LOS ANGELES -- Lawyers for trustees of taxable municipal bonds backed by the failed Executive Life Insurance Co. are pursuing as much as $800 million of added recovery for all policyholders, according to recently filed appeals.
The briefs, filed in the Second Appellate District of the California Court of Appeal, challenge a lower court's decision this summer to approve a modified rehabilitation plan for the failed insurer.
The trustees -- representing holders of about $1.85 billion of bonds secured by Executive Life guaranteed investment contracts -- sharply attacked the handling of a March 1992 sale of Executive Life's high-yield bond portfolio as part of their overall arguments filed last month.
Texas Commerce Bank -- El Paso, which represents holders of $200 million of El Paso Housing Finance Corp. multifamily housing revenue bonds, said its appeal arises "from a simple, fundamental principle: the [California Insurance] Commissioner and the Superior Court have statutory and common law duties to ensure that assets of an insolvent insurance company are sold at their fair market value and in a commercially reasonable manner so as to maximize the ultimate recovery for policyholders and other creditors of the insolvent company."
The bank argues, however, that insurance commissioner John Garamendi and the lower court "failed to fulfill their obligations" and permitted the insurer's high-yield bond portfolio to be sold "for at least $800 million less than its fair market value."
The portfolio was sold for $3.25 billion to Altus Finance, a French corporation.
But Texas Commerce claims the sale suffered from "critical defects," such as an all-or-nothing clause for the large portfolio of bonds "instead of breaking them down into more marketable segments or selling on an issue-by-issue basis."
The result, the bank says, was a failure to produce fair market value for the bonds.
Texas Commerce says some experts estimated the portfolio's fair market value at about $800 million more -- if not higher -- than the results produced by the sale to Altus Finance Accordingly, the bank asks the appellate court to increase the recovery of Executive Life's policyholders by at least that amount.
Factoring that $800 million figure into the rehabilitation plan "equates to an increased recovery of at least 8.6% for every [Executive Life] policyholder," including those with bonds backed by the GICs, says the Texas Commerce filing, which was prepared by lawyers at Thelen, Marrin, Johnson, & Bridges.
Texas Commerce previously agreed to settlement with the insurance commissioner over certain other objections previously raised against the rehabilitation plan. As a result, the bank's arguments focus only on the fairness of the transferred portfolio.
By contrast, a much broader appeal was filed by lawyers representing trustees for about $1.65 billion of taxable municipal bonds backed by the GICs.
That broader appeal, prepared by lawyers at Pillsbury Madison & Sutro, claims that the modified rehabilitation plan still fails to cure all the defects that led the state appellate court to reject an earlier plan last March.
The broader appeal was filed on behalf of Commercial National Bank in Shreveport, First Interstate Bank of Denver, First Tennessee Bank, NationsBank of Texas, Norwest Bank Minnesota, and Sunburst Bank.
That filing also charges that the lower court erred when it denied motions of rescission or restitution in connection with the portfolio sale to Altus.
But the filing also questions other terms of the rehabilitation plan, including charging that the modified proposal discriminates against policyholders who choose to "opt out" of the insurer rather than stay with Aurora National Life Assurance Co., which is purchasing Executive Life's insurance business.
The Pillsbury Madison brief also challenges other features of the plan, including the way current account values are calculated.
Many policyholders could recover all or close to all of their account values, partly because insurance guarantee associations have agreed to make them whole.
But policyholders who do not benefit from these benefits, such as the GICs, are expected to receive roughly 81% to 84% of their account values if they opt out, according to the recent court filings.
So-called muni-GIC holders who choose to opt out could receive a "substantial" payment by next May or June, according to Robert Wallan, a partner at Pillsbury Madison. Another smaller deferred payment is tied to resolution of all issues on appeal.
In addition, Wallan said trustees collected about $265 million in back-interest payments last September, following the appellate court's rejection of a request to temporarily block the sale of the failed insurer.
But Wallan said the pay out of that back interest is being slowed down, at least for the time being, because of questions raised by former bondholders who are pursuing litigation against the underwriters of the bonds. That litigation, involving a separate suit, is pending in a federal court in New Orleans.
Meanwhile, lawyers for Garamendi and other supporters of the rehabilitation plan have until mid-January to file responses to the trustees' appeal briefs in the California litigation.
Although "no one can predict" how fast the case will move, Wallan said it is possible oral arguments might be heard sometime next summer.
