WaMu Judge Extends Mediation on Bankruptcy Exit Two Weeks

Washington Mutual Inc.’s bankruptcy judge ordered creditors and shareholders to remain in mediation for the next two weeks to try to resolve disputes that have kept the former bank holding company from exiting bankruptcy.

U.S. Bankruptcy Judge Mary Walrath in Wilmington, Delaware, told the parties to keep working to resolve a dispute about insider trading allegations that shareholders made against hedge funds that hold WaMu debt. Walrath asked the company to report back Nov. 22.

The talks “have been fruitful,” Brian Rosen, an attorney for WaMu, said in court today in Wilmington. “The discussions have been positive.”

Walrath has twice rejected WaMu’s reorganization proposal, which is built on a settlement splitting billions of dollars in cash and tax refunds among the company’s creditors, JPMorgan Chase & Co. and the Federal Deposit Insurance Corp. Walrath approved the settlement and rejected the reorganization plan.

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 for $1.9 billion. Washington Mutual Bank had more than 2,200 branches and $188 billion in deposits.

The parties in the mediation include four hedge funds that helped negotiate the plan and shareholders who oppose it. The shareholders accuse the hedge funds of using nonpublic information that they gained while helping to negotiate the plan to trade WaMu securities.

U.S. Bankruptcy Judge Raymond T. Lyons has been leading sessions among creditors and shareholders, who have been fighting over the $7 billion payment plan.

The hedge funds deny the insider-trading allegations. Walrath gave shareholders permission to sue the funds.

The case is In re Washington Mutual Inc., 08-12229, U.S. Bankruptcy Court, District of Delaware (Wilmington).

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