Hedge funds appeal ruling on WaMu trust securities

A group of hedge funds have appealed a court ruling that billions of dollars of Washington Mutual Inc -related securities were now owned by JPMorgan Chase & Co , a key decision to ending the Washington Mutual bankruptcy.

Most of the hedge funds, which recently bought the securities presumably for a tiny fraction of the face value, stand to reap a huge windfall if the ruling is overturned, court records show.

Delaware bankruptcy court judge Mary Walrath ruled on January 7 that the disputed securities had undergone a conditional exchange on the eve of the company's September 2008 bankruptcy, and the securities now belonged to JPMorgan.

The more than 20 hedge funds, which includes Black Horse Capital LP, Greywolf Capital Partners II and Paige Opportunity Partners LP, appealed that summary judgment decision to Delaware District Court.

As a result of that conditional exchange, the securities were transferred to Washington Mutual Bank, which was seized and sold to JPMorgan for $1.88 billion.

Investors who had held the securities were swapped into new securities linked to Washington Mutual Inc preferred stock.

Hours after the exchange was announced, the company filed for bankruptcy which rendered the newly issued securities essentially worthless.

Washington Mutual's reorganization plan is based on a settlement that ends its legal disputes with JPMorgan and the Federal Deposit Insurance Corp. As part of that settlement, Washington Mutual agreed the trust preferred belonged to JPMorgan.

While Walrath ruled in Washington Mutual and JPMorgan's favor on the trust securities, she also rejected the company's reorganization plan. Washington Mutual said it expects to rework the plan and resubmit it.

An attorney for the hedge funds did not immediately return a call for comment.

Washington Mutual and JPMorgan declined to comment.

The adversary proceeding is Black Horse Capital et al v JPMorgan Chase Bank, U.S. Bankruptcy Court for the District of Delaware, No. 10-51387.

(Reporting by Tom Hals; Editing by Richard Chang)