Bankruptcy Court Approves Settlement With FCA Creditors : Thrifts: Agreement allows trustee for defunct American Savings parent to pay off bondholders and others up to 10 cents on the dollar and close estate.
Bankrupt Financial Corp. of America, once a high-flying savings-and-loan holding company run by maverick money man Charles W. Knapp, won court approval Wednesday for a settlement that will allow it to pay bondholders and other creditors up to 10 cents on the dollar.
The settlement of a claim by the Internal Revenue Service brings to a close the long saga of the Irvine company that built the nation’s largest thrift, American Savings & Loan, with risky loans and investments.
Wednesday’s agreement paves the way for the trustee for now-defunct FCA, which filed for bankruptcy protection in 1988, to pay $9 million to creditors and close the estate.
“After all these years, that’s better than nothing--and nothing is what we were looking at before,” said Pamela Webster, a lawyer for bondholder interests.
David M. Gill, the trustee for the bankrupt estate, said that, until Wednesday, he had “no idea” whether there would ever be any money available to pay nearly 8,000 small investors who were left holding about $80 million in FCA bonds when the company went bankrupt.
Under the settlement in U.S. Bankruptcy Court in Santa Ana, the IRS, which originally sought $301.2 million, will have a claim for $26 million. The agency will take $6 million now and split the rest with creditors after administrative costs are paid.
Gill had reached the agreement with local IRS officials two years ago but had to fight to save the deal during numerous reviews by higher officials in the tax agency and the U.S. Justice Department. Recently, the congressional Joint Committee on Taxation approved the settlement.
A year’s worth of work remains, however, to determine exactly how many unsecured creditors there are and how much is owed to each. Gill said he didn’t want to spend money previously to figure that out because there was no assurance the bankrupt FCA estate would have any money to disburse to creditors.
More than $950 million in claims were filed against FCA, but Gill said the vast majority are duplicates and many others were reduced or disallowed. A state Franchise Tax Board claim for $36.8 million, for instance, was reduced to $84,825.
Gill, with his law firm partner Richard Diamond acting as his attorney, collected more than $28 million in legal proceedings FCA pursued against the government and others. Ironically, the biggest single chunk--$10 million--came from the federal government. Diamond had argued that regulators wrongly seized and sold FCA property when they took over American Savings.
FCA still has about 1,000 unimproved residential lots for sale in an area near the borders of Los Angeles, Kern and San Bernardino counties, but the total value is estimated to be worth less than $500,000.
The estate has spent about $2 million for various services, including legal, accounting and brokerage fees.
Knapp used FCA in 1983 to buy American Savings & Loan and merge it with another FCA-owned thrift. Partly through complicated securities investments, Knapp built American into the nation’s largest S&L.; But bad loans and securities losses in 1984 caused a decline of confidence in his management, leading to a devastating deposit run of nearly $7 billion.
Regulators forced Knapp out, and the thrift limped along for four more years. After a well-publicized effort to woo a buyer, regulators seized the thrift in September, 1988, and sold its good loans and other assets three months later to the Robert M. Bass Group in Fort Worth. The Bass organization still owns what is now American Savings Bank in Irvine.
Three days after the government took over American, FCA filed for bankruptcy protection. Without its main asset, the company was left with little money to cover a mountain of debts, including the $80 million owed to bondholders.
Most of the bondholders are elderly individuals who made their investments as long ago as the 1960s, attorney Webster said. “All the institutional investors, the sophisticated investors, saw FCA going down and sold out before the bankruptcy.”
Knapp was convicted last year of lying to obtain a $15-million loan from a now-failed Phoenix thrift, Western Savings & Loan. He was sentenced to 6 1/2 years in prison and ordered to pay $11 million in restitution.
