Former officials of a now-defunct Baltimore savings and loan are being sued by the Federal Savings and Loan Insurance Corp. for allegedly squandering more than $22 million of the thrift's funds on risky development and construction loans.
The lawsuit, filed in U.S. District Court last month, accuses former officers and directors of Fidelity Federal Savings and Loan of making "grossly imprudent loans, investments and acquisitions" in a quest for rapid growth that FSLIC said "devastated" the thrift and its subsidiary companies.
Federal regulators took over Fidelity in 1983 and dismissed four of the officers named in the suit.
In 1984, the California-based Household Bank, F. S. B., a subsidiary of Household Finance Corp. acquired Fidelity with millions of dollars in assistance from FSLIC.
FSLIC kept the stock in Fidelity's two D.C.-based subsidiaries, Howard International Inc. and Development Funding/Highpointe Inc. The two firms, described as "service corporations," were run by some of the Fidelity officers named in the suit, and Highpointe received a loan from the thrift.
The lawsuit accuses five former Fidelity officials of making loans without adequate collateral or financial information from borrowers; of using "inadequate or nonexistent" appraisals in making loans and investments; and of doing business without proper underwriting.
Named in the suit are the estate of former Fidelity president Gerard A. Heidrick Jr., now deceased, and former vice presidents Edmund A. Chrzanowski, Richard M. Smith, Francis A. Korwek and Kendall L. White. They are accused of violating numerous federal regulations and repeatedly ignoring compliance orders from regulatory authorities.
According to the suit, "Heidrick devised, and Korwek and White implemented, an imprudent 'strategy' of attempting to rapidly increase income by concentrating on high-risk acquisition development and construction loans, particularly in the condominium market, without proper underwriting or loan administration.
These loans were structured so that high fees could be deducted from the loan proceeds and immediately credited on the association's books as income."
The other defendants are accused of failing to properly exercise their oversight authority as directors.
White and Chrzanowski also denied the allegations. Smith could not be reached for comment.
"The allegations about the loan practices are just totally wrong," Korwek said.
He said Fidelity officers were knowledgeable about real estate and could not have made deals that would have incurred the losses FSLIC has claimed:
*An unsecured $7.69 million loan to Highpointe to buy a 182-unit apartment building in Alexandria and convert it to condominiums. FSLIC estimated the loss on the project at $6.1 million.
*A $3.5 million loan to Carnaby Corp. to buy a 106-unit building in Suitland, Md., and convert it to condominiums. Loss estimated at $1.9 million.
*A $5.7 million loan to Washington House Limited Partnership to finance the purchase of a 124-unit D.C. apartment complex and convert it to condominiums. Loss estimated at $2.4 million.
*A $4.5 million loan to Community Business Services Inc. for purchase of 118 acres in Anne Arundel County and the development of a 56-house subdivision. Community entered into a joint-venture agreement with Howard International, a Fidelity subsidiary. FSCLIC estimated the loss for that venture at $2.8 million.