Washington Mutual trust preferred holders object to plan disclosure

By Caroline Salls

Pittsburgh, May 12 - Washington Mutual, Inc.'s consortium of trust preferred security holders objected to the disclosure statement for the company's proposed plan of reorganization, arguing that the disclosure does not give enough information about what led to the company's decision to abandon plans to maximize recovery for stakeholders, according to a Tuesday filing with the U.S. Bankruptcy Court for the District of Delaware.

The consortium said a key controversy raised in multiple lawsuits filed in Washington Mutual's bankruptcy case involved ownership of the trust preferred securities, which could represent upwards of a $4 billion value swing.

According to the objection, this controversy involves secret side letters between Washington Mutual and the Office of Thrift Supervision, alleged significant, undisclosed fraud at the company and Washington Mutual Bank at the time the trust preferred securities were sold and resold in the marketplace, the alleged post-collapse occurrence of a conditional exchange and the alleged assignment of the trust preferred securities to the bank from Washington Mutual after the bank's assets and operations had already been seized and sold to JPMorgan Chase Bank, NA.

The security holders said significant questions as to the actual ownership of the trust preferred securities remain unanswered, as Washington Mutual admitted in its own descriptions of the status of the purported conditional exchange and the subsequent "down streaming" of the trust preferred securities to the Washington Mutual Bank shell.

The consortium said it is clear that the company and its senior creditors had a significant incentive to ignore the issue of whether the conditional exchange had occurred and to trade away the trust preferred securities to JPMorgan in exchange for cash to which the company was already entitled.

Although neither the issues surrounding ownership of the trust preferred securities nor any of the other most significant claims and causes of action were ever brought to trial or even progressed to the point of meaningful discovery, the consortium said the company announced a prospective settlement of the myriad claims and causes of action that had been the focal point of these cases in March.

This settlement was later incorporated in the proposed plan.

"That agreement, purportedly based on the debtors' business judgment, would settle away potentially many billions of dollars in claims and actions of the debtors' estates," the security holders said in the objection.

The consortium said the plan also allows the various exchanges and assignments necessary to deliver the trust preferred securities to JPMorgan and seeks to compromise the rights and claims of non-debtors against other non-debtors without consent, including claims against JPMorgan and others involved in the seizure and sale of the bank and against parties involved in the initial issuance and sale of the trust preferred securities.

The consortium said the plan also would grant insiders, JPMorgan and others broad releases, "thereby putting the finishing touches on a whitewashing of the largest thrift failure in history, leaving significant portions of the debtors' stakeholders with minimal or no recovery."

"But, the disclosure statement fails to explain why, after spending nearly a year and a half in Chapter 11 and incurring significant professional fees, the debtors suddenly chose to throw up their hands and abandon the effort to maximize stakeholder recoveries," the consortium said in the objection.

In addition, the group said the disclosure statement fails to explain what factors the company considered "before agreeing to compromise potentially valuable rights of the estates and, importantly, critical rights of non-debtors against other non-debtors."

Washington Mutual, a Seattle-based savings and loan holding company, filed for Chapter 11 bankruptcy on Sept. 26, 2008. Its Chapter 11 case number is 08-12229.

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.