Feds Ask Ouster of Lawyers for American Continental

Federal regulators, battling the parent company of Lincoln Savings & Loan, told a U.S. district court judge Monday in Phoenix that lawyers for American Continental Corp. should be removed from the case because of a conflict of interest.

The Federal Deposit Insurance Corp. and the Federal Savings and Loan Insurance Corp. filed papers asking the court to disqualify the Houston-based law firm of Sheinfeld, Maley & Kay because it still represents FSLIC in a Texas court and knows the agency’s litigation strategy.

An American Continental lawyer also revealed that Beus, Gilbert, Wake & Morrill, a Phoenix law firm helping Sheinfeld Maley, could have a similar problem because it represents the FDIC in the takeover of a Phoenix-based savings institution. Under President Bush’s rescue plan for the S&L; industry, the FDIC is managing S&Ls; at which the FSLIC serves as conservator.

“Having been advised of a potential conflict, and it appears well taken, I’d advise using other counsel,” U.S. District Court Judge Paul G. Rosenblatt told attorneys for American Continental. His comment, however, was not a ruling. Lawyers will return to court Friday

The loss of Sheinfeld Maley could be a blow to American Continental’s own strategy. The law firm had helped the company devise the plan that included American’s April 13 petition for bankruptcy reorganization. The company also put 11 Lincoln subsidiaries, but not the S&L;, in bankruptcy. Regulators seized Irvine-based Lincoln the next day.

Monday’s arguments came in a suit American Continental filed to stop the regulators from removing officers and taking other actions at the 11 Lincoln subsidiaries in bankruptcy. The judge has ruled that the company can go to trial over the agencies’ rights in operating the subsidiaries.

In another motion filed Monday, attorneys for Star Bank in Cincinnati asked to intervene in American Continental’s lawsuit. The bank represents about 11,000 holders of American Continental bonds and notes, bank lawyers said.

FDIC attorneys said the agency will oppose Star Bank’s motion.