LOS ANGELES -- Supporters of a modified rehabilitation plan for Executive Life Insurance Co. yesterday urged a California judge to approve the plan and rejected the notion that a sale of the failed insurer's junk bond portfolio can be rescinded.
No plan is perfect "in theory or in fact, [but] this is the best we can do," Karl Rubinstein, a lawyer for California insurance commissioner John Garamendi, said yesterday during closing arguments in the case. "It's tough to do right by everybody when everybody has something to complain about."
Garamendi developed the modified plan after a state appellate court struck down an initial proposal in March.
Los Angeles County Superior Court Judge Kurt Lewin is expected to rule on the modified plan in the next few days. If Lewin approves the plan -- and many observers expect he will -- it will return to the appellate court for review.
The modified plan addresses problems raised by the appellate court, Rubinstein argued yesterday, including eliminating a system that would have valued taxable municipal bonds at the price paid, rather than the par value, in establishing rehabilitation recovery levels. Those municipal bonds are backed by Executive Life guaranteed investment contracts.
Lawyers for trustees and underwriters of about $1.6 billion of such taxable bonds remain the last group of opponents to the modified plan. Other previous opponents, including trustees for about $50 million of tax-exempt bonds secured by the insurer's GICs, agreed to settle their claims last month in exchange for a slightly sweetened recovery.
Lawyers for the settling parties and the proposed successor company to Executive Life, Aurora National Life Insurance Co., also argued on behalf of the modified plan yesterday.
Their closing arguments included a common chorus to reject the municipal bondholders' bid to share in the appreciated value of Executive Life's former junk bond portfolio. That portfolio was sold for $3.25 billion in late 1991 to a French group led by Altus Finance.
Lawyers for the municipal bondholders want a share in the portfolio's recent gains on the grounds that the bond sale should have been rescinded once the initial rehabilitation plan was struck down.
But Rubinstein argued yesterday that the so-called rescission claim has "no basis in fact, no basis in law," saying that "it would be a travesty" to honor the bondholders' claim. "We will never sell another asset out of a receivership" if there is a public policy to rescind sales simply because there have been subsequent gains, he added.
At one point in yesterday's proceeding, Lewin said, "My cries for help went unheeded" when he sought other bidders for the junk bond portfolio. If the bonds were so attractive, Lewin asked, "where were all the sharks" when the portfolio was for sale?
Other lawyers accused trustees for the municipal bondholders of wanting the enhanced benefits that were given to other policyholders, even in the event where trustees choose to "opt out" of the GICs rather than stay tied to the successor company.
Lawyers for the trustees and underwriters were expected to present their closing arguments late yesterday. They were expected to argue that the modified plan is still defective on the grounds that it still fails to treat some policyholders equally.
The lawyers also claim Lewin has failed to fulfill the intent of the appellate court ruling by refusing to grant interim interest payments to holders of the municipal bonds.