`Unscrupulous' loan tactics cited; LBM Financial and owner Mallegni fined $1.1M.

Byline: Jay Whearley

WORCESTER - A loan repayment demanded at gunpoint, effective interest rates exceeding 41 percent and a near decade-long litany of coercion and strong-arm tactics left two borrowers "between the proverbial rock and a hard place," according to a federal judge's ruling that comes down hard on a controversial Marlboro lending firm and its president.

U.S. Bankruptcy Court Judge Joel B. Rosenthal's decision last week in favor of two corporations controlled by area real estate developers David D. Depietri of Southboro and Robert Depietri Jr. of Worcester marked the first time complaints against LBM Financial LLC and its owner, Marcello M. Mallegni, were aired in a trial and ruled upon by a judge.

In his decision, Judge Rosenthal declared that LBM and Mr. Mallegni used a variety of "unscrupulous, to say the least" tactics to ensnare the Depietri brothers' corporations, 201 Forest Street LLC and 219 Forest Street LLC, into a cycle of ever-increasing default interest and late fees.

The adversary proceeding in Bankruptcy Court arose out of LBM and Mr. Mallegni's attempt to foreclose on the two Forest Street developments, located in Marlboro. The ruling had been anxiously awaited by those who have filed more than a dozen state and federal lawsuits that accuse LBM and people associated with it of using similar tactics - including loan sharking, racketeering, extortion and fraud - in transactions they had with the firm.

The underlying intent of LBM and its principals, the lawsuits allege, was to wrest control of development projects through foreclosure, or, at the very least, force delays to run up the cost of those loans by piling on fees, penalties and default interest rates.

"This is exactly what they did to me," said Barnstable developer Robert M. Bradley, who has a pending federal racketeering lawsuit against LBM, Mr. Mallegni and others. His experiences, he added, "absolutely mirror those made in this case, only tenfold."

Mr. Mallegni's lawyer, Jeffrey D. Ganz, told the Telegram & Gazette that last week's ruling has no bearing whatsoever on the lawsuits against his client. "Judge Rosenthal's ruling pertained specifically to 201 Forest Street and 219 Forest Street. Period," he said.

Mr. Ganz said Mr. Mallegni is considering an appeal of last week's ruling.

"He completely disagrees with the court's interpretation of events," the lawyer said. "We believe he (Judge Rosenthal) got it horribly wrong."

The judge's 77-page decision is rife with challenges to the credibility of Mr. Mallegni, who maintained that LBM and its predecessor, Wolfpen LLC, were owed more than $3 million in interest and fees by the Depietri brothers on loans that began with a $1.2 million loan in 1998. The original loan was issued by Wolfpen, co-owned by Mr. Mallegni and William Depietri, a brother of David and Robert.

"It is appropriate to begin with a few words about credibility," the judge wrote. "The court did not find Mallegni to be a credible witness."

The lengthy ruling reconstructs what the judge described as a "tumultuous history" between companies with which Mr. Mallegni was connected and David and Robert Depietri. That history began in 1997, the judge said, when David Depietri and Kimberly Depietri, Robert's wife, formed a company called 219 Forest Street LLC to develop property in Marlboro that was adjacent to an office park they owned at 201 Forest St.

The original loan from Wolfpen LLC, according to the judge, appeared to contain standard terms for a "hard-money" lender - a firm that provides high-interest, short-term loans to get development projects off the ground - but for a stipulation that "Wolfpen had an option to acquire 40 percent of the property prior to the expiration of the note or be paid a $100,000 exit fee. ..."

The judge said that the Depietris ended up transferring a 40 percent interest in 219 Forest Street LLC to Wolfpen in accordance with the loan terms. He noted, however, that Mr. Mallegni testified that the transfer wasn't part of the loan agreement and that Robert Depietri "simply gave the 40 percent interest to Wolfpen because it `had put up the money and helped them with the loans.'"

"The Court does not find Mallegni's version credible, as there was no evidence that the parties to this litigation were ever exchanging `gifts,' nor is it credible that the owners of 219 Forest would give away almost half of the company at a time when 219 Forest had already obtained" and loan payments were current, Judge Rosenthal wrote.

The judge also noted that the transfer was significant "to say the least" because the agreement was structured so that the Depietris could not enter into any financing transaction without the consent of "its new 40 percent owner, Wolfpen."

At about the time that an extension of the loan was about to expire, according to the judge's decision, a principal in a firm that funded half of the $1.2 million loan to the Depietris - Mr. Mallegni's company supplied the other half - showed up, along with Mr. Mallegni, at the Depietri brothers' office in Marlboro. He wielded a gun and demanded repayment of the loan.

"In response to the pressure," Judge Rosenthal wrote, the Depietris obtained new loans from Hudson Savings Bank and Wolfpen to pay off the first loan, even though Robert Depietri argued the payoff amount demanded was considerably higher than he believed was owed. Despite monthly payments for some 16 months, the Depietris were told they owed $1,311,015.

The brothers' experiences with Mr. Mallegni only worsened after that, according to the judge.

To pay off the Hudson bank and Wolfpen loans, the judge wrote, the Depietris sought new financing through Commerce Bank & Trust of Worcester, with Mr. Mallegni assisting in the efforts.

"Although Mallegni's `assistance' may appear innocuous at first blush, this was the first of many instances where Mallegni manipulated the direction that 219 Forest took with respect to its financing," according to Judge Rosenthal.

The Depietris borrowed $1.8 million from Commerce Bank, the loan stipulating that the brothers personally guarantee it and that Mr. Mallegni would repurchase the Commerce note if 219 Forest Street LLC defaulted. The judge noted that the loan from the Worcester bank was used to pay off the Hudson bank loan in full, but, according to Mr. Mallegni, only covered $670,779 of the $907,518 that he claimed was due Wolfpen.

In exchange for Mr. Mallegni's agreement to the repurchase requirement in the event of a default, the judge said that the Depietris were obligated to turn over their remaining interests in 219 Forest Street LLC if they failed to make their loan payments.

Judge Rosenthal said Robert Depietri again challenged the Wolfpen payoff figure cited by Mr. Mallegni but finally yielded to the demand when Mr. Mallegni threatened that the Commerce loan "wasn't going to happen" unless he agreed to the contested amount. The loan called for interest-only payments at 16 percent per year, but stated that defaulting on the loan would increase the interest to 20 percent, plus 1 point, and add a 10 percent surcharge on any payment more than five days late.

Various fees and penalties kicked up the effective interest rate to at least 41 percent, according to the judge.

Other transactions proved equally damaging to the Depietris, who at the end of 2001 sent letters to other financial institutions soliciting construction loans for the 219 Forest St. site. In March or April of 2002, the judge wrote, the brothers received a commitment letter from First Essex Bank.

Judge Rosenthal said the day after the commitment letter was received, Mr. Mallegni - "empowered by Wolfpen's veto power" - nixed the deal. According to the judge, Mr. Mallegni told the Depietris that he had spoken with David G. "Duddie" Massad, chairman and primary owner of Commerce Bank, who "wanted to do the construction financing."

The alleged communication with Mr. Massad, along with the fact that "Mallegni had previously `assisted' 219 Forest in securing the Commerce note aroused the court's suspicions that Mallegni may have had an undisclosed relationship with Commerce," the judge said.

Mr. Massad and his lawyers have said that the bank chairman invested his own money in Mr. Mallegni's LBM firm, but insist that Mr. Massad played no role in the firm's operations. Commerce Bank President Brian W. Thompson has said the bank has no involvement, directly or indirectly, with LBM.

Many of the state and federal lawsuits filed against Mr. Mallegni and LBM also name Mr. Massad as a defendant. Lawyers for Mr. Massad and Mr. Mallegni have said the lawsuits are baseless and represent last-ditch attempts by failed developers to recoup financial losses brought about by their own ineptitude.

According to Judge Rosenthal, after "Mallegni single-handedly foreclosed the prospect of First Essex financing," Robert Depietri met with Mr. Mallegni, Mr. Massad and a senior bank loan officer to discuss new financing. That discussion, the judge said, produced terms very similar to those offered by First Essex and a loan proposal was issued on May 13, 2002.

However, the judge wrote, a few weeks after Robert Depietri received the proposal, he was told by a Commerce Bank official that the paperwork had been lost. At the end of June 2002, a new proposal was issued, but for $1.5 million less than the Depietris were seeking. The revised loan did not provide enough funding to let the brothers refinance their existing loans and complete construction of the 219 Forest St. project.

Afterward, Judge Rosenthal said, Mr. Mallegni assumed the Commerce note and in December 2002 issued a new note with terms "much more onerous." Using default interest rates that appeared to be set arbitrarily, the judge said, Mr. Mallegni eventually gained a mortgage to the brothers' 201 Forest St. development which had been used as collateral.

Subsequent transactions with Mr. Mallegni and LBM, the judge said, were equally dubious. Mr. Mallegni's refusal in 2005 to provide the Depietris with an accurate payoff figure when the brothers were negotiating a refinancing package through another lender, National City Bank, "may have very well sealed 219 Forest's financial fate."

By 2007, the Depietris' two companies were forced to file for Chapter 11 bankruptcy protection. The 219 Forest Street site, which now houses an athletic complex, was sold that year for an amount well-below what Mr. Mallegni claimed was still due.

Judge Rosenthal's ruling effectively disallowed more than $3 million in default interest and other claims sought by LBM from 219 Forest Street LLC and 201 Forest Street LLC. The judge also awarded in excess of $1.1 million in punitive damages to the two corporations and ordered LBM and Mr. Mallegni to pay the brothers' legal fees in the case.

Harry Murphy, chairman of the Boston law firm Hanify & King, which represented the Depietris in the bankruptcy court adversary proceeding, said the actual amount due the brothers from LBM and Mr. Mallegni has yet to be determined, but is expected to be well-above

the $1.1 million figure cited in the initial ruling. The Depietris had sought about $30 million in damages and other costs from LBM and its president.

Charles R. Bennett Jr., the lawyer who represented the Depietris, said "the ruling confirmed the fact that the Forest Street entities were subjected to unfair lending practices."

Contact Jay Whearley at [e-mail].

ART: PHOTO

CUTLINE: Mr. Mallegni