N.H. Banking Dept. seeks expenses from bankruptcy court for FRM Ponzi probe
State revenue agency is looking for a share too
[UPDATED] The New Hampshire Banking Department – the agency most widely criticized for allowing the multimillion-dollar Financial Resource Mortgage Inc. Ponzi scheme to flourish – has filed for nearly $100,000 in claims against FRM’s bankrupt estate, outraging some of the scheme’s victims.
Although the bankruptcy court in Manchester approved the claim in July, the department has since asked the request to be waived altogether. But it's not clear whether the approval can or will be withdrawn.
And even though another state agency, the Department of Revenue Administration has filed its own nearly $100,000 claim over unpaid taxes, the outrage of Susan and Al McIlvene — outspoken advocates for the victims of the FRM scheme — has been focused on the Banking Department.
“Every penny that they take is taken out of the pool for the victims,” said Susan McIlvene. “To have the audacity … they were the ones that helped them accomplish the fraud. They made that claim when they knew that is almost immoral.”
The McIlvenes also charge that the department screwed up in another way: by failing to apply a law that would have required FRM to carry a fidelity bond insurance against this kind of fraud.
The Banking Department won’t comment on the ethics of applying for the money, said Deputy Banking Commissioner Ingrid White, but it does contend that the law the McIlvenes are pointing to applies to banks, not mortgage brokers.
"The Banking Department later contacted NHBR to say that Commissioner Glenn Perlow “has requested the Attorney General's office withdraw the claim."
It was the Banking Department that eventually forced FRM and a related company, CL&M, into bankruptcy in 2009 following the collapse of the Meredith mortgage company that was at the heart of the biggest Ponzi scheme in New Hampshire history.
Under the scheme, Scott Farah and Donald Dodge had convinced hundreds of investors to part with a good portion of their life savings to invest in various commercial mortgages.
Both pleaded guilty to fraud and went to prison, leaving behind few assets and about $80 million in claims that are still being sorted out. The trustee for the bankrupt estate has collected $6.7 million of that money, mainly by settling with victims – hard-money lenders who had claims, according to Jim Donchess, an attorney and partner of Steve Nottinger, who is trustee of the estate.
After various payouts and expenses, the estate has about $3.5 million on hand. Nottinger and his law firm, Donchess & Nottinger, have already applied for more than $550,000 in fees, according to a June filing, and have more than $460,000 coming to them. Nottinger also gets a percentage of estate as the trustee.
Donchess said that he hopes for an initial distribution of the bulk of the funds by the end of the year, but estimates that it will amount to less than a nickel on the dollar.
The McIlvenes won’t even get that – as part of a previous settlement, they gave up their claim – but they are still advocating for other victims.
The McIlvenes were critical of the department for “double dipping,” but White countered, “Applying is not the same as collecting.”
A surety bond doesn’t cover theft and fraud, but a fidelity bond does, and a state law requires the Banking Department to require the entities it regulates to obtain such a bond. If FRM had such a bond, the estate would have another asset that could be distributed to the victims.
But White said that the law was first passed in 1937, when lawmakers never even heard of mortgage brokers. She argued that it was never intended to apply to them, and never has been.
But the McIlvenes say the law was updated as late as 1997 m lawmakers were very much aware of them, and did not exempt them. (Lawmakers however, did pass such an exemption last year in a housekeeping bill that goes into effect in a few weeks. White said that the “clarification” was a “coincidence” and predated the McIlvenes’ raising the issue.)
As for the DRA, it claims FRM owes three years of back business taxes totaling almost $74,000, plus more than $20,000 in interest for a grand total of $94,384.43.
But should the agency pursue the claim when so many victims are being left with next to nothing?
At first, Commissioner John Beardmore said yes. Although he was not able to be reached for comment by deadline, he wrote to the McIlvenes that “the department is obligated by statue to collect all unpaid tax debts.”
But the McIlvenes say no. The state as a whole is somewhat culpable in the mess, they argue. Indeed, there was a bill passed by the Senate last session that would reimburse the victims.
As for attorney James Donchess, he saw no reason to contest legal claims for moral reasons, particularly the Banking Department’s claim.
“We are not going to spend estate money trying to resolve some issue of principle,” he said. And he questioned whether DRA can just waive collections.
“Can a public servant say, ‘Hey I don’t want to collect a tax?’” he asked.
But if either agency declined the money, “I’d be happy. That will be more money to distribute. I’m not going to argue with that.”