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SAN FRANCISCO-American International Group Inc. is continuing to battle for control of Golden Eagle Insurance Co.

AIG last week filed an appeal seeking to overturn a May 30 trial court decision that awarded control of the insurer's rehabilitation to Liberty Mutual Insurance Co. (BI, June 9). That ruling reversed the California Insurance Commissioner's earlier acceptance of AIG's bid for Golden Eagle.

AIG argues that the court overstepped its bounds in rescinding the contract the department had awarded to AIG.

The New York-based insurer also makes several allegations in its appeal that question the actions of Commissioner Chuck Quackenbush, Liberty Mutual and Golden Eagle owner John Mabee.

Liberty Mutual declined comment on the controversy. A spokesman said it is against company policy to comment on matters in litigation.

In its appeal, AIG charges that Mr. Quackenbush made an about-face and lent his support to the competing bid after Liberty Mutual negotiated a backdoor settlement with Mr. Mabee and the Insurance Department.

But California regulators deny any improper dealings took place in the bidding for Golden Eagle.

Furthermore, they assert that the overbidding process triggered by Liberty Mutual's enhanced offer will benefit policyholders.

"AIG is simply a disappointed bidder that's trying to get its foot back in the door," said Cynthia J. Larsen, an attorney with Orrick, Herrington & Sutcliffe in Sacramento who is representing the insurance commissioner in the case. Ms. Larsen added that "all of AIG's arguments will ultimately be found meritless."

When San Francisco Superior Court Judge William Cahill agreed to entertain Liberty's post-deadline offer, he invited AIG to enter into a new bidding contest in which the two insurers were pitted against one another. Although AIG matched "virtually all" of Liberty's bid, Judge Cahill reversed the commissioner's decision and awarded the company to Liberty Mutual,according to AIG's appeal.

In a phone interview last week, Ms. Larsen said the Liberty Mutual offer approved by Judge Cahill was superior to AIG's in several areas.

According to the commissioner's brief opposing AIG's appeal, these benefits were added:

Increased reinsurance coverage. The level of reinsurance coverage that protects Golden Eagle's policyholders was increased to 135% of total liabilities under the Liberty plan, from about 127% under the AIG plan.

More money for the liquidating trust. The Liberty deal provides for $20 million-$5 million more than the original rehabilitation plan-to be paid to the Golden Eagle Liquidating Trust for payment of unreinsured policyholder and general creditor claims.

An option payment to the Mabees. The Liberty plan includes a $20 million payment to the Mabees, from funds outside the Golden Eagle estate, to pay for an option to buy their stock in the insurer and their residual rights in the liquidating trust.

In sum, "the proposal that Liberty came forward with is better for policyholders," Ms. Larsen asserted.

But in its appeal, AIG repeatedly alleges that the $20 million Liberty Mutual offered to the Mabees would be coming from Golden Eagle's assets.

"After spending months portraying Real Party in Interest John Mabee (who, with his wife, was the sole shareholder of Golden Eagle) as the second coming of Attila the Hun, the Commissioner entered into an agreement with Mr. Mabee by which erstwhile arch-fiend will emerge with a net financial gain that will necessarily come at the expense of Golden Eagle policyholders," says the AIG appeal.

The commissioners' brief contains a counterargument: "This is false. The terms of the settlement expressly provide that any funds that flow to the shareholder, particularly the $20 million 'option price,' must not derive, directly or indirectly, from any assets that come from Golden Eagle."

The settlement agreement contained in the Liberty Mutual offer provides for, among other things, the release of all claims that the Insurance Department and Golden Eagle might have against the Mabees and for the Mabees to drop their objections to the Insurance Department's conservation order. In exchange, Liberty Mutual offered the $20 million for the option on the Mabees' Golden Eagle stock.

AIG also charges in its appeal that a portion of the settlement agreement between the Mabees and the department has been sealed, so that nobody other than the court, Mr. Mabee and the commissioner knows what the full deal really is.

While Ms. Larsen acknowledged that Golden Eagle had asked that a portion of the agreement be sealed, she said all relevant components have been put on the record.

But AIG also argues that policyholders and creditors of Golden Eagle are not being given enough time to review the rehabilitation plan, which is scheduled for a hearing July 23.

"First, the court ignored the commissioner's auction and conducted one of its own," said Florence Davis, vp and general counsel for AIG.

"Now the commissioner wants the policyholders' approval (of the rehabilitation plan) in an impossibly short time frame and without telling them that the man who ran Golden Eagle and whom the Department of Insurance has spent months vilifying will actually make money on the rehabilitation," she said.

"AIG has asked the Court of Appeal to restore some semblance of rationality to this process, give full disclosure to the policyholders and provide them with adequate time to respond," Ms. Davis said.

American International Group Inc. and American Home Assurance Co. vs. Superior Court of the State of California, County of San Francisco; Sup. Ct. Case No. 984502. July 3, 1997.