Heritage Bank Action to Center on Pact : Court Hearing Could Also Determine Role of New York Law Firm

An Orange County Superior Court will hear arguments Friday that could lead to a reduction of the complex litigation surrounding the 1984 collapse of Heritage Bank.

The outcome of the hearing also could clear the way for a major national law firm to return as counsel for the Federal Deposit Insurance Corp. in the case--a position that could earn the firm $2 million or more.

Friday’s hearing centers on whether the former Orange Coast Savings & Loan Assn., now called Charter Savings Bank, has a binding agreement to drop its suit against the FDIC in return for the agency’s dismissing the S&L; as a defendant in its $150-million suit against Heritage.

The key issue is whether the S&L; agreed as a condition of the settlement to drop its objection to the FDIC’s use of the New York-based law firm of Finley, Kumble, Wagner, Heine, Underberg, Manley & Casey as its counsel in the Heritage suit.

FDIC Denies Condition

The FDIC claims such a condition existed; the S&L; says it doesn’t.

Without Orange Coast as a defendant in the FDIC lawsuit, Finley Kumble presumably could return as the FDIC’s counsel. The law firm initiated the Heritage suit and worked on it for more than 18 months, picking up more than $1.5 million in fees. It would earn at least $2 million more if it can continue representing the government agency.

The S&L; won a court order in June disqualifying Finley Kumble from the case on the grounds that it created a conflict of interest by hiring a former Orange Coast Savings lawyer who was privy to information about the S&L;’s dealings with Heritage Bank before the Anaheim bank was declared insolvent.

While the order is on appeal by the FDIC, the law firm continues to represent the agency.

Orange Coast S&L; was founded and run by Douglas E. Patty, who also headed Heritage Bank.

Patty and a number of other Heritage directors who also invested in the S&L; were ousted from Heritage and later sold their interests in the S&L.; Transactions between the two institutions formed the basis for the S&L;’s suit against the FDIC and for the agency’s claim that the transactions contributed to Heritage’s downfall.

In its action, the S&L; claims that the FDIC refused to turn over the S&L;’s share of loan proceeds from the participations.

Agreement Reached

On June 25, nearly three weeks after Finley Kumble was disqualified, the agency and the S&L; reached an agreement to settle both actions.

According to the FDIC, the S&L; also agreed to waive its objection to Finley Kumble continuing as the agency’s lawyers.

But the S&L; soon disavowed any agreement to waive its objection to Finley Kumble, saying it does not want to hinder other defendants in the FDIC action from also attempting to disqualify the law firm.

Claiming the agency is trying to impose a new term in the settlement, the S&L; is seeking a court order to enforce the settlement it says was reached in June. In opposing the motion, the agency now claims that no final settlement was ever reached.