Deadline looms for Met bankruptcy plan

Investors battered by the failure of Metropolitan Mortgage & Securities Co. should get a look next month at a revised Bankruptcy Court plan that estimates a return to them of 15 cents on the dollar.

U.S. Bankruptcy Judge Patricia Williams issued a terse 30-word order last month for lawyers in the case to submit the new plan of reorganization to hasten the conclusion of Spokane’s largest business failure.

The judge wants the plan filed by April 1.

Though complex, Metropolitan’s bankruptcy case is more than a year old and has cost nearly $8 million in lawyer charges and other fees such as complying with a federal securities investigation — numbers that gall many creditors.

The plan will basically serve as a liquidation blueprint, reporting how money will be distributed and how to deal with future sales, judgments and other assets.

Metropolitan and its sister company, Summit Securities Inc., will most likely file separate liquidation plans, even though a court-appointed special examiner had recommended that the affiliated companies be merged into a single case, said Maggie Lyons, the acting chief executive officer of Metropolitan.

Barring unanticipated problems, Metropolitan should have about $50 million in cash to return to creditors from the sale of property and receivables, Lyons said.

That would return about 15 cents on the dollar to the approximately 10,000 people holding unsecured bonds called debentures.

The numbers are a bit worse for the 6,600 investors who purchased Summit Securities debentures. The Idaho-based company will have about $20 million available to repay creditors, or about 12 cents to 14 cents on the dollar, according to Lyons.

The preferred stock sold by the companies to investors is worthless. The same holds for other equity investments such as common stock, most of which is owned or controlled by C. Paul Sandifur Jr., the former chairman and CEO who resigned amid an accounting scandal in January 2004.

The returns are based on the money Metropolitan has on hand from the sale of properties, and the money company officials believe should be earned from the sale of valuable beachfront property in Hawaii and some other, smaller assets.

Yet the reorganization plan will have a large hole in it, said Lyons.

An estimated 87 percent of Metropolitan’s assets were held by its insurance subsidiary, Western United Life Assurance Co.

Though Metropolitan technically owns the insurance company, Western was seized a year ago by Washington State Insurance Commissioner Mike Kreidler as the parent company unraveled.

Since then, Kreidler’s receivership team has all but severed the relationship between Western and Metropolitan. In fact, the two companies have inter-company claims that they are attempting to resolve.

Western has taken major writedowns and had to wipe out millions in federal income tax credits after the Internal Revenue Service disallowed them.

Consider this: In 2002, Western reported a net worth of $144.3 million. Yet, in its 2004 annual report, the insurance company listed its net worth at $63.3 million.

An independent audit found that Western lost $44.5 million in 2003. A similar audit for Western’s 2004 fiscal year is due this summer.

Western vice president Scott Cordell said the startling turnabout was due to financial adjustments that had to be made to correct financial actions the insurance company undertook while managed by Metropolitan.

Now operating in a separate building from Metropolitan, with independent managers, Western has aggressively repositioned its holdings to curb risk and more closely adhere to standard insurance company investments, such as having more money invested in bonds, ratcheting down the number of mortgages held and owning less real estate.

While Kreidler’s team continues to run the insurance company, it remains unknown if Western will be sold and the money from the sale routed to Metropolitan creditors.

Lyons declined to even estimate how much money Metropolitan could expect to earn from the sale of its insurance subsidiary.

Metropolitan’s bankruptcy plan will likely establish a creditors’ trust to handle any proceeds that may come from Western, whether from a sale of the company or from future dividend payments if the company is not sold.

The uncertainty regarding Western may be reflected in the amended plan.

“We simply don’t have a say in (Western’s) affairs even though we own the company,” Lyons said.

By contrast, two Summit-owned insurance companies, Old Standard Life Insurance Co., and Old West Annuity and Life Insurance Co., are reportedly for sale. If successful, any proceeds from the sales will be routed to Summit creditors.

Other recoveries for creditors could include Metropolitan and Summit’s potential arbitration against former auditor Ernst & Young LLP.

Also, about half of Metropolitan’s investors — those who bought debentures between January 2001 through March 2003 — might be able to boost their recovery through class-action lawsuits.

Those investors are suing former company officers and directors, auditors and other professionals who may have had a role in disguising Metropolitan’s financial condition or in defrauding investors.