The Hughes administration, which announced today it will call a special legislative session in two to three weeks to permit out-of-state banks to acquire state savings and loans, will waive some of its rights to pursue civil damages against the owner of one troubled thrift scheduled to be acquired by Chase Manhattan Corp, sources familiar with the negotiations said today.
Under the proposal in which Chase is expected to purchase Merritt Commercial Savings and Loan Association of Baltimore -- which is still being refined, according to the sources -- the state would reserve the right to bring legal actions alleging fraud or criminal activity against owner Gerald Klein, but would assign most of its potential civil remedies to Chase.
The state's waiver could close off its future legal options and prevent it from filing any actions similar to the $200 million lawsuit filed against the owners and directors of the Old Court Savings & Loan Association. But the benefits of the Chase deal would outweigh any loss of legal maneuvering room, and retaining the right to bring actions for fraud or criminal activity would guarantee the state the chance "to have its cake and eat it too," said one source familiar with the negotiations.
Chase, the nation's third largest bank company, already has announced purchase agreements to take over two other, healthier thrifts, Friendship Savings and Loan of Bethesda and Chesapeake Savings and Loan of Annapolis. The bank has been negotiating for more than two months on a takeover of Merritt.
Gov. Harry Hughes is under pressure from Chase to call a special legislative session in time for it to comply with purchase agreements with Friendship and Chesapeake that expire at the end of this month. He announced today that he will convene the General Assembly between Oct. 17 and 24.
Hughes' aides and Chase officials said today that the negotiations to take over Merritt were virtually concluded, and the legislature will begin reviewing the package on Tuesday. A second New York bank, Citicorp, is negotiating to take over another thrift, First Maryland Savings and Loan of Silver Spring, but no agreement has been reached.
An announcement of Chase's purchase of Merritt has been repeatedly delayed in recent days, in part because of a raging state government debate over whether Klein should be shielded from any state civil actions.
The issue put Hughes in a particularly ticklish spot just a few days after he announced he was forming a campaign committee for his expected race for the U.S. Senate in 1986. He was caught between Chase's offer to take over -- and return to normal operation -- three thrifts with 70,000 depositors and more than $800 million in assets, and the politically risky proposition of signing away the state's potential civil remedies against Klein.
Chase has asked, according to sources, that the state assign to it whatever rights the state may claim to have for suing Klein for civil damages. Chase would then have the right to recover from Klein if liability claims are brought against it as the successor to Merritt.
Sources said that Attorney General Stephen H. Sachs argued strongly against agreeing to the immunity provisions during a two-hour meeting with Hughes and administration officials Thursday. Neither Sachs nor any member of Hughes' executive staff would comment on the issue.
Klein, who powered Merritt from a $70 million savings and loan in 1982 to one with $383 million in assets by last May, must agree to the Chase takeover. He also declined comment.
Klein, said one source familiar with the negotiations, "wants the ability to walk away without being shot in the back by the state. He wants to be able to work his way back into the community. He doesn't want his assets frozen."
Also as part of the deal, the state will pay Chase $25 million for any losses it might suffer by assuming Merritt's complex loan portfolio, and Chase would take over the Baltimore office tower being constructed by the thrift if no buyer is willing to pay more than $30 million for it by the end of this month.
Chase is also guaranteed exclusive rights to purchase Merritt, and $10 million in damages if the state reneges on its bargain.