In Trenton today, Judge Paul Levy will decide whether to make permanent an order preventing trustees from performing their fiduciary responsibilities by foreclosing on Mutual Benefit Life Insurance Co.-backed housing projects.

The outcome of the Superior Court hearing will have a direct impact on bondholders of 44 tax-exempt issues guaranteed by Mutual Benefit. Many of the deals, totaling about $600 million, are in default, and language in the indentures requires the trustees to foreclose on the underlying properties to salvage whatever possible for bondholders.

All of the trustees were temporarily prevented from foreclosing last month by an order from Judge Levy, who is overseeing the rehabilitation of the company. The temporary restraining order was requested by New Jersey's attorney general, commissioner of insurance, and the deputy rehabilitator for Mutual Benefit -- Victor H. Palmieri -- after several trustees began foreclosures in various states.

Issuers and trustee banks protested the Oct. 16 order, saying Judge Levy did not have jurisdiction over their municipal issues, which they deem to be covered by the respective state laws.

Judge Levy "is trying to have New Jersey law overrule what another state's law says," said Ann Horrigan-Filloon, chief financial officer at the Florida Housing Finance Agency. Several of the Mutual Benefit-insured deals were sold by Florida Housing, and the agency's trustee -- Sun Bank -- is one of three banks that began foreclosure procedures.

Howard Hawkins, a partner at Cadwalader Wickersham & Taft and counsel to deputy rehabilitator Palmieri, said the trustees' jurisdictional arguments "are not persuasive" because the very reason for foreclosure is linked to the rehabilitation. "They started [the foreclosures] because Mutual Benefit went into rehabilitation," he said, "and then they turn around and say the court can't deal with the issue."

The three trustees also argue that the properties in question, all limited partnerships, are not the same party as Mutual Benefit. The reasoning distantly echoes the successful strategy taken in the Prime Motors Inn case, where letter-of-credit contracts ultimately were deemed outside of bankruptcy law.

"The rights of the trustees are rights vis-a-vis single assets -- the limited partnerships," said Jonathan Rich, a partner at Maguire Voorhis & Wells in Orlando and counsel to Sun Bank. "While those [partnerships] may be up to 50% owned by [Mutual Benefit], they are not the same entity legally. Under the relevant state statutes, it's fairly clear that the partnerships are not deemed part of the estate of Mutual Benefit.

"So, our position is that the New Jersey court does not have jurisdiction to enter an order staying us from foreclosing in Florida," Mr. Rich added.

Mr. Hawkins, on the other hand, invoked the mission of the rehabilitation itself, saying it could not proceed in an orderly fashion without the permanent injunction.

"We feel confident that the court has the power to issue the stay and that the court will grant the motion for a stay," he said. "Any other result would be deleterious to the Mutual Benefit Life reorganization."

Mr. Rich said the trustees could come to an agreement with lawyers for the rehabilitator prior to a formal decision by Judge Levy, which would obviate the need for a formal extension of the staying order. The other two trustees that attempted to foreclose and named in the restraining order are Texas Commerce Bank and Connecticut National Bank.

It is generally agreed, even by some trustee sources, that the best course for bondholders would be to keep the issues outstanding. Foreclosures are fraught with uncertainties and legal costs, and analysts have said investors are certainly looking at losses -- the only question is to what degree.

Keeping the bonds outstanding, however, takes the various parties into uncharted territory, Mr. Rich said. "The difficulty is that these are no longer the bonds that were marketed and sold to bondholders," he said. "They're not rated. Also, if bondholders approve having the bonds outstanding without a guarantee, then how long will the approval be valid? What if the deal takes a turn for the worse, if revenues decline, or credit quality deteriorates further?"

Another wrinkle is that trustees can interpret the bond indentures as requiring the foreclosures, even though the best bondholder value would be in leaving the projects untouched. "It's not that the agency wants the foreclosure," said Ms. Horrigan-Filloon of Florida Housing. "It just happens that the way the indentures are worded requires it."

John Nuveen & Co. also will be presenting an argument before Judge Levy today, reportedly against the motion for a permanent restraining order. Nuveen owns all of the $16.6 million Folirda Housing Finance Agency Series 1984C variable-rate demand bonds. The investment bank has filed a brief arguing that it has a right to foreclose on the Hammocks Place project, and sources say Nuveen has no intention of settling.

A spokesman for Nuveen declined comment.

When Mutual Benefit was originally seized in July, Nuveen mysteriously was the only party able to find an alternate guarantor for its tax-exempt housing bonds. Spokesmen at both Nuveen and Municipal Bond Investors Assurance Corp. -- the insurer taking on the Mutual Benefit liability -- refused to confirm which deal was at stake and how much Nuveen paid for MBIA's protection.

An MBIA spokesman at the time would only say that all of the exposure had been reinsured.

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