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Developers Suing FSLIC Over Failed S&L's Policies

November 11, 1987|Associated Press

DALLAS — Two Dallas developers have sued the Federal Savings & Loan Insurance Corp. for $30 million, alleging that former officials of a failed Arkansas thrift violated federal fraud, racketeering and securities laws by misrepresenting its business condition and intentions.

The suit, filed Friday in Los Angeles, names FSLIC as the only defendant. The agency became receiver of FirstSouth Savings & Loan of Pine Bluff, Ark., on Dec. 4, 1986, after federal regulators declared the institution insolvent.

The developers, George S. Watson and A. Starke Taylor III, are partners in Watson & Taylor Realty Co. of Dallas, which borrowed more than $142 million for real estate development from First-South between June, 1983, and October, 1985.

Beginning in November, 1983, the partners also acquired 19.9% of FirstSouth's stock at a cost to each of more than $4.2 million, according to the suit.

Both Taylor, son of former Dallas Mayor A. Starke Taylor Jr., and Watson are among the more than 400 individuals whose financial records were subpoenaed last summer by a federal task force investigating the S&L crisis.

When FirstSouth closed late last year, federal regulators said the thrift loaned more to Watson & Taylor Realty Co. than it was legally allowed to lend to any one group of borrowers.

In their suit, the two developers said they continually were assured by FirstSouth's principal officers--Howard Wiechern Jr. and Roderick Reed--that the thrift was selling participations in their loans to other S&Ls and keeping only small interests for itself, thus lowering its risk and staying within federal limits on loans to one group.

Unable to Fund

But according to the suit, First-South sold the participations and agreed to take back the loans if the other thrifts should ever want to sell them back.

When the other thrifts did that, FirstSouth violated the regulations prohibiting "excessive or illegal concentration of loans to a group of related borrowers," the suit charged.

When the loans came back to FirstSouth, the suit said, the thrift was unable to continue funding its real estate loans, including those to Watson & Taylor Realty Co.

Watson & Taylor then defaulted, and in March and June of this year, all 14 of the properties mentioned in the suit were sold in foreclosure auctions.

According to the suit, FSLIC is asking Watson & Taylor to pay the $93.1-million difference between the amount the company borrowed and the sales prices of the properties sold at auction.

The suit charges that FSLIC caused the losses by allowing the properties to be foreclosed and asks that the developers not pay anything.

Different Prior Rulings

Despite their 20% ownership, Watson and Taylor said they were not involved in the thrift's operations and acted as they did because of assurances and promises from FirstSouth's officers.

"We were stockholders and borrowers, and not in a position to know what FirstSouth management was doing internally," the developers said in a statement. "We were not involved in the management, nor on the board, and never attended a stockholders' meeting."

Watson and Taylor said they filed the suit in California because the 5th U.S. Circuit Court of Appeals in New Orleans, which hears cases appealed from Texas, requires cases against FSLIC to be heard by the agency in an administrative hearing first.

The 9th U.S. Circuit Court of Appeals, which hears cases appealed from California, has ruled that such suits should be heard in open court.

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