Investors and some creditors sought this week to derail a plan to reorganize the bankrupt real estate partnerships of Equity Programs Investment Corp. (EPIC), threatening to overturn months of negotiations aimed at paying off EPIC's $1.4 billion in mortgage debt.
One of the chief complaints is that the EPIC reorganization plan under consideration by the bankruptcy court would give as much as $65 million to the state of Maryland, which took over EPIC's parent, Community Savings & Loan of Bethesda.
Lawyers who object to the plan claim the state would not be entitled to much of this money under normal bankruptcy procedures.
Daniel M. Lewis, an attorney for Maryland, said that amount the state would get is reasonable because of concessions it made. The state has ". . . contributed a great deal to the workout plan," including some $10 million in costs it has incurred since it took over the Epic operation in the fall, he said.
In motions filed this week in Alexandria federal court, lawyers posed the first major challenges to a proposal for the orderly liquidation of more than 20,000 single-family homes owned by the partnerships. The proposal was presented to the court last month by lawyers for the partnerships and an ad hoc committee of major EPIC creditors.
This complaint and others come at a critical time in the protracted negotiations to develop an EPIC reorganization plan acceptable to creditors, investors, Maryland officials, and the companies that insured EPIC mortgages and mortgage securities.
More than 350 EPIC partnerships filed for bankruptcy in September after missing payments on their mortgage debt and triggering the collapse of Community, which had lent heavily to the partnerships.
A plan for reviving the partnerships and resuming mortgage payments is critical to more than 100 savings institutions, who fear the financial impact of writing off their EPIC loans.
Meanwhile, Maryland, standing in the shoes of Community, is anxious to reduce the $150 million it could lose as a result of the EPIC fiasco.
The plan essentially calls for the orderly liquidation of the EPIC properties, with the proceeds going first to pay off creditors whose loans are secured by the houses. The idea is to avoid a fire sale of the houses, many of which are in Texas and other depressed real estate markets.
But the proposal must be approved by the bankruptcy judge, after a vote among creditors and the investors in the partnerships.
Although provisions of bankruptcy laws allow the judge to approve the plan over the objections of one party to the case, voicing many objections could undermine the proposal.
It is unclear how much support there is for the plan. As expected, lawyers for a committee representing the interests of people who invested in the EPIC partnerships filed a voluminous list of objections with the bankruptcy court this week.
But, unexpectedly, a separate motion was filed by lawyers for Dollar Bank of Pittsburgh and California Federal Savings & Loan Association, who join the investors in charging that the plan violates numerous provisions of the federal bankruptcy code.
The immediate issue is the 172-page "disclosure statement" filed with the plan of reorganization. The disclosure statement is supposed to describe the financial conditions of the partnerships, the recovery plan, and any other information that the creditors and investors need to decide how to vote on the plan. It would be sent out to the creditors after being approved by the judge, perhaps at a hearing scheduled for Tuesday.
Both sets of objections filed this week, however, said that the disclosure statement is rife with misleading and inadequate information about the proposed reorganization.
Both also say that the plan described in the statement is so flawed that it is not confirmable under provisions of the bankruptcy code.
Among the chief sticking points are the benefits the state of Maryland would get. Most of Maryland's debt is unsecured by property or securities and, hence, normally would be paid only after the secured debt is paid. Under the plan, however, Maryland would get $28 million that normally would go first to secured creditors.
The plan also calls for all parties to cede to Maryland their potentially lucrative rights to sue key EPIC executives and assorted EPIC affiliates.
"No information is given concerning the value or worth, if any, of what MDIF and Community give to the plan, in comparison to the numerous benefits received by them," lawyers for the banks contend. MDIF is the Maryland Deposit Insurance Fund, the state agency overseeing Community's and EPIC's affairs.
Meanwhile, pleadings by lawyers for the investors contend that the disclosure statement does not make it clear that Maryland's lawyers and a group of creditors had a major role in drawing up the plan.
"If investors are told that the plan was drafted by these insiders and creditors, they will understand that the plan has been drafted by entities with interests diametrically opposed to theirs," the papers said. "They will be alert to, and on guard for, the bias of those draftsmen and will subject each provision of the plan to careful scrutiny."