A Baltimore Circuit Court judge placed the insolvent Old Court Savings and Loan Association in state receivership today, clearing the way for liquidation of the thrift's assets and eventual reimbursement of funds to depositors.
Judge Joseph H.H. Kaplan took the action at the request of the Maryland Deposit Insurance Fund (MDIF), a state agency that for six months has acted as conservator of the Baltimore thrift. The move immediately halted interest payments on 50,137 depositor accounts that have been frozen since May.
While ordering Old Court into receivership, Kaplan also agreed to listen to an alternative plan for the thrift that is scheduled to be presented to him Monday by Old Court stockholders. Kaplan said he would rescind his receivership order if the stockholders came up with a bailout plan that was acceptable to him and to MDIF officals.
But the judge held out little hope he would reverse his decision, saying, "Right now the only alternative is pie in the sky."
"We vigorously oppose placement of Old Court in receivership," said Paul Mark Sandler, attorney for former Old Court president Jeffrey Levitt who, along with other former officers, is being sued on allegations of fraudulently diverting funds from the thrift. "If it were handled by a trusteeship or other means it would not be necessary to liquidate." Sandler could not be reached for further comment after the hearing.
Attorneys for Old Court depositors urged Kaplan to allow interest payments on accounts to continue, but the judge said he was bound by the legal constraints of receivership to halt them.
"We don't think it's fair. The interest is now being put back into the pot," Marilyn McNeill, vice president of the Maryland Savings and Loan Depositors Committee, said late today.
"My phone has been ringing off the wall," she said, acknowledging that "69 of the 75 people I've talked to today are saying, if receivership will get me dollar for dollar, I don't care -- if it will get me out of there."
Kaplan's action allows the state wide latitude in turning Old Court assets into funds that could be returned to depositors. MDIF Director Melville S. Brown said his agency was considering several methods beyond simply selling off properties and investments to other financial institutions.
Brown estimated Old Court's assets at $600 million, most of them "classic bad loans," including insider transactions that are now in default. The institution owes depositors $544 million. In addition, Old Court has borrowed $250 million in unsecured loans, owes what could amount to $1 million in taxes and is running up legal and administrative costs at a current rate of about $400,000 a month.
Brown testified that some of Old Court's construction loans and real estate ventures will eventually earn a profit and that the state should hold onto them. However, he said those investments represent a relatively small part of Old Court loans, "certainly not more than 20 percent."
At a news conference after today's court hearing, Brown outlined an MDIF plan that would allow at least some funds to be returned to depositors before Old Court's assets are recovered, which officials say will take years.
The plan calls for the formation of a corporation that would sell stock in Old Court assets to banks, developers and investors. Funds generated from the stock sale would be used to pay off depositors. The stocks would pay dividends and could be redeemed when MDIF recovers the assets.
Brown said such a plan would probably require the state to provide financial incentives such as tax credits to investors. In addition, the state would eventually have to come up with the difference between what the assets bring in and the $544 million due depositors. Gov. Harry Hughes promised thrift depositors the state would back accounts up to $100,000 shortly after a depositor run at Old Court in May propelled that thrift and several others into financial crisis.
An attorney for MDIF who attended the news conference said it was not yet clear whether accounts containing more than $100,000 would be fully covered by state insurance. Brown said there were about 170 such accounts, including one $16 million union pension fund account.