It's Washington Mutual Inc vs. shareholders, round II.

The company begins its second attempt on Wednesday to end its bankruptcy and get court approval for a plan to distribute around $7 billion to its creditors, and again it is facing its stiffest objections from equity holders.

But there are also big differences between now and January, when U.S. Bankruptcy Judge Mary Walrath in Delaware rejected an earlier version of the same plan.

While Walrath sent the plan back for modifications, she also approved a deal at the heart of the plan. The global settlement agreement that she approved parceled out the company's assets to the major parties to the Chapter 11. In return, those parties threw their support behind the plan.

Her approval, along with various plan changes, leaves shareholders and other opponents with fewer targets to take aim at during hearings that begin Wednesday.

In addition, the potential pot of money for shareholders is shrinking.

Creditors must be paid in full before shareholders, and creditors' claims are accruing interest, reducing the amount left over for shareholders with every delay -- delays that are in part caused by shareholders battling for more money.

That's the profound irony of it, said Kevin Starke, an analyst at CRT Capital Group, a Stamford, Connecticut-based broker-dealer that focuses on distressed securities. If Washington Mutual got out sooner there would have been a recovery at the preferred equity level.

This time around, lowest-ranking creditors appear unlikely to be paid in full and even preferred shareholders may get nothing, Starke said. Common shareholders are still farther back in the line and the company has consistently said they will get nothing.

Washington Mutual filed for bankruptcy in September 2008, a day after its savings and loan was seized by regulators in the biggest bank failure in U.S. history. The savings and loan was sold immediately by the Federal Deposit Insurance Corp to JPMorgan Chase & Co for $1.88 billion.

The first 18 months of the bankruptcy was spent fighting over ownership of about $10 billion of assets, which mostly consisted of cash and tax refunds. The global settlement ended those fights and provided most of the $7 billion that Washington Mutual plans to distribute to creditors, which are mostly investors such as hedge funds that hold its securities.

JPMorgan and the FDIC divided the rest of the assets and in return dropped their legal fights with Washington Mutual.


Unable to attack the global settlement agreement, the shareholders may be pinning their hopes on making accusations of insider trading stick against a group of hedge funds that helped negotiate that deal.

The four funds -- Owl Creek Asset Management LP, Appaloosa Management LP, Centerbridge Partners LP and Aurelius Capital Management LP -- were accused by individual investor Nate Thoma of gleaning information from settlement talks to profit on Washington Mutual securities.

If that accusation sticks, the funds will not be able to collect all the interest they claim they are due, which would free some value that could flow to shareholders.

Most of the documents relating to the insider-trading accusations have been sealed, and attorneys for the official committee of equity holders did not return a call for comment.

A company spokesman declined to comment.

Shareholders will also likely try to prove Washington Mutual is giving away valuable tax breaks and legal claims. The company plans to reorganize around a small mortgage reinsurance company that will have little value except tax breaks it could use to offset future income.

Just last month, it seemed that shareholders had a deal to take a significant stake in that reorganized company, which shareholders had argued was worth billions more than the $160 million estimated by Washington Mutual. However, that deal eventually collapsed.

The case is In re Washington Mutual, U.S. Bankruptcy Court, District of Delaware, No. 08-12229.

(Reporting by Tom Hals; Editing by Martha Graybow, Phil Berlowitz)