Memorandum of Points and Authorities in Support of Its Motion For Partial Summary Judgment Dismissing All Claims Against JPMC
Memorandum of Points and Authorities in Support of Its Motion For Partial Summary Judgment Dismissing All Claims Against JPMC
Defendants.
x
MEMORANDUM OF POINTS AND AUTHORITIES IN SUPPORT OF
DEFENDANT JPMORGAN CHASE BANK, N.A.'S
MOTION FOR PARTIAL SUMMARY JUDGMENT
Brent J. McIntosh
SULLIVAN & CROMWELL LLP
1701 Pennsylvania Avenue, NW
Washington, DC 20006
Tel: (202) 956-7500
Fax: (202) 293-6330
PRELIMINARY STATEMENT............................................................................................ 1
SUMMARY OF THE ARGUMENT...................................................................................... 2
STATEMENT OF FACTS....................................................................................................... 5
The Trust Preferred Securities....................................................................................... 5
A. Tier 1 Capital Absorbs Banks' Losses in Times of
Financial Distress............................................................................................... 6
B. The Trust Preferred Securities Included the Conditional
Exchange Feature to Qualify as Tier 1 Capital............................................... 7
WMB's Receivership and the Conditional Exchange................................................. 9
III. Litigation over the Trust Preferred Securities and the Global
Settlement Agreement.................................................................................................. 11
Page(s)
Cases
In re APF Co.,
274 B.R. 408 (Bankr. D. Del. 2001).................................................................. 20
Bernstein v. Canet,
Civ. A. No. 13924, 1996 WL 342096 (Del. Ch. Jun. 11, 1996)............................ 25
Bernstein v. Goldsmith,
Civ. A. No. 05-4702 (HAA), 2006 WL 1644849
(D.N.J. Jun. 6, 2006)..................................................................................... 20
In re Broadstripe, LLC,
B.R. ---, 2010 WL 3768003 (Bankr. D. Del. Sept. 2, 2010)....................... 14, 27
Castle v. Cohen,
840 F.3d 173 (3d Cir. 1988)...................................................................... 22, 23
Karpenko v. Leendertz,
619 F.3d 259 (3d Cir. 2010) 32
Larson v. Domestic & Foreign Commerce Corp.,
337 U.S. 682 (1949) 26
-iv-
National Association of Home Builders v. Defenders of Wildlife,
551 U.S. 644 (2007)....................................................................................... 16
Shields v. Shields,
498 A.2d 161 (Del. Ch. 1985).......................................................................... 26
-v-
Home Owners Loan Act, 12 U.S.C. § 1462a
32
15 U.S.C. § 77d
27
15 U.S.C. § 77e
27
12 C.F.R. § 567
6
17 C.F.R. § 230.144A
26
Financial Institutions Reform, Recovery, and Enforcement Act of 1989,
Pub. L. 101-73, 103 Stat. 183 (1989)
15
Delaware Statutes
6 Del. C. § 1-201
25
6 Del. C. § 8-104
25
6 Del. C. § 8-307
26
6 Del. C. § 8-401
26
Other
memorandum of points and authorities in support of its Motion for Partial Summary
Judgment dismissing all claims against JPMC that have not been stayed (Counts I-IV and
VI) on the ground that, as a matter of law, Plaintiffs do not own Trust Preferred Securities
In 2006 and 2007, Washington Mutual, Inc. ("wmr) caused the issuance
of the Trust Preferred Securities in dispute here. WMI wanted the OTS to consider the
resulting capital to be core capital of its primary thrift subsidiary, Washington Mutual
Bank ("WMB"). Accordingly, the terms of the controlling Trust Agreements provided
that the Trust Preferred Securities would be returned to Washington Mutual in exchange
for preferred stock in WMI if the Office of Thrift Supervision ("OTS") so directed. The
OTS did so on September 25, 2008, when it declared an "Exchange Event" and directed
that all outstanding Trust Preferred Securities be automatically exchanged for WMI
preferred stock (the "Conditional Exchange"). Based upon the governing legal
documents, all outstanding Trust Preferred Securities were thus automatically converted
into preferred stock of WMI. The Conditional Exchange was automatic, involuntary, and
the dollar—what they claim to be interests in Trust Preferred Securities. Plaintiffs do not
have any interest in WMI Trust Preferred Securities. Instead, by law Plaintiffs actually
hold WMI preferred equity. It does not matter that physical certificates for the Trust
Preferred Securities apparently were not exchanged for physical certificates for the WMI
preferred stock, or that the records of the Depository Trust Company ("DTC") or the
Wilmington Trust Company may not have been updated. Upon the Conditional
Exchange, all outstanding Trust Preferred Securities were deemed as a matter of law to
represent interests in WMI preferred equity without any further action by anyone.
Through this action, the plaintiff hedge funds are asserting that the
two-year-old, automatic, and permanent exchange should be unwound. The result would
give them a $1.1 billion preference over creditors and other equity. They are not
entitled to that preference. The Court should firmly and swiftly reject the ownership
claims of these hedge fund Plaintiffs, which are untenable as a matter of law.
Those Agreements unambiguously provide that the Trust Preferred Securities are to be
automatically exchanged for interests in WMI preferred equity when the OTS, in its sole
discretion, declares the occurrence of an Exchange Event and directs the Conditional
Exchange. There is no dispute that on September 25, 2008, the OTS did exactly this.
was the sole condition precedent to the Conditional Exchange. Once the Conditional
ownership interest of any outside investor in the Trust Preferred Securities. (See infra
Part I.A-C.) Under the Trust Agreements' terms, any litigation delay, or delay of any
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sort, has no effect on ownership: Until WMI issues new certificates representing
preferred stock, the certificates previously representing Trust Preferred Securities are
deemed to represent WMI preferred stock. (See infra Part LA-C.) Based on these
undisputed facts alone, Plaintiffs' claims to ownership of Trust Preferred Securities fail
as a matter of law. For this reason, Plaintiffs were correct when they previously
represented to this Court that they hold WMI preferred equity. (See infra Part I.D.)
6. In Count III, Plaintiffs argue that the Conditional Exchange failed because
the Trust Preferred Securities could be transferred only to "Qualified Institutional Buyers";
Plaintiffs claim WMI was not such a buyer. This argument is especially off-base, as the
very agreements that contained the transfer restriction expressly provide for the exchange
that Plaintiffs claim violated the transfer restriction, and such a restriction would be
unnecessary under the securities laws in any event. (See infra Part H.C.)
7. In Count IV, Plaintiffs propose a conspiracy theory in which the OTS acted
outside its authority in directing the Conditional Exchange, arguing that the Court should
therefore void the exchange that resulted from OTS' s directive. These arguments also fail
as a matter of law:
• Almost all of the Plaintiffs lack standin to alle e the fraud. The
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Preferred Securities because even tortious actions of federal agencies are
not ultra vires and void. (See infra Part II.D.3.)
• The alleged omission of WMI's commitment to contribute the TruPS to
WMB in a Conditional Exchange does not affect Plaintiffs' ownership
claims, since the Plaintiffs lost all right to the TruPS regardless of whether
or not WMI contributed the TruPS to WMB. (See infra Part II.D.4.)
8. In Counts V and VI, Plaintiffs seek declarations as to WMI' s unclean
hands and JPMC' s status as a bona fide purchaser. These theories do not affect the
Conditional Exchange' s validity and are therefore irrelevant to Plaintiffs' claims to
ownership of Trust Preferred Securities. (See infra Part II.E.)
10. Plaintiffs' claims are all dependent upon ownership of the Trust Preferred
Securities. Because the Court can and should determine as a matter of law that Plaintiffs
do not own Trust Preferred Securities, based solely on (i) the terms of the governing
Trust Agreements and (ii) the undisputed fact that on September 25, 2008, the OTS
declared an Exchange Event and directed a Conditional Exchange, summary judgment
should be entered to dispose of Plaintiffs' claims.
STATEMENT OF FACTS
The Trust Preferred Securities
In 2006 and 2007, Washington Mutual affiliates issued five series of Real
Estate Investment Trust ("REIT") preferred securities, the terms of which were governed
by the Trust Agreements. (See Declaration of Brent J. McIntosh, dated Nov. 2, 2010
("McIntosh Decl."), Exs. 1A-1E; id., Ex. 1E, pp. 1-21; id., Exs. 3A-3E.) These
drew value from their indirect interest in $13 billion of mortgages held by a subsidiary of
WMB called Washington Mutual Preferred Funding ("WMPF").2 One purpose of the
TruPS issuance was to create core capital, also called Tier 1 capital, for WMB—that is,
capital available to absorb WMB's losses before those losses compromised WMB's
ability to meet its financial obligations. In order to qualify the TruPS as Tier 1 capital of
WMB, the agreements creating the TruPS included a mechanism whereby they would be
mandatorily and automatically exchanged for WMI preferred shares upon the occurrence
stock and other equity interests that fulfill the same at-risk role as common stock. See 12
C.F.R. § 567(a)(1) (OTS definition of core capital). Tier 1 capital provides a bank with a
position to protect more senior positions.3 According to the OTS, other federal
regulators, and
1 For economy and ease of reference, this memorandum will refer to the
Washington Mutual Preferred Funding Trust IV offering circular (McIntosh Decl., Ex.
1E) as representative of the four other offering circulars (id., Exs. 1A-1D). Appendix C
lists corresponding provisions in the five offering circulars by page number.
2 The structure of the Trust Preferred Securities is described in detail in
Appendix A. Briefly, WMB contributed $13 billion in mortgage assets to WMPF, which
issued preferred securities (the "WMPF Preferred Securities") to four Delaware trusts
that qualified as REITs and one Cayman Islands limited corporation (with the REITs, the "
Issuer Trusts"). The Issuer Trusts then issued preferred securities (the TruPS) to third-
party investors. (McIntosh Decl., Ex. 1E, pp. 1-2.)
3
See McIntosh Decl., Ex. 10A, p. 4 ("In a distressed situation, equity provides the
first layer of loss absorption."); id., Ex. 10F, p. 2 ("Tier 1 capital is supposed to have
absolute loss absorption capacity during times of fmancial difficulties . . . .").
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international banking accords, certain "hybrid" securities such as the TruPS at issue here
can qualify as Tier 1 capital so long as they are available to absorb bank losses should the
bank fall into financial distress.4
p. 30.5) Without such a provision, "REIT preferred securities would provide little support
to a deteriorating or failing [] bank or to the FDIC, despite possibly comprising a
substantial amount of the [] bank's tier 1 capital." (Id., Ex. 9C, p. 11,828.) Since
REIT-preferred securities are backed by mortgage assets, the exchange feature "unlocks"
those assets to cushion the bank's losses. (See id., Ex. 9E, p. 30 (OTS's Tier 1 capital
guidelines stating, "If the thrift faces operating difficulties, all assets of the consolidated
entity should be available for the thrift' s use").)
4 See McIntosh Decl., Ex. 9A; id., Ex. 9E, p. 30 (OTS requires REIT-preferred
securities to be non-cumulative and perpetual to receive Tier 1 treatment); id., Ex. 10A,
p. 4 ("In a distressed situation, equity provides the first layer of loss absorption [and] . . .
hybrids seek to replicate the above . . . characteristics."); id., Ex. 10C, p. 8 ("Bank Tier 1
instruments have a clearly defined role in acting like risk capital in the event of stress.");
id., Ex. 10D, p. 2-3 (Fitch Ratings will treat hybrid securities like core equity if they are
perpetual, junior, non-cumulative, and loss-absorbing).
5 See also McIntosh Decl., Ex. 9B, p. 2 (REIT-preferred securities "must have an
exchange feature" for Tier 1 capital treatment); id., Ex. 9D, p. 2 (requiring "convertibility
provision," similar to the Conditional Exchange, as prerequisite to Tier 1 treatment); id.,
Ex. 10F, p. 20.
-7-
Exchange provision, WMB's primary regulator, the OTS, could determine that WMB
Exchange Event had occurred and directed the Conditional Exchange, the Trust Preferred
Securities would return to WMI to absorb potential WMB losses. (Id.) Whatever entities
were then holding Trust Preferred Securities would, by law, immediately lose their Trust
To ensure that the bank receives the emergency capital promptly, the
holders of Trust Securities, by WMI, by WMB (other than to inform the OTS), by [
WMPF] or by the Trust[s] in order to effect the automatic exchange as of the time of the
exchange." (Id., p. 92 (emphasis added).) Indeed, the Trust Agreements and offering
circulars make clear that the exchange will occur even in the case of a receivership,
where WMI and its investors (including Plaintiffs here) are left only with receivership
claims and not a direct interest in the former subsidiary. (Id., p. 91.)
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To ensure the TruPS could absorb WMB's losses—and thus protect
WMB's depositors—WMI committed to contribute the TruPS to WMB in the event of a
Conditional Exchange. (McIntosh Decl., Exs. 5A-5I, die "Capital Commitment Letters.")
The Trust Preferred Securities would not have qualified as WMB core capital without
this commitment, because they would not have provided loss-absorbing support to the
bank. (See McIntosh Decl.,
id., Ex. 9C, p. 11,828; id., Ex. 9E, p. 30; id., Ex. 10F, p.
20; see also id., Ex. 9F, pp. 6-7 (Tier 1 eligibility requires holding company to contribute
exchanged securities to thrift).)7
None of this was a secret. Radier, the TruPS offering circulars contained
extensive disclosures about the Conditional Exchange, including the explicit warning that
TruPS investors could lose "all or part" of their investment if a Conditional Exchange
occurs. (McIntosh Decl., Ex. 1E, p. 29.8) The Circulars specifically state that WMI
would likely file for bankruptcy if WMB went into receivership, in which case investors
would be subordinate equity holders of WMI with no guarantee of reaching the value in
die TruPS. (Id. at pp. 30-31.)
-9-
thereafter, on September 25, 2008, due to concerns over the safety and soundness of
WMB, and with explicit reference to the prior MOU, the OTS declared the occurrence
of an Exchange Event and directed the exchange of the Trust Preferred Securities. (
McIntosh Decl., Ex. 6A.) WMI then executed an Assignment Agreement (id., Ex. 7B)
to fulfill its commitment that the TruPS would be transferred to WMB. Later that night,
the OTS appointed the Federal Deposit Insurance Corporation ("FDIC") receiver for
WMB, and the FDIC immediately sold substantially all the assets and certain liabilities of
WMB to JPMC. (Id., Ex. 7C; id., Ex. 7D ("P&A Agreement").)
each outstanding [TruPS] will be exchanged automatically for" WMI preferred stock, and
that until physical Depositary Shares of WMI preferred stock were delivered, "any
certificates previously representing [TruPS] will be deemed for all purposes, effective as
of 8:00 AM New York time on September 26, 2008, to represent [] Depositary Shares."
9 In addition to the Trust Agreements, each TruPS series involved an Exchange
Agreement between the Issuer Trust, WMI, and Mellon Investor Services LLC, which
govems the issuance of Depositary Shares representing interests in WMI preferred stock
following the Conditional Exchange. (See McIntosh Decl., Exs. 4A-4D ("Exchange
Agr.").) The Exchange Agreements also provided that 'WMI was "bound
unconditionally" to effect the exchange of TruPS for WMI preferred equity, and that
unless and until receipts evidencing preferred equity were delivered, the certificates
representing TruPS "shall be deemed for all purposes" to represent preferred equity. (Id.)
Each Exchange Agreement was referenced as binding in the respective Trust Agreement. (
Trust Agr., § 4.08(a)(iii).)
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(Id.) At 8 a.m. that day, then, the Conditional Exchange was complete, the TruPS
reverted to Washington Mutual, and the certificates formerly representing TruPS were
rightful ownership of the Trust Preferred Securities. Both parties acknowledged that the
Conditional Exchange had occurred and that the TruPS had then immediately been
transferred to WMB, but WMI contended that the transfer from WMI to WMB should be
the TruPS's owner.1° Until earlier this year, though—nearly two years after the OTS
mandated the Conditional Exchange—neither WMI nor JPMC nor any other party
disputed that the Conditional Exchange had occurred. (See, e.g., McIntosh Decl., Ex.
14C,155.) As long as its ownership dispute with WMI remained unresolved, JPMC has
taken no action to reflect its ownership of the TruPS on the books of the depository DTC
or the trustee Wilmington Trust Co.,11 and apparently neither has WMI.12
(McIntosh Decl., Ex. 13C.) linportantly, Plaintiffs did not pay anything near liquidation
-12-
and after WMI had publicly disclosed that any certificates formerly representing TruPS
would be deemed interests in WMI preferred equity.
Only of Plaintiffs'
interests were purchased before the September 26, 2008, Conditional Exchange. (Id.,
Exs. 13A, 13C.) Plaintiffs purchased for pennies on the dollar, at
discounts of up to 99%. (See id., Ex. 13A.) During this buying spree, seven Plaintiff
Two months after the parties announced the Global Settlement Agreement,
and almost two years after the Conditional Exchange, these hedge funds commenced the
present adversary proceeding. (See Complaint ("Compl."), D.I. 1.) Some funds
continued to buy up their interests even after the filing of the Complaint (McIntosh Decl.,
Ex. 13B), but still portray themselves as fraud victims and demand a declaration that their
penny stocks represent $1.1 billion worth of TruPS, not WMI equity—i.e., that the
Conditional Exchange never happened at all.
The Complaint pleads nine claims for relief. Counts I-VI demand
declaratory relief that the Conditional Exchange never happened and cannot happen now:
• Count I asserts that the Conditional Exchange failed under the terms of the
Trust Agreements. (Compl.B 201-210.)
• Count II asserts that the Conditional Exchange failed under the delivery
rules of the Uniform Commercial Code. (Compl. 9191211-218.)
• Count III asserts that the Conditional Exchange is void because it violated
transfer restrictions on the TruPS requiring transferees to be Qualified
Institutional Buyers ("QIBs"). (Comp1.11 219-228.)
• Count IV asserts that the Conditional Exchange is void because the OTS
directive declaring it was ultra vires, "tainted" by the OTS' s aiding and
abetting WMI' s supposed fraud upon investors. (Compl. IN 229-243.)
• Count V seeks a declaration that WMI has unclean hands because of the
alleged fraud. (Comp1.911 244-249.)
Count VI seeks a declaration that JPMC is not a bona fide purchaser of the
Trust Preferred Securities. (Compl. 250-258.)
Counts plead damages claims against WMPF and the related entities for fraud,
negligent misrepresentation, and aiding and abetting fraud. (Compl. 259-293.) By the
Court' s order of September 7, 2010, Counts VII-IX have been stayed until after the
confirmation hearing. (D.I. 53.)
ARGUMENT
claims border on bad faith and defy the governing documents and undisputed facts. They
should be summarily rejected.
Adv. No. 09-52841, 2010 WL 3435380, *4 (Bankr. D. Del. Aug. 27, 2010) (quoting
Newport Assocs. Dev. Co. v. Travelers Indemnity Co. of Ill., 162 F.3d 789, 791 (3d Cir.
1998)). Here, the Trust Agreements' unambiguous terms establish that the Conditional
Exchange occurred and effectively transferred the Trust Preferred Securities. As a result,
Plaintiffs' claims, which require a fmding to the contrary, fail as a matter of law.
OTS declares an Exchange Event and direct the Conditional Exchange, and it is
undisputed that the OTS did so. The Conditional Exchange automatically converted any
outstanding Trust Preferred Securities holdings into interests in WMI preferred stock.
once the OTS declares an Exchange Event and issues a directive. The Trust Agreements
13 See also Fed. R. Civ. Pro. 56(c) (Summary judgment should be granted "if the
pleadings, the discovery and disclosure materials on file, and any affidavits show that
there is no genuine issue as to any material fact and that the movant is entitled to
judgment as a matter of law."); Fed. R. Bankr. Pro. 7056 (applying Rule 56 to adversary
proceedings). Although the Court must draw reasonable inferences in favor of the non-
movant, "the non-movant must set out specific facts showing a genuine issue for trial"
with admissible evidence. Worldwide Direct, 2010 WL 3435380, at *3.
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If the OTS so directs upon the occurrence of an Exchange
Event, each Trust Security then outstanding shall be
exchanged automatically for a Like Amount of newly
issued Depositary Shares (the "Conditional Exchange").
(Trust Agr., § 4.08(a) (emphasis added)). Once the OTS directs the Conditional
Exchange, the Conditional Exchange "shall occur" at 8:00 a.m. on the next business day,
mandatory, see Nat'l Ass'n of Home Builders v. Defenders of Wildlife, 551 U.S. 644, 661 (
2007) ("shall' generally . . . admits of no discretion"), and unambiguous: the only event
that must occur to trigger the mandatory Conditional Exchange is the OTS directive.
Exchange when, on September 25, 2008, it declared an Exchange Event and directed the
Conditional Exchange.14 (See McIntosh Decl., Ex. 5A.) The OTS directed the exchange
in unambiguous terms:
§§ 4.08(a)-(b).)
14 The OTS enjoys broad authority under the Home Owners Loan Act ("HOLA") to
issue any order or directive appropriate to maintain adequate capital at thrifts like WMB.
See 12 U.S.C. § 1464(s)(1)(B); United Liberty Life Ins. Co. v. Ryan, 985 F.2d 1320, 1326 (
6th Cir. 1993). The OTS acted pursuant to this authority when it found that WMB faced
significant deposit outflows and directed the Conditional Exchange in order to provide
WMB with an additional capital cushion. (See McIntosh Decl., Ex. 6A.)
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All Trust Preferred Securities Certificates into
Certificates Representing WMI Preferred Stock.
Consistent with the term "automatic"—which the governing Trust
had an immediate effect an the rights of WMI and third-party investors. According to the
Depositar v Shares (representing fractional interests in WMI preferred stock), and WMI
to- _
immediately became the holder of the Trust Preferred Securities:
TruPS immediately ceased. (Id.) Additionally, as of the Conditional Exchange, the "
global certificates" that to date had represented the TruPS ceased to represent these
securities:
15 See Trust Agr. § 4.08(a); McIntosh Decl., Ex. 1E, cover page; id., Ex. 21, p. 3.
16 Because the trust certificates evidence beneficial interest in a trust, the Trust
Agreements control what rights these certificates represent and can change those rights,
as a matter of contract law. See In re Amer. Home Mortg. Holdings, Inc., No. 09-3568,
2010 WL 2676383, *3 (3d Cir. Jul. 7, 2010) (trust documents controlled trust certificate-
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These legally controlling provisions comport with the Offering Circulars'
description of the Conditional Exchange: "[O]nce the OTS directs a Conditional
Exchange after the occurrence of an Exchange Event, no action will be required to be
taken by holders of Trust Securities, by WMI, by WMB (other than to inform the OTS),
by [WMPF] or by the [Issuer] Trust in order to effect the automatic exchange as of the
time of the exchange." (McIntosh Decl., Ex. 1E, p. 92 (emphasis added).17)
holder's right to cash distributions); Mangano v. PeriCor Therap'cs., Inc., C.A. No.
3777-VCN, 2009 WL 4345149, *7 (Del. Ch. Dec. 1, 2009) (surrender of trust certificates
held irrelevant where the trust instrument automatically terminated voting trust, and
ownership of the underlying shares reverted to plaintiff).
17
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announcement.18 (See McIntosh Decl., Ex. 13C.) Thus, it is not surprising that, before
filing this action, some Plaintiffs held themselves out to the Court as WMI equity
holders. At the January 28, 2010 hearing before this Court, counsel for Black Horse
stated that the $4 billion of "hybrid preferred," subject to the JPMC adversary
proceeding, was part of the $7.5 billion in WMI preferred equity, and requested that the
interests. (McIntosh Decl., Ex. 14D, pp. 45, 56; see also id., Ex. 14E, p. 1 ("Black
Horse is the holder of certain preferred 'hybrid' equity securities of the above-
18
19
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Having bought equity, paid for equity, and represented themselves to the
Court as equity, Plaintiffs now seek to improve their position over other equity holders
with a $1.1 billion preference. Their attempted preferential arbitrage should be rejected.
September 26, 2008, Plaintiffs now insist, two years later, that the Conditional Exchange
failed because three ministerial acts, meant to reflect the Conditional Exchange on certain
parties' records, were postponed during litigation. 2° Although these record-keeping acts
will be completed as soon as the settlement is approved, they are legally irrelevant to the
effectiveness of the Conditional Exchange, as the Trust Agreements make clear. Perhaps
realizing this, Plaintiffs' Complaint also includes over a hundred paragraphs of fraud
allegations that have nothing to do with the Conditional Exchange or its effect on their
interests. Plaintiffs' Counts fail on the unambiguous terms of the Trust Agreements,
and their Counts IV-VI are legally irrelevant to the occurrence of the Conditional
20 The automatic stay prohibits parties from unilaterally altering the status quo as of
the petition date. See In re Schaefer Salt Recov., Inc., 542 F.3d 90, 100 (3d Cir. 2008) (
automatic stay prevents creditors from "acting unilaterally to obtain payment from a
debtor"); In re APF Co., 274 B.R. 408, 417 (Bankr. D. Del. 2001) (automatic stay
designed to "maintain the status quo that exists at the time of the debtor's bankruptcy
filing"). Even without the automatic stay, unilateral self-help is inappropriate in pending
litigation. See Bernstein v. Goldsmith, Civ. A. No. 05-4702 (HAA), 2006 WL 1644849,
at *7 (D.N.J. Jun. 6, 2006).
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A. The OTS Directive Was the Only Condition
Precedent to the Conditional Exchange (Count I).
In Count I, Plaintiffs attempt to transform the three ministerial obligations
meant to record and reflect the Conditional Exchange into conditions precedent to the
Conditional Exchange. But the governing Trust Agreements and other offering
documents unambiguously preclude this argument. They describe the Conditional
Exchange as "automatic" and subject to a single condition precedent: the Conditional
Exchange "shall occur" if the OTS directs a Conditional Exchange upon the
occurrence of an Exchange Event.21 (Trust Agr., § 4.08(a)-(b).) They further make
clear that certificates previously representing Trust Preferred Securities shall be deemed
for all purposes to represent shares of WMI equity until new certificates are issued. (Id.,
§ 4.08(c).) If there were any room for ambiguity in these provisions, the Offering
Circulars eliminate it: "[O]nce the OTS directs a Conditional Exchange after the
occurrence of an Exchange Event, no action will be required to be taken . . . in order to
effect the automatic exchange as of the time of the exchange." (McIntosh Decl., Ex.
1E, p. 92 (emphasis added).) In an audacious misreading of these terms, the Plaintiffs
claim that, in fact, three actions were required to be taken to effect the Exchange:
surrender of the global certificates, registration of the Conditional Exchange on the
Trustee' s books, and issuance of depositary receipts by WMI. (Compl. Mt 203-206.)
These three actions are not "conditions precedent," as Plaintiffs urge, but
rather ministerial details meant to reflect the Conditional Exchange after the fact. "A
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condition precedent is an act or event, other than a lapse of time, that must exist or occur
before a duty to perform something promised arises." AES Puerto Rico, L.P. v. Alstom
Power, Inc., 429 F. Supp. 2d 713, 717 (D. Del. 2006).22 "Conditions precedent are not
Here, the Trust Agreements unambiguously state that the three record-
keeping acts Plaintiffs point to are not conditions precedent. First, the Trust Agreements
describe all three acts as "unconditional obligations" that follow the occurrence of the
Conditional Exchange. (Trust Agr., § 4.08(a)(i)-(iii).) Logically, an obligation that
follows from the occurrence of the Conditional Exchange cannot be a prerequisite to the
Conditional Exchange. Second, the Trust Agreements describe the Conditional Exchange
as "automatic." (Id., § 4.08(a).) The description of the exchange as "automatic" is
patently inconsistent with the presence of implied, additional conditions precedent. Cf
Morgan Stanley High Yield Sec'ys., Inc. v. Seven Circle Gaming Corp., 269 F. Supp. 2d
206, 219 (S.D.N.Y. 2003) (When a contract explicitly states that a party's obligations are "
unconditional," "courts have generally found that any condition precedent is inherently
in conflict with such a provision.") (citing cases). Third, the Trust Agreements expressly
state that the former TruPS certificates are deemed to represent an interest in WMI
22 Because the Trust Agreements state that they are governed by Delaware law,
Delaware corporate law and contract law govern the interpretation of these Agreements
and the Conditional Exchange provided for therein. (Trust Agr., § 7.07) See Paccom
Leasing Corp. v. E.I. Du Pont de Nemours & Co., Nos. 89-225-CMVV, 90-311-CMW,
1991 WL 226775, at *5 (D. Del. Oct. 30, 1991) (when contract contains Delaware choice
of law provision "and there is an obvious connection to Delaware," Delaware law
controls).
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preferred equity even before the actual issuance of new certificates--or even "in the
event . . . replacement certificates are not delivered." (Trust Agr., § 4.08(c).) And fourth,
even if the Trust Agreements left any room for ambiguity, the Plaintiffs' claim would still
fail, since conditions precedent must be unambiguously and explicitly stated.23 See
Castle, 840 F.2d at 177.
The Exarniner identified the major flaws in Plaintiffs' argument that the
incomplete record-keeping steps—what the Examiner termed the "Unperformed
Obligations"—were conditions precedent to the Conditional Exchange:
logistical term that is not a condition precedent does not affect the validity of an
automatic exchange. See JAS Sec'ys., LLP v. Amer. Int'l Group, Inc., No. Civ. A.
99C-01-126 WTQ, 1999 WL 1441991, at *5 (Del. Super. Dec. 13, 1999) (faxing notice
of automatic conversion instead of mailing notice did not affect conversion' s validity).
Plaintiffs raise no genuine factual dispute that alters the meaning of the Trust
exchange built into the Trust Preferred Securities and required by the governing Trust
the Uniform Commercial Code ("UCC"), Article 8. (Compl. 1 77.) This effort, too, fails
securities. See UCC § 8-302, cmt. n.2 (2007) ("Article 8 is not a comprehensive
codification of all of the law governing the creation or transfer of interest in securities.");
Kallop v. McAllister, 678 A.2d 526, 529 (Del. 1996) ("Article 8 of the UCC . . . did not
preclude the validity of a stock transfer accomplished by methods that are not listed.").
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UCC Article 8 provides a standard mechanism for the transfer of securities
by voluntary purchase, but not by automatic exchange. UCC Section 8-104 states that a
person "acquires a security or an interest therein, under this Article, if . . . [, inter alia,]
the person is a purchaser to whom a security is delivered pursuant to Section 8-301."
§ 101(43) (In the B ankruptcy Code, "[t]he term `purchaser' means transferee of a
voluntary transfer." (emphasis added)). Article 8 is explicitly non-exclusive: It states
that the delivery rules of § 8-301 apply to securities transfers "unless the context shows
that a different meaning is intended." 6 Del. C. § 8-104(d); Kallop, 678 A.2d at 529; see
also Barber v. VistaRMS, Inc., 272 Va. 319, 331 (2006) (UCC § 8-301 did not govem
automatic divestiture of stock as "[n[o sale or purchase of stock occurred in this case").
Here, where the Trust Agreements provide not for a voluntary purchase,
but for an involuntary exchange, a different meaning is not only intended, but required.
The Trust Agreements describe what happens upon a Conditional Exchange and the Mies
for voluntary transfers in different Articles. (Trust Agr., §§ 3.03, 4.08.) Section 3.03
imposes registration requirements and restrictions on voluntary transfers that differ
from or do not appear at all in Section 4.08's description of the Conditional Exchange. (
Id., §§ 3.03, 3.05, 4.08.) Delaware corporate law similarly distinguishes between
voluntary transfers and automatic exchanges. Bernstein v. Canet, Civ. A. No. 13924,
1996 WL
-25-
342096, *6 (Del. Ch. Jun. 11, 1996) ("exchange" or "conversion" was not a "sale"
triggering anti-dilution rights); Shields v. Shields, 498 A.2d 161, 167 (Del. Ch. 1985) (
"The statutory conversion of stock in . . . a stock for stock merger ought not be construed
to constitute a sale, transfer or exchange of that stock."). These distinctions reflect the
obvious: The Conditional Exchange is not the same as a commercial securities sale and
should not be treated as though it were one.
of stock even without recordation of transfer). The Delaware Supreme Court has said
that constructive delivery suffices "when actual transfer of physical possession is
impractical," id. at 531—as it was here, where the urgency of the Conditional Exchange
could not await transfer of physical possession. In such instances, a purchaser enjoys the
right to demand that the issuer register transfer of a security. See 6 Del. C. §§ 8-307, 401;
Loretto Literary & Benev. Inst. v. Blue Diamond Coal Co., 444 A.2d 256, 259 (Del. Ch.
1982). Regardless of delivery, Plaintiffs have no right to the Trust Preferred Securities,
and JPMC and/or WMI may demand that the Trustee register JPMC as the owner.
Under the plain terms of the Trust Agreements and Delaware law, the
Trust Preferred Securities were effectively exchanged for WMI preferred equity. As the
Examiner said, this is a purely legal question (McIntosh Decl., Ex. 14K, p. 152), and
Defendants are entitled to summary judgment dismissing Count II. See Broadstripe,
2010 WL 3768003, at *16.
investors" that can purchase unregistered securities). It would lead to an impermissible "
absurd result" to apply this provision to an involuntary exchange back to WMI, but this
is precisely the absurdity Plaintiffs urge upon the Court. See Osbom ex reL Osborrt v.
Kemp, 991 A.2d 1153, 1160 (Del. 2010).
Count III reads disharmony into the Trust Agreements where there is
none. "Where a contract provision lends itself to two interpretations, a court will . . .
adopt the construction that . . . harmonizes the affected contract provisions." Axis Reins.
Co. v. HLTH Corp., 993 A.2d 1057, 1063 (Del. 2010). Plaintiffs read the QB3
-27-
restrictions (Trust Agr., § 3.05) to conflict with the Conditional Exchange provisions (
Trust Agr., § 4.08), because there could be times when WMI—the provided transferee in
§ 4.08—did not qualify as a QIB. (Comp1.91222.) But the Trust Agreements do not in
any way qualify the Conditional Exchange by reference to WMI' s status as a QIB at the
time the OTS declares an Exchange Event. Moreover, under Plaintiffs' construction, it is
when the Conditional Exchange was is likely to occur—in times of fmancial distress-
that a transfer to WMI would most likely violate § 3.05; it is difficult to see how the
TruPS would qualify as core capital if their availability to absorb losses at the bank was
constrained as Plaintiffs suggest. (See McIntosh Decl., Ex. 1E, p. 22 ("If a Conditional
Exchange occurs, it is likely to occur at a time when . . . WMI' s fmancial condition has
deteriorated.").) This supposed conflict is wholly artificial, and its result would be
absurd. Cf. Osborn, 991 A.2d at 1160. The Conditional Exchange is not a voluntary
commercial transfer, as explained supra, and so does not conflict with § 3.05's
restrictions an voluntary commercial transfers.25 Plaintiffs claim ambiguity where there
is none, and so Count III fails as a matter of law. See Worldwide Direct, 2010 WL
3435380, at *4.
§ 3.05.) But because the Conditional Exchange was as a matter of law an involuntary
25 For this reason, the fact that transfers to WMI are not expressly exempted from
the QIB provision is unsurprising, notwithstanding the Examiner's puzzlement (see
McIntosh Decl., Ex. 14K, p. 171): Because the QIB provision does not govern the
Conditional Exchange, there was no need for such an exception.
-28-
exchange, not a new sale of securities, it was not required to comply with Rule 144A' s
safe harbor.26 As such, Rule 144A's QIB rules governed private resale in the
secondary market, but not involuntary exchanges such as the Conditional Exchange.
D. The OTS Directive Was Authorized and Fully Effective (Count IV).
Plaintiffs' oddest theory—that the Conditional Exchange never occurred
because the OTS willingly assisted WMI in defrauding investors (Compl. 243)—also
fails as a matter of law. For one, Count IV is pleaded wrong from both ends: Plaintiffs
have no standing to bring it, and Plaintiffs have brought it against the wrong parties.
Plaintiffs have essentially conceded that they were not the investors whom WMI
allegedly defrauded, so this fraud claim is not theirs to pursue. And while Count IV aims
to invalidate the act of a federal agency by proving the OTS aided and abetted fraud,
Plaintiffs have not actually sued the OTS or properly sought to challenge the OTS' s
regulatory action. But even if Plaintiffs could somehow prove that the OTS had aided
and abetted a fi-aud (which they cannot), that would not affect the validity of the
Conditional Exchange at all.
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77 ("[T]he reliance of the Plaintiffs[[ is not relevant to this count [Count IV].").) Nor
could they, given that purchased their purported interests long after the
public armouncement of the Conditional Exchange, when the events underlying their
fraud claim were well known. (
.111) As a matter of standing, "a plaintiff may not normally enforce the rights of a
third party." St. Matthew's Slovak Rom. Cath. Congreg. v. Most Rev. Wuerl, 106 F.
App'x. 761, 765 (3d Cir. 2004) (citing Elk Grove Unif. Sch. Distr. v. Newdow, 542
U.S. 1, 12 (2004)); Fields v. Penn. Dept. of Corrections, Civ. A. No. 05-05897, 2006 WL
1285030, at *3 (E.D. Pa. May 5, 2006) (no standing where plaintiff based claim of relief
on violation of third party' s legal rights). Even looked at most generously, Count IV
attempts to enforce the rights of third-party investors who are not Plaintiffs, and thus fails
for lack of standing. And even if Plaintiffs could enforce the rights of those third-party
investors, their claims would be mere securities claims that would be subordinated if they
had been filed before the bar date and would be rejected here because they were not.
-30-
useful to parties in resolving conflict). In challenging the acts of federal agencies, "[d]
eclaratory relief is not available where Congress had explicitly provided a statutory
review scheme," Cost Control Mktg. & Mgmt., Inc. v. Pierce, 848 F.2d 47, 50 (3d Cir.
1988), including when Plaintiffs seek to set aside agency acts as ultra vires. See Solar
Turbines Inc. v. Seif, 879 F.2d 1073, 1077-78 (3d Cir. 1989). Congress has provided
only federal thrifts—to challenge OTS capital directives, see United Liberty Life Ins. Co.
v. Ryan, 985 F.2d 1320, 1328 (6th Cir. 1993), and this scheme precludes declaratory
relief. Nor have Plaintiffs attempted to comply with the Administrative Procedure Act, 5
U.S.C. § 706(2), which provides cause of action to set aside unlawful agency acts. Cf.
United Liberty Life Ins., 985 F.2d at 1327 (OTS capital directive was committed to
Here, Plaintiffs have not sued the OTS to set aside its directive, but sought
to void its acts through an "incidental legal determination" without the OTS's
participation. See Lujan, 504 U.S. at 569. Plaintiffs cannot obtain declaratory relief in
such a manner, and so they cannot invalidate the OTS's declaration of the Conditional
27 JPMC also believes that other grounds for dismissal of Plaintiffs' claims exist,
including that Plaintiffs' claims are barred by the Financial Institutions Reform,
Recovery, and Enforcement Act of 1989, Pub. L. 101-73, 103 Stat. 183 (1989) ("
FIRREA"), and that FIRREA bars any court in this district from exercising jurisdiction
over Plaintiffs' claims. JPMC does not waive any such additional arguments.
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3. The OTS Directive Is Not Ultra Vires
Because the OTS Acted Pursuant
to Statutory Authority under HOLA.
The Court need not decide the fraud elements to reject Count IV, because
even if Plaintiffs could somehow prove that the OTS had aided and abetted a fraud (
which they cannot), it would not affect the Conditional Exchange in the least. When the
OTS issued its directive, triggering the Conditional Exchange, it was exercising its
statutory authority under the Home Owners Loan Act, 12 U.S.C. § 1461 et seq. ("
HOLA"), and therefore was not acting ultra vires.
Ultra vires agency actions are those taken without, or contrary to,
statutory authority. See Transohio Savings Bank v. Director of OTS, 967 F.2d 598, 621
(D.C. Cir. 1993) ("Agency actions beyond delegated authority are ultra vires.'"); A-1
Amusement Co. v. United States, 48 Fed. Cl. 63, 67 (2000) (ultra vires means "either
explicitly prohibited or . . . outside the normal scope of the government officials' duties"
(quoting Del-Rio Drilling Programs Inc. v. United States, 146 F.3d 1358, 1363 (Fed. Cir.
1998))). Even tortious acts of a govemment agency are not ultra vires if the agency acts
pursuant to its delegated authority. See Larson v . Domestic & Foreign Commerce Corp.,
337 U.S. 682, 695 (1949); Centennial Assoc. L.P. v. FDIC, 927 F. Supp. 806, 812 (D.N.J.
1996) (finding, where FDIC exercised function assigned to it by statute, "it is irrelevant
whether the receiver exercised its statutory authority unwisely or even illegally").28
28 In Larson, the Supreme Court found that a federal officer' s breach of contract was
not ultra vires, because he acted pursuant to his authority to administer an assets sales
program, stating: "Ulf the actions of an officer do not conflict with the terms of his valid
statutory authority, then tlney are the actions of the sovereign, whether or not they are
tortious under general law," 337 U.S. at 695 (emphasis added); see also Del-Rio
Drilling, 146 F.3d at 1362 ("Merely because a government agent's conduct is unlawful
does not mean that it is unauthorized; a govemment official may act within his authority
even if his conduct is later determined to have been contrary to law.").
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Here, the OTS directive was authorized under HOLA because it was part
of an arrangement to maintain capital levels at WMB. The OTS Director has broad
authority to issue any order that she deems "necessary for carrying out" HOLA. 12
U.S.C. § 1462a(b)(2). HOLA specifies capital standards for savings and loan
associations and defines core capital. 12 U.S.C. § 1464(t)(9). HOLA further authorizes
OTS to ensure adequate capital maintenance by establishing minimum capital
requirements and "other such methods as the [OTS] Director determines to be
appropriate." 12 U.S.C. § 1464(s)(1)(B); see United Liberty Life Ins., 985 F.2d at 1326 ("[
Section 1464(s)] grants OTS the power to require savings associations to maintain
adequate capital, using any methods OTS determines to be appropriate."). The OTS
acted within the powers granted it by §§ 1462a and 1464(s) in directing the Conditional
Exchange because it determined the Conditional Exchange to be a necessary and
appropriate method for ensuring adequate capital maintenance. As such, the OTS's
declaration of the Conditional Exchange was valid and effective, Plaintiffs' fraud
claims
are irrelevant to the Conditional Exchange, and any factual disputes raised with respect to
these fraud claims are immaterial. See Worldwide Direct, 2010 WL 3435380, at *3 ("
Issues of fact are only considered material if their resolution potentially impacts the
outcome of the suit under governing law.").
instead dealt entirely with the disposition of the Trust Preferred Securities after outside
investors' interests in them had been terminated. As such, it can have no effect on the
validity of the Conditional Exchange. Defendants are entitled to summary judgment on
Count IV.
purchaser of the Trust Preferred Securities, have nothing to do with Plaintiffs' baseless
claim to own the Trust Preferred Securities. The Conditional Exchange is complete and
effective, and neither WMI's alleged unclean hands nor JPMC's status as a bona fide
purchaser affects the Conditional Exchange in the least.
Civ. A. No. 7:07-cv-59 (HL), 2007 WL 3333342, at *4 (M.D. Ga. Nov. 9, 2007). "Mn
determining the issue of clean hands, we look solely at the conduct of the plaintiff—the
one who seeks the aid of the chancellor—and not the conduct of the defendant."
Salomon Smith Barney Inc. v. Vockel, 137 F. Supp. 2d 599, 603 (E.D. Pa. 2000);
accord
Karpenko v. Leendertz, 619 F.3d 259, 265 (3d Cir. 2010) (Unclean hands "closes the
-34-
doors of a court of equity to one tainted with inequitableness or bad faith . . . however
improper may have been the behavior of the defendant." (emphasis added)). Thus
cognizable claim and are legally irrelevant to Plaintiffs' contention that they somehow
But beyond that, Plaintiffs' action is riddled with bad faith that would
preclude them from obtaining equitable relief on this or any other count. The entire
lawsuit is, in essence, a lottery ticket bought for pennies on the dollar in the remote hope
that Plaintiffs can persuade the Court to reverse the Conditional Exchange that occurred
long before they ever had an interest in what were, prior to that Conditional Exchange,
Trust Preferred Securities. (McIntosh Decl., Ex. 12A, pp. 4-5.) The extent of Plaintiffs'
insincerity is astonishing:
Defendants and Debtors' creditors, and their claims should be barred by laches. See
United States v. City of Loveland, Ohio, --- F.3d ----, 2010 WL 3565186, *7 (6th Cir.
converted their TruPS into WMI preferred equity since September 26, 2008. (McIntosh
Decl., Ex. 6C.) They could have intervened and asserted their claims in the adversary
proceeding between JPMC and WMI involving the TruPS, which commenced in March
2009. Instead, Plaintiffs sat on their claims as the parties crafted a delicate compromise
unaware that any party questioned the validity of the Conditional Exchange. (See id., Ex.
8A, p. 50.) Only after Debtors announced a Chapter 11 plan did Plaintiffs file their suit,
figuring the parties would pay them more rather than derail a settlement worth over $6
29 The Complaint cites, as examples of misleading representations, the Trust II, III
and IV Offering Circulars' favorable descriptions of the WMB loan portfolios. (Compl.
11 104-105, n.52-n.53 (citing McIntosh Decl., Ex. 1C, p. 60; id., Ex. 1D, pp. 49, 60; id.,
Ex. lE, p. 65).) But what these passages describe are the assets that Plaintiffs want to
reach through the TruPS. (See App'x. C.)
-36-
billion to Debtors' estate. (See id., Ex. 14F, p. 5;
With respect to Count VI, the question of whether JPMC is a bona fide
purchaser is a dispute regarding where the Trust Preferred Securities end up alter the
to the validity of the Conditional Exchange itself. See Worldwide Direct, 2010 WL
3435380, at *3 ("Issues of fact are only considered material if their resolution potentially
the Proposed Order attached to JPMC's Motion, granting summary judgment in JPMC's
favor on Counts I-IV and VI on the gound that Plaintiffs are not owners of the TruPS.
The following chart provides, for each section or topic listed below, corresponding page
numbers for each of the offering memoranda.