The credit quality of municipal guaranteed investment contracts lies in the hands of Judge Kurt Lewin, Superior Court justice for Los Angeles Country.

Last week, both sides of the court battle over the status of $1.93 billion of municipal bonds backed by Executive Live Insurance Co. GICs rested, and it is now up to Judge Lewin to decide whether the contracts are "policies of insurance."

Judge Lewin's decision will have a resounding impact on existing municipal bonds with proceeds in GICs, as well as the GIC industry itself. Market sources and bond counsel say a ruling in favor of California Insurance Commissioner John Garamendi, who has argued that Executive Life's municipal GICs are fraudulent, would severely damage specific sectors of the industry.

"Issuers already are less inclined to do investment agreements with insurance companies," said one GIC broker, who asked not to be identified. "They won't do any if this goes through."

The judge must rule within 90 days of last Thursday's concluding arguments and has said he will rule no later than Nov. 18. "But he could rule today," said one lawyer working on the case.

A ruling against municipal GIC interests also will confuse the life insurer's rehabilitation, according to counsel for trustee banks. "It would also have a negative impact on the rehabilitation of Executive Life," said John Grenfell, a partner with Pillsbury Sutro & Madison and lawyer for the trustees. "We would be obliged to pursue all other appellate remedies; we would set off on a further litigation saga.

If Judge Lewin rules in favor of the GCIs, Mr. Grenfell said, the process of selling Executive Life to one of the interested bidders can proceed.

The most likely candidate for winning the right to purchase Executive Life appears to be the National Organization of Life and Health Guaranty Associations. The life insurance industry trade group, known as NOLHGA, has the support of Mr. Garamendi and the participation of all the nation's major life insurers.

A ruling for municipal GICs would send each bidder back to the drawing board to amend their bids. In most cases, the bids easily could be adjusted to include the municipal claimants in the distribution of available assets. For NOLHGA, however, a GIC victory would increase its total liability, according to Mr. Grenfell.

He explained that NOLHGA -- an association representing the individual states' guarantee funds -- represents the actual guarantors of the Executive Life annuity and life insurance policies. As such, NOLHGA members are on the hook for whatever shortfalls result from the firm's rehabilitation. Recognition of municipal GICs would mean less money for other claimants and more liabilities for NOLHGA, Mr. Grenfell said.

"If we win, it will probably reduce the payment to the other policyholders by something like 9 cents" on the dollar, he said. "If we lose, our recovery falls from 71 cents to zero."

NOLHGA this week completed the finishing touches of its bid for Executive Life. The association won approval from Mr. Garamendi last month but had to comply with several conditions, including far stronger cash and credit commitment than originally put forth.

The bid's cash commitment Monday was boosted to $300 million from $5 million, and 21 member insurers stepped up with a $1 billion credit line. As a measure of further security, the same member firms -- including the largest life insurers in the county -- established a future capacity reservation of $1.25 billion, which NOLHGA officials do not expect to use.

For the bondholders, trustee banks, and underwriters involved with Executive Life GICs, it appears irrelevant which bidder wins the right to Executive Life's customers, junk bond portfolio, and liabilities. The real issue for them hinges on whether Mr. Garamendi's attempts to deal the municipal GICs out of the game is successful.

Carl Rubenstein, partner at Rubenstein & Perry and counsel representing the insurance commissioner, said that prior opinions from the California insurance department stated that municipal GICs were not insurance contracts, "even though they were sold by insurance companies."

Other factors mitigating against the municipal GICs include a shadow rating of A2 from Moody's Investors Service, which contrasted sharply with Standard & Poor's Corp.'s AAA; "discounted" trading activity that has put many of the bonds at stake into speculators' hands; and a 1988 California Legislature ruling that states they are not insurance, he said.

Lawyers for the municipal trustees said the case brought by Mr. Rubenstein was not "credible."

Mr. Rubenstein "admitted in the closing arguments that he had not proven all the things he had said about Drexel [Burnham Lambert Inc.] and the great conspiracy," Mr. Grenfell said. "And the judge indicated that he would not base his ruling on that. We don't feel he had credible evidence or a credible theory.

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