LOS ANGELES -- Lawyers for trustees of $1.65% billion of taxable municipal bonds plan to file legal appeals this week over a judge's decision to approve a modified rehabilitation plan for the failed Executive Life Insurance Co.
At the very least, the lawyers hope to convince a state appellate court to issue a stay that prevents the modified plan from closing until some of the opposing arguments can be considered.
Although it is impossible to predict how a court might rule, "we think that we have a pretty good shot" at getting heard at the appellate level, said Robert Wallan, a lawyer at Pillsbury, Madison & Sutro.
Wallan's firm represents the taxable bond trustees that still oppose the plan. The taxable municipal bonds are backed by Executive Life guaranteed investment contracts.
In a separate development yesterday, some investors holding muni-GICs urged their indenture trustees to reach a prompt settlement rather than prolong the litigation.
Soros Fund Management, a principal investment adviser to investors claiming to be "substantial holders" of the bonds, said in a release that the time for adversary litigation "is now nearing its end, and the time for negotiation and compromise has begun."
A Los Angeles-based investment adviser said he was glad to see the Soros Fund publicly take a stance, though "I'm not so sure that [their approach] would generate the most money."
The adviser said he still believes the case will proceed to the appellate level, and said decision makers for the indenture trustees should avoid being swayed by holders who try to exert, "pressure here through the press."
As expected, Los Angeles County Superior Court Judge Kurt Lewin approved the modified plan in an order released late Friday afternoon.
California insurance commissioner John Garamendi devised the modified plan after a state appellate court rejected an initial plan in March.
But lawyers for the muni-GIC holders, along with a lawyer for underwriters of the taxable bonds, contend that the modified plan remains flawed.
They argue that the new plan still discriminates against their clients.
For example, they argue, it is unfair for policy holders who "opt out" -- meaning those who withdraw funds rather than stay with the successor company to Executive Life -- to receive less than those who "opt in." The muni-GIC lawyers also challenged Garamendi's valuation method for certain claims.
Lewin failed to find merit in those claims, stating instead that the modified plan "fairly and uniformly distributes the current value" of Executive Life's assets.
The modified plan would transfer most Executive Life assets to a new company, Aurora National Life Assurance Co., which is controlled by a French investor group led by Mutuelle Assurance Artisanale de France and one-third owned by Los Angeles-based SunAmerica Inc.
Spokesmen for the French group and Garamendi expressed delight with Lewin's ruling.
Lewin generally favored Garamendi's position during a hearing on the modified plan, and the judge's final decision on the matter was virtually identical to a proposed draft that had been submitted by Garamendi's lawyers in July.
In a separate five-page order, Lewin also listed numerous reasons for rejecting motions by the muni-GIC lawyers to rescind a $3.25 billion sale of Executive Life's high-yield bond portfolio. That sale closed in March 1992.
The muni-GIC lawyers argued that their clients should share in the subsequent appreciation of those bonds, on the grounds that the sale should have been rescinded after the appellate court rejected the initial plan.
But Lewin concluded the bond sale "was not conditioned on consummating the insurance transaction."
Wallan, the trustee lawyer, said the rescission argument will be pursued at the appellate level.
Wallan said the appellate court could take various steps, including granting the request for an appeal hearing or rejecting it outright. The court could also issue a stay on the modified plan until it can study the issues raised by the muni-GIC group, or it could hear the issues but let the transaction close.
If the appellate court decides to hear an appeal, the matter might be ruled on by yearend, Wallan said.
But the Soros Fund release urged a settlement rather than "a lengthy appeal process."
A settlement could be structured on terms similar to those reached in a settlement involving $200 million of El Paso Housing Finance Corp. multifamily housing revenue bonds, according to the Soros release.
The release concedes that a majority of El Paso bondholders rejected those terms in a vote earlier this month, but says the Soros Fund "believes that those negative votes could be turned around with only a few, relatively minor, additions to that agreement."
The additions would include creating two separately tradable instruments that reflect two components backing the bonds: the GIC itself, and an interest in several liquidating trusts.
Also, the Soros release says Aurora could "well afford to offer to repurchase the reorganized GIC-backed portion of the bonds one year following the closing." It says that "a put price varying inversely with interest rates, capped at a current value of 99.5% of the restructured GIC principal amount, has been proposed."
Such terms were the subject of now-terminated discussions between certain holders of the muni-GIC bonds and Aurora, the release says, adding that "we hope that the trustees will be willing" to consider pursuing such a settlement package.
The release says the Soros Fund is advising muni-GIC holders identified as Quantum Partners LDC and Quasar International Partners C.V.
Christine Franklin, a lawyer for Texas Commerce Bank, the trustee for the El Paso housing bonds, said the bondholders' rejection of the settlement terms means that the bank is "back in litigation," but on a "smaller scope" than the other muni-GIC group.