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Second Largest U.S. Bankruptcy Reorganization Wins Approval

Like Lehman Brothers before it late last year, the complicated and litigious bankruptcy reorganization of Washington Mutual can see the light at the end of the tunnel as a U.S. Bankruptcy Court judge has approved a plan after a group of angry creditors acquiesced hours earlier.

On Friday, Judge Mary Walrath approved the Washington Mutual (WaMu) reorganization plan, the second largest in U.S. history, after some three-and-a-half years of wrangling. Among the fallout from the case is what could be seen as a small victory for lower-level creditors. Even though most will receive pennies on the dollar as a result of the expense of a drawn-out case, it was a shock to many watchers that lower level creditors were able to recoup anything. It also found that the court, or at least Walrath, was not as willing to promote secured, senior creditors on the backs of others to the extent many believed would occur.

Walrath, who rejected multiple WaMu reorganization plans because of opposition from creditor groups, was able to approve of this one because of a deal struck last week with a group of debt holders. The group, mostly securities investors, fought against previous plans because the debt was converted into stock—they would have received significantly less value out of stock than out of the categorization of being a holder of debt. The agreement includes their receiving $18 million from JPMorgan Chase, which purchased WaMu assets after its collapse, as well as the reimbursement of millions in legal fees.

Marked by their size, drastically different plans and legal wrangling between creditors, attorneys and judges have characterized Lehman Brothers and WaMu as the two most difficult bankruptcy proceedings seen in U.S. court history. If nothing else, the cases may have illustrated the versatility and adaptability of the Chapter 11 system.

"To process the claims and have some sense of order going forward was quite an achievement," said Scott Cargill, Esq. Of Counsel at Lowenstein Sandler PC in a late 2011 NACM interview about the implications of the massive reorganization cases. "In 2008, there were a lot of fears about whether our restructuring system could even handle something like this."

Brian Shappell, NACM staff writer