SEATTLE (CN) – After Washington Mutual became the biggest bank failure in U.S. history, 92 of its officers and executives tried to profit from the collapse through illegal golden-parachute payments, the receiver claims in court.
The WMI Liquidating Trust sued the Federal Deposit Insurance Corp., the Board of Governors of the Federal Reserve, and the 92 former bank officers in Federal Court.
Washington Mutual filed for bankruptcy and was placed in receivership in 2008. JPMorgan Chase bought it for $1.9 billion in September 2008, in a deal brokered by the federal government. WaMu had $310 billion in assets when it collapsed.
In its 103-page lawsuit, the WMI Liquidating Trust (WMILT) seeks judgment that various severance and benefits sought in bankruptcy proceedings are prohibited by the federal Golden Parachute Regulations.
“The individual defendants include some of WMI’s most senior executives and members of its Executive Committee. These same individual defendants seek to profit as a result of the bank failure and recover from WMILT pursuant to contracts or plans providing for large – and now prohibited – ‘golden parachute’ payments,” according to the complaint.
WMILT says the Bankruptcy Court ordered it to file the action against the employees, and the FDIC and Federal Reserve, to determine whether the employee payouts are allowed.
The Golden Parachute Regulations were enacted to prevent “distorted incentives and inequities that would result if employees and executives were rewarded when a bank or bank holding company (for which they were responsible) fails,” and to “prohibit precisely the types of payments that the individual defendants are seeking,” the receiver claims in the lawsuit.
It also claims that the payments are illegal under the Automatic Termination Regulation, which requires that an employment contract between a savings association and its officers and employees must terminate if the association is in default, and that all obligations terminate on the date of default.
The FDIC already has obtained judgment that certain WaMu employment contracts, involving some of the 92 individual defendants, were unenforceable due to the Automatic Termination Regulation, but the employees are still pursuing the claims in bankruptcy court, the receiver says in the complaint.
“In plain disregard of this court’s prior determination that certain of the contracts and plans are unenforceable under the Automatic Termination Regulation, several of the individual defendants who brought suit against the FDIC are now seeking to enforce those same contracts and plans against WMILT,” the lawsuit states.
WMILT says the Bankruptcy Court denied its motion to assert the Golden Parachute and Automatic Termination Regulations as additional defenses in the employee claims, because the decision “would not be binding” on the FDIC and Federal Reserve Board, because they were not parties.
“While the Bankruptcy Court declined to grant WMILT’s Motion to Amend, it recognized the merits of the proposed objections by expressly acknowledging that the Bankruptcy Court has no authority to direct payment on account of the employee claims without either the prior written approval of the FDIC and FRB or the entry of an order declaring that the Golden Parachute Regulations and the Automatic Termination Regulation do not preclude payment on account of the employee claims. In order to resolve the issue, the Bankruptcy Court simultaneously ordered WMILT to file this declaratory judgment action against the FDIC, FRB and the individual defendants,” the complaint states.
WMILT is represented by Edgar Sargent and Justin Nelson with Susman Godfrey, in Seattle, and by Brian Rosen and John Mastando III with Weil, Gotshal & Manges of New York City.
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