WaMu ally u-turns, now opposes bankruptcy plan

Wed Jun 22, 2011 5:57pm EDT

* Former WaMu ally Aurelius opposes latest plan

* Aurelius: JPMorgan needs to provide more to settlement

By Tom Hals

WILMINGTON, Del., June 22 (Reuters) - A hedge fund that helped craft a settlement at the heart of Washington Mutual Inc's WAMUQ.PK reorganization plan now opposes the deal, saying it unfairly enriches JPMorgan Chase & Co (JPM.N), which bought the thrift's banking operations.

In a court filing on Wednesday, Aurelius Capital Management LP said the delay in implementing the deal has drained money from creditors, and that JPMorgan should contribute more to the settlement.

Aurelius and three other hedge funds helped strike a "global settlement" last year that ended legal battles between Washington Mutual, JPMorgan and the Federal Deposit Insurance Corp.

In return for ending lawsuits, the parties agreed to divide about $10 billion of disputed assets. Washington Mutual ended up with about $7 billion, which it plans to distribute to creditors once it gets court approval to do so.

One of the disputed assets was $4 billion that Washington Mutual had on deposit at its former bank. That bank was seized and sold by the FDIC to JPMorgan in the biggest bank failure in U.S. history in September 2008. The next day Washington Mutual filed for bankruptcy.

JPMorgan is paying an annual 0.2 percent interest to Washington Mutual on that $4 billion deposit. Aurelius argued in court papers that JPMorgan could have earned more than $400 million on those deposits since the start of the bankruptcy, while paying a total of only $20 million in interest.

Aurelius said it supported the global settlement when it expected the company's reorganization to become effective a year ago. But a series of setbacks mean the company is still in bankruptcy, and JPMorgan continues to benefit from the deposit.

"At this time, the Amended Global Settlement Agreement should not be approved as fair unless (JPMorgan) provides additional value to the debtors to compensate for the substantial delays," Aurelius said in a filing with Delaware's bankruptcy court.

"Washington Mutual is a little bit surprised by the filing, specifically with Aurelius's position with respect to the global settlement agreement, especially in light of the court's approval of the global settlement agreement," said Washington Mutual attorney Brian Rosen of the Weil, Gotshal & Manges LLP law firm.

He added that Judge Mary Walrath has said she will not relitigate the settlement agreement. She described the settlement as fair in a Jan. 7 opinion in which she rejected the company's previous reorganization plan and requested modifications, such as changes to legal releases.

JPMorgan declined to comment.

Walrath will hold hearings in July on whether to approve Washington Mutual's plan of reorganization.

The case is In re Washington Mutual, U.S. Bankruptcy Court, District of Delaware, No. 08-12229. (Reporting by Tom Hals, editing by Matthew Lewis)

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