The Federal Deposit Insurance Corporation, et al v. Killinger et al, No. 2:2011cv00459 - Document 87 (W.D. Wash. 2012)
Court Description: MOTION to Dismiss [Defendants Motion for a Reasonableness Determination and Entry of Final Judgment of Dismissal Pursuant to Settlement] by Defendants Kerry K Killinger, Linda C Killinger, Esther T Rotella, Stephen J Rotella, David C Schneider. (Attachments: # 1 Proposed Order) Noting Date 2/24/2012, (Caplow, Steven) (Entered: 02/24/2012)
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. The Federal Deposit Insurance Corporation, et al v. Killinger et al Doc. 87 Judge Marsha J. Pechman 1 2 3 4 5 6 7 8 9 UNITED STATES DISTRICT COURT WESTERN DISTRICT OF WASHINGTON AT SEATTLE 10 11 12 13 14 15 16 17 18 THE FEDERAL DEPOSIT INSURANCE CORPORATION, as RECEIVER of WASHINGTON MUTUAL BANK, ) ) ) ) Plaintiff, ) ) v. ) ) KERRY K. KILLINGER, STEPHEN J. ) ROTELLA, DAVID C. SCHNEIDER, LINDA ) C. KILLINGER, and ESTHER T. ROTELLA, ) ) Defendants. ) ) No.: 2:11-cv-00459-MJP DEFENDANTS’ MOTION FOR A REASONABLENESS DETERMINATION AND ENTRY OF FINAL JUDGMENT OF DISMISSAL PURSUANT TO SETTLEMENT Note on Motion Calendar: February 24, 2012 19 20 21 22 23 24 25 26 27 DEFS.’ MOT. FOR REASONABLENESS DETERMINATION AND ENTRY OF JUDGMENT No.: 2:11-cv-00459-MJP Dockets.Justia.com . 1 Defendants Kerry K. Killinger, Stephen J. Rotella, David C. Schneider, Linda C. 2 Killinger and Esther T. Rotella (“Defendants”) respectfully submit this motion for (1) a 3 reasonableness determination of the December 13, 2011 Settlement and Release Agreement 4 between the Defendants and The Federal Deposit Insurance Corporation, as Receiver for 5 Washington Mutual Bank (the “FDIC,” and collectively with the Defendants, the “Parties”) 6 (“Settlement Agreement,” attached as Exhibit A hereto), and (2) entry of a final judgment 7 substantially in the form of Exhibit B. Defendants’ motion is supported by the accompanying 8 declaration of the mediator who facilitated the Parties’ settlement, the Hon. Layn R. Phillips 9 (U.S. District Judge, Ret.) (“Phillips Declaration,” attached as Exhibit C hereto). The FDIC 10 supports Defendants’ motion and jointly requests its entry. 11 I. 12 PROCEDURAL BACKGROUND The Settlement Agreement required the Parties to submit the agreement for approval to 13 the Delaware Bankruptcy Court and for a reasonableness determination by this Court in 14 conjunction with the request for entry of a final judgment. Ex. A, Section II. B. On February 15, 15 2012, the Delaware Bankruptcy Court granted its approval of the Settlement Agreement. See 16 Exhibit D hereto. The next step contemplated by the Settlement Agreement is a determination 17 by this Court of the reasonableness of the settlement and entry of a final judgment. 18 The FDIC’s lawsuit, relying on jurisdiction pursuant to 28 U.S.C. §§ 1331 and 1345, 19 asserted state law claims against the Defendants alleging negligence, breach of fiduciary duty 20 and fraudulent conveyance. The FDIC has commenced litigation against other parties in other 21 jurisdictions related to Washington Mutual Bank, which could put at issue whether the terms of 22 the Settlement are reasonable and the product of good faith, arms-length negotiations. The 23 Parties therefore agreed consistent with RCW 4.22.060 to submit the Settlement Agreement for a 24 reasonableness determination by this Court. 25 26 27 DEFS.’ MOT. FOR REASONABLENESS DETERMINATION AND ENTRY OF JUDGMENT No. 2:11-cv-00459-MJP 1 . II. 1 ARGUMENT In conjunction with entry of the final judgment, the Defendants respectfully request this 2 3 Court to enter a finding, based on the Settlement Agreement itself, the declaration of Judge 4 Phillips, the Order approving the settlement entered by United States Bankruptcy Judge Mary 5 Walrath, and the standards set forth in RCW 4.22.060, that the terms of the Settlement 6 Agreement are fair, reasonable, the product of arm’s length negotiations, and non-collusive. 7 The federal courts in this District conduct reasonableness hearings pursuant to RCW 8 4.22.060. See, e.g., Barabin v. AstenJohnson, Inc., 2010 WL 3699979 (W.D. Wash. Sept. 13, 9 2010). In making a reasonableness determination, the court considers the factors set out in 10 Chaussee v. Maryland Casualty Co., 60 Wn. App. 504 (1991), which are derived from Glover v. 11 Tacoma General Hospital, 98 Wn.2d 708 (1983), overruled on other grounds by Crown 12 Controls, Inc. v. Smiley, 110 Wn.2d 695 (1988). 1 This Court has broad discretion as to how to 13 weigh the various factors. Chaussee, 60 Wn. App. at 512. The factors relevant to this case 14 include: the amount of damages sought by plaintiff, the merits of plaintiff’s liability theory, the 15 merits of defendant’s defense theory, the risks and expenses of continued litigation, the 16 defendants’ ability to pay, and any evidence of bad faith, collusion, or fraud in the settlement 17 negotiations. Id. As set forth below, application of the relevant Glover factors easily 18 demonstrates that the Settlement is reasonable. 19 A. 20 The Settlement Is The Result Of Extensive Arms-Length Negotiations With An Experienced Mediator. 21 The FDIC’s claims, Defendants’ defenses thereto, and the positions of the various 22 directors and officers liability (“D&O”) insurers were complex. The Parties required numerous 23 sessions with Judge Phillips, who is a former U.S. Attorney and U.S. District Judge and among 24 25 26 1 The Court’s jurisdiction to conduct reasonableness determinations extends to executed settlement agreements, see Villas at Harbour Pointe Owners Assoc., 137 Wn. App. 751, 760 (2007) and to cases in which all parties to a case have settled, see Martin v. Johnson, 141 Wn. App. 611, 617 (2007) (reasonableness determination made when there were no non-settling defendants and court stating “RCW 4.22.060's requirement of a reasonableness hearing in the tort litigation context [does not] preclude use of a reasonableness hearing in other contexts.”). 27 DEFS.’ MOT. FOR REASONABLENESS DETERMINATION AND ENTRY OF JUDGMENT No. 2:11-cv-00459-MJP 2 . 1 the most experienced and respected mediators of complex cases in the country. Judge Phillips 2 was familiar with many of the issues in this case because he was responsible for successfully 3 mediating the resolution of the WaMu MDL class action and the related “tag-along” Flaherty 4 and Solton/Buenaventura cases that were pending before this Court. Judge Phillips directly 5 oversaw a protracted mediation process, which involved ten days of face-to-face meetings and 6 extensive telephonic sessions over the course of nine months. Based on his involvement in the mediation process, as detailed in his declaration, Judge 7 8 Phillips believes that the Settlement was fair, reasonable, the result of extensive arms’ length 9 negotiations, and not the result of any collusion. See Phillips Decl. ¶¶ 14-15. Judge Phillips also 10 observed that the arguments and positions by all involved with the mediation process were 11 complex and highly adversarial, as reflected in the length, number, and intensity of the 12 negotiation sessions that were required to reach an agreement in principle to settle this Action. 13 See id. ¶¶ 14, 17. 14 B. The Terms Of The Settlement Are Reasonable. There were substantial risks to all Parties if a settlement was not reached. In connection 15 16 with the Defendants’ motions to dismiss, the parties have previously submitted extensive 17 briefing on the merits of the legal claims and defenses that they were prepared to litigate if the 18 case proceeded. As Judge Phillips observed, the FDIC was prepared to prosecute these claims 19 vigorously, while the Defendants were also prepared to defend the claims with equal vigor. 20 Phillips Decl. ¶ 7. Further, as discussed in more detail below, the FDIC was seeking substantial 21 damages that were well beyond the available D&O insurance limits and the Defendants’ ability 22 to pay. 23 In addition, a significant complication in the mediation process was the status of the 24 D&O insurance policies, which represented a material source for potential recovery. As this 25 Court is aware from its oversight of the WaMu MDL actions and approval of the WaMu MDL 26 27 DEFS.’ MOT. FOR REASONABLENESS DETERMINATION AND ENTRY OF JUDGMENT No. 2:11-cv-00459-MJP 3 . 1 class settlement, there has been substantial erosion of the D&O insurance policies used to fund 2 the defense and settlement of the WaMu MDL and tag-along actions. The same D&O insurance 3 policies were at issue for this case. In addition, there are other pending cases and other potential 4 claimants to these D&O insurance policies that threatened further erosion of these policies. See 5 id. ¶¶ 9, 16. 6 Judge Phillips specifically noted the depletion of the D&O insurance policies as a 7 significant factor that not only led to the settlement, but also supports the reasonableness of the 8 settlement amount itself. Id. ¶ 9. Judge Phillips noted that, while the FDIC was intent on a 9 vigorous prosecution of its claims, Defendants were intent upon a vigorous defense of all 10 allegations of wrongdoing, and observes that, even if the FDIC had litigated this case through 11 trial and obtained a judgment against Defendants, there might not have been any insurance 12 available to satisfy a portion of that judgment. Id. ¶ 16. 13 Another significant complication was the potential contributions by the Defendants to 14 any settlement. The negotiations and discussions concerning whether and how the individuals 15 would personally contribute to any settlement were particularly difficult, especially given the 16 eventual agreed-upon structure of contributions that implicated issues and parties in the Chapter 17 11 proceedings involving Washington Mutual Inc. (“WMI”) pending in the United States 18 Bankruptcy Court for the District of Delaware. Id. ¶¶ 10, 16. 19 There were many complex issues that required careful analysis and creative solutions. In 20 particular, prior to filing this action, the FDIC had entered into a “Global Settlement Agreement” 21 with WMI and other parties, as a result of which the FDIC obtained highly significant value, 22 including $125 million from WMI in exchange for the release of the FDIC’s claims against the 23 former WaMu directors (other than Mr. Killinger) and other WaMu officers. As part of the 24 Global Settlement Agreement, the FDIC agreed to judgment and settlement reduction provisions 25 by which WMI would not have to pay anything further as a result of any FDIC lawsuits against 26 27 DEFS.’ MOT. FOR REASONABLENESS DETERMINATION AND ENTRY OF JUDGMENT No. 2:11-cv-00459-MJP 4 . 1 non-released WaMu directors and officers, such as Messrs. Killinger, Rotella and Schneider. See 2 Ex. E at § 3.6 (“Judgment Reduction Provision”). Because Messrs. Killinger, Rotella and 3 Schneider retained certain indemnification rights, there was a risk that any judgment the FDIC 4 might obtain against Messrs. Killinger, Rotella, or Schneider would be indemnifiable by WMI. 5 Thus, the Judgment Reduction Provision in the FDIC’s Global Settlement Agreement with WMI, 6 in the absence of available insurance, could have required the FDIC to reduce any judgment it 7 ultimately obtained to zero. As noted above, had the parties not settled, the available D&O 8 insurance likely would have been severely depleted or eliminated in its entirety by the time of 9 trial in this action (which had been set for September 2013), due to the potential settlement of 10 competing claims on the policies and defense costs. These factors created substantial risks 11 regarding the cost-effectiveness of the FDIC’s continued prosecution of the claims and were 12 important to the FDIC’s decision to settle and its evaluation of the overall amount of the 13 settlement. 14 Based on all of the above, and what he learned during the mediation regarding the 15 personal assets of the Defendants, Judge Phillips believes that it was reasonable for the FDIC and 16 in the FDIC’s interests to settle for the consideration provided in the Settlement Agreement – 17 $39.575 million cash obtained from the D&O insurance policies, cash payments from the 18 Defendants of $425,000 and their agreement to pay the FDIC an additional cash amount based 19 upon the amounts Defendants actually receive, after tax, from certain of their claims pending in 20 the WMI Chapter 11 proceedings (with a $24.7 million pre-tax face value) – rather than to 21 proceed further with this action and, even if successful, risk getting far less or nothing at all. 22 Therefore, the parties submit that the settlement represents a recovery and outcome that is 23 reasonable and fair for the FDIC as Receiver for Washington Mutual Bank and the Defendants, 24 particularly given the litigation risks, the costs of prosecution, and the finite assets available to 25 satisfy any judgment that might have been obtained against the Defendants. There can be no 26 27 DEFS.’ MOT. FOR REASONABLENESS DETERMINATION AND ENTRY OF JUDGMENT No. 2:11-cv-00459-MJP 5 . 1 question that this Settlement Agreement was not collusive, but was the result of difficult and 2 vigorous negotiations among experienced and sophisticated counsel. Judge Phillips thus 3 concluded that it was in the best interests of all Parties to avoid the burdens and risks associated 4 with further litigation and to enter into this Settlement Agreement. 5 6 C. The Reaction Of The Bankruptcy Court To The Settlement Supports The Reasonableness Of The Settlement. 7 Consistent with Judge Phillips’ conclusions about the reasonableness of the Settlement, 8 on February 15, 2012, United States Bankruptcy Judge Walrath entered an order approving the 9 Settlement and finding that it is fair and reasonable as to WMI and the Debtors in the Chapter 11 10 proceedings. See Ex. D. WMI itself proffered this settlement and filed the motion seeking Judge 11 Walrath’s approval of the Settlement, pursuant to Section 105(a) of the Bankruptcy Code and 12 Rule 9019 of the Federal Rules of Bankruptcy Procedure. Dozens of third parties received notice 13 of WMI’s motion (see Ex. F), and not a single objection was filed. See Ex. G. The findings of 14 Judge Walrath and the absence of any objections in the bankruptcy proceedings further support 15 the reasonableness of the Settlement. 16 17 III. CONCLUSION For the foregoing reasons, Defendants respectfully request that this Court enter the 18 proposed judgment submitted herewith, which includes the reasonableness determination 19 consistent with RCW 4.22.060. 20 Dated: February 24, 2012 s/ Barry M. Kaplan Barry M. Kaplan, WSBA #8661 WILSON SONSINI GOODRICH & ROSATI Professional Corporation 701 Fifth Avenue, Suite 5100 Seattle, WA 98104-7036 Telephone: (206) 883-2500 Facsimile: (206) 883-2699 Email: bkaplan@wsgr.com 21 22 23 24 25 26 27 DEFS.’ MOT. FOR REASONABLENESS DETERMINATION AND ENTRY OF JUDGMENT No. 2:11-cv-00459-MJP 6 . s/ David D. Aufhauser Brendan V. Sullivan, Jr. (Admitted Pro Hac Vice) David D. Aufhauser (Admitted Pro Hac Vice) Tobin J. Romero (Admitted Pro Hac Vice) Beth A. Stewart (Admitted Pro Hac Vice) Steven M. Cady (Admitted Pro Hac Vice) George W. Hicks (Admitted Pro Hac Vice) WILLIAMS & CONNOLLY LLP 725 Twelfth Street, N.W. Washington DC 20005 Telephone: (202) 434-5000 Facsimile: (202) 434-5029 Email: bsullivan@wc.com Email: daufhauser@wc.com Email: tromero@wc.com Email: bstewart@wc.com Email: scady@wc.com Email: ghicks@wc.com 1 2 3 4 5 6 7 8 9 10 11 Attorneys for Defendants Kerry and Linda Killinger 12 13 14 Dated: February 24, 2012 s/ Steven P. Caplow DAVIS WRIGHT TREMAINE LLP Stephen M. Rummage, WSBA #11168 Steven P. Caplow, WSBA #19843 1201 Third Avenue, Suite 2200 Seattle, Washington 98101-3045 Tel.: (206) 757-8018 Fax: (206) 757-7017 E-mail: steverummage@dwt.com stevencaplow@dwt.com 15 16 17 18 19 20 21 SIMPSON THACHER & BARTLETT LLP Barry R. Ostrager (pro hac vice) Mary Kay Vyskocil (pro hac vice) 425 Lexington Avenue New York, New York 10017 Tel.: (212) 455-2000 Fax: (212) 455-2502 Email: bostrager@stblaw.com mvyskocil@stblaw.com 22 23 24 25 26 27 DEFS.’ MOT. FOR REASONABLENESS DETERMINATION AND ENTRY OF JUDGMENT No. 2:11-cv-00459-MJP 7 . 1 -and- 2 Deborah L. Stein (pro hac vice) 1999 Avenue of the Stars, 29th Floor Los Angeles, California 90067 Tel.: (310) 407-7500 Fax: (310) 407-7502 Email: dstein@stblaw.com 3 4 5 6 Attorneys for Stephen J. Rotella, David C. Schneider, and Esther T. Rotella 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 DEFS.’ MOT. FOR REASONABLENESS DETERMINATION AND ENTRY OF JUDGMENT No. 2:11-cv-00459-MJP 8 . 1 2 CERTIFICATE OF SERVICE I hereby certify that on February 24, 2012, the foregoing was electronically filed with the 3 Clerk of the Court using the CM/ECF system which will send notification of such filing to all 4 counsel of record who receive CM/ECF notification, and that the remaining parties shall be 5 served in accordance with the Federal Rules of Civil Procedure. 6 DATED this 24th day of February, 2012. 7 Davis Wright Tremaine LLP 8 By s/ Steven P. Caplow Steven P. Caplow, WSBA #19843 Suite 2200 1201 Third Avenue Seattle, Washington 98101-3045 Tel: (206) 757-8018 Fax: (206) 757-7108 E-mail: stevencaplow@dwt.com 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 DEFS.’ MOT. FOR REASONABLENESS DETERMINATION AND ENTRY OF JUDGMENT No. 2:11-cv-00459-MJP 9
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