JPMorgan wants U.S. Bankruptcy Judge Mary F. Walrath in Wilmington, Delaware, to rule that investors got preferred stock in WaMu in exchange for the debt-like, trust-preferred securities when WaMu’s bank was seized by regulators. The Office of Thrift Supervision ordered the exchange to ensure that WaMu’s bank kept control of the securities, according to court records.
Walrath said she will rule on whether that exchange actually took place when she decides to approve or reject Seattle-based WaMu’s bankruptcy liquidation plan. Walrath will start a hearing on the plan tomorrow.
The judge today questioned one of the arguments of hedge funds claiming to own $1.1 billion of the securities. The funds said they still own the debt-like investments because WaMu didn’t create, register and deliver the stock they were supposed to get in exchange for the trust-preferred securities.
“That makes no sense,” Walrath told attorney Robert J. Stark, who is representing hedge fund managers including Black Horse Capital LP and Lonestar Partners LP.
JPMorgan argued that the exchange took place even though investors still have physical possession of the paper securities and never received stock certificates.
“The exchange was automatic as of the day the OTS said it should happen,” JPMorgan attorney Stacey Friedman told Walrath, referring to the Office of Thrift Supervision.
New York-based JPMorgan is the second biggest U.S. bank by assets behind Bank of America.
Investors bought the securities from a WaMu affiliate knowing that under certain circumstances the investments would be exchanged for WaMu stock, Friedman said in court.
The hedge funds sued JPMorgan trying to win control of the securities, which entitle the owner to payments backed by $13 billion of mortgages.
The securities are part of a settlement between WaMu and JPMorgan that is at the heart of the $7 billion repayment plan that Walrath will consider approving later this week.
WaMu agreed to drop claims against JPMorgan and the Federal Deposit Insurance Corp. over the seizure of its bank in return for part of about $10 billion in cash and tax refunds.
WaMu filed for bankruptcy on Sept. 26, 2008, the day after its banking unit was taken over by regulators and sold to JPMorgan. Before it failed, Washington Mutual Bank had more than 2,200 branches and $188 billion in deposits.
Each Side’s Aim
The hedge funds asked Walrath to rule that the trust- preferred securities were never exchanged for stock. JPMorgan is asking her to rule that the exchange did take place. Whoever wins that dispute would be considered the owner of the securities, which entitle the owner to regular payments from the $13 billion of mortgages.
The bankruptcy case is In Re Washington Mutual Inc., 08- 12229, and the securities lawsuit is Black Horse Capital LP v. JPMorgan Chase Bank NA, 10-51387, U.S. Bankruptcy Court, District of Delaware (Wilmington).
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