## Facts

- Washington Mutual, Inc. (WMI), a holding company, filed Chapter 11 the day after Washington Mutual Bank was seized and placed into FDIC receivership; the FDIC sold substantially all bank assets to JPMorgan Chase Bank, N.A. the same day.
- The debtors proposed a Sixth Amended Joint Plan of Reorganization supported by a Global Settlement Agreement among WMI, the FDIC, JPMorgan, and key creditor constituencies.
- The plan included expansive third-party release and exculpation provisions benefiting, among others, the FDIC, JPMorgan, and a group of large unsecured noteholders that supported the settlement and plan (Settlement Noteholders).
- An official equity committee representing shareholders objected, challenging the breadth of the releases/exculpation and seeking remedies against the Settlement Noteholders for alleged insider trading during the case.
- The equity committee moved to equitably disallow the Settlement Noteholders’ claims, alleging they traded WMI securities using confidential, material nonpublic information obtained in settlement and plan negotiations.

## Issues

1. Whether the plan’s third-party releases and exculpation provisions were permissible under the Bankruptcy Code and controlling Third Circuit standards for non-debtor releases.
2. Whether the Bankruptcy Code authorizes “equitable disallowance” of claims as a remedy for alleged creditor misconduct such as insider trading or misuse of confidential information.
3. If equitable disallowance is unavailable, what bankruptcy remedies remain potentially available for proven inequitable conduct by creditors.

## Decision

- The court approved the Global Settlement Agreement as a fair and reasonable compromise under the applicable settlement standard.
- The court denied confirmation of the Sixth Amended Plan because the third-party releases and exculpation provisions were excessively broad and impermissible.
- The court denied the equity committee’s request for equitable disallowance, holding that the Bankruptcy Code does not recognize equitable disallowance as a distinct remedy.
- The court noted that equitable subordination under § 510(c) may be available upon the required showing, and that securities-law remedies for insider trading, if any, arise through the mechanisms provided by non-bankruptcy law.

## Legal Principles

- A bankruptcy court may approve a comprehensive settlement as fair and reasonable while still denying plan confirmation if plan provisions (including releases and exculpations) exceed what the Bankruptcy Code and governing circuit law permit.
- Non-consensual third-party releases of creditor-owned, non-derivative claims are strongly disfavored and require extraordinary justification; releases must be narrowly tailored and grounded in applicable precedent.
- Claim disallowance is governed by § 502’s statutory grounds; a bankruptcy court may not create a freestanding equitable doctrine that disallows claims outside that scheme.
- Creditor misconduct may be addressed through remedies authorized by the Code, including equitable subordination under § 510(c) when the elements are proven, rather than through non-statutory claim forfeiture.

## Conclusion

The court approved the parties’ global compromise but refused to confirm a plan that attempted to grant sweeping third-party releases and exculpations, and it rejected “equitable disallowance” as an unauthorized bankruptcy remedy, directing that creditor misconduct be addressed through statutory tools such as equitable subordination or through applicable non-bankruptcy law.


In re Washington Mutual, Inc., 461 B.R. 200 (Bankr. D. Del. 2011)