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FDIC'S HANDUNG OF SMALL BUSINESS ASSET FORECLOSURES Y4,SM 1:104-94 FDIC'5 Handling of Snail Business A... HEARING BEFORE THE SUBCOMMITTEE ON GOVERNMENT PROGRAMS OF THE COMMITTEE ON SMALL BUSINESS HOUSE OP REPRESENTATIVES ONE HUNDRED FOURTH CONGRESS SECOND SESSION WASHINGTON, DC, SEPTEMBER 25, 1996 Printed for the use of the Committee on Small Business Serial No. 104-94 FDIC'S HANDUNG OF SMALL BUSINESS ASSET FORECLOSURES HEARING BEFORE THE SUBCOMMITTEE ON GOVERNMENT PROGRAMS OF THE COMMITTEE ON SMALL BUSINESS HOUSE OP REPRESENTATIVES ONE HUNDRED FOURTH CONGRESS SECOND SESSION WASHINGTON, DC, SEPTEMBER 25, 1996 Printed for the use of the Committee on Small Business Serial No. 104-94 U.S. GOVERNMENT PRINTING OFFICE 27-573 WASHINGTON : 1996 ForsalebytheU.S.GovernmentPrintingOffice SuperintendentofDocuments,CongressionalSalesOffice,Washington,DC 20402 ISBN 0-16-054043-7 COMMITTEE ON SMALL BUSINESS JAN MEYERS, Kansas, Chair JOEL HEFLEY, Colorado JOHN J. LaFALCE, New York WILLIAM H. ZELIFF, Jr., IKE SKELTON, Missouri New Hampshire NORMAN SISISKY, Virginia JAMES M. TALENT, Missouri FLOYD H. FLAKE, New York DONALD A. MANZULLO, Illinois GLENN POSHARD, IlUnois PETER G. TORKILDSEN, Massachusetts EVA M. CLAYTON, North Carolina ROSCOE G. BARTLETT, Maryland MARTIN T. MEEHAN, Massachusetts LINDA SMITH, Washington NYDIA M. VELAZQUEZ, New York FRANK A. LoBIONDO, New Jersey CLEO FIELDS, Louisiana ZACH WAMP, Tennessee DOUGLAS "PETE" PETERSON, Florida SUE W. KELLY, New York KEN BENTSEN, Texas DICK CHRYSLER, Michigan WILLIAM P. LUTHER, Minnesota JAMES B. LONGLEY, Jr., Maine JOHN ELIAS BALDACCI, Maine WALTER B. JONES, Jr., JESSE JACKSON, JR., lUinois North Carolina JUANITA MILLENDER-MCDONALD, MATT SALMON, Arizona California VAN HILLEARY, Tennessee EARL BLUMENAUER, Oregon MARK E. SOUDER, Indiana XAVIER BECERRA, CaUfomia SAM BROWNBACK, Kansas JAMES E. CLYBURN, South CaroUna STEVEN J. CHABOT, Ohio ELEANOR HOLMES NORTON, SUE MYRICK, North Carolina District ofColiunbia JACK METCALF, Washington MAXINE WATERS, California STEVEN C. LaTOURETTE, Ohio Jenifer Loon, StaffDirector Jeanne M. Roslanowick, Minority StaffDirector Subcommittee on Government Programs PETER G. TORKILDSEN, Masschusetts, Chairman JOEL HEFLEY, Colorado GLENN POSHARD, Illinois SUE MYRICK, North Carolina CLEO FIELDS, Louisiana SUE W. KELLY, New York JUANITA MILLENDER-McDONALD, DICK CHRYSLER, Michigan California STEVEN C. LaTOURETTE, Ohio JESSE JACKSON, Jr., lUinois KEN BENTSEN, Texas Laurie Rains, Subcommittee StaffDirector (II) CONTENTS Page Hearingheld on September25, 1996 1 WITNESSES Wednesday, September 25, 1996 Bovenzi, John, Director, Depositor and Asset Services, Federal Deposit Insur- ance Corporation, Washington, DC 16 Britton, Peter, Chairman, Hamilton Planning Board, Hamilton, Massachu- setts 11 Scott, Betty, smallbusiness owner. Concord, Massachusetts 9 Sweeney, Rhetta, smallbusinessowner, Hamilton, Massachusetts 2 APPENDDC Opening statements: Torkildsen, Hon. PeterG 22 Poshard, Hon. Glenn 25 Prepared statements: Bovenzi,John 26 Britton, Peter 44 Scott, Betty 49 Sweeney, Rhetta 58 Additional material: Appendix Indexto statementofRhetta B. Sweeney 78 (III) FDIC'S HANDLING OF SMALL BUSINESS ASSET FORECLOSURES WEDNESDAY, SEPTEMBER 25, 1996 House of Representatives, Subcommittee on Government Programs Committee on Small Business, Washington, DC. The Subcommittee met, pursuant to notice, at 2:08 p.m., in room 2359, Rayburn House Office Building, the Honorable Peter Torkildsen (Chairman ofthe Subcommittee), presiding. Chairman Torkildsen. CJood afternoon. The Subcommittee on Small Business Govemment Programs will come to order. It's my pleasure to welcome our witnesses and guests to today's hearing. Today's hearing will focus on the Federal Deposit Insurance Cor- poration's management of small business asset foreclosures and specifically as a result offoreclosures in Massachusetts. We're going to be focussing on two situations where small business projects were not completed due to the failure of one bank, ComFed Savings, and the alleged actions by the RTC when they were appointed conservator in December 1990. We will hear from small business owners as to the details oftheir situations. In addition, we will hear from the FDIC on their general business practices when handling asset foreclosures. FDIC will also provide testimony on their involvement regarding the feiilure of ComFed. Our first panel of witnesses includes two small business owners, Mrs. Rhetta Sweeney of Hamilton, Massachusetts and Mrs. Betty Scott of Concord, Massachusetts. Also testifjdng is Mr. Peter Britton of the Hamilton Planning Board in Hamilton, Massachu- setts. The second panel we will hear from will be Mr. John Bovenzi, director of the FDIC's Depositor and Asset Services Division. The Subcommittee looks forward to hearing from today's witnesses and if a Member of the minority party comes we will ask if he or she would like to make an opening statement, as well. With that, I'd like to begin the testimony of our witnesses and Mrs. Sweeney, ifyou'd like to start with your testimony, please. If you could speak into the microphone and if you could condense your testimony, please do that but your full written statement will appear in the record. Mrs. Sweeney. [Chairman Torkildsen's statement may be found in the appendix.] (1) TESTIMONY OF RHETTA SWEENEY, SMALL BUSINESS OWNER, HAMILTON, MASSACHUSETTS Mrs. Sweeney. Thank you. Mr. Chairman, thank you and mem- bers of the Small Business Committee Subcomm^ittee on Govern- ment Programs. May I take this opportunity to thank you for allowing me to appear before you today to testify from my personal knowledge and experience about abuse by the Resolution Trust Corporation, Federal Deposit Insurance Corporation and their agent, John Hanify, surrounding my small business project, approved by the Hamilton Planning Board in Hamilton, Massachu- setts March 21, 1988. Thank you for allowing me to appear before the proper Sub- committee with jurisdiction over the abuse which we have been subjected to for several years, abuse against small business persons in Massachusetts. Although we have appeared before the U.S. Sen- ate Subcommittee on Government Oversight, the subject of those hearings was a banking issue called the D'oench Duhine doctrine. This obscure doctrine never had anything to do with our cir- cumstances, as at case we had against our lender was not about oral agreements but, in fact, written agreements which were in violation of the Massachusetts Consumer Protection Act, the law of 93(a), for unfair and deceptive business practices. Our agreements with the S&L ComFed were in writing, signed by both parties and recorded in the loan committee minutes and recorded with the Essex County Registry ofDeeds. I will speak today, as you have requested, about a brief background of the relationship with the bank and a little bit about the Hamilton Rock Maple Flexible Subdivision plan, which we were able to have approved with the Hamilton Planning Board, and the difficulty we had surrounding the unfair and deceptive trade business practices with the S&L ComFed which resulted in litigation in the Middlesex Superior Court ofMassachusetts. I will speak about extraordinary actions that were taken by the RTC and their agent, John Hanify, to cover up the judgment that was entered in the State court in our favor in January 1991 to present. The issues that I think the U.S. Congress has to be aware of today are the specific things that are a problem today for the FDIC, who have now succeeded to the RTC upon the closing of the RTC in December 1995. Hanify & King, when he removed the State court judgment, did so without a legal services agreement, which we have recently learned from the FDIC, acting without authority to work on the case as an RTC representative. Hanify & King did not successfully substitute the party defendants into the State court action. Hanify & King removed the case to the wrong court and Hanify & King, when he learned of the original State court judgment, absconded the judgment, concealed it in his offices for 26 days imtil the State courtjudge had a clerk inform our lawyers that a State court judgment existed. Hanify & King, in the Federal court, obstructed claims that we had, valid claims we had against our defendants, the ComFed Mortgage Company, who were a State-organized entity and were not subject to the Federal laws. Incredibly, with all of these issues of law and rules, I will speak a little bit about the fact that the acting Federal Judge Harrington refused to remand this case in spite of the gross violations of rules and laws which I havejust cited. He ruled that for reasons ofmiss- ing a 30-day remand period surrounding the period of time when records had been absconded and we had not been informed, that for that particular law the jurisdiction stayed in the Federal court. However, he had at all times the right to remand the case for reasons of subject matter jurisdiction because of the errors which I havejust explained to you today. It is especially timely that we come before you today because shortly before leaving for Washington to attend these hearings we were sued again by the FDIC, seeking to take possession of our property and physically remove us from our home. Although legal research previously detailed that the eviction process had to go through our local State court, the FDIC and their legal agents have gone to the same Federaljudge. Judge Harrington, to gain an order to proceed now in Federal court. As the FDIC advances in our property it is important that this Subcommittee recognize that the actions taken by the FDIC agent, John Hanify of Hanify & King, surrounding the handling of our case were done without authorization and second, they did not comply with the necessary rules and laws, which I will discuss a little more fully. The recent report received under the Freedom ofInformation Act on the 16th ofAugust 1996, whereby the FDIC now has stated that Hanify & King had no legal services agreement with the Resolution Trust Corporation, can leave no doubt that, as I have previously re- ported to your offices, Mr. Chairman, John Hanify acted in violation oflaw in the handling ofour State court action. When John Hanify of Hanify & King represented to the State court that he was a representative for the Resolution Trust Cor- poration he was, in fact, acting in both the State and Federal courts without authorization and in violation of law, specifically in the unlawful removal and concealment of a $4 million State court judgment. The actions taken by Hanify were intentional and mali- cious and, as a result, my small business project has been harmed. The significance of this report is an affirmation of what we have previously discussed over the years, which is that John Hanify was not qualified to continue to be employed by the FDIC or the RTC. As a result, substantial losses to me as a small business person include loss of my project through an unlawful foreclosure auction, loss of home, which is part of the real estate project, loss of dam- ages from a State court judgment entered in my favor in excess of $4 million, loss of profits as a small business person, loss ofoppor- tunities as a small business person since 1988. The extreme infliction ofemotional distress my family and I have suffered can only be described as a gang-style pattern of repeated physical, emotional, financial and professional unacceptable behav- ior which began in August 1987 by the bank and their agent, John Hanify, and continues to this day by the FDIC and their agent, John Hanify. The background began in 1987 when I entered into a commercial loan agreement with ComFed Savings Bank to develop a real estate project in Hamilton, Mass. During the spring of 1987 we began preliminary work on a real estate plan with the Hamilton Planning Board, seeking to subdivide a 14-acre piece of property, including our home, which has been in the family for six generations. In July 1987 I was introduced to S&L ComFed Savings Bank as a potential real estate lender. Loan commitment letters were issued by ComFed during July and August 1987. The original commitment began at $600,000, which was to refinance a 4-acre parcel ofland, and it included an 18th century home and two barns. On the August 20, 1987 ComFed issued a fourth commitment let- ter of $1.6 million, which was to refinance the mortgages for both pieces of real estate, putting ComFed in first position for the entire asset. I agreed to borrow $1.6 million rather than the initial loan amount of $600,000 as a means of guaranteeing the future financial support for the entire project. I did no—t know that our loan officer was operating on a commission basis the bigger the loan, the bigger his commission would be. Because ComFed Savings Bank was a federally regulated State- chartered FSLIC S&L, I believed I was dealing with a trustworthy lender, not a criminal enterprise, which we now know that is ex- actly what was going on there. After the closing of the August 27, 1987 loan, I hired a team of professionals, to include a real estate lawyer, an engineer, a land- scape architect, an architect, land use planner, and the develop- ment work to obtain subdivision approvals from the Hamilton Planning Board. Preliminary approvals for the subdivision project were in place by January 1988 and the flexible subdivision plan was signed in February 1988. Chairman Torkildsen. Mrs. Sweeney, could I ask you to just pause for a moment? We have beenjoined by the Ranking Minority Member of the Subcommittee, Mr. Poshard of Illinois, and I know he has other commitments and I just wanted to recognize him if he wanted to make a statement at this time. Mr. Poshard? Mr. Poshard. Thank you, Mr. Chairman. I appreciate your hold- ing this Subcommittee hearing. I do not have any questions at this time. I am interested in hearing more about Mrs. Sweeney's case, but I would like to submit an opening statement for the record, with unanimous consent. Chairman Torkildsen. Without objection, so ordered. Mr. Poshard. Thank you. [Mr. Poshard's statement may be found in the appendix.] Chairman Torkildsen. Thank you for joining us on the panel today, Mr. Poshard. Mrs. Sweeney, if you'd like to continue with your testimony, please. Mrs. Sweeney. Between June 1988 and April 1989 the bank and their agent, Hanify & King, in particular John Hanify, refused to accept sales of the property, which was our only means of pa5dng back the loan, obstructed the construction financing and filed foreclosure proceedings on the 30th ofNovember 1988. On the 14th ofApril 1989, 1 filed a complaint for reasons ofviola- tion of State laws against ComFed Savings Bank, ComFed Mort- gage Company, ComFed Advisory Company, and my loan officer.