Creditors’ Bid to Control Lincoln Mortgage Denied : Courts: Bankruptcy judge gives founder Sarvak at least 90 days to prepare a plan to repay $30 million lost in second trust deed pool.

A bid by creditors of bankrupt Lincoln Mortgage and Loan Co. to wrest control of the business from founder Kenneth E. Sarvak failed Wednesday as a federal bankruptcy judge ruled that Sarvak could remain in charge for at least 90 days while preparing a financial reorganization plan.

Sarvak, a 68-year-old real estate investor, was given until July 13 to prepare a plan to repay creditors who invested more than $30 million into his second trust deed pool.

A court-ordered audit found that Lincoln, based in Newport Beach, holds deeds to about $9 million worth of land, leaving investors with a $21-million shortfall.

Though apparently profitable for Sarvak and its investors for most of its 20 years in business, Lincoln by 1990 had become a victim of the collapsing Southern California real estate market and of several bad investments.

The state Department of Corporations also alleged in a civil suit filed earlier this year that the company and its investors were defrauded by Sarvak, who allegedly was cannibalizing the company by diverting investment funds to make promised interest payments to investors.

Part of Lincoln’s business was lending investors’ money to homeowners whose credit was not good enough for them to borrow from a bank. The borrower would take a second mortgage on the house and, in return, give Lincoln a deed to ensure that the company got its money back.

That is known as the hard-money second mortgage business. If the borrower cannot make the mortgage payments, the lender forecloses and takes the house.

Until the company stopped making interest payments late in 1992, investors earned returns as high as 14%.

Brochures for the company said that each investor’s name would be recorded in county land records on each deed to reserve the investor a place in line if the homeowner did not make loan payments and the house had to be sold to pay off creditors.

But records show that many investors’ names were never recorded, so their investments were unsecured by collateral.

Through his lawyers, Sarvak has said that the case is a misunderstanding. He never lied to his investors, he said, and the documents he gave them did not require him to record their deeds.

The Department of Corporations’ fraud suit, however, says he was required to do so.

Though Lincoln apparently flourished during the 1980s, its fortunes declined with real estate values in 1990. By November last year, with the company facing a blizzard of lawsuits by disgruntled clients, Sarvak filed for protection from creditors in U.S. bankruptcy court.

Federal bankruptcy law has allowed Sarvak to keep control of the company while planning its reorganization but requires court review and approval of significant transactions.

Fearful that Sarvak might somehow dissipate Lincoln’s already diminished assets, the creditors initially had sought to have the company’s voluntary reorganization under Chapter 11 of the bankruptcy code converted to a court-ordered liquidation of assets under Chapter 7.

But after a nationwide telephone conference among themselves Tuesday, the creditors concluded that a liquidation might hurt them if Lincoln’s land holdings were disposed of at fire-sale prices.

Instead, they asked Bankruptcy Judge John Wilson to leave Lincoln in Chapter 11 but to appoint an examiner to take over administration of the company, said Emogene Butler, a Newport Beach real estate broker and co-chairwoman of the creditors committee.

Butler, who said she has invested $600,000 with Lincoln, said creditors hoped the arrangement would protect the company’s assets while allowing Sarvak to use his real estate experience to get the most value out of the properties that the company owns.

The examiner, however, declined to take on the assignment, maintaining that the existence of several other companies owned by Sarvak and involved in separate bankruptcy proceedings would make the situation too complicated.

And Judge Wilson agreed that selling Lincoln’s property in a forced liquidation would almost guarantee further losses to creditors.

“As an individual investor, I’m pleased that he didn’t order liquidation,” Butler said. “Now we have at least 90 more days for Mr. Sarvak, under court supervision, to figure out how to get money back without dumping the real estate.”

The extra time could be important, she said, “because there are signs out there that the (real estate) market is coming back.”