By Peg Brickley
A bankruptcy judge Tuesday tied up a remaining loose end from
the 2008 collapse of Washington Mutual Bank, endorsing a $37
million settlement of the company's claims against its former
leaders.
Judge Mary Walrath signed off on the settlement at a hearing in
the U.S. Bankruptcy Court in Wilmington, Del., where the failed
thrift's corporate parent, Washington Mutual Inc., took refuge in
2008.
Regulators seized the troubled subprime lender and sold it to
J.P. Morgan Chase & Co.
Once a savings and loan, Washington Mutual became an
enthusiastic participant in the home loan boom, creating what a
Senate panel later called a "time bomb" doomed to blow up in
investors' faces.
The settlement approved Tuesday ends some of the litigation over
who was to blame for Washington Mutual's failure including legal
fights with insurance companies that balked at paying.
Washington Mutual's trustees accused the company's leaders of
neglecting their duties to look out for the parent company.
For example, they sought to recover $500 million of parent
company funds that were diverted to prop up the finances of the
thrift. The thrift, and the $500 million, fell into the hands of
regulators.
Kerry Killinger, who was ousted from the chief executive spot at
Washington Mutual not long before the thrift was seized, gets $7
million or more from the settlement, for agreeing to drop claims he
filed against the company. Other former Washington Mutual leaders
will also collect something for unpaid directors' fees or company
expenses under the pact.
None of the parties involved admitted to wrongdoing, but those
in charge of rounding up money for creditors say it is time to stop
the litigation in state and bankruptcy courts and to engage in a
compromise all around.
Among other things, the settlement could free up about $18
million that has been held in reserve in the event the bankrupt
company was required to cover the defense fees and costs of sued
executives.
An attorney for Mr. Killinger couldn't immediately be reached to
comment Tuesday on the settlement, which was filed with the court
earlier this month.
Lawyers for the trust cited the "inherent uncertainty, delay,
and expense connected with litigation," estimating it would take
four years and cost $10 million to fight the cases through the
courts.
Washington Mutual's trustees were facing the likelihood that the
company's former leaders would raise a vigorous defense, court
papers say. The executives could invoke the protection of
Delaware's business judgment rule, which shields executives from
being second-guessed by courts.
Additionally, Washington Mutual's leaders were likely to argue
they were acting on the instruction of federal regulators when they
propped up the ailing thrift, according to arguments advanced to
support the settlement.
The deal is the latest in a series of settlements that have
ended many of the fights over Washington Mutual's demise, at least
those being fought in bankruptcy court. The Chapter 11 plan that
wrapped up the bulk of the Washington Mutual's affairs had as its
backbone a deal to divide billions of dollars in tax refunds among
J.P. Morgan, the parent company and the receivership that is taking
care of the thrift's final affairs.
The $37 million for the settlement is coming from insurance
companies, which are paying on behalf of the sued executives. The
liquidating trust set up under Washington Mutual's Chapter 11 plan
will make the settlement payments to executives, court papers
say.
Trustees have been distributing funds to creditors since 2012,
when the parent company's $7 billion Chapter 11 plan was
approved.
Write to Peg Brickley at peg.brickley@wsj.com
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