Sun Savings to Take Legal Actions Against Delinquent Debtors

Sun Savings & Loan will attempt to revive its nearly $38 million in non-performing loans with “tough and aggressive” legal action anywhere “we have a cause of action and a likelihood of recovery,” Sun’s chief attorney said Monday.

The financially troubled University City-based S&L; is now “starting to identify and map out a comprehensive and aggressive program of pursuit” of its non-performing loans, said John Grosvenor, Sun’s executive vice president and general counsel.

Legal action against delinquent debtors had taken a back seat to boosting Sun’s sagging net worth, Grosvenor said. But Sun now expects to increase its capital base through a $4.7-million infusion from a public stock offering and a $2.5-million investment from local developer Victor Fargo. So now attention has shifted to reversing Sun’s non-performing assets.

“Almost all” of Sun’s $37.6 million in “scheduled items”--loans delinquent for more than 90 days and foreclosed real estate--is “capable of getting back into the revenue stream,” Grosvenor said. “The question is when. It doesn’t take long to make a bad loan, but it takes a long time to work it out.”

The first of several expected lawsuits was filed by Sun last week. In a $13-million action against an Orange County developer and a dozen other individuals and firms, Sun alleged negligence, conspiracy and breach of contract on a series of loans. The lawsuit alleges that the developer, Robert A. Buceta of Newport Beach; his wife, Patricia Thibault, and Buceta’s Omni Plus Corp. set up a “sham escrow” and sold the properties twice.

The effect of that transaction, according to the lawsuit, was to inflate the value of the properties so that the loans would not exceed 75% of the purchase price, which was one of Sun’s stipulations. The loans were for the condominium conversion of 283 apartment units in Denver.

The Buceta loan is reportedly one of the business deals being examined by federal prosecutors investigating ousted Sun Chairman Daniel W. Dierdorff, according to sources familiar with the case.

The Buceta loan is the largest of several “blocks” of problem loans at Sun, Grosvenor said. The company is focusing on those delinquent loans “which will produce the best results first,” he said.

Another “block” involves a proposed $8-million loan swap with troubled Westside Federal Savings & Loan in Seattle, which was taken over by regulators last month. In the second quarter--and before the takeover--Sun swapped $4 million of its delinquent loans for an equal amount of performing loans with Westside.

The rest of the loan swap, worth about $8 million, was called when regulators seized Westside’s operations. Their status is now the subject of negotiations between Sun officials and regulators. Sun had been a participating lender and Westside was the lead lender in all of the loans designated for trading.

The loan swap was first announced at Sun’s annual meeting in May. At that time, Sun officials hinted that, if the swaps weren’t completed, they planned to take legal action against Westside for getting Sun involved in the loans in the first place.

The $4 million in swapped loans resulted in a net gain of $503,000 in the second quarter, and that was the major factor in Sun reporting earnings of $20,000 for the six months ended June 30. Without that extraordinary gain, Sun would have reported a loss of $483,000 for the six months.

Such non-operating gains will not be uncommon in the future, Grosvenor said. “All quarters will be driven by extraordinary items,” he said. “We won’t be operationally profitable until we return some significant portion of those non-performing assets to performing status.”

Sun’s net worth as of June 30 was $6.4 million, or 1.36% of its $468 million in assets, well below the regulatory minimum of 3%.

Sun could exceed that minimum if its $7.2-million capital infusion plan comes to fruition. Included is a $2.5-million investment by Fargo, whose contribution depends on Sun becoming a major tenant and equity partner in his La Jolla office building. The stock brokerage firm of Merrill Lynch moved into the building as its prime tenant earlier this month.

Fargo has in hand two letters of commitment from lenders, according to sources familiar with the deal. However, if the deal isn’t consummated by mid-November, Sun officials will have to rewrite the capital infusion plan to include the thrift’s third-quarter financial figures, which are expected to be released by that time.

Sun has four branches in San Diego and one in Mission Viejo.