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Susman Godfrey lawyers representing the out-of-the-money equity committee in the Washington Mutual Inc. Chapter 11 have spent the last six months trying to convince Delaware federal bankruptcy court judge Mary Walrath that WMI and its lawyers left money on the table in WMI’s $7 billion global settlement with JPMorgan Chase and the Federal Depositors Insurance Corporation. As we’ve reported, the equity committee has had a couple of preliminary successes along the way (see here and here), but in a 109-page ruling Friday, Judge Walrath dashed the equity committee’s hopes of upending the WMI reorganization plan, vindicating WaMu’s litigation against JPMorgan and the FDIC. Though the judge denied confirmation of the plan, finding that WMI shouldn’t have agreed to release some parties from liability and shouldn’t have agreed to third-party releases, she concluded the settlement between WMI, JPMorgan, and the FDIC was reasonable. In reaching that conclusion, she agreed with the November findings of the court-appoined examiner, even though the examiner’s report was barred from evidence in last December’s confirmation hearing. “After reviewing each of the claims, the court is not convinced that the debtors have a probability of achieving a result significantly better if they were to continue to litigate than they will receive under the global settlement considering the claims separately or holistically,” Judge Walrath wrote. “Therefore, the court finds that this factor supports approval of the global settlement….The fact that the recovery may not reach shareholders is not enough to find it unreasonable.” The equity committee, later joined by counsel for holders of certain trust preferred securities, had tried to argue that WMI’s lawyers–debtor’s counsel Weil, Gotshal & Manges and special litigation counsel Quinn Emanuel Urquhart & Sullivan–did not adequately investigate claims against JPMorgan and the FDIC before reaching the global settlement deal. The judge rejected that assertion. “The court finds no evidence of lack of good faith,” she wrote. “Simply because the debtors were not able to achieve a greater recovery in the global settlement does not mean that they did not meet their fiduciary duty to all constituents. More than mere innuendo and speculation is needed to establish a lack of good faith.” Judge Walrath also granted WMI’s motion for summary judgment against the claims of the trust preferred securities holders, who alleged that WMI improperly transferred billions of dollars of their securities to JPMorgan. Quinn partner David David Elsberg hailed the ruling. “We’re pleased to see that in light of the litigation approach that WaMu took, the judge concluded across the board that the global settlement agreement is fair and reasonable, as we argued in court,” he said. Counsel to the trust preferred securities holders, Robert Stark of Brown Rudnick, declined comment. Equity committee counsel Justin Nelson of Susman Godfrey sent us an e-mail statement: “We are gratified by the court’s order denying confirmation. We are reviewing the court’s opinion and our options going forward.” Despite Walrath’s endorsement of the global settlement, WMI’s reorganization isn’t yet a done deal. The judge found that WMI’s confirmation plan should not have released claims against settlement noteholders, the creditors committee and its members, the indentured trustee, and the liquidating trust and trustee, as well as directors and officers and bankruptcy professionals. Moreover, she found, the plan can’t release certain third-party claims. She denied confirmation of the plan until it is amended to address those concerns. Equity committee counsel Justin Nelson of Susman Godfrey sent us an e-mail statement: “We are gratified by the court’s order denying confirmation. We are reviewing the court’s opinion and our options going forward.” WMI said in a press release that it “intends to modify the plan consistent with the court’s suggestion and will seek confirmation as soon as possible.”

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