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BANKING/FINANCE : Investors Add State as Defendant in Suit Against Lincoln S

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Small investors who bought nearly $200 million in debt securities from the bankrupt parent of the failed Lincoln Savings & Loan have again added the state of California as a defendant to their lawsuit against Lincoln’s former operators, outside lawyers and accountants.

The amended complaint, filed in Orange County Superior Court on behalf of nearly 22,000 debt holders, provides more factual allegations about the role of the state Department of Corporations in approving the securities for sale.

The suit claims the state agency knew that Lincoln’s parent, American Continental Corp. in Phoenix, was in no shape financially to repay the debt it proposed to issue to the public in 1988. Yet, using political connections in the Deukmejian Administration, the company was able to obtain the approval it needed, the suit contends.

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Two weeks ago, the state won dismissal of allegations against it, saying that the investors did not show sufficient grounds to get around the doctrine of sovereign immunity, which prohibits lawsuits against the state in most cases.

A lawyer for the agency said the state probably will ask the court again to dismiss the suit against the state on the same grounds, this time without an opportunity for amending the complaint further.

The immunity issue is a difficult hurdle for citizens suing the state, partly because there are few state Supreme Court decisions that discuss it.

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Federal regulators seized Lincoln last April, a day after American Continental filed for bankruptcy protection. A federal bailout of the Irvine-based S&L; is expected to cost taxpayers $2 billion, making it the costliest thrift bailout ever.

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