Trustees of tax-exempts guaranteed by Mutual Benefit Life Insurance Co. were thwarted yesterday, when a New Jersey appeals court denied them the ability to foreclose on properties.

The decision upheld a November 1991 temporary restraining order issued by Judge Paul Levy, who is overseeing the rehabilitation of the failed insurer. Some 44 municipal issues totaling about $500 million were affected by the ruling.

Three appeals to the Superior Court of New Jersey's Appellate Division had been filed jointly by three trustee banks: Maryland National Bank, First Tennessee Bank, and Citizens & Southern National Bank of South Carolina. All three appeals were rejected.

One motion challenged Judge Levy's ability to issue a temporary restraining order preventing foreclosure; one asserted that the properties in question were not actually assets of Mutual Benefit; and a third claimed that Judge Levy had no jurisdiction over properties outside of New Jersey.

Mutual Benefit was seized in July 1991 by the New Jersey insurance commissioner, Samuel F. Fortunato, after a "run" on the life insurer's assets pushed it toward insolvency.

Traders yesterday said the Mutual Benefit-backed deals were apparently unaffected by the decision.

The bonds have been trading according to coupon size and the properties' underlying cash flows. Higher coupons and stronger projects were quoted at about 91 cents on the dollar yesterday, while the weakest tax-exempt issue - a $5.3 million deal sold by the Allegheny County, Pa., Industrial Development Authority - last traded at about 72 cents on the dollar. Other issues ranged in the 85- to 92-cent range, with one firmly bid at 97.

One trader said that although the appeals may have been forced by bondholders, the trustees' efforts to foreclose could easily hurt most investors.

"The last thing in the world that I would want them to do is come in and yank the project away," said Chris Hall, a partner at the Miami-based firm of Howe, Solomon and Hall. "At this stage of the game, it would affect us adversely. They're making the coupon payments now, and these are relatively high coupons."

The majority of Mutual Benefit-backed deals have coupons ranging from 7.25% to 10%.

"The potential for multi-state foreclosures ... can only adversely affect [Mutual Benefit's] chances for rehabilitation, "yesterday's ruling says. "On the other hand, staying such foreclosures would not adversely affect the trustees or their bondholders."

Lawyers for Mutual Benefit and the insurance commissioner said the decision will preserve the value of Mutual Benefit's assets and allow a higher compensation level for all policyholders.

"It's a very important victory for the rehabilitation effort," said Howard R. Hawkins Jr., a partner at Cadwalader, Wickersham & Taft. "It makes clear that [Judge Levy's] jurisdiction does extent to all the assets and liabilities and issues relating to Mutual Benefit."

The ruling refers to the New Jersey Uniform Insurance Company Liquidation Act and says that a rehabilitation court's jurisdiction must be broadly construed to effectively liquidate multistate assets of failed insurers, Mr. Hawkins said.

"There has never been a decision under the act that has been this broad," he said.

The three indentured trustees appealing last December's ruling may now find themselves out in the cold, according to trustee officials.

Last November, several banks signed a standstill agreement that prevented foreclosure but assured the issues interest payments for the term of the agreement, which expires Aug. 15 and may be extended. Since then, at least two issues have received partial payments or no money at all.

The issues not being paid in full are those with insufficient cash flow, said a trust officer not associated with the appeal.

"They're saying, ~We're not going to contribute cash to pay all the interest; that's a capital payment,'" he said. "It appears that that's the approach they're beginning to take."

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