Lincoln Stalled on Recovery of Bond Payments

A federal judge issued an order Thursday that could further stall the effort by American Continental Corp. to recoup $24.5 million from creditors--mostly bondholders--who were paid just before the company entered bankruptcy two years ago.

U.S. District Judge Richard M. Bilby ordered lawyers for the former parent company of Irvine-based Lincoln Savings & Loan and attorneys for creditors to appear in court Aug. 16 to discuss the company’s effort.

Under the liquidation plan Bilby approved earlier, creditors who were paid during the three months prior to the April 13, 1989, bankruptcy filing could be asked to return the money so that the trustee in charge of the company can split it up among other creditors.

Those so-called preference payments, which are commonly sought in bankruptcy cases, were the object of nearly 2,100 lawsuits that the company recently filed against creditors.

Nearly $23 million of the money American Continental wants back covers principal and interest paid to small investors who bought the corporation’s bonds at Lincoln’s Southern California branches.

In mid-July, at the company’s request, Bilby halted further action in the litigation until Aug. 31 to see if lawyers could reach a settlement.

Lawyers for the bondholders maintain that the payments made before the bankruptcy filing were part of the company’s normal course of business and, therefore, should fall under a bankruptcy law exception on preference payments.

Now Bilby wants the lawyers to argue about whether the preference litigation should be continued until after the U.S. Supreme Court rules on the same issue in a similar case involving ZZZZ Best Co., the Reseda carpet cleaning company that collapsed in 1987 in a fraudulent scheme that led to the conviction of its founder Barry Minkow.

The U.S. 9th Circuit Court of Appeals ruled in ZZZZ Best that such payments are not in the normal course of business, but three other circuit courts have ruled that they are.

Bilby also wants the lawyers to address whether American Continental’s lawsuits should be held in abeyance pending a settlement of nearly 20 state and federal bondholder lawsuits that have been consolidated before him. He also asked for proposals on the “fairest, most efficient, cooperative resolution” of the preference actions.

Thousands of bondholders lost more than $250 million after the Phoenix company filed for bankruptcy. Regulators seized Lincoln the next day, and the S&L; now is the nation’s biggest thrift failure with an estimated taxpayer bill of $2.6 billion.