Judge Approves $37 Million Washington Mutual Bankruptcy Settlement

By Peg Brickley 

A bankruptcy judge Tuesday tied up a remaining loose end from the 2008 collapse of Washington Mutual Bank, endorsing a $37 million settlement of the company's claims against its former leaders.

Judge Mary Walrath signed off on the settlement at a hearing in the U.S. Bankruptcy Court in Wilmington, Del., where the failed thrift's corporate parent, Washington Mutual Inc., took refuge in 2008.

Regulators seized the troubled subprime lender and sold it to J.P. Morgan Chase & Co., adding to the shaking of the U.S. financial system.

Once a staid savings and loan, Washington Mutual became an enthusiastic participant in the home loan boom, creating what a Senate panel later called a "time bomb" doomed to blow up in investors' faces.

The settlement approved Tuesday ends some of the litigation over who was to blame for Washington Mutual's failure including legal fights with insurance companies that balked at paying.

Washington Mutual's trustees accused the company's leaders of neglecting their duties to look out for the parent company.

For example, they sought to recover $500 million of parent company funds that were diverted to prop up the finances of the thrift. The thrift, and the $500 million, fell into the hands of regulators.

Kerry Killinger, who was ousted from the chief executive spot at Washington Mutual not long before the thrift was seized, gets $7 million or more from the settlement, for agreeing to drop claims he filed against the company. Other former Washington Mutual leaders will also collect something for unpaid directors' fees or company expenses under the pact.

None of the parties involved admitted to wrongdoing, but those in charge of rounding up money for creditors say it is time to stop the litigation in state and bankruptcy courts and to engage in a compromise all around.

Among other things, the settlement could free up about $18 million that has been held in reserve in the event the bankrupt company was required to cover the defense fees and costs of sued executives.

The $37 million for the settlement is coming from insurance companies, who are paying on behalf of the sued executives. The liquidating trust set up under Washington Mutual's Chapter 11 plan will make the settlement payments to executives, court papers say.

Trustees have been distributing funds to creditors since 2012, when the parent company's $7 billion Chapter 11 plan was approved.

Write to Peg Brickley at [e-mail]

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