Creditors of Failed Insurer Will Receive $80 Million : Bankruptcy: Settlement involving former shareholder Shearson Lehman clears way for Los Angeles-based First Capital to reorganize.

Creditors of failed First Capital Holdings Corp. will receive $80 million plus interest under a lawsuit settlement with former directors and officers of the company and its former controlling shareholder, Shearson Lehman Bros. Inc.

The settlement, subject to Bankruptcy Court approval, clears the way for a reorganization plan for Los Angeles-based First Capital, which filed for Chapter 11 bankruptcy protection in 1991 after California and Virginia insurance regulators had seized its life insurance units, First Capital Life Insurance Co. and Fidelity Bankers Life Insurance Co., respectively.

Shearson, a former unit of American Express Co., owned a controlling 28% stake in the parent company at the time of the bankruptcy.

Through its retail brokerage outlets, Shearson sold annuities and life insurance products of First Capital’s life insurance subsidiaries.

A committee of unsecured creditors in 1992 sued Shearson and the directors and officers for alleged breach of fiduciary duty. Soured junk bond investments were blamed for capsizing the firm.

A group of banks that are First Capital’s senior creditors, owed a total of $262 million, will get the lion’s share of the settlement money, according to Robert Orgel, a lawyer for the creditors committee.

Holders of bonds with a face value of $120 million apparently will recoup only about $6 million plus an undetermined sum to be recovered from First Capital’s remaining assets.