Recent Bankruptcy Court Decision Finds Colorable Claim for Equitable Disallowance on the Basis of Alleged Insider Trading by Creditors

A recent Delaware bankruptcy court decision raises the possibility of equitable disallowance of claims as a result of alleged insider trading by creditors participating in Chapter 11 settlement discussions.  The court in In re Washington Mutual, Inc., No. 08-12229 (MFW), 2011 WL 4090757 (Bankr. D. Del. Sept. 13, 2011), held that the official committee of equityholders had stated a colorable claim for equitable disallowance of certain noteholders’ claims, finding that the noteholders may have engaged in insider trading by trading debt securities issued by the Debtors while in possession of material non-public information arising out of settlement negotiations.