Mortgage Company Files for Bankruptcy : Courts: State agency was investigating allegations that Washington Trust Deed Service defrauded investors.

Washington Trust Deed Service Corp., under investigation by state agencies for allegedly defrauding investors, Wednesday filed for bankruptcy.

All the assets of Washington Trust will now be sold to repay creditors and the company will go out of business.

Less than two weeks ago, the state Department of Corporations had a receiver appointed to run the company and protect investors’ interests after accusing its owner, Kenneth E. Sarvak, of defrauding hundreds of investors, many of them elderly.

But the bankruptcy snatches control of the Newport Beach company from the receiver and--by extension--from the state agency. The company will now be liquidated by a federal bankruptcy trustee.

For years, Sarvak loaned investors’ money to homeowners in the form of first and second mortgages and repaid investors with returns as high as 14% with no known problems.

As of a year ago, however, the Lido Isle resident owed these investors $30 million, according to the Corporations Department, but owned deeds to only $9.4 million worth of property with which to repay them.

Sarvak, 68, filed for personal bankruptcy in November and his other major company, a sole proprietorship called Lincoln Mortgage & Loan Co., is essentially in bankruptcy, too.

The key question is how much money is available to repay more than 200 investors, some of whom sank their life savings into the business. Even Sarvak’s lawyers are not optimistic that investors will get all their money back.

Washington Trust did not specify what its assets and liabilities are in the bankruptcy filing. But the company’s bankruptcy lawyer said Wednesday that the property Washington Trust owns could be worth as much as $10 million.

Sarvak’s lawyers said Washington Trust filed for bankruptcy liquidation because Sarvak believes investors will get a better shake from the federal bankruptcy court than from the Department of Corporation’s receiver.

“The Department of Corporations has gone on a rampage. It’s been very antagonistic,” said John B. Casoria, one of Sarvak’s lawyers. “He felt it was not properly protecting the creditors and the assets, and that the best thing to do was to get a true neutral party in charge.”

The other key question is whether Sarvak intentionally lied to investors about how safe their money was--as the state alleges--or whether he was just a victim of a slump in real estate, as his lawyers contend.