuse of the process that can come from allowing powerful funds like these, and they are powerful and they're big and they acquired very large positions, in order to get their influence in this case to allow them in under the tent, I think someone used that term which I think is a very good term, and to allow them to trade when they're under the tent and they know what the debtor is thinking and they hear what JPMorgan is saying and they know these settlement discussions and they know what these back and forth term sheets are; it's not fair, Your Honor and it shouldn't be allowed. And people should not just be allowed to make their trades at all costs and make their money at all costs. not going to disclose the numbers here. I am

We put it in our brief

how much we calculated these firms have made just in realized trading, Your Honor. It's a huge amount of money. And that's

just in actual trading. out.

That's not even what they stand to get

And so we agree with the equity committee. going to go through the remedies.

I'm not

I think we agree with the

equity committee's request and I think if you have any further questions about that, Your Honor, Mr. Stark probably will be able to answer that. THE COURT: Thank you. All right. Thank you.

MR. ECKSTEIN:

Your Honor, I apologize for just

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Page 251 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 interjecting for a moment. I didn't want to interrupt in the

middle of Mr. Kaplan's remarks but Mr. Kaplan did use the charts and there was supposed to be an understanding that the charts were going to be in a form agreed to before they were used. I advised Mr. Kaplan last week of our suggested They were not accepted. Unfortunately, the

corrections.

charts that were presented were just simply misleading. And I just want to point out, TPS-7, Mr. Kaplan did not include in the chart the sales. mention it. He footnoted it, did not

It's not visible and he argued strenuously from it

about materiality. TPS-9, it's headed, "Aurelius' Purchases of PIERS" knowing full well and it's even there, that there's a sale, a significant sale on the chart. We pointed out those specific They were ignored and

corrections to Mr. Kaplan last week.

they were argued and I simply could not allow the issue to pass without mentioning it. MR. KAPLAN: Your Honor, we added the word sale on That's what we did.

that chart at Kramer Levin's request. MR. ECKSTEIN: Purchases -MR. KAPLAN: MR. ECKSTEIN: of PIERS". MR. KAPLAN: That was there.

The heading says "Aurelius'

That was --

The heading says "Aurelius' Purchases

This is -- listen, listen.

Your Honor,

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Page 252 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 first of all, we got their -- we gave them these charts at the confirmation hearing, number one. Number two, they didn't give

us comments until after we filed our brief but even then we talked to them. We listened to them and we did make one change I don't think there's

on TPS-9 where the bright red says sale.

any confusion there and I don't think the Court is confused. MR. ECKSTEIN: MR. KAPLAN: THE COURT: MR. KAPLAN: The heading is very clear. On TPS-7 -All right. Anyway, on TPS-7, I just want to point

out the footnote says the information that Mr. Eckstein is complaining about. THE COURT: Thank you. All right. Thank you. Howie, did you buy any time

UNIDENTIFIED SPEAKER: from anyone? MR. KAPLAN: What?

UNIDENTIFIED SPEAKER: MR. KAPLAN:

Did you buy time from anyone? JPMorgan loaned me --

Yeah, Mr. Sacks.

UNIDENTIFIED SPEAKER: the TPS folks any time. MR. STARK: podium so badly?

No, I don't think I am loaning

Certainly not Mr. Stark, Your Honor.

Why do they want to keep me from the

Good afternoon, Your Honor. Good afternoon. Robert Stark from Brown Rudnick on behalf I'm just going to --

THE COURT: MR. STARK:

of the TPS consortium.

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Page 253 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 THE COURT: Despite your colleague taking more time, I

will give you twenty minutes. MR. STARK: Thank you. I will do my best. We can

talk about Stern for twenty hours but let me delve into the divestitures quickly. Notwithstanding Mr. Sacks' view of our There's already We're going to go

appeal, we believe it in 110 percent.

substantial briefing before Judge Sleet. full forward with that appeal.

The law has an obligation on

this court to enable that process to move along. The divestiture rule says this court's jurisdiction is circumscribed. This is a court of limited jurisdiction. You

can confirm a plan.

You can enable case advancement but you You can't approve a plan that moots

can't disable his appeal. it.

That would exceed the reaches of your jurisdictional This principle It's

authority and the cases are clear on this. isn't all that convoluted.

It's not even controversial.

just inconvenient to their case strategy and that's no rebuttal in the eyes of the law. THE COURT: the appeal. Well, I don't think it says you can't moot

It says I cannot enter an order that changes my

prior order, enlarges or modifies. MR. STARK: It actually says beyond that, Your Honor.

The applicable quote that Judge Shannon cites in VII Holdings which is replete within all of these cases and if Your Honor will allow me, a court may quote, "enforce an order or judgment

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Page 254 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 appealed because in implementing an appealed order, the Court does not disrupt the appellate process so long as its decision remains intact for the appellate court to review" closed quote. Your Honor, right now what they want to do is take the TPS securities, hand them over to JPMorgan, give them a 363(m) excuse that says we can no longer ever get it back if Judge Sleet reverses Your Honor. That is exactly contrary to what

every case -- and there's many cases talking about -- and the binding precedent of cases talk about what the divestiture rule says. The enforcement exception does not swallow the rule. Your jurisdiction is now --

That issue is now his, his alone.

is enabled on plan stuff but those TPS securities must be reserved in an escrow pending the ultimate resolution of that appeal. THE COURT: MR. STARK: Honor's -THE COURT: MR. STARK: THE COURT: Let me posit the situation -Sure. -- that I face every day and that is a Without a stay pending appeal. Your Honor, a stay for what? Your

dispute, whether the debtor owns property of the estate that it proposes to sell in a 363 sale. MR. STARK: THE COURT: MR. STARK: But I don't see how that's a divestiture. I just -Oh, I am sorry -- oh, if it's appealed?

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Page 255 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 appeal -THE COURT: MR. STARK: Yes. -- if it's on appeal, at that moment in appealed. THE COURT: MR. STARK: THE COURT: MR. STARK: THE COURT: Right. Your Honor, but that's different. How? Okay. Well, yes, do you know what? Excuse me. THE COURT: MR. STARK: Yes. So you enter an order and then that's

I've decided this is property of the

estate that can be sold. MR. STARK: Right. And then while it's up on

time the issue must be ring-fenced for the decision ultimately for Judge Sleet or Judge Robinson to make a decision on that particular moment. Your Honor can no longer say that

particular piece of property at this moment in time belongs to whoever the seller is. THE COURT: The cases are clear on that point. I've decided it belongs to the

Why?

seller and I'm simply -MR. STARK: THE COURT: MR. STARK: THE COURT: Well, for the --- enforcing that order. To the buyer or to the seller? To the seller. Excuse me.

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Page 256 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 that. MR. STARK: THE COURT: MR. STARK: THE COURT: MR. STARK: piece of property. THE COURT: The seller. I've decided it belongs -The debtor sold --- to the debtor. Forgive me, Your Honor. It sells it to a buyer. I first decide it's debtors' -- it's The debtor has a

property of the estate. MR. STARK: THE COURT: Accurate. Okay. And then some --

An appeal of that decision doesn't mean

that I can't authorize the debtor to sell that, consistent with my prior order. MR. STARK: Your Honor, I respectfully disagree with That

I think the cases are very, very clear on that.

issue if it's on appeal -THE COURT: MR. STARK: Is there any case that holds that? All of the cases that I've cited in the

opinion, Your Honor, I think the Strawberry's -THE COURT: They're distinguishable. The facts of

your cases are distinguishable. MR. STARK: Your Honor, I don't think so at all. Your

Honor, we have an issue and it's a very live issue as to whether or not this estate owns the TPS securities. gives it to somebody else and says it's theirs. it. Their plan

They can have

And I have on appeal before Judge Sleet whether or not

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Page 257 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Your Honor's ruling as to whether or not the estate even owns it, is accurate. If this plan has in it about stealing my

house or Your Honor's house or somebody else's house and hands it off to somebody else and exceeds the bounds of the jurisdiction of -- excuse me, exceeds the legitimate Butner interests under state law as to whether or not this estate actually owns it, and hands it off to somebody else, that's not the way the system works. There's now a reviewing court that's

going to decide whether or not that underlying decision is right and it can't be mooted out. The fact that there's an equitable mootness doctrine is after the fact. It's after the fact. I have to ask Your

Honor for a stay with respect to whether or not you can enter an order on something you don't have jurisdiction over anymore. THE COURT: No, I do have jurisdiction to enter a stay That's clear. Your first

of my ruling on the TPS issue.

request has to come to me for a stay pending appeal and then you go to the district court. MR. STARK: Well, Your Honor, again respectfully, I I think once the issue has

don't think that's the law at all.

been handed over to Judge Sleet to decide to review your decision, you've lost jurisdiction. a stay of something you cannot do. automatic. Your Honor, I think the cases are about as clear as I would be asking you for I don't need to. It's

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Page 258 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 clear can be on that. And what would that stay look like? I

would be asking Your Honor for an injunction from anybody doing anything in this case, filing any plan at all, that exceeds the bounds of your jurisdiction. THE COURT: It's --

No, you're asking for a stay of my

decision finding that the debtors are the owners of that property. MR. STARK: of the cases -THE COURT: That would be the effect of it. If I Your Honor, respectfully, I have read all

stayed that ruling, then yes, the debtors could not put together a plan that included selling that property if my ruling that they owned it was stayed. MR. STARK: rule then means. Your Honor, I don't know what divestiture

From the Supreme Court in Grimes to the Third

Circuit in Venen, to the many cases, not just the three that we cited in the post-trial brief, but all the ones we cited before and all the ones they've cited, they all say the same thing. It's not a convoluted or controversial doctrine. very, very clear. If there's an issue as to whether or not the estate owns a piece of property and there's a contest over that and that issue is now put before the district court on appeal, that issue cannot -- Your Honor has no jurisdiction -THE COURT: Except -- I have jurisdiction to enforce It's all

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Page 259 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 the order. MR. STARK: THE COURT: that order? MR. STARK: You have to read the end of the sentence You have jurisdiction to Only to the -How else could I have jurisdiction over

in all of these cases, Your Honor.

enforce it, only so long as in the enforcement action, you don't otherwise disturb the issues on appeal. So, for example, Your Honor, it's a -- we could talk about any of the cases that you like but that's the wording in all of them. So long as you don't disturb the issues that are

before Judge Sleet, you don't have the power, you don't have the jurisdiction to moot an appeal before Judge Sleet. That's

what Strawberry Square says in about as clear terms as can be. You can't touch the issue on appeal, even on other issues, so as to disable him to reverse. Your Honor, I only have twenty minutes, so I am going to move to Stern but we can talk about it as much as you'd like. Whereas I think that issue is very clear, I think this Maybe Your Honor will think this one's a

one's very hard. whole lot easier.

There's no dispute anymore that Your Honor can't adjudicate the underlying causes of action. You heard Mr.

Sacks say I don't agree to the Court's jurisdiction to adjudicate the matter. So the question is only whether or not

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Page 260 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 the Court can approve the hotly contested settlement of the noncore actions. And in my articulation, as I read Stern, the

question is, is the stuff of Article III district court litigation or is it the stuff of bankruptcy administration. They use the sort of agency rubric of public rights. Is this

sort of an agency administrative function and the stuff of bankruptcy? And it's not an easy call. It's a really hard call.

It's something that I know Judge Amber would love to get his hands on and perhaps there isn't a bright-line test. talk about that fact there isn't a bright-line test. Let's Of course It

the Court has core jurisdiction to confirm plans generally. would be silly to suggest otherwise. But also axiomatic, not every plan has in it provisions that fall within the Court's jurisdiction.

If this

plan had an active -- a declaration of war against Canada, Your Honor could not approve that plan because it would exceed the bounds of your jurisdiction. executive branch. THE COURT: MR. STARK: It would encroach upon the

I know I am being a little bit -Extreme. -- extreme, but the concept is the same.

Plans, just because you put the word plan on the coverage, doesn't mean that its provisions can't necessarily exceed the bounds of Your Honor's jurisdiction. little bit more bright-lined. You have to look at it a

There's a continuum and it's a

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Page 261 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 continuum with respect to settlement approvals that are within the plan. If this was a case where you had a company that was rehabilitated, you had jobs at stake, you had money being involved, you were increasing an enterprise value, you were doing all the things that Chapter 11 wants us to be doing, rehabilitating and restructuring companies for the benefit of everyone and you had a smaller settlement in there that frankly wasn't sort of the heart of the plan, I don't know that it wouldn't fall within normal bankruptcy administration and well within your court's jurisdiction to approve that kind of a plan but this case is different. This case is very different because in this case, there is no business. This case has nothing other than rights

of recovery against various different people including the government and third parties and this plan is essentially nothing more than a way to effectuate the settlement and impose it upon lots and lots of people who don't like it. There's

other bells and whistles associated but it's the heart and the vital organs of this plan is that settlement agreement. It does analogize very well, Your Honor, to the magistrate judge, the other Article I judge, who is being asked to approve a fairness -- make a fairness determination on general class action. Article I magistrates can't do that, nor That's really the stuff of

can this court do that here.

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Page 262 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 litigation. So if this plan had more to it, that felt like it was a real bankruptcy plan of reorganization, was really doing something that we normally do here, I'd say on the continuum, a very decent argument probably could be made. It fits within

the agency concept, the public rights concept of bankruptcy administration but not this plan. THE COURT: MR. STARK: THE COURT: Well -Not what it's trying to do. But isn't the norm in plans today

liquidation and certainly Chapter 11 plans can be liquidations. MR. STARK: They certainly can but it's certainly not I've been --

my experience that the norm is liquidation plans.

every case that I'm involved in besides this one is all reorganization, Your Honor. forward. THE COURT: MR. STARK: I guess you're lucky. Matsushita and Grimes, they're completely These are cases that I hope that's the way we go

irrelevant authorities that were cited.

dealt with two federal statutes and the only issue is which one trumps the other. And it's issues as to whether or not a state

court adjudication has binding authority under the federal statutory regime. Well, state courts are not courts under the It's not a

constitution of limited jurisdiction. constitutional question.

It's an interpretation of statute;

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Page 263 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 which statute trumps the other. This issue here is whether or not this court, this court of limited jurisdiction has constitutional power to do what Stern says is not something that's an easy decision to make. It's completely irrelevant, Your Honor. And Okwanna, Your Honor, I think there's two aspects of Okwanna; one I think is just plain wrong and one makes it inapplicable. Okwanna relies upon the idea that it's -I

because it's a 9019 Federal Rule, somehow we get past Stern. think Stern made it pretty clear that a statute or a rule doesn't make something constitutional. five thousand dollars.

It's also an issue over

And what makes it sort of inapplicable

or irrelevant is it dealt with whether or not the person was going to be able to have an exemption right of property, okay? Whether or not that five thousand dollars in the settlement of an insurance issue would go back and would enable the fresh start philosophy. THE COURT: MR. STARK: Uh-huh. And so I would say that along my continuum You are enabling a

idea, that is bankruptcy administration. person's fresh start.

And so I think Okwanna is different than

this particular circumstance. Here, I think the Supreme Court would say if they looked at this case that they are asking Your Honor to do more than what is bankruptcy administration. It feels like and it

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Page 264 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 is an end run around litigation, the big causes of action and letting those judges who are now dealing with those causes of action, approve the settlement. bankruptcy. This plan isn't the stuff of

It's the stuff of litigation.

With that, I think that takes us to the third point, that's post-petition interest, Your Honor. I think this is

another Judge Ambro decision but again, I don't think it's all that hard. I really don't either. 726(a)(5) instructs Your

Honor to act like a court of law, notwithstanding what Mr. Hodara says, you've got discretion. of law, the legal rate. You're acting like a court

There's a rate, apply it and it's not

the contract rate because 506(b) says contract rate and this doesn't. It's the federal judgment rate for all those other

reasons that Your Honor knows about and has written about. There is judicial discretion in the context of postpetition interest but it's confused in all of the arguments that's being brought before Your Honor. 726(a)(5). It doesn't exist under

It exists under 1129(b) in the fair and equitable.

That is where the Court is being asked, not to act as a court of law, but to act as a court of equity. equitable. And that's where case circumstance plays a part and that's the distinction between Dow I and Dow II and Coram was a situation where the equity committee says we've got this great plan idea and we're going to cram it on those unsecured It says it; fair and

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Page 265 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 creditors and Your Honor said I've got discretion and my discretion arises as to whether or not you, equity committee plan, is fair and equitable. That's not this case. Okay? But that's not this plan.

There's no creditors cramdown This is only whether or not what

contemplated in this case.

the equity is entitled to under federal judgment rate of interest has been taken away from them. And that's the On this

beginning and the end of the analysis on this plan.

plan that value, you calculate what the post-petition interest would be using the federal judgment rate and if there's value that goes to equity, they have to get it and if they don't get it, then the plan fails 726(a)(5). test. And what's more, the Court need not worry in this case about a situation where I think Dow sort of alluded to it, where no plan works. You can't find a way to stretch the value It fails best interest

that the equity's entitled to and at the same time, you can't figure out how to do it without cramming it on unsecured creditors because the evidence shows enough that there's cash. You can pay off the creditors in full, give them the 726(a)(5) interest still yield substantial cash and all the other value including WMMRC and the causes of action. It means you don't

have to value them and that flows down; just natural, ordinary waterfall as Mr. Rosen would like to put nice graphics up there.

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Page 266 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Admittedly, to get to the level where TPS is in the money using the evidence in the record, you need to find the judgment date is now, is confirmation. date. It's not the petition

If it's the petition date, then it would be some ninety-

odd million before we're in the money which again in the grand scheme of seven-odd billion dollars is as I said before, they put their hand over equity, it was a penny less than paying them off in full and so that's kind of where we are. penny less than paying them off in full. But let's talk a minute about how we use the interest reference date. Is it the petition date? Is it today? And we It's a

cite a whole lot of authority in our pleading that talk about the fact that as a matter of logic, as a matter of law, there's that Second Circuit case, that it really ought to be calculated as of today. The plan supporters say well, that flies into the

face of the cases that are out there, including cases that I cited that say federal judgment rate is determined as of the petition date. None of them are binding precedent and I've

got -- I really want to talk to Your Honor about why I think that that conclusion in those cases should not be followed here. First, there's limited if any, analysis. Most of

those cases just sort of say; say we'll use federal judgment rate. It will be the petition date. And I think in most

cases, the issue has always been historically do I use the

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Page 267 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 wrote -MR. STARK: I don't believe so, Your Honor. contract date, do I do the federal judgment rate and if I got the federal judgment rate, wherever you sort of peg the date, I'm happy because the VIG is significant. So I presume in all

of these -- most of these cases, nobody ever litigated the issue. It wasn't analytically put before the judge. There is one or two cases where there is a little explanation. I'll give you a quote from the Chiapetta case,

"Since a claim is like a judgment entered at the time of the bankruptcy filing, the applicable rate should be the federal judgment rate in effect at the time of the bankruptcy filing" and that's closed quote. But that's not correct at all. equal judgment from a court. acceleration. Bankruptcy doesn't

Bankruptcy equals default and

It means the claim can be asserted, not that a

court has said you now must pay it. And the last time I checked, the definition of claim includes contingent and unliquidated claims. So you're sort of

in this weird theoretical idea that the judgment date is the date before a court has ultimately determined whether the contingencies exist and what the liquidated amount of the claim would be. So it's a theoretical conundrum to say that the

petition date is the judgment date. THE COURT: But isn't that the conundrum Congress

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Page 268 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 file -MR. STARK: If I'm a secured creditor, I don't have to THE COURT: petition date? MR. STARK: What the petition date is the date that -- that we view everything as of the

somebody files a proof of claim and says I'm entitled to payment. It's the same as filing a complaint in federal civil It's not appealable. It's not something that's

litigation.

otherwise -- an appeal is what -- defines what a judgment is as we said in the brief. Filing the petition -- filing the claim Now, people

on the petition date says I am entitled to pay. can come in and say I disagree.

I can object to that claim and

then there will be an adjudication thereafter and that's when the judgment happens. THE COURT: file a claim. MR. STARK: THE COURT: I don't have to file a claim? Yes, in many cases you don't have to even But in Chapter 11, you don't even have to

file a claim but if I am an unsecured creditor, I do. THE COURT: date, for example. MR. STARK: Not unless I enter an order setting a bar So, I mean -I think 502 says that I have to file a

proof of claim, if I am going to assert a claim unless they schedule it or I'm a secured creditor and then I assert the right of payment. Someone can then object, as they can defend

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Page 269 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 in a cause of action. Then we have an adjudication and then

the determination is made, is the claim allowed or not allowed. And the plan will then decide what's being paid. THE COURT: So you're suggesting that the interest

rate day is different for every claim. MR. STARK: No. No, no, no, no, no. I'm saying that

the petition date does not analogize at all to the judgment date which is the date by which you determine what's the prevailing federal judgment rate. THE COURT: The petition date --

So you're suggesting that for each claim,

I have to determine the judgment date to determine the effective -MR. STARK: THE COURT: MR. STARK: Well, the judgment --- federal judgment rate on that date. What the cases say -- well I will give you You've got -- when there's

an -- we'll do a different analogy.

a Chapter 11 case that converts to a 7, the cases don't say that the petition date is the reference date for determining post-petition interest. It's the conversion date. It's when They

there's a date that actually is determining the judgment.

view that as the judgment date at that moment in time because there's no plan anymore. straight up liquidation. At that moment in time, it's a And there's a fair amount of analysis

and all of those cases decided as to why that's the case and not the petition date. It's a hotly litigated issue and the

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Page 270 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 case. cases are almost uniform now and extensive appellate analysis that it's the date by which -- of the conversion, not the petition date. There's a gap period otherwise and if you say

today that the judgment is the petition date as a matter of law, then you fly in the face of all those other cases. must be something else in the bankruptcy case. We cited the Second Circuit's decision in Preferred Prescriptions, quote, "The confirmation of a plan in a Chapter 11 proceeding is an event comparable to the entry of a final judgment in an ordinary civil proceeding" closed quote. It seems pretty clear, at least to the Second Circuit's decision and analysis that the filing of the plan is the judgment and that's the date that should be determined but I am going to move on. Let's just say for the sake of argument We're ninety The plan It

that Your Honor determines the petition date.

million dollars, give or take, out of the money.

still can't be confirmed and I think this is really important. You've heard none of -- nothing on this today. Okay? And this

is the death trap discussion and it's also how you value estate causes of action. There are two forms of value being distributed in this You've got cash proceeds and you've got a liquidation

trust and there's things being put into that liquidation trust including, among other things, all of these estate causes of action that are not being settled; D's & O's, we heard Mr.

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Page 271 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Goulding talk about. There's at least 250 million. There's

litigation against potentially other Wall Street participants, rating agencies, appraisal firms. This is Washington Mutual.

This is the epicenter of the nation's macroeconomic decline. There's lot of people that were involved in WaMu's decline and all of that is going in this liquidation trust. And they talk about the flow down. They have a really

nice graphic about how it all flows down and it will be what it will be but that's not accurate because since we didn't tender a release to JPMorgan and thereby give up our appellate rights, we're deprived of participation in that trust vehicle. been death-trapped. We've

Now, death traps, I suppose, are legal

under the cases just so long as I don't otherwise have entitlement to the thing that's being taken away from me, okay? It's effectively a gift, okay? want it. That's fine. The gift is available. I don't

But they have to prove I don't

otherwise have entitlement to value that they're pulling it away. Otherwise, it would be violative of best interest in the We quoted

fair and equitable test and that's MCorp Financial. that at length in our brief. So they've now foisted on themselves a huge

evidentiary burden and we've heard nothing about it today. That the causes of action that are going to be vested in the trust now have to be worth according to their plan and to enable it to be confirmed, has to be worth less than ninety

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Page 272 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 million dollars as a matter of law. you. They have to prove it to It's not a canvassing It's value

It's not part of the settlement.

of an issue. allocation.

This is part of the plan itself.

It's been deprived to us and so whatever is in the

trust must be worth less than the ninety million that otherwise would get me whole. And Judge Posner, Circuit Judge Posner, told us how they were supposed to do it in the Polis case that we cite. They were supposed to come to this court and tell us who will be sued, under what theories, how much will be demanded and what's the likelihood of success. As in December, we have an utter failure of proof. They gave us absolutely no information. They essentially admit They don't know

that they don't know who they're going to sue. what they're going to get.

And only now getting around to

investigating it by hiring Klee, Tuchin to do that investigation for them. But where there is relevant evidence, it forcefully suggests that trust will hold claims that vastly exceed the ninety million dollars, perhaps by billions of dollars. You

have Mr. Goulding and Mr. Kosturos who have testified that there's an intention right now to invest tens of millions of dollars to fund this trust. It simply defies credibility to

believe that these sophisticated parties will spend tens of millions of dollars to pursue less than ninety.

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Page 273 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 You heard Mr. Kosturos talk about 250 million dollars of potential D & O coverage. I didn't hear insured versus Rather, I heard that

insured once in any of that discussion.

that 250 million dollars may be sitting and waiting for the trust's taking. And then you have the Senate report. The

quotes given were intended by us, we selected them because they seemed to us pure fact finding. at corporate headquarters. investment banks. They say here's what happened

Here's what happened at the

Here's what happened at the rating agencies And they forcefully suggest that

and at the appraisal firms.

tens of millions of dollars invested in these causes of action is a very, very good investment, yielding again perhaps billions of dollars. Frankly, on this point alone, I simply don't see how the plan can be confirmed. They offered this court nothing to

shelter the legal and evidentiary infirmity which is clearly and utterly stated in the law. Now, we talk also in our brief about the governance structure. We have an entitlement here. It's being taken away

but let's say Your Honor tells them in your next opinion give them the proper participation they deserve. into the governance structure of it, okay? Here you have indentured trustees controlling trust governance, indentured trustees whose bondholders are being paid off. 1127(a)(3) says governance must be consistent with Well, then we get

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Page 274 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 the interests of the trust beneficiaries, in effect. shouldn't be allocated as political patronage. It

Trustee's

representing claims paid off under the plan, don't represent beneficial interests anymore. Those should go to those who are Here too,

going to be the trust beneficiaries; TPS and equity. I think the plan facially violates the law.

You've heard

nothing about it today and you've heard no evidence along the way. I know Your Honor doesn't really want me to talk too much about the global settlement, so I'll touch on it briefly, if only for establishing the record. any law of the case rule here. We don't believe there's

There wasn't a final opinion.

The December record is being incorporated by the reference and they're asking again for approval of the global settlement. And if there was, in fact, a final order on that, which there isn't, I think we'd still have 60(b) rights, coming back and say reconsideration by subsequent developments. But with that, I just want to make sure that we understand one another about my prior objection in December about what their settlement burden is under TMT Trailers. take it as a given that issues like tax refunds, deposits, BOLI/COLI, things like that; those are legal issues. Those are I

issues that have been briefed and Your Honor's been given the contracts and Your Honor probably can with that evidentiary record make a determination as to the fairness of the

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Page 275 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 settlement. We don't contest that.

The problem we have are with the fact intensive ones; the business torts and the avoidance actions. legal. These are not

These are pure fact driven causes of action and they've

been asserted in complaints and in other pleadings before Your Honor, substantial complaints in other pleadings before Your Honor, seeking in excess of, I think it was as much as 6.5 billion or exceeding. Prima facie claims were asserted in a complaint, a lengthy one and the evidentiary record supports the prima facie case. You have Debtors' Exhibit 68, Debtors' Exhibit 70,

Debtors' Exhibit 44, Debtors' Exhibit 32, Debtors' Exhibit 48 and all of the attachments to those 2004 motions; all the emails that were tendered by JPMorgan, all substantiating further investigation and an ability for the debtors' to sue. And these claims are admittedly being given up for nothing. And absolutely no evidence was put before Your Honor as to why that's appropriate and there was perhaps reason for this back in December. You had ANICO. They put the stock market trading

in front of you, prepetition capitalization, and said that, under some Third Circuit authority, can be a -- is a prima facie defense of solvency. And then ANICO said you haven't

exhausted your administrative remedies and the debtor didn't assert the claims. Okay?

Well again, I don't know that they actually did put

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Page 276 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 the market capitalization in front of Your Honor but we don't see anywhere in the record any evidence on any of these claims and now with the record that's being augmented by the Senate report, which would strongly suggest that the OTS was not monitoring WaMu and the public didn't know it, and therefore -and also that the operations there were not being disclosed appropriately and were not being run appropriately, there's a pretty good argument that in fact it was insolvent and that market capitalization was fraudulently induced. that, ANICO has been reversed. THE COURT: Well, doesn't that mean there is no injury On top of

to be recovered for a business? MR. STARK: THE COURT: MR. STARK: conveyance. I don't -- no, I don't. No damages? First of all, it's a fraudulent

It could be a fraudulent conveyance onto itself, a

substantial fraudulent conveyance about the 6.5 billion. There's intercompany claims and other sorts of assertions that have been made about that. I appreciate that Your Honor said

in your prior opinion that they're mutually exclusive and I guess this gets us back into the whole theoretical deepening insolvency kind of a regime. If the company otherwise was

worth X dollars but it was insolvent then, and it became worth a whole lot less as a result of the activities because the company's still been damaged, I would contend, Your Honor, I

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Page 277 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 think pretty competently that the answer is yes, notwithstanding the fact that there's no deepening insolvency anymore. If this company became worth 6.5 billion dollars less

or it became more insolvent by 6.5 billion dollars, I think a business tort claim will survive that. I raise all this, I know I am rehashing a little bit from my prior argument, but I do believe that if Your Honor agrees with me with respect Stern v. Marshall and we're going to deliver proposed findings of fact and conclusions of law to -- which by the way, we'd solve the divestiture problem, too because it puts both issues before Judge Sleet at the same time. THE COURT: direct appeal? How does that mesh with your request for a

Aren't you the one who raised that? Oh, Your Honor, I requested an appeal of I've been waiting for oral He's the

MR. STARK:

the issue before Judge Sleet. argument.

I've been trying to move that case along.

one who has told me I have to wait.

If Your Honor puts the

proposed findings of fact and conclusions of law before Judge Sleet, I'll gleefully argue to him, let's do it all together. So you'll solve two problems at once. But, Your Honor, I think if you're going to do proposed findings of fact and conclusions of law, I think you should turn to Mr. Rosen and say give me a draft and in that draft identify with specificity where in the evidentiary record

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Page 278 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 there is support for a sweeping of these claims under the rug as they have been asserted in a lawsuit and they've otherwise been substantiated in other pleadings brought before Your Honor with the e-mails attached. Excuse me.

And I think when that's done, when that direction is given to the debtors, then I pick up where Mr. Folse left off. The negotiations then will mature to their proper place. case is not -- is only half matured in its negotiations. will then have to do what I thought Your Honor sort of suggested they did in your last opinion which is negotiate with these people. Your Honor, I'm going to conclude only with this. confirm this plan is not a small thing. in the eyes of the law. To This They

It's a very big thing

These are very big and difficult legal

questions you've been asked to look at and a lot of people are going to be looking at them after you render your ruling. Many

of these issues, I think this case not only -- not only this case, but all of us frankly, would really benefit from a Third Circuit decision, the Court's jurisdictional bounds; Stern v. Marshall and constitutional powers, calculating post-petition interest, death traps, when are they legal, valuation of estate causes of action, methodologically, post-consummation trust governance, TMT Trailers and its evidentiary standard when you've merged both legal issues that are being settled and fact intensive ones in the same hearing and what the debtor must

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Page 279 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 show. Your Honor, I respectfully urge that you deny

confirmation for our post-trial brief. Any questions for me? THE COURT: No, thanks. Good afternoon, Your Honor. Arthur

MR. STEINBERG:

Steinberg on behalf of the esoteric security, the Dime Litigation tracking warrant. Unlike the people who are

opposing the plan who preceded me, we are not out of the money. In fact, there's a mechanism there to put us in the money. the real question is why is someone who is in the money and it's been asked before, why is someone opposing this plan? And we've decided that if we don't have a deal in place or a firmly litigated resolution, that we would litigate to make sure that the people who I believe have treated the LTW holders unfairly would not be in charge post-confirmation or through representation on the litigation oversight board. They So

would not have an unfettered budget with little court oversight as to what they would do. And those who were responsible for

depriving the Litigation tracking warrant holders for what they were entitled to get would only be able to get under this plan what they were legally responsible to be paid and nothing more. And it's for those reasons why we are objecting to the plan. And part of what I say will come out as sounding a little paranoid and some of it will come out and sound like I'm arguing for the inequitable conduct but I want to be clear, the

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Page 280 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 inequitable conduct that I will be arguing will have a relation to the type of interest that should be paid to the PIERS holders and the settlement noteholders and I am not wading into the controversy over whether there was insider trading or not. And when we were here in December talking about the global settlement, the key word as people were talking about the division of the Litigation tracking warrant, the key word was it was Mr. Goulding's testimony about the holistic way upon which the debtor approached the settlement. There was a

massive value that it was giving to the -- JPMorgan and it was going to keep a massive value back for itself. But when you look at the brief filed by the equity committee as to actually how the Anchor litigation ended up with JPMorgan as part of the global settlement, the first person who gave it away was two of the settlement noteholders who did that in the context of a direct settlement offer that they made with JPMorgan. And then they convinced the debtors'

management to allow that offer to stay and ultimately, the board I guess was worried about being sued but wasn't paying any attention to the fact that the LTW rights have been shifted but this starts with the settlement noteholders giving it away in the context of an offer that was made. The second thing, Your Honor, is that -- and not to lose sight of it -- is that Aurelius has been waffling about whether they like the global settlement, whether they don't

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Page 281 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 like the global settlement. don't like it. They filed their brief saying they

Then after everything was argued, they say I didn't really mean it that much.

let's withdraw it.

The argument that they said as to why they objected to the global settlement is significant in that they said that I thought I had a deal and would confirm at the beginning of January of this year. That's way too long. rate in this case. If you multiply the burn rate for the months that they said tipped the settlement from their support to their opposition, it's less than the Anchor litigation that is going over to JPMorgan by a significant degree. This thing, according to Aurelius, missed the lowest point in the range of reasonableness by a very, very small fraction of a number and then -- and that number was the value that JPMorgan got of the Anchor litigation. If you did thirty We have a Now it's going to wait until August. I've suffered by the delay and the burn

million times seven, it's 210 million dollars. reserve in this case for 337 million dollars.

This global settlement was structured to, in effect, damage the Litigation tracking warrant holders. They could JPMorgan

have done a 9019 settlement and said we claim this. claimed that. This is how we're dividing it up.

No, that

wasn't good enough.

They needed to say I'm doing this with a I'm selling my interest. I'm doing it

Section 363 framework.

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Page 282 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 free and clear. going to happen. I want a finding from the Court that that's And the only thing that they said

specifically that they were going to sell free and clear was free and clear of the Litigation tracking warrant position. The only liability -THE COURT: TPS, as well. MR. STEINBERG: THE COURT: I don't think so. No, I think they mentioned that as to the

Don't they? I don't think so, not in the And I think that the only liability that

MR. STEINBERG: disclosure statement.

they said really didn't follow the asset that JPMorgan was getting was the liability owed to the Litigation tracking warrant holders and JPMorgan got the Anchor litigation. And while the debtor says that we tried to be inclusive, our goal is try to get as many people involved in the process on this particular situation, they didn't get the Litigation tracking warrant holders involved at all. They

tried to do this around the Litigation tracking warrant holders. They didn't think it was a good idea to notify them They were

even of the bar date before in this case either.

excluded from the process and we've been running upstream to try to be able to get ourselves back in the position that we should have been all along. That's why we fought for the

reserve where they only wanted to reserve for Broadbill.

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Page 283 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 That's why we fought when Mr. Goulding forgot 100 million dollars for the gross-up amount. That's what we fought at the

trial on expenses when we pointed out that Mr. Goulding was reviewing recreated bills by Jones Day. That's why we fought

when the debtor put a summary judgment motion in on a draft Golden State document instead of the final document. And after

it was pointed out to the debtor, the debtor still refused to withdraw it and it was up to us to make a motion to strike it. That's why we fought when they tried to introduce the Chamberlain report while there was a pending summary judgment motion and we said that you can't do that to us on the day before the confirmation hearing and Your Honor properly struck it. We've been fighting because it's been an unfair fight and

we've been fighting to maintain our position. And, Your Honor, that's what you have here now and that's what I am going to try to elicit in this closing as to what I still think is unfair. On page 32 of the debtors'

brief, they ask Your Honor to in effect make a finding that the global settlement was not a transfer of substantially all of the assets of the debtors. They said we need to do that

because 1123(b)(4) has a provision that says that the plan may have that, substantially all the assets and we'll ask the Court to make a finding that this was a sale but not a sale of substantially all the assets. Now, why do I point that out? Because our argument in

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Page 284 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 the trial to take place next week is, one of our claims is based on the fact that the global settlement constitutes a combination. A combination is defined as a sale of

substantially all the assets of the debtor and here the debtor is trying to sneak in a finding that they then will cite as the law of the case against us. Well, I looked to see what was your basis for saying that it's not a sale of substantially all the assets? said, we cite to the Goulding declaration. And they

There it was

interesting at confirmation, we had a declaration but that was only half the direct and then we had the direct and then we had the cross. Well, what does Goulding's declaration say why it's He doesn't say

not a sale of substantially all the assets? anything. He just makes the statement.

So it's either pencils

down or you try to challenge the statement. Well, I will argue this next month at the trial. certainly don't want anything that Your Honor does in the confirmation hearing to prejudice that right but if one wanted to say what's in this record now to say why that finding would be absolutely false, is that part of the global settlement JPMorgan got the tax refund, which Your Honor has said was more likely than it probably belonging to the debtor. couple of billion dollars. interest. That was a I

They got the trust preferred They got the They

That was four billion value.

intellectual property.

That had some significant value.

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Page 285 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 got the Anchor litigation which is 600 million dollars if you did the gross up of the full amount. And what does the debtor have left? 160 million So I got

dollars, I think that was the number that they used. four or five, six billion dollars being transferred to JPMorgan.

The debtor is holding back 160 million dollars. It's their cash.

I I

don't think it should count its deposits.

don't think if you have cash, it doesn't mean you're not liquidating the rest of your assets. That would be our view as That

to why there was a sale of substantially all the assets. would be our view as to why Mr. Goulding is wrong.

And that

would be our view why Your Honor shouldn't have to make this finding, this finding which is unnecessary for anything in the context of a plan. There's been a lot of discussion about the litigation. I think some of it has been touched upon, some of it really hasn't been touched upon. Mr. Kosturos, I think said that he Okay. But do

was not in the business of valuing litigations. you know what? Someone should.

Someone should be telling

people what these litigations are and they should do it because it has a significant or as the death trap, as Mr. Stark talked about, it has a significance, as to whether other people are in the money. What do we know? We know that there's -- the debtor The debtor is

has 150 tolling agreements of some people.

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Page 286 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 scurrying around to get tolling agreements signed right before the confirmation and it has also a relevance, Your Honor, as to who should be bringing these lawsuits. There is a very compelling argument that the debtor who tried to get rid of a lot of these claims through the sixth plan should not be the person in charge of litigating these claims as part of the sixth modified plan. But why also are these litigation claims relevant? Because there's a tax ramification on anybody who has a membership interest in the litigating trust. You need to value

the litigations in order to say what someone's tax basis is in the membership interest. That exercise has to be done and that

valuation exercise is significant for purposes of the best interest test because the tax ramifications of using the litigation trust structure which is only in the Chapter 11 scenario but not the Chapter 7 scenario, could have an impact on creditors. That's why I asked Mr. Goulding at his He said somebody And Mr.

testimony, who is valuing the litigations. who works for me. What are they doing?

I don't know.

Kosturos had the opportunity to testify to that and he didn't want to talk about it. But it is relevant because it is significant on the best interest test by itself as to whether the litigation trust structure works and is better than what the Chapter 7 alternative is.

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Page 287 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 We also talked about that the fees for the people overseeing the liquidating trusts, they have to be disclosed. That's an 1129(a)(4) requirement. If they're insiders,

payments to the people who will be running the reorganized debtor. We know that the in-house counsel is going to be one That had to be disclosed. That wasn't

of the directors there. disclosed, as well.

Let me talk a little about post-petition interest. For the life of me, I cannot figure out why the debtor bets its entire case as to being right on the issue of contract rate versus federal judgment rate. It warned by myself at the

disclosure statement hearing that they should put in a blue line, so that if they're wrong, their plan could otherwise be confirmed. They chose not to do that. Even White and Case in

their objection to the disclosure statement thought that was the right result. So they've bet the entire case on being

right on an issue that they're wrong about. And the arguments that have been raised which is, Judge, if you decide in favor of federal judgment rate, think of all the further damage that will be done to those people who have to waive further in this case. Well, that's the Abe

Lincoln lawyer story where he's defending someone who has killed his parents and is throwing himself on the mercy of the Court on the grounds that he's an orphan. mess. You created the

You created your own problem that you're now saying

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Page 288 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 please don't fault me on when you were forewarned about it. And I heard Mr. Hodara, I have a new word instead of holistic, I'm going to principle reading. Mr. Hodara said I

took a principle reading of the statute for purposes of interpreting whether it's contract rate versus federal judgment rate. Well, I'm going to call to issue and ask everybody on

the debtors' side, the committee's side, who said that the confirmation opinion says that the contract rate applies unless the equities dictate otherwise. I'm going to ask them to take

a principle reading of pages 90 to 94 and produce where those words are. And why they would want to cite Your Honor's

opinion and misquote Your Honor's opinion beats the hell out of me. The confirmation opinion does not say there's a presumption of the contract rate, so when the debtor has on page 124 of its post-confirmation brief, a whole section on the law of the case, that that's the law that should be applied here, that's wrong. And the confirmation opinion did not say

that the contract rate would apply unless there was insider trading of the settlement noteholders. We correctly cited what the confirmation opinion says. I think Mr. Stark is right, that generally the equities of the case comes up in the context of a cramdown discussion as to what the appropriate interest rate is but the majority of the cases clearly are that the federal judgment rate should apply.

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Page 289 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 And when Mr. Hodara says we're going to take a principle reading and we should interpret what Congress said, well he can show where the federal judgment rate is not used a lot in the Bankruptcy Code but clearly the Bankruptcy Code uses the word contract rate and Section 506(b). Clearly, the

Bankruptcy Code talks about rights for -- contract rights that people have in 569 and Section 560 of the Bankruptcy Code. Clearly, the Bankruptcy Code talks about protecting contractual rights under Section 1110 where their claim, airplane secured lenders and it doesn't say it in Section 726(a)(5). So on a principle reading of the section, it can't be right that it must mean the contractual right. And some of the

cases draw the distinction and I'll just repeat it, they say it says the legal rate not a legal rate. The must mean a uniform

rate and that's where they say it can't be something like the contract rate. Under the debtors' formulation, by the way, if

the contract rate is used, it doesn't mean that every unsecured creditor gets the contract rate. It means the people in the

committee will get the contract rate but there's a whole bunch of unsecured creditors that will get the legal rate. And it was interesting that when the debtor did its best interest test as to the post-petition interest that the PIERS would get, they gave him post-petition interest, not just on their coupon which was five and three-eighths percent, they gave them post-petition interest on what Mr. Goulding called

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Page 290 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 the accretion of the OID which wasn't interest but was akin to interest. So that -- and when you applied the federal judgment You didn't get I guess when

rate instead of the contract rate, guess what? the akin interest. It was something different.

you're not interest but only akin to interest, you don't get it on the federal judgment rate when there's a uniformed rate. it does have a difference here. And what's the significance of contract rate versus interest rate? It is amusing to me that when people are saying So

I want the contract rate when if you believe the debtors' numbers, then they would probably do better with the federal judgment rate. But the reason why they're urging the contractual rate is because using the federal judgment rate puts a cap on what the PIERS could otherwise get and the only reason why you care about that issue is if you think the debtor is going to push through that cap because it's numbers are underestimated. the reason why it would be underestimated is because they haven't even talked about what their litigation claims are. And that's why knowing what the litigation claims are does have a relevance. When someone wants to talk about the equities of this case, and someone wants to say we should not visit this harm on the settlement noteholders because they've been pushing for the result all along and they've been stymied, let me just remind And

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Page 291 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 mirror. everybody the plan proponents lost at confirmation in December. They proffered a plan that was patently unconfirmable on its face. They put in that plan releases for third parties like

the settlement noteholders who were not paying any consideration and asking everybody and trying to cram that result on everybody. If there's been a delay in this case, look in the You caused it. If you want to talk about the equities

of the case and why this case has dragged on, it's not because the plan opponents have been brilliant, it's because proponents have been shooting themselves in their foot. Now, none of the cases that they cite for a contract rate issue involve a public company whose shareholders were innocent victims of the debtors' blatant mismanagement. And I

know Mr. Uzzi said that I feel sorry, representing the senior noteholders, that we can't give anything to the equity and then cites the Armstrong case that say it was impossible to do that. If I was an equity holder, I would throw up with that statement. But I would just simply point out to the fact that

if that truly was the case, then what was anybody doing with regard to the Seventh Amendment plan which was going to give value to the equity? Why did they delay this confirmation and

spend money if it wasn't to try to give some result that was going to be satisfactory to the equity holders that would get by Armstrong? And if he thought that was a blatant waste of

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Page 292 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 time, well why didn't he say something instead of saying I'm sitting on the sidelines? Let me talk a little about the best interest test. There, the debtor said essentially through Mr. Goulding that there were two variables that separated Chapter 11 from Chapter 7; the value of WMMRC and the incremental cost of the Chapter 11. WMMRC was valued as a liquidating entity. I have no clue The

as to why those numbers shouldn't be exactly the same.

postulation was that WMMRC has no employees, no new business. It was going to run off their insurance book. The only thing

that Mr. Goulding said is the reason why I'm separating the value is that he got two unsolicited offers more than two years ago in the height of the financial crisis which the debtors turned down and that was his benchmark for valuing what it was on a liquidation basis. Blackstone never did it. Debtors never marketed WMMRC. He even testified, Mr. Zelin, that

the value of WMMRC has actually gone up because you're now closer to the run off period. But no one ever updated their

analysis and on page 144 of Mr. Goulding's testimony, he assumed that the tax attributes go because you would be forced to sell it right away and then you would lose it. scintillating. Let's talk about his analysis on the incremental cost of a Chapter 11. He says that there were delays that would So that was

cause the extension and how did he factor what the delays were?

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Page 293 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Well, he extrapolated off a Chapter 11 run rate which was being incurred during the confirmation process when it was the height of running up expenses and the debtor had just recently run up expenses. He decided that I'm going to include the expenses of the creditors committee and the equity committee in the Chapter 7 scenario because he somehow thought that they would survive in a Chapter 7. He was just wrong about that.

He assumed that nobody who has been paid fifty million dollars in this case would assist in any kind of transition because they would be owed some Chapter 11 administrative expense money and that would be a disabling conflict for them to try to help out a Chapter 7 trustee. He assumed the Chapter

7 trustee would get a windfall fee as contrasted to what the litigation trustee might charge and the only testimony that they had as to what the litigation trustee might charge was, I don't know, we're going to reserve around fifty, seventy-five million dollars. That was the number that was thrown around.

But no one was able to sort of contrast why the Chapter 7 trustee couldn't do something more efficiently. They exaggerated the cost of the claims resolution because they said there was fifty-five billion dollars of disputed claims but when under cross-examination, if a global settlement was approved, it falls under a billion dollars and it backed out my client's claims, we were basically trying to

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Page 294 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 figure out how to reduce 500 million dollars of claims to the debtors' estimate of 375 million dollars. One would assume that a Chapter 7 trustee could revisit what happened in Chapter 11. No one seems to be

looking at anybody else's fees and maybe he'd bring a tighter rein to the subject. But the real heart of why a Chapter 7

trustee may actually be better than not, is the information that you didn't get. The Chapter 7 trustee would be

supervising the litigations; the litigations that no one has really talked about, the litigations that we know the debtor tried to bury as part of the sixth plan, vis-a-vis officers and the directors. And we know that the officers and directors are

paying a significant sum of money in connection with the ANICO settlement. They've been sued by the FDIC. Mr. Kosturos said

that probably the 2007 D&O policy may have been used up without him ever trying to capture that value but he thinks there's value on the 2008. So the issue is whether Mr. Kosturos is the

right person to be heading up the liquidating trust efforts on these unspecified litigations. The debtors' explanation for not including the litigations in its liquidation analysis makes no sense. They

said well, you know, it's the same in Chapter 11 as Chapter 7, so why bother? Well, almost every asset was the same in

Chapter 11 as Chapter 7, except for the two variables and you do put it in because you need to analyze it from a tax basis

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Page 295 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 and from a disclosure viewpoint that creditors should know what's -- creditors and equity holders should know what's involved in this case. And I will call out the fact that when

the debtor announced that they were going to do the seventh plan, they were going to fund somebody twenty-five million dollars to sue somebody. That must mean that the debtor

thought that there was some value to sue somebody for at least getting more than twenty-five million dollars but that didn't come up. Let me talk a little about the PIERS claim. The

source of my information for why the PIERS claims are being compensated on their equity warrant is the debtors' disclosure statement and the debtors' confirmation brief. great deal of additional analysis from that. I don't have a From page 22 of

the debtors' post-confirmation brief, the PIERS units were issued at an initial purchase price of fifty dollars, with $32.33 allocated to the PIERS preferred securities, and the balance, $17.67 attributable to original issued discount related to the value of the aforementioned warrant, which is the equity warrant. And then they said they made monthly

accounting entries to accrete the discount and increase the balance over time. So when the PIERS were issued in 2001, there was 400 million dollars of value given to the warrant. issued with an OID. The PIERS were

The OID was preferable to the warrant and

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Page 296 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 between 2001 and 2008, there was an accretion of the OID which was the warrant component. from. Mr. Goulding testified well, that's wrong. There was That's where I get my information

an accretion and the PIERS are really entitled to something with a rate of return of closer to over eight percent. But the

coupon that they were getting paid on a quarterly basis, I think it was, was five and three-eighths percent. quite understood that testimony. So I never

And I don't care what their I cared what their

overall rate of return promise was.

interest rate was and I cared whether -- that there was a valuation -- whether there was a compensation on the warrant. And why do I think that that's true? It ties into the

argument that we've made that the PIERS is Tier 1 capital. Generally subdebt is Tier 2 capital. This was Tier 1 capital.

This money was issued by an investment trust, wholly owned by Washington Mutual, Inc. and that investment trust raised the money to do acquisitions, I think according to its prospectus and to boost the regulatory capital of WaMu, Inc. -- of WaMu Bank, rather. And when the debtor attaches references the 2001

10K and on page 24 of its brief it says that the consolidated statement of stockholder equity went up by 398 million dollars for the value of the warrants. hybrid instrument. This PIERS instrument was a

It was part equity and it was part debt.

It was done for regulatory purposes and it was done for tax

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Page 297 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 purposes. When the debtor says in its quotations to Your Honor

that it was clear that -- and everybody always understood this to be debt, when they quote in their brief on that issue, they're quoting from an excerpt from the Heller Ehrman tax opinion. When they get to the debt part and they got dot, dot,

dot, what they leave off from the dot, dot, dot is for federal tax purposes. purposes. They're saying it's debt for federal tax That's not necessarily that

That has a consequence.

it's debt for all purposes.

And if the debtor wants to

establish the rule of law is that if it's also debt for GAP purposes, that's the end of the story, then that's fine because I'll have a trial in September and I'll make the showing that LTW should have been treated as liabilities for GAP purposes and we'll have a very short trial. But the fact of the matter is is that nobody ever, ever went to try to challenge the PIERS claims, not because there was a merger or not but you had a hybrid instrument, something that was due in forty years, something that you could have a deferral of dividends for I think five years and somehow say is that -- something that was Tier 1 capital and someone saying is that equity or not. The argument on the PIERS common securities is based on the fact that this was a business trust and on page 105 of their post-confirmation brief, they say that in a business trust, that the owners of the securities really have the

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Page 298 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 beneficial interest in the actual asset of the trust which was the debenture. So if the common security holder which was

Washington Mutual had the beneficial interest in the debenture, then that portion of the debenture referable to the common security was Washington Mutual paying itself. we argue should not have been allowed. I don't care if there was a subordination. The fact And that's what

of the matter is that portion of debenture which is held by Washington Mutual, Inc., I believe is Washington Mutual paying itself. I believe that there's been an overpayment of the

PIERS security and that it should be adjusted for it. Now, with regard to reorganized WMI, seventy-seven percent is going to be owned by the PIERS. elected for it. Many of them

If they didn't elect for it, they got it by

default, then they did it in a plan which they voted to approve which allowed them to get it as a default. convenient that they did it. So it was

Mr. Goulding testified that

someone who elects stock believes that the value of stock was actually greater than the cash and the stock was undervalued. And really when you go through all the experts, at the end of the day what they disagreed about was how to value the five billion dollars of the corporate opportunity of the NOL. They both essentially agreed that a wind down of WMMRC was going to be the same and they both essentially agreed that the value of the NOL used to shield the WMMRC gain was going to be

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Page 299 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 around the same. And why did they differ, is because the Wilkie Farr expert said Section 269 was critical and that you needed to be able to respect Section 269 and if you respected Section 269, you implicitly put a cap on the amount of money that could be raised by organized WMI because he was saying you can't do it for more than the value of WMMRC and WMMRC was valued at somewhere like 120 million dollars which essentially meant that most of the NOLs would never be utilized. their major difference was. Well two things; one as I pointed out at the crossexamination under Section 1129(v) of the Bankruptcy Code, the same 269 concern is the 1129(v) concern. There's the purpose And that's where

of this plan, principle purpose of the plan, tax avoidance. The debtor on page 78 of their post-confirmation brief asks you to make a finding that the principle purpose is not tax avoidance and highlights that no governmental official objected to the plan on that basis. And it was interesting that when Mr. Zelin testified, he said that it's not raising money afterwards that's the problem. You could raise as much money as you want. It's by

raising a lot of money because of this 269, it casts doubt as to what happened originally as part of the plan process that's the issue. But, Your Honor, they're asking you to make the 269

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Page 300 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 finding now and there's nothing in this reorganization of WMI that puts a cap on how much money they could raise in the future. want. We also raised the issues about that we think you had a valuable asset which was fritted away, which was steered towards the people who were going to naturally elect to take the shares and therefore, to actually try to do a stock election when you don't say who is going to be running the reorganized WMI, when you don't have any real minority protection knowing that you'll be a minority holder, so you don't know really how you're going to get out your money without disclosing how you are going to actually raise money which was a feature of the six plan which had a rights offering and was the feature of the seventh plan which had the 100 million dollar offering to be supplied by the settlement noteholders to the debtor. Without that, you basically took It's an unlimited cap and they could do whatever they

what Your Honor said had to be given which is a stockholder election, and you basically made it a worthless right. And we

think that that was unfair and it also means that the debtor may not have fully exploited its asset. The late filed claims issue, Your Honor, is to some extent a nonissue but I am going to dwell on it a second because I think the reasoning that's been supplied as to why someone's raising it is faulty. And I think it illustrates

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Page 301 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 some of the inconsistent arguments in the case. I have no quibble with the debtor. The debtor

actually has said that were they in class 12 or class 21, not class 12(a). So from the debtors' plan, they're not saying the I could stop there but I

late filed claims affects my client. am not.

Aurelius has raised this as an issue but Aurelius defines in its objection on page 3, note 2, that a late filed claim is a claim that's not filed as of the confirmation date, not the bar date but the confirmation date. While the class

action complaint could be filed, it was filed months, months before the confirmation hearing. So even under the Aurelius

standard, I would be okay as well, too. But what is it that causes me to talk about this any further than that? And the reason is is that Aurelius has

asked Your Honor to revisit that issue and say that notwithstanding your confirmation opinion, that post-petition interest should get paid ahead of late filed claims. My

response to them is why don't you just look at the sections of your brief which talk about the law of the case and that you can't revisit the law of the case as you talk to the global settlement and just apply it -- just say it to yourself. And

then if that's not enough, then think about the circumstance where you're actually objecting to a plan and I adopt Mr. Crowley's sound logic which is this is the plan that the debtor

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Page 302 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 proffered consistent with Your Honor's opinion. If it doesn't

work, then you're just objecting to the plan and that's just going to undo your desire to get something done sooner rather than later. And two other quick things just to dwell on it a little further. There's a cross reference in Aurelius'

argument here that Section 502(b)(9) is support for their theory and I look to Section 502(b)(9) and taking a principle reading of Section 502(b)(9), it cross references Section 726(a)(3) which is late filed claims. So I don't know why they

cited it but it's supportive of my position, not their position. And frankly, if they want to continue to argue that the Banco Latino case has some relevance to this circumstance, then I don't think they should ignore the fact that the issue came up, not in the context of a confirmation hearing with best interest but the issue was raised six years after confirmation. They may think that's a fact without relevance. think it's a significant fact. And here's where I am going to agree with Mr. Hodara. I actually think that post-petition interest does come ahead of the subject subordinated claims and that to the extent that Section 726(b)(4) is clearly an issue that -- let me strike that. I apologize. Your Honor, this is in connection with the argument I certainly

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Page 303 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 that they raised that the subordinated claims come ahead of late filed claims. I'll just point out that any late filed There's a new

claim of the case gets converted to Chapter 7.

time period to file claims in that case and you'll come as a 726(3)(a)(3) creditor ahead of any kind of subordinated creditor and you'll be a timely filed creditor, so that argument wouldn't work. Your Honor, I briefly -- I have talked about this ad nauseum and I won't do it again. The debtor came close to

carving out and being consistent with your opinion on third party releases. The thing that I quibble with is that Your

Honor didn't say put a one year sunset provision so that if you don't give a release by that point in time, you've waived your rights. That wasn't in the opinion and I obviously have the

concern that our rights would not be fully adjudicated within the one year of confirmation and that under that circumstance, we would be forced to potentially give a release without knowing whether we did anything under a plan. And I don't

think that that's fair or consistent with Your Honor's ruling. With regard to the -THE COURT: You're way over. Am I way over?

MR. STEINBERG: THE COURT: Yes.

MR. STEINBERG: wrap-up is really simple.

Okay.

So let me just wrap up.

My

I didn't know whether I'd be giving

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Page 304 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 also. quickly. se. THE COURT: MR. MASON: close enough? THE COURT: MR. MASON: It is. Thank you. I'll try not to talk too All right. Your Honor, Ben Mason, pro se. Is that left? MR. MASON: Your Honor, I believe it would only be pro this closing argument over a telephone on a cruise ship or a telephone in Alaska, whether it was through the act of God, Your Honor or my counsel, they've allowed me to give this oral argument in person and I thank whoever is responsible for that. THE COURT: All right. Thank you. Who do we have

I submitted a post hearing memorandum of basically Do you have a copy of that, Your

the NOL values to the Court. Honor? THE COURT: MR. MASON:

Not here, but I have received it. Okay. And then also my written objection, That was

I didn't know if you had a copy of that.

timely filed. time.

It was docketed the 12th but I did docket it on

Just kind of real briefly, the -- I have to -- I know

that there are other people that want to talk and we've been here a long time but I am representing myself and, of course, other people situated which are typically retail shareholders. At the disclosure statement hearing, Your Honor asked for a

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Page 305 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 full disclosure of the NOLs and that wasn't included within the disclosure statement hearing and so I e-mailed the debtors. Actually, I e-mailed Weil Gotshal and requested that and it was not given to me. And basically, I believe that the reason was, and I could submit that to the Court, was that the disclosure statement was approved and so that was sufficient because at the time, I kind of anticipated that there might be fourteen billion or so in actual true NOL value. Now moving forward, we

get to the confirmation hearings and we've learned from Mr. Carreon there's an additional 600 million dollars at the company level, there's the 5.5 billion dollars that's related to stock abandonment. And also he stated there's another four

billion or so that's related to other payments according to the plan. This is related to what -- he said according to our dug

diligence, we have determined there's another four billion dollars. So it looks like we're coming together. We're not in

the middle yet but it appears to me that there's actually even more money to be made there that's actually in this plan. And

so, the stock abandonment is an area of real, I guess, concern for retail shareholders for one, because we're afraid there are going to be losses, like a loss of right of suit that are related to stock abandonment, I personally don't know whether or not that's true or not but also because it's not really

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Page 306 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 necessary according to this plan. This plan is basically a

run-off plan that purports that the whole company is only worth 125 million. The 600 million in holding company losses are That anything in

sufficient to meet all of those tax needs. this plan -- that's stock abandonment. essentially outside the plan. is all it's worth.

Anything above that is

They're saying that we -- this

This is all we're going to be able to use.

Well, then don't abandon -- then don't use those NOLs. And so of that four billion, I'm not sure what it is, it could be that the 335 million dollars in payment to the WMB could be the 3.5 billion or so in payments to JPMorgan, the FDIC, as considered a capital contribution. It could be

related to the four billion in TPS assets but I do know that at the disclosure statement hearing and we discussed this, it was on Blackstone, figured out that there was an additional 4.6 billion dollars that wasn't disclosed. Now, they say this

wasn't going to be used but there's this proration rule that I believe that now we're up to like fourteen billion dollars. Now, if they don't need all the additional NOLs that are related to the stock abandonment, if that 600 is actually all you need, then there's no need to abandon. That way then they

can stick to their plan and just use this company as a runoff company. And also, I actually went in much more detail within my memorandum and I don't want to go into that for you too much

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Page 307 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 more because there are other people here and I know it would take a lot of time. So I guess the other part is, I guess -- the other part of my discussion is really, I guess, the representation that we are getting here from Weil Gotshal and Alvarez & Marsal. I'm sure they're very nice people at home. I'm not And so

sure -- well, I'm not really sure but I think so.

here's -- this is from the second confirmation hearing testimony. negotiator. Mr. Kosturos, "I would say I was the lead I would say that Weil Gotshal drafted a lot of

documents as well as Quinn Emanuel after they were hired, also had input. And within this -- does this work? Yes, it does.

These are the layers of relationship between Alvarez & Marsal and JPMorgan Chase. Now, one is always going to be there. The

far right is always going to be there which is the holder has held an economic interest in this case but the other four has -- is currently advising or has previously advised creditor client of an A&M's field, yes. A&M's client, yes. Significant equity holder of

Members of -- is currently advising or has

previously advised members of an unofficial committee, yes. So our primary negotiator and the restructurer that was making decisions on this is heavily conflicted with our primary adversarial party and so -- and I said in my actual written argument that this suggests a firm that's in business with the primary adversary on every possible level. That's not

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Page 308 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 had -MR. MASON: THE COURT: MR. MASON: Okay. -- others presented it. Well, okay, so I will -- well I guess that The business tort quite true, it's close. THE COURT: Well, wasn't this addressed at the first

confirmation hearing and I did decide that issue? MR. MASON: THE COURT: MR. MASON: Did you, Your Honor? I did. Did you see this really, really good table

that I put together because I'm going to tell you when you put that table up there, it looks really good. THE COURT: Okay.

No, but I think all the information I

makes me a little sad but I'll keep going.

claims; now that's really interesting because they were just discussing the business tort claims and one of the issues was -- it's from the deposition, page 262, line 22: "Q. During discussions, did you discuss the business tort

claim with JPMorgan? "A. Not in any detail." This is one of the biggest claims in this case and they didn't even discuss it. And so that's also, I'm not going to deal with third parties because that was already dealt with and I also have another really, really good table but I am not going to show

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Page 309 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 you that one because it's related to the same topic. But this actually directly relates to what was just being discussed by both Mr. Steinberg and also Mr. Stark. goal during -- this is from Mr. Kosturos: "Q. Your goal during this negotiation period was to pay off Your

your creditors; is that right? "A. No, my goal was to maximize the values of the estate." And then he went on in the same hearing, "One of the things about the fraudulent conveyance is it has real tension with the business cores and the fraudulent conveyance are trying to prove insolvency to look back to try to recover, you know, potential capital contributions and business torts. tried doing the opposite. We

So there's a natural tension that

makes it difficult to really proceed with". And this argument was also included in the Court's rejection of the first confirmation but this is only partly true and here's why. First of all, I understand that they say

they have to make a choice but they didn't really make a choice because all of the stuff that could be reclaimed, all went there and essentially -- I did another table -- essentially when you take a look at these capital contributions, 6.5 billion, the TPS asset pool was worth over ten billion dollars, and that's when you include both the TPS themselves and also the assets back then, that's ten billion, and that was the day after filing those went over to JPMorgan Chase. And so --

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Page 310 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 UNIDENTIFIED SPEAKER: MR. MASON: that's right. That's a settlement agreement.

And also, this is a settlement agreement, That is a settlement agreement.

That's right.

Essentially all of these things that we talk about that if you're going to try to prove insolvency, you want to try to pull back to the estate, they're all going. insolvency side is going away. concern, okay? We understand now that the NOLs are a pretty big carrot for the settlement noteholders; this is a really big carrot. I guess the sort of follow-up question is was there a Everything on that

And so, that's of course a big

stick associated with it and it seems to me that it's, of course, pretty troubling, I'm trying to deal in facts, that's why I used lots of tables because you can only use facts in tables, but when you are talking about what your concerns are, my fear in this case is that when on August 24, 2009 when JPMorgan filed their 2019 discovery motion, they basically talked about their concerns about noteholders accumulating claims during these proceedings. And so that to me is of a

concern since these were the same individuals who crafted the settlement. We had this big carrot which was the NOLs and we

have this big stick which is potentially getting called out for inside trading. nothing? Now, we know that -- so did that stick mean

Well, it meant something because it was enough to

bring them back to the table to maybe work out some kind of

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Page 311 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 deal with it. So it had some value, at least to them, okay?

The GSA renewal, I asked during the Goulding deposition, I asked was that an Alvarez & Marsal decision. said it's a decision that's made by the team. He

So I asked was

that a board decision that was voted on and he didn't know. And I requested board minutes and they didn't give it to me and I understand. They wanted me to sign a really long

confidentiality agreement and to be fair, those are really precarious in this case. tell me who was there. So I said well just -- can you just Can you just tell me who came and like So I understand

when and they said it was unduly burdensome. that.

But my concern is that as members of the board have left, they have been replaced by Alvarez & Marsal as they leave. So now this really works out a whole lot better if you

believe what I believe which is that they really weren't pursuing recovery from JPMorgan Chase due to their status is not as a disinterested person, then -- but if you don't, then it doesn't necessarily come into play. play with have things changed? But it does come into

Since that case, Colonial's

come down the pike and in Colonial, they exited with their claims intact and they got their tax deposits and the refunds. Meritor came down the pike in that time. yes you can sue the FDIC. In Meritor, they said

And the FDIC had the option to take

that all the way to the Supreme Court to say no, we are not an

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Page 312 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 arm of the government, you cannot sue us. So far, my So

understanding is that they have chosen not to do so.

Meritor, to me -- before you renew a GSA, you have to at least talk about this. Okay? And I am going to -- because of the conflict talk, basically the discussion on conflicts, I am going to move all the way to the very end of my presentation and talk about one other section and that was with the business tort claims. If Why are we giving them a billion dollars?

you have a choice, either going after the fraudulent conveyance as which they never -- none of those things were ever returned back to the estate within the settlement, or the other one which is to pursue the business torts, there is a tension. according to the FDIC, there was only one conforming bid and that was JPMorgan Chase but JPMorgan Chase had signed this contract that you're not going to buy us from anybody else. They signed it the same month that they hired Weil Gotshal in March of 2008. And they signed this contract that says we're We're not going to And so what But

not going to -- it will be eighteen months. buy you -- from anyone else but you; right? happens if they don't submit a bid?

This is at the sort of

central tentative contract law with the sufficient breach. What happens if you don't? Well, you have to go to a

nonconforming bid and one of the nonconforming bids -- I've also learned from this that I am very poor highlighter -- is

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Page 313 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 record. this bid from Wells Fargo. I'm going to read it because I just

realized nobody's going to be able to read that at length. Wells Fargo offered a nonconforming bid on the day of seizure, that morning. They offered it to Sheila Bair. And it stated

that we would like to -- Wells Fargo would assume all deposit liabilities -THE COURT: MR. MASON: THE COURT: MR. MASON: Is this in the record? No, it is not. Well -Oh, no. You mean the actual -- this? I mentioned examiner's

Here's what happened, Your Honor.

materials and I tried to submit this into the record but because the examiner's materials all have confidential, only to be used -THE COURT: MR. MASON: THE COURT: MR. MASON: to discuss this. Right. -- they were not allowed to be docketed. Right. And so I was at a quandary for being able

This was directly from the examiner's

materials and he has already released them. THE COURT: Well, that doesn't mean it's part of the

Was there a witness and an exhibit offered at the

seven days of the confirmation hearing that I had? MR. MASON: Well, let me see. I have a courier.

Would you like me to submit something to the Court?

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Page 314 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 THE COURT: MR. MASON: No. Okay. I mean it's too late. There's got to be something else I If it's part of -- essentially is

can say to that, Your Honor.

it part of the public record if it's already been submitted by the examiner? THE COURT: MR. MASON: THE COURT: MR. MASON: No. Okay. No. All right. Well, if you'll please indulge There's a fifty to a

me and let me finish just one last thing.

hundred billion dollar offer and that fifty to a hundred billion dollar offer was only contingent upon a sixty day. We'll protect all deposits and we would like sixty days. And

that low end offer is enough to satisfy every constituency here and remember, we never even discussed it. it. They didn't talk about it with them. We never addressed And that to me is

like more importantly, the biggest concern of this case for counsel. Thank you, Your Honor. THE COURT: MR. BERG: All right. Thank you.

Your Honor, I'm James Berg, a series R After a

preferred and WMI common shareholder appearing pro se.

recent ruling, I became concerned that you might consider some of my written arguments to be hearsay. In reality, they're

based on solid, verifiable facts obtained from official documents in the public domain. There can be no dispute that

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Page 315 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 the FDIC corporate and the FDIC's receiver are separate, legally distinct entities since that is the way they represented themselves in this court and in Judge Collier's court. A search of the claims register confirms that FDIC

receiver has filed claim 2140 and that FDIC corporate has filed no claim against the estate. Most of WMI's most significant of

claims against the FDIC must be attributed to FDIC corporate since FDIC's receiver only came into existence at seizure. Given Your Honor's earlier ruling that releases will not be provided without consideration, it is clear that FDIC corporate should not be provided a release as the debtors propose. I used two different methods to analyze the value of

WMI's counterclaims against JPMorgan, each of which came out to approximately 45 billion dollars and the market value method I obtained, a 13.8 billion in WMB liabilities from the September 30, 2008 WMB receivership balance sheet. WMI's liabilities

were obtained from the debtors' June monthly operating report on August 1, 2011, docket number 8358. For the accounting gains method, I obtained the thirty-one billion dollar write-down from JPMorgan's September 30, 2008 10-Q filed on November 7, 2008. The same 10-Q reports

that the negative goodwill at 581 million dollars but it must be increased by JPMorgan's third quarter 2008 operating loss resulting in the 1.9 billion dollar figure I used in my written argument.

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Page 316 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Page 122 of JPMorgan's March 31, 2009 10-Q provides confirmation that JPMorgan has calculated 21.9 billion dollars in accretable yield which will be used to write up the value of WaMu's loans over time. In that filing, JPMorgan states, "The

accretable yield represents the excess of cash flows expected to be collected over the fair value of the purchase credit impaired loans". This amount is not reported on the firm's

consolidated balance sheets but is accreted into interest income at a level rate of return over the term of the underlying loans. For additional detail and conclusions,

please see my written argued filed in docket 8407. For the remainder of my presentation today, I'd like to address the debtors and their fiduciary duty to all stakeholders. In paragraph 30 of their motion to disband the

equity committee, docket number 2132, filed January 11, 2010, the debtors state, "To date in these cases there have been no assertions by any party that the debtors or the creditors committee are doing anything but discharging their respective fiduciary duties to the estates and the estate's creditors". believe that this statement is no longer true and I'd like to use quotes from this confirmation hearing transcript to prove my point. From the July 18, 2011 transcript, Mr. Gropper of Aurelius, page 66, lines 2 through 7: "A. And then after we obtained the information we could from I

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Page 317 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Mr. Kosturos, a bunch of us did a bunch of analysis, mainly on legal pads attempting to come up with the consensus inside at least the creditors side of the house, an appropriate proposal to make to JPMorgan because the debtors -- we thought the debtors had not asked for enough". One would think that Mr. Gropper may have thought that the debtors were not taking appropriate steps to maximize value to the estate. "A. One page 70, line 23 through page 71, line 11.

Additionally, there were 6.5 billion dollars of downstream

transfers that were made within one year of the filing, 2.5 billion dollar of which were made within ninety days. you know -- we've been involved in a lot of fraudulent conveyance cases. We were involved in Tribune earlier this Well, I,

year, very involved in the TOUSA bankruptcy case, and so we've done a lot of work applying our knowledge from those cases to this one. We thought they were very solid fraudulent

conveyance claims and they were being settled for under this proposal zero. Additionally, there were hundreds of millions

of dollars of preference claims which could be assertable against either the WMB estate or JPMorgan. being settled for zero". My commentary, Mr. Gropper appears to be suggesting that the debtors ignored viable claims in order to obtain a quick resolution to these cases. On page 70, line 23 through page 71, line 11. Wait. Again, those were

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Page 318 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Sorry, Judge. Do that -- maybe not. I'm sorry. Additionally,

there were 6.5 billion dollars of downstream transfers that were made within one year of the filing. I just did. I'm sorry. I thought so. Okay. This looks like what I don't know how I got

that in there. I'm sorry.

I'm sorry.

I know what I did wrong.

I'm sorry, Your Honor.

The other thing that I wanted to point out to them -oh, page 75 rather, lines 3 through 21. "The other thing that

I wanted to point out to them is that I was concerned that the debtors were receiving pressure from the holders of senior bonds who obviously had different goals in the context of the case than the holders of subordinated bonds, junior subordinated bonds and preferred stock, which we were at the time. And so I wanted to make sure the debtors weren't going

to try to -- weren't going to assent to the desires of those group (sic) and look to make a quick deal but rather that the debtors get a recovery that was commensurate with the rights of WMI in these cases." "Q. "A. And where did point this out in this letter? If you look at the last sentence in the penultimate

paragraph, I said quote, 'As fiduciaries, I am sure that you are desirous of maximizing value for all stakeholders.' that I said stakeholders". And then he quotes again, "rather than just those who are simply looking for a quick deal that compromises significant Note

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Page 319 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 "A. value for the estate" end quote. And Mr. Eckstein replied: "Mr. Eckstein: Your Honor, I would like to move

Aurelius' Exhibit 22 into evidence". Here Mr. Gropper is pointing out to the debtors their fiduciary duty to all stakeholders. He would have had no

reason to do so unless he felt the debtors were not maximizing the value of the estates. On page 70, lines 7 through 32: The purchase and sale agreement provided, it said nothing

about whether or not the tax assets were transferred to JPMorgan and it was a pretty big asset. So, you know, one

would think that there may be a mention of it but the only claim the subsidiary had to the tax assets of the holding company were pursuant to a tax sharing agreement. sharing agreement that we reviewed. That's a tax

It was publicly filed as

an exhibit to the 10-K and it's -- and so the only way the subsidiary could get at those tax assets was to exercise its right under the tax sharing agreement. Well, that's an

intercompany claim and the purchase and sale agreement specifically carved out intercompany claims. So from our

perspective, speaking just from Aurelius', our approach to analyzing that dispute we said, well gee, it's pretty clear that in our view, JPMorgan didn't in fact buy the tax asset". On page 109, lines 21 through 23:

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Page 320 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 "A. And lastly, there was a provision in the bill as passed by

Congress that did not allow TARP recipients to benefit from the passage of that bill." My summary, "Mr. Gropper appears to be suggesting that JPMorgan is not entitled to any tax refunds. As confirmed in

my written argument, I agree with that suggestion". From the July 20, 2011 hearing transcript, Mr. Bolin, speaking on pages 288, lines 3 through 9: "Q. Wouldn't you agree with me though, sir, that the

resolution of the division of the tax refund is really the primary focus of these settlement negotiations? A. It was a big focus; yes. The only other thing I know is So when you talk

it's a big number, three billion dollars.

about twenty percent on three billion dollars, that's a lot of money". Here Mr. Bolin appears to be suggesting that the claims may not have been settled on their merits but on whether they provide a lot of money to the estate. When dealing with

many billions in claims, that may be settling too cheaply. Your Honor, you had the foresight to appoint an equity committee despite the debtors insisting that over one hundred billion dollars in claims were outstanding, that equity was adequately represented and that others were looking out for our best interest. At the first confirmation hearing, you had the

wisdom to listen to Mr. Thoma's documented facts, combined with

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Page 321 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 hearsay and use them to determine that discovery of the settlement noteholders was warranted. The debtors and the settlement noteholders fought tooth and nail to avoid public disclosure of their confidential information and now we know why. The knowledge of the facts

and the timeline they fit into paint a very unflattering picture of themselves and the debtors and bring into question the most fundamental assumptions which were used to form the debtors' business judgment which resulted in a global settlement agreement. Despite additional monies flowing into

the estates due to the extended five year tax look back, equity's position never changed. Due to the negotiating skills

of the debtors, we were always just barely out of the money. Too many in this case are so blinded by dollar signs that they cannot see how many people their actions are hurting. you, Your Honor. Thank

Without you, we would never have learned

these ugly truths or had this opportunity to set things right. Thank you again for having the wisdom and courage needed to do the right thing. Your Honor, given -- I do have copies of the receivership balance sheet and excerpts of the JPMorgan September 30, 2008 and March 31, 2009 quarterly SEC filings, if you would like to review them. I am guessing probably not.

They're likely too late given what you've -THE COURT: Ruled previously --

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Page 322 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 se. MR. BERG: THE COURT: MR. BERG: Yes. I think it's too late. Thank you, Your Honor. I'd be happy to

answer any questions you have at this time. THE COURT: MR. BERG: MR. THOMA: No questions. Thank you. Good evening, Your Honor. Nate Thoma, pro Thank you.

Out of deference to the late hour, I'm just going to try I know the debtors still have to go and

to hit bullet points.

hopefully the equity committee can have their motion addressed tonight. I don't know if the Court recalls at the last confirmation hearing the issues surrounding the rights offering and I guess a lot of people's confusion as to whether that was legitimate or not. I can briefly go into that. Back further

on when the debtors first submitted their plan and disclosure statements, docket number 3713, Wells Fargo's indentured trustee for the PIERS objected to the deficiencies in the debtors then proposed disclosure statement saying, "Further, the current eligibility threshold substantially limits the universe of those PIERS noteholders who are able to participate in the rights offering". THE COURT: MR. THOMA: Right. Therefore, the debtors should also

disclose the reason for imposing an eligibility threshold at

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Page 323 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 all but the debtors believe that restricting the eligible participants in the matter they propose, does not violate Section 1123(a)(4) of the Bankruptcy Code which requires the same treatment for all claims in a particulate class. And apparently the debtors weren't forthcoming as the PIERS trustee later filed docket number 4406 which stated, "In particular, the PIERS trustee is troubled by the structure of the rights offering and its apparent discriminatory treatment of certain holders of PIERS claims". They go on to say,

"Debtors failure to address these issues adequately could lead to a serious question regarding confirmability of the plan in light of the apparently discriminatory treatment of creditors within a single class". So, you know, the PIERS trustee later dropped the objection which seemed an anomalous given the suggested gravity of the issue and I inquired with them as to the rationale and their response was much the same as was received by fellow PIERS holder, Michael Rozenfeld, who in his objection to the current plan confirmation docket number 7496, Exhibit C -- I'm just going to cite the relevant section, quote "Even though certain PIERS noteholders may not be able to participate in the rights offering, the plan is structured to assure that all PIERS noteholders receive the same value under the plan, regardless of whether they elect to purchase common stock by participating in the rights offering, if they are eligible,

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Page 324 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 choose to receive their entire distribution in cash or in accordance with Section 20.2 of the plan, chose to --" THE COURT: Well, hasn't that issue been resolved

because there is no longer a rights offering? MR. THOMA: Yes, there is no rights offering anymore I'm not bringing up the rights I

but, you know, I understand.

offering for any reason other than to give context.

originally took all of those explanations at face value and I originally wasn't even going to bring it up at the confirmation at the time and I really assumed that the reasons I was getting, the parties who were representing my interest would have no reason to give me anything what the actual legal conclusion was in that matter. But the response obviously from Mr. Curchack and the immediate response was that -- was an intimation that the terms of the rights offering had been modified, a response it conveniently neglected to point out that there was still a two million dollar threshold for participation. I found that

curious but even more curious was the debtors' subsequent offering of the rationalization that this was necessary to somehow comply with federal securities law which was a completely different reason than was given previously. So, it struck me at that point that in conjunction with just the strangeness of the cap with PIERS, the strangeness of the appearance and the withdrawal of these

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Page 325 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 objections, and multiple other things, the plan, who was actually going to be in charge of the reorganized debtor -- and for the record that would be the four representatives from each of the representative noteholders, including a representative from Wells Fargo as trustee for the PIERS -- you know, all these things in conjunction made it really obvious to me that this isn't as a lot of the rhetoric here seems to suggest a question of in the money versus out of the money interest or even creditors versus equity but it's really about the debtors and their favored class of creditors versus literally everybody else. I think that pretty much covers that. This is a little more esoteric. I have a difficult

time understanding at the time of the last confirmation hearing, it was projected that there would be a December -late December of 2010 emergence from bankruptcy. At that

point, it was projected that the PIERS were to receive seventythree percent of their prepetition claims which would be a total shortfall of roughly 170 million and maybe there's some legal reason for this but I am just using simple math. The

forty million dollar burn rate that everybody bandies about here at every hearing, if you step backwards just a few months, all of the sudden that 170 million dollar shortfall disappears. What's more interesting me is that in October of 2010, the estate decided in its own best business judgment that 390 million dollar should be given to the settling noteholders to I

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Page 326 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 guess expunge that set of claims that the debtors maintained had no value, which to me suggests that at some point probably around July of 2010, there should have been enough in the estate to not only pay off the PIERS prepetition claims but the post-petition interests at the contract rate, as well. So I

don't know if somebody has some kind of explanation about the chronology that I am somehow missing but I would be interested to hear what the basis was for that. It's kind of unfortunate because it seems like over the past -- I'm being a little hard on the debtors but I feel as though the global settlement was pretty much known about in early March. It was announced in late March. There were still

negotiations ongoing into May but I really feel like they could have had a plan that was more robust than the one they offered in December, probably much earlier in the year. And had that

actually happened and all this money had actually been back in the estate, we wouldn't be having any discussions about the contract rates of interest that the PIERS would have been paid in full. But in addition, I mean since about that time, it's just apparent that the estate spent over a billion dollars trying to reorganize around what the debtors continue to insist is only 150 million dollar cap to reinsurance business and runoff mode. to reconcile. So that's a massive discrepancy that I can't seem I don't know if anybody can.

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Page 327 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Here we are, however, at this point, I would imagine the debtors would strive to maximize the future potential of the reorganized company and again, the actions of the debtors seem a little schizophrenic. Early, very early on in the

proceedings, they filed a motion to restrict transfers of certain interest in the debtors. That was docket number 156

and specifically, they called out the trust preferred securities, the R series preferred, common stock and any options or warrants for the same. And the reason they gave was

the debtors estimate that there could remain available multibillion dollar net operating losses that would be adversely affected and could be eliminated by a subsequent ownership change, thereby resulting in a potential loss of value. And

the Court granted that and I agree with both the Court and the debtors, that's definitely a worthy aim to preserve, billions of potential net operating losses. But the subsequent kind of

refusal I think by the debtors to try to avail themselves of this and the reorganized debtor of this benefit, that's obviously a pet peeve of mine. I realize my objectives here are vastly different from those that have whittled away the estate's subsidiaries and assets into relatively nothing but I'm more than content to suffer any upfront dilution that would be incurred by the inclusion of any class of securities, whether they be CCB claims or equity interests that would allow for multiple

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Page 328 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 billions of forward looking tax benefits to be available to the reorganized debtor in a wholly unrestricted capacity. The safe

harbor provisions under 382(l)(5) would be satisfied and no ownership could occur as -- as far as my understanding goes, that could still be the case with the CCB claims. instance, I'll move on. It's my understanding that provisions for payment of the ad hoc committee's counsel, the fees are included in the plan of reorganization. I find it extremely difficult to But in any

reconcile the idea of the estate paying these fees with the Court's January opinion determining that these parties were acting in their own self-interest. I don't have the benefit of

the equity committee's 2004 discovery materials or a very deep understanding of securities laws. comment very much. I originally wasn't going to

I think the equity committee appears to

have done a very thorough job analyzing, I guess the activities here. But I do have to comment on a common sense level, question the propriety of any sales or purchases of securities within days of the debtors March 12 announcing purporting to outline the terms of the global settlement. The question of

materiality is easily determined here as another shareholder pointed out a while back because we have an empirical metric that would actually determine materiality. The market actually

reacted quite drastically and quite negatively to the terms the

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Page 329 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 billions. debtors outlined that day. And I keep hearing about this immaterial gap of It seems incongruous with testimony suggesting that

as the recovery of the senior notes became more certain, some parties sold some of the senior notes and quote, "moved down the ladder" end quote, as it were. Statements by the debtors through February of 2010 suggested that the recovery of these bonds was still uncertain and faced with up to 100 billion dollars in claims but both the senior note and the subordinate notes traded at or near par, shortly beginning December of 2009, all the way to the announcement of the global settlement. For whatever reason, the market appeared to have a much more accurate assessment of the ultimate recovery of these instruments we received and even the debtors and that wasn't a small debt. That was 4.8 billion worth of senior notes that

were trading at or above par and roughly 1.7 billion of subordinate notes likewise. So, likewise I've come to realize that there are certain terms or phrases that carry a legal meaning that doesn't necessarily correspond to the literal common usage of the same words. So while I am unsure as to the precise meaning

of undue influence, I do have to question the propriety of the revelation that the debtors accelerated publication of information for the benefit of some parties to allow them to

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Page 330 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 trade in debtors' securities. that up. I did want to actually respond, and I have to apologize, I didn't catch counsel's name but counsel for Centerbridge earlier was showing graphs, I guess, of the trading history and position size of Centerbridge's positions throughout these proceedings and the different classes of debt. And he, I believe, suggested that somehow those actions indicated the behavior of a party that would be doing the exact opposite of acting on material or nonpublic information. While I think other people brought

I can't really comment from a securities law standpoint, I can comment as an investor standpoint and that is I think what counsel was missing is that the total amount for each class of securities, basically halves; you have roughly 4.8 billion of senior notes, 1.7 subordinate notes, and around 740 million worth of PIERS claims. The objective here was obviously not to profit because of the four settlement noteholders, all but Appaloosa, so neglecting Appaloosa, Owl Creek, Aurelius and Centerbridge, all purchased the subordinate notes above par at the high watermark and according to their 2019 statements, that was docket number 3761. I believe the prices were one of three cents on the

dollar, one of four cents on the dollar and one of six cents on the dollar. So, you know, I think it's strains credibility to

suggest that there was some kind of serious return they were

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Page 331 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 expecting buying bonds of a bankrupt company at par at that stage in the game and the obvious answer is that it wasn't about profit from the movement of prices in securities, it was about obviously control of the classes' vote. If you note the

2019 statements of settlement noteholders, again docket number 3761, the collective holdings for all four capped out at around sixty-six to seventy percent of the PIERS and subordinate notes. If they saw fit to purchase these subordinate notes

above par for so long, they could have bought them all above par, you know. They could have continued buying to this day

above par but they obviously had a certain threshold that they were trying to meet. And again, the fact that the positions, the actual total value of the position that they had in WMI securities decreased, is also belied by the fact that seventy percent of four billion is going to be a lot more than seventy percent of 1.7 billion and seventy percent of 700 million. So it was

obviously not about the movement and the price of securities but control of the vote. I think -- and this gets into a bunch more of kind of naive stuff. I am just kind of amazed at some of the things

that have gone on here and I realize that this is everybody's daily grind in some cases but I think what struck me the most is how closely this resembles what I understand to be the state of a bankruptcy process pre-Chandler Act. We have large

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Page 332 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 investment firms dominating the process, unequal treatment of similar interests, greater returns for consenting parties compared with nonconsenting parties, i.e., releases, lock-up of stakeholder securities, self-interest interfering with representation and absence of full disclosure of the amount of securities held and the times of acquisition. And to be fair, there have been a lot of creative rationalizations and slight twists of the comparisons aren't obviously direct and all the concepts like compliance with the Federal Securities laws, we need to have releases, the DTCC requires that the securities be tendered and so forth but the net results seems eerily similar. I think many of us who fall into the naive category have gotten a pretty good look at how the sausage gets made here and at this point, everyone's just wondering if it will pass inspection. As a result of the foregoing, I'd like to request that the Court consider carving out any provisions for the ad hoc committee's fees to be paid. I may have misinterpreted this

but I gathered from one of the UCC filings that they didn't feel equitable subordination is a remedy that's available to the Court. I disagree and to the extent that the Court finds

that inequitable conduct has occurred here, I would hope that that's the least relief the Court would consider granting. I will leave the FTAR discussion. You know,

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Page 333 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 everybody's pretty much done that to death but regarding FTAR and equitable subordination and disallowance and all these other things, to the extent that the Court deems any of these things that would finally bring money back over what the debtors estimate the creditors' claims would be, I just ask that if the Court has the ability to by any means possible try to preserve the forward looking tax benefits under 382(l)(5). I don't know if the Court has that capability. THE COURT: MR. THOMA: better on it. And I create --

I can't write the debtors' plan. Okay. Yes. Okay. I don't know any

I have to reiterate my reluctance to suggest Obviously, I have a

appointment of a trustee and liquidate.

crisis of confidence in our current representation though and I still as in December, I still don't know what to request of the Court in that regard. At this point, I could be wrong but it

appears as though the estate has been horribly, irrevocably compromised. I'm not aware of any other remedies that might So the standard

exist that could somehow undo that damage.

boilerplate of any other relief that the Court deems appropriate will have to do. THE COURT: MS. BARR: Thank you, Your Honor. No, one more. I

Is that all?

Your Honor, may I speak a few seconds? We've all been here a long time

would just close it out.

today, so if I could just read into the record a simple statement.

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Page 334 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 THE COURT: MS. BARR: Okay. Who are you?

Dorothea Barr, former member of the equity

committee and I want to thank you for the equity committee at the same time. THE COURT: MS. BARR: Thank you. In January of 2010, the U.S. Trustee

appointed me to serve on the Washington Mutual Equity Committee when the formation of the committee approved by this bankruptcy court. Just about every party presenting here today opposed

the formation of the committee including the UCC, JPM, the FDIC, and the debtor. In fact, the debtor claimed that a key

factor was that equity's interests were already wellrepresented by them and their legal representatives. As you heard in closing arguments and in evidence produced by counsel for the equity committee, there is a significant question about whether any other -- anyone other than the equity committee ever considered equity's interests as settlements were being negotiated. Claims traded away with

little or no consideration -- for little or no consideration. Assets potentially hidden and remained as estate values hoarded by parties whose claims could otherwise be satisfied. In fact, much of what has been recently discovered by equity committee counsel is news to me, as the debtor made considerable efforts to keep any of these -- any of that case status from being shared with the equity committee, even

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Page 335 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 though -- I can't read my handwriting -it was the Court's

sanctioned official committee and a party of interest in these bankruptcy proceedings. When I became a member of the equity committee, I was required by the debtor and the U.S. trustee to sign a confidentiality agreement related to these proceedings which included terms prohibiting me from trading at any time while I was on the committee or at any subsequent time as long as I was holding nonpublic information. As I just alluded, the information I or any of my colleagues was privy to was well short of what we now know the settlement noteholders had access to. By not being able to

trade during my ten months on the committee, I watched in surprise and agony, as at times the preferred and common equity shares swung wildly. It was bad enough that I lost money when

Washington Mutual initially sought bankruptcy protection, now it appears that these shares may also have subsequently been traded by those who had material nonpublic information and benefited by that information while my portfolio and those of my equity committee colleagues, former by the way, and all the shareholders we represented were materially harmed a second time. Should this court find that there were, in fact, issues with the way the bankruptcy proceedings were handled, I respectfully request that this court also determine an

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Page 336 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 you. this. equitable way to insure that those parties most hurt by the machinations are fairly protected and compensated for this court does make -- for if this court does make a determination regarding federal judgment rates -- I've got to find my last page -- equitable disallowance or similar measures, I fear that absent such direction, the debtor will find a way to direct those funds from those parties who have been most harmed by the actions that this court takes issue with. And I would like to say further that I was here for the hearings in July and the one thing that we did hear on the stand from the many witnesses is that many of the parties that are here today in this room who are paid to be here, did not have equity's interest at heart at any time. And we have heard today that this is a good and fair plan, that this is a good and fair offer. How can it be a good

and fair offer when, in fact, fiduciary responsibilities were breached? Your Honor. THE COURT: MS. BARR: Thank you. THE COURT: All right. Don't confirm is what you want. Thank I'm Thank you. Oh, I respectfully request that you decline Isn't that the basis of good and fair? Thank you,

That's it?

Well, thanks to the parties.

not sure it brings me any closer to a decision but -MR. OWENS: Your Honor, very briefly, I would like to

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Page 337 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 request leave of court to submit a very brief letter distinguishing the DeBartolo case which Mr. Folse mentioned in his oral argument but had not cited in his brief and we've not had a chance to respond to. THE COURT: Don't you think I can read it and decide

the -- what's applicable? MR. OWENS: Well, I would still like to be heard by

the Court on why I think it's readily distinguishable and doesn't stand for the proposition it cited and so I would ask for an opportunity to submit a very brief letter to the Court in the next few days. THE COURT: MR. OWENS: THE COURT: MR. OWENS: THE COURT: Thank you. (Whereupon these proceedings were concluded at 7:14 PM) You may. Thank you, Your Honor. Can you do it by Monday? Yes, Your Honor. All right. We will stand adjourned then.

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Page 338 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Motion to strike additional evidence granted Exhibit 301B to be allowed into the record only as a demonstrative RULINGS Page 28 36 Line 8 25 I N D E X

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Page 339 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Date: August 26, 2011 Veritext 200 Old Country Road Suite 580 Mineola, NY 11501 I, Dena Page, certify that the foregoing transcript is a true and accurate record of the proceedings. C E R T I F I C A T I O N

Dena Page
DENA PAGE

______________________________________

Digitally signed by Dena Page DN: cn=Dena Page, o, ou, email=digital1@veritext.com, c=US Date: 2011.08.26 15:39:12 -04'00'

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