10 settle suit citing fault at failed thrift RTC action accused Baltimore Federal of 'gross negligence'

'We paid a hostage fee'

Plaintiffs included former directors and executives

January 06, 1996|By Bill Atkinson | Bill Atkinson,SUN STAFF

Ten former directors and executives of failed Baltimore Federal Financial have agreed to pay $1.7 million to settle a lawsuit filed against them nearly four years ago by the Resolution rTC Trust Corp., according to documents obtained by The Sun.

The directors, who include Robert E. Hecht Sr., Baltimore Federal's former chairman, and James L. Fisher, former president of Towson State University, were accused of "gross negligence" and settled the suit Dec. 15, RTC and court documents state. On Dec. 20, Judge Marvin J. Garbis dismissed the suit, which had been filed in 1992 in U.S. District Court in Baltimore.

"I don't have any statement about it," said Mr. Hecht, who retired from his position as chairman and chief executive of Baltimore Federal in 1988. "It's finished business, and that is the end of it."

"We paid a hostage fee," said Melvin T. Pugatch, a former director. He declined to elaborate or comment further.

An attorney for the RTC declined to comment.

Baltimore Federal, which was the third largest thrift in Maryland with $1.7 billion in assets, was placed in government conservatorship on Feb. 7, 1989, after suffering massive losses. The RTC, the agency charged with disposing of failed thrifts, sued the directors and executives for $32 million, alleging that "unsound and reckless" lending policies contributed to the thrift's demise.

In its lawsuit, the RTC alleged that the directors approved six commercial real estate loans that caused $40 million in losses, according to court documents.

Agency attorneys argued that thrift officials overseeing the underwriting of the loans lacked sufficient experience, and "gambled their depositors' money on high-risk strategies."

Among the loans was $3 million Baltimore Federal lent to renovate 16 condominiums in Houston; $5 million to fund a hotel and convention center, also in Houston; and $10 million for a mixed residential and commercial project outside of Dallas, according to court documents.

"Like the drunk driver who says that he never intended to hurt anyone, the defendants are claiming that they never intended to cause losses to Baltimore Federal," the RTC stated in court documents last August. "They contend that their good intentions excuse the harm they caused. Defendants miss the point." Baltimore Federal's demise came at the tail end of Maryland's thrift crisis, which erupted with the seizure of Old Court Savings and Loan in May 1985, kicking off a statewide panic.

Of the 153 S&Ls in the state in 1985, 75 failed -- with an eventual cost to taxpayers of $130 million to $150 million.

Problems had spread throughout much of the nation as thrifts from California to New York splurged on risky commercial real estate ventures. Many of the thrifts later failed, and the crisis caught the national spotlight.

A year before being taken over by the regulators, Baltimore Federal lost $120 million, followed by a $42 million loss in 1988. The thrift was placed in conservatorship on Feb. 7, 1989, a day after President Bush announced a sweeping initiative to rescue the thrift industry.

That year, Baltimore Federal's net worth -- liabilities subtracted from assets -- plunged to a negative $265.4 million.

A year later, the RTC sold $900 million of Baltimore Federal deposits to Household Bank FSB of Newport, Calif.

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