Sorting out the confusing corporate structure of the EPIC family of companies appears to be the main task of a federal judge who has been asked to step into the crisis surrounding the real estate and financial services group.
U.S. District Judge Claude Hilton is scheduled to rule today on a request for an injunction against EPIC's mortgage-banking affiliate brought by the trustees for nearly $1 billion in EPIC mortgage-backed securities. The trustees, the National Bank of Washington and the First National Bank of Maryland, are seeking more than $10 million in interest and other payments missed by EPIC.
The central issue that has emerged in court arguments over the banks' request is one that has perplexed lawyers and investors since EPIC's troubles first became known more than two weeks ago: just how the whole structure was put together.
EPIC's lawyers have argued that a number of distinct EPIC entities exist with different responsibilities that are not readily tranferrable from one to the other. The banks' lawyers contend, by contrast, that the assorted EPIC affiliates essentially are one company wearing a number of different hats.
Which contention the judge ends up believing is considered crucial to EPIC's future as its group of companies faces a wave of lawsuits related to its delinquency on $1.4 billion worth of mortgages and mortgage-backed securities. In court documents, EPIC lawyers have raised the specter of losses of $500 million and a bankruptcy if Hilton grants the banks' request for an injunction and the appointment of a court receiver to oversee the servicing of the mortgages.
The centerpiece of the EPIC empire is Equity Programs Investment Corp., which set up -- and is general partner in -- tax-shelter investment partnerships that now own more than 20,000 houses. Equity Programs is owned by the same holding company that owns Community Savings & Loan of Bethesda, which has been shut down by an executive order temporarily banning withdrawals.
To run this real estate empire, EPIC spawned a host of related companies, including EPIC Mortgage, which services the mortgages, and EPIC Realty Services, which manages and collects the rents on the EPIC properties.
Just how these companies were organized and connected has proved a source of confusion, especially because of an EPIC corporate restructuring last February. EPIC founder T. J. Billman transferred his interest in EPIC and Community's holding company to a stock-option plan for top EPIC management. He also spun off several EPIC-related companies to a new holding company owned entirely by himself.
EPIC Mortgage is the object of the banks' lawsuit, but EPIC lawyers have argued that the company does not control the cash flow generated by the mortgaged properties -- the source of the money the banks are seeking. In essence, they said the banks have sued the wrong party.
Early last month, after some of the EPIC partnerships failed to make monthly payments due on their mortgages, they were notified by EPIC Mortgage of their defaults and advised that the entire debt would have to be paid within 30 days if the required payments were not made, according to a court deposition of Robert N. Kemp, president of EPIC Mortgage.
Kemp said that EPIC Mortgage decided in the meantime not to advance the shortfall to the banks because it might not be able to recover such advances from insurance proceeds or liquidation of the properties, a move within its legal purview. Otherwise, he said, EPIC Mortgage has done all it is legally obliged to do under its contracts with the trustees.
Lawyers for the bank, however, portrayed the EPIC defense as a legal gambit that obscures the underlying connection between the EPIC affiliates.
According to depositions filed by bank officials, the banks met on several occasions with Kemp and James B. Deerin, who it said were officers of both EPIC Mortgage and Equity Programs. The EPIC officials refused to permit access to EPIC books and records, and declined "to take any action to secure the rents and other income flowing into its own affiliates from the mortgaged properties," Richard Bass, vice president of National Bank of Washington, said in a deposition.
Bass also said he was told that EPIC considered the right of holders of EPIC paper to the funds generated by the mortgaged properties to be secondary to that of the investors in the partnerships that own the EPIC properties.
In short, the lawyers for the banks argued, the same officers work for all the EPIC affiliates and thus it is disingenuous for them to argue that they are legally distinct bodies. What EPIC is essentially saying, they said, is that certain EPIC officials have issued a notice of default to themselves.