A federal bankruptcy judge has approved American...

A federal bankruptcy judge has approved American Thrift & Loan Assn.’s proposal to return 35% of deposits to its depositors. Deposits totaling $14.5 million in 1,700 accounts have been frozen since June 6, when San Diego the thrift filed for protection under Chapter 11 of the federal Bankruptcy Code.

The bankruptcy petition was filed shortly before American Thrift & Loan was to have closed because it was unable to qualify for insurance from the Federal Deposit Insurance Corp.

Both the state Department of Corporations and Thrift Guaranty Corp., the state-supervised agency that regulates the industry, have challenged the bankruptcy by arguing that they, not the bankruptcy court, have the right to supervise liquidation of the state’s thrift and loans.

In its filing, American Thrift & Loan, a single-branch institution in Mission Valley, maintained it could generate a better return on the sale of its assets than the state. The thrift also indicated that it doubted the ability of Thrift Guaranty to pay off depositors.

U.S. Bankruptcy Judge Peter Bowie agreed with the state agencies last month that the case did not belong in the Bankruptcy Court. But an objection to his ruling is being considered by U.S. District Judge John S. Rhoades.

In the meantime, Judge Bowie approved the sale by American Thrift & Loan management of certain assets and the distribution of a share of the deposits.

An American Thrift & Loan spokesman said Wednesday that “subsequent payments will be made as additional assets are sold. . . . Our intention is to pay off 100% of deposits.”