The trustee for one of the defaulted Executive Life-backed issues has scheduled a bondholders' meeting next week to consider how to litigate against the failed insurer and the California Insurance Commission.
Texas Commerce Bank-El Paso, trustee for the El Paso Housing Finance Corp.'s 1986 taxable issue, on July 16 will present investors with two propositions relating to their representation in the upcoming lawsuits. Bondholders may adopt the largest existing investor group -- the Taxable Municipal Bondholders' Protective Committee -- or form their own special committee, according to a notice from the bank last week.
Bondholders' committees were the main subject of the most recent hearing concerning the fate of Executive Life Insurance Co. policyholders. On June 27, Judge Kurt Lewin of the Los Angeles County Superior Court dissolved the existing committees and instructed the bondholders' groups to present an official list of investor claimants at the next hearing July 18.
Executive Life of California was placed in conservatorship by the state insurance commissioner, John Garamendi, on April 11, after he received approval to do so from Judge Lewin. The move resulted in a freezing of interest payments to municipal guaranteed investment contracts and the subsequent default of several issues backed by such GICs.
Since the conservatorship, different groups of claimants -- including bondholders, annuity holders, pension funds with Executive Life GICs, and life insurance policyholders -- have each pressed for priority satisfaction. All the claimants are worried that the assets underlying the company will be inadequate to meet their claims.
Municipal bondholders would only get 20 cents on the dollar under a rehabilitation plan proposed by Mr. Garamendi. Almost $1.93 billion of taxable and tax-exempt bonds hang in the balance.
"As a practical matter, [the bondholders' committees] didn't technically exist, except as interim committees, because the court hadn't recognized them," said Gary Fontana, counsel to Texas Commerce Bank and attorney with Thelen Marrin, Johnson & Bridges in San Francisco.
The judge's "attitude was that these committees were more trouble than they were worth," Mr. Fontana said. "Some committees were asking to have counsel fees paid by the [Executive Life] estate."
The Taxable Municipal Bondholders' Protective Committee, which represents investors holding more than $1 billion of the $1.85 billion in taxable municipal bonds tied up in Executive Life GICs, was one of several committees seeking fees from the life insurer's estate, according to Reagan Simons, adviser to the committee.
The opporutnity for El Paso bondholders to select the protective committee is "an excellent step forward," Mr. Simmons said. "If they're successful, we'll have a huge trustee coming on board."
The best scenario for the committee, Mr. Simons siad, would be for other trustees to sign on by offering a similar option to the bondholders they represent.
Mr. Simon said one the most intractable problems facing bondholder claimants is the perceived status of the insurance commission. "It would be incorrect not to assume that the conservator is viewed as a friend of the court," he said. "Allegedly, the conservator is protecting the assets of the company. But there are other interests out there.
"We're not trying to get blood out of a turnip, but we're trying to be treated fairly," he continued. "We're equal. In 1986, when these things were issued, we were equal."
For its part, Texas Commerce Bank plans to continue separate litigation against the insurance commission and Executive Life, Mr. Fontana said. The bank plans "to seek damages and to have municipal GICs declared a policy of insurance," he said. "If they are not ruled policies of insurance, then we assert a variety of other claims against the underwriters and the commissioner."
The majority of trustees affected by the Executive Life conservatorship are currently allied under one suit filed through San Francisco-based Pillsbury Madison & Sutro. Six banks, all trustees for taxable issues sold in 1986, are also attempting to have the GICs determined policies of insurance and thus brought up the same level of importance as pension GICs and other claimant groups.
The banks are Commerce National Bank in Shreveport, La., NCNB Corp., Sunburst Bank of Louisiana, First Interstate Bank of Denver, Norwest Bank of Minnesota, and First Trust National Association, also of Minnesota.
John Grenfell, a partner with Pillsbury Madison & Sutro, said the taxable issues all have provisions allowing a majority of the bondholders to take control of legal proceedings if they so wish.
"The other trustees have similar provisions in their indentures, and some of them may indeed convene meetings of this nature," Mr. Grenfell said.
The most important decision of the case for municipal bondholders -- at what level their claims will be satisfied, if at all -- will not be considered at the July 18 hearing, according to Mr. Grenfell.
"The judge has said he doesn't have to consider [bondholders' claim levels] until and unless a liquidation occurs," he said.
