Print | Share | Reprint

Judge again denies WaMu plan confirmation

by Jamie Mason | Published September 14, 2011 at 5:13 PM

A Delaware judge has denied confirmation of a reorganization plan for bankrupt Washington Mutual Inc. for the second time, ruling that the method chosen for paying interest to some creditors isn't in the best interests of all of the bank holding company's creditors.

Under WaMu's current plan, the debtor wanted to pay some creditors at the contract interest rate, which is higher than the federal interest rate, but one source familiar with the case who asked not to be named said that using the federal interest rate would "significantly reduce" the cost to the estate by "hundreds of millions of dollars" and thus could allow equity holders to receive a recovery which they aren't now getting.

Judge Mary F. Walrath of the U.S. Bankruptcy Court for the District of Delaware in Wilmington issued a 139-page opinion denying the plan's confirmation on Tuesday and ordered the parties to mediate.

"[WaMu] intends, in consultation with parties-in-interest, to proceed in a manner consistent with the opinion in order to seek confirmation of a modified plan as soon as practicable," a WaMu statement said.

Walrath denied confirmation after finding that the plan failed the best-interests-of-creditors test because it would pay creditors contract rate interest instead of the federal judgment interest rate, the opinion said.

The contract interest rate would give creditors the interest they would have received before the company went bankrupt, while the federal judgment rate is set by the government and is much lower, said the source.

"Because the court concludes that creditors are only entitled to the payment of interest from the debtors at the federal judgment interest rate in effect on the petition date, compounded annually, the court finds that the modified plan which provides for payment of the contract rate violates the best interests of creditors test," Walrath said in the opinion.

The judge on Tuesday approved the equity committee's request for standing to prosecute claim for equitable disallowance.

The equity committee wants to bring an action to equitably subordinate or disallow the noteholders' claims, because they claim that the noteholders traded on insider
information when they participated in settlement discussions with the debtor and J.P. Morgan Chase Bank NA, court papers said.

Before the action can be brought against the noteholders, hedge funds Appaloosa Management LP, Aurelius Capital Management LP, Centerbridge Partners LP and Owl Creek Asset Management LP must first attempt to mediate.

"The court is concerned that the case will devolve into a litigation morass," Walrath said in her opinion.

There is an Oct. 7 status hearing before mediation will take place, court papers said.

The reorganization plan is centered on a settlement with J.P. Morgan Chase Bank and the Federal Deposit Insurance Corp. under which WaMu expects to receive $5.5 billion to $5.8 billion in federal, state and local tax refunds. WaMu expects its share of the refunds to fall between $2.49 billion and $2.55 billion.

The first portion of tax refunds, between $2.7 billion and $3 billion, would be split 20%-80% between WaMu and J.P. Morgan. Any additional tax refunds, estimated at $2.8 billion, would be split in a 69.64%-30.36% ratio between the debtor and the FDIC.

Walrath believes that the settlement is reasonable.

"[WaMu] is pleased that the Bankruptcy Court reaffirmed its conclusion that the global settlement agreement is fair and reasonable and determined that substantially all aspects of the plan of reorganization comply with the requirements of the Bankruptcy Code," said a statement from WaMu.

According to the plan, funds in excess of $7 billion would be available for distribution to its creditors.

Under the plan, administrative claims would be repaid in full in cash, along with priority tax and nontax claims.

Senior noteholders, owed $4.1 billion, would receive a pro-rata share of cash and interests in a liquidating trust holding more than $7 billion.

Senior subordinated noteholders, owed $1.6 billion, general unsecured creditors and holders of $68 million in guarantee claims from WaMu's purchase of Commercial Capital Bancorp Inc. would also receive a pro-rata share in cash and the liquidating trust.

The creditors could also choose to receive stock in the reorganized debtor instead.

Vendor claims would be paid in cash through a $50 million vendor escrow account, and convenience claims would be paid in full in cash.

Holders of Piers claims would receive a pro-rata share of reorganized common stock, cash and liquidating trust interests for an estimated 73% recovery.

Creditors with senior notes issued by WaMu unit Washington Mutual Bank would receive a pro-rata share of $335 million of the tax refunds, plus up to an additional $10 million to compensate for legal fees and expenses incurred in the bankruptcy case.

Holders of other subordinated claims would receive a stake in the liquidating trust or reorganized stock if all senior creditor classes were paid in full.

Preferred shareholders would receive a stake in the liquidating trust only if all senior creditors were paid in full, including holders of subordinated claims.

Holders of certain preferred equity series, termed the REIT series, however, are guaranteed a recovery under the settlement with J.P. Morgan and the FDIC. The group would receive $50 million in cash or $50 million in J.P. Morgan common shares at the bank's election.

Holders of warrants and common equity would be wiped out.

The plan's disclosure statement was approved on March 21.

WaMu's first attempt to win confirmation ended Jan. 7, when Walrath rejected the debtor's sixth amended reorganization plan in a 109-page opinion.

The judge was opposed to the releases granted to noteholders, the official committee of unsecured creditors and its members, indenture trustees, and the liquidating trust and trustee, as well as the debtor's management, finding that they weren't appropriate.

WaMu filed for Chapter 11 on Sept. 26, 2008, the day after the FDIC took control of WaMu's Washington Mutual FSB unit and sold it to J.P. Morgan Chase for $1.9 billion.

Through the sale, J.P. Morgan Chase received $307 billion in combined assets and $188 billion in total deposits from the Park City, Utah, subsidiary.

Before the seizure, WaMu and its subsidiaries were the sixth-largest depository and bank card issuer in the U.S.

The bank holding company blamed its bankruptcy filing on the disruption in the residential mortgage markets caused by credit quality deterioration in a significant portion of originated loans, the slowing pace of transactions, declining home values, increased mortgage rates and reduced availability of borrowing.

WaMu also said it was affected by the rising unemployment rate, increased delinquencies in nonmortgage consumer credit, illiquid credit markets and changes in the regulatory market.

A series of downgrades by Moody's Investors Service, Standard & Poor's and Fitch Ratings Inc. also "fed the pervasive speculation that began to circulate in the market that WaMu's operations were unstable," court papers said.

WaMu, which has been in business since 1889, was created after the Great Seattle Fire destroyed the city's business district the same year. WaMu gave loans to help residents rebuild after the fire.

In the 1980s and 1990s, the lender grew through acquisitions of institutions including Commercial Capital Bancorp, PNC Mortgage Corp. and many others.

Debtor counsel is Brian Rosen, Marcia Goldstein and Michael F. Walsh of Weil, Gotshal & Manges LLP and Mark D. Collins and Michael Merchant at Richards, Layton & Finger PA.

Counsel to the equity committee is Seth D. Ard, Stephen D. Susman, Parker C. Folse III, Edgar Sargent and Justin A. Nelson at Susman Godfrey LLP and William P. Bowden at Ashby & Geddes PA.

Fred S. Hodara, David P. Simonds and Scott Alberino at Akin Gump Strauss Hauer & Feld LLP and David B. Stratton at Pepper Hamilton LLP represent the official committee of unsecured creditors.

Share:

Tags: bankruptcy | Federal Deposit Insurance Corp. | J.P. Morgan Chase Bank | Washington Mutual Bank | Washington Mutual Inc.

Restructuring

Judge again denies WaMu plan confirmation

Free preview

Meet the journalists

Jamie Mason

Senior Editor: Out of Court Restructuring

Movers & Shakers

Video

Fewer deals despite discount debt

Sectors