Lincoln S&L;’s Parent Is Running Out of Money : Thrifts: American Continental is spending more than $1 million a month on lawyers. It may be out of funds by Jan. 30.

The parent company of Lincoln Savings & Loan in Irvine is spending more than $1 million a month on outside lawyers in its clashes with government regulators and bankruptcy creditors, and it is rapidly running out of cash, a court official said Friday.

Ronald E. Warnicke, a court-appointed bankruptcy examiner assigned to investigate the cause of American Continental Corp.’s collapse, said in a federal court hearing in Phoenix that the company could run out of available funds as early as Jan. 30. An attorney for American Continental disputed Warnicke’s contention.

Warnicke, citing the company’s dwindling resources, questioned the wisdom of American Continental’s strategy of fighting federal regulators in court in an effort to regain control of Lincoln and to collect damages as a result of its seizure.

American Continental, headquartered in Phoenix, filed for protection from creditors under Chapter 11 of the bankruptcy code last April 13. The next day, Lincoln was seized by federal regulators, who said the parent company was dissipating its assets.

The $2-billion collapse of Lincoln ranks as the most expensive thrift failure ever. American Continental Chairman Charles H. Keating Jr. and other company officials have been accused of fraud and racketeering in a $1.1-billion civil lawsuit filed by federal regulators.

The big legal bills and dwindling cash reserves described by Warnicke raise the possibility that American Continental will be unable to make any payments to creditors if its courtroom challenges are unsuccessful.

The company’s creditors include some 22,000 investors, many of them elderly Californians, who bought more than $200 million in now-worthless junk bonds issued by American Continental and sold in many cases at Lincoln branch offices.

But Warnicke’s characterization of the company’s financial situation was disputed Friday by American Continental’s principal bankruptcy lawyer, James Feder of Los Angeles.

Feder said that American Continental had $10 million in cash available and that the only hope for paying off creditors in full was the pending litigation against the government. He said that if American Continental were to liquidate itself now, creditors would get no more than 10 cents on the dollar.

Upon hearing Warnicke’s comments, U.S. District Judge Richard M. Bilby said enough litigation was pending that no American Continental creditors are “going to come out of this anywhere close to whole” in their efforts to recover the funds owed them.

“I would hate for this case’s epitaph five years from now to be that the public lost, the regulators lost, American Continental lost, the creditors lost, Mr. Keating lost, but the lawyers got rich,” Bilby told about 15 lawyers assembled in his courtroom. “I hope you think about it, because that would be a disaster.”

The judge ordered company attorneys to report next Friday on American Continental’s remaining assets, the amount of money it has paid out already and the amount it expects to pay out.

Warnicke said the company spent about $1.5 million on legal fees last month and would spend about the same amount this month, according to projections from Price Waterhouse, a major accounting firm retained by a creditors committee.

Warnicke said after the hearing that the Price Waterhouse projections did not include legal and accounting fees generated by the creditors committee, which has $700,000 in billings so far. The projections also did not include examiner fees to be paid to him.

In September and October, American Continental spent a total of $2.25 million on legal fees and $260,000 on accounting fees, according to Price Waterhouse. “If things heat up, the fees will increase,” said an accountant involved in the bankruptcy case.

Feder, the American Continental attorney, said after the hearing that the company’s $10 million in available funds comes partly from cash on hand at the time of the bankruptcy filing and from the sale of two corporate jets. The sale of a third jet is pending, he said.

Even so, the company’s financial future is bleak.

At the end of August, American Continental’s $386 million in stated liabilities exceeded its assets by only $13 million. But most of its assets consisted of investments in subsidiaries that are in the hands of federal thrift regulators. The company has only $87 million in real estate assets that it controls outright.

Warnicke argued that the court should deny American Continental’s request to use its funds to pay defense costs in the federal racketeering suit filed against Keating and other corporate executives.

Warnicke also questioned whether the company should be allowed to pursue three lawsuits it has filed against the government for events surrounding the seizure of Lincoln.

“I’m not saying the suits don’t have merit, but if the resources are limited, is that really where we want to put them?” Warnicke asked.

He noted that Keating’s interest in reviving the company may not be the same as creditors’ interests.

A trial in one of those cases will begin next week in federal court in Washington. U.S. District Judge Stanley Sporkin has scheduled a trial to start Thursday in a case involving four Lincoln transactions and the S&L;’s controversial accounting procedures. The trial stems from a lawsuit American Continental filed to challenge the regulatory takeover of Lincoln in April.

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