In the spring of 1983, a mortgage broker approached Dominion Federal officers with the kind of deal that appealed to Bill Walde's thirst for growth and prestige: the revival of Bob Guccione's plans to build a casino-hotel in Atlantic City.
Ever since gambling returned to New Jersey in the late 1970s, Guccione had dreamed of augmenting his Penthouse publishing empire with a state-of-the-art casino on the boardwalk.
It was not easy. Despite spending more than $70 million on the project, Guccione was forced to abandon construction in 1980 after running out of money, leaving a half-completed structure of rusting steel girders jutting out over abandoned buildings. For several years, his efforts to raise the remainder of the financing were unsuccessful.
But Guccione's fortunes appeared to improve in June 1983, when his firm, Penthouse International Ltd., received a written commitment from Queen City Savings and Loan, a New Jersey bank now known as First Atlantic Savings and Loan, to help organize a consortium of lenders to issue a $97 million loan to complete the project. One of the prospective lenders was Dominion Federal.
As Walde saw it, participating in the consortium could be an excellent opportunity for Dominion Federal.
The yield on the loan, he would later testify, was "fantastic," meaning that Dominion could commit to lending a huge chunk of the money and have confidence that it could easily turn around and sell off parts of the loan to other S&Ls. By becoming one of the lead lenders on the project, Dominion Federal would be entitled to a hefty share of the fees that such a deal would surely generate.
In November 1983, Dominion Federal agreed, contingent on a number of conditions, to provide $35 million for the casino project, becoming one of the "colead lenders" in the consortium and completing Guccione's financing package. As part of the agreement, a Penthouse subsidiary paid the association a $175,000 fee for the loan commitment.
A critical factor for Dominion Federal, Walde would later testify, was a separate agreement it had reached to sell half of the loan to Community S&L of Bethesda. He said this second agreement not only minimized Dominion Federal's overall exposure on the Penthouse loan, it was essential to the transaction because Dominion Federal was barred by federal regulators from making loans in excess of $18.5 million.
Several months later, however, after Community began having second thoughts about the loan (it would eventually withdraw), Dominion Federal's own enthusiasm for the deal appeared to wane, according to court testimony.
After several more weeks of negotiations, Guccione invited Walde to his house on Manhattan's East Side, flying him up on his private plane, in an effort to keep the syndicate together. After dinner, Guccione, Penthouse executive vice president David Myerson and Walde retired to the wood-paneled Georgian room that Guccione had transported whole from an estate in England.
According to the Penthouse publisher's recollection of the meeting at the trial last May, Walde devoted much of the time to belittling Queen City, which had already raised $62 million for the deal, and urging Guccione to fire the coleader of the syndicate and replace it with Dominion Federal.
"I believe his words were something like a small, shaky bank of no consequence. They were small potatoes and a company our size should not deal with such a bank and that the bank presented an image problem to Dominion," Guccione testified.
"Dominion had done many major deals, had never dealt with a bank that small, had no intention with dealing with such a bank," Guccione quoted Walde as saying.
But Guccione also testified that Walde continued to express enthusiasm about the project. Walde "said that he understood Atlantic City better than anybody else in the syndicate. And he thought it was a perfectly marvelous deal."
"He said the worst thing that could happen is that, 'You refuse to pay and I have to take it over.' Those were his exact words," Guccione said.
In his testimony, Walde denied making disparaging remarks about Queen City or that he attempted to have the S&L fired from the deal. However, Walde did say that he expressed concern to Guccione about the loan documentation and about "Queen City's ability to close a large commercial loan of this nature."
"I emphasized that we were definitely going to make the loan, wanted to make the loan but we couldn't close a loan if we didn't have the proper documentation," Walde testified. Guccione promised to appoint someone to follow up on Dominion's concerns, he said.
Eight days later, Guccione flew down to Washington to meet with Walde at Dominion Federal headquarters. Guccione testified that he told Walde he would not get rid of Queen City, but that he would be "very happy to pay whatever expenses, whatever service charges, whatever fees you might lose as a result of not being the lead bank." He pleaded with Walde that "we should find a way to reconcile everybody's problems."
But Guccione says he was beginning to believe that Walde had a different motive -- getting out of the deal. "I told him by that time that I thought the Dominion participation was very shaky indeed, that I was beginning to distrust Dominion," Guccione testified.
The loan was never made. Guccione's casino has never been finished. Later in 1984, Penthouse filed suit, accusing Dominion Federal of breaking its agreement to finance the project and making it impossible for the company to find other funding.
Dominion Federal countered by saying that Penthouse never fulfilled all the conditions necessary for the loan to get final approval. These conditions included providing the final plans and specifications for the casino project, as well as numerous other documents. Dominion Federal also said Penthouse did not have clear title to all the real estate on which it planned to build the casino.
After a three-week trial last May, U.S. District Judge Kevin Thomas Duffy in New York said in a 35-page opinion that many of Dominion Federal's demands were excessive and beyond the scope of the loan agreement.
Duffy ruled that Dominion Federal had breached the agreement, and ordered the association and its law firm to pay Penthouse $129 million in lost profits and other damages.
Dominion Federal officials have bitterly denounced the ruling and vow to overturn it on appeal with their newly hired legal gun -- famed Manhattan defense lawyer Arthur Liman.
Although Duffy recently rejected Dominion Federal's request for a new trial, Walde expresses the utmost confidence that he will prevail in the end. He refused, on the advice of his attorney, to comment on the specifics of the Penthouse case, but he said: "What happened here, Dominion was not at fault in any way, shape or form."