Judge approves settlement in WaMu bankruptcy

WILMINGTON, Del. — A Delaware bankruptcy judge on Wednesday said she would approve a settlement between bank holding company Washington Mutual Inc. and a group of investors who had argued unsuccessfully that they held claims against it worth more than $300 million.

The settlement involves holders of warrants that entitled them to shares of WMI common stock if the company won a lawsuit filed against the federal government 17 years ago over the government’s treatment of Anchor Bank, which merged with an entity later acquired by Washington Mutual.

The warrant holders asserted debt claims in the bankruptcy case, but U.S. Bankruptcy Judge Mary Walrath ruled last month that they hold only equity interests, which slashed their potential recovery in the bankruptcy. Arthur Steinberg, an attorney representing the warrant holders, said there was no certainty they would win an appeal of Walrath’s ruling.

The claimants agreed to drop their lawsuit in return for an unsecured claim of $9 million, minus legal fees and expenses, plus up to $10 million if anything’s left after payments to higher-priority creditors. They also would get some stock in the reorganized company.

Walrath also said Wednesday that Tranquility Master Fund, a hedge fund that says it was misled into purchasing some $71 million in mortgage-backed securities from Washington Mutual, can assert limited claims totaling $10 million for the purpose of voting on WaMu’s latest reorganization plan.

Walrath similarly agreed to allow a limited $435 million general unsecured claim asserted by a separate group of investors who are plaintiffs in a mortgage-backed securities lawsuit in Washington.

The plaintiffs argued that, before they vote on Washington Mutual’s reorganization plan, Walrath must decide whether they will be treated as general unsecured creditors, or whether WMI will try to put them in a lower-ranking class of creditors who would be at the tail end of any distributions.

“Without knowing which class we’re in, we don’t know how to vote,” said John Sherwood, an attorney for the plaintiffs.

But Walrath refused to decide which creditor class the plaintiffs should be in or the merits of their claim, saying they could object to their classification in connection with a hearing on whether to confirm Washington Mutual’s reorganization plan.

Walrath also will wait until the confirmation hearing later this month to decide whether to approve a settlement under which Tranquility would drop a $49 million claim against WMI in return for a general unsecured claim of $9 million and up to an additional $1 million if money remains after payments to other creditors.

Washington Mutual’s latest reorganization plan, like two failed predecessors, is based on WMI, JPMorgan Chase and the Federal Deposit Insurance Corp. settling lawsuits they filed against one another after the collapse of Seattle-based Washington Mutual Bank in 2008 and the sale of its assets to JPMorgan Chase & Co. for $1.9 billion. It was the largest bank failure in U.S. history.

Walrath has twice rejected reorganization plans filed by WMI, including in September, when she said WaMu’s equity security holders had argued credibly that hedge funds supporting an earlier plan had engaged in insider trading of the company’s securities based on information they obtained during the bankruptcy. The hedge funds denied the allegations.

Washington Mutual announced in December that it was submitting a new plan to distribute about $7 billion to creditors after reaching a settlement with major creditors, including those who had made the insider trading allegations against the hedge funds.

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