REAL ESTATE : The Covington-FarWest Question: Whose Default Is This, Anyway?

There are lots of stories like this out there, but most are settled privately and quietly.

A unit of Covington Technologies, a major Fullerton-based home builder, has filed for protection from creditors under Chapter 11 of the federal bankruptcy code.

John Schafer, vice president of Covington Homes/Inland Empire unit, which filed the petition, maintains that the action doesn’t mean Covington is in trouble. It was simply the only way to resolve a tiff with an inflexible construction lender, he says.

The lender, financially embattled FarWest Savings and Loan Assn. in Newport Beach, declined to discuss the matter.

But Schafer, who is also vice president of Covington Technologies, says the bankruptcy petition was filed to halt FarWest’s foreclosure sale of a $3-million property in Riverside County until the property can be sold in a normal transaction early next month.

It seems that FarWest--insolvent and under the gun from federal regulators to improve its finances or face seizure--wants the construction loan to Covington Homes/Inland off its books by Dec. 31.

The S&L;, Schafer says, claims it simply cannot afford to wait a few extra weeks, until mid-January. That’s when Covington Homes/Inland will be able to repay the loan after closing sale of the property to a joint venture group made up of parent Covington Technologies and several Japanese investors, he says.

“We have a loan commitment and an agreement and are getting ready to fund the sale, but FarWest won’t bend,” he complains.

That, of course, doesn’t explain why Covington/Inland defaulted on the loan from FarWest in the first place.

Schafer says the default occurred because Covington stopped making payments when FarWest, after funding the original loan for land acquisition and construction, refused to release payments to cover early construction costs. Instead, Schafer says, the S&L; suddenly asked to be let out of the deal--apparently because of regulatory pressure to cut its involvement in speculative real estate lending.