A local builder charged yesterday in federal court in Alexandria that he was the victim of an elaborate shell game in which Tom J. Billman, founder of the troubled EPIC real estate empire, cheated him out of his interest in a valuable EPIC subsidiary.
William J. Harnett, chairman of Washington Homes Inc., the Waldorf, Md.-based home builder, said Billman deceived him in a series of meetings and telephone calls in 1983 about his plans to spin off a subsidiary of Equity Programs Investment Corp. that serviced mortgages of single-family homes owned by EPIC's investment partnerships.
Billman later denied the charge from the witness stand.
Billman gained prominence in recent weeks when EPIC failed to meet mortgage payments and Maryland officials placed one of its parent companies, the Bethesda-based Community Savings & Loan Association, under state control.
Harnett, a former 1 percent owner of EPIC, invested $5,000 in the company when it was formed in 1975.
The lawsuit, one of four filed by Harnett against EPIC officials, centers on the arcane field of mortgage servicing, which involves the collection of mortgage payments, taxes and other fees from property owners, and the forwarding of those funds to the appropriate recipients.
In this case, an EPIC subsidiary called EPIC Mortgage Inc. for years had been performing EPIC's mortgage servicing by collecting payments from EPIC's limited partnerships.
Harnett charged that Billman's deception occurred in meetings and telephone calls in February and March 1983, around the time EPIC was merging with Community S&L. Billman and another top EPIC official, Clayton C. McCuistion, repeatedly tried to persuade him to agree to the merger by accepting stock in Community, Harnett said.
When they failed to persuade him, they offered Harnett 1,250 shares -- equal to the number of his EPIC shares -- in a new company, EPIC Mortgage Servicing Inc., which they said would service mortgages generated by EPIC partnerships in the future, Harnett said.
Harnett testified that he accepted that arrangement. But he said that 20 months later, when he was notified by letter that a Billman-owned oil drilling company had taken over EPIC Mortgage Servicing Inc. (EMSI), he found out EMSI was not servicing all of EPIC's growing mortgage portfolio, but only the approximately $500 million in EPIC partnership mortgages in existence at the time of the March 1983 spinoff.
In fact, without Harnett's knowledge, EMSI had agreed to have EPIC Mortgage Inc. service even those mortgages originated before that date -- meaning that EMSI hardly performed any real-life work, Harnett testified.
Harnett said that Billman told him that all of EPIC Mortgage Inc.'s mortgage servicing employes would be transferred to EMSI, and that EMSI would have the use of a large array of computers at EPIC's headquarters.
"EMSI never serviced one single loan," Harnett testified. "No people, operations, assets, desks or computers were transferred" to EMSI by EPIC Mortgage Inc., even though Billman had said they would be, Harnett said.
"EMSI was like a figment of someone's imagination," testified Harnett, who frequently raised his voice in anger on the witness stand when speaking about Billman. "It just never became a company."
Billman said he never told Harnett that EMSI would service mortgages originated after March 1983.
Billman, who was EMSI's president in 1983, testified that EMSI had no office space of its own in EPIC's Falls Church headquarters, had no corporate stationery and no full-time employes.
He said that he decided then that it was "more economical" to have EMSI contract with EPIC Mortgage Inc. to continue to service mortgages, instead of having EMSI itself perform those functions.
EMSI now is owned outright by Billman. It was one of numerous EPIC-related companies that Billman, in a complicated series of transactions earlier this year, removed from the EPIC group. Billman no longer has any formal role within EPIC.
Besides Billman and McCuistion, the defendants in the suit are EPIC Mortgage Inc.; Billman's oil exploration company, Cavalier Oil Inc., which now controls EMSI; and EPIC Realty Services Inc., a property management company that EPIC had spun off previously.
Harnett testified that Billman said repeatedly in 1983 that the spinoff of EMSI was going to be "just like" the spinoff of EPIC Realty Services Inc. As an EPIC shareholder in 1982, Harnett had received stock in EPIC Realty Services Inc. when it was spun off, and Harnett said he was satisfied with the arrangement.
Billman testified yesterday that when he said the EMSI spinoff would be "just like" the previous one, he meant only that they would be similar in their tax status.
An expert witness for Harnett, James F. Chadbourne, a certified public accountant with Price Waterhouse & Co., testified yesterday that if EMSI had gotten the right to service the EPIC partnerships' and some other mortgages, as Harnett had thought it had, then by 1990 Harnett's EMSI stock could be worth up to $752,000.
But under questioning from John R. Fornaciari, an EPIC lawyer, Chadborune acknowledged that that figure did not take into account EPIC's current problems, which have forced it to stop originating mortgages.
Fornaciari called Harnett's allegations "a house of cards," and added that "it's clear there were no misrepresentations" by Billman and McCuistion.