Washington Mutual Inc defended on Thursday its plan to repay creditors, while an attorney for disgruntled shareholders attacked the proposal because it leaves them with nothing.

Washington Mutual's chief restructuring officer, William Kosturos, made the case in bankruptcy court for approving a proposed settlement that will make about $7 billion available for Washington Mutual creditors. As often happens in bankruptcy, shareholders will not get any recoveries.

U.S. Bankruptcy Judge Mary Walrath is holding hearings on the plan, which seem likely to run into next week.

The company filed for bankruptcy in September 2008, a day after its lending business was seized by regulators and sold to JPMorgan Chase & Co for $1.9 billion in the biggest bank failure in U.S. history.

At the heart of the reorganization plan is a deal between Washington Mutual, JPMorgan and the Federal Deposit Insurance Corp, which sold the bank, to divide disputed cash and tax refunds.

That money will be distributed to the hedge funds and other investors that hold its notes and securities, but there will be nothing left over for stockholders.

Kosturos faced questions from an attorney who represents the official committee of equity holders. The attorney, Justin Nelson, said in his cross examination that $2.7 billion in cash to support the deal came from taxpayers, not JPMorgan.

The money came by way of tax refunds from a stimulus program that was championed as a way to help homeowners and the unemployed.

The actual money from the tax refunds is coming from the U.S. government, correct? asked Nelson.

Yes, that's where tax refunds come from, Kosturos said.

Shareholders have been battling for a say in the bankruptcy and a recovery of their investment in the company, a one-time stock market darling.

They have argued that Washington Mutual is surrendering potentially $30 billion in legal claims that could be brought against regulators and JPMorgan, which they have accused of colluding to snatch the bank at a fire sale price.

Asked why JPMorgan was only writing a check for $25 million to support the settlement, Kosturos argued the company was surrendering billions of dollars of legal claims against Washington Mutual.

Washington Mutual is essentially liquidating, although it may bring a small mortgage insurance business out of bankruptcy to preserve tax credits left from huge operating losses.

CLOSED HEARINGS?

The hearings are scheduled to wrap up on Friday, but given the hundreds of objections it seems likely to run much longer.

Most of those objections have been brought by individual shareholders. The official committee of equity holders asked to introduce some privileged client-attorney information, which could require the courtroom to be closed to the public.

The judge said she was reluctant to seal the courtroom but would deal with the issue if and when it came up.

Founded in Seattle in 1889, Washington Mutual was once the largest U.S. savings and loan, with more than 2,500 branches, $300 billion in assets and $188 billion in deposits when it was seized.

Former Chief Executive Officer Kerry Killinger, who stepped down just weeks before the bank's collapse, led the company through a string of acquisitions and pushed to expand the riskier loans that came to be known as subprime mortgages.

(Reporting by Tom Hals; Editing by Tim Dobbyn)

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