Creditors File Plan to Seize Control of Lincoln Parent
Unsecured creditors of bankrupt American Continental Corp., joining forces with federal thrift regulators, have filed a plan in federal court in Phoenix that would give creditors $21 million and control of the one-time parent of Irvine-based Lincoln Savings & Loan.
The plan calls for the ouster of top American Continental officers, liquidation of the company and lawsuits against those responsible for the company’s demise.
Details of the plan, filed late Wednesday, were released Thursday in U.S. District Court in Arizona, where the plan must be approved before it goes into effect.
The plan is also subject to a separate agreement with American Continental bondholders, who have held $275 million of worthless stock since the company filed for bankruptcy in April, 1989. Lawyers for the bondholders helped to form the reorganization plan and hope to sign the agreement within a week, said Ronald Rus of Orange, one of the lawyers.
The coordinated plan is a significant step in the massive litigation involving American Continental’s bankruptcy and the failure of its Lincoln Savings & Loan unit,which regulators say will be one of the costliest thrift fiascoes in the nation, with a taxpayer bill of more than $2 billion.
In May, the creditors committee announced a tentative agreement with regulators, but bondholders’ lawyers had not been consulted and objected to certain terms. Bondholders agreed to participate in the new effort.
The reorganization plan is the first complete proposal filed with the court since American Continental filed for bankruptcy protection in April, 1989. The company had filed an outline of a proposed plan a year ago.
The plan filed Wednesday would provide bondholders with $14 million to $16 million and would eliminate competing claims for remaining corporate assets made by bondholders, other unsecured creditors and the Resolution Trust Corp., the federal agency running Lincoln.
Under the pending agreement with bondholders, it also would remove the RTC-run Lincoln as a defendant in 17 class-action lawsuits filed by bondholders and would create a committee of creditors and regulators to pursue all legal claims against American Continental’s top management and its professional advisers.
“This solidifies a natural alliance between RTC and the securities holders’ lawyers,” said Michael Manning, a Phoenix lawyer for the agency. “Now there will be a joint effort against those who defrauded the public and the regulatory system.”
Except for dropping Lincoln from the class actions, the plan would not affect either that litigation or the RTC’s $1.1-billion civil racketeering suit against certain corporate executives. Lincoln’s former owners are also the target of various federal and state criminal investigations.
The reorganization plan and related documents must be reviewed at a minimum of two court hearings and will not be approved by the court for at least two months.
American Continental management will strongly oppose the plan and put forth its own ideas, Chairman Charles H. Keating Jr. said Thursday.
Keating called the plan “a fraud, a charade on the securities holders of ACC and a fraud on the government, in the final analysis.” He asserted that regulators are trying to get off cheaply when they were the ones who caused the collapse of Lincoln and American Continental.
The joint effort against him, he said, also is “typical” of government efforts to do “everything they can to put us out of business, break (American Continental), put us in jail and shut out truth and facts.”
Keating, who had been kept informed of the progress of the plan, said he asked the creditors committee in late May to include a provision that would allow a new Keating-led company called Leland Financial Corp. to purchase $500 million worth of Lincoln’s assets, including the S&L;’s 20% stake in General Oriental Investments Ltd., an international investing firm headed by British financier Sir James Goldsmith.
Keating said he believed that regulators would dump the General Oriental stock for much less than its value, which he estimated at $215 million. With no money down, he said, he could repay the purchase price within five years and also make $50 million at the end of the second year specifically for bondholders. Otherwise, he charged, regulators would sell those assets to others at discounts totaling $200 million or more.
The General Oriental stock was part of the outline of Keating’s reorganization plan for American Continental that was filed last year. The plan, which lacked the needed regulatory cooperation, was never completed.
The agreement between the creditors committee and the RTC is actually a three-way deal. When the pact was first outlined in early May, lawyers for bondholders in the class actions angrily blocked it. Bondholders represent the biggest block of creditors--23,000 out of 25,000 claimants--and are owed the biggest debt--$275 million out of $365 million.
The lawyers particularly objected to a provision that would have given the RTC 35% of all money the bondholders won in judgments or settlements from current litigation against American Continental management and its professional advisers. The three sides quickly hashed out a new agreement, but layers of regulatory bureaucracy delayed the government’s approval.
Under the plan and the pending agreement between creditors and the RTC:
* The government agency would put $21 million into a trust to be disbursed to all unsecured creditors on a pro-rata basis, regardless of any priority that one group may have over another under bankruptcy law. Up to $16 million would go to bondholders.
* The three sides would jointly pursue civil claims, including litigation, against 12 American Continental directors and officers and the accounting, appraisal and law firms that advised them. The RTC would fund the litigation with $1 million and include its claim against Touche, Ross & Co.--now called Deloitte & Touche--for the $2 million the accounting firm was paid in fees during the six months before American Continental’s bankruptcy.
* The RTC would get 35% of any judgments or settlements from the joint-claims actions--not the bondholders’ litigation--and the rest would go to creditors in the order prescribed by bankruptcy rules on seniority. Bondholders who bought securities at Lincoln’s 20 Southern California branches, for instance, stand last in line.
* The RTC also would get 5 cents for every dollar over $175 million recovered from defendants sued by the bondholders in the class actions.
“The RTC is betting on bondholder lawyers,” said Donald Gaffney of Phoenix, lead lawyer for the creditors committee. “The agency believes the lawyers will be able to collect a lot of money.”
So far, the class actions have resulted in settlements with two law firms for a total of $24.3 million. Those settlements must still be approved by the court.
A CHRONOLOGY OF BANKRUPTCY The reorganization plan filed by the unsecured creditors committee in the bankruptcy of American Continental Corp. is the first complete plan filed in court since the company filed for protection from creditors. Under law, the company had the first shot at coming up with a reorganization plan. The following chart tracks significant court events.
1989
April 13: American Continental seeks protection from creditors in U.S. Bankruptcy Court in Phoenix to reorganize its debts under Chapter 11 of federal bankruptcy laws. Eleven subsidiaries of its primary asset, Lincoln Savings & Loan in Irvine, file similar petitions.
April 14: Federal thrift regulators seize Lincoln, putting it in conservatorship. They eventually win control of the 11 subsidiaries, which hold most of the company’s assets.
June 6: American Continental files an outline of a proposal to pay off shareholders, bondholders and other creditors in full--but over time and at a reduced interest rate. The company never files a formal plan, saying it needs the cooperation of recalcitrant regulators.
Aug. 3: Regulators, saying Lincoln is insolvent, put it in receivership, allowing them to liquidate the thrift and its subsidiaries.
Dec. 1: A court-appointed examiner claims the company is running out of money because it is spending more than $1 million a month on outside lawyers in its running fight with regulators. The company also is paying his legal fees and those of the creditors committee.
Feb. 2: U.S. District Judge Richard M. Bilby, who is presiding over American Continental civil litigation and certain bankruptcy issues, takes control of all bankruptcy cases.
May 4: The creditors committee reaches agreement with the Resolution Trust Corp. on a reorganization plan that would oust top officers, liquidate the company and provide bondholders with some money. But bondholder lawyers, who weren’t consulted, object to onerous provisions that would require bondholders to pay back the money out of any judgments or settlements in their litigation--and much more--to the RTC.
July 19: The federal court releases a reorganization plan that includes an accord between the RTC and creditors, including bondholders. Besides seeking the ouster of corporate executives and the company’s liquidation, it provides for joint legal action against the company’s top management and advisers and limits the amount bondholders would pay back to the RTC.
