WaMu Starts Court Hearing on $7 Billion Bankruptcy Plan

Feb. 16 (Bloomberg) -- Washington Mutual Inc., the former owner of the biggest U.S. bank to fail, began a court hearing on a $7 billion reorganization plan that pays bondholders in full.

WaMu will try to resolve a conflict among shareholders caused by a group of investors who voted against the proposed reorganization plan. That vote by a minority of preferred shareholders may make it impossible for common shareholders to receive stock in the only part of WaMu that would survive the bankruptcy.

The hearing today in U.S. Bankruptcy Court in Wilmington, Delaware, is WaMu’s third attempt to win court approval for its reorganization plan, which would pay $7 billion to creditors. That plan, which includes a settlement endorsed by a committee of preferred and common shareholders, would give the shares’ owners new stock in the only part of the company to survive.

In court papers, WaMu outlined a legal strategy designed to ensure that common shareholders collect something. WaMu said that at least part of the “no” vote should be discounted because it was cast by creditors who have “a bad-faith ulterior motive.”

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

-- Editors: Fred Strasser, Glenn Holdcraft

To contact the reporter on this story: Steven Church in Wilmington, Delaware, at schurch3@bloomberg.net

To contact the editor responsible for this story: John Pickering at jpickering@bloomberg.net