That would have reduced the amount of money available for holders of unsecured and uninsured Advanta investment notes - attractive for their high-interest returns, but risky - when any remaining money is distributed at the end of the bankruptcy.
Under Monday's settlement, which still requires court approval, Advanta will support the FDIC's effort to secure the tax refund, Advanta attorney Richard L. Levine, of Weil, Gotshal & Manges L.L.P., said Wednesday.
If the IRS approves a refund, the FDIC will get 90 percent of the money, and Advanta will get the rest, he said. The $170 million claim would be dropped.
"If the IRS declines to issue a tax refund, the FDIC will receive a $50 million general unsecured claim in the Advanta bankruptcy," Levine said.
That would put the FDIC in direct competition for Advanta's roughly $100 million in cash with investors such as Wayne Biecker of Lansdale.
Hoping the bankruptcy settlement would be better than offers he has received for 20 cents on the dollar, Biecker has kept the notes. "If things are going to backfire, maybe I should have taken one of those offers," Biecker said Wednesday after being told of the FDIC settlement.
Resolving the dispute with the FDIC brings Advanta, which was founded in 1951 by Jack Alter, father of current chairman and chief executive officer Dennis Alter, a step closer to the end.
The company, which was based in Spring House until moving this year to smaller quarters in Plymouth Meeting, landed in serious financial trouble in 2008, when many small-business owners who relied on Advanta credit cards started having trouble making payments as the economy headed into the deepest recession in generations.
In response, Advanta raised interest rates on many customers to 36 percent, infuriating them and exacerbating their financial woes.
Things came to a head in May 2009, when Advanta closed customer accounts to new charges because of mounting losses. Six months later, the company filed for bankruptcy.
The plan then was to get through bankruptcy and reinvent the company in some way, as had been done after previous financial wipeouts under Alter's leadership since the 1970s. To that end, the company kept a 40-member payroll with an average annual salary of $268,000.
But in January, the Advanta board voted to liquidate.
The tax dispute began in March, before Advanta Bank was taken over by the FDIC. In its 2009 tax return, filed March 14, Advanta chose not to apply its $628 million loss to previous years, as allowed under federal tax laws.
Doing so would have generated not just the $54 million refund, most of which would have gone to Advanta Bank, but also the $170 million bankruptcy claim by the FDIC under a complicated tax-sharing agreement between Advanta Corp. and its subsidiaries.
It is not clear how the IRS will decide on the tax refund. Neither the IRS nor the FDIC would comment.
Warren Foley, a Huntingdon Valley retiree who invested with Advanta for 25 years and said he made a lot of money from the company, said he was not optimistic about the outcome of the bankruptcy.
"I knew when it happened that it was probably going to end up disastrous," he said.
Contact staff writer Harold Brubaker at 215-854-4651 or hbrubaker@phillynews.com.
