Washington Mutual Inc. has sued to force insurers to cover legal defense costs for ex-chief executive Kerry Killinger and other former leaders tagged with blame for the biggest banking collapse in U.S. history.
The former parent of Washington Mutual Bank, or WaMu, is preparing some $6 billion worth of bankruptcy payout checks to go out to creditors "in the coming weeks," court papers say. In a footnote, the company said the checks could go out as early as Friday.
WaMu's former parent is holding back $55 million, however, because Killinger and other former leaders say the company has to pay their legal bills if the insurers continue to balk.
Washington Mutual's Chapter 11 plan was confirmed nearly a month ago, clearing the way for an impressive payday for hedge funds that paid pennies on the dollar for debt that will be paid in full, with interest.
The fight with the insurers is one of several remaining pieces of business that have tied up some of the cash in the Chapter 11 coffers.
WaMu's former parent sued Thursday, saying it paid $15 million for $250 million worth of coverage for alleged wrongs by directors and officers from May 1, 2008, through May 1, 2009, but is not getting what it paid for.
A dozen insurance companies were named as defendants in the case, accused of asserting "baseless" arguments to avoid paying.
According to WaMu's former parent, the official creditors committee in its Chapter 11 case last year sent letters threatening to sue company leaders, a move that should have triggered the insurance coverage.
The letters accused WaMu's former leaders of wrongdoing in connection with a $ 500 million capital contribution from the parent company to the ailing thrift weeks before WaMu failed. Creditors said the capital infusion was "reckless and wasteful," court papers say.
Insurers refused to pay up, contending the creditors' demand letter was connected to securities class action lawsuits that also hit WaMu's former leaders. Insurance for the 2007 through 2008 period should cover the problem, the insurers contend. Washington Mutual says the 2007 through 2008 insurance is "nearly exhausted."
According to the complaint, Washington Mutual paid about three times more for its 2008 through 2009 insurance coverage than it paid for the previous year's protection.
WaMu's collapse and seizure in the fall of 2008 drew a heap of legal trouble down on the company's leaders, including suits from shareholders, bondholders and the Federal Deposit Insurance Corp.
Many of the suits settled in the course of the three-year bankruptcy case. Killinger and two other executives, for example, agreed to a nearly $65 million settlement with the Federal Deposit Insurance Corp.
That settlement included an agreement to give up some benefit claims against Washington Mutual. Killinger and others, however, didn't relinquish the right to make the company pick up the tab for their legal defense.