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Merger advised at Met

A court-ordered report suggests that bankrupt Metropolitan Mortgage & Securities’ entire family of so-called independent companies be merged.

If adopted by the court, such a consolidation would drop claims the companies have against each other and treat investors in Metropolitan and its sister company Summit Securities Inc. as equals in their ongoing bankruptcy case.

Though billed as separate companies, Metropolitan and Summit were managed to help each other and common owner C. Paul Sandifur Jr., said the report filed Monday by independent examiner Samuel Maizel.

The report said a web of related-company loans between those companies weren’t properly secured, thus leaving the claims meaningless.

Some of the thousands of investors in the two companies may have made a deliberate choice between Metropolitan and Summit based on the financial soundness of one company or the other, but the cozy relationship linked the two company’s fortunes, the report said.

It was the second court-ordered report from Maizel. The first report released in June faulted Sandifur for Metropolitan’s collapse. It also criticized the company’s former auditor, Ernst & Young LLP.

Since that blistering initial examination, Ernst & Young has been sued for professional negligence by Western United Life Assurance Co., a subsidiary of Metropolitan. Metropolitan, too, has hired a law firm to pursue legal action against the large accounting firm.

The latest examiner’s report does not pin blame on two other companies that had been considered by lawyers involved with the case as potential lawsuit targets. Although it’s critical of law firm Kutak Rock and securities firm Roth Capital, the report said the two firms didn’t share the sort of liability that has been alleged against Ernst & Young.

Maggie Lyons, CEO of Metropolitan Mortgage, said Metropolitan and Summit will seek a merger of the companies into one corporation as part of their plan to repay investors. The companies already have merged their bankruptcy cases.

She hopes a plan can be confirmed in the first quarter of 2005 and quickly disperse some money collected from asset sales back to creditors.

Meeting the legal threshold to consolidate companies is high, however.

Michael Lubic, an attorney for Western United, said it doesn’t yet appear consolidation would be warranted.

“I don’t think the legal requirements for consolidation are met here, and as a substantial creditor of Metropolitan, I believe (Western United) would oppose,” he said.

As an independent insurance subsidiary, Western United is the largest creditor against Metropolitan. Lubic declined to say how much Western believes it is owed by Metropolitan, but the amount would be significant.

Last March, Washington Insurance Commissioner Mike Kreidler placed Western United into receivership and so is duty-bound to try to rehabilitate the company and protect its policy holders. That includes pursuing claims to recover as much money as possible, even if it means filing against Metropolitan.

Ford Elsaesser, a lawyer representing Summit in the case, backs consolidation and said the entire focus of the case is finding a fair compromise for the more than 16,000 investors in the two companies, who have a total of $580 million at stake.

Estimates are that asset sales may return to investors up to 15 cents on the dollar. So the major source of recovery may be lawsuits against Ernst & Young, and perhaps former executives and other companies.

“We’re working cooperatively with (Western United)… and trying to find win-win solutions between the debtors and insurance subsidiaries,” Elsaesser said.

Lyons said a bill for the second report has not yet been submitted. The cost of the initial examination was about $960,000.

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