Bondholders Seek Share of Any Damages Recovered : Creditors Group Sees Lincoln Suit as Boon
The recent federal racketeering lawsuit against the former operators of Lincoln Savings & Loan opens the door for bondholders and other creditors of the thrift’s bankrupt parent to recoup $363.1 million in debts, according to papers filed Monday in federal courts in Phoenix.
The committee for unsecured creditors in Lincoln’s parent, American Continental Corp., contends that if the government’s racketeering allegations are true, then Irvine-based Lincoln was a perpetrator, not a victim, so creditors are entitled to share in any damages recovered by S&L; regulators on behalf of depositors.
The committee’s motion, filed in U.S. District Court and in U.S. Bankruptcy Court, seeks to consolidate Phoenix-based American Continental’s bankruptcy proceedings with those of 11 Lincoln subsidiaries and with Lincoln’s receivership as well.
American Continental and the Lincoln subsidiaries filed for bankruptcy protection April 13, and regulators seized Lincoln the next day. In early August, regulators declared the S&L; insolvent and put it in receivership.
Federal regulators on Sept. 15 sued Charles H. Keating Jr., American Continental’s chairman, and six other corporate executives, alleging that they devised a racketeering scheme to siphon $1.1 billion in federally insured deposits from the S&L; for their own use. The suit also accused them and 30 other defendants of bank fraud and other wrongdoing.
“We don’t know if the government’s racketeering allegations are true,” said Donald Gaffney, an attorney for the unsecured creditors. “But if the government is right, then the remedies run to all the bondholders, just as they run to the depositors.”
The collapse of Lincoln is expected to cost taxpayers up to $2.5 billion, making the S&L; failure the biggest ever. Regulators are hoping to recoup some of the cost of the failure from the sale of the assets of Lincoln and its subsidiaries.
Attorneys for regulators said they will fight efforts by American Continental’s creditors to recover losses from those assets.
Michael Manning, a Kansas City lawyer who led the legal team in designing the racketeering suit for regulators, called the effort by the committee’s lawyers “pretty sophomoric” and suggested that “they sit down and study the (racketeering) complaint.”
The creditors committee, a group usually formed in bankruptcies, includes about 22,000 people who bought nearly $200 million in American Continental debt securities through Lincoln’s 29 Southern California branches. Most were elderly depositors who believed mistakenly that the securities were insured by the federal government.
The effort to consolidate the 12 bankruptcies and the Lincoln receivership is aimed at halting regulators from liquidating Lincoln and at turning the S&L;’s operations over to a third party to conserve assets while reorganization plans are determined.
U.S. District Court, meanwhile, is scheduled to hear arguments Friday on a motion by regulators to dismiss the bankruptcy petitions of Lincoln’s subsidiaries.
