An emerging proposal by Gov. Harry Hughes that state officials said would give Mellon Bank Corp. of Pennsylvania roughly $120 million in cash and expanded banking rights in Maryland if it acquires the crippled Community Savings & Loan of Bethesda encountered withering opposition in the General Assembly yesterday.
In a separate development, Maryland has agreed to forgive nearly $8 million of any judgment it wins in its lawsuit against the former top officers of Community Savings & Loan and Equity Programs Investment Corp. (EPIC), Community's defunct real estate syndication unit, according to state documents presented in Baltimore Circuit Court.
The concession is part of a complicated set of agreements the state reached with Tom J. Billman, EPIC's founder, and Clayton C. McCuistion, Community's former president, to obtain their cooperation in a proposed EPIC reorganization that could reduce losses for the state from an estimated $150 million to $90 million.
Senate President Melvin A. Steinberg (D-Baltimore County), who was briefed Tuesday on the outlines of the proposal to sell Community to Mellon said yesterday it was a "terrible, terrible deal." The package would cost the state far too much and give the giant Pennsylvania bank broad rights to acquire Maryland bank companies once it took over Community's $320 million in deposits, he said.
According to legislative leaders and officials in Hughes' administration, Mellon has agreed to pay a $12 million premium for taking over Community, but after that the state would have to pay the bank $120 million up front and agree to cover some potential future losses from Community. Steinberg estimated that those losses could reach $60 million after several years if the bank loses money on some of the thrift's weaker assets.
Steinberg, who led a Senate revolt in October that nearly scuttled the Hughes administration's sale of three savings and loans to Chase Manhattan Corp., said that "Mellon is not in the charity business, but neither am I going to stand by and let them rape the State of Maryland."
His unexpected objections stunned Hughes administration officials who, under Mellon's terms, must win General Assembly approval of the proposed change in the law that Chase Manhattan used to acquired the thrifts last fall. Steinberg and others had criticized the terms of the sale as being too lenient to Gerald S. Klein, the owner of one of the thrifts, Merritt Commercial Savings and Loan of Baltimore. Klein was allowed to keep some of the thrift's assets.
Mellon, a $33.4 billion bank holding company, is insisting that the state amend the Chase legislation to expressly grant Mellon the right to acquire Maryland bank holding companies once it purchases Community. Administration officials described the change as "technical," but Steinberg said it would grant Mellon broad new rights that should command a higher price than the $12 million the bank is willing to pay.
"We are not getting a value for what we are giving away," Steinberg said.
Thomas H. Maddux, Hughes' secretary of economic and community development, disputed Steinberg's assessment of the eventual cost of the Mellon deal, arguing that a favorable resolution to the tangled affairs of Community's EPIC subsidiary could ultimately reduce the state's cost to about $75 million.
"I think we've constructed the best deal we can," said Maddux, who has spearheaded the negotiations with Mellon. "I'm surprised at his [Steinberg's] comments. Maybe he has a better deal."
Ten months after the beginning of Maryland's savings and loan crisis, the state still controls four distressed thrifts with combined deposits of more than $1 billion. The estimated gap between the value of Community's assets and liabilities is $162 million.
Both EPIC and Community were placed into state conservatorship last September, after real estate partnerships established by EPIC defaulted on $1.4 billion of mortgage debt and filed for bankruptcy.
Since then the state has simultaneously been seeking to sell the deposits and good assets of Community, while looking to reduce its exposure at EPIC. Maryland stands to lose as much as $150 million in funds Community advanced to the EPIC partnerships.
Maryland could reduce its exposure by as much as $60 million under a reorganization proposal submitted last month to the federal bankruptcy court in Alexandria.
The projected high cost of selling Community to Mellon has led many legislators to believe it would be more prudent simply to liquidate the thrift, an action that would cost the state $100 million but delay the release of funds to the thrift's 27,000 depositors for several years. Old Court Savings & Loan Association of Baltimore, the thrift whose troubles triggered the crisis, is already being liquidated and its depositors are scheduled to receive their money over the next four years.
The issue has divided legislators from the Baltimore and Washington areas, with some lawmakers from suburban Washington -- whose constituents would be expected to be affected by a Community liquidation -- accusing their Baltimore counterparts of objecting to the deal because Community depositors will get their funds earlier than Old Court depositors.
"There are some people who are willing to see Community go down the tubes so there will be more money for Old Court," said Sen. Howard A. Denis (R-Montgomery). "This is more of a geographical dispute."
Maryland officials said the deal with Billman and McCuistion makes sense in light of the overall return Maryland hopes to get from the reorganization plan. They stressed that they still plan to pursue aggressively a $100 million civil suit against the Community principals for alleged mismanagement of the thrift and its EPIC subsidiary.
They also resisted comparisons of the deal to the terms of the Merritt takeover.
"It's not as if Billman and McCuistion can say 'Aha, you can't sue me.' MDIF is going to sue them if there's anything to these claims," said Daniel M. Lewis, a lawyer with the Maryland Deposit Insurance Fund, the state agency overseeing Community's affairs.
Lewis said the agreements the state reached with the two former officials allow the state to use valuable assets -- in particular EPIC's property management affiliate and more than 4,000 EPIC houses not in bankruptcy -- to make a much better plan for all the parties, including MDIF.
"The concessions granted were, from our perspective, very reasonable," said Lewis.
The agreements Maryland reached to obtain control over these assets was approved last week by Baltimore Circuit Court Judge Joseph H.H. Kaplan and disclosed in papers filed this week in connection with the EPIC bankruptcy.
Both agreements are contingent on the bankruptcy court approving the EPIC reorganization plan, a key provision for Billman and McCuistion, some lawyers say, because it would reduce the amount of litigation they could face.
House Speaker Benjamin L. Cardin (D-Baltimore) said he had not heard of the agreement, but he added that legislators are very sensitive "to any waivers of liability" and would investigate the matter.
Billman and McCuistion have denied all the allegations of wrongdoing, but McCuistion's attorney, Charles M. Darling, said yesterday that turning over the assets to the state "seemed like an appropriate thing to do."
"Mr. McCuistion has no desire to worsen things . . . and we recognize the exigencies of litigation," Darling said. He added that the deal "does not cost Maryland taxpayers a cent," while he said the state is getting control of assets worth at least $15 million.
When told of the plan, Denis agreed that its provisions were not unwarranted because of the need to give depositors quick access to their funds in Community. Those funds have largely been frozen since the state took control of Community and EPIC last fall.
"I don't like the necessity of dealing with them Billman and McCuistion , or of letting them off the hook a little, but I understand why the state is doing this," Denis said. "There is enough liability -- both civilly and criminally -- that they will be held accountable."