American Continental Bondholders Can Fight
Q: I am a 92-year-old widow with two $20,000 American Continental Corp. debentures purchased from Lincoln Savings & Loan. One bond matured, and I redeemed it in March, 1989, just a month before Lincoln’s parent corporation, American Continental, filed for bankruptcy. Recently I received a notice from the bankruptcy court demanding that I return the bond proceeds plus interest because I cashed in the bond within 90 days of the bankruptcy filing. This doesn’t seem at all fair. Must I comply? Do I have any rights? --E. N. G.
A: As unfair as it might seem, you are legally required to comply with the bankruptcy court order--or face the consequences of a court judgment against you. However, even if you return the money, you can still fight for repayment through the courts, a tactic many American Continental bondholders are pursuing.
Earl Hagen, an Encino bankruptcy attorney, is representing several of the nearly 2,000 American Continental bondholders who have been ordered to return a total of about $24 million in proceeds from bonds redeemed in the 90 days before the company’s bankruptcy filing. According to Hagen, bankruptcy law specifically allows a bankruptcy trustee to recover certain payments made within three months of a bankruptcy filing on behalf of the interests of all creditors of the corporation.
However, Hagen said he believes that American Continental bondholders should be able to successfully argue that the bonds redeemed before the bankruptcy filing were part of the corporation’s normal business operations and are therefore outside the reach of the bankruptcy court. But Hagen said this argument must be made as part of a lawsuit against the bankruptcy trustee--and only after bondholders comply with the demand to return their bond proceeds.
“Bondholders cannot ignore the trustee’s demand for repayment,” he said. “They must comply or face the consequences.”
However, bondholders do not have to accept the trustee’s offer to remit 15% of the proceeds in exchange for their waiving their claim to the remainder. If bondholders accept this offer, they effectively give up their right to sue for the balance. He said bondholders can return the entire amount and consult an attorney about recovering the funds through a lawsuit.
But you should know that legal action certainly won’t come cheap. Hagen is charging his clients a flat fee of $1,000 or 15% of the amount they are suing for, whichever is greater.
Bondholders are advised to think long and hard about their choices. They can accept the bankruptcy trustee’s offer of 15% of their proceeds, write off the remainder on their taxes and be through with the whole mess. Or they can return the whole amount to the trustee, pay some additional attorney’s fees up front and fight for their bond proceeds.
The fight could drag on for years--and at 92 you may not be willing to sign on for such a long-playing event. But you no doubt believe that there is a principle at stake here and will want to give the entire matter a thorough examination with the aid of some competent legal advice.
Q: In a recent column you said money market accounts carry no federal deposit insurance. Not only did that seem totally wrong to me, but it scared the daylights out of me. So I called my bank and they said my account does have insurance. Do you have an explanation for what you said--or an apology? --T. R.
A: Perhaps the column in question contained an unfortunate mixing of terms that might have caused some misunderstanding among depositors.
Money market funds are a type of mutual fund offered by securities firms that typically invest in a variety of short-term securities issued by governments and corporations. These funds, which are also called “money market accounts,” pay an interest rate pegged to the daily fluctuations of the securities markets. Although considered quite safe, these funds, in their own right, are not federally insured.
Technically speaking, banks, savings and loans and other insured thrift institutions do not offer money market accounts. Although the institutions might informally refer to their market rate interest-paying insured deposits as “money market accounts,” they are more precisely and correctly known as “money market deposit accounts.”
Although the difference in terminology seems slight, there are significant differences between the two types of accounts. Money market deposit accounts carry federal deposit insurance up to the maximum allowed limits because they are considered a variation of a bank savings account. However, this insurance carries a price. Money market deposit accounts typically carry a lower rate of interest than the money market accounts offered by securities firms.
But now we may have unnecessarily alarmed investors who hold money market accounts through their brokerage and have been told that their brokerage holdings are insured. Brokerages that belong to Securities Investor Protection Corp. do offer their customers some insurance protection in the event they fail. However, there is no insurance protection in the event a money market fund fails, which none of these funds has yet done.
