Three days after Virginia state Sen. Peter K. Babalas helped kill legislation putting new restrictions on mortgage loan interest rates, officials of a major mortgage company authorized a $3,000 payment to the senior Democratic legislator.
"This was one we agreed to pay after he stopped legislation in Richmond," said a handwritten note on a check voucher that appears to carry the initials of a vice president of Landbank Equity Corp. of Virginia Beach.
Babalas, 63, a Norfolk lawyer and the Senate's fourth-ranking member, received $61,480 in legal fees from the now-bankrupt Landbank. Most of the fees came while he was serving as the firm's general counsel and as a member of a legislative subcommittee responsible for rewriting some of Virginia's interest rate laws, according to records filed in U.S. Bankruptcy Court here.
On Feb. 11, Babalas cast his vote and the proxies of two other senators against a measure that would have limited the amount of interest that lending institutions, such as Landbank, could charge on second-mortgage loans in Virginia. The bill died in a 7-to-5 vote in the Senate commerce committee.
Details of the voucher, dated three days later and authorizing payment of $3,000 to Babalas' law firm, were reported today by The Virginian-Pilot. The voucher was among hundreds of documents filed in the bankruptcy case involving Landbank, which until its September collapse was one of the largest second-mortgage companies on the East Coast. Records show that the actual payment was made with a check dated April 29.
Babalas has denied any wrongdoing in his dealings with Landbank, and today his lawyer questioned the handwritten explanation for the Feb. 14 voucher. "It comes as a total surprise that any such notation exists," said Wayne Lustig. "I think Sen. Babalas is being set up . . . . "
Lustig has not disputed that Babalas was paid $61,480 by Landbank, but he has said that Babalas was permitted to accept the money for the legal services he provided as its lawyer.
"Lawyer-legislators with regularity vote on any number of issues that affect their clients," said Lustig. "If the public does not want lawyers voting on broad issues that involve industries that these lawyers may represent, there should be a push to change the law."
Babalas had no stock or other ownership interest in Landbank, Lustig has said. Babalas also stated his relationship with Landbank to the Senate committee at the time of the hearings.
A Senate ethics panel is investigating whether Babalas' actions constituted a conflict of interest. Babalas requested an inquiry in November, saying it would clear him of any allegation of wrongdoing.
The handwritten notation on the voucher referring to "legislation in Richmond" was initialed "TCL." A vice president of the corporation, T.C. Lea Jr., said today, "I am told to say 'no comment' " when asked about the notation. I don't have anything to hide."
Another handwritten note on the voucher said, "OK" next to the initials "MLR." Marika Lody Runnells is co-owner and president of Landbank.
"I don't think Marika has done anything wrong," said Virginia Beach attorney Richard G. Brydges, who is representing Runnells. He said she had no knowledge of Landbank money being paid "for any legislative influence."
Copies of the voucher and other documents have been turned over to the ethics panel for its investigation. Court-appointed trustees for Landbank have said in bankruptcy proceedings they are trying separately to determine whether the legislator played a role in an alleged scheme by Landbank to defraud its creditors. The company is under investigation by the FBI and a federal grand jury.
Landbank grew into one of the largest second-mortgage companies on the East Coast during its five-year existence, selling more than $184 million in loans.
It collapsed in September amid allegations that it had defrauded its customers and creditors of millions of dollars.
More than 100 lawsuits filed in various courts after the firm's failure allege that Landbank took advantage of poor, illiterate or elderly people with its high-interest, last-resort loans that sometimes carried extra charges that drove some interest rates as high as 40 percent.
Other suits contend that the company's owners defrauded unsuspecting investors who believed they were receiving high-income investments backed by valuable real estate.
David H. Adams, the attorney for Landbank's trustee, has succeeded in having the company's assets frozen. He said records indicate that Landbank's top officers, including William Runnells and his wife, Marika, of Virginia Beach, used company Babalas' use of proxies to kill the interest rate legislation has revived a debate over their use. money to finance a lavish life style of Jaguars, Porsches, Rolex watches, multiple homes and world travel.
"That's pie in the sky," charged Runnells' attorney, Brydges.
"They were making money, and they spent money. They spent money that they made. She hasn't done anything wrong . . . . It may not be a business I'd want to get in. But it's a legitimate business. They were lending money at high interest rates to people who couldn't get them elsewhere," Brydges said.
Babalas, a member of the legislature's Democratic majority since 1968, became general counsel for Landbank in September 1984, about the time he was heading a subcommittee studying interest rate regulations in Virginia.
Adams pointed out in an interview that Landbank dropped its previous attorneys to hire Babalas as general counsel and had paid him $12,530 prior to the Feb. 11 vote. "He received a lot of money prior to the vote," said Adams. "Shortly thereafter, he goes on an $8,000 monthly retainer."
Babalas' actions in killing the interest rate legislation were consistent with his past record, he said. "I have been one of the leaders in deregulation and open competition," Babalas said during a Bankruptcy Court hearing.
Under questioning, Babalas denied that Landbank officials asked him to vote against the bill or that they paid him to kill the measure.
" Landbank used him because he's somebody that's prominent and knew the banking laws," said attorney Brydges. "Marika did not hire him or use his services for the purpose to influence the General Assembly in Richmond at all."
When a financial company backing some of Landbank's investments threatened to inform investors and federal and state authorities of what they perceived as questionable business practices by the company, Adams noted, Babalas wrote two letters. One was on Senate stationery and the other on Landbank's letterhead.
On Landbank's stationery, Babalas wrote: "I was disappointed with your reference that you intended to call investors. This would not be a prudent act . . . . I remind you of Virginia law which would require formal hearings, which from my years of experience would not be to the best interest of anyone."
On Senate stationery the same day, Babalas stated: "As I told you by phone last week, I am chairman of a committee that is studying interest rates, commercial bank, savings and loans, credit unions and the study of usury laws . . . . This means that Virginia is an unregulated, second-mortgage state."
Conflict-of-interest questions have proved among the most troubling issues facing the Virginia General Assembly, where rules basically leave individual legislators on their honor to disclose any financial or personal interests they may have in pending legislation.
State law provides penalties for attempting to bribe a public official and for public officials convicted of accepting bribes.
Virginia also prohibits legislators from voting on matters directly affecting their personal interests.
Babalas' use of proxies to kill the interest rate legislation has infuriated some legislators and revived a debate over their use. Senate President Pro Tem Edward E. Willey, a Richmond Democrat whose proxy against the regulation was cast by Babalas, has said that "had I been Sen. Babalas . . . not only would I refrain from voting on it, but I would not vote my colleagues on it."
"The Babalas episode has certainly reinforced the need to have a change" in Senate rules, said state Sen. Wiley F. Mitchell, an Alexandria Republican. He said he will push to have proxy regulations tightened during the 1986 General Assembly.
The measure Babalas helped defeat had been approved by the House of Delegates 99 to 0 and had the support of some of the state's leading conservatives, including House Speaker A.L. Philpott