Representatives of thousands of investors in bankrupt real estate partnerships established by Equity Programs Investment Corp. (EPIC) have begun an effort to remove the state of Maryland from control of EPIC houses.
Although the success of such action is questioned, it will likely complicate, and perhaps even torpedo, efforts to put together a bailout plan for the real estate group and thus precipitate a full-scale legal brawl for EPIC's assets, lawyers familiar with the situation said. A collapse of the bailout effort could leave Maryland, which took over responsibility for insuring deposits at EPIC's parent, Community Savings & Loan, facing losses on the order of $100 million.
Lawyers for Maryland, which has been appointed conservator at Community, have been negotiating with other creditors over a plan that provides for the orderly liquidation of 20,000 properties owned by EPIC partnerships and cuts the state's losses.
The state, however, must now start grappling with a new legal challenge posed this week by the newly appointed representatives of more than 6,000 investors around the country who bought shares in real estate partnerships set up by EPIC. These investors generally have been absent from most of the negotiations involving the failed partnerships, although they face not only the loss of their investments but also heavy tax liabilities as a result of EPIC's collapse.
A committee recently was appointed by the bankruptcy judge overseeing the case to represent the interests of the limited partners, as the investors are known. This committee has retained the Washington law firm of Cadwalader, Wickersham and Taft, as well as BJF Development Ltd., an Illinois firm that has handled other real estate liquidations.
Bruce J. Frey, chairman of the firm, said yesterday one of the group's first orders of business is to attempt to remove Maryland from control of the partnerships and put them in the hands of a trustee with more experience in real estate. He said that, with the permission of the bankruptcy judge, the firm has sent out a proxy solicitation to the limited partners asking for permission to remove EPIC, and hence Maryland, as the general partner in more than 350 bankrupt partnerships.
Frey questioned the propriety of Maryland, as conservator, essentially playing two roles, one as a major creditor of EPIC and the other as the debtor in the bankruptcy. As conservator, Maryland stands in the shoes of Community, which loaned EPIC partnerships as much as $100 million to keep afloat. But it also stands as a debtor in that it is general partner for the partnerships, which have run up more than $1 billion of mortgage debt.
"That is truly a conflicting role. You can't wear two hats," Frey said, suggesting that no one has been looking out for the interests of the limited partners.
Other lawyers involved with the case, however, said the limited partners would be on shaky legal ground in trying to remove Maryland from control of the properties. They said they could only do this in unusual circumstances, such as if they could prove fraud on the part of the conservator.
"I don't think there are any grounds for the appointment of a trustee here," said Daniel M. Lewis, a lawyer representing the Maryland Deposit Insurance Fund, the conservator of EPIC and Community.
Lewis said the state was conscious of potential conflicts arising from its dual role as creditor and debtor and had, thus, sought the previous appointment of another lawyer, Roger Whalen, to represent the bankrupt partnerships and their interests.
But he also added that the investors were well aware of the dual role EPIC would be playing in the partnerships they were buying into. EPIC was not only general partner, he said, but it also contributed many of the payments needed to enable the partnerships to meet their mortgage payments.
Lewis and other lawyers, however, expressed concern that the added legal threat this week could destroy any chances for a negotiated solution to untangling EPIC's finances. Some speculated that the move was designed to improve the bargaining position of the limited partners, who essentially stand behind all of EPIC's creditors in recovering any of the partnerships' assets.
"It could delay resolution here where time is of the essence -- for everyone, including the limited partners," said William Perlstein, a lawyer for a group of major EPIC creditors attempting to negotiate a bailout.