Bankruptcy Judge Mary Walrath has for the second time refused to confirm Washington Mutual’s bankruptcy plan on the grounds that without mediation the bankruptcy case could collapse into a litigation nightmare. The major point of contention is allegations of insider trading which hedge fund investors vehemently deny. But the bankruptcy judge views the allegations as reasonable and has ordered mediation as a condition of confirmation.In rejecting a proposed reorganization plan from WaMu for a second time last month, Judge Mary Walrath had cited several impediments to confirmation. These included claims by a committee of equity security holders that hedge funds supporting the plan had engaged in insider trading of WMI debt based on information they obtained during the bankruptcy.
She had ordered the warring parties to engage in mediation in an attempt to resolve their differences without letting the bankruptcy case, now three years old, crumble into a “litigation morass.”
For its part, Washington Mutual and the hedge fund investors facing insider trading allegations are appealing the bankruptcy judge’s ruling. Washington Mutual says that only the insider trading issues should be addressed at the mediation; but the bankruptcy judge insists that all issues are addressed because she does not want the bankruptcy case to trip over another litigation landmine before confirmation. Washington Mutual’s bankruptcy case has been ongoing for the past three years, mired in litigation and fighting the entire way. In forcing all issues to the table at the next mediation scheduled for November, the bankruptcy judge hopes that the company’s bankruptcy exit can be expedited. Lengthy bankruptcy cases are not good for the corporate debtor or the creditors.