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The S&L witch-hunt: officers, directors of Arkansas thrifts feeling Resolution Trust Corp.'s sting.

Jeanne Anthony was co-owner of the Anthony Schools in Little Rock and Pine Bluff.

The schools bill themselves as places where the "best and brightest" receive an education.

Anthony is affectionately known as Miss Jeanne.

For a decade, Miss Jeanne served as a director at First Federal Savings of Arkansas in Little Rock.

Because of that, her name is one of 11 listed in a lawsuit filed by the Resolution Trust Corp. against the lending institution, which failed in February 1989.

By association, Jeanne Anthony is accused of fraud.

Miss Jeanne?

Accused of fraud?

Some would say this is the worst-case scenario of the RTC's federal mandate to clean up the mess left behind when almost 600 thrifts failed in the late 1980s.

Congress mandated that the RTC dispose of failed savings and loan associations and get the taxpayers some of their money back.

Now, RTC officials are calling directors, officers and consultants of failed S&Ls in Arkansas and other states on the carpet to answer allegations concerning their lending practices.

The RTC, in other words, is after money.

And it's running out of time.

There is a three-year statute of limitations for the RTC to bring suit. This is the last year the RTC can file lawsuits against those involved with 318 failed institutions.

By next month, RTC attorneys are expected to have filed almost 140 such suits.

In Arkansas, the RTC has filed five lawsuits against officers, directors and consultants of defunct S&Ls since Feb. 7. The institutions involved are First Federal Savings of Arkansas, First Federal Savings & Loan Association at Fayetteville, First State Savings Bank at Mountain Home, Independence Federal Bank at Batesville and Savers Federal Savings & Loan Association at Little Rock.

Attorneys involved in the cases expect more lawsuits to follow.

The next Arkansas S&L on the RTC hit list may be First Federal Savings & Loan Association of Malvern, which was placed into conservatorship on Aug. 31, 1989.

Who's Innocent?

The most widely publicized suits are those involving 23 prominent figures at First Federal and Savers. The suits seek $191 million in damages from First Federal and at least $50 million from Savers.

The common thread is alleged mismanagement in the issuance of loans.

The heat is on.

But is it justified?

Do the lawsuits have merit or is this a case of the RTC looking for scapegoats?

Not surprisingly, those on the defense side say the RTC is taking a sue-first, investigate-later approach.

"Frankly, I think they're extortionate," attorney Philip Anderson of the Little Rock firm Williams & Anderson says of the RTC's charges. "It's regrettable. The entire S&L industry went down, and there were clear abuses in some cases. However, the industry did not fail because all the directors in the country were not doing their jobs."

Anderson is one of the many Arkansas attorneys involved in the First Federal and Savers cases. He represents defendants in both lawsuits. Most of Anderson's clients were outside directors who were not involved in the day-to-day operations of the institutions.

"Some people have been sued who have been off the board for years and years," he says.

One such example is J.W. "Buddy" Benafield of Little Rock, a Savers director from 1982-86. Benafield is represented by Anderson. Like most defendants, Benafield has been instructed by his attorney not to discuss the case with the media.

But the lawyers will talk.

"The RTC has ... condemned everybody who was in any way involved in a savings and loan," says Phil Kaplan, a Little Rock attorney who represents former First Federal director Charles Johnston, former Savers director John Greenway and former Savers Chief Executive Officer Wilbur Gulley Jr.

Kaplan says the RTC is attempting to "paint everybody with the same brush as the criminal element involved. None of the people sued in either the Savers case or the First Federal case did anything that even comes near being unlawful. It's unfair to use national sentiment ... against these people."

Anderson and Kaplan are not the first people to attack the RTC.

Taking Shots

The agency has come under fire from politicians for its efforts to dispose of assets.

Recently, the General Accounting Office, the congressional watchdog agency, criticized the RTC's methods of keeping records. GAO officials also told members of the House Banking, Finance and Urban Affairs Committee that the RTC possibly overstated the amount of money it could recover through asset sales.

Some question the credibility of the RTC lawsuits because of the rush to beat the deadline.

Others have gone further, characterizing the suits as a witch-hunt.

RTC officials are aware of the criticisms.

"I've probably heard the same stories you have," says an RTC spokeswoman.

A bad rap?

"Yes," says Jane Jankowski, the public affairs officer at the RTC's regional office in Overland Park, Kan. "We do not believe in just filing suits. We must have a strong case ... They are very time-consuming, and we consider the costs.

"Obviously, we don't take them lightly."

The RTC and the Federal Deposit Insurance Corp., which is filing similar suits, recovered about $300 million last year.

The RTC has no sympathy for directors and officers of failed S&Ls who allegedly made substantial amounts of money by making bad loans.

"These directors basically sat back," says John Beaty, the RTC's assistant general counsel. "Even on the largest loans, they would scarcely look at the packages. Hey, there was no appraisal, no feasibility study, nothing on which to make a reasonably prudent lending decision.

"They wouldn't even read it, even on loans they were betting the bank on."

The RTC has its own attorneys and employs attorneys at private firms across the country. The Rose Law Firm of Little Rock is handling the First Federal case for the RTC, although Rose's Webb Hubbell directs all questions about the lawsuit to the RTC.

Many former S&L officers have few assets remaining. Most of the money will come from insurance policies, attorneys say.

Held Up

At the crux of the First Federal case is the question of insurance.

Attorneys for the First Federal defendants claim the officers' and directors' liability insurance should cover the costs of defense and judgments up to policy limits. The insurance was provided by American Casualty Co. of Reading, Pa., a wholly owned subsidiary of CNA Insurance Cos. of Chicago.

According to legal filings made last month, the insurance policy provided $10 million per director each year the policy was in effect. The policy's expiration date was Dec. 31, 1987.

CNA attorneys say that since no claims were made or brought prior to that date, no coverage exists for the former First Federal directors and officers.

Attorneys for the defendants in the RTC suit, however, say the insurance company was notified of potential claims while the policy was in effect. The insurance debate will delay the lawsuit for several months.

"You don't know how to proceed until the question of insurance is solved," says Little Rock attorney Stephen Jones, who represents Jack Flowers, a former senior vice president at First Federal. "If there is no coverage, the RTC will take a different look."

If defendants do not have enough money to justify the legal fees generated by the lawsuit, the RTC may move on, one attorney says.

"Before we file a lawsuit, we make a determination as to the viability and cost-effectiveness of the suit," Jankowski says. "We don't take them lightly. We do not file lawsuits against every former savings and loan. We don't pursue some institutions."

"The RTC is in this thing for money," Jones counters. "... It's a dollars-and-cents equation for them. If the insurance is there, they want money |from the insurance company~. If there is no insurance, they look at the finances of the individuals."

On The Wall

In the case of some smaller, uninsured thrifts, there is little money to recover.

A former director of a failed thrift, who has not yet become a defendant, says the only thing the RTC would obtain by naming him in a suit is a batch of attorneys' bills.

"They would pay lawyers $100,000 to $150,000 in puffed-up legal fees to sue me?" he says. "For what? A $3 million judgment for money I don't have? What are they going to do with that? Frame it and put it on the wall?"

He believes the RTC is feasting on innocent victims.

"Most people in the business could not believe what happened," the former director says. "It's like we went to war, did the best we could in a bad situation, and we came home and people spit on us.

"They say we should not have done this. Hell, we basically did what we were supposed to do."

Former directors argue that federal regulators encouraged thrifts to move aggressively into the real estate market when inflationatory interest rates caused a credit crunch. When those commercial loans in one-time boom towns such as Dallas turned up bad, the S&Ls went bust.

Federal regulators answer that S&L officials, more adept at granting home loans, should have made efforts to better master the commercial loan market.

The First Federal lawsuit alleges that acquisition, development and construction lending (ADC loans) were the thrift's undoing.

"ADC loans dramatically increased the size of First Federal's commercial loan portfolio," the RTC alleges. "Between 1981 and 1985, First Federal made 136 major commercial real estate ADC loans totaling more than $1.1 billion.

"Such growth and expansion was pursued by defendants without due regard for the quality of the ADC loans and without establishing, monitoring or maintaining policies and procedures designed to assure First Federal's financial health."

"|S&L directors and officers~ were used to dealing with local issues," one financial expert says. "These were doctors, lawyers, leading citizens of the community. They knew the people they were dealing with. They knew if the guy down the street was OK for a home loan.

"Then, they were thrust into this era of deregulation."

Ripe For Trouble

Deregulation, changes in tax laws and a downturn in the real estate market most often are cited as the monsters that ate the S&L industry.

In short, thrifts in Arkansas were forced to look out of state and make commercial loans to stay afloat. Dallas was the promised land. S&L across the Sun Belt fueled the construction industry there.

Colorado, Florida and California were other lending hot spots.

The Tax Reform Act of 1986 eliminated tax shelters for commercial real estate, making it less attractive.

"That was the coup de grace for the S&L industry," Jones says. "It devalued commercial real estate by 10 to 15 percent. These deals would not work without lower taxes. My guess is that First Federal would have made it without the '86 Tax Reform Act.

"They were wounded and, with that, they took the IV out."

Kaplan says those being charged with mismanagement were in a Catch-22. He says the Federal Home Loan Bank Board encouraged institutions to make loans nationwide.

"One of the allegations was lending outside of the lending area," Kaplan says. "That's a Catch-22. They would put a normal, credible business person in a position where he was told to do that, and now he is being told it was wrong.

"If that isn't the quintessential Catch-22, I don't know what is. It defies logic."

Who, then, is accountable?

If the S&Ls made bad loans, who is to blame if not the S&L officers and directors?

The buck stops with the directors, doesn't it? They do the hiring and firing. Even when caught in a sea of change, they still are responsible for steering the ship.

"That's the concept," says a veteran industry observer. "The real reason for this is the RTC has itself in a crack."

Caught in the middle are the men and women who sat on the boards but were not actively involved in daily operations. For some, an appointment to an S&L board was more a matter of prestige than power.

Now, those directors may have to pay an unexpected price.

"Once you're sued, the impact on your credit rating is dramatic," Jones says. "Try to borrow money with a $190 million lawsuit on your hands. If you're trying to do business deals, this will kill you.

"Obviously, nobody likes to be sued. For all these people, it hurts their reputations."

Suing The S&Ls

These are the lawsuits filed against failed Arkansas thrifts by the Resolution Trust Corp. this year. The flood of legal proceedings is the result of a three-year statute of limitations imposed in 1989.

* First Federal Savings of Arkansas at Little Rock

Suit filed: Feb. 7

The suit seeks at least $191 million in damages. The Federal Home Loan Bank Board declared First Federal insolvent on Feb. 10, 1989. The Office of Thrift Supervision appointed the RTC as the receiver of First Federal on Aug. 30, 1989.

* First State Savings Bank at Mountain Home

Suit filed: Feb. 26

The institution was closed by the OTS on Oct. 26, 1990. Partial assets were purchased and liabilities were assumed by Worthen Banking Corp. of Little Rock.

* Independence Federal Bank at Batesville

Suit filed: Feb. 13

The suit seeks about $39 million in damages. Independence was placed in receivership on Feb. 17, 1989, and reopened until Sept. 10, 1990. Partial assets were purchased and liabilities were assumed by Worthen.

* Savers Federal Savings & Loan Association at Little Rock

Suit filed: Feb. 7

The suit seeks more than $50 million damages. Savers was placed in receivership on Oct. 31, 1989, and reopened as Savers Savings Association.

* First Federal Savings & Loan Association at Fayetteville

Suit filed: Feb. 27

The institution was placed in receivership by the OTS on Nov. 9, 1990. It was purchased by four financial institutions -- McIlroy Bank & Trust at Fayetteville, First National Bank & Trust Co. at Rogers, the Bank of Bentonville and First National Bank at Siloam Springs.

Other Arkansas S&Ls placed in conservatorship:

* Unipoint Federal Savings Bank at Trumann

* Capital Savings & Loan Association at Little Rock

* First Federal Savings & Loan Association at Malvern

* Madison Guaranty Savings & Loan Association at McCrory

* Commonwealth Savings & Loan Association at Osceola
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Author:Webb, Kane
Publication:Arkansas Business
Date:Mar 30, 1992
Previous Article:North Little Rock.
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