WILMINGTON, Del. — Washington Mutual Inc. on Wednesday moved a step closer to an exit from bankruptcy when a judge rebuffed a bid to hold up confirmation proceedings for the company's $7 billion Chapter 11 plan.
Judge Mary Walrath rejected a request by some investors to stay confirmation proceedings while their appeal of an unfavorable ruling makes its way through the courts. She said she would approve the disclosure statement that explains the distribution scheme for the money that stacked up in the big bank holding company's Chapter 11 case.
Washington Mutual is heading to a Feb. 16 court session where it will make its third attempt to win confirmation of a Chapter 11 plan. The company warned that delay in the case, already three years old, was eating as much as $30 million per month out of the recovery for creditors at the bottom of the payment priority scheme.
"The harm to all the other creditors and stakeholders in this case I think would be enormous," Walrath said at a hearing in the U.S. Bankruptcy Court in Wilmington, Del. where she refused to hold up the Chapter 11 proceedings for the appeal by holders of trust-preferred securities.
"This case has lasted for many, many years."
Washington Mutual, the holding company behind the biggest banking failure in U.S. history, filed for Chapter 11 protection in September 2008. Its operating subsidiary, Washington Mutual Bank, or WaMu, had been seized by regulators fearful the mortgage-stuffed thrift was on the point of collapse.
Under bankruptcy court protection, WaMu's former parent hammered out deals with regulators and with JPMorgan Chase & Co. (JPM), WaMu's new owner, that meant payment in full for top-ranking creditors, and enormous profits for investors who jumped on Washington Mutual's debt in the uncertain days after WaMu's seizure.
JPMorgan and the Federal Deposit Insurance Corp. agreed to divide billions of dollars worth of tax refunds to WaMu's former parent, and end litigation over who was to blame for the thrift's failure.
Wednesday, JPMorgan attorney Robert Sacks of Sullivan & Cromwell warned the core settlement in Washington Mutual's Chapter 11 plan would not hold indefinitely if confirmation was delayed.
Two earlier attempts at winning confirmation failed amid suspicions major hedge funds engaged in insider trading during the big bankruptcy case.
In a recent deal, shareholders agreed to drop the allegations of inside trading, in exchange for a stake in the reorganized Washington Mutual.
The post-bankruptcy company will operate a fading insurance operation in "run-off," meaning it will not issue new policies, but will continue to take in premiums and pay claims on existing business. The reorganized company will have financing that could allow it to take advantage of tax breaks, if the Chapter 11 plan is approved.
It wasn't until late last year that Washington Mutual agreed to give something to shareholders under its Chapter 11 plan. For years, the company said creditors at the top of the pile would get paid in full, in cash, with interest, but there was nothing left for shareholders.
After two defeats in confirmation contests, Washington Mutual cut a deal that got shareholders on its side. They are joining in the push for speed in getting a Chapter 11 plan confirmed.
Wednesday, Washington Mutual picked up another ally in its drive for confirmation, thanks to a settlement with holders of litigation tracking warrants, securities linked to the outcome of old lawsuits over Dime Savings Bank.
Walrath ruled against the litigation tracking warrant holders recently, rejecting their arguments they should be treated as creditors in Washington Mutual's Chapter 11 plan, rather than as shareholders.
To head off an appeal, Washington Mutual reached a deal with the litigation tracking warrant holders that gives them $9 million as creditors, as well as a piece of the reorganized company.
The settlement frees up more than $300 million in cash that was reserved under the Chapter 11 plan in case the litigation tracking warrants won the litigation against Washington Mutual.
The investors who unsuccessfully tried to hold up the Washington Mutual plan are holders of trust preferred securities. They contend they are being deprived of their property under the Chapter 11 plan.
JPMorgan is getting the trust preferred securities as part of its global settlement with Washington Mutual.
Investors in the trust preferred securities said they would be irreparably harmed if Washington Mutual's Chapter 11 plan is confirmed before they get their day in the higher court.