Delaware federal bankruptcy court Judge Mary Walrath is going to have a doozy of a fall. On Sept. 7, she’s set to receive a report from the recently appointed examiner in the Washington Mutual Inc. Chapter 11, who has a broad mandate to investigate the circumstances of WMI’s September 2008 demise. On the same day, WMI is scheduled to file its response to an adversary proceeding brought by holders of $1 billion in WMI trust preferred securities, who assert that WMI and JPMorgan Chase wrongfully appropriated $4 billion for WMI’s estate.

At a hearing in Wilmington on Tuesday, Walrath said trial in the adversary case would begin on Nov. 1, as the first order of business in the confirmation hearing on WMI’s reorganization plan. And according to the trust preferred investors’ counsel at Brown Rudnick, the outcome of that proceeding may derail the rest of the confirmation hearing.

The trust preferred securities holders filed their 97-page complaint last month, naming WMI, several WMI trusts, and JPMorgan Chase as defendants. (JPMorgan, you’ll recall, acquired WMI’s subsidiary, Washington Mutual Bank, in 2008, after the Federal Deposit Insurance Corp. took over WaMu Bank.) As Zach Lowe at the Am Law Daily explained at the time, Brown Rudnick’s clients allege that WMI, the federal government, and JPMorgan colluded to deceive and then deprive them of their $1 billion investment in preferred trust securites. They bought the securities, they allege, with the understanding that if WaMu Bank failed, the preferred trust shares would be converted into WMI preferred stock. But instead, they allege, WMI attempted to transfer all of the preferred trust securities — totaling $4 billion — to JPMorgan when it acquired WaMu Bank.

The $4 billion transfer is cited in the settlement agreement between WMI and JPMorgan Chase that’s the foundation of WMI’s reorganization plan. But Brown Rudnick’s clients assert that, in fact, the transfer never took place and their trust preferred securities are not part of the WMI estate. That’s the issue Walrath will address beginning on Nov. 1.

“There’s unanimity on the point that our claims have to be resolved before anything else,” said Jeremy Coffey of Brown Rudnick, who represents the trust preferred investor group. “It’s a $4 billion issue. If we’re right, there’s $4 billion less in the estate, and I don’t think the plan goes forward.”

The investors had asked Walrath for a trial apart from the plan confirmation process, but Coffey said it’s not important that she set their trial to begin as part of that process. “It will be the first thing she hears,” Coffey said. “We’ll be ready for trial on Nov. 1.”

WMI and the other defendants may still move to dismiss the trust preferred investors’ case. They have until Sept. 7 to do so. We called WMI lead bankruptcy counsel Brian Rosen of Weil, Gotshal & Manges but didn’t hear back.

This article first appeared on The Am Law Litigation Daily blog on