Tentative Pact Lets Lincoln Investors Share
Bondholders of bankrupt American Continental Corp. would recover a small portion of their investments under a tentative, $21-million agreement between the company’s creditors and the federal government.
The two sides also agreed to seek court approval to liquidate the Phoenix company and oust its controversial chairman, Charles H. Keating Jr. American Continental, now in Chapter 11 bankruptcy, is the parent of the failed Lincoln Savings & Loan in Irvine.
Under the agreement announced in U.S. District Court in Phoenix on Friday, much of the $21 million would go toward providing 22,000 mostly elderly bondholders with at least partial repayment of the $200 million they invested. They would have a chance to recover more if the court approved the liquidation.
A representative for Keating said the executive plans to resign as American Continental’s chairman and chief executive next week to head a court-approved shareholders committee, which will take part in the bankruptcy court negotiations over the company’s fate.
The actions are strategic moves in the high-stakes contest between federal regulators and Keating over assets of American Continental.
The agreement would settle significant differences between creditors and the Resolution Trust Corp., the government agency operating Lincoln. It also gives the agency rights that will help it move faster and more easily against Keating.
Regulators hold Lincoln up as the epitome of everything that has gone wrong in the thrift industry. They estimate that the S&L; will cost taxpayers $2 billion, one of the costliest thrift cleanups in the nation. Federal authorities have launched an all-out attack on Keating through a series of criminal investigations and a $1.1-billion racketeering suit against him and his top executives. Keating denies any wrongdoing.
Details of the agreement have not been worked out but are expected to be announced by next Friday, when the unsecured creditors committee has said it will file its reorganization plan. American Continental’s bankruptcy is the fifth-largest in U.S. history.
The pact provides that American Continental’s “estate will be liquidated and that those proceeds will be distributed first to the creditors,” said Michael Manning, a Phoenix lawyer for Resolution Trust. The creditors and the government would also seek the removal of Keating and all top American Continental executives. They would be replaced by a new, independent management, Manning said.
The agreement in principle was announced in U.S. District Court in Phoenix and came as a surprise to Keating and his associates, who knew only that the creditors committee and the government agency had been talking for the past two months.
“RTC has simply refused to negotiate with us,” said James J. Feder, a Los Angeles lawyer for American Continental. “It’s too big a cause celebre for them to do a settlement with us. They’ve made Lincoln and Keating their major target.”
He said the agreement “settles nothing” because the company must be involved in the final negotiating process and the court must approve any plan. American Continental has had an outline of a reorganization plan pending since last June but has not pursued it.
Feder said Keating will probably resign next week as American Continental’s chairman to head up a shareholders committee, the formation of which was approved Friday by U.S. District Judge Richard M. Bilby. The committee will take part in negotiations on a reorganization plan to be presented to Bilby for his approval, Feder said.
The agreement between the creditors and the government does not affect three other legal areas: the racketeering lawsuit against Keating and others, American Continental’s challenge of last year’s federal takeover of Lincoln and the lawsuits filed against Keating and others by holders of American Continental’s debt securities.
Those bondholders make up the bulk of the company’s creditors and would benefit most under the agreement. Although the bondholders’ payment hasn’t been determined yet, lawyers in the case said talks have put the figure at about $14 million, or nearly 7 cents on the dollar. The other $7 million would go to other creditors.
The bondholders are mostly elderly Lincoln depositors who were persuaded to buy nearly $200 million of the parent company’s debt securities at the S&L;’s 29 Southern California branches.
Meantime, in Orange County Superior Court on Friday, a judge once again dismissed the state of California as a defendant in seven bondholder lawsuits. Judge David G. Sills had let the state out once before but allowed bondholders to plead new facts to try to keep the state as a defendant. Finding no new facts, he said, he decided to dismiss the state without allowing bondholders to try again.
Sills decided that California law made the state immune to lawsuits stemming from its official actions. The state Department of Corporations had approved the sale of American Continental bonds to the public.
