Chase Manhattan Sues to Halt Restructure of Citadel Holding : Banking: Fidelity Federal’s parent firm says plan would make its thrift a better buy, but giant creditor says move would impede $35-million loan repayment.
Citadel Holding Corp.’s restructuring plan, which the savings and loan parent company has proposed under threat of government seizure, is now in doubt because of a lawsuit filed by Chase Manhattan Bank.
At issue is $482 million of troubled real estate assets that Glendale-based Citadel wants to transfer to a new subsidiary or division of the company, and then use to secure new debt. The move is intended, Citadel says, to free its Fidelity Federal Bank from the bad loans and make the S&L; more attractive to a potential buyer.
In its breach-of-contract complaint, however, Chase accuses Citadel of self-dealing. Citadel’s plan to shift the “cherry-picked real estate loans and real property” to the new subsidiary at “a bargain basement price” would benefit Citadel insiders, the lawsuit states.
The lawsuit, filed earlier this month in U.S. District Court in New York, seeks a court order barring Citadel from going forward with the plan, plus unspecified damages and attorney fees. It also names Citadel Chairman James J. Cotter as a defendant.
New York-based Chase contends in the complaint that Citadel’s plan is intended to delay or hinder Chase’s collection of the $35 million it loaned to Citadel in 1990. If the restructuring is implemented, the lawsuit says, Citadel would not have adequate capital or reserves, possibly rendering it insolvent and unable to repay the loan.
Others argue that, restructuring or not, Citadel faces inevitable government seizure.
“Citadel will never accomplish the things it’s trying to do,” said analyst Howard Rosencrans at HD Brous & Co., an investment banking and research firm in Great Neck, N.Y. “People will buy it out of bankruptcy when they can get a deal.”
Citadel officials did not return phone calls. In a statement issued shortly after the lawsuit was filed, Citadel said it “does not believe the allegations have merit.”
With total assets of $4.4 billion, 42 branch offices and 10 mortgage lending offices throughout the state, Citadel is a mid-size savings-and-loan company by California standards. Fidelity Federal has been up for sale since last June.
The company recently reported that it lost $67 million in 1993, in contrast with a $2 million profit in 1992. Citadel blamed the loss on Southern California’s sour real estate market and continuing foreclosures, which forced it to increase its provisions for loan and real estate losses by $26 million last year, to $95 million.
Citadel’s stock closed Monday at $5.375 a share. A year ago, the stock traded near $24.
Although Citadel remains adequately capitalized according to federal standards, concern over Citadel’s losses and deteriorating capital has prompted the Office of Thrift Supervision, the federal regulatory agency overseeing savings and loans, to increase its oversight of the company.
Citadel also expects to report losses in the first and second quarters of this year. Without an infusion of capital or a reduction in its assets, it said, those losses would reduce Citadel’s capital below regulatory minimums.
Some analysts say that if Citadel’s restructuring plan is held up and the problem loans aren’t unloaded, the risk of a government takeover will increase. A large portion of those loans are on apartment houses, many in the San Fernando Valley, which have suffered because of the recession and, more recently, the Northridge earthquake in January.
But analyst Charlotte Chamberlain at Los Angeles investment firm Wedbush Morgan Securities said: “The regulators may be forced to do something if the restructuring can’t be achieved.”
A few weeks ago, Citadel said that it is discussing the sale of the thrift, and other investment alternatives, with unnamed parties. It hopes to complete the restructuring by the middle of the year, after which Citadel would become a real estate company focusing on servicing its loan and property portfolio.
Analysts say that some larger, well-capitalized financial institutions are probably interested in Fidelity Federal’s well-located branches, which are mostly in Los Angeles and Orange counties. Great Western Corp. in Chatsworth, Irwindale-based H. F. Ahmanson & Co. and Golden West Financial Corp. in Oakland have been mentioned as possible bidders. None of these thrift holding companies would comment.
