Creditors of bankrupt holding company Washington Mutual Inc. want more control over the company’s ability to fund capital calls.
Washington Mutual Inc., which formerly owned Washington Mutual Bank, is attempting to sell its interests in 10 venture capital funds after being penalised for not meeting a $700,000 capital call from one of the funds.
The holding company’s creditors committee has asked bankruptcy court to force the company to get written consent from the committee prior to funding capital calls in excess of $100,000. The creditors also want notification seven days prior to the company funding any capital calls.
“The foregoing requested modifications to the proposed sale procedure are modest and appropriate,” the creditors committee said in a bankruptcy filing. “The [company has] offered no compelling reason for [its] refusal to acquiesce.”
The auction for the fund interests is scheduled for 16 December. WaMu has said in court documents that it should not be penalised for missing capital calls because it is protected by bankruptcy law.
Washington Mutual Inc.’s subsidiary, WMI Investment, has committed $36.5 million to the 10 funds, and has to date contributed $27.8 million, according to bankruptcy documents.
The funds are ARCH Venture Fund V; Arrowpath eCommerce Fund II; Digital Partners III; Financial Technology Ventures; Financial Technology Ventures II; Financial Technology Ventures III; Madrona Venture Fund I-A; Madrona Venture Fund III; Maveron Equity Partners 2000 and Northwest Venture Partners III.
WMI is in default on its fund commitment to Financial Technology Ventures III, which issued a $700,000 capital call on 1 October 2008. The fund is run by San Francisco-based FTVentures, a growth capital firm that invests in business services and software companies. The firm recently committed $30 million to Mu Sigma, a provider of analytical decision support services.
WMI committed $10 million to the fund in March 2007, and has so far contributed $3.3 million. WMI has not fulfilled the capital request from FTVentures and is being penalised with an 18 percent default interest accrual on the amount of the capital call, according to court documents. WMI was required to forfeit 25 percent of contributed capital on 6 December 2008 if it was still in default of the capital call, and 50 percent on 6 February 2009, WMI said.
WMI, meanwhile, notified FTVentures that the default interest penalty is a violation of bankruptcy law and should not be applied. Bankruptcy law protects company under Chapter 11 protection through the “automatic stay provision”, which bars creditors from collecting debts from a debtor, with certain exceptions.
An attorney with experience of bankrupt limited partnerships said the LP interest could be viewed as just another asset that needs to be sold in liquidation.
“In a liquidating bankruptcy case, you try to realise value from the assets. If no one buys it, it will end up abandoning it,” the lawyer said. “If it’s worthless, no one will make the payment, and if it’s worthless, eventually the fund will not have one of its LPs.”