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July 20, 2010 3:36 PM

Quinn, Susman Both Claim Victory in WaMu Hearing

Posted by Zach Lowe

The Washington Mutual bankruptcy is going to fly past the two-year mark after a federal judge granted shareholders' request to have an independent examiner investigate whether creditors and the WaMu estate are leaving billions on the table in a proposed settlement, according to Reuters and lawyers who were in the courtroom today. 

Judge Mary Walrath's ruling means that creditors and the WaMu estate must wait a little more than six weeks before they can truly start the process of gathering official support for the proposed plan to end WaMu's Chapter 11 case. That plan would resolve potential litigation between WaMu and JPMorgan, which purchased WaMu at the height of the financial panic in 2008, and would provide about $6.8 billion in recovery for creditors. Shareholders would receive nothing under that plan. But a committee of shareholders, represented by Susman Godfrey, believe the proposed plan might shortchange the value of certain WaMu assets and of potentially explosive legal claims WaMu might make against JPMorgan. An examiner, to be appointed Monday, will look into all of this.

"We are thrilled by today's ruling," says Justin Nelson, a Susman Godfrey partner and former Am Law Litigation Daily Litigator of the Week for his work on the WaMu case. But Nelson's chief adversary today, Susheel Kirpalani of Quinn Emanuel Urquhart & Sullivan, which is serving as WaMu's special counsel, says his side is fine with Judge Walrath's ruling despite the six-week delay in the case. Kirpalani conceded in court that the case might need an examiner and urged Judge Walrath to require the examiner to submit a report on a faster-than-usual schedule. The Quinn team got that much, as Walrath set a Sept. 7 deadline for a preliminary report; the shareholders had requested the examiner get another two months, according to Bloomberg.

"We think the judge struck the right balance," Kirpalani tells us. 

The examiner's report will be a fitting coda to a wild bankruptcy. It was Quinn and WaMu's other lead counsel at Weil, Gotshal & Manges that set the tone early on by accusing JPMorgan of hastening WaMu's collapse nearly two years ago. The WaMu team sought discovery they said would prove that JPMorgan leaked false information about WaMu's finances to discourage rival bidders in hopes that the FDIC would rescue WaMu and sell it to JPMorgan on the cheap, according to our prior reporting. The FDIC indeed placed WaMu into a receivership and sold it to JPMorgan for $1.9 billion. Sullivan & Cromwell represented JPMorgan in that deal and did not respond to requests from WaMu's bankruptcy lawyers for documents related to the WaMu acquisition.

But the WaMu team in March agreed to drop potential claims against JPMorgan in exchange for the return of about $4 billion in deposits and other funds that would be distributed to creditors under WaMu's proposed reorganization plan. That set the stage, we thought, for the end of the case. The WaMu team would have to win support from various cranky bondholders represented by Boies, Schiller & Flexner, Wilmer Cutler Pickering Hale and Dorr, Fried, Frank, Harris, Shriver & Jacobson and other firms, but such approval seemed fairly likely given how long the case had already been going. 

But the shareholders stepped up in May and asked Judge Walrath if they--or an examiner--might conduct the wide-ranging investigation WaMu cut short when it settled with JPMorgan. Attorneys for WaMu and various creditors howled in protest at the potential delay, but the shareholders fought on, and today they won what they consider a major victory. 

So here's where we stand: The U.S. trustee overseeing the case must name an examiner by Monday, and the examiner must issue that preliminary report by Sept. 7. On that same day, Judge Walrath will hold a hearing on whether to approve a disclosure statement that describes WaMu's plan to reorganize and pay off creditors. Should the judge approve that plan, WaMu's team can mail out ballots to creditors, who will then begin voting on the plan, lawyers say. That plan could be confirmed as early as November 1, lawyers say. 

By that time, the case will be nearly 26 months old.

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