Fairfax settles with developers

September 15, 1995|By Timothy J. Mullaney | Timothy J. Mullaney,Sun Staff Writer

Fairfax Savings Bank has quietly settled a punitive damages claim with the developers of a Westminster shopping center who claimed that the Baltimore thrift and its downtown law firm committed fraud in a real estate deal.

The developers' lawsuit had sparked an embarrassing showdown this summer with Fairfax's longtime law firm, Weinberg and Green.

Terms of the punitive damages settlement were not disclosed. But they come in addition to $7.5 million in compensation to the developers -- $2.65 million for their emotional distress, plus cancellation of the developers' $4.85 million debt to Fairfax -- awarded earlier by a trial jury.

As part of the punitive damages settlement, Fairfax agreed to abandon efforts to get courts to reconsider the $7.5 million compensatory award.

The settlement on punitive damages was reached last week, just before the battle between Fairfax and developers Charles Ellerin and Louis and Gloria Seidel was set to go to trial for the fourth time in Baltimore County Circuit Court, lawyers for both sides said.

The lawyers said Fairfax already had paid the compensatory damages, which are separate from the punitive award.

Maryland's Court of Appeals set the stage for the latest trial in February, when it upheld a 1990 jury verdict in favor of the developers but ordered a new trial on punitive damages. The court pointed out that no Maryland law calls for criminal fines of more than $1 million and that most criminal fines for commercial fraud are $10,000 or less, far below the $6 million in punishment meted out by the jury in the third trial.

Neither Fairfax attorney George Nilson nor David Freishtat, the lawyer for the Seidels and Mr. Ellerin, would say how much Fairfax paid to settle the punitive damages portion of the case. A confidentiality agreement was part of the settlement.

"I'm not going to tell you anything about money changing hands," said Mr. Nilson. "One way to look at the settlement is that everything has got to end sometime. It was a 10-year-old case. There were risks on both sides. It pleased nobody, and therefore was probably a good settlement."

Mr. Freishtat denied that the Court of Appeals ruling, which did not mandate any limit on the award, served as a cap on punitive damages.

"We were ready to go to trial, and anxious to do so, but for a satisfactory settlement," Mr. Freishtat said. "You can't just look at the fine. . . . What would one pay to stay out of jail for 20 years?"

The case began in 1982, when the developers were attempting to develop a shopping center called Sherwood Square. They borrowed $5.7 million from Fairfax.

Ten days before the official signing of the loan agreements and the transfer of the money, the developers approved contract language saying that Mr. Ellerin and Mr. Seidel would not be personally liable for the loan after the shopping center was built. Instead, Fairfax's collateral would be the shopping center, not everything the borrowers owned, once the developers finished construction.

But the Maryland Court of Appeals eventually ruled that the documents the developers signed at the loan closing were not the documents they approved a week earlier. Instead, attorneys at Weinberg had changed them, at Fairfax's direction, to make the developers personally liable for the loan until 70 percent of the project was leased.

The center failed, so Fairfax foreclosed and attempted to enforce the personal guarantees.

Fairfax won in the first trial, in 1987, but the verdict was reversed by Maryland's Court of Special Appeals. The second trial, in 1990, resulted in a hung jury.

The third trial, also in 1990, awarded $8.65 million in cash, plus the voiding of the partners' debt, to Fairfax.

The third trial jury found that the developers had to repay the loan because the borrowers discovered the fraud after the closing and did not protest, so the personal guarantees became part of the contract.

But that jury also found that the fraud caused the developers to sign the guarantees.

The jury then awarded the developers the amount they owed Fairfax as partial compensation for the fraud, plus $2.6 million for emotional distress and miscellaneous damages.

This summer, Weinberg and Fairfax battled in a malpractice case in Montgomery County that stemmed from the Ellerin case. In that proceeding, Fairfax's lawyers added a $30 million claim tied to about $130,000 in alleged overbilling on the accounts of Fairfax's majority owner, Malcolm Berman. At one time, Mr. Berman had given the law firm up to $1 million a year in business.

Montgomery County Circuit Judge Ann S. Harrington wrote in her opinion that $20,000 of the overbilling was related to Weinberg's defense of Fairfax against the Ellerin fraud suit, Mr. Berman testified.

Judge Harrington also wrote that Weinberg, in 1987, admitted overbilling Mr. Berman more than $110,000 for accounts unrelated to the Ellerin case.

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