WaMu Judge Calls Legal Advice on Settlement Irrelevant
By Steven Church - Dec 8, 2010 12:57 AM GMT+0100
Advice that Washington Mutual Inc.’s managers got from their lawyers is “irrelevant” to whether the former owner of the biggest U.S. bank to fail can settle its legal disputes with JPMorgan Chase & Co., a judge said.
U.S. Bankruptcy Judge Mary F. Walrath in Wilmington, Delaware, today said WaMu can rely only on testimony and documents not covered by attorney-client privilege to persuade her to approve that settlement and others worth billions of dollars.
WaMu is trying to win approval of settlements that split almost $10 billion in cash and tax refunds without revealing any advice its lawyers gave company managers about whether the company could win lawsuits against JPMorgan and federal regulators over the 2008 collapse of Seattle-based WaMu’s subsidiary, Washington Mutual Bank.
“The debtor is walking a fine line here,” Walrath said on the final day of a hearing to decide whether WaMu can end its bankruptcy by settling with JPMorgan and the Federal Deposit Insurance Corp.
At the end of the nine-hour hearing, Walrath said she wouldn’t immediately rule on the settlement or the bankruptcy plan and would instead issue an opinion. She didn’t say when she might rule.
At the start of the hearing, Walrath rejected a request from lower-ranking creditors and shareholders to throw out testimony from managers about why they settled instead of continuing to fight. Walrath said WaMu executives couldn’t justify the settlement based on the advice of their attorneys unless that advice was made public.
Shareholders claimed in court papers that WaMu could collect more than $30 billion by winning lawsuits against JPMorgan, the FDIC and others.
David L. Elsberg, an attorney for WaMu, said the ruling was an important victory for his client because it shows Walrath won’t be distracted from the facts that justify the settlement.
WaMu filed for bankruptcy on Sept. 26, 2008, the day after its banking unit was taken over by regulators and sold to JPMorgan for $1.9 billion. Before it failed, Washington Mutual Bank had more than 2,200 branches and $188 billion in deposits.
Shareholders claim JPMorgan didn’t pay enough, and that federal regulators were too quick to close the bank. JPMorgan and federal regulators deny those claims in court papers.
WaMu said that there is enough evidence about the benefits of the settlements to justify approval. Shareholders who will get nothing from the settlements, along with the creditors that won’t benefit from them, said there isn’t enough evidence.
In his closing argument in support of the settlements, Brian Rosen, a WaMu attorney, said the company faced more than $85 billion in claims filed against it by JPMorgan, the FDIC and others. By settling, WaMu will wipe out those claims and collect enough to pay creditors more than $7 billion, Rosen said.
Justin Nelson, an attorney for shareholders, said WaMu officials didn’t provide enough information for Walrath to find that the settlement is fair and reasonable. Company officials didn’t testify about what legal advice they got on WaMu’s chances of winning lawsuits related to the closing of Washington Mutual Bank.
Walrath can’t approve the settlement without evidence of how strong WaMu’s lawsuits are, Nelson argued.
He cited a ruling last year from the chief bankruptcy judge in Delaware, Kevin Carey, who rejected a $70 million settlement between computer chipmaker Spansion Inc. and Samsung Electronics Co. Carey rejected the settlement in part because company officials testified they didn’t rely on their attorneys’ advice.
Spansion, which has since exited bankruptcy, was opposed by creditors in that case.
Opponents in the Spansion case put on evidence to show its settlement with Samsung was bad for creditors, distinguishing it from WaMu’s case, Elsberg told Walrath. WaMu’s shareholders and lower-ranking creditors haven’t offered any witnesses to show why the settlement is bad, Elsberg said.
WaMu’s 4 5/8ths percent bonds due in 2014 rose more than 1 percent to 107 cents on the dollar, according to TRACE, the bond-price reporting system of the Financial Industry Regulatory Authority.
The case is In re Washington Mutual Inc., 08-12229, U.S. Bankruptcy Court, District of Delaware (Wilmington).