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Originally published Tuesday, February 14, 2012 at 7:47 PM

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Washington Mutual bankruptcy plan hits stumbling block; votes fall short

Preferred shareholders of Washington Mutual Inc., the former owner of the biggest U.S. bank to fail, voted against the company's proposed plan.

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A proposed plan to bring what's left of Washington Mutual out of bankruptcy has hit a snag — not enough of the Seattle company's preferred shareholders voted for the plan to formally approve it.

According to documents filed in U.S. Bankruptcy Court in Delaware, the plan received just over 62 percent of the weighted vote of preferred shareholders, shy of the two-thirds requirement.

A vocal group of preferred shareholders has fought the plan, which would allot around $7 billion in disputed assets to more senior creditors and give preferred and common shareholders ownership of a much smaller company centered on a mortgage reinsurer.

That group has argued, in essence, that the plan violates federal bankruptcy law by subordinating their interests to those of common shareholders, who ought to receive nothing until the preferred shareholders' claims are paid in full.

The plan's failure to get the requisite number of votes calls into question whether federal Bankruptcy Judge Mary Walrath will confirm the plan after a hearing scheduled for Thursday.

Common shareholders, who had successfully stymied previous reorganization plans, had settled a potential lawsuit against higher-ranking creditors and voted in favor of the plan with the expectation of getting paid.

"It looks like the settlement for the common shares is out the window," Kevin Starke, a senior analyst with CRT Capital Group told Bloomberg News. Unless the judge throws out the no votes, he said, the common shares won't be entitled to recover anything.

WaMu filed for bankruptcy Sept. 26, 2008, the day after its banking unit was taken over by regulators and sold to JPMorgan Chase & Co. for $1.9 billion. Washington Mutual Bank had more than 2,200 branches and $188 billion in deposits.

WaMu's preferred convertible securities that may be redeemed until 2049 rose nearly 24 percent Tuesday to $15.88, according to data compiled by Bloomberg.

Lower-ranking creditors such as common shareholders typically will not be paid anything unless a supermajority of higher-ranking creditors, like preferred shareholders, agree.

WaMu attorney Brian Rosen told Bloomberg that because only 62 percent of the total value of preferred shares were voted in favor of the plan, Walrath must find a reason to ignore the no votes before approving the plan.

The official committee that represents common and preferred shareholders supports the reorganization proposal, committee chairman Michael Willingham said in court papers filed Monday.

In court papers, WaMu outlined a legal strategy designed to ensure that common shareholders collect something. WaMu said that at least part of the no vote should be discounted because it was cast by creditors that have "a bad-faith ulterior motive."

Creditors that voted against the plan are part of a group called TPS Consortium, WaMu said in its filing. The consortium includes affiliates of hedge funds Black Horse Capital Advisors, Greywolf Capital Management and Scoggin Capital Management.

The company argued that "the majority of stakeholders... have resoundingly voted in favor of the plan," and accused the TPS group of "seek(ing) to once again derail confirmation for their own gain, and at the expense of all other stakeholders."

In separate votes, the funds voted against the plan and also refused to waive their right to sue, meaning they cannot receive stock set aside for preferred shareholders, WaMu said.

Rosen, WaMu's attorney, said the funds' votes should be discounted because they weren't eligible to recover under the plan.

But analyst Starke said that under bankruptcy rules it may be difficult for WaMu to persuade Walrath to discount the no votes.

Starke doesn't own WaMu securities. CRT Capital, of Stamford, Conn., is a broker-dealer that helps connect buyers and sellers of securities, including WaMu's.

CRT Capital holds three WaMu bonds with a face value of $1,000 each

Robert Stark, a lawyer for the funds, didn't immediately return an email from Bloomberg requesting comment.

Seattle Times business reporter Drew DeSilver and Bloomberg News contributed to this report.

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