Bankruptcy judge denies request from Washington Mutual shareholders for independent examiner

By Randall Chase, AP
Wednesday, May 5, 2010

WaMu shareholders lose request for examiner

WILMINGTON, Del. — A Delaware bankruptcy judge on Wednesday denied a request by Washington Mutual Inc. shareholders to appoint an independent examiner in the bank holding company’s Chapter 11 case.

The shareholders asked for an examiner to review several issues surrounding the largest bank failure in U.S. history, including Washington Mutual’s proposed settlement of a $4 billion dispute with JPMorgan Chase & Co. and the Federal Deposit Insurance Corp. that is the basis for WaMu’s proposed reorganization plan.

But Judge Mary Walrath said Washington Mutual already has been the subject of plenty scrutiny, and that an independent examiner was not needed.

“It is clear to me that this matter has been investigated to death,” said the judge, citing investigations by parties in the bankruptcy case, federal regulators, Congress, and a host of federal agencies ranging from Department of Labor to the FBI.

While many of the investigations go beyond the scope of bankruptcy issues to broader issues regarding the nation’s banking system, Walrath said she was satisfied that enough information has been or will be made available to WMI’s official committee of equity security holders in the bankruptcy case.

“I don’t think it is fair for the creditors in this case to be saddled with an investigation of systemic problems that would only benefit future parties but not benefit the parties in this case,” she said.

The shareholders argued that Washington Mutual is trying to rush the settlement without adequately analyzing the value of is assets, including potential litigation claims stemming from the FDIC’s seizure of Washington Mutual’s flagship bank in 2008 and the sale of its assets to JPMorgan for $1.9 billion.

“This is the largest bank failure in this country’s history,” said Justin Nelson, an attorney for the equity security holders.

Nelson said that before the process to confirm WMI’s proposed reorganization plan begins, stakeholders must know the potential value of the company’s assets in order to determine whether the proposed settlement is fair.

“Nobody has given a full accounting of the facts that led to the bankruptcy,” said Nelson, who proposed giving an independent examiner 150 days to conduct an investigation.

The U.S. trustee in the case supported the request for an examiner, but attorneys for WMI, its official committee of unsecured creditors, and a group of noteholders argued that an examiner would spend unnecessary time and money duplicating investigations already undertaken.

“There cannot be more transparency regarding the circumstances leading to the seizure of Washington Mutual bank and its immediate sale to JPMorgan,” said Brian Rosen, an attorney for Washington Mutual.

The objectors also accused the equity holders of trying to delay the bankruptcy case while they attempt to install a new board that would destroy the proposed settlement agreement.

“What the equity committee is seeking to do is create chaos,” said Robert Johnson, an attorney for the creditors committee.

Johnson and Thomas Lauria, an attorney for the noteholders, warned that the period in which WMI has exclusive rights to file a reorganization plan is about to expire, and that the court could soon face a host of competing plans.

Meanwhile, Washington Mutual is still trying to nail down the FDIC’s consent in the proposed settlement.

“There is no dispute that we have an agreement; just final words are being worked on with the FDIC,” Rosen told the judge, without offering details.

Under the proposed settlement, JPMorgan would turn over some $4 billion in disputed deposit accounts to Washington Mutual after deducting $172 million as its share of tax refunds received.

In return, JPMorgan would get 70 percent of expected tax refunds resulting from WaMu’s prior operating losses that are valued at about $3 billion, with Washington Mutual getting 30 percent.

WaMu also would get about 40 percent of a second round of operating-loss tax refunds valued at about $2.6 billion, with roughly 60 percent going to the FDIC.

The deal, which would result in the dismissal of three lawsuits pitting WaMu, JPMorgan and the FDIC against one another, also is contingent on the resolution of claims from holders of billions of dollars of bonds issued by Washington Mutual Bank, or WMB. Without the bondholders’ approval, the agreement could fall apart.

May 6, 2010: 1:14 am

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