Mortgage investors rebuffed in WaMu bankruptcy

[May 08, 2012]  WILMINGTON, Del. (AP) -- The judge in Washington Mutual's bankruptcy case ruled Monday that a group of investors who are plaintiffs in a federal mortgage-backed securities lawsuit against WaMu cannot file a claim in the company's bankruptcy case until distributions are made to a group of low-ranking creditors.

The plaintiffs, whose lawsuit is scheduled for a September trial in Seattle, have asserted a claim of $435 million in the bankruptcy case and argue that they should be treated as general unsecured creditors.

Washington Mutual maintains that the plaintiffs' claims must be subordinate to those of other creditor classes. WaMu also says the plaintiffs had agreed in a previous stipulation not to file a claim unless a group of low-ranking creditors with securities fraud claims had received recoveries.

Following a hearing Monday, Judge Mary Walrath declined to rule on whether the plaintiffs should be treated as general unsecured creditors. She agreed with Washington Mutual, however, that the filing of their claim was premature because the required distributions to the low-ranking creditor group have not yet been made.

"The trigger has not occurred for purposes of the stipulation.... Therefore, the claim is premature," Walrath said.

In another victory for Washington Mutual, Walrath said a $435 million general unsecured claim that had been reserved pending resolution of the dispute between WaMu and the mortgage-backed securities investors could be released and made available for payment to other creditors. The judge said that because the investors, known as the MBS plaintiffs, had no pending claims, there was no need to maintain the reserve to the detriment of other creditors.

Under a reorganization plan approved by the judge earlier this year, some $7 billion will be distributed to creditors, including significant recoveries for shareholders, who often are left with nothing in bankruptcy cases.

The plan is based on the settlement of lawsuits that pitted Washington Mutual Inc., JPMorgan Chase and the Federal Deposit Insurance Corporation against one another after the collapse of Seattle-based Washington Mutual Bank in 2008 and the sale of its assets to JPMorgan Chase & Co. for $1.9 billion. It was the largest bank failure in U.S. history.

[Associated Press; RANDALL CHASE]

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