FRM victims lash out at trustee’s role in bankruptcy

The bankrupt estate of Financial Resources Mortgage Inc. – the Meredith company behind a multimillion-dollar Ponzi scheme – has been suing hundreds of the people who were victimized by the swindle for whatever FRM-related assets they may still have. In many cases, the victims are settling, forking over thousands more dollars in order to get on with their lives.Jim Donchess, an attorney and law partner of trustee Steven Notinger, said the trustee is trying to fairly distribute the estate equally.”The simplest, cheapest and fairest thing is to bring all of the assets into the estate and liquidate it on a prorated basis,” said Donchess. “Everyone should be treated the same.”But many of those holding mortgages filed in county courthouses who thought their loans were backed by a particular property in which they invested through FRM aren’t buying the trustee’s idea, saying that essentially FRM is reaching out from its bankrupt grave and stealing from them again.FRM — and its mortgage servicing arm CL&M — was primarily a commercial mortgage brokerage that promised high-interest rates to hard-money lenders backing specific projects.The two firms collapsed in 2009, costing dozens of lenders tens of millions of dollars, resulting in lengthy prison sentences for its two principals — Scott Farah and Donald Dodge — and prompting numerous state investigations into regulatory agencies and their actions surrounding the FRM scheme. Its collapse also launched one of the most complicated bankruptcies in New Hampshire history.’Kicked sand in my face’Clearly, there is not enough money to go around.By the July 6 deadline, creditors filed more than $150 million in claims. Thus far, the trustee has collected only $3.4 million, and it has spent at least $1.1 million in fees, with $580,000 going to Notinger’s own law firm, which will soon be claiming about $175,000 more in legal fees. (By law, Notinger — as trustee — also gets 3 percent of whatever is collected before expenses.)”When these guys get all done, their bill for services rendered will be so close to what they collect from everybody, that nobody is going to get anything,” complained Harry Bean of Gilford, who blames FRM and its aftermath to the accelerated death of a brother to leukemia.He said the FRM debacle cost him $2 million and forced him into Chapter 11 bankruptcy to salvage half of the 75 apartment units he owned. But the FRM trustee showed up at his bankruptcy proceedings and threatened to oppose his reorganization plan. Bean ended up settling, agreeing to give the trustee 45 percent of whatever collateral his 13 FRM-related mortgages would provide — which he doesn’t expect to be much.”They knew I was down on the ground and they kicked sand in my face,” he said. “It seems like a mortgage isn’t worth the paper it is written on. Someone decided that Notinger could have them. The decision is radical, to say the least.”Actually, there has been no decision as of yet. More than a year and a half after the state Banking Department and the Attorney General’s Office forced FRM into bankruptcy, after 14 adversary proceedings (including one omnibus proceeding with nearly 400 defendants), and more than 700 filings, not a single case has gone to trial yet. At least 28 have settled.Those contacted by NHBR are almost as angry at the trustee as they were with Scott Farah. But Donchess said many were happy with the settlements, and those without mortgages are particularly supportive of the trustee’s actions.Donchess argued that since FRM commingled all of the lenders’ money, it is no longer their money. The mortgages don’t belong to them, but belong to the FRM estate. He also argued that the interest that they collected for four years before the firm collapsed was “false interest” and also belongs to the estate.It is unfair that those with property be allowed to collect everything the collateral is worth, while leaving nothing for the unsecured creditors, Donchess contended. Many of the latter lenders’ mortgages never were filed, yet those lenders had the same intention as those with that piece of paper.”Should someone get paid 100 percent so that another person gets nothing? In this case, everybody is a victim. No one is happy,” Donchess said.’This was everything’Certainly, Paul and Lindsay Frucci of Wolfeboro, some of the first to settle, are not. Lindsay said the couple lost $1.6 million due to the FRM fraud. But the FRM estate went after their properties, including one they foreclosed on more than a month before FRM went under. They ended up paying the trustee $38,000 out of the foreclosure proceeds, agreed to hand over 30 percent on two properties sold (worth together about $147,000) and agreed to give 50 percent of whatever they could get on the others.Before Lindsay Frucci first met the trustee, she thought she no longer needed an attorney, but “I came away from that first meeting scared. I felt we now needed protection from him. He treated us as if we were stupid, and that we got what we deserved.”Frucci, however, felt that her husband – 61 and also suffering from leukemia – shouldn’t have to go back to work, that they shouldn’t have had to sell their dream house that they had bought from the sale of her successful business in 2005.”This was everything, all our retirement. And now we hardly have anything.”Then there were those whose loans were secured by the units of Abbott Village in Concord. The trustee sold the development for a half a million dollars. After expenses, some $28,116 would be allocated for each of the 18 units after expenses, with half (or about $14,000 a unit) going to the various mortgage holders and half going to the trustee.But the units were in vastly different shape, said Ken Miller, an outspoken FRM victim from Amherst. Some were finished and fully rented, and others weren’t even built yet. His was rented, so he got the trustee to go up another $10,000, to $38,000, as his payment. But Miller said he invested some $100,000 in that unit, and after carving out his share, walked away with $6,000.Miller said he was also looking at another property in Greenfield, where $50,000 is being held in escrow. His other two partners settled, agreeing to hand over 30 percent of their share. He, however, won’t come to an agreement.”I look at these guys as nothing but extortionists,” he said.It was Miller who sent a letter in April to the court demanding that the trustee give regular status updates on his actions, which would include the amount collected and the fees paid. Such an accounting was filed the following month, though nothing has been filed since.Donchess, however, updated the figures for NHBR in July.”In general the percentages paid by lender/investors range from 30 percent to 60 percent of the value of their loans,” said the status report, “with the amounts paid dependent on a lot of factors unique to each lender/investor’s particular loans and/or financial situation.”Legislative action?Those who do not settle are finding themselves on the receiving end of a separate adversary proceeding.For instance, in May the trustee filed suit against Anne Peterson, Jackson Realtor, and Spruce Mountain Associations, for $217,000 and $39,000 in interest. In another suit filed against a group of Arizona lenders, the trustee is seeking $272,000 and $45,500 in interest.The most watched case is that of Philip and Melanie Migliaccio of Washington state.On July 8, the bankruptcy court dismissed two of the five counts against them, but left the rest intact. The decision, however, only allowed the trustee to move ahead, and raised some questions about the commingling funds that could come back to haunt the trustee should the case go to trial. On the other hand, “the court ruled that even if she owns the piece of paper, Notinger is entitled to go after the money,” said Susan McIlvene, who with her husband Al has been one of the most outspoken advocates on behalf of FRM victims.The McIlvenes, of Kittery, Maine, didn’t wait for an outcome, deciding to settle their own case. The couple, who claim to have lost $843,000 from FRM, forked over $50,000 to the trustee and get to keep about $155,000 of what they have collected as well as three quarters of whatever else they are able to collect in the future.”The cost of fighting for what is rightfully ours would have exceeded the settlement cost,” said Al McIlvene.Others, said the couple, are motivated by the fear that the trustee will come after the interest earned on their loans. The McIlvenes said they have asked the trustee for more clarification on how vigorously he intends to pursue claw backs.”People are terribly concerned, and it is motivating them to reach settlements,” said McIlvene. “The Notinger firm has not been very upfront. He likes to keep you guessing. He thinks that is leverage.”One of the things the McIlvenes said they would like the trustee to be more upfront about is the total number and amount of claims. Although the claims listed add up to $150 million, many are duplicates. Such a number would help in the victims’ claims against the state for failing to stop the fraud despite numerous warning signs.A restitution bill for FRM introduced last year is being retained in the Legislature.Donchess, however, said that many such claims would not be ruled valid by the court, and therefore it is impossible to know how many are legitimate, so such a total would be a “meaningless number”The McIlvenes said they would continue their battle on various other fronts as well. They are still pressing a right-to-know claim against the state concerning a crucial meeting four days after the bankruptcy filing between officials from the Banking Department the Attorney General and the bankruptcy trustees. They contend that the various powers that be colluded to form a common strategy to paint the lenders as investors, hurting chances for recovery. They also are backing a bill referred back to committee last session that calls for restitution on behalf of the state for ignoring many warnings about the Ponzi scheme, which could have resulted in shutting it down years earlier.The McIlvenes said they met with Gov. Lynch at his invitation about both of these matters on May 4 and have not heard from him since.They also said they plan to attend further legislative hearings on the matter and pore through thousands of financial records that Notinger recently placed online, to see if any money was squirreled away.”It’s a huge job,” said Al McIlvene. “But we will do what we feel compelled to do.”