A bankruptcy judge Friday nixed a bid by a group of big bondholders of Washington Mutual Inc. to intervene in a shareholder lawsuit aimed at derailing the bankruptcy plan of the company, the former parent of Washington Mutual Bank, or WaMu.
The thrift was seized and sold in September 2008, pushing parent Washington Mutual to file for Chapter 11 protection in the Bankruptcy Court in Wilmington, Del.
At a hearing in that court, Judge Mary Walrath rejected a petition from Washington Mutual senior bondholders who said the size of their holdings, some $2.3 billion, entitled them to a voice at a Nov. 9 court session. Company shareholders at that session will seek to force an annual meeting that would be an opportunity to vote out the board that approved the Chapter 11 plan.
"A creditor does not have any standing, in my opinion, to be heard on corporate governance issues," Walrath said. The judge noted that Washington Mutual and its official committee of unsecured creditors can be counted on to fight the shareholders.
Gregory Starner of White & Case, attorney for Washington Mutual's senior noteholders, said the group deserved the right to be heard on the shareholder suit, in order to challenge the motivations behind the legal action. Good corporate governance of the company that lost WaMu to regulators isn't the ultimate goal of the equity stakeholders, he said.
Washington Mutual has a Dec. 1 confirmation hearing on a Chapter 11 plan that is premised on a settlement with regulators and WaMu's new owner, J.P. Morgan Chase & Co. If it goes through, the plan means payment in full, plus years of interest for the senior bondholders, out of the $7 billion settlement.
Shareholders have vowed to block the plan, and convening an annual meeting to vote out Washington Mutual's board is the first step in that effort, according to Starner.
"What they're seeking to do is overturn the settlement and basically derail confirmation," the lawyer said.
"I'm sure the company will say terrible things will happen" if shareholders win the right to hold an annual meeting, the judge said, ruling that the Washington Mutual bondholders have nothing to add to the debate.
Washington Mutual and the official creditors committee have accused shareholders of pursuing scorched earth tactics to block a Chapter 11 plan that gives them nothing.
Shareholders say Washington Mutual has sold them out in a pact that means big profits for top-ranking creditors, and lawsuit immunity for those responsible for WaMu's collapse.
Court-appointed investigator Joshua Hochberg is due to file a report Nov. 1 detailing his findings on a series of allegations that regulators, J.P. Morgan, management or others are to blame for the largest banking collapse in history.