Washington Mutual modified sixth plan rejected; judge orders mediation

By Caroline Salls

Pittsburgh, Sept. 14 - Washington Mutual, Inc.'s modified sixth amended plan of reorganization was rejected late Tuesday by judge Mary F. Walrath, marking the second rejection of a WaMu plan this year.

In her opinion filed with the U.S. Bankruptcy Court for the District of Delaware, Walrath did affirm her Jan. 7 ruling that the global settlement on which the plan is based "provides a reasonable resolution in light of the possible results of the multiple complex litigation, the likely difficulties in collection, the expense inherent in any further delay and the paramount interests of the stakeholders."

Court findings

Walrath also ruled that:

• The liquidating trustee to be appointed under the plan must be removable at the discretion of a majority of the trust advisory board;

• The composition of the trust advisory board must reflect the constituents who hold liquidating trust interests;

• When creditors lose their liquidating trust interests because they have been paid in full, the creditors' board representative will be replaced by representatives selected by equity holders;

• The federal judgment interest rate is appropriate for payment of post-bankruptcy interest to unsecured creditors rather than the contract rate, despite the objection of the senior noteholders and unsecured creditors committee.

"The fact that some of the creditors have contractually agreed to pay their distribution to other creditors does not mean that the debtors are required to make payments to the senior creditors that are more than the Bankruptcy Code allows, while preserving the subordinated creditors' claims against the estate," the judge said in her ruling.

"While the debtors can, through a plan of reorganization, effectuate the subordination agreements by diverting payments from subordinated creditors to senior creditors, that cannot affect the total claims against the estate, which do not include post-petition interest on any unsecured claim at more than the federal judgment rate."

• Subordinated claims do not need to be paid until senior claims are paid in full, with interest;

• A plan condition requiring a release to JPMorgan and other non-debtors in order to receive a distribution does not violate the best interest of creditors test;

• The payment of cash, liquidating trust interests or stock equal to the value of senior noteholder claims satisfies the absolute priority rule and pays senior noteholders in full; and

• The company's PIERS should be classified as debt, not equity.

Potential shareholder claims

Meanwhile, Walrath said the Washington Mutual equity committee has valid claims that settlement noteholders received material non-public information and acted recklessly in their use of that information.

The judge said evidence showed that "it appears that [settlement] negotiations may have shifted towards the material end of the spectrum and that the settlement noteholders traded on that information which was not known to the public."

The judge also said the equity committee has a claim that the settlement noteholders became temporary insiders of the company when Washington Mutual gave them confidential information and allowed them to participate in negotiations with JPMC for the shared goal of reaching a settlement.

"The court finds that the equity committee and the [trust preferred securities] group have stated a colorable claim that the settlement noteholders engaged in insider trading under the classical and misappropriation theories," the judge said in her ruling.

Walrath said she disagreed with the settlement noteholders' warning that any finding of insider trading would chill the participation of creditors in settlement discussions in public company bankruptcy cases.

"There is an easy solution: creditors who want to participate in settlement discussions in which they receive material non-public information about the debtor must either restrict their trading or establish an ethical wall between traders and participants in the bankruptcy case," Walrath said in her opinion.

Mediation first

Because of her concerns that the equity committee's claims could cause the case to "devolve into a litigation morass," the judge ordered the parties to participate in mediation before the shareholder group proceeds with its claims.

Walrath said the potential recoveries for all parties dwindle as the bankruptcy case continues.

"Regardless of which parties prevail, they may be disappointed to find their recovery significantly less than expected," Walrath said.

Washington Mutual said in a news release that it believes the expeditious distribution of funds to claimants is of paramount importance."

As a result, the company said it will work with parties in interest to seek confirmation of a modified plan as soon as possible.

A status hearing has been scheduled for Oct. 7.

Washington Mutual, a Seattle-based savings and loan holding company, filed for Chapter 11 bankruptcy on Sept. 26, 2008. Its Chapter 11 case number is 08-12229.

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.