The Los Angeles Superior Court ruled last week against holders of Executive Life Insurance Co.-backed bonds, sending prices for $1.93 billion of municipal securities down by 33%.

The ruling, handled down Wednesday at 7:30 p.m. eastern daylight time, found that the California Insurance Commission's rehabilitation of Executive Life may include compensating municipal guaranteed investment contracts according to purchase price rather than face value.

The 16 GIC-backed municipal issues immediately dropped to 26 cents on the dollar 39 cents, losing one-third of their value, traders said Thursday. Trading had halted by midday, and one New York dealer said the bid side could fall to 22 cents if activity resumed.

Superior Court Judge Kurt Lewin, presiding over the rehabilitation of Executive Life, said the insurance commission can pay holders of municipal GIC-backed bonds based on what they paid originally for the securities. Many current holders of the bonds were speculators who bought the issues at distressed levels after the commission seized Executive Life on April 11, 1991.

The compensation issue, however, is far from clear. Lawyers for bondholders and trustees could appeal the decision, setting the stage for another court battle.

Robert Knight, chairman of the Alliance National Bank in Alliance, Kan., and an advocate for the GIC holders, said it was likely the ruling would be appealed.

"I don't think the decisions have been made yet," he said. "but I presume there will be appeals."

Karl L Rubinstein, counsel for Commissioner John Garamendi and a partner at Los Angeles-based Rubinstein & Perry, said he was "totally confident" Thursday's "excellent" decision would hold up in an appeals court.

Market participants said the decision will simply continue the legal roller-coaster ride that the bonds have been on for more than a year. Since conservatorship, prices have tracked the various court developments, reaching the 26-cent level on several occasions in the past.

"These things have been bouncing around for quite a while," said one regional dealer in the Southeast. "This is not the first trip down here. You're looking at another year [of litigation]. Lawyers love this."

The litigants on Thursday appeared to be drawing battle lines over whether the commissioner's plan to compensate bondholders is "two-tiered," or preferential to one group of bondholders over another.

Mr. Knight, who is also chairman of the largest such investor group, the Bondholders Protective Committee, said the insurance commissioner's plan is questionable because it assumes state courts can contravene contracts. If trustees were forced to treat bondholders unequally, he said, the contracts between trustees and investors would be abrogated.

"It is our feeling that it is not a legal provision," Mr. Knight said. The two-tiered system" raises serious questions under the U.S. Constitution, and it would stand 200 years of financial history on its head."

The plan technically treats investors differently: Those who bought the GIC-backed issues before April 11, 1991, are to be satisfied based on the "account value" of the contracts; those who bought them after that date, presumably speculators trying to realize capital appreciation, are to be compensated according to "market price" paid, according to a statement from the California Department of Insurance.

Mr. Rubinstein said the ruling would not treat bondholders differently. "That's an absurd argument. It's not two-tiered," he said. "Everybody will be paid according to purchase price.

"Our position was and still is that these contracts are not entitled to anything," Mr. Rubinstein added. "Our view is that GIC [bondholders] should be paid nothing because they are Class 6 claimants."

In November 1991, Judge Lewin ruled that municipal GICs are Class 5 policies of insurance, and as such bondholders had the same rights to Executive Life's assets as annuitants and other policyholders. Mr. Garamendi appealed the ruling, asserting that the municipal GICs are not insurance policies. The California Court of Appeals will hear final oral arguments on this case early next month.

Of the 16 issues at stake, nine sold in 1986 are taxable deals totaling $1.85 billion. All but one of the taxable issues were underwritten by Drexel Burnham Lambert Inc.

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