(Updates with letter to hedge fund investors in third paragraph.)
Sept. 28 (Bloomberg) -- Noteholders of Washington Mutual Inc., the former owner of the biggest U.S. bank to fail, is seeking a court ruling to overturn a judge’s rejection of a reorganization plan that would pay them billions of dollars.
The noteholders, four hedge funds that helped negotiate the plan, also seek to reverse a decision by U.S. Bankruptcy Judge Mary Walrath in Wilmington, Delaware, that may force them to face a lawsuit accusing them of insider trading. The hedge funds filed papers yesterday asking Walrath to allow their appeals to go forward while they attend court-ordered mediation.
“You do not need to be a lawyer to recognize from the motion that the WaMu decision is appalling -- a radical departure from binding precedent,” Aurelius Capital Management LP Chairman Mark Brodsky said in a letter to investors obtained by Bloomberg News. The decision “will, until overturned, impede consensual plan negotiations and even the formation of ad hoc creditor committees,” he wrote.
Walrath rejected WaMu’s reorganization plan for the second time on Sept. 14, in part because she said the plan pays a higher interest rate than is legally allowed to some WaMu noteholders, including the hedge funds. Walrath also allowed shareholders, including those who are getting nothing under the plan, to try to prove their allegations of insider trading in a lawsuit that she authorized them to file.
WaMu, based in Seattle, filed for bankruptcy on Sept. 26, 2008, the day after its banking unit was taken over by regulators and sold to JPMorgan Chase & Co. for $1.9 billion. Washington Mutual Bank had more than 2,200 branches and $188 billion in deposits.
The hedge funds that hold different sets of WaMu bonds and convertible securities, shareholders and other creditors fought throughout the case over how to divide the cash, tax refunds and new stock to be issued in the only part of WaMu that will survive bankruptcy, a small reinsurance company.
WaMu has $4 billion in cash and more than $3 billion in tax refunds and other assets to distribute to creditors if the company rewrites its plan and wins Walrath’s approval, or if a higher court overturns her rejection of the current plan.
The four hedge funds accused by shareholders of receiving inside information are Aurelius Capital Management, Centerbridge Partners LP, Appaloosa Management LP and Owl Creek Asset Management LP. All four have denied using any material, non- public information to buy or sell WaMu securities.
Walrath granted a request by a committee of shareholders to sue the hedge funds for their conduct during the bankruptcy. She said that potential lawsuit can’t immediately go forward, ordering shareholders and supporters of the rejected plan to mediation.
She rejected allegations that the hedge funds, known as the settlement noteholders, controlled WaMu and that the entire plan was proposed in bad faith. She also upheld the settlement among JPMorgan, WaMu and the hedge funds that serves as the foundation for the reorganization plan.
The company, the shareholders and the hedge funds will return to court next month to talk about how to proceed with mediation.
WaMu’s 5 percent notes due next year climbed nearly 9 percent today to 110.5 cents on the dollar, according to information on the Bloomberg Terminal.
The case is In re Washington Mutual Inc., 08-12229, U.S. Bankruptcy Court, District of Delaware (Wilmington).
--Editors: Andrew Dunn, Michael Hytha
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