Burned Metropolitan Mortgage & Securities Co. investors will have their day in court against a big auditing firm they accuse of professional negligence.

They have a shot at a potential payday that could top $200 million after U.S. District Judge Fred Van Sickle on Tuesday reversed earlier tentative rulings and rejected motions by PricewaterhouseCoopers LLP to dismiss the lawsuit. He encouraged the sides to rekindle settlement talks and drop next month’s trial.

The rulings were a major hurdle for investors who are now members of a special creditors trust trying to salvage legal claims in the wake of Metropolitan’s 2004 bankruptcy.

There are 16,000 investors who held $470 million worth of unsecured debenture bonds and other Metropolitan notes. Their recovery on those investments has been reduced so far to 4 to 7 cents on the dollar.

“It’s a good day,” said trustee Maggie Lyons, even while acknowledging the difficulties of winning at the upcoming trial.

Two dozen Metropolitan investors sat through much of the hearing to represent those who lost money. Most Met investors were retired and lived in the Northwest, making the Metropolitan collapse one of the worst financial failures in Spokane’s history.

Lawyers for PricewaterhouseCoopers declined to comment after the judge reversed direction; Van Sickle wrote last month that he was leaning toward siding with the large auditing firm. That would have short-circuited a case may be the best chance for investors to recover more of their losses.

The arguments boiled down to speculation about what Metropolitan’s board of directors would have done differently if the auditors had uncovered what in hindsight seem to be obvious problems.

Lawyers hired by the trust contend the entire bankruptcy might have been avoided if the auditors had performed their duties in accordance with industry standards.

An expert witness from Los Angeles-based Fulcrum Financial said that if PricewaterhouseCoopers had correctly audited Metropolitan’s financial books, the numbers would have shocked the firm’s board of directors into action.

Instead of showing profits, accurate audits of the real estate and insurance conglomerate would have revealed a poorly managed firm that was hemorrhaging cash and nearing insolvency.

The board, argued creditors trust attorney Parker Folse, would have insisted on hiring a turnaround specialist.

Fulcrum’s Dave Nolte insisted that such a specialist would have taken corrective actions, including selling Metropolitan’s insurance affiliate Western United Life Assurance and cutting overhead costs, which could have raised $300 million in cash as late as 2001.

That much money would have soothed a looming cash crunch and enabled Metropolitan to avoid bankruptcy.

PricewaterhouseCoopers argued that even if its audits did reveal a company in crisis, the board was timid and ineffectual and would not have stood up to C. Paul Sandifur Jr., the company’s headstrong chairman and chief executive.

The auditor’s attorney, James Cusick, pointed to board minutes where directors didn’t voice concern as Sandifur outlined plans to lend $100 million a month to high-risk commercial real estate projects.

Metropolitan collapsed three years after PricewaterhouseCoopers quit auditing the books, Cusick reminded the judge, saying there’s insufficient evidence of anything the auditor did to cause Metropolitan’s crisis.

He recounted an investigation by the National Association of Securities Dealers, along with probes by the U.S. Securities and Exchange Commission, that halted Metropolitan’s ability to sell more stocks and bonds to finance Sandifur’s aggressive commercial lending strategy.

Without that new money, Metropolitan defaulted – the first time in its 50-year history that it missed a payment.

Trust attorney Edgar Sargent argued that the auditing firm’s negligence, along with its promotion of a tax shelter sham that whitewashed the company’s financial performance from 1999 to 2001, worsened the company’s fate. Subsequent investigations would not have been necessary had PricewaterhouseCoopers conducted accurate audits and showed losses of about $22 million during those years rather than gains, Folse said: “It would have prompted the board to act.”