WaMu Bankruptcy Plans Rejected. Mediation Required.

US Bankruptcy Judge Mary Walrath has ordered extensive mediation in the Chapter 11 bankruptcy hearing of Washington Mutual, known affectionately as WaMu. The court-ordered mediation comes after Judge Walrath rejected WaMu’s bankruptcy, twice. She gave the parties until November 7, 2011 to come to an acceptable agreement.The hearing had originally been scheduled to take just three days.

The Four Horsemen Noteholders

According to FINAlternatives, the problem is allegations over insider trading against four hedge funds that are known as the “settlement noteholders”. They include Appaloosa Management, Aurelius Capital Partners, Centerbridge Partners and Owl Creek Asset Management. Under the plan presented by WaMu, these hedge funds would have been due billions of dollars. Judge Walrath rejected it citing that the plan asked for a higher interest rate than is allowed by law and that WaMu’s Shareholders had made a “case that the hedge funds had violated insider trading laws.” The hedge funds have each denied wrongdoing and have expressed a desire to confront any allegations head on but Judge Walrath is using a different track.

Judge Lays Down the Law, Insisting Certain Issues Be Dealt With First

The issue, apparently, is not the main points of WaMu’s bankruptcy plan.  She ruled that the shareholders in the matter have enough evidence to confirm that “the settlement noteholders knowingly traded with knowledge that the debtors were engaged in global settlement negotiations… of which the trading public was unaware” to sue the hedge funds, but she blocked any immediate litigation, pending mediation. Walrath is requiring that for mediation “all the issues have to be on the table.” She also cautioned the parties involved that she would only accept “very, very minimal damages).