A bankruptcy judge has rejected Washington Mutual Inc's reorganization plan but said the company's $10 billion settlement with JPMorgan Chase & Co and a bank regulator was fair and reasonable.
The judge found that some legal releases from liability in the reorganization plan were too broad, among other issues.
"The court finds that the debtors' plan is not confirmable unless the deficiencies explained herein are corrected," Delaware judge Mary Walrath wrote in an 109-page opinion.
Washington Mutual welcomed approval of the settlement and said it expected to modify the reorganization plan and seek approval as soon as it can.
The settlement ends most of the legal battles that began when the company filed for Chapter 11 in September 2008, the day after regulators seized its WaMu savings and loan in the biggest bank failure in U.S. history.
The Seattle-based bank was immediately sold by the FDIC to JPMorgan for $1.88 billion.
The settlement divides disputed cash and tax refunds and provides most of the $7 billion that Washington Mutual plans to distribute to hedge funds and other bondholders under its plan of reorganization. Most creditors will be repaid in full.
JPMorgan will receive about $2.5 billion in tax refunds under the deal, and the FDIC will get about $800 million.
The reorganization is likely to wipe out the common stock, and shareholders argued the settlement should be rejected because it ended potential lawsuits against JPMorgan and the Federal Deposit Insurance Corp with little in return.
They said that Washington Mutual could end up with $33 billion if it scored major legal victories and if its assets were more fairly valued.
The company welcomed the judge's rulings.
"WMI is also pleased that the court suggested that the plan of reorganization is confirmable subject to limited modifications," Washington Mutual Inc, or WMI, said in a statement.
JPMorgan and the FDIC declined to comment.
Justin Nelson, an attorney with Susman Godfrey which represents the official equity committee, said "we are gratified the court denied confirmation and we're evaluating the opinion and our options going forward."
Walrath also ruled against a group of hedge funds that claimed ownership of billions of dollars in securities that also were claimed by JPMorgan, a key victory for the Wall Street bank.
An attorney for the hedge funds did not immediately return a call for comment.
Shares in Washington Mutual ended Friday down 4.8 percent at 5.7 cents in pink sheet trading.
