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March 12, 2010 5:17 PM

WaMu, JPMorgan Agree to $6 Billion Settlement

Posted by Zach Lowe

Major developments out of federal bankruptcy court in Delaware: Washington Mutual's estate has reached a proposed settlement with JPMorgan Chase and federal regulators that will result in the return of $4 billion in deposits and nearly $2 billion in other cash that will be used to pay WaMu creditors, according to lawyers involved in the matter. 

As part of the proposed settlement, which still requires bondholder approval, the bankrupt WaMu estate agreed not to pursue claims against JPMorgan and the Federal Deposit Insurance Corporation over the bank's collapse.

As you'll recall, the FDIC scooped up the bank in late 2008, placed it in receivership, and sold its assets to JPMorgan for $1.9 billion. As we've previously reported, WaMu's estate and its special litigation team from Quinn Emanuel Urquhart & Sullivan claimed JPMorgan and several of its top executives, including the bank's chief, Jamie Dimon, conspired to lower WaMu's sale price by leaking false information about WaMu's finances to federal regulators and potential rival bidders.

The estate successfully convinced a judge to compel discovery from JPMorgan, and, buoyed by that victory, asked the judge to apply similar discovery orders to some 20 other entities, including JPMorgan's M&A counsel at Sullivan & Cromwell. While that request was pending, a few potential targets turned over documents, while others (including the FDIC, represented by DLA Piper) objected. A third group did nothing. S&C fell into that last category, and its strategy of waiting out Judge Mary Walrath paid off when she denied Quinn's motion to compel discovery from the firm and the other targets. 

Now, back to Friday's news: Occasionally lost amid all the sniping over JPMorgan's alleged nefarious conduct is a dispute over billions in deposits the WaMu estate claimed rightfully belonged to it and not to JPMorgan. Under the term's of the proposed settlement announced Friday, WaMu will get $4 billion in deposits back plus a minority share in two expected tax refunds that will total about $5.6 billion, according to Reuters, Bloomberg, and lawyers on the case. The total recovery for the WaMu estate comes to nearly $6 billion. 

"We are delighted with the settlement," says David Elsberg, who led the Quinn team along with partner Peter Calamari. (Weil, Gotshal & Manges is also serving as WaMu's debtor's counsel). "It means there will be a significant distribution for [WaMu]'s creditors, and it vindicates the positions we took in court." 

Robert Sacks and Stacey Friedman, the lead S&C partners listed on the matter, did not return messages seeking comment. JPMorgan, which has denied the allegations about its conduct preceding the WaMu collapse, had claimed ownership of the deposits at issue, according to Reuters. 

WaMu's share price dropped on the news of the settlement, in part, Bloomberg notes, because shareholders expected recovery might reach $20 billion. The estate has $7 billion in outstanding bondholder and unsecured debt, though about $100 billion in claims have been filed against it in the Chapter 11 case, according to Reuters and Bloomberg. 

The estate will officially file the settlement papers on March 26.

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