WILMINGTON, Delaware (Reuters) - A bankruptcy judge has appointed an examiner to investigate potential legal claims and assets of Washington Mutual Inc stemming from the biggest bank failure in U.S. history, handing a victory to shareholders.
Judge Mary Walrath directed an examiner to investigate not just the legal settlement at the heart of Washington Mutual’s reorganization, but also all potential claims and assets that are part of the settlement or that will be retained by the company.
The examiner has been long-sought by shareholders. They hope an independent investigation will affirm what they have been arguing, that the company’s assets are worth as much as $30 billion and that they are being improperly denied a recovery in the company’s proposed reorganization.
The appointment will extend the company’s bankruptcy. The judge said Washington Mutual might begin hearings to confirm its reorganization in November, rather than August as once proposed.
Washington Mutual filed for bankruptcy in September 2008, the day after its lending operations were seized by regulators, and it has spent most of its bankruptcy fighting legal battles stemming from the bank’s collapse.
Earlier this year, the company settled its main disputes with the Federal Deposit Insurance Corp, which sold the seized bank, and JPMorgan Chase & Co, which bought it for $1.9 billion.
The company has proposed a reorganization plan based on that settlement that provides as much as $6.8 billion for creditors, but nothing for shareholders.
The judge accepted arguments on Tuesday that the company had settled without fully measuring potential claims and without helping shareholders conduct their own examination.
“Given the inability of the parties to fully investigate all of the claims, I’m not in a position to decide the reasonableness of the settlement and I believe the examiner is the way to go,” said Walrath, who rejected the appointment of examiner earlier this year.
The equity committee that represents shareholders said in a statement that it was “thrilled” by the ruling.
“We look forward to an independent investigation into the claims and assets of the estate,” it said.
The company saw the writing on the wall and opened the hearing by saying it no longer opposed the appointment of an examiner, but warned that, without a short leash, an investigator could undo the proposed reorganization.
“Is it really going to be a case that falls off the rails on our watch?” said Susheel Kirpalani, an attorney with Quinn Emanuel Urquhart & Sullivan, which is special counsel to Washington Mutual.
Walrath accepted a broader brief for the examiner than many of the creditors wanted. She directed the U.S. Trustee to name a candidate by Monday and directed the examiner to provide a work plan by August 7 and a preliminary report by September 7.
A hearing on the company’s disclosure statement, which must be approved before it can send its reorganization plan to creditors for a vote, was postponed until September 7.
Almost every party in the case bears some risk from the examiner’s report.
“We don’t know if it’s black or white,” said Justin Nelson, an attorney with Susman Godfrey, which represents the equity committee. “But if it turns out to be black, we accept that.”
The examiner will delay payment to creditors getting a recovery under the proposed plan while legal fees pile up and the examiner will also potentially reopen claims at the heart of the settlement that ended 18 months of dispute.
“There isn’t one dollar of cash in the estate that hasn’t been challenged,” said Tom Lauria of White and Case, which represent holders of Washington Mutual Inc notes.
He said an examiner raised the risk that “we could go to zero” rather than a slight shift in recoveries.
“We are at risk of a very different outcome,” he added.
The shareholders could complicate the case further. They want permission from the court to hold a shareholder meeting to elect a new board. To counter that risk, creditors have asked the court to convert the case to a Chapter 7 liquidation under the direction of a court-appointed trustee.
Walrath said she would also take up on September 7 the issue of an annual shareholder meeting.
Washington Mutual shares were down about 7 percent at 18 cents each in afternoon pink sheet trading.
The case is In re Washington Mutual Inc, U.S. Bankruptcy Court, District of Delaware, No. 08-12229.
Reporting by Tom Hals; editing by Andre Grenon