A California appellate court late Wednesday temporarily halted the sale of Executive Life Insurance Co. of California, acting on a motion filed by trustees of $1.85 billion of municipal bonds backed by the failed insurer.

The stay order blocks a planned sale this week to a French investor group headed by Altus Finance, a subsidiary of Credit Lyonnais, and Mutuelle Assurance des Artisanale de France.

California Insurance Commissioner John Garamendi, who was engineering the sale, could not be reached for comment. The stay is in effect until Dec, 16, and a hearing on the issue is scheduled for Wednesday, according to Philip S. Warden, attorney for the trustees of the municipal bonds, known as muni-GICs.

Muni investors objected to the way the sale could affect repayment of their investment.

In addition to the muni-GIC investors, holders of approximately $750 million in pension GICs were party to the motion seeking a stay, said Larry W. Gabriel, attorney for the pension GIC holders.

Warden said trustees moved to halt the sale because in order to complete the transaction, Garamendi was attempting to contact bondholders with an offer to "opt out," or cash in their investments, rather than have them backed by Executive Life's successor.

Those efforts involved polling bondholders to determine how much they paid for their securities in the secondary market. Trustees objected to that because it would enable the insurance commissioner to pay bondholders according to a two-tier system, a procedure that is itself the subject of a separate lawsuit.

Garamendi's proposed system would compensate bondholders differently, based on whether bonds were originally purchased in the primary or secondary market. Under the two-tier payment plan, holders, presumably speculators, who purchased bonds after Executive Life was seized by California insurance regulators on April 11, 1991, would be compensated based on the average price of their securities on that date. Meanwhile, holders who purchased bonds before that date would be compensated based on what they paid for the bonds.

Bondholders object to the idea because they would would not all be compensated based on what they paid for the securities.

The courts have not yet determined how muni-GIC holders will be compensated. A hearing on the issue is also set for Dec. 9.

The stay order is the second action taken by the court this week in the Executive Life case.

On Monday, the appellate court upheld a Superior Court decision confirming the status of the muni-GICs as Class 5 policies of insurance. As a result, holders of taxable municipal bonds backed by guaranteed investment contracts of Executive Life have the same rights to Executive Life's assets as annuitants and other policyholders.

In December 1991, California Superior Court Judge Kurt Lewin approved the sale of Executive Life to Altus Finance and Mutuelle Assurance. The group bid $3.25 billion to purchase the insurance company, a subsidiary of First Executive Corp. In addition, the group is expected to inject another $300 million into the successor insurance company, to be called Aurora National Life Assurance Co.

At the time the Altus bid was accepted, it was estimated that if muni-GIC holders' claims were upheld, policyholders would receive about 72 cents for every dollar invested. If Garamendi is successful in any attempt to appeal the court's Class 5 muni-GIC designation, other policyholders could get an estimated 89 cents on the dollar, and holders of the muni-GICs would lose any claim to the company's assets.

The guaranteed investment contracts represent the sole source of payment for $1.85 billion of taxable municipal bonds issued by state, municipal, and county authorities located in Colorado, Louisiana, Nebraska, Tennessee, and Texas.

Problems with the muni-GICs arose after California regulators took over Executive Life, due to problems with its real estate and junk bond portfolios.

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