Ted S. Warren / AP

Washington Mutual Inc, the biggest bank to fail in U.S. history, said it reached a settlement in a dispute between shareholders and certain creditors that had prevented the bank from emerging from Chapter 11 bankruptcy proceedings.

It was the biggest bankruptcy ever by a U.S. bank, but three years after filing for Chapter 11 (and after two previous attempts to emerge from bankruptcy), Washington Mutual Inc. is seeing a light at the end of the reorganization tunnel.

WaMu said it reached a settlement in a dispute between shareholders and certain creditors that had prevented the bank from emerging from Chapter 11 bankruptcy proceedings. WaMu got a respite late on Monday when it said in a court filing that the shareholders represented by an equity committee would drop legal claims against settlement noteholders.

"The Equity Committee and its advisors are pleased with the result and look forward to and support the swift confirmation of the plan," said Michael Willingham, chairman of the Equity Committee appointed in the Chapter 11 proceedings.

The Wall Street Journal also reported Tuesday that three former executives of WaMu agreed to settle a civil lawsuit that emerged from the bankruptcy for around $75 million, less than 10 percent of the $900 million that regulators had sought. Most of the payment will not come from the executives - former Chief Executive Kerry Killinger, ex-President Stephen Rotella and the bank's ex-home loans chief, David Schneider. Instead, the Journal reported, the money would come from insurers and the bank's estate.

It would still be one of the largest payments stemming from the financial crisis. The lawsuit brought by the Federal Deposit Insurance Corp., accused the three officials of taking bets that led to WaMu's collapse. 

Washington Mutual has languished in Chapter 11 bankruptcy since regulators seized its savings and loan in September 2008, the height of the financial crisis. The banking business was sold by the Federal Deposit Insurance Corp to JPMorgan Chase & Co for $1.88 billion.
Almost immediately after the bankruptcy started, Washington Mutual, the FDIC and JPMorgan began a legal battle to sort out who owned what of the failed bank.

The plan to settle the dispute will allow WaMu to distribute $7 billion to creditors. "The proposed settlement agreement represents a positive step toward completing the Chapter 11 process," WaMu said.

WaMu's reorganized assets will consist of its equity interests in WMI Investment Corp and WM Mortgage Reinsurance Co Inc. The reorganized company will be funded by a $75 million contribution from certain creditors. The reorganized entity will also receive a credit line of $125 million from the noteholders, according to the court filing.

WaMu said the majority of common equity in the reorganized company will be distributed to the company's current preferred and common equity holders.

In September, Judge Mary Walrath rejected WaMu's second attempt to end its bankruptcy as disputes raged between the shareholders and noteholders.

In her earlier opinion, Walrath had ordered mediation as a way to end lingering disputes between the warring parties. 

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

Reuters contributed to this report.