Incorporating legal claims.

• Author: Steinitz, Maya
• Position: Commercial litigation funding governance - II. Claim Incorporation and Litigation Governance: winstar, Information Resources, Crystallex, and TRECA A. Loose and Strict Incorporation to Reduce Hidden Costs: The Winstar Savings & Loans Litigations and Information Resources 3. Loose Incorporation in the Dime/Anchor Savings Litigation: Litigation Track

3. Loose Incorporation in the Dime/Anchor Savings Litigation: Litigation Tracking Warrants

   Anchor Savings' claim was based on eight acquisitions of failing S&Ls from 1982 to 1985, four of which were facilitated by regulators. (125) When FIRREA was enacted in 1989, Anchor's books still carried over $500 million of related capital, including the goodwill. As a result, Anchor claimed it faced severe limitations on its activities and was forced to liquidate valuable assets at fire-sale prices. (126) In 1994, Anchor and Dime Savings Bank agreed to merge. In January of 1995 Anchor filed the suit against the government. Shortly thereafter the merger closed, and, as a result of the merger, Dime became entitled to the proceeds. (127) Because filing the claim did not disrupt the merger pricing previously negotiated by Anchor and Dime, Anchor had no motivation to issue litigation securities at that point. However, a later deal did face the pricing problem.

   In early 2000, North Fork Bank attempted a hostile takeover of Dime. Dime found a white knight in Warburg Pincus. As Dime and Warburg did not agree on the value of the litigation, that major equity investment faced the hidden cost issue. As a result, Dime issued LTWs on December 29, 2000. (128) Again, because these were issued directly by Dime they represent a "loose" incorporation. Dime retained control of the litigation. The Anchor/ Dime LTWs were conceptually similar to the Golden State LTWs and were similarly worth stock representing 85% of the net recovery. Also like the Golden State LTWs, the Dime LTWs traded on the NASDAQ and, because of the merger, were ultimately redeemable for shares in a different company than Dime.

   In 2001 Dime announced its intention to merge with Washington Mutual (WaMu), and that deal closed in 20 02. (129) Not much happened until 2008, when the trial court awarded $356 million in damages. (130) The decision was appealed. (131) Later in 2008, regulators seized WaMu and sold most of its assets to JPMorgan Chase. (132) The hollowed-out parent company filed for bankruptcy the next day. (133) In 2010 the appeals court remanded for further damage calculations, suggesting the damages should be $63 million more. (134)

   Shortly thereafter LTW holders began negotiating with the WaMu estate. One group decided to settle and received some cash, some stock in a reorganized WaMu, and some "Run-off Notes." (135) Other LTW holders sued, seeking a declaration of their rights and creditor status above equity holders. In 2012, the court ruled the LTWs were equity, and the litigating LTW holders were assigned such status and their related claims subordinated. (136) As a result of that decision, $337 million in proceeds were released into the estate. (137)

4. Strict Incorporation in the Coast Savings litigation: Trust Certificates

   Coast Savings Financial took over the failed Central Savings and Loan Association from regulators in 1987, in a deal that involved a $298 million "capital credit" that was wiped out by FIRREA in 1989. (138) Coast filed its goodwill claim in July 1992. (139) The litigation was stayed (while the Glendale/ Winstar litigation worked its way to the Supreme Court), and the case was not scheduled to be tried until 1999 at the earliest. (140) However, in 1997 Coast began negotiating merger terms with H. F. Ahmanson & Co.

   Again, the litigation's valuation difficulty created hidden costs. As part of the merger agreement executed in October 1997, Coast Savings announced it would spin off the value of its claim immediately pre-merger. Coast effectuated its claim spinoff via a "strict" incorporation approach: it created a trust to receive the value of the claim, the trustees of which controlled the litigation, and then the trust issued contingent payment right certificates to Coast's pre-merger shareholders.

   The basic structure of the deal was as follows. A trust was formed with certain powers, approximately $20 million (earmarked for litigation expenses), and an asset called "the Commitment." Securities embodying the right to receive part of the payments made pursuant to the Commitment were issued to existing Coast Savings shareholders. Coast Savings merged into H. F. Ahmanson and Ahmanson, as successor to Coast Savings, owned the claim and the right to receive the proceeds. If proceeds were ever received, Ahmanson would be required by the Commitment to give them to the trust. Monies received by the trust were to be paid to certificate holders, net of certain costs.

   More specifically, on January 8, 1998, the Coast Federal Litigation Contingent Payment Rights Trust (CPR Trust) was created, with the powers and limitations conferred upon it by an Amended and Restated Declaration of Trust signed by Coast Savings (as sponsor), Bankers Trust Company (as trustee), (141) and the CPR Trust (through its four Litigation Trustees). On January 13, 1998, the CPR Trust registered Contingent Payment Rights Certificates (CPR Certificates) with the Securities and Exchange Commission. (142) On February 13, 1998, moments before the merger closed, Ahmanson entered a commitment agreement with the CPR Trust, contributed approximately $20 million to the CPR Trust to fund the litigation, and the CPR Trust issued the CPR Certificates to Coast shareholders. (143)

   This transaction is the purest strict incorporation of a claim I have found (although the Treca Trust (discussed below) would be equally pure if it were ever created). This is because the Litigation Trustees were given complete control over the claim; Ahmanson, which nominally owned the claim and showed it on its books, had none. (144) Moreover, the trustees' primary loyalty was to the CPR Trust, that is, to certificate holders, even at the expense of Ahmanson, the claim owner. (145) Thus in every sense except the most formal, the CPR Trust embodied the claim.

   While it is true that the Litigation Trustees were former executives of Coast with knowledge of the litigation's facts, putting them in charge of the litigation in this manner, rather than via a management agreement like Golden State entered, creates unnecessary issues under the legal ethics paradigm.

   From an ethics perspective, the Coast Savings deal created ambiguity as to whom litigation counsel represents: the trustees, who controlled the litigation and who had duties to maximize the claim's monetary value on behalf of certificate holders, or Ahmanson, which nominally owned it? Similarly unclear are the implications of the answer to the latter question to the application of the attorney-client privilege. Also, do the CPR Trust and Ahmanson share a common legal interest that protects privilege regardless of who the client actually is? (146) And how should this structure be viewed from the champerty perspective?

   Ultimately, the Court of Claims entered a judgment of no damages in 2001, so the CPR Certificates were worthless. (147) The CPR Trust appealed and won at the Federal Circuit in 2002, (148) but then the Government sought and won a rehearing en banc. (149) In 2003 the full court upheld the Court of Claims' judgment of no damages, (150) and the CPR Trust decided not to appeal to the U.S. Supreme Court. (151) The CPR Trust terminated, and the CPR Certificates were de-listed on May 23, 2003. (152)

5. Strict Incorporation in the Information Resources Antitrust Litigation: Contingent Value Rights

   In July of 1996 Information Resources sued Dun & Bradstreet, Inc. and others, alleging antitrust claims. Information Resources alleged damages exceeding $350 million, prior to trebling. (153) The suit came nearly three months after the European Union had begun formal proceedings against the defendant for abusive practices. Three months after the suit was filed, the defendant entered into an agreement with the European Union to end its abusive practices. (154) A trial was scheduled for September 2004. (155) However, in 2003 Information Resources was negotiating a merger with Gingko Corporation, and the litigation posed a hidden cost problem.

   To solve the problem, Information Resources formed a special purpose (statutory) trust, which issued "Rights Certificates" tied to the proceeds of the antitrust claim. Unlike the Coast deal, however, Information Resources did not transfer control of the claim to the trust. As a result, it is more accurate to say the trust received the monetary value of the claim rather than the claim itself. In some jurisdictions, the distinctions between (a) transferring the value of the claim versus the claim itself and/or (b) transferring control over the claim versus the value of the claim differentiated between a void champertous transaction and a valid non-champertous transaction. (156) Instead, a separate contract governed the conduct of the claim. Under that contract the company that survived the merger (and thus owned the claim) retained control of the settlement decision as well as influence over major strategic choices. Nonetheless, executives from the pre-merger claim owner retained significant influence over major strategic decisions.

   The Information Resources transaction was a more complicated deal overall than the CPR Trust, largely because several investors/companies were coming together to form a company that would merge into the publicly traded Information Resources and take it private. Thus, there were more parties and more steps to the overall transaction. In addition, the privately held status of the surviving company and the newness of the trust created in the deal meant that the certificates it issued could not be listed on the NASDAQ, although they were tradable over the counter. (157) (Complicating the discussion of the deal further, the surviving entity retained the name "Information Resources," while becoming a wholly owned subsidiary of Gingko. To facilitate this discussion, when speaking of the post-merger entity, I use the term "pmIR"; for pre-merger, it is simply "IR"; and because the trust was...