Washington Mutual plan confirmation denied; required fixes outlined

By Caroline Salls

Pittsburgh, Jan. 7 - Washington Mutual, Inc.'s plan of reorganization will not be confirmed in its present form, according to an opinion filed Jan. 7 by judge Mary F. Walrath of the U.S. Bankruptcy Court for the District of Delaware.

Although the judge said the global settlement on which the plan is based "is fair and reasonable," she ruled that the plan cannot be confirmed until the company corrects several deficiencies.

However, Walrath did say that there was no evidence that the company did not propose the plan in good faith.

"Simply because the debtors were not able to achieve a greater recovery in the global settlement does not mean that they did not meet their fiduciary duty to all constituents," the judge said in her opinion.

Walrath said any changes the company previously made to the final version of the plan "are completely ineffective" because the same changes were not made to the global settlement, which supersedes the plan provisions if there is any conflict between the two documents.

She said this issue is particularly evident in connection with plan releases.

"While the debtors have modified the release language in the plan, the global settlement language has not been modified and may nullify any plan modification," the judge said.

"It is not sufficient to rely on the confirmation order to remedy deficiencies in the plan or to deal with all inconsistencies between the global settlement and the plan."

Plan deficiencies

The plan issues identified by the court include the following:

• The plan must be modified to allow all PIERs claimants the right to participate in the company's rights offering.

Walrath said she did not agree with Washington Mutual's argument that the rights offering has no value. She said the reorganized company's value will exceed the $157.5 million enterprise value set by Washington Mutual's expert;

• The same recovery options must be given to all creditors in the same class.

The judge agreed that holders of LTW claims are not being treated the same as other unsecured creditors, and she ordered the company to change this;

• Third-party releases should not extend to creditor affiliates who have no relation to Washington Mutual's case;

• Any third-party release should only apply to parties who consented to it by voting in favor of the plan and not opting out of the releases;

• The definition of released claims should be limited to claims of Washington Mutual and to creditor claims related to claims they filed against the company;

• The plan should be modified to clarify that interest should not be paid on creditors' claims until late-filed claims are paid in full;

• The equity committee should continue in a limited role after the company emerges from bankruptcy to protect the interests of shareholders; and

• The plan must allow fees to be approved by the court as reasonable before they can be paid.

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.

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