Lincoln S&L;’s Parent Wins Ruling; Creditors Hopeful

A federal judge in Phoenix denied government motions Friday to throw out the bankruptcy petitions of 11 subsidiaries of insolvent Lincoln Savings & Loan, keeping alive the hopes of creditors that they may get back a portion of the $363.1 million owed them.

The decision, together with other rulings and comments by U.S. District Judge Richard M. Bilby, was a “big victory” for Lincoln’s bankrupt parent firm, American Continental Corp., said Brad Boland, a company spokesman.

Both sides had acknowledged previously that Friday’s hearing was a key one in the legal battle between American Continental, which filed for bankruptcy protection on April 13, and federal regulators, who seized Irvine-based Lincoln on April 14. The collapse of Lincoln could ultimately cost taxpayers $2.5 billion, making it the largest S&L; failure ever.

Had the motions been granted, regulators would have had a free hand in dealing with the 11 subsidiaries, which hold most of Lincoln’s assets, and American Continental’s hopes for reorganizing itself would have been dashed.

Kathleen Wood, a Federal Deposit Insurance Corp. staff lawyer assigned to the subsidiaries, said the denial of the motion will inconvenience rather than jeopardize the agency’s efforts.

“The subsidiary cases are going forward,” she said. “The ruling will not affect what we do so much as hinder us in doing it.”

One obstacle to the FDIC’s effort Friday was a motion filed Monday by the creditors committee, including about 22,000 holders of nearly $200 million in American Continental bonds, to consolidate the bankruptcies of the subsidiaries, as well as the receivership of Lincoln, into the American Continental bankruptcy.

A committee lawyer, Donald Gaffney of Phoenix, argued that a racketeering suit brought by federal regulators two weeks ago alleges that the parent and all its subsidiaries constituted one enterprise.

“Someone somewhere has to deal with the whole ball of wax,” the judge said.

In a folksy but direct manner, Bilby told a courtroom packed with nearly 100 lawyers and government agents that he wants American Continental, the FDIC and the creditors committee to start negotiating to settle the bankruptcy cases.

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