Washington Mutual warrant holders state case for additional recovery

By Jim Witters

Wilmington, Del., Sept. 12 - Washington Mutual Inc. owes an additional $63 million to the holders of Dime Bancorp litigation tracking warrants, according to arguments made by the Dime lawyer during an adversary trial Monday in U.S. Bankruptcy Court for the District of Delaware.

Arthur J. Steinberg said that the $63 million should be added to the award made to the warrant holders, who are among those whose disputed claims are included in a $337 million reserve in the debtors' proposed plan of reorganization.

Steinberg has said previously that the Dime warrant holders "fell through the cracks" during Washington Mutual's bankruptcy case because the creditors committee considered them equity holders, while the warrant holders believe they are creditors.

The warrant holders sought committee status because they said the official committee of unsecured creditors and the equity committee failed in their fiduciary responsibilities in protecting the warrant holders' interests. But Judge Mary F. Walrath denied them committee status during an August hearing, saying that their interests would be represented during the adversary trial.

Debtors' attorney Adam P. Strochak said during the August hearing that if the court rules the warrant holders are creditors, they will be eligible for recovery from the $337 million reserve for disputed claims. If the judge rules that the warrant holders are clients, they will be eligible for 85% recovery under the terms of the proposed reorganization plan.

The warrant holders began their case on Monday with the testimony of expert witness Barry M. Levine, a financial industry consultant.

Levine testified that the litigation tracking warrants are Washington Mutual liabilities, not secured equities.

The warrants are Dime Savings Bank or Dime Bancorp litigation tracking warrants. Dime merged with Washington Mutual in 2002, with WaMu assuming the obligations under the warrants.

The litigation involved was the case of Anchor Savings Bank FSB v. the United States of America in which Washington Mutual was awarded $382 million in damages in March 2008.

Levine testified on Monday that the warrants were issued as a way for Dime to transfer 85% of the value of the lawsuit to its shareholders. The warrants were redeemable for Dime stock.

He said that he examined the seizure of Washington Mutual Bank, the global settlement between the debtors and J.P. Morgan Securities LLC and the Chapter 11 plan. He said that, taken together, those three elements constituted a sale of substantially all of Washington Mutual's assets.

Strochak asked Levine whether he examined what was left in the estate before the distribution to creditors. Levine replied that he considered the estimated $6.1 billion to $6.8 billion to be "proceeds of the sale." He said the $200 million to $300 million remaining in the estate after distribution to creditors was small in comparison to the $6 billion figure.

Levine also testified that he used definitions and guidelines promulgated by the U.S. Securities and Exchange Commission, the Financial Accounting Standards Board and the International Accounting Standards Board in reaching his conclusion about the Dime litigation tracking warrants.

"LTWs are categorically not equity securities," he testified. "They are properly classified as liabilities."

Levine cited accounting entries by two other financial institutions that categorized their litigation participation certificates - an earlier, similar instrument - as liabilities.

Litigation tracking warrants are neither equity warrants nor equity securities, he said.

Strochak played a six-minute video of a deposition by Mitchell S. Eitel, an attorney with Sullivan & Cromwell LLP, which represented Dime at the time the warrants were issued.

Eitel testified in the video that the purpose of the warrants was to increase the shareholders' equity as the value of Dime stocks rose with the increased value of the company, resulting from a favorable settlement of the Anchor case.

When asked by Strochak, Levine testified that the Eitel video did not sway his opinion, in part because Eitel began his statement by stating that his recollection of the purpose for the warrants was "sketchy" and Eitel had not examined the related documents in a dozen years.

Strochak's cross-examination of Levine is scheduled to resume at 9:30 a.m. ET on Tuesday before Judge Walrath.

Steinberg said the trial may carry over into Wednesday.

Washington Mutual, a Seattle-based savings and loan holding company, filed for Chapter 11 bankruptcy on Sept. 26, 2008, in the U.S. Bankruptcy Court for the District of Delaware. Its Chapter 11 case number is 08-12229.

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