BEHIND THE NEWS: For Conseco, tough loan tactics yielding big results

December 11, 2006

Conseco Inc.'s scorched-earth legal tactics have sometimes infuriated the defendants in the company's path. But they sure seem to be working.

As of Sept. 30, the company's legal assault on the 11 biggest borrowers under its disastrous directors-and-officers loan program was expected to yield $54 million, after expenses-and that was before the Dec. 6 settlement with Stephen Hilbert, 60, the biggest borrower of all.

Attorneys declined to tell how much Hilbert will pay, saying the deal is confidential. But you can bet there are plenty of zeroes. Expect the estimated recovery to rise when Conseco next reports financials in early 2007.

Conseco had contended Hilbert owed $300 million on loans he took out in the 1990s to buy company stock that later became worthless.

About $155 million of that was principal. Borrowing such a whopping sum was a great leap of faith in the future of the company. Call it supreme confidence.

And Hilbert wasn't alone. In total, Conseco says, the 11 largest borrowers owed $485 million in principal before collection efforts began three years ago. The company now has reached settlements with seven borrowers. Another two have meager or no assets, leaving the company to wage battle with just two others-former company directors Dennis Murray and James Massey.

A lot remains on the line. Conseco says Murray, 66, a Sandusky, Ohio, trial attorney, owes more than $150 million. The company says Massey, 71, the retired president of Indianapolis-based Merchants National Bank, owes $23 million.

Conseco has been able to sway most borrowers to settle because judges have shot down the defenses they hoped would get them off the hook. It also didn't hurt that the company has unleashed wave after wave of public and sometimes embarrassing allegations against the borrowers.

At one point, Hilbert complained that Conseco for months "employed a veritable army of private investigators harassing me, my wife, my children, my friends and even the youngsters that cut the grass at my home."

Reed Oslan, a partner at Chicagobased Kirkland & Ellis leading the collection effort, said he's been aggressive, but hasn't harassed anyone.

"If any defendants were prosecuting the case from Conseco's side, they would have done the same thing," Oslan said. He said the collection effort will continue "until we resolve everything that is resolvable, and get every penny we can get."

Conseco isn't the only beneficiary of that effort. To help win over creditors and emerge from bankruptcy court, the company in 2003 agreed to share the recovery with holders of its so-called trust-preferred securities. They'll get 45 percent of the recovery, after expenses, up to $30 million.

They're not far from that maximum now. The $54 million recovery Conseco estimated as of Sept. 30 would provide $24 million for holders of the trust-preferred securities.

Like other borrowers, Massey and Murray say they owe little or nothing. They raise a range of legal arguments, including that Conseco's 2002 bankruptcy filing qualifies as a "change of control," triggering a provision in loan documents wiping out their obligations.

Attorneys for the pair could not be reached by deadline.

Conseco is furthest along in its case against Massey. In June, a Hamilton County court entered an $8 million judgment against him covering loan interest. Conseco is pursuing the principal through a separate lawsuit.

Just weeks after winning the judgment, the company upped the pressure, filing an involuntary bankruptcy petition for Massey. In that case, it alleges Massey fraudulently transferred millions of dollars to other family members in an effort to put it beyond the company's reach.

The bankruptcy filing didn't sit well with Massey's attorneys, who cast it as an effort to smear their client.

"This obviously was done to paint a false and distorted picture of Mr. Massey as a deadbeat deserving to be placed in bankruptcy," the attorneys said in a filing.

Judge Basil Lorch in October agreed to suspend the bankruptcy proceedings in return for Massey's freezing various assets collectively worth $14 million.

The battle now has shifted back to Hamilton County, where Conseco is asking Judge Steve Nation to require Massey to post an $8 million bond while he pursues an appeal.

Watching all this from the sidelines is John Mutz, another former Conseco director who participated in the loan program. But unlike others, he borrowed only what he could repay. In late 2000, he paid off the $1.3 million in principal and interest he owed.

"I took the position I owed the money," Mutz, 70, said. "Whenever you sign a note, that implies you have a personal commitment to repay.

"Nobody likes to be chased, and in as public a way as this was conducted," he added. "On the other hand, you have to step up and meet your obligations."
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