Executive Life Deal Is Rejected : Insurance: An appellate court tosses out parts of Commissioner Garamendi’s rehabilitation plan in a major victory for big investors.

California Insurance Commissioner John Garamendi’s plan for rehabilitating Executive Life Insurance Co. was dealt a huge blow Monday when a state appellate court threw out several parts of his proposal.

The decision marked a major victory for big investors holding so-called municipal guaranteed investment contracts. These investors--known as Muni-GIC holders--said the Garamendi plan discriminated against them in favor of the 360,000 insurance policyholders and 300,000 pensioners whose income is guaranteed by Executive Life.

Although the ruling by the 2nd District Court of Appeal in Los Angeles would require significant changes in the rehabilitation plan, spokesmen for some parties in the case said it still might be possible to fashion a similar deal.

A spokesman for the French investment group chosen by Garamendi to acquire Executive Life said late Monday that the group’s lawyers still were interpreting the decision.

But he added that members of the group, led by Mutuelle Assurance Artisanale de France, “are not giving up at this point. They’re going to try to make it work.”

Likewise, in a news release, Garamendi said the court’s “stated hope and expectation is that the changes can be made and that the plan will be resubmitted. We take this as a positive sign.”

“Liquidation of Executive Life is simply not an option,” Garamendi added. “It would provide no real gain for any particular party and could lead to significant losses for many. Executive Life should now instead be rehabilitated to ensure policyholders that an ongoing company will be able to meet its obligations and provide needed benefits.”

However, Gary Fontana, a lawyer for one of the eight major Muni-GIC holders, said the court decision means that Garamendi “has to go back to the drawing board.”

While the ruling calls for equalizing the rights of Muni-GIC holders with those of policyholders, Fontana declared the development a victory for both sides.

He cited a finding by the appellate court that the Garamendi plan was improperly based on a valuation of the company’s assets at the time it was seized by state regulators in April, 1991.

Fontana said the use of the old asset figure, $5.04 billion, was unfair to investors and policyholders and would give the French investors a windfall because the value of the company’s assets has risen over the last two years.

“We and all the other policyholders will celebrate because we’ll all receive more than we would have otherwise,” Fontana said.

Representatives of individual policyholders could not be reached for comment late Monday.

With its ruling, the Court of Appeal remanded the case back to Superior Court in an effort to draw up a new agreement. The case has been in litigation since the company was seized by the state.

The Los Angeles-based company, in one of the biggest failures ever of an insurer, collapsed under the weight of losses from junk bond investments and consumer demands to cash in their policies.