Creditors who stand to receiving nothing under Washington Mutual Inc.'s reorganization plan are trying to block court approval of the plan, attorneys for WMI and supporters of the plan told a Delaware bankruptcy judge on Wednesday.
Attorneys for WMI, JPMorgan Chase & Co. and the Federal Deposit Insurance Corp. accused Washington Mutual's official equity holders committee and a group of investors who purchased certain securities of trying to block confirmation of the plan in order to win concessions from other creditors.
But opponents of the plan argued that it is based on negotiations driven by hedge funds who bought enough Washington Mutual debt to obtain veto power over the plan, then used inside information gained during negotiations to improperly trade in WMI securities.
After hearing almost nine hours of closing arguments on whether she should confirm Washington Mutual's plan, Judge Mary Walrath gave no indication on when she would rule.
The proposed reorganization plan is based on settling lawsuits that pitted Washington Mutual, the FDIC and JPMorgan against one another after the FDIC seized WaMu's Seattle-based flagship bank in 2008 and sold its assets to JPMorgan for $1.9 billion. It was the largest bank failure in U.S. history.
Under the proposed settlement, the competing lawsuits would be dismissed and some $10 billion in disputed assets would be distributed among Washington Mutual, JPMorgan and the FDIC.
Walrath ruled in January that the proposed settlement was reasonable, but she refused to confirm WaMu's plan until certain changes were made. The judge concluded, among other things, that the protections from future legal liabilities that the plan granted to the company's directors, officers and professionals, as well as members of its creditors committee and certain third parties, were either unwarranted or too broad.
Attorneys for the equity committee appealed Walrath's ruling and argue that four hedge funds that bought Washington Mutual debt and supported the reorganization plan used information gained in settlement negotiations to engage in insider trading. The hedge funds have denied any wrongdoing.
One of the funds, Aurelius Capital Management, has objected to WaMu's reorganization plan. Aurelius said that Washington Mutual has been denied access to $4 billion in cash improperly held by JPMorgan, which is paying far less interest to WaMu under the settlement than it would otherwise. With WaMu being deprived of that value and incurring mounting costs in the three-year-old bankruptcy case, the settlement has become more valuable to JPMorgan than to Washington Mutual, according to Aurelius.
Robert Sacks, an attorney for JP Morgan, said his client has made significant compromises that will result in more than $7 billion going to Washington Mutual's bankruptcy estate for distribution to creditors.
In addition to accusations of insider trading, plan opponents also argue that Walrath does not have the constitutional authority to issue a final order resolving Washington Mutual's claims against JPMorgan and the FDIC. Such an order, they claim, must come from a federal district court judge.
Under the proposed settlement, JPMorgan would turn over some $4 billion in disputed deposit accounts to WMI for distribution to holders of allowed claims against the bankruptcy estate. JPMorgan in return would get 80 percent of expected tax refunds resulting from Washington Mutual's prior operating losses, which are valued at between $2.7 billion and $3 billion. Washington Mutual would get 20 percent.
Washington Mutual also would get about 70 percent of a second round of operating-loss tax refunds valued at about $2.8 billion, with roughly 30 percent going to the FDIC. WaMu would give $335 million of its share to holders of senior Washington Mutual Bank notes, who are owed billions of dollars, in return for their support of the reorganization plan.
While the settlement would end litigation among WMI, the FDIC and JPMorgan, it would not affect other lawsuits stemming from the bank failure.