Keating Fails to Get Control of Lincoln Units : Parent Firm of S&L; Plans Further Lawsuits

A federal judge in Arizona on Friday rejected an attempt by Arizona financier Charles H. Keating Jr. to regain control of 11 Lincoln Savings & Loan subsidiaries placed in bankruptcy proceedings last month along with Lincoln’s parent firm.

U.S. District Judge Paul G. Rosenblatt ruled that the parent company, American Continental Corp. of Phoenix, does not have the legal standing to win control of the Lincoln subsidiaries from federal regulators.

Irvine-based Lincoln Savings was seized by regulators on April 14, the day after American Continental filed for protection from creditors under federal bankruptcy laws for itself and the 11 Lincoln subsidiaries. Lincoln Savings itself was not included in the filing.

The judge said American Continental’s ownership of the 11 subsidiaries is so indirect that its stake in their assets is “too tangential” to give the company the right to appear in court on behalf of the subsidiaries. American Continental owns a holding company, which in turn owns Lincoln, and Lincoln owns the 11 subsidiaries in bankruptcy. The S&L; also owns 24 other subsidiaries.

American Continental sued federal officials shortly after the takeover of Lincoln, claiming that the regulators lacked the ability to manage the subsidiaries. The subsidiaries hold $3.4 billion of Lincoln’s $5.3 billion in assets and own the S&L;’s major real estate ventures, including the extravagant Phoenician Resort in suburban Scottsdale.

Long-Term Battle

Keating, American Continental’s chairman, said in prepared remarks that he was disappointed with the ruling and promised to pursue other lawsuits to oust the conservator and to seek damages from the government. He said he also plans to continue questioning “the ability of the regulators to manage these assets.”

Since he bought Lincoln in 1984, Keating has been jousting with regulators over his use of nontraditional S&L; strategies, such as making direct investments in real estate projects.

“We won this battle, but the war is far from over,” said Marc Kalish, a lawyer for the Federal Deposit Insurance Corp. The federal agency is managing the S&L; under a contract with the conservator, the Federal Savings and Loan Insurance Corp.

Kalish said he expects American Continental to raise many of the same issues in U.S. Bankruptcy Court, where it is trying to reorganize its debts under Chapter 11 of the U.S. Bankruptcy Code. The company also is challenging the conservatorship in a suit in Washington, claiming that regulators did not have the right to seize Lincoln.

“I’d be fibbing if I didn’t say I’m surprised and disappointed by the ruling,” said Barbara J. Houser, one of American Continental’s lawyers. “Obviously, it’s a setback.”

She said the company has not decided yet if it will appeal Rosenblatt’s decision.

The judge also disqualified Houser’s firm, Sheinfeld, Maley & Kay in Houston, along with the Phoenix firm of Bues, Gilbert, Wake & Morrill, from the case.

Conflicts Cited

He said the firms had a conflict of interest in this case because they were challenging the competency of FDIC and FSLIC when both firms had represented or are currently representing the agencies in other litigation.

In arguing for control over the subsidiaries, lawyers for American Continental had said that the company cannot work its way out of its financial troubles without control over its entire enterprise. They warned that the regulators will either mismanage or dismember the subsidiaries.

Regulators had contended that the assets were purchased with depositor money from the S&L; and warned that the parent company would treat them as assets purchased from stockholders’ money.

Steve Webb, a free-lance writer in Phoenix, contributed to this report.