The state agency overseeing Old Court Savings & Loan is negotiating a settlement with former thrift owners Jeffrey Levitt, Jerome Cardin and Allan Pearlstein that could result in the state dropping its $200 million civil suit against the former Old Court officials.

The settlement plan under discussion would require Levitt, Cardin and Pearlstein to purchase a substantial part of Old Court loans and mortgages now in default, and would relieve the state of part of Old Court's projected $208 million deficit.

Melville Brown, director of the Maryland Deposit Insurance Fund, the agency acting as receiver for Old Court, said yesterday that the settlement being negotiated could reduce the state's projected losses from Old Court's loan portfolio by as much as $37 million. A recovery of that size, he said, would require Levitt, Cardin and Pearlstein to pay face value for $150 million Old Court commercial loans and mortgages that are actually worth far less.

The $208 million deficit facing the state represents the difference between the thrift's assets and its outstanding liabilities, which include depositors' funds tied up since the savings and loan crisis began last May. The state already has pledged to cover deposits in Old Court.

While terms of the settlement are still being discussed, Brown emphasized that any settlement with Old Court defendants would have to be one of "major proportion." He said he was skeptical about the settlement's prospects because he does not think Levitt, Cardin, and Pearlstein, the three principal defendants in the state's civil suit, can come up with the amount sought by the state.

Reliable sources said negotiations have been going on for more than a week. On Tuesday, sources said, Levitt, Cardin, Pearlstein and six of their lawyers gathered to discuss the settlement plan at the Maryland Correctional Institute at Jessup, where Levitt is serving an 18-month sentence for contempt of court.

Levitt's lawyer, William Hundley, confirmed that a 3 1/2-hour meeting took place at the prison on Tuesday, but he would not comment on the substance of the discussion.

State officials do not know what assets Levitt, Pearlstein and Cardin have. All three have refused to turn over personal financial information in the state's civil suit against them, because their lawyers have claimed such information could incriminate them in the state's separate criminal investigation of Old Court.

Both Brown and Hundley said that any settlement plan would likely require the three former thrift owners to use up virtually all of their assets. "They're going to have to put up everything they own," said Hundley.

To come up with the settlement figure, Hundley said, the former thrift owners would have to turn over the assets they hold and would try to refinance some of the bad loans they purchase from the Old Court estate, which is now in receivership. He said they also would take possession of some commercial properties that have defaulted on loans, sell them off and return the money to Old Court. State officials estimate that the money returned to Old Court would amount to $37 million.

Most of the loans and mortgages Levitt, Pearlstein and Cardin would purchase under the settlement plan were "grossly overlent," said Brown. He said he is uncertain about the chances for reaching a settlement because the prospects of collecting on the loans and mortgages is poor.

"The settlement talks are starting to develop now because it's obvious we're proceeding vigorously, both civilly and criminally," Brown said. "Unless there's a benefit back to the receivership estate . . . there's no settlement."

Lawyers for Cardin could not be reached for comment on the settlement talks. A Pearlstein attorney refused to comment.

Both Brown and Hundley said the impetus for settling the case has come from Baltimore Circuit Court Judge Joseph H.H. Kaplan, who is concerned about the mounting cost of legal fees to Old Court.

"We call it the Kaplan Global Plan to Settle Everything," said Hundley.

Kaplan would not comment on the specifics of the settlement talks yesterday.