The Work

May 25, 2010 4:56 PM

The WaMu Bankruptcy Won't End

Posted by Zach Lowe

The Washington Mutual Chapter 11 case has been contentious from the start, complete with accusations of sabotage. So it's fitting that a global settlement that would pave the way for resolving the mess seems to be perpetually out of reach. 

The newest twist: A group of senior bondholders who own debt from WaMu's banking unit announced Monday that it is opposing a proposed settlement between the bankrupt estate, the Federal Deposit Insurance Corporation, other bondholders, and WaMu's new owners at JPMorgan Chase, according to Reuters and this release from Boies, Schiller & Flexner attorneys representing the dissident bondholders.

Meanwhile, a separate group of WaMu shareholders, this one represented by Susman Godfrey, has also expressed concerns about the proposed settlement. This group is upset at the possibility that the bankrupt estate (advised by Weil, Gotshal & Manges and a litigation team from Quinn, Emanuel, Urquhart & Sullivan) may be leaving money on the table in the proposed settlement. Boies Schiller's clients have similar concerns, but also claim the settlement shortchanges their class of bondholders while benefiting others, Reuters says. 

As you can see, there are a ton of moving parts here. In broad terms, the controversy stems from a series of disputes between the WaMu estate and JPMorgan over the latter's acquisition of the troubled bank during the height of the economic crisis. As you may recall, the FDIC rescued the bank, placed it into a receivership, and then sold it to JPMorgan (represented at the time by Sullivan & Cromwell) for $1.9 billion.

Washington Mutual has since made two claims: First, that by leaking false information about WaMu's finances, JPMorgan discouraged rival bidders that might have been able to save the bank. Second, that JPMorgan wrongly withdrew $4 billion in deposits from WaMu shortly before WaMu's bankruptcy filing, according to court records and this roundup from the Associated Press. The WaMu estate pursued potential litigation against JPMorgan and sought broad discovery of documents related to the JPMorgan-WaMu deal. The two sides have also argued about how to split up tax refunds WaMu is to receive (and, in some cases, has already received) linked to past losses, the AP says. 

The estate and JPMorgan (represented again in the bankruptcy litigation by S&C) have agreed on the broad parameters of a settlement that would return most of the $4 billion in deposits to the estate and revise how everyone would split up the tax refunds. The FDIC and its legal team at DLA Piper must also approve the deal, and the agency indicated last week it would do so, according to The New York Times. Various parties who hold debt linked to WaMu's parent company (represented by several firms, including White & Case and Wilmer Cutler Pickering Hale and Dorr) are either leaning toward approving the deal or reviewing it, according to the AP.

But Boies Schiller partner William Isaacson says bondholders who hold debt in WaMu's bank unit stand to recover much less than other note holders in the proposed deal. We reached out to Isaacson to learn a bit more about his clients, but we haven't yet heard back. We'll let you know if we do. 

A hearing on the proposed plan is scheduled for June 3 in federal bankruptcy court in Delaware. 

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And just out today, Susman's motion for an order pursuant to Bankruptcy Rule 2004 Directing the EXAMINATION OF JPMORGAN CHASE. To the eyes of pre-seizure equity holder, this is an absolute thing of beauty. Thank you Mr. Susman!


Zombie bankruptcy?

You forgot to mention that Brian Rosen's (Weil) plan was submitted by Washington Mutual's Board of Director's (JPM Moles) and that this plan seriously undervalues Wamu's assets. Also, this Proposed POR includes an immunity clause to release JPM and current Wamu BOD members from any future CRIMINAL CHARGES. Also on 6-11-10 there will be a court decision deciding on granting shareholder's right to a meeting to dissolve and elect new Wamu friendly Board of Directors.

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