Judge Dismisses State From Lincoln Suit

An Orange County judge has dismissed California from the $250-million lawsuit filed by small investors in Lincoln Savings & Loan’s parent firm, but he gave investors time to file a new complaint against the state.

Superior Court Judge David G. Sills, in an order released Tuesday, decided that the investors who filed the class-action suit after the S&L;’s collapse in April didn’t have enough factual allegations to get around the state’s claim that it is immune from such suits.

Lawyers for the investors have until Jan. 26 to file an amended complaint.

“At the time the suit was filed, we didn’t have the facts that we have developed since,” said Ronald Rus of Orange, one of the plaintiffs’ lawyers. “We didn’t know then the extent of knowledge that the Department of Corporations had.”

The suit claims the state agency abused its discretion by approving for sale debt securities in Lincoln’s parent, American Continental Corp. in Phoenix. About $200 million in securities were sold at Lincoln’s 29 Southern California branches to nearly 22,000 small investors, many of them elderly customers who mistakenly believed their investments were insured.

The new complaint to be filed, Rus said, will contain allegations that the state agency had investigated American Continental’s financial condition, concluding that it could not repay the debt but approving the sale of the debt issue anyway.

The agency has said previously that it relied on a clean bill of health that independent auditors gave American Continental and that no state or federal S&L; regulators had taken any action against Lincoln by the time the debt issue was approved in May, 1988.

Leonard Pape, a deputy attorney general representing the Corporations Department, said that once the amended suit is filed, he will probably ask the court again to dismiss it without an opportunity for amending the complaint further.

Other defendants in the suit include the former operators of Lincoln and the lawyers and accountants who advised those operators.

Rus said the immunity issue is a difficult one primarily because there are few state Supreme Court decisions that discuss it. The issue in the investors’ suit may well go to the state’s high court, he said.

Lincoln’s collapse is expected to become the nation’s biggest bailout, costing taxpayers an estimated $2 billion.