Case MFW Doc Filed 02/17/17 Page 1 of 16 IN THE UNITED STATES BANKRUPTCY COURT FOR THE DISTRICT OF DELAWARE

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1 Case MFW Doc Filed 02/17/17 Page 1 of 16 IN THE UNITED STATES BANKRUPTCY COURT FOR THE DISTRICT OF DELAWARE x : In re: : Chapter 11 : WASHINGTON MUTUAL, INC., et al., 1 : Case No (MFW) : : (Jointly Administered) Debtors. : : Re: Docket No x EVIDENTIARY OBJECTIONS TO, AND REQUEST TO STRIKE PORTIONS OF, THE DECLARATION OF CURT BROUWER OFFERED IN SUPPORT OF WMI TRUST S SUPPLEMENTAL OPPOSITION TO GRANT THORNTON S SUPPLEMENTAL MOTION FOR AN ORDER TO SHOW CAUSE WHY SANCTIONS SHOULD NOT BE IMPOSED AGAINST WASHINGTON MUTUAL LIQUIDATING TRUST FOR FAILURE TO COMPLY WITH THE COURT S FINAL FEE ORDER [DOCKET NO ] BY FAILING AND REFUSING TO PAY APPROVED PROFESSIONAL FEES Grant Thornton submits the following evidentiary objections to, and request to strike portions of, the Declaration of Curt Brouwer in Support of WMI Liquidating Trust s Opposition to Grant Thornton s Motion for an Order to Show Cause Why Sanctions should not be Imposed against WMI Liquidating Trust for Failure to Comply with the Court s Final Fee Order by Failing and Refusing to Pay Approved Professional Fees. EVIDENTIARY OBJECTIONS TO DECLARATION OF CURT BROUWER Evidence Objected to: Grounds for Objection: SUSTAIN/ 3: As set forth in more detail below, I agreed to Grant Thornton s engagement after discussions with lead engagement partner Steve Ryan. We agreed that Grant Thornton would assist the Debtors Lack of Foundation FRE 901; OVERRULE 1 The Debtors in these chapter 11 cases along with the last four digits of each Debtor s federal tax identification number are: (i) Washington Mutual, Inc. (3725); and (ii) WMI Investment Corp. (5395). The principal offices of WMI Liquidating Trust are located at 1201 Third Avenue, Suite 3000, Seattle, Washington

2 Case MFW Doc Filed 02/17/17 Page 2 of 16 in pursuing a specific refund claim. The refund claim asserted that California s taxation of the Debtors federal bond interest was unconstitutional and should be refunded to WMI (the Treasury Interest Issue ) (explained in more detail at 5 below). We agreed that Grant Thornton would be paid hourly fees of up to $150,000, and then a contingency fee of 10% of the value that the Debtors recovered from the Treasury Interest Issue refund claim. The notion that Grant Thornton could charge a contingency fee if its refund claim did not prevail, or could charge a fee for unrelated refunds, was never discussed and is contrary to what we agreed. Based on my interactions with Grant Thornton s engagement partner, neither of us read the engagement agreement to provide for such a fee, which would be unheard of in our industry. If that is what the engagement agreement provides, then it does not properly reflect our agreement. I would never have presented that agreement to WMI, the Debtors, or the Court for any of their approval. 4 We originally believed that the Treasury Interest Issue could lead to a refund claim of $50 million or higher. The actual claim turned out to be $42 million, plus interest. California rejected the claim consistently because of an erroneous factual premise underlying the claim. The Trust lowered the claim to $21 million to try to get some traction from it, but, after continued rejections, I made the decision in consultation with Trust management and JPMorgan Chase that the merits of the issue were not strong enough to continue pursuing. The Trust therefore withdrew its request for a treasury interest refund. The Trust did not receive a refund for the Treasury Interest Issue; the Trust did not trade ILSC 5/8-201); Relevance FRE 401and 402; Speculation. Speculation. 2

3 Case MFW Doc Filed 02/17/17 Page 3 of 16 off the Treasury Interest Issue to reduce another claim; and, because the Trust conceded the claim, it did not prevail. 10: We did not agree that Grant Thornton would have a broad mandate to handle all California issues, as I understand Grant Thornton has previously stated to the Court. We agreed to include standard language providing that if Grant Thornton happened to discover another tax reduction idea while reviewing the California returns for information related to the Treasury Interest Issue, then Grant Thornton could bring that idea to my attention and I could decide if WMI was willing to pursue that refund as well. This never became an issue, because neither Mr. Ryan nor anyone else at Grant Thornton ever brought me another idea for WMI s use. This engagement related to the Treasury Interest Issue only. 11: As compensation, Grant Thornton would charge hourly fees, at a 20% discount, up to a maximum of $100,000. After hitting this cap, all further compensation would arise from a contingency fee if the Treasury Interest Issue prevailed. We agreed on a contingency fee of 10% of the value that WMI recovered from the claim, up to a maximum of $5 million. We chose the $5 million number based on our rough estimate at the time that WMI could potentially ask for a refund of $50 million or higher. I believed it was appropriate to cap the contingency fee, because the cap would benefit WMI. We also agreed that Grant Thornton s hourly fees would be subtracted from any contingency fee. 12: Mr. Ryan and I agreed that Grant Thornton s contingency fee applied to the value that WMI received from the ILCS 5/8-201); Lack of Foundation FRE 901; Speculation. FRE

4 Case MFW Doc Filed 02/17/17 Page 4 of 16 Treasury Interest Issue. That was the only refund that we ever discussed. And, it is the only issue on which Grant Thornton ever worked. I would never have agreed to a contingency fee of 10% of any refund that WMI received from the FTB, whether related to the Treasury Interest Issue or not, because that would have resulted in Grant Thornton being paid for all manner of other tax issues that WMI had before the FTB. Based on my thirty years of experience in the industry, a contingency fee is paid only upon recovery on the specific underlying claim. To allow Grant Thornton to charge a contingency fee for claims unrelated to its own, regardless of the success of its own claim, would have been contrary to common sense or anything I had seen before in the industry. Improper Lay Opinion FRE 702, 703 and 705; Speculation. 13: As a general matter, when a large taxpayer asserts a refund claim against a state, the taxpayer can obtain a recovery in several ways. Most directly, the taxpayer could obtain a refund payment from the state. But, if the state accepts the refund claim, it could provide value in other ways: it could set off another tax liability owed by the taxpayer, or it could provide a credit against future taxes. All of these alternatives provide value to the taxpayer, because in each case the taxpayer receives the same net benefit. Mr. Ryan and I agreed that, if the Treasury Interest Issue provided value in one of these ways (a direct refund, a setoff, a credit, etc ), then the contingency fee would apply to that value. That is reflected in the Engagement Agreement s concept of Economic Value. Infra 25(d). Stated another way, the term Economic Value was intended only to be the means to measure the value received from the Treasury Interest Issue. We were both in Improper Lay Opinion FRE 702, 703 and 705; Relevance FRE 401and 402; Speculation. 4

5 Case MFW Doc Filed 02/17/17 Page 5 of 16 agreement that the value, in whatever form it took, had to be derived from that issue. 14: At this time, as described below, the IRS had already adjusted a significant portion of WMI s federal taxable income downward, and WMI had already filed (but had not yet received) a corresponding refund claim from the FTB for $172 million as a result of these adjustments (and WMI was expecting to continue filing refund claims for hundreds of millions more on account of the IRS adjustments). So even at this early date, a contingency fee based on all value received from the FTB, whether related to the Treasury Interest Issue or not, would have led to a guaranteed noncontingent fee based on this unrelated refund claim. That was not what Mr. Ryan and I agreed or understood. Lack of Foundation FRE 901; Improper Lay Opinion FRE 702, 703 and 705; ILSC 5/ : Grant Thornton proposed two alternative fee structures for me to consider. The first was the same structure as pre-petition, with one modification: Grant Thornton would be paid hourly fees up to a cap of $150,000 (as opposed to $100,000), and then would receive a contingency fee of 10% of any value yielded by the Treasury Interest Issue. The second proposal was an hourly arrangement with a minimum fee of $1 million and a maximum of $2 million. Both of these proposals were premised on Grant Thornton s belief that the Treasury Interest Issue could yield an economic value as high as $60-$80 million (at this time, the Debtors still had not calculated the actual number, which turned out to be $42 million plus interest).... Lack of Foundation FRE 901; Speculation. 5

6 Case MFW Doc Filed 02/17/17 Page 6 of 16 23: I agreed to re-engage Grant Thornton under the first proposal, which mirrored the pre-bankruptcy engagement. We agreed that Grant Thornton would be paid hourly fees of up to $150,000, after which it would receive 10% of the amount recovered. The Debtors would pay a maximum of $150,000 upfront, and Grant Thornton would shoulder the risk of not receiving a contingency fee if the Treasury Interest Issue did not yield value. I did not agree to the $1 million minimum / $2 million maximum fee proposal, in part because I did not believe I could justify committing the Debtors to that expense for a claim that might not yield value in excess of that expense. 24: As before, Mr. Ryan and I agreed that the contingency fee would apply to the value that the Debtors received from Grant Thornton s work product only (the Treasury Interest Issue). I would never have agreed to a contingency fee of 10% of any value that the Debtors received from the FTB, because I would not have agreed to a contingency fee that was not based on the Treasury Interest Issue prevailing. That was contrary to our express agreement, and would have been unlike anything I have seen before in the industry. Likewise, I would never have agreed to allow Grant Thornton to bill a fee for any reduction in the FTB proof of claim. Lack of Foundation FRE 901; FRE 802. FRE : I believed that these documents accurately incorporated our agreement, because of the following language contained therein: a. The Statement of Work listed the services that Grant Thornton would provide, and used 6

7 Case MFW Doc Filed 02/17/17 Page 7 of 16 language that we agreed referred to the Treasury Interest Issue. That section, entitled [t]he services we will provide, begins with the following language: The Services will include assisting WMI in conducting a detailed review of WMI s federal and California franchise (income) tax filings [for all tax periods prior to 2008] for the purpose of identifying and compiling certain income amounts that Grant Thornton in our professional judgment qualify for exemption from California franchise (income) tax. Improper Lay Opinion FRE 702, 703 and 705; Relevance FRE 401and 402. All amounts specifically qualifying for California exemption and underlying position will be discussed with WMI personnel who will review and provide their approval prior to any discussions or communications with the [FTB]. Statement of Work at 1 (A63) (emphasis added). The term exemption has a specific meaning in tax parlance. It refers to income that is non-taxable and, therefore, any taxes paid on that income would be refundable. I understood this language about Grant Thornton developing a theory that certain income amounts qualify for exemption from California franchise (income) tax to refer to the Treasury Interest Issue, the 7

8 Case MFW Doc Filed 02/17/17 Page 8 of 16 only idea that Mr. Ryan and I discussed. As is customary in this type of arrangement, we included language allowing Grant Thornton to bring any other refund theories that it discovered to my attention, but Grant Thornton never did. Per the second paragraph quoted, the only issue that Grant Thornton discussed and obtained permission to assert was the Treasury Interest Issue. b. Paragraph 4 of the same section ( The Services we will provide ) further states: WMI understands and has been advised by Grant Thornton that it is anticipated that the FTB will initially deny the claims (either by issuing a notice of denial or via a deemed denial that occurs by operation of California law that occurs through the non-processing of the claims). A63. The only claims that Mr. Ryan advised me that the FTB would initially deny was the treasury interest refund request. This further confirmed my belief that the prior paragraph of the Statement of Work referred to the Treasury Interest Issue. c. Page 2 of the Statement of Work lists the Procedure and Deliverables for the engagement, which include: identify[ing] and document[ing] refund opportunities (overpayments) of franchise (income) tax that come to Grant Thornton s attention. All refund opportunities will be discussed with WMI personnel who will review and approve both the amounts identified an all underlying tax positions. 8

9 Case MFW Doc Filed 02/17/17 Page 9 of 16 Statement of Work at 2, at third bullet point (A64). Mr. Ryan and I agreed that Grant Thornton would develop the Treasury Interest Issue, but would approach me if, in so doing, Grant Thornton found any other refund theories. This language incorporated that understanding. As noted above, Grant Thornton never approached me with any other idea. d. Pages 3 and 4 of the Statement of Work contain Grant Thornton s compensation terms. They provide that Grant Thornton will receive up to $150,000 in hourly fees, discounted by 20%, and then a contingency fee as follows: The FTB will review the filing(s) submitted under this SOW [statement of work]. In connection with FTB findings, WMI will pay Grant Thornton ten percent (10%) of the Economic Value received by WMI or its subsidiaries, not to exceed $5 million. WMI will receive a credit for amounts previously paid to Grant Thornton under the $150,000 cap. For purposes of this Engagement, Economic Value includes tax, interest and penalty offsets, whether received by check, deposit, overpayment applied, 9

10 Case MFW Doc Filed 02/17/17 Page 10 of 16 credit, audit offset, or any other means. Statement of Work at 4 (emphasis added) (A66). I believed that this language accurately incorporated my agreement with Mr. Ryan for a contingency fee based on the recovery from Grant Thornton s work product. The language states that [t]he FTB will review the filings under this SOW, which I understood to mean the work product that Grant Thornton provided in this engagement. The second sentence builds off the first: in connection with FTB findings, WMI will pay Grant Thornton ten percent of the Economic Value received by WMI or its subsidiaries, not to exceed $5 million. I read the words in connection with FTB findings to connect the second sentence to the first ( the FTB will review the filings submitted under this SOW ), thus limiting the contingency fee to the value received from Grant Thornton s work product in this engagement. Mr. Ryan and I never agreed that Grant Thornton could bill for other claims, like the FTB refunds that the Debtors received on account of the IRS adjustments. e. The same paragraph that defines Economic Value also provides: The total Economic Value will not be reduced by the amount of any unrelated audit 10

11 Case MFW Doc Filed 02/17/17 Page 11 of 16 assessments or exposure items uncovered. Statement of Work at 4, 2 (A66). In other words, if the Treasury Interest Issue yielded value, but, at the same time, the FTB assessed other amounts against the Debtors, these unrelated assessments would not lessen the Economic Value provided by the Treasury Interest Issue. This demonstrates how careful Grant Thornton was in limiting Economic Value to the Treasury Interest Issue. Yet, Grant Thornton now contends that Economic Value should take into account unrelated issues: the refund arising from the IRS adjustments, and the various state audit reductions that the Debtors other tax professionals obtained. That is contrary to the agreement I reached with Mr. Ryan, and to common-sense business practice 26: For these reasons, I believed that the Statement of Work accurately reflected the agreement that I reached with Mr. Ryan. Throughout the engagement and until his death in 2012, Mr. Ryan never expressed to me a contradictory understanding. For example, when the FTB accepted the Debtors entitlement to hundreds of millions of refunds on account of the IRS adjustments, Mr. Ryan did not bill the Debtors or act as if Grant Thornton had reached its fee cap. To the extent that the Engagement Agreement does not incorporate my understanding with Mr. Ryan, then it would have to be because we were jointly mistaken. And, because Relevance FRE 401and

12 Case MFW Doc Filed 02/17/17 Page 12 of 16 the fee as it has since been construed was so far contrary to our agreement and to anything I ve ever seen in the industry, I would never have read the agreement to provide for such a fee. Nor would I have allowed such a broad fee to be presented to WMI, the Debtors, or the Court for approval. 27: At the time of engagement, I could never have anticipated that five years later, Grant Thornton would try to receive a much more expansive contingent fee than what we agreed upon and believed to be incorporated into the Engagement Agreement. Such a fee is so far beyond the norm that in my opinion, no reasonable person could have agreed to it or anticipated it. 28: I understand that Grant Thornton previously represented to the Court that it had a broad mandate to handle all California issues, and that it worked on every issue raised in the FTB proof of claim (all FTB audit issues). A376. That is absolutely and unequivocally false. I was directly involved in every tax issue relating to the FTB. The professionals handling those issues reported to me. Grant Thornton did not have a broad mandate to handle California issues; it was hired to work on the Treasury Interest Issue refund only. Grant Thornton did not work on any of the issues that the FTB raised in its proof of claim under this engagement. Grant Thornton needed to obtain permission from the Debtors for any issue it worked on; the only issue that Grant Thornton was permitted to work on was the Treasury Interest Issue. 39. Based on my involvement in the negotiations, the Treasury Interest Issue did not yield value... It therefore did not Relevance FRE 401and 402; Improper Lay Opinion FRE 702, 703 and 705; Relevance FRE 401and 402. Relevance FRE 401and

13 Case MFW Doc Filed 02/17/17 Page 13 of 16 contribute to the final settlement number. We negotiated with the FTB issue-byissue, and we did not receive an express refund for the Treasury Interest Issue, nor did we receive indirect value by trading it off for a reduction of an unrelated audit issue. While I cannot read the FTB s mind, I cannot think of a single reason why it would pay value for a withdrawn claim. 40. After the Court approved the FTB settlement, Grant Thornton contacted me about whether it had earned a contingency fee. Specifically, in May or June 2014, Don Corbett or Grant Thornton called me to discuss what impact the Treasury Interest Issue might have had on the settlement. Mr. Corbett was Grant Thornton s relationship partner with WMI. 41. I knew Mr. Corbett well and considered him a friend. So, in the interest of seeing if we could reach a business resolution that both of us could live with, I told him that I would consider any ways in which the Treasury Interest Issue could have provided value. I did not believe that it did, but I was willing to entertain the discussion with Mr. Corbett due to our relationship and in an effort to reach a business resolution. For example, I was willing to consider the possibility that had the Debtors litigated the issue, the FTB would have had to incur $1 million in fees and costs, and, therefore, the FTB attributed that relatively small amount to the issue in its final settlement number. But, because the Debtors stopped pressing the issue, this did not seem like a realistic basis for determining Grant Thornton s fee. Any possible value that the Treasury Interest Issue provided would have been intangible and de Relevance FRE 401 and 402; Improper Lay Opinion FRE 702, 703 and 705; FRE 802. Relevance FRE 401and 402; Inadmissible Settlement Discussion FRE 408. Relevance FRE 401 and 402; Improper Lay Opinion FRE 702, 703 and 705; Lack of Foundation FRE 901; Inadmissible Settlement Discussion FRE

14 Case MFW Doc Filed 02/17/17 Page 14 of 16 minimis, given that the Debtors withdrew the claim. 42. My conversation with Mr. Corbett focused on the value, if any, of the Treasury Interest Issue. It was clear from our discussion that Mr. Corbett understood that Grant Thornton was to be paid only for the value yielded by the Treasury Interest Issue, and not 10% of all value received from the FTB. Speculation; Relevance FRE 401 and 402; Inadmissible Settlement Discussion FRE Later in June 2014, Mr. Corbett followed up our phone call with an asking if I had considered what impact the Treasury Interest issue might have contributed to the overall success of the resolution. A362. We agreed to have another phone call We discussed whether the Treasure Interest Issue yielded any value. No one on that call suggested that Grant Thornton could bill for all value received from the FTB. Instead, our discussions were based on our mutual (and longstanding) understanding that any fee was based on the value, if any, from the Treasury Interest Issue. I asked Grant Thornton to think about a reasonable basis for concluding that it had earned a contingency fee, and Mr. Corbett agreed he would do so and get back to me. 45. In September 2014, Mr. Corbett ed me the following response: I circled the wagon with my team to discuss and consider what potential fair amount to compensate Grant Thornton for its efforts. A365. Thus, more than three months into our discussions, Grant Thornton s professionals continued to Relevance FRE 401 and 402; Inadmissible Settlement Discussion FRE 408. Relevance FRE 401 and 402; Inadmissible Settlement Discussion FRE 408. Relevance FRE 401 and 402; Inadmissible Settlement Discussion FRE

15 Case MFW Doc Filed 02/17/17 Page 15 of 16 discuss with me what value the Treasury Interest Issue provided as the basis for the contingency fee. 46. Throughout the Fall of 2014, we continued discussions with Grant Thornton. Grant Thornton ultimately proposed to settle for a $1.23 million fee. A369. Grant Thornton wrote in this proposal that it calculated this number by taking $41 million (roughly the full amount of the refund request) and assuming a 30% chance of success, for an economic benefit of $12.3 million. Grant Thornton then applied its 10% fee to this amount to reach $1.23 million (which would have to be reduced by $150,000 in hourly fees). 47. The Debtors rejected this offer because there was no reasonable basis to conclude that the Treasury Interest Issue had yielded over $12 million in value, given that the Debtors had withdrawn it. Further, I did not believe that it was appropriate to pay such a significant amount based on the mere chance that the Treasury Interest Idea would have succeeded if the Debtors had litigated it (and incurred the costs and risks of doing so). My agreement with Mr. Ryan was to pay only for the value that the Debtors actually received from the issue. Moreover, the $41 million starting point did not make sense as the Debtors had reduced their demand to $21 million, and then withdrew the claim in full. The parties soon reached impasse, as Grant Thornton continued to insist on a fee of over $1 million. 48. In sum, until shortly before Grant Thornton filed its Sanctions Motion, the parties had been continuing discussions on the shared understanding that Grant Thornton s fee was based on the Treasury Interest Issue. Under the Relevance FRE 401 and 402; Inadmissible Settlement Discussion FRE 408. Relevance FRE 401 and 402; Inadmissible Settlement Discussion FRE

16 Case MFW Doc Filed 02/17/17 Page 16 of 16 circumstances, I believe that the Debtors acted reasonably in attempting to reach a resolution and not blindly paying $5 million. A $5 million fee based on all value received from the FTB was inconsistent with my agreement with Grant Thornton, with the parties conduct, and the basis on which the Debtors presented this engagement to the Court for its approval. Improper Lay Opinion FRE 702, 703 and 705; ILSC 5/8-201); Relevance FRE 401and 402; Date: February 17, 2017 CROSS & SIMON, LLC By: /s/ Joseph Grey Joseph Grey (ID 2358) 1105 North Market Street, Suite 901 Wilmington, DE (320) jgrey@crosslaw.com and Ian S. Landsberg, Esq. Casey Z. Donoyan, Esq. Lisa Skaist, Esq. LANDSBERG LAW, APC 9300 Wilshire Blvd, Suite 565 Beverly Hills, CA Attorneys for Grant Thornton, LLC 16

17 Case MFW Doc Filed 02/17/17 Page 1 of 1 CERTIFICATE OF SERVICE I, Joseph Grey, hereby certify that on this 17th day of February, 2017, and in addition to the service provided under the Court s CM/ECF system, I caused copies of Evidentiary Objections to, and Request to Strike Portions of, the Declaration of Curt Brower Offered in Support of WMI Trust s Supplemental Opposition to Grant Thornton s Supplemental Motion for an Order to Show Cause Why Sanctions Should Not Be Imposed Against Washington Mutual Liquidating Trust for Failure to Comply With the Court s Final Fee Order [Docket No ] By Failing and Refusing to Pay Approved Professional Fees to be served on the parties listed below in the manner(s) indicated. VIA Marcos A. Ramos, Esq. Cory D. Kandestin, Esq. Andrew M. Dean, Esq. RICHARDS, LAYTON & FINGER, P.A. One Rodney Square 920 North King Street Wilmington, Delaware VIA Brian S. Rosen, Esq. WElL, GOTSHAL & MANGES LLP 767 Fifth Avenue New York, New York /s/ Joseph Grey Joseph Grey (No. 2358)