Federal bankruptcy watchdogs have challenged Washington Mutual Inc. over tactics designed to force angry creditors to abandon the pursuit of those they blame for the collapse of Washington Mutual Bank, or Wamu.
Washington Mutual's Chapter 11 plan is based on a settlement of legal claims the company had against JPMorgan Chase & Co., which bought Wamu, and the Federal Deposit Insurance Corp., which brokered the sale of the distressed thrift, from lawsuits over the deal.
A "trap door" built into the Chapter 11 plan punishes those who don't want to let potentially responsible parties off the hook, U.S. trustee Roberta A. DeAngelis said in a court filing, and that's not fair or legal.
Washington Mutual is urging creditors to support a Chapter 11 plan that means an end to a storm of legal trouble that erupted when regulators seized Wamu and sold it to JPMorgan in September 2008. Creditors who "opt out" will be stripped of legal rights, and some won't get anything out of the bankruptcy proceeding, the U.S. trustee warned.
DeAngelis added her voice to a rising chorus of protest over Washington Mutual's Chapter 11 plan, which sets out how the company plans to distribute an estimated $7 billion, mostly cash. Hers is one of more than 580 objections Washington Mutual will face Thursday, when its plan comes up for preliminary review Thursday in the U.S. Bankruptcy Court in Wilmington, Del.
Efforts to force creditors to abandon legal claims against outsiders they blame for their financial distress are a controversial topic in bankruptcy circles that has divided the courts.
Plaintiffs in a securities class action that targets Washington Mutual's top leaders and underwriters have also challenged the releases in the plan as unjustified.
"A settlement implies that somebody is getting something to give up rights," said plaintiff attorney Michael Etkin, attorney, who's with of Lowenstein Sandler. "In situations like this, in Wamu in particular, I see these releases as being gratuitous to the extent that they extend to the defendants in the securities litigation."
While they're a common element of Chapter 11 plans, grants of legal immunity are suspect, Etkin said. Troubled companies courting consent from creditors are "all wolves in sheep's clothing."
DeAngelis said Washington Mutual's "unduly coercive" Chapter 11 plan effectively guts the concept of consent. If the company thinks it can force creditors to give up rights, it should make out a case of necessity in open court, she said.
In the meantime, however, Washington Mutual should not be permitted to approach creditors seeking consent "based on the false premise that their choice matters."
Plan objectors range from stock speculators who bought Washington Mutual shares for pennies in hopes of a big lawsuit payout to major institutions that backed Wamu and paid full price for the debt of the once-thriving thrift.
A spokesman for Washington Mutual did not respond to an invitation to reply to the U.S. trustee's criticism. Lawyers for the parent company say lawsuits against JPMorgan, the FDIC and others are chancy, and the settlement that forms the basis for the Chapter 11 plan is the best route to a sure, fast recovery.
The U.S. trustee in Washington Mutual's case is siding with bondholders of Wamu, the failed thrift. In their objection, they said the former parent company has no legal right to force them to walk away from valid legal claims.
If they're correct, they say, Washington Mutual's plan won't even clear the first hurdle at Thursday's court hearing, which is a bid for permission to start the voting process.
The forced releases mean Washington Mutual's plan won't qualify for confirmation, so there's no point in sending it out for votes, Wamu bondholders say.