Did waiver make First Executive bond sale final?.

According to a motion recently filed in Superior Court by Insurance Commissioner John Garamendi and lawyers for the French buyers of the failed First Executive life insurance company, Garamendi inked a waiver in March 1992 that made a sale of $7.56 billion (face value) of the insurer's junk bonds to French bank Credit Lyonnais final -- no matter what.

A return of the bonds to First Executive, sought by some policyholders and bondholders, could make the insurer financially solvent again -- but Garamendi's troops last week said such a return is impossible, due to the waiver.

The waiver, made public two weeks ago in Los Angeles Superior Court, turned out to be a surprise to Maureen Marr, leader of the Santa Monica-based Action Network for Victims of Executive Life, a group of First Executive policyholders that, until recently, had supported Garamendi's plan.

"That's a waiver we have never seen before," said Marr last week. "The waiver flies in the face of everything we were told by the Commissioner and (the French). When we endorsed (Garamendi's) plan, we were told it was one, interdependent plan."

Last week, Garamendi's press officer, Bill Schulz, and in-house lawyer, Richard Baum, said the waiver had been filed with the court in March 1992 and was not secret.

However, both Schulz and Baum conceded that no press release had gone out on the waiver -- although the ambitious Garamendi is well known for issuing many press releases.

"This was all aired in the court; everybody knew about the waiver," said Schulz. "I don't recall any press releases (on it)."

The waiver was part of a long and complex bond sale agreement filed with the court, according to Schulz and Baum, who averred that major participants in the First Executive rehabilitation were aware of the waiver.

First Executive was the life insurer Fred Carr built, which collapsed in 1991 when the value of junk bonds in its portfolio fell. More than 360,000 policyholders were left in the lerch.

First Executive had gorged itself on high-yield bonds underwritten by Drexel Burnham Lambert, and its leader, Michael Milken, who subsequently was convicted of securities law violations.

Garamendi seized First Executive in April 1991, and then devised a plan to sell junk bonds in the insurer's portfolio to Altus Finance, an arm of French bank Credit Lyonnais, and the insurer itself to Mutuelle Assurance Artisanale de France, a French automobile insurer. It was advertised as a package deal.

Indeed, in a Nov. 11, 1991 letter to Garamendi, Altus Finance wrote of its plan that a certain provision "has been eliminated to ensure that the transferred bonds (junk bonds) are only sold as part of a comprehensive rehabilitation."

Altus Finance lawyer Kenneth Heitz, with the Century City law firm Irell & Manella, said last week that although that sentence is the letter, still Altus Finance and Garamendi agreed that a mutual waiver could exist -- that bonds could be sold without the rest of the rehabilitation package ever being consummated.

By March, evidently, Altus Finance and Garamendi had in fact opted to make the bond sale irrevocable -- but Garamendi's plan ran aground in the state Court of Appeal this March, when Judge Norman Epstein ruled that parts of the plan were "based on unjustified fiction and is not supported by law or reason."

Epstein fumed that Garamendi's plan discriminated against a class of bondholder known as the muni-GIC, an acronym for a type of annuity known as municipal guaranteed investment contracts.

Garamendi has since devised a new plan and is seeking court approval for it, and some First Executive creditor groups are supporting his plan.

But the muni-GIC holders and others wonder why Garamendi is so eager to stay with his original sale of bonds to Altus Finance -- especially as it has become obvious that $7.56 billion (face value) of bonds the French bought for $2.77 billion are now probably worth $5.25 billion or more -- and were, most probably, worth at least $5 billion even when Garamendi sold them.

According to expert testimony before the court at the time of the bond sale, the bonds could have garnered more than $5 billion merely through an orderly liquidation, rather than the all-cash offer for a lump sum of bonds that Garamendi required.

A lawyer for the muni-GIC holders last week said the waiver Garamendi signed was never approved by the court. "The deal was approved as a package deal, and only later did Garamendi sign the waiver," said Rovert Wallan, of the downtown Los Angeles law offices of Pillsbury Madison & Sutro. "The waiver is irrelevant."

But last week, Garamendi's press officer Schulz said the commissioner is pressing ahead with a modified rehabilitation plan for First Executive, and will continue to seek court approval for it.