In some editions yesterday, it was incorrectly stated that Eugene Isaacs, president of EPIC Realty Services Inc. (ERSI), testified that auditors found no problems with EPIC's own books. Isaacs testified that auditors found no problems with ERSI's own books.
Less than two months before the collapse of the EPIC real estate group, three principal officers of the group removed $2 million in funds from an affiliated company that they owned, one of the three disclosed in court testimony yesterday.
Eugene Isaacs, president of EPIC Realty Services Inc. (ERSI), testified that on July 2 the three owners of the company, which collects rents on EPIC properties, decided to transfer about $2 million out of ERSI. He said the owners took out the cash to pay federal income taxes on their profits from the business. Isaacs said the payment consisted of dividends from retained earnings and advances on earnings expected over the rest of the year, witnesses present at the hearing said.
The money was paid to Isaacs, EPIC founder Tom J. Billman and Clayton McCuistion, president of Community Savings & Loan of Bethesda, who together own EPIC Realty Services.
Isaacs said that he did not know of the financial problems of the EPIC companies when he and the other two men took the payment at the beginning of July.
ERSI's attorney, Charles Docter, said the testimony indicated there was nothing improper about the payment, which was disclosed during a bankruptcy court hearing in Alexandria.
After the hearing, Judge Martin Bostetter agreed to release about $1.4 million in EPIC Realty funds that had been frozen by court order. The judge permitted the funds to be used to pay salaries and operating expenses.
On Aug. 16, Equity Programs Investment Corp., the centerpiece of the EPIC empire, declared it was delinquent on payments on $1.4 billion worth of mortgages and mortgage-backed securities, sparking a crisis at its sister institution, Community Savings & Loan of Bethesda. Since then, 341 limited partnerships set up by EPIC to buy houses as tax shelters have declared bankruptcy, and the state of Maryland has taken control of Community and its EPIC affiliates.
ERSI is an independent company, not owned by Community or EPIC, that collected rents on the houses owned by the limited partnerships. The realty company is owned 61 percent by Billman, 19 percent by Isaacs and 20 percent by McCuistion, according to court documents recently filed by EPIC.
Neither Isaacs nor the other owners of ERSI could be reached yesterday; James B. Deerin, Equity Program's general counsel, declined to comment. He said he has been directed by state conservators for Community not to make any public statements concerning the situation.
The disclosure provoked protests from representatives of EPIC creditors, to whom the company owes millions of dollars in missed interest payments on mortgages and mortgage-backed securities.
"I am flabbergasted that somebody would take . . . out unearned funds, earnings that they expect to get," said one source for a major EPIC lender. He contended that the three men essentially borrowed dividends from the corporation "when its affiliates were about to go under.".
The testimony about the payment came at a hastily convened hearing requested by lawyers for ERSI, who were seeking permission to obtain funds they said were needed to pay bills and fees related to the management of EPIC properties in July and August. ERSI is not in bankruptcy or conservatorship, but its funds -- slightly more than $4 million -- have been frozen by the bankruptcy court until the disposition of the other EPIC funds can be determined.
ERSI lawyers asked for approximately $3 million, and the judge granted about half: $903,103 for repairs on the properties and $476,140 for salaries to ERSI employes, according to Docter.
"We got what we wanted," said Docter. He said the money is necessary to keep the EPIC properties properly managed.
The payment to Isaacs, McCuistion and Billman was disclosed during cross-examination of Isaacs. Other court proceedings disclosed that not all of the 20,000 houses owned by EPIC's tax-shelter partnerships are included in bankruptcy petitions filed last week. When the petitions were filed, it was widely assumed they covered all the properties.
However, according to an affidavit filed by Isaacs, the bankrupt partnerships own only 65 percent of the EPIC properties. The rest of the properties are still outside of the bankruptcy proceedings, lawyers involved in the situation said.
Lawyers for the creditors and the state of Maryland said they did not know the nature or status of the nonbankrupt partnerships or whether they still are able to meet the interest payments on their mortgages. One person familiar with EPIC's structure said some of the nonbankrupt partnerships were managed in conjunction with U.S. Home Corp., a large home-building company.
"We are very interested in learning the whereabouts of the gap between what we were led to believe is in bankruptcy and what is in bankruptcy," said Daniel Sullivan, a lawyer for the Federal National Mortgage Association, which holds more than $100 million in EPIC mortgages.
"Whether intentional or not, there seems to have been a process of misinformation, to say the least, about how much of EPIC has been submitted to the jurisdiction of the bankruptcy court," Sullivan said.
Isaacs also testified yesterday that ERSI's auditor, Arthur Andersen, gave a qualified opinion on ERSI's financial report in 1984 because of that company's ties to EPIC. He said the auditors found no problems with EPIC's own books.
Representatives of the EPIC creditors said yesterday's information provides new insight into EPIC's operations that might change the way they approach what is likely to be a protracted legal battle over EPIC's remaining assets.
"I think it will very likely change the attitude of many of the lenders about their willingness to work with the other parties," said one source, who asked not to be identified.
Daniel Lewis, a lawyer retained by Maryland to help map out strategy for its conservatorship of Community S&L, said some of the information revealed in court came as a surprise.
He said he had not yet reached any conclusions as to whether the ERSI and EPIC actions were appropriate. "We are not in any way taking the position that past management did bad or good," he said. "If wrongdoing occurred, the conservator is going to track it down and take appropriate action."
He said he agreed with the decision to release some funds to ERSI because the money is required to keep the properties in good shape. Not only does ERSI have a legal right to the money, Lewis said, but "if they were not paid, ERSI's ability to maintain the properties would be immediately and adversely affected." He also noted that the judge's order enjoins ERSI from paying any consulting fees or money to the principals, except for Isaacs' salary, so no funds will be diverted.
Yesterday's action in Alexandria was one of several developments around the country related to EPIC.
In Chicago, officials of Ticor Mortgage Insurance Co., one of the main insurers of EPIC mortgages, said initial comments were favorable on its proposal for bailing out EPIC. After meetings to discuss the proposal with other insurers and lenders, Ticor issued a statement saying other insurance companies have endorsed its proposal to work out EPIC's cash-flow squeeze. The Ticor plan calls for the lenders to accept reduced monthly interest payments on the mortgages as well as cash contributions by the insurance companies to help meet those payments.
The statement said several lenders have commented favorably on the plan. However, David O. Maxwell, chairman of Federal National Mortgage Association, one of the major holders of EPIC mortgages, said his representatives had attended the meeting for informational purposes and had not reached any decision on participating in the Ticor plan.
Maxwell yesterday was elected chairman of a new committee established by eight major investors in EPIC, including Salomon Bros., the Wall Street brokerage house, and PSFS, the financial services company that owns more than $200 million of EPIC certificates. The purpose of the committee is to map out strategy for an orderly solution to the EPIC problem, Maxwell said.