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IN THE UNITED STATES BANUPTCY COURTFOR THE DISTRICT OF DELAWARE

In re Chapter 11

WASHINGTON MUTUAL, INC, et al., 1 Case No 0812229 (MFW)

Debtors

)))

)))

Jointy Adinistered

) Related Docket Nos. 8672

867486758727878

THE OFFICIAL COMMITTEE OF EQUITY SECURITY HOLDERS' OPPOSITION

TO THE MOTIONS FOR LEAVE TO APPEAL FILED BY AURELIUS CAPITAL

MANAGEMENT L.P., THE OFFICIAL COMMITTEE OF UNSECURED

CREDITORS, APPALOOSA MANAGEMENT L.P., CENTERBRIDGE PARTNERS,

L.P. AND OWL CREEK ASSET MANAGEMENT, L.P. AND THE JOINDER FILEDBY THE DEBTORS

Dated Otober 14, 2011

ASHBY GEDDES, P.A. SUSMAN GODFREY L.L.P. SULLIVAN HAZELTINEWiia P Bowden (#2553) Stephen D Susan ALLINSON LLCGregory A Tayor (#4008) Seth D. Ard Wiia D Suian (#2820)Benjain Keenan (#424) 654 Madison A enue, 5th Foor 901 N. Market Street,Stay L. Newan (#5044) New York, NY 10065 Suite 1300500 Deaware Aenue, 8th Foor Wiington, DE 19801

P.O Box 1150 Parker C Fose, III Teephone: (302) 4288191Wiington, DE 19899 Edgar Sargent Fasiie: (302) 4288195Teephone: (302) 6541888 Justin A NesonFasiie : (302) 654206 1201 Third Ae, Suite 3800 Cocts CoCounsel for the

Seatte, WA 98101 Ocal Commttee ofEquDelaware Counsel to the Ocal Teephone: (206) 5163880 Secur Holders of WashngtonCommttee ofEqu Secur Fasiie: (206) 5163883 Mutual Inc. et al. as toHolders of Washngton Mutual Aurelus Captal ManagementInc. et al. and wth respect to the CoCounsel to the Ocal LP.Settlement Note Holders only as Commttee ofEqu Securto Centerbrdge Partners LP Holders of Washngton Mutual

Appaloosa Management LP and Inc et al.Owl Creek Asset ManagementLP.

Debtos in these Chapte 11 cases and the last fo digits of each Debto's fedeal taxidentication nmbes ae: (i) Washington Mtal, Inc. (3725) and (ii) WMI Investment Co. (5395).The Debtos ae located at 925 Foth Avene, Site 2500, Seattle, Washington 98104.

{00563843;v}

0812229111014000000000005

Docket #8811 Date Filed: 10/14/201



TBLE OF CONTENT

I. PRELIMINARY STATEMENT 2

II FAC UAL BACKGROUND 3

III ARGUMENT

A The Order Granting Standing T The Equity Cmmittee Is Nt Final ....... 7

B The Order Des Nt Meet The Strict Requirements Fr InterlcutryAppeal 9

1 The Debtrs Have Standing T Remedy Inequitable Cnduct By AnEstate Fiduciary . 10

2. Equitable Disallwance Is An Available Remedy In Bankruptcy 13

a Equitable Disallwance Cntinues T Be A Valid Remedy .. 13

b Travelers Des Nt Silently Abrgate Prir Supreme Curt Precedent 14

c The SNH's Miscnduct Falls Squarely Within TheDisallwance Thery 17

3. The Equity Cmmittee Is Nt Required T Plead Or Prve TheElements f Federal Securities Fraud ... ... .... ... ... .... ... ... .... ... ... ... .... .. 17

a The Equity Cmittee Has Pled Facts Demnstrating AFiduciary Duty .. 19

b The Equity Cmmittee Has Pled Scienter ... .. .. ... .. .. .. ... .. .. ... . 21

4. Authrizing Suit T Be Filed Against Owl Creek And AppalsaDid Nt Infringe Their Rights .... ... ... .... ... ... .... ... ... .... ... ... .... ... ... .... ... 24

5. The Bankruptcy Curt Weighed The Burdens And Benets f TheLitigatin 26

6. The Bankruptcy Curt Did Nt Establish A Per Se Rule RequiringEthical Walls .. 27



7 Appeal Of The Cur's Ruling On he Crrect Pst-Petitin Rate Of Interest Is Premature 29

CONCLUSION 29

ii



TBLE OF UTHORITIEPage(s)

CE

Adelphia Recove Trust v Bank ofAm A

390 BR 64 (SDNY 2008) 14-16

Chambers Dev Co Inc v Passaic Coun Utils Auth62 F3d 582 (3d Cir 1995) 25

Citicorp Venture Capital Ltd v Comm of Creditors Holding Unsecured Claims160 F3d 982 (3d Cir 1998) 11, 14, 18

Comm of Unsecured Creditors v Citicorp Venture Capital Ltd"In re Papercra Corp

253 BR 385 (Ba WD Pa 2000) 14, 18

Dewsnup v mm502 US 410 (1992) 16

Dirks v Ec,463 US 646 (1983) 19

GSC Partners CDO Fund v Washington368 F3d 228 (3d Cir 2004) 24

In re Adelphia Commc 'ns Corp2006 WL 1114054 (SDNY Apr 26, 2006) 7

In re Adelphia Commc 'ns Corp365 BR 64 (SDNY 2008) 14, 16

In re Amatex Corp55 F2d 1034 (3d Cir 1985) 7

In re Armstrong World Indus Inc

432 F3d 507 (3d Cir 2005) 8

In re Baltimore Emergency Servs II Corp432 F3d 557 (4 Cir 2005) 25

In re Coppereld Invs LLC421 BR 604 (Ba DNY 2010) 25

III



In re Frascella Enters Inc388 BR 619 (Ba. ED Pa 2008) 9

In re Outdoor Sports Headquarters Inc

168 BR. 177 (Ba SD Ohio 1994) 11

In re Pzer Inc Sec Litig538 F Supp 2d 621 (SDNY 2008) 21

In re Phila Newspapers418 BR 548 (ED Pa 2009) 9

In re Prosser2011 WL 2181619 (DVI June 3 2011) 9

In re SemCrude LP407 B.R 553 (D De1 2009) 9

In re Tile Outlet2006 WL 1716125 (SD Tex June 162006) 7

Kahn v Kolberg Kravis Roberts & Co LP2011 WL 2447690 (Del June 20 2011) ; 12

LFD Operating Inc v Ames Dep 't Stores Inc

274 BR 600 (Ba SDNY 2002) 20

Majer v Sonex Research Inc541 F Supp 2d 693 (ED Pa 2008) 21

Moran v Ocial Comm ofAdmin Claimants2006 WL 3253128 (ND Ohio Nov 82006) 7

Oursler v Women's Interart Ctr Inc170 AD2d 407 (NY App Div 1991) 20

Pepper v Litton308 US 295 (1939) 11 13 17 18

EC v Espuelas698 F Supp 2d 415 (SDNY) 21

iv



Travelers Casual & Sure Co. ofAm. v. Pac. Gas & Elec. Co., 549 U.S. 443 (2007) . ...... .... ... ... ....... ... ............... ....... 14 15

us v. Noland, 517 US. 535 (1996) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . 11

United States v . O'Hagen, 521 US. 642 (1997) ..... . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 4

TTUTE

11 U.SC. § 502(b) 15

28 USC § 158(a)(3) .9

OTHER

Private Securities Litigation Reform Act of 1995... . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23

Mark J Krudys, Insider Trading By Members Of Creditors' Committees - Actionable!, 44 DePaul L. Rev 99 (1994) ..... . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29

v



IN THE UNITED STATES BANKRUPTCY COURTFOR THE DISTRICT OF DELAWARE

In re ))))

))

Chapter 11

WASHIGTON MUTUAL, C, et ai.,J Case No 08-19 (MFW)

Debtors. Jontly Admnstered

)- Related Docket Nos. 8672

867486758727878

THE OFFICIAL COMMITTEE OF EQUITY SECURITY HOLDERS'OPPOSITION TO THE MOTIONS FOR LEAVE TO APPEAL FILED BY

AURELIUS CAPITAL MANAGEMENT L.P., THE OFFICIAL COMMITTEEOF UNSECURED CREDITORS, APPALOOSA MANAGEMENT L.P.,

CENTERBRIDGE PARTNERS, L.P. AND OWL CREEK ASSETMANAGEMENT,L.P. AND THE OINDER FILED BY THE DEBTORS

The Ofcal Commtee of Equty Securty Holders (the "Equty Commttee)

respectlly submts ths opposton to motons for leave to appeal ceran portons of the

Bankruptcy Cour's September 13, 011 Order (the "Order) Docket No 8613] and

Opnon (the "Opnon) Docket No 861] that were led by Appaloosa Management

LP. ("aloosa), Centerbrdge Partners, L.P ("Centerbrdge), Owl Creek Asset

Management, LP. ("Owl Creek) (Appaloosa, Centerbrdge, and Owl Creek led a jont

bref n suppor of ther motons for leave to appeal and are referred to collectvely as

"AOC) Docket Nos 8674, 8675], Aurelus Captal Management, LP. ("Aurelus and

collectvely wth AOC the "Settlement Note Holders or "SNH) Docket No. 867], and

the Ofcal Commttee of Unsecured Credtors ("Credtors Commttee) Docket No

877] and the jonder led by the Debtors [Docket No 8781].

Debtors in these Chapter 11 cases and the last for digits of each Debtor's federal taxidentication nmbers are: (i) Washington Mtal Inc (3725) and (ii) WMI Investment Corp.(5395) The Debtors are located at 925 Forth Avene Site 2500, Seattle Washington 98104.2 By agreement of the parties the Eqity Committee's deadline to respond to the motionsfor leave to appeal was extended ntil October 14, 2011

1



I. PRELIMINARY STATEMENT

The motions for leave to appeal seek prematre review, at a point when a

complaint has not even been led, of claims against four distressed-debt hedge nds (the

Settlement Note Holders) for trading in the Debtors' securities while in possession of

material, non-public information At this point, the Bakrptcy Court has done nothing

more than nd that these claims e colorable and authorized the Equity Committee to

pursue them in the name of the Debtors The Bankruptcy Court made this determination

based, in part, on several days of testimony conceing the hedge nds' prticipation in

condential settlement negotiations and their trading activities Both the legal basis and

the evidentiary support for these claims is unassailable, d the hedge nds' effort to

derail the litigation through this premature and unjustied inteocutory appeal should be

rejected

Evidence adduced at the hearing demonstrates that the SNH entered into

condentiality aeements with the Debtors in order to participate in the Debtors'

negotiations conceing settlement of multi-billion doll claims with JPMorgan Chase

Bank, NA ("JPMC). During those negotiations, which led to a $6 billion settlement for

the Estates within one year, JPMC made a seres of ever-increasing offers that would

have made several classes of the Debtors' securities whole The content of these

negotiations were never publicly disclosed hile in possession of this condential

information, e SNH acquired tens of millions of dollars worth of WMI securities in the

public bond mkets Not surprisingly, these acquisitions equently demonstrated that

the SNH were taking advantage of their knowledge to acquire bonds that would provide a

The Bptcy Cort transmitted Arelis' motion for leave to appeal to the DistrictCort on October 13, 2011, and AOC's motion for leave to appeal on October 14, 2011, prior tothe ling of this opposition. The motion for leave to appeal led by the Creditors Committee (aswell as the joinder led by the Debtors) has not yet been transmitted to the District Cort. Sincethe Eqity Committee sbmits this combined response in opposition to all three motions (as wellas to the joinder), it is being led in both the Banptcy Cort and the District Cort.



siicant prot if JPMCs most recent offer (or a stilleater ture offer) were

accepted. It is undisputed that the SNH stand to collect hundreds of millions of dollars in

prots on the steeply discounted WMI securities that they acquired aer the bkrptcy.

By seeking an immediate appeal and reversal as a matter of law, the hedge nds

e trying to establish legal insulation for a business model that depends on their ability to

exploit condential information obtained through the bankptcy system. No court

should sanction this misconduct. Appeal of the Bankrptcy Courts carelly-reasoned

decision should be denied, and the Equity Committee should be permitted to commence

their adversary case on behalf of the Debtors and proceed to discovery.

II. FCTUL BCKGROUND

Immediately aer Washinton Mutual Banks holding company parent WMI led

for bankruptcy protection on September 5, 008, hedge nds specializing in distressed

debt began acquiring large amounts of WMIs bonds. These sizable holdings allowed the

nds, either alone or in coalitions with other nds, to assume a prominent role in the

management of the bankrptcy, working closely with the Debtors professionals to

resolve major litigation on behalf of the Debtor and dra a plan of reorganization. At the

same time, at least four of these nds the Settlement Note Holders continued trading

the Debtors securities. Because their role in the Debtors affairs gave the SNH access to

non-public information bearing on the ultimate recovery ticipated by the Estates, this

trading activity constitted unlawl insider trading, or, at the very least, an inequitable

abuse of the hedge nds position in the management of the bankptcy

Much of the nonpublic information obtained by the SNH related to settlement of

the Debtors claims against JPMC and the FDIC WMIs bankruptcy had been

precipitated by the seizure of Washington Mutual Bank ("WMB) by the Ofce of Thri

3



Superision and the FDIC's almost simultaneous pre-arranged sale of substantially all of

WMB's assets to JPMC In the wake of the seizure d sale, ownership of a number of

multi-billion dollar assets were in dispute, inluding over $4 billion in deposits WMI had

with WMB, billions in tax rends, and an even eater amount of ollateral that had been

tied to seurities issued by WMI. In addition, WMI had tort laims against JPMC for

alleged ations that ontributed to the failure of WMB and for onspiring with other

potential bidders for WMB's assets No other assets or laims held by the WMI estate

even approahed the potential value of these disputes with JPMC, whih ultimately were

settled for an mount just shy of making all $7 billion-plus of WMI reditors whole

Intensive negotiations with JPMC began no later than Marh 009 a year before

the global settlement agreement ("GSA) with JPMC and the FDIC was announed

publily in Marh 010 During this year, as far as the publi was aware, the Debtors and

JPMC were loked in ontentious litigation. Complaints were led by both parties in the

Bankrpty Cour, and WMI also led suit against JPMC in Washington D.C The

Debtors sought and reeived authorization om the Cour to obtain disovery omJPMC

under Bankrpty Rule 004 and then near the end of 009 sought to expand the

disovery, but were denied permission to do that under Rule 004. The Debtors also

led a summary judent motion seeking ownership of the $4 billion in deposits, whih

JPMC opposed. The Bapty Court had heard oral argment on that motion, but had

not yet rled, when the GSA was announed

What the SNH knew, but the publi did not, was that during this apparently

litigious period the Debtors were onduting a series of negotiations with JPMC that

brought the two pies ever loser to reahing a deal. Beginning with the rst session at

whih aual terms were exhanged, whih ourred in early Marh 009 the Debtors

4



invied he NH o pricipe in negoiions The NH were invoved in or les

wre of he exchnge of erm shees on sever subsequen occsions hrough December

009 Two of he NH Apploos nd Cenerbridge conced JPMC on heir own

wihou he involvemen of he Debors nd exchged erm shees in Juy nd Augs

009, which becme he bsis for rher negoiions in which he Debors (ong wih

he NH) were direcy involved.

The srcure of he offers nd couneroffers in his negoiion woud hve been

pricurly informive for ny invesor rying o predic he uime recovery for he

Eses The pries did no simply offer or demnd boomline moun bu broke

down he erm shees ino he differen sses in dispue nd proposed resoluion for

ech Three of he sses hd vlue in excess of $4 bilion ech specicy he

deposis WMI climed o own WMB he x rends nd he coer for he so

cled "Trs Preferred securiies The erm shees reeced h he pries eed on

he ocion of he rs nd hird of hese lmos om he ouse: in Mrch 009,

subjec o resouion of oher ousnding issues boh JPMC nd he Debors eed h

he Debors were enied o he $4 bilion in deposis nd h JPMC woud ge he Trs

Preferred coer JPMCs inhouse counsel indiced in semen h ws given o

he NH h his division reeced JPMCs view of which eniy ws ikey o previ on

ech of hese cims in liigion

JPMC's concession on he deposi cim ws n enormous boon o he Eses.

This recovery one woud be very nery sufcien o sis he cims of WMIs senior

css of bonds Furher concessions by JPMC on he x rends nd oher iems s he

negoiions proceeded mde siicn recovery on junior bonds nd oher junior

securiies ook very ikey s wel

5



During the ajority of 2009, when they were privy to this settleent inforation,

the SNH continued very active trading in the Debtors securities. I order to participate

directly in settleent talks during two periods, March-April and Noveber-Deceber

2009, the SNH aeed either to restrct their trading or to erect ethical walls between

SNH participants in the negotiations and their trading desks. When these restrctions

expired, however, the SNH resued trading with no effort to insulate the trading

decisions o the inforation about the proess of settleent talks that they had

leed during the restricted periods. Even during the non-restricted periods, the SNH's

outside counsel paricipated in negotiations and obtained condential inforation o

the Debtors. Although the SNH now clai that the attoeys shared none of this

inforation with the, the Bankruptcy Cour rightly found this testiony dubious at

best.

The SNH's trading pattes support the notion that the nds were aking trading

decisions based on inforation leed in the settleent talks. Centerbridge and

Aurelius, for exaple, both bought large quantities of debt securities shorly aer each of

the restricted periods ended The classes of debt purchased by each reect knowledge of

what priority level of debt was likely to recover given e concessionsJPMC had ade in

the ost recent negotiations

The Equity Coittee has taken only liited discovery into the SNH's trading

activities. The Bankrptcy Court anted discovery under Rule 2004, but only into the

ount and tiing of actual trades ade by the SNH and the history of the JPMC

settleent negotiations. The Equity Coittee has taken no discovery into the SNH's

inteal analysis of their investent decisions and has only liited trading inforation.

Only one deposition has been taken of each of the Settleent Note Holders Despite

6



these limitations, the evidence that has been developed offers clear and detailed support

for the Equity Committees allegations that the SNH engaged in insider trading and the

Baptcy Courts nding that the Equity Committee has asserted "colorable claims

against the Settlement Note Holders

III ARGUMENT

A THE ORDER GANTING STANDING TO THE EQUITYCOMMITTEE IS NOT FINAL

The SNH and the Creditors Committee argue that this appeal should be heard as

of rit because the order anting standing to the Equity Committee (the "Standing

Order) is a nal order under the "exible d praatic interpretation of nality given

to orders in bakruptcy See eg., In re Amate Corp, 755 F2d 103, 039 (3d Cir

985)

Characterizing e Standing Order as nal stretches to the breaking point even the

"lexible standards goveing bankrptcy orders The Standing Order ntates a case, it

does not end one It does not nally resolve any partys rights, the size of any claim, or

any other disputed issue in the bankrptcy Not surprisingly, courts have repeatedly

found that orders anting standing are not nal and not subject to immediate appellate

review See e.g., Moran v. Ocal Comm. ofAdmn Clamants, 2006 WL 3253128, at

*2 (ND Ohio Nov 8, 2006), ad, 560 F3d 9 (6th Cir 2009); In re Tle Outlet, 2006

WL 71625, at *-5 (SD Tex June 16, 2006); In re Adelpha Commcns Corp., 2006

WL 11105, at *2 (SDNY Apr 26, 2006)

As the SNH acknowledge, Third Circuit courts consider four factors when

analyzing the nality of an order for purposes of appeal (1) the impact of the order on

the assets of the bankrptcy estate; (2) the necessity of rther fact-nding on remand to

the bankrptcy court; (3) the preclusive effect of the decision on the merits of subsequent

7



ltgaton; and (4 the theance of judcal economy. See In re Armstrong World

Indus Inc, 432 F.3d 507 5 (3d C. 2005 In the beng the SNH focus on the

st and fouth factos agung that the ode s nal because n the vew mmedate

appeal wll avod both estate ependtues on ltgaton and unnecessay cou tme.

(AOC B. at -2; Auelus B. at 7-8. Ths agument msapples the factos to a

dstoted pctue of ths ltgaton and the WMI baptcy

The cost to the estate of ltgatng the clams at ssue aganst the SNH wll not

have a mateal mpact on the estate. The Debto cuently pojects that t wll be

dstbutng assets woh ove $7 bllon to ts cedtos In ths contet even the ossly

ecessve estmates of "tens of mllons n ltgaton epenses suggested by the SNH s

not mateal. A moe ealstc estmate of those costs n the ange of $3 to $5 mllon s

even less scant By contast the amount n dspute s appaently ove $2 bllon

based on the face mount of the secutes potentally electng hundeds of mllons n

pots3 Cetanly ltgaton wth these stakes n the contet of a baptcy of ths sze

does not pesent the type of potental squandeng of estate assets that would just

teatng ths pelmnay ode as nal and antng mmedate appellate evew.

Judcal efcency pesents a no moe compellng case fo appeal. The ltgaton

aganst the SNH has been stayed by the Bankptcy Cout whle the ptes attempt to

medate a settlement but that medaton s scheduled to conclude by no late than ealy

Decembe and f t does not succeed n esolvng the clams ltgaton wll commence

(Opnon at 3839 Thus f an appeal s anted the ltgaton would be smultaneously

poceedng along pallel tacks n two couts the appeal n ths Cout and dscovey n

the Bauptcy Cout. Ths s not efcent but wastel And the SNH ae wong to

As of Octobe 5 2010 the S have not disclosed the ll amont of thei centholdings of secities.

8



suggest that the ounds they seek for reversa woud dentvey end the tgaton. A

number of the ssues they rase ncudng camed decences n the peadng on severa

ssues the Bankruptcy Court's aeged faure to baance the costs and benets of the

tgaton and the decson to aow cams to proceed aganst Ow Creek and Appaoosa

thou they were not named n the nta Compant attached to the Standng Moton are

a narguaby matters that coud be addressed and cured on remand.

None of the factors used to determne the naty of bankrptcy orders s

genuney satsed n ths case and ths appea cannot be heard on that bass.

B THE ORDER DOES NOT MEET THE STRICT REQUIREMENTSFOR INTERLOCUTORY APPEAL

Because the Order s not na t may be appeaed ony wth the permsson of ths

Court under 28 U.S.. § 58(a)(3). To ant an nterocutory appea ths Cour must nd

tree eements () that the appea addresses a controng queston of aw; () on whch

there s reasonabe ound for dsaeement; and () mmedate appea w materay

advance the bkruptcy. See e.g. In re Ph/a. Newpaper 48 B.R. 548 556-57 (E.D.

Pa. 2009); In re SemCrude LP. 407 B.R. 553 556-57 (D. De. 2009). The SNH and

Credtors Commttee have the burden of estabshng that a three eements have been

met here. In re Prer 20 WL 2869 at *2 (D.V.. June 3 20).

Even f the SNH and Credtors Commttee coud estabsh these eements and

they cannot nterocutory revew remans dscretonary. Leave to e an nterocutory

appea "s tsef an extraordny measure that s not ty anted. In re Fracea

Enter. Inc., 388 B.R. 69 623 (Bankr. E.D. Pa. 2008). The Dstrct Cour may reject the

appea because for exampe t woud prefer "to have a record before consderng the

dsputed ega ssue. In re SemCrude 407 B.R. at 557. n addton to the three

requrements e party seekng revew has the burden to demonstrate that exceptona

9



crcumsances exs Id.

No exceponal crcumsances jus mmedae appellae revew here The rghs

of credors oher han he defendans are no mplcaed, nor s he Debors' ably o

proceed wh plan conrmaon and reorganaon. The SNH are n he poson of

defendans who have los an nal moon o dsmss (more accuraely, a moon ha

precedes a moon o dsmss). Lke ohers n ha suaon, he SNH undoubedly feel

ha would be "more efcen f hey can ake a second sho wh her legal argmens

n an effor o have he case dsmssed pror o dscovery. Ye even he exsence of

poenally decsve legal ssues does no jus roune nerlocuory appeal of moons o

dsmss. Nor can he se conces jus nerlocuory appeal of he Bankrupcy

Courts prelmnary order auhorng hs adversary proceedng

The SNH and Credors Commee have assembled a hos of complans abou he

Bankrupcy Cours rulng. None of hese ssues s as conroversal as he SNH conend

and none juses he exraordnary relef of an nerlocuory appeal

1 The Debtors Have Standing To Remedy Inequitable Conduct By An Estate Fiduciary

The SNH nss ha no maer how eegous her msuse of he Debors'

condenal nformaon, he Debors lack sandng o manan hs acon In he SNHs

vew, he Esaes suffered no harm as a resul of he nsder radng, and so sandng

resdes only wh deauded credors. Ths argumen ores preceden n boh

bankrpcy cases and secures cases, boh of whch auhore an eny o brng an acon

agans a ducary ha has breached s dues by radng n secures whle n possesson

of maeral nonpublc nformaon.

The SNH nss ha under bankrpcy preceden a debor has no sandng o brng

a clam based on njury o credors. Case law addressng clams for equable

0



subodnaton and equtable dsallowance holds exactly the opposte. Indeed, one of the

elements of a clam fo equtable subodnaton s that "the msconduct must hae

esulted n njuy t the credtr o confeed unfa adantage on the clamant.

Ctcrp Venture Captal Ltd v. Cmm. f Credtr Hldng Unecured Clam 160

F.3d 982, 986 (3d C. 1998) (ctng u v Nland 517 U.S. 535, 53839 (1996»

(emphass added).

Equtable dsallowance dees om the same pncples and also allows the

debto to bng a clam to edess msconduct by one cedto, geneally a ducay, who

njued anothe. Fo exmple, the tcrp case cted n the pecedng paaaph

addessed clams that a ducay had abused ts poston by acqung the debto's

secutes based on nsde nfomaton. Id. at 986 (dscussng njues to cedtos

esultng om nsde tadng by a ducay). The Thd Ccut held that the debto had

standng to seek equtable subodnaton o dsallowance of the ducay's clams aganst

the estate on the bass of the nsde tadng. Id. at 991 n.7. Smlaly, n a case nolng

a majo cedto that had used ts nuence oe the debto to negotate loan tems that

dsadantaged othe cedtos, the cout found that equtable dsallowance was an

aalable emedy fo the debto. In re Outdr Sprt Headquarter Inc 168 B.R. 177,

181 (Ba. S.D. Oho 1994) (ejectng the defendant's summay judent agument that

equtable dsallowance s not aalable fo conduct that njued cedtos but not the

debto). Indeed, Pepper v. Lttn the Supeme Cout's semnal case on equtable

dsallowance, endoses the poposton that such clams ae a tool fo emedyng

msconduct by one cedto that ctmzes anothe. 308 U.S. 295, 311 (1939) (lstng

foms of nequtable conduct at may just subodnaton o dsallowance as ncludng

a ducay who "use[ s] hs powe fo hs pesonal adantage and to the detment of the

11



stckhlders and creditrs)

In the nnbankrptcy cntext, a crpratin has standing t bring an actin

against a dciary wh has engaged in insider trading even i the crpratin cannt

identi an injry that it has sered as a reslt Challenging this pint, Arelis claims

that there is n legal spprt r the Bankrptcy Crts assertin that the Debtr here

wld have had a deense t the SNHs claims tside bankrptcy (Arelis Br at 24)

Arelis is lat wrng Jst this past smer, the Spreme Crt Delawe issed an

pinin reinrcing the lngstanding principle that a crpratin may bring a claim

(knwn as a Brphy claim) against its wn dciary r insider trading Kahn v. Klerg

Krav Rert C LP. 20 WL 2447690 (Del Jne 20 201) The Crt held

specically that injry t the crpratin is nt a prereqisite r the claim, rejecting a

psitin taken by a lwer crt in the Pfeer decisin

We decline t adpt Pfeer' thghtl, bt ndly narrw,interpretatin Brphy and its prgeny We als disaee with the Pfeer crts cnclsin that the prpse Brphy is t "remedy harmt the crpratin In act, Brphy explicitly held that the crpratin didnt need t ser an actal lss r there t be a viable claimImprtantly, Brphy csed n preventing a dciary wrngder mbeing njstly enriched

We decline t adpt Pfeer interpretatin that wld limit the disgrgement remedy t a srpatin crprate pprtnity r caseswhere the insider sed cndential inrmatin t cmpete directly withthe crpratin Brphy was nt premised n either thse ratinalesRather, Brphy csed n the pblic plicy preventing njstenrichment based n the misse cndential crprate inrmatin

The rle, inveterate and ncmprmising in its rigidity, des ntrest pn e narrw nd injry r damage t the crpratinreslting m a betrayal cndence, bt pn a brader ndatin a wise pblic plicy that, r the prpse remving all temptatin,extingishes all pssibility prt lwing m a breach the cndence impsed by the dciary relatin

Id. at *6

Ths, there is ple legal athrity in bankrptcy and in secrities cases r the

2



Debors, and, derivaively, he Equiy Commiee, o asser claims agains he SNH based

on he use of nonpublic informaion o ade in he Debors' securiies

2. Equitable Disallowance Is An Available Remedy InBankuptcy

The Crediors Commiee, among ohers, arge a lengh ha equiable

disallowance is no an available remedy Their argmens are hreefold: (i) he Supreme

Cour, he Third Circui, and he Adelpha Disric Co incorrecly recoized e

validiy of he equiable disallowance remedy (ii) he Supreme Cour's decision in

Traveler ' implicily abrogaed u lenc prior Supreme Cour preceden recoizing

disallowance as a remedy and (iii) prior Supreme Co preceden is disingishable or

he reasons explained a lengh in udge Walrah's Opinion and below, none of hese

argmens has any meri

a. Equitable Disallowance Continues To Be A ValidRemedy

In Pepper v Ln, he Supreme Cour explicily found ha where an insider is

gily of a "violaion of rules of fair play and good conscience, ha may be a sufcien

consideraion o invoke equiy o disallow he insider's claims 308 US a 311. In

reaching ha conclusion, e Cour noed ha a duciary "canno serve himself rs and

his cesuis second, and in paricular, "canno uilize his inside informaion and his

sraegic posiion for his own prefermen I The Cour wen on o hold

Id

[The credior] canno use his power for his personal advanage and o he derimen of he sockholders and crediors no maer how absolue inerms ha power may be and no maer how meiculous he is o saisechnical requiremens or ha power is a all imes subjec o he equiable limiaion ha i may no be exercised for he agandisemen,preference, or advanage of he duciary o he exclusion or derimen of e cesuis Where here is a violaion of hose principles, equiy will undohe wrong or inervene o preven is consummaion

3



More recentl the Thrd Crcut ha held that where an nder ue nde

nfoaton to purchae a debtor' clam at a dcount wthout pror dcloure "[a]t a

mnmum the remed [] hould deprve [the nderducar] of t prot on the

purchae of the note and eprel declned to "endore the dtrct court'

concluon that t wa "wthout authort to fahon a dallowance remed' f needed

to compenate the debtor' etate See Ctcrp 160 F3d at 991 & n7 Cmm. f

Unecured Credtr v Ctcrp Venture Captal Ltd (In re Papercra Crp.) 253

BR 385 (Bankr WD Pa 2000) (on remand rher reducng nder' clam to account

for addtonal admntratve epene profeonal fee lot nteret and other cot)

Fnall n the mot epanve dcuon of th topc n recent ear the

Adelpha Bankruptc and Dtrct Cour concluded that "equtable dallowance

peble under Pepper" and t progen even aer the paage of the Bankruptc

Code Adeha Recve Trut v. Bank fAm. 390 BR 64 76 (SDNY 2008)

(quotng and ang In re Adeha Cmmcn Crp. 365 BR 24 7173 (Bankr

SDNY 2007))

b Tavl Des Nt Silently Abrgate Prir SupremeCurt Precedent

Notwthtandng th precedent whch udge Walrath dcued and endored the

Credtor Commttee among other argue that equtable dallowance doe not et a

a remed under the Bankruptc Code In parcul thoe eekng leave to appeal arge

that under Traveler Caual Sure C. fAm v. Pac. Ga Elec. C. 549 US 443

(2007) a cour ma not equtabl dallow a clam becaue nequtable conduct not one

of Secton 502(b)' nne enumerated ound for dallowng clam (OC Br at 2627

urelu Br at 3738) The SNH alo arge that the leglatve htor of Secton 510

relatng to equtable ubordnaton uppor ther agument becaue language about the

14



ourt's power to disallow laims was dropped before the nal version of the Code was

enated. These argments were onsidered and rejeted by Judge Walrath and the

banpty and distrit ourts in the Adelpha banpty litigation

First, Judge Walrath and the distrit ourt in Adelpha orretly noted that

Traveler did not purport to overtu Pepper v Lttn lear holding that equitable

disallowane is available under the appropriate irumstanes as a remedy for inequitable

ondut Adeha 390 BR. at 76 ("Nor does the Supreme Cour's reading of USC

§ 502(b) in [Traveler] suggest the abandonment of Pepper v Lttn"). Rather,

Traveler more narrowly held that the so-alled Fan rle, a judge-made rle in the

Ninth Ciruit relating to attoey's fees, was not a viable ound for disallowane under

Setion 502(b). Traveler 549 US at 45-52 There was no allegation of inequitable

ondut in Traveler nor any appeal to the banpty our's equitable powers Indeed,

when the parties attempted to arge that other equitable priniples beyond the Fan

rle might support disallowane, the Court delined to reah the question beause it was

not briefed below Thus, the Cour "expressed] no opinion with regard to whether,

following the demise of the Fan rle, other priniples of banpty law might

provide an independent basis for disallowing Travelers' laim for attoey's fees I at

456. Given that the Supreme Court did not reah other equitable ounds for disallowing

the attoeyfee question in ont of it, the deision annot be read to prelude equitable

disallowane theories, suh as this one, that did not even touh on any issue in ont of

the Court. As Judge Walrath indiated, the narrow holding of Traveler simply has

nothing to do with this ase (Opinion at 3 (haterizing Traveler as "holding that

Banpty Code does not b ontratual laim for attoeys' fees inurred during

banpty ase beause it was not disallowable under one of the nine exeptions to

5



dsallowance under secton 502()))

Second, contrary to the SNH's arguments here, the absence of statutory language

addressng dsallowance s not tantamount to a clear rejecton of the remedy. Indeed, the

dstrct court n Adelpha noted that, n decdng to drop the langage om the nal

enactment, "Coness could have decded to do away wth equtable dsallowance, or t

could have thout specc reference to t was superuous. Adelpha, 390 BR. at 76

Thrd, n consderng the vablty of equtable dsallowance, the bankruptcy court

n Adeha noted that the leslatve hstory of Secton 510 of the Bankrptcy Code

speccally acknowledges the estence of dsallowance as an approprate remedy:

Ths secton s ntended to cod case law, such as Pepperv.

Lttn . . ,and s not ntended to lmt the courts power n any way . . Nr deth uectn preclude a anuptcy curt frm cmpletely dallwng aclam n apprprate crcumtance.

Adelpha 365 BR. at 71 (quotng legslatve hstory) The cort noted that s

legslatve hstory s persuasve n lt of the absence of clear drecton n the

Bankrptcy Code tself I Because of the lack of legslatve hstory to the contrary, the

Adelpha cours followed longstandng jursprdental practce of assumng that preCode

practces survved the enactment of the Code absent strong ndcatons to the contrary

See eg. Dewnup v. Tmm 502 U.S. 410 419 (1992) ("ths Cour has been reluctant to

accept argments that would nterpret e Code, however vage the parcular language

under consderaton mght be, to effect a major change n preCode practce that s not the

subject of at least some dscusson n the legslatve hstory).

4 The S arge that Adelphia is wrongly decided merely because the bakrptcy courtlooked to the legislative history of the statte This is a odd argument from parties whothemselves use legislative history to make their argument to the contrary (See AOC Br at 28)

Nevertheless, their argument is wrong The court inAdelphia reasonably looked to other non statutory sources given at the statute is silent on the issue of whether equitable disallowance is aviable remedy The SNH's argment that the statute is clear on its face is misleading, given thatthe Code simply does not expressly address equitable disallowance either way

16



c The SNH's Misconduct Falls Squarely Within TheDisallowance Theory

here is no meri o he suggesion ha, if equiable disalloance is a viable

remedy and if he SNH raded on maerial non-public informaion in violaion of a duy

no o, he facs in his case do no fall ihin he parameers of radiional equiable

disalloance heory In describing he equiable disalloance remedy in Pepper, he

Supreme Cour explicily found ha here an insider is gily of a "violaion of les of

fair play and good conscience, ha may be a "sufcien consideraion o invoke equiy

o disallo he insider's claims 308 US a 311 In reaching ha conclusion, he Cour

noed ha a duciary "canno uilize his inside informaion and his sraegic posiion for

his on prefermen Id ha is exacly ha happened here

3 The Equity Committee Is Not Required To Plead Or ProveThe Elements Of Federal Securities Fraud

he SNH devoe larg secions of heir brieng o argmens ha various

elemens of a federal securiies la violaion canno be me in is case hese argmens

are ndamenally misguided In assuming ha he Equiy Commiee's complain mus

sricly adhere o he echnical requiremens for pleading federal securiies aud, he

SNH iore he fac ha he Equiy Commiee has alleged a claim for equiable

disalloance, no a securiies claim As he Bankrupcy Cour observes, he securiies

las provide guidance and demonsrae he seriousness of he conduc a issue (Opinion

a 117) here is no, hoever, any absolue legal requiremen ha he inequiable

conduc proved in hese cases conform o every elemen of a sae or federal securiies

la violaion

he Bankpcy Cour as cononed ih he folloing undispued facs

(a) he SNH acquired large quaniies of WMI's deb securiies a deeply discouned prices, a leas parly ih he inen of using heir large posiions o insinuae hemselves ino he managemen of he WMI esae

17



(b in conjunction with their invovement with the estate, the SNHparticipated in negotiations to sette, on the estate's behaf, muti-biiondo caims against JPMC during which siicant concessions were made by both sides that were not known to the pubic;

(c the SNH traded in WMI's securities, both by buying and seing whie in possession of materia information about these settement taks that had

not been discosed to the pubicEven if this course of conduct did not constitute a "coorabe vioation of the

federa securities aws and it does, as expained more y beow it is unquestionaby

a "coorabe abuse of the bankrptcy process about which the Bankrptcy Court was

justiaby conceed Inequitabe conduct is not conned to conduct that constiutes a

federa crime If, as suggested by these facts, certain power creditors have been abe to

expoit condentia information they obtained in the bakrptcy to take advantage of

other esspower, and esswe-informed, parties-in-interest, and if the Debtors' own

professionas were compicit in the scheme that aowed this to happen, there is no doubt

that a remedy punishing the wrongdoers is a egitimate exercise of the Bankrptcy

Cour's equitabe authority See e.g. Pepper 308 US. at 3; Ctcrp 60 F.3d at 99;

In re Papercra 253 BR. 385

Athough it is not essentia to the Equity Committee's caims or to the Bankrptcy

Court's nding that those caims are coorabe, the aegations in the Compaint are

sufcient to state a caim for insider trading under the federa securities aws The SNH

arge that two of the eements cannot be satised as a matter of aw. First they insist that

they owed no duty to other securities hoders to reain om trading when in possession

of materia, nonpubic information Second, they argue that they acked the requisite

scienter. Neither of these argments is persuasive, even assuming that federa securities

aw goves these caims With respect to each of these eements, the Bankptcy Court

reied on we-estabished federa securities precedent to nd coorabe caims of

8



misconduct.

a The Euity Committee Has Pled Facts Demonstrating AFiduciary Duty

The SNH insist that the Bankrptcy Court committed an error of law in nding

that they had a duciary duty to the Debtors in conjunction with the negotiation of the

Global Settlement According to the SNH, they were acting solely in their own interest

and, because their relationship was goveed by a contract, e the condentiality

agreements, they could not have assumed duciary duties as a matter of law This

gment fails to acknowledge the nature of the role played by the SNH and misconstres

federal securities case law on "temporary insiders

The SNH's claim that they were acting solely in their own interest does not stand

up to scrtiny They were involved in negotiations with JPMC at times negotiating on

their own without the involvement of the Debtors' professionals in order to settle

claims on behalf of the Debtors, not on behalf of themselves Any concessions they

made or benet they obtained would impact all of the Debtors' constituents, not only

themselves Most importantly, any information they received as part of this process,

whether om the Debtors' professionals or om JPMC, was given to them in order to

rther the Debtors' interest in settlement (om which the SNH would benet only

indirectly), not to give the SNH a leg up in their trading decisions.

This situation ts the denition of a "temporary insider perfectly Under the

relevant case law, "temporary insiders are corporate outsiders who "have entered into a

special condential elationship in the conduct of the business of the enterprise and are

given access to information solely for corporate puoses Dr v Ec, 463 US

646, 655 nl4 (1983. The SNH entered into such a relationship expressly by siing

condentiality aeements in order to participate in settlement negotiations Under the

19



tes of these aeements the SNH were being given access to condential infoation

"for the limited purpose of Participt's paicipation in negotiations among the Debtors

the [FDIC]JPMorgan Chase & Co

Repeating an argment that failed to persuade the Bankruptcy Court Aurelius

tries to argue that the temporary insider doctrine applies only to "those who actually

become insiders such as lawyers and accountants. (Aurelius Br at 29) It is not clear

why Aurelius believes an accountant "actually becomes an insider but it and the other

SNH did not The point of the temporary insider doctrine is that individuals who are not

traditional insiders (e who are not employees) but who are given access to

condential inteal infoation in order to advance the interests of the corporation

cot then use that infoation to disadvantage securities holders to whom any insider

owes a duciary duty. This doctrine prevents accountants who have ely access to

eaings infoation om trading based on that infoation And on the same principle

it prevents Aurelius which had early access to JPMC settlement infoation om

trading based on that infonation There is no meaningl distinction between these

sitations with respect to the policy that the securities laws were intended to advance

Aurelius also arges that under New York law "the existence of an a's lengh

contract prevents the foation of a duciary relationship. (Aurelius Br. at 28 (citing

LFD Operatng Inc v Ame Dep 't Stre Inc 274 B.R 600, 626 (Bankr. SD.NY

2002)). The case holds nothing of the kind stating instead only the unremarkable

proposition that an arm's length business transaction does not necessarily establish a

duciary relationship Ame Dept Stre Inc. 274 B.R. at 626 (quoting Ourler v

Wmen ' Interart Ctr Inc. 170 AD2d 407, 408 (N.Y App. Div 1991) (holding that

"[ a] conventional business relationship without more does not become a duciary

20



reationship by mere alegation)) Aureius absurd reading of these cases woud mean

that even attoeys and accountts ack duciary obigations since those reationships

too are typicay founded on armsengh contracts Where a contract gives an outsider

access to condentia, inside information in order to advance a corporate purpose, that

contract estabishes temporary insider stats The Bankrptcy Courts ndings e

perfectly consistent with this ongsetted egal principle and there is no justication

whatsoever for an etraordinary interocutory appea to reconsider the issue

b. The Equity Committee Has Pled Scienter

Liability for federal securities aud under Section 10b)5) requires proof that the

misrepresentation or omission at issue created a danger of miseading buyers and seers

that was either known to the defendant or that is so obvious that the defendant must have

been aware of it See e.g. Majer v. Sonex Research Inc., 541 F Supp 2d 693, 709

ED Pa 2008) To raise a strong inference of scienter based on reckessness, securities

aud plaintiffs must aege conduct that is highly unreasonable and represents an etreme

deparure om the standards of ordinary care In re Pzer Inc. Sec. Ltg., 538 F Supp

2d 62, 636 SDNY 2008) Direct evidence of a defendants state of mind is

understood to be rey avaiabe and is not required; scienter is most equenty

estabished through circumstantia evidence See e.g. Ec v Espuelas, 698 F Supp

2d 45, 426 SDNY 2010) holding that scienter can be proved either through facts

showing that the defendant had motive and opportunity to commit aud or other

circumstances showing a strong inference of conscious misbehavior or recklessness)

In the decision beow, the Bankrptcy Cour found that the Equity Committee had

ped a coorabe claim of scienter based on severa aegations First, the Baptcy

Court noted the amount and siicance of the nonpubic information in the SNHs

21



possession. he settlement negotiations with JPMC focused on the most siicant and

valuable assets of the estate, and aeements between the parties on various components

of the settlement were, on their own, sufcient to make senior classes of WMI securities

whole. his information was so obviously material that any investor, paricularly a

sophisticated player in the distressed debt markets, who claims otherwise raises serious

doubts about his or her credibility.

Contrary to representations in Aurelius' brief, however, the materiality of the

information in the SNH's possession was not the only circumstantial evidence of scienter

considered by the Bankruptcy Court. he SNH's own buying pattes ve strong

suppor for the allegation that the SNH understood the siicance of the settlement

negotiations and therefore also understood the unfair advantage they had over sellers who

were not privy to the same inforation. Immediately aer the expiration of the lockup

periods, several of the SNH stared acquiring large quantities of bonds, equently in

classes that were most likely to be impacted by settlement concessions that had been

made in the most recent round of talks.

he SNH contend that at least some of these purchases may be explained by other

factors. hese explanations do not stand up to scrutiny, as the Equity Committee

demonstrated at the evidentiary hearing. For example, the SNH contend that May 2009

purchases of securities were driven by the Debtors' public disclosure of the amount of a

tax rend. But this tax rend was disclosed on April 30th and Aurelius, who was not

restricted during this period, did not begin acquiring siicant quantities of subordinated

securities until May th By that time, of course, the market had completely absorbed

any increase in value attributable to the tax rend. But what the market had not

absorbed was the condential information about JPMC settlement talks, information that

22



Aurelius was rs able o ake ino accoun in is rading decisions on ha ery day (bu

which was sill no disclosed o he public a large)

Addiional circumsanial eidence of sciener is proided in he SNH's own

ineal policies on insider rading These policies make a number of poins esablishing

he maerialiy of he non-public inforaion a issue here and hus demonsrae ha he

SNH were awe ha rading wihou disclosing he informaion was decepie For

example he policies emphasize ha negoiaions for siican deals such as mergers

need no be nalized o be maerial and ha een preliminary sages of negoiaions may

be relean o marke paricipans if he deal is of sufcien maiude This policy

gidace (which racks he securiies laws) no only demonsraes ha he SNH

undersood he siicance of he non-public informaion hey had i calls ino quesion

he credibiliy of heir winesses a he eideniary hearing each of whom disclaimed he

maerialiy of he JPMC negoiaions because he ers were no nalized This dubious

esimony is iself rher eidence ha he SNH no only did somehing wrong hey

knew i and are now rying o excuse or coer i up (See Opinion a 137 (nding he

SNH's esimony ha heir aoeys were no sharing condenial informaion abou

selemen alks lacking in credibiliy))

Aurelius argues ha he Bankrpcy Cour erred in failing o employ an analysis

of sciener required by he Priae Securiies Liigaion Reform Ac of 1995 (PSLRA)

(Aurelius Br a 31-32) Een if i were re his argmen is irrelean The Equiy

Commiee's proposed Complain does no plead a cause of acion for federal securiies

aud and so need no sais he pleading requiremens for such a claim

The SNH also insis ha sciener canno be demonsraed because he Debors'

professionals auhorized he nds o resume rading knowing ha he deails of he

23



settlement discussions had not been disclosed AOC insists that the uity Committee

cannot demonstrate the necessary deception because the Debtors' authorization of trading

shows that they were not deceived. (AOC Br at 31) This argument misses the point that

it is not the Debtors' professionals who are the victims of the deception at issue but other

WMI securities holders. See GSC Partners CDO Fund v Washngton, 368 F d 228 239

(3d Cir 2004) (holding that recklessness is shown by a departure om the ordinary

standard of care that "presents a danger of misleading buyers or seers" (emphasis

added)).

AOC's citation to the Supreme Court's opinion in the 0 'Hagan case is off-point

That case addressed a misappropriation claim which involves a duty to the source of the

information not an insider or temporary insider claim such as is one which involves a

duty to the entity's investors See Unted States v O 'Hagen, 521 US 642 652 655

(1997) (distinguishing between classical insider liability based on a duty to investors and

misappropriation liability based on a duty to the source of the information and holding

that misappropriation cannot be found when the source of the information authorizes its

use)

For its part Aurelius relies upon the Debtors' awareness of the SNH's trading

activities as factual evidence that "undercuts evidence of scienter (Aurelius Br at 32)

The Bankruptcy Court considered this evidence and rejected it (Opinion at 134-35) At

most Aurelius has only identied a piece of evidence that it believes weis against the

Bankruptcy Court's conclusions This evidentiary dispute is no grounds for appeal

certainly not for the immediate interlocutory appeal sought by the SNH

4 Authorizing Suit To Be Filed Against Owl Creek AndAppaloosa Did Not Infringe Their Rights

Appaloosa and Owl Creek gue that the Bkruptcy Court's authorization of the

24



ling of a complaint against them fails to comport with due process because they were

not given sucient notice and oppounity to oppose such an action. There is no legal or

factual basis for this claim whatsoever. Granting interlocutory appellate review of this

issue would be a pointless waste of resources, and the issue cerainly cannot suppor a

motion for leave to appeal an interlocutory order.

First, there is no legal support for the notion that Owl Creek or Appaloosa had a

due process right to oppose the ling of a complaint. Of course, suits are led constantly

in our legal system against defendants who have been given no oppornity to "oppose

the ling. Nothing in the Bankrptcy Cour's Opinion and Order deprives Owl Creek or

Appaloosa of any of the due process protections afforded defendants in any other federal

court litigation. AOC relies on a case holding that the entry of udent without an

opporunity to be heard constittes error. (AOC Br. at 37 (citing Chambes Dev. Co.

Inc. v. Passac Coun Ut/s Auth., 62 F.3d 582, 584 n.5 (3d Cir. 995. Of course,

entry of udent is not equivalent to an order autorizing suit to be led, and this case is

utterly off point.

Because this suit will be led by the Equity Committee acting on behalf of the

Debtor in a bankrptcy, a motion for leave to proceed was required. But the purpose of

this requirement is not to protect defendts om having to defend the claim, it is to

protect debtors om having to nd baseless litigation. See e.g. In e Baltmoe

Emegency Sevs Cop., 432 F.3d 557, 563 (4th Cir. 2005; In e Coppeeld Invs.

LLC 42 B.R. 604, 609 (Bankr. E.D.N.. 200.

Moreover, Owl Creek and Appaloosa were on ample notice that claims might be

led against them for insider trading, and the Cour's decision to authorize suit was based

on an extensive record about their trading practices The Equity Committee indicated

25



bth befre and aer the evdentary hearng that t was reservng ts rght t pursue

clams aganst Owl Creek and Appalsa (Equty Cmmttee Standng Mtn [Dcket

N 8179] at 7) Certanly the Bankrptcy Curts questn t cunsel fr the Equty

Cmmttee at psthearng ral gment abut whether the Cmmttee ntended t lmt

ts sut t the ther SNH wuld have put Owl Creek and Appalsa n ntce that the

Bankruptcy Curt was cnsderng authrzng the clams

Fnally and mst mprtantly evdence supprtng the clams aganst Owl Creek

and Appalsa s mre than sufcent t sustan the clams n the same bass as thse

aganst the tw ther SNH. When decdng t authrze the clams the Bankrptcy Curt

had the benet f fur days f testmny n the nsder tradng allegatns ncludng

hurs f testmny by representatves f bth Owl Creek and Appalsa The Curt als

had hundreds f pages f pst-tral breng (ncludng brefs led by Owl reek and

Appalsa) much f whch addressed the merts f the nsder tradng allegatns The

Bankrptcy Cur undubtedly cncluded fr gd reasn at prceedng aganst all

fur Settlement Nte Hlders m the utset wuld be mre efcent and less

burdensme n the Estates than prceedng aganst nly tw wth the lkelhd that tw

mre suts wuld be led at a later date Gven the verwhelmng recrd evdence

supprtng the clrablty f the clams there s n dubt that reversal n ths ssue

wuld be an empty exercse leadng nly t the entry f a secnd rder authrzng the

same ltgatn

5 The Bankruptcy Court Weighed The Burdens And Benets OfThe Litigation

The SNH cntend that the Bankrptcy Curt's decsn must be reversed because

the Cur faled t cmpare the burdens f the ltgatn t the ptental benets

Remarkably n makng ths argment the SNH cte t the very sectn f the Opnn

26



where the Court makes t cear that t has performed precsey ths anayss (Aureus

Br at 384 (ctng Opnon at 38» Indeed, n consderng ths queston, the Court ctes

most f not a of the "burdens descrbed by the SNH, ncudng costs to the estate and

deay n resouton of these cams (Opnon at 38 Aer consderng these factors, the

Bankruptcy Court concuded that the potenta burdens are sufcenty substanta that t

woud order the ptes to medate n an attempt to resoe the cams pror to tgaton,

but not so substanta that t woud precude the tgaton atogether (. Apparenty,

athough the concuson of the baancng anayss s perfecty cear on the face of the

Opnon, the SNH seek reersa because of the Bankruptcy Cours omsson of expct

anguage aong the nes of "I hae weghed the costs and benets of tgaton But

there ae no magc words that a Bankruptcy Court must repeat n order to satsfy ths

requrement The Opnon ctes the test, dscusses the factors, and then reaches a

concuson Grantng appeate reew of ths ssue woud be a rdcuousy technca and

pontess exercse, and the SNHs argument does not remotey approach the

"extraordnary showng necessary to ust nterocutory appea

6 The Bakruptcy Court Did Not Establish A P S RuleRequirig Ethical Walls

The SNH and Credtors Commttee nsst that the Bankruptcy Court has erected a

new er se rue barrng credtors n bankruptcy om parcpatng n settement

negotatons uness they hae erected an ntea ethca wa and mantan t throuout

the pendency of the case Ths s a oss msreadng of the Opnon Frst, despte the

undsputed oaton of ths supposed er se rue, the Bankruptcy Cour has not entered

udent aganst the SNH for nsder tradng It has ony found that cams for nsder

tradng are coorabe and may be tgated If a er se rue were the Bankruptcy Cours

ntent, the rher dscoery d tgaton antcpated by the Cour woud not be

27



necessary as liabiliy wold already hae been proen

ead in conex, he inen of he Bankrpcy Cor in his secion of he Opinion

is clely no he noel rle ha he SN sgges The Cor was responding o an

argmen by he SN ha a nding of insider rading in his case wold chill credior

inolemen in bankrpcy proceedings and selemen negoiaions in pariclar

(Opinion a 13738) The Cor poins o ha crediors inolemen in selemen alks

and oher affairs of he debor wold be ee of any risk if he crediors esablish ehical

walls. .). The Cor did no nd ha he failre o mainain sch a wall esablishes

liabiliy, as a per se rle wold reqire, only ha he failre o mainain he wall has he

potental o expose crediors o maerial, non-pblic informaion, and hs he potental for insider rading liabiliy. In oher words, if he risk of insider rading liabiliy wold be

o chill crediors williness o paricipae in he bakrpcy, hen he crediors can

easily remoe ha chill by erecing and mainaining an ineal ehical wall beween he

bankrpcy and he raders.

In essence, he Bakrpcy Cor held nohing more srprising or conroersial

han ha crediors who obain access o condenial informaion abo a pblicly raded

debor may be sbjec o insider rading liabiliy Indeed, i is he SN who hope o

esablish a per se rle, a rle ha wold permi hem and many ohers like hem o

conine o rade in pblic secriies markes wih impniy while in possession of

condenial informaion abo a debor, no maer how siican or maerial ha

informaion happens o be. By insising ha hey e inslaed, as a maer of law, om

scriny for insider rading, he SN seek absole proecion for a bsiness model based

on heir abiliy o obain condenial informaion om a debor and hen rade in a less

well-informed marke. Arbirage of his informaion gap nqesionably iolaes he

28



intent of the securities laws and constitutes an inequitable abuse of the bankrptcy

process as coentators have waed See Mark J rdys Inder Tradng By

Member O redtor ' ommttee - Actonable! 44 DePaul L Rev 99 142 (1994)

Contrary to the alaist rhetoric in the SNHs briefs the Bankruptcy Court's Opinion in

this case is not a threat to the intety of the bankrptcy syste it is instead a substantial

step in the direction of restorng that inteity.

7 Appeal Of The Court's Ruling On The Correct Post-PetitionRate Of nterest s Premature

In addition to the issues in the portion of the Opinion anting standing to the

Equity Coittee Aurelius also seeks leave to appeal the Bkrptcy Court's ruling that

post-petition interest on the clais in this bankruptcy will be paid at the federal judent

rate Appeal of this issue is preatre because no plan has been conred and no nal

order has yet been entered on payent of clais or post-petition interest This portion of

the Bankrptcy Courts Opinion does not constitute a nal order appealable as of right.

Nor can Aurelius satisfy the requireents for an interlocutory appeal

IV. CONCUSON

For these reasons the otions for leave to appeal led by Aurelius AOC and the

Creditors Coittee should be denied

29



Dated: October 14 2011Wlmngton Delaware

ASHBY GEDDES, PA

s Wllam P Bowdn

Wll P Bowden (DE Bar No 2553)Gregor A Talor (DE Bar No 4008)Benjn Keenan (DE Bar No 4724)

Stac L Newm (DE Bar No 5044)500 Delaware Avenue 8th Floor PO Box 1150Wlmngton DE 19899Telephone: (302) 6541888Facsmle (302) 6542067

Dlawar Counsl to th Ocal Commtt ofEqu Scur Holdrs of Washngton MutualInc t al and wth rspct to th Sttlmnt NotHoldrs only as to Cntrbrdg Partnrs L.P

Appaloosa Managmnt LP. and Owl Crk AsstManagmnt L.P

and

SUSMAN GODFREY, LLPStephen D Susman (NY Bar No 3041712)Seth D Ard (NY Bar No 4773982)654 Madson Avenue 5th Floor New York N 10065

Parker C Folse III (WA Bar No 24895)Edgar Sargent (WA Bar No 28283)

Justn A Nelson (WA B No 31864)1201 Thrd Ave Sute 3800Seattle WA 98101Telephone (206) 5163880Facsmle: (206) 5163883

CoCounsl to th Ocal Commtt ofEquScur Holdrs of Washngton Mutual Inc. t al.

and

30



SULLIVAN HAZELTINE ALLINSON LLC

s Wllam D. Sullvan

Wllam D Sullvan (DE Bar No 2820)901 N Market Street, Sute 1300Wlmngton, DE 19801

Telephone: (302) 288191Facmle: (302) 28-8195

Concts CoCounsel for the Ocal Commttee ofEqu Secur Holders of Washngton MutualInc et al as to Aurelus Captal ManagementL.p.

washington mutual (wmi) - the equity committee’s opposition to the motions for leave to appeal...

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