In Re Washington Mutual, Inc.

Citations: 408 B.R. 45; 2009 Bankr. LEXIS 1988; 51 Bankr. Ct. Dec. (CRR) 229; 2009 WL 1851120Docket: 19-10388

Court: United States Bankruptcy Court, D. Delaware; June 24, 2009; Us Bankruptcy; United States Bankruptcy Court

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The United States Bankruptcy Court for the District of Delaware granted the Debtors' Motion for an Order under Bankruptcy Rule 2004, allowing for the examination of JPMorgan Chase Bank, National Association (JPM). Prior to their chapter 11 filing, Washington Mutual, Inc. (WMI) was a major savings and loan holding company, owning Washington Mutual Bank (WMB), which was the largest of its kind in the U.S. A downturn in the economy and a crisis in the residential housing market led to significant financial struggles for WMI and WMB, culminating in a bank run and WMB's closure by the Office of Thrift Supervision on September 25, 2008. The FDIC was appointed as receiver and subsequently sold most of WMB’s assets to JPM. 

After filing for chapter 11 on September 26, 2008, the Debtors submitted claims to the FDIC related to various financial matters, including intercompany loans, tax issues, and asset sales. The FDIC denied these claims, prompting the Debtors to file a lawsuit against the FDIC in the District of Columbia, seeking review of the claims' denial and other relief. JPM sought to intervene in this lawsuit, which the Debtors opposed. Subsequently, JPM initiated an adversary proceeding in bankruptcy court, seeking declaratory judgments regarding the ownership of assets claimed to have been acquired in good faith from the FDIC. These assets include significant amounts in trust securities and financial accounts, tax refunds, and various rights associated with former employees and corporate interests.

JPM identifies the JPM Adversary Action as closely related to the DC Action, asserting claims stemming from the Debtors' attempts to claim ownership over assets allegedly acquired from the FDIC. On April 27, 2009, the Debtors initiated a Turnover Action against JPM, seeking the return of approximately $4 billion in cash held in accounts at WMB and WMBfsb at the time of WMB's takeover by JPM. JPM has moved to dismiss this action, while the Debtors seek summary judgment. 

Simultaneously, on February 16, 2009, a group of insurance companies, the Insurance Company Plaintiffs, filed the Texas Action against JPM and its parent, JPMorgan Chase & Co. The FDIC intervened, and the action was subsequently removed to federal court, with a pending motion from the FDIC to transfer the case to the DC Court, opposed by the Insurance Company Plaintiffs who wish to return to state court. The Texas Complaint includes claims for tortious interference, breach of confidentiality, and unjust enrichment, alleging that JPM manipulated WMB's value to secure its assets at an undervalued price.

The current dispute arises from the Debtors' Motion for an Order under Bankruptcy Rule 2004 for JPM's examination, filed on May 1, 2009. This Motion requests documents and depositions related to potential business tort claims, fraudulent transfer claims regarding $6.5 billion contributed by WMI to WMB, turnover claims related to promissory notes and intercompany receivables, and preferential transfer claims involving $152 million transferred in the year before the Debtors’ chapter 11 filings. JPM opposes the Motion, arguing it pertains to ongoing litigation and should adhere to discovery rules of the Federal Rules of Civil Procedure. A hearing was held on May 20, and the Court is currently deliberating on the Motion, which falls under its jurisdiction as a core proceeding.

Rule 2004(a) of the Federal Rules of Bankruptcy Procedure allows a court to order the examination of any entity at the request of a party in interest. This examination is characterized by an "unfettered and broad" scope, encompassing the debtor's acts, conduct, property, liabilities, financial condition, and matters affecting the administration of the debtor's estate. In chapter 11 cases, it may also include inquiries into business operations, the sources of funds for plan consummation, and other relevant issues. Rule 2004 examinations serve primarily to help trustees uncover the bankruptcy estate's nature and extent, identify assets, scrutinize transactions, and investigate potential wrongdoing. However, these examinations cannot be used for harassment or to explore irrelevant matters.

A significant limitation arises under the "pending proceeding" rule, which stipulates that once an adversary proceeding or contested matter is initiated, discovery should follow the more formal procedures of Federal Rules of Bankruptcy Procedure 7026 instead of Rule 2004. Courts have ruled that Rule 2004 may be inappropriate if the requesting party stands to gain from ongoing litigation outside the bankruptcy context. The rationale for these restrictions emphasizes that discovery rules in adversarial contexts provide better procedural protections, such as the right to legal representation and the ability to object to improper questions. Nonetheless, an exception exists: unrelated discovery can proceed under Rule 2004 even if an adversary proceeding is pending, provided that discovery pertaining to the pending matter adheres to stricter rules.

Trustees may conduct Rule 2004 examinations of non-affiliated entities even after initiating adversary proceedings, as these entities do not require the same protections under the Federal Rules. This principle, supported by multiple cases, allows for examinations unrelated to pending adversary litigation, which is essential for the trustee's duty to maximize estate assets. Courts caution against using Rule 2004 to bypass procedural safeguards. 

In the current case, JPM argues that the Debtors' Rule 2004 examination request is improper due to its relation to the JPM Adversary Action. JPM presents a chart showing overlaps between the adversary action and the Debtors’ document requests, stemming from concerns about the safety of WMB, which was placed in receivership. However, the Court emphasizes that mere background information does not establish a direct relationship to the adversary proceeding. The Court must assess whether the requested examination will yield evidence pertinent to the ongoing litigation.

The JPM Adversary Action seeks declaratory judgments on asset ownership following JPM's acquisition of WMB's assets. The Debtors’ Motion aims for documents and depositions related to potential claims against JPM, including business torts and fraudulent transfers. Ultimately, the Court determines that the Debtors' Motion does not pursue evidence directly related to the JPM Adversary Action.

The Debtors are investigating potential business tort claims related to conduct occurring before the Office of Thrift Supervision (OTS) closed Washington Mutual Bank (WMB), while the JPM Adversary Action focuses on asset ownership disputes arising from the sale of WMB's assets to JPM after the OTS closure. The Debtors' document requests for information on fraudulent transfer, turnover, and preference claims are unrelated to the JPM Adversary Action. Specifically, the JPM Adversary Action Complaint does not address the ownership of assets the Debtors wish to investigate, including $6.5 billion in capital contributions, $177 million in outstanding promissory notes, $22.5 million in intercompany receivables, and $152 million transferred to WMB in the year before the Debtors' chapter 11 filings. 

JPM contends that the Debtors' requested Rule 2004 examination seeks documents related to the DC Action, despite JPM not being a party to it. Although JPM acknowledges the likelihood of intervening in the DC Action, the Court finds that this potential does not justify denying the Debtors' Motion. The Court emphasizes that the "pending proceeding" rule requires an actual action between the two parties, which is not the case here. Therefore, the Court concludes there is no basis to prevent the Rule 2004 examination of JPM, as it serves as a pre-litigation tool, and grants the Debtors' Motion accordingly.

This Opinion outlines the Court's findings of fact and conclusions of law under Rule 7052 of the Federal Rules of Bankruptcy Procedure, applicable to contested matters via Rule 9014. Washington Mutual Bank (WMB) was under the oversight of various regulatory bodies, including the OCC, the Federal Reserve, and the FDIC. Multiple legal actions are referenced including cases involving JPMorgan Chase and the FDIC, with the FDIC seeking to intervene in a Turnover Action and both the FDIC and JPM requesting a stay pending the outcome of another case. 

The plaintiffs in a related Texas Action include various insurance companies, but JPM does not contest the Debtors' request for a 2004 examination in relation to this Texas Action, as it does not interfere with the Turnover Action. The examination seeks extensive discovery linked to the Texas Action, although the Debtor is not a party to it, making the examination permissible. Furthermore, claims involving business torts do not pertain to the DC Action, as the Debtors aim to gather evidence concerning JPM's conduct before WMB's seizure and sale. JPM's argument that this discovery relates to potential claims against the FDIC is countered by the fact that the examination does not seek information pertinent to the dissipation and takings causes of action linked to the hypothetical liquidation value of WMB's assets.