Met creditors pick up pieces

Thousands of Metropolitan Mortgage & Securities creditors may receive a small check next year as the failed financial firm is pulled apart and sold off piece by piece.

The checks are likely to be just cents on the dollar of the creditors’ original investment and will be paid only to holders of unsecured bonds called debentures.

It’s an especially difficult result, since many of the creditors are elderly people who invested their life’s savings, their children’s inheritance or their grandchildren’s college funds in what they believed were fail-safe bonds.

That fact isn’t lost on the lawyers and company officials shepherding Metropolitan through its difficult bankruptcy.

“It’s heartbreaking,” said Maggie Lyons, who recently was appointed Metropolitan’s top financial manager and who helped devise a reorganization plan and accompanying disclosure statement.

The recently filed plan delivered a dose of bad news to creditors clinging to hopes they might collect a modest recovery of their investment.

“To say we’re unhappy about what happened isn’t even close,” said Marcia McKinnon, who with her husband, Michael, owned $26,400 in Metropolitan debentures.

“We thought these bonds were a Steady Eddy deal. This was our conservative investment.”

Designed to act as a blueprint of Metropolitan’s bankruptcy, the reorganization plan is a series of scenarios that predict a much richer return in several years if creditors can hold out.

Here’s what’s most certain:

There are some 10,000 creditors holding $352 million in Metropolitan notes.

The bankrupt company anticipates it might be able to repay the investors 15 cents on the dollar after assets such as real estate, loans and structured settlements like lottery winnings are sold.

Another 6,600 people hold $112 million in Summit Securities notes, Metropolitan’s sister company based in Idaho. The plan of reorganization estimates that Summit investors may receive 10 cents on the dollar.

Out of luck are thousands of preferred stockholders in the two companies. The bankruptcy plan says preferred stocks will be rendered worthless.

The same is true for other equity investments such as common stock, almost all of which is owned or controlled by former Metropolitan chairman and CEO C. Paul Sandifur Jr.

There are far more unknowns:

Although Metropolitan and Summit still own insurance affiliates now controlled by insurance commissioners in three states, it’s uncertain if the companies can survive and be sold.

The three insurance companies were valued at $183.5 million before the bankruptcy, but the plan states such a value is “substantially overstated” and “may bear no relationship to what the fair market value would actually be.”

The best chance for investors may be in suing outside accounting firms.

Metropolitan’s bankruptcy lawyers and new management have alleged professional malpractice by auditors, lawyers, tax consultants and others.

Samuel Maizel, the examiner appointed by the bankruptcy court to investigate the financial collapse of Metropolitan, reported, “The recoveries on such claims could potentially be in the tens or even hundreds of millions of dollars.”

Creditors’ attorney P.J. Grabicki has said he plans to hire a law firm next month to sue outside auditor Ernst & Young LLP.

The Big 4 accounting firm audited Metropolitan’s financial statements, but resigned in January after determining that Met executives misled its auditing staff. Ernst & Young disavowed three years of audited financial statements.

Metropolitan filed for bankruptcy protection two weeks later, a Securities & Exchange Commission investigation grew and a federal grand jury was convened in Portland.

While waiting for repayment, some creditors are selling their bankruptcy claims to Argo Partners. The New York firm has offered creditors a nickel on the dollar for their debenture bonds.

The McKinnons are two of those who’ve taken the Argo deal.

“We just didn’t want to wait around for something to happen,” Marcia McKinnon said. The couple received about $1,300 from Argo for their $26,400 in Metropolitan debentures. They still hold about $10,000 in Summit Securities bonds.

Michael Singer, a principal in Argo Partners, said his company has received a trickle of interest in its offer, which was mailed to creditors in August.

“We see ourselves as a firm that provides crisis liquidity,” he said. “Our offer may not be for everyone, but some people need money now.

“I know that what’s happened at Met has made people unhappy and I’m sure coming out with a bid reflecting what we think will happen isn’t very popular,” Singer said.

Argo, he said, is willing to wait for Metropolitan to pay out. And it’s willing to risk the unknown: whether Metropolitan will net money from the auditors and other professionals and whether it will recapture the value of its three life insurance companies, Western United Life Assurance in Washington, Old Standard Life in Idaho, and Old West in Arizona.

Some people close to the case say settling the insurance company matters could take years. Lawsuits against auditors and others could take a similar amount of time.

Company officials and attorneys representing creditors in the bankruptcy say they are troubled by offers such as that from Argo. Last spring a San Francisco company was offering creditors a penny on the dollar.

They point to the reorganization plan as proof that investors likely will get something within a year — probably more than a nickel on the dollar.

But lawyers and company officials who drafted the plan can’t publicly solicit support for its passage until Bankruptcy Court Judge Patricia Williams approves the disclosure statement that details risks and benefits of the plan.