LOS ANGELES -- Investors in defaulted Washington Public Power Supply System bonds finally appear close to receiving a partial payment on their losses after almost a decade of waiting.
The U.S. Supreme Court yesterday declined to hear a final challenge to settlements in the WPPSS federal bond fraud case, and partial payments to bondholders may be ready "within a week or 10 days," said Melvyn Weiss, who represents class action purchasers of WPPSS nuclear power units 4 and 5 bonds. Their lawsuit stemmed from the supply system's $2.25 billion default in 1983.
"I'm very pleased we're finally at a point where we can give the bondholders some money," Weiss said.
The proposed partial distribution would provide about $ 504 million to class action plaintiffs who bought their bonds before June 15, 1983, when the Washington State Supreme Court struck down the utility participants' agreements that provided security for the debt.
Under the partial distribution plan, another payment of almost $148 million would go to the WPPSS units 4 and 5 bond fund controlled by Chemical Bank, the bond trustee. Money in that fund will eventually be distributed to all current bondholders, regardless of when they purchased their holdings.
William Berls, a vice president at Chemical, said yesterday that "we and our counsel are considering" whether it also makes sense to make a partial distribution out of that bond fund as well.
"It's an expensive process," so the administrative costs will be one factor in that decision, Berls said. He also noted that additional funds could flow into the bond fund -- for eventual distribution to current bondholders -- from separate litigation that remains pending over the way WPPSS shared costs among four of its nuclear plants.
Regarding yesterday's Supreme Court action, Berls said, "We are delighted after 10 years that bond purchasers can finally recoup part of their initial investment."
Lawyers for the class action members filed for a partial settlement payout two months ago. But U.S. District Court Judge William Browning, who oversaw the case in his Tucson courtroom, decided against authorizing a distribution until he saw how the high court handled the last challenge to certain out-of-court settlements in the case.
That challenge, by the so-called Hoffer bondholder, group, contended that lower federal courts erred when they snuffed out a pending Hoffer lawsuit in Washington State as part of an out-of-court settlement package that ended the complex federal lawsuit in late 1988.
The bondholder suit, named after plaintiff Arthur Hoffer, alleged that the state and some of its officials shared some of the blame for misleading investors in the defaulted bonds. Their allegations revolved around violations of Washington State securities law.
But the Supreme Court yesterday denied without comment the Hoffer group's petition for a hearing.
Chemical Bank supported the settlement package and joined class action lawyers in opposing the Hoffer petition. They argued that legal precedent supports the notion that a federal court can extinguish a lawsuit ending in a state forum when the facts and class action members in the cases are similar.
The out-of-court settlement fund totals almost $900 million. Lawyers are seeking only a partial distribution because some money must be held in reserve to cover legal fees, taxes, and other allocations.
Settlement funds came from defendants in the federal litigation, including numerous public utilities in the Pacific Northwest, underwriters and bond counsel for the defaulted bonds, the financial adviser, and engineering consultants.
Washington State was not a defendant in the federal case, but it chipped in $ 10 million toward the settlement fund in exchange for being released from any existing or future claims arising from the default, including the Hoffer charges.
Browning must still authorize any partial payment. Based on his comments in past orders, it appears the judge will want payments to begin as soon as possible now that the Hoffer petition is resolved, Weiss said yesterday.
"We're off and running" on getting the payments ready, Weiss added.
Two certified groups of class action bondholders would receive the proposed $504 million partial distribution.
Investors who purchased WPPSS 4 and 5 bonds from Feb. 23, 1977, to Jan. 22, 1982, the day the partly built nuclear plants were terminated, make up one class action group. The other class action group involves bond purchases from Jan. 23,1982, to June 15, 1983, the day of the state high court ruling.
That latter group of purchasers, known as the post-termination buyers, will have their allowable losses reduced by 40% compared with bondholders who purchased bonds prior to termination of the plants.
The allowable losses for the class action bondholders totaled about $1.4 billion as of Aug. 18, 1992. That sum is less than the defaulted amount because the loss formula includes an imputed sales price -- at a steep discount -- for the bonds in the secondary market.
Since the allowable losses certified by the court exceed amounts generated by the settlements, class action members will receive a prorated recovery on their calculated losses.
Besides the partial distribution to class action bondholders, the lawyers also requested a $147.8 million payment to the WPPSS units 4 and 5 bond fund that is controlled by the bond trustee. Moneys in this fund will eventually be distributed by Chemical Bank to all current bondholders, regardless of when they purchased their bonds. Browning previously approved giving that amount of the settlements to the bond fund in a previous allocation and fee order.
Finally, the partial distribution would provide almost $41 million to plaintiffs' lawyers for non-disputed legal fees and expenses.
As a result, about $188 million of settlement funds would remain in reserve to cover potential tax liability, reserves for disputed claims, disputed legal fees and expenses, and other reserves. If some of those funds eventually are not needed for such contingencies, they would benefit class action holders in the 1977 to 1983 purchasing groups.
All of the payment amounts are tentative and could change slightly because of actual interest earnings in the settlement fund and about $11.6 million of insurance proceeds that remain in escrow for now.
"It looks like we're finally coming to an and here," said C. Richard Lehmann, president of the Bond Investors Association, which includes many WPPSS 4 and 5 bondholders.
Lehmann said one remaining concern is the way that mutual bonds funds and unit investment trusts with claims handle any settlement moneys they receive.
The settlement could produce "a windfall profit" for such funds unless they attempt to disburse the settlements to investors who actually suffered the losses, rather than to current fundholders, Lehmann said.
Lehmann raised this issue in a letter last July to the Securities and Exchange Commission. He said he has not received a reply.