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(Reuters) - Washington Mutual Inc's WAMUQ.PK plan to pay more than $7 billion to creditors and exit bankruptcy was rejected by a judge who ordered the company's creditors and shareholders into mediation, according to a Tuesday ruling.
Delaware Bankruptcy Judge Mary Walrath, who rejected the company's first attempted reorganization plan in January, sent the warring parties to mediation to avoid a "litigation morass" that would eat up funds that could be paid to creditors.
Washington Mutual filed for bankruptcy in September 2008, at the height of the financial crisis, after regulators seized its savings and loan business in the biggest bank failure in U.S. history.
The banking business was sold to JPMorgan Chase & Co (JPM.N) for $1.88 billion.
The company reached a deal to distribute $7 billion to the hedge funds that hold its securities, but the plan left nothing for shareholders, who led opposition to the plan.
Reporting by Tom Hals