By Steven Church – Sep 14, 2011 12:22 AM GMT+0100
Washington Mutual Inc. failed to win approval for a plan to pay creditors more than $7 billion as a bankruptcy judge sided with opponents, including shareholders, who said hedge funds’ use of inside information tainted the deal.
U.S. Bankruptcy Judge Mary Walrath in Wilmington, Delaware, said in a decision today that she was “concerned that the case will devolve into a litigation morass” and ordered the two sides into mediation.
WaMu, based in Seattle, was allied with hedge funds, JPMorgan Chase & Co. (JPM) and the Federal Deposit Insurance Corp. The reorganization plan they support was built on an agreement to split $4 billion in cash, and billions of dollars more in tax refunds. The settlement would also have resolved lawsuits over who is to blame for WaMu’s 2008 collapse, the biggest bank failure in U.S. history.
Common shareholders opposed that plan because it paid them nothing. They claim billions of dollars more could be raised by suing JPMorgan and the FDIC over the demise of Washington Mutual Bank, WaMu’s main operating unit.
WaMu filed for bankruptcy on Sept. 26, 2008, the day after its banking unit was taken over by regulators and sold to JPMorgan for $1.9 billion. Washington Mutual Bank had more than 2,200 branches and $188 billion in deposits.
The hedge funds that hold different sets of WaMu bonds and convertible securities, shareholders and other creditors fought throughout the case over how to divide the cash, tax refunds and new stock to be issued in the only part of WaMu that will survive bankruptcy, a small reinsurance company.
The case is In re Washington Mutual Inc. (WAMUQ), 08-12229, U.S. Bankruptcy Court, District of Delaware (Wilmington).
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