SECTION FIVE

RESPONDENTS’ REAL ESTATE LENDING PRACTICES

I. Hurwitz’s Policy Guidance And Direction

R1.1. Prior to MCO and Federated acquiring an interest in United Financial Group, USAT typically made smaller loans including home mortgage loans and smaller commercial loans. Large real estate transactions, made subsequent to MCO and Federated’s acquisition of UFG stock, were a departure from United’s prior lending practices. Tr. 6,719:1-11 (Graham). USAT’s Senior Vice President for Real Estate, David Graham (“Graham”), testified that after Hurwitz’s company held a position in USAT:

Charles [Hurwitz] basically met with us to talk about the deals we were working on. He gave input of what areas we thought we ought to concentrate on, areas we thought were good for us to invest in . It was generally – he never came and sat down and said, “This is what we’re going to do.” We usually had group meetings and talked about the directions we wanted to go, what directions he thought would be advantageous and, you know, it was kind of an informal approach.

Tr. 5,714:7 - 5,715:9.

R2.2. Graham testified that Hurwitz and Gross were the predominant voices at USAT when the Park 410 and Norwood transactions occurred and that Hurwitz and Gross changed the direction of the real estate business at USAT. Tr. 5,716:1-19.

R3.3. Although Hurwitz was not a USAT director, officer, or a member of USAT’s Senior Loan Committee (“SLC”), he participated in USAT’s real estate functions by, among other things, attending USAT’s SLC meetings. Ex. B-4167, Tab 1039; A-1646, Tab 1040; T-7585, Tab 1363; B-4168, Tab 1042.

R4.4. Graham testified that Hurwitz assisted in giving members of the real estate department a “bigger picture” because “he saw more aspects of the company than we did.” Tr. 6,923:10-17. Graham further testified that Hurwitz’s advice was sought, “so, we often went to ask Charles [Hurwitz], particularly on unique financing issues. He certainly had more knowledge than we did.” Tr. 6,949:6-20.

R5.5. On February 26, 1985, Graham forwarded a memorandum to USAT accountant Jim Wolfe requesting Wolfe’s opinion concerning how regulators and auditors would treat two items, one of which stated:

Charles Hurwitz has proposed that we make a loan to a purchaser of a hotel utilizing a zero-coupon bond approach. It will be a five year loan with all principal and interest due on maturity. My question is this: . . . In essence, what structure of collateral is needed to book current interest on a deferred interest payment?

Ex. T-7475, Tab 787, emphasis added.

R6.6. Gross, likewise, believed it was important to keep Hurwitz apprised of what was happening at the savings and loan level, and from time to time, he would let him know what was going on. Tr. 20,567:10-16 (Gross). Gross considered Hurwitz’s input to be “very valuable” in the corporate bond area, stock arbitrage area, and to a lesser degree, the real estate area. . . .  he was interested in real estate and involved in real estate, but I looked upon him as having his greatest expertise in stocks and bonds.” Tr. 20,568:7 - 20,569:2.

II. USAT Management Was Aware Of Serious Underwriting And Lending

Flaws As Early As October 1984

R7.7. In April or May of 1984, USAT retained Gross as a consultant. Tr. 20,466:16 - 20,467:2. On October 23, 1984, while serving as a consultant for USAT, Gross prepared “Notes Regarding United Savings” and described what examiners would observe if they “came in today to look at” USAT. Ex. T-7571, Tab 1035.

R8.8. In his “Notes regarding United Savings, Gross observed:

$ “United is making 100% loans and funding the interest payments on risky deals, that is real estate deals where the developer has no equity in it at all.”

$ “United is going into risky real estate ventures, both as a partner and as a sole developer. Therefore, they are getting into areas that increase their chances for large losses.”

$ “As of the past month, 27% of all construction loans were all delinquent.”

$ “The real estate owned portfolio is up some $17,000,000 this year from $12,000,000 to $30,000,000.”

$ “A large number of the single family residential and the construction loans are in bankruptcy.”

$ “With a portfolio of approximately 900 commercial loans from United, fully one-third of the files have the original documents missing.”

$ “There is a great deal of question as to whether some of the files even exist.”

Ex. T-7571, Tab 1035.

R9.9. With respect to his observations regarding real estate matters, Gross recognized that he was instructing USAT management that:

because the [acquisition, development and construction] loans are large loans as compared to a home loan, that an examiner walking into the institution is going to look at them far more frequently than he's going to look at a single-family residential loan. As a result of that, I'm saying it is imperative that they get all these properly documented, that they have the -- everything in the file, financial statements, that they be sure they have good credit risk. I'm trying to point out to them that these are going to be the first things looked at.”

Tr. 20,797:20 - 20,798:8.

R10.10. Indeed, Gross reiterated his point: “they better have good backup for what they are doing and it's -- they need to be well-documented. They need to have good partners. They need to have good locations, and they need to have well-documented loans.” Tr. 20,799:12-16.

R11.11. On October 24, 1984, Gross drafted two memoranda: “Solutions to Problems at United Savings,” and “Future Programs of United Savings,” to attempt to solve USAT’s problems. Tr. 20,482:18 - 20,483:10. Among other things, Gross proposed:

$ “We should try to find something that we can take a large profit on to offset some of the losses that we are going to have to take.”

$ “More time needs to be spent with large potential real estate deals to examine them more thoroughly. . . .  But, with a 10 or 15 minute presentation we are approving $40,000,000 land deals which may end up being several hundred million dollar developments. Certainly, there is not enough time in that frame to really determine if these are good ventures or bad ventures.”

$ “I think primarily we need to hit a couple of home runs to create some large profits to try to take the losses we need to take in the rest of the portfolio . . . .”

Ex. T-7572, Tab 1037; T-7573, Tab 1036.

R12.12. Indeed, in UFG’s 10-K for the year ending December 31, 1985, UFG recognized the risk associated with construction and commercial lending, as opposed to single-family residential mortgage lending:

[T]he analysis of prospective construction loan projects requires an expertise that is different in significant respects from that which is required for single-family mortgage lending. If the Company is forced to foreclose on a project prior to or at completion due to default, there can be no assurance that the Company will be able to recover all of the unpaid balance of, and accrued interest on, the loan as well as related foreclosure and holding costs.

Ex. A-3021, Tab 1161, p. UFG-J 1998.

III. USAT’s Management Was Aware Of The Condition Of The Texas Economy

R13.13. UFG’s 10-K for the year ended December 31, 1985 demonstrates management’s knowledge of the downturn in the Texas economy and the existing and potential impact on business:

During recent years, the economy in Texas has experienced a reduced level of business activity and an increased level of unemployment. During this period, the retrenchment in the oil industry caused by the decline in oil prices and over-building of commercial and residential projects in the real estate markets have contributed significantly to the reduced level of business activity and increased level of unemployment. Should this trend continue, or worsen, the Company’s business could be further adversely affected.

Ex. A-3021, Tab 1161, p. UFG-J 1995.

R14.14. Gross elaborated on this theme in a March 26, 1986 memorandum to USAT’s “Executive Committee” and noted several concerns regarding the condition of the Texas economy:

$ “Texas has been in a major recession and is probably headed into a major depression. . . . The end result is that we are having what has been a recession, which now becomes a depression because of the anticipated new round of lay-offs as a result of all the cut-backs in oil company expenditures.”

$ “During 1985, in the real estate market, there was no progress made in office occupancy anywhere in the state, including Houston. . . .  There was some reduction in apartment vacancy in Houston, while vacancy was rising throughout the rest of the state.”

$ “We need to assume “that Houston is going to have a calamitous year this year with a number of oil firms and manufacturers going under and laying off people, which is going to create more vacant space and more supply of houses.”

$ “With the banks taking a very negative attitude, it means that they are not going to be supporting growth in the community, but will be supporting contraction. We need to then take a look at the similar effects on the State of Texas for the oil, although it will not be as severe, they will still be there. And, impose upon this, the over expansion of office facilities and other real estate in Dallas, Austin, and, to a much lesser degree, San Antonio. We also need to look at the shrinking income for the state. I wonder what this might do to employment in Austin if the state has to cut-back on employment.”

$ “. . . I guess, part of the mentality is the same thing that we faced in Houston ten years ago in real estate in that a lot of the things that are being built today are not worth economically what they cost physically the day they are finished because you can’t rent them out at a price that gives you a return on your real costs. The sensible thing is for an entrepreneur to quit building which, of course, puts him out of business . . . .”

Ex. T-7584, Tab 1794.

R15.15. Nevertheless, in the two-year period between December 31, 1984 and December 31, 1986, USAT’s lending in single-family homes decreased from $126,058,000 to $19,035,000, while in the same two-year period, land development loans nearly doubled from $133,129,000 to $254,248,000. Ex. A-3022, Tab719.

IV. USAT Management Was Aware That Falling Oil Prices Were Creating

Major Economic And Real Estate Uncertainties Throughout All Of Texas

R16.16. In this testimony about Texas during the mid-1980’s, Respondents’ expert on the Texas economy and underwriting, Dr. William Wallace, agreed that safe and sound banking practices would require financial institution executives to take anticipated changes in oil prices into account because oil was the most important commodity in Texas. Tr. 27,544:2-13. Wallace testified that the price of oil in Texas is a fundamental price that significantly impacts the economy because of its influence on the prices of many other items. Tr. 27,534:2-5. Indeed, in his Expert Report, Wallace summarized the dependence of the Texas economy on oil: “As goes oil, so goes the Texas economy.” Ex. B-4388, Tab 2007.

R17.17. In his March 26, 1986 memorandum to the Executive Committee, Gross, likewise demonstrated his awareness of a relationship between declining oil prices, stagnant office occupancy rates throughout Texas, and overbuilt office facilities in Dallas, Austin and, to a lesser degree, San Antonio. Ex. T-7584, Tab 1794; Tr. 27,540:19 - 27,541:20 (Wallace).

R18.18. Indeed, as a member of the business community and a director of the Federal Reserve Bank of Dallas in Houston (“FRB Dallas, Houston”), Gross had a good vantage point from which to raise the issues he addressed in his March 26 memorandum. Ex. T-7584, Tab 1794; Tr. 27,541:21 - 27,542:4 (Wallace).

R19.19. Dr. Wallace noted that according to the Historical Crude Oil Price Table for Texas, there was an $8 dip in oil prices over a 13 month period in the early 1980’s -- from the March 1981 price of $37.48 per barrel to about $28 per barrel in April 1983. T-7427, Tab 2011; Tr. 27,551:14 - 27,554:12.

R20.20. However, Dr. Wallace identified January 1986 as “when the sort of panic set in as to what was happening to oil prices.” Tr. 27,554:17-21. During the four months between December 1985 and March 1986, the price of oil steadily declined, dropping by 50 percent -- from $24.51 per barrel in December 1985, to $12.62 per barrel in March 1986. Ex. T-7427, Tab 2011; Tr. 27,554:17 - 27,555:15.

R21.21. As a director of the FRB Dallas, Houston, Gross would have been aware that the FRB Dallas, had created a special group focusing on the energy industry and its impact on the Texas economy. Tr. 27,545:1-12. The FRB Dallas was assessing the impact of falling oil prices on the economy because people in San Antonio, Dallas and Austin were “scared.” Tr. 27,556:6 - 27,557:14.

R22.22. Unlike the oil price dip of the early 1980’s, the falling oil prices that started in January 1986 -- dropping 50% in the first quarter -- were unprecedented. Indeed, Wallace testified that people in San Antonio, Dallas and Austin were “scared, because nobody knew where it was headed. And there was just simply no way to tell how long this dip was going to – how much further down it was going to go or how long it would last.” Tr. 27,560:10-18.

V. Conditions In The Real Estate Markets Of San Antonio And Austin

R23.23. Newspaper articles published in 1985 and 1986 before the Park 410 and Norwood transactions were approved reported that the office and retail markets in both San Antonio and Austin were overbuilt. Ex. T-7004, Tab 815; T-7005, Tab 650; T-7743, Tab 789.

A. San Antonio

R24.24. Newspaper articles in 1985 and 1986, before the Park 410 and Norwood loans were approved, reported that construction and permanent financing for office, retail, and apartment construction, had become virtually unavailable for projects underway, much less those not yet started. Ex. T-7005, Tab 650; T-7004, Tab 815.

R25.25. In December 1985, a major San Antonio newspaper carried the headline “Real Estate Boom City Turns To Bust,” and reported “Overbuilding Of Offices, Retail, Apartments And Lost Financing Lead To Plenty Of Foreclosures.” Ex. T-7005, Tab 650.

R26.26. In San Antonio, according to a study available to USAT in October 1985 (the “Tremar Study”), more than 12,000 acres of land were competing with the Park 410 project in the area adjacent to and in the immediate vicinity of Park 410. Ex. T-7127, Tab 710.

R27.27. By December 1985, three months before USAT approved the Park 410 loan, it was a matter of common knowledge that San Antonio had more than a two-year supply of office space, with additional office and hotel space and multifamily projects already under construction, and that vacancy rates were rising. Ex. T-7744, Tab 788 (December 15, 1985).

B. Austin

R28.28. In Austin, information publicly available in March 1986, prior to the approval of the Norwood transaction, revealed that the area in the vicinity of the Norwood site, referred to in City of Austin documents as the “Northeast Corridor” had a forty-five year supply of office space already planned. Ex. T-7651, Tab 689, p. OW195368.

R29.29. Contemporaneous Austin newspaper articles reported that an oversupply of office space existed. Ex. T-7003, Tab 662 (July 22-28, 1985); T-7436, Tab 1821 (May 19, 1985).

R30.30. Similarly, significant competition for existing hotels/motels existed in the area immediately surrounding the Norwood site. Ex. T-7138, Tab 690, pp. OW193377-88.

VI. USAT Maintained Inadequate Capital And Excessive Loan Concentrations

R31.31. Against this economic backdrop, in March 1986, USAT approved an $80 million dollar loan to Park 410 Joint Venture (discussed infra. at Findings R50 - R239). At the time the Park 410 loan was approved, USAT’s revised first quarter 1986 Thrift Financial Report (“TFR”), prepared August 8, 1986,[1] reported regulatory net worth of $215.3 million; and tangible regulatory net worth of negative $31.3 million (calculated as regulatory net worth, minus goodwill of $246.6 million). Ex. A-4012, Tab1023; T-7451, Tab 1022; Tr. 10,608:7-16 (Stone).

R32.32. Similarly, before filing its second quarter 1986 TFR, USAT, on June 2, 1986, approved another large real estate deal, the Norwood transaction, in the form of a $30 million loan, and a $9.4 million cash investment (discussed infra. at FOF R240 - R380).

R33.33. Measured against USAT’s regulatory net worth (also referred to as “capital”) and negative tangible net worth (also referred to as “tangible capital”), OTS’s underwriting and safety and soundness expert, John Stone[2] testified that the Park 410 and Norwood real estate transactions constituted 37 percent and 18 percent, respectively, of USAT’s regulatory capital, and, when the two transactions are combined, they represent more than 50 percent of regulatory capital. Tr. 10,631:1-21; Tr. 10,635:2-5.

R34.34. Both the Park 410 and Norwood transactions were speculative in that they were predicated on the future value of real estate where USAT had substantially all of the money at risk, and with little protection from default outside the underlying real estate. Tr. 10,634:7-14 (Stone). As Stone testified, because the sources of USAT’s protection against default on these loans was not diversified, losses suffered on loans of this size, relative to USAT ‘s available capital, can dissipate the capital account that serves as a buffer against losses to the institution. Ex. T-7451, Tab 1022; Tr. 10,633:16 - 10,634:6 (Stone).

R35.35. Respondents’ underwriting expert, Dr. William Wallace, agreed that “large loans diminished the loss-absorbing capacity of the institution . . .” and that “the more you reduce that capital, the less that loss-absorbing capacity is.” Ex. A-11178A, Tab 2009; Tr. 27, 609:11-21.

R36.36. Specifically, Stone explained that, based on adverse trends known to USAT management, “the future prospects for capital sufficient to carry loan/investments of $80 million and $39.4 million were, at best, highly questionable at the time approved.” T- 7451, Tab 1022.

A. USAT’s Profits Were Declining

R37.37. Quarterly TFR’s prepared by USAT and filed with the Federal Home Loan Bank of Dallas demonstrated that during the period from 1984 through the first quarter of 1986, USAT was unprofitable on an operating basis. Ex. T-7451, Tab 1022. “Absent gains on sale of branches and loans (non-recurring events), the institution operated at a loss.” Id. For example, USAT reported net income of $4.79 million on its September 30, 1985 TFR. However, USAT earned $8.3 million in non-recurring profit in the same quarter from sales of investment securities and loans. Subtracting the $8.3 million of non-recurring income from the $4.79 million of net income indicates that “the institution on an operating basis lost approximately $3,600,000.” Ex. A-4010, Tab 1023, Tr. 10,661:3 - 10,662:9 (Stone).

B. USAT Held A Substantial, And Increasing, Inventory

Of Foreclosed Real Estate

R38.38. USAT’s real estate owned (“REO”), that is, the value of real estate held by the institution due to foreclosures, had been increasing since at least March, 1984:

Foreclosed Real Estate - USAT

1984 1985 1986

March $ 17,200,000 $48,400,000 $122,100,000

June 20,500,000 63,900,000

September 36,400,000 79,400,000

December 37,700,000 90,900,000

Ex. T-7541, Tab 1023.

R39.39. With respect to USAT’s REO burden, Gross expressly stated his agreement with the assessment, made by then USAT president Gerald Williams, about USAT’s REO and workout problems in 1985 and thereafter: “we’ve got all this real estate to carry and we need a stream of income to carry it.” Tr. 20,557:2-12.

C. Operating Losses

R40.40. The Form 10-Q filed with the Securities and Exchange Commission (“SEC”) for the quarter ending March 31, 1985, shows that UFG, USAT’s holding company, had a net loss for the quarter of $7.7 million as a result of operations (a decrease of $10.7 million from net income of $3.0 million for the same period in 1984). Ex. T-7569, Tab 721, p. OW012960.

R41.41. According to the March 31, 1985 10-Q, this deteriorating financial condition, was attributable, in part, to the “continuing adverse economic and real estate conditions primarily in the Houston and Brownsville areas which have resulted in significant increases in foreclosures and non-accruing loans.” Ex. T-7569, Tab 721, p. OWO12963; see also Ex. T-7599, Tab 1364, p. 1 (October 8, 1985 UFG Audit Planning Memorandum referring to the “continuing depression in the Houston and Rio Grande Valley real estate and home construction markets, which has resulted in increased foreclosures and nonaccruing loans.”)

R42.42. The Form 10-Q filed with the Securities and Exchange Commission (“SEC”) for the quarter ending June 30, 1985, shows that net income for UFG had declined by 75% over the previous year's corresponding quarter and that a net loss of $6.5 million for the six months ended June 30, 1985 represented a decrease of $14 million from the net income of $7.5 million for the same period in 1984. Ex. A-3034, Tab 913 pp. CN114300, CN114303.

R43.43. According to the June 30, 1985 10-Q, these deteriorating financial conditions “are primarily attributable to the relatively weakened housing and real estate markets in Houston and most of Texas, which have resulted in significant increases in foreclosures and nonaccruing loans.” Ex. A-3034, Tab 913, p. CN114303.

VII. FHLBB Memorandum R-62 - Directors’ Responsibilities

R44.44. Federal Home Loan Bank Board Memorandum R-62 (“FHLBB Mem. R-62”), promulgated May 8, 1985, established the duties and responsibilities of savings and loan directors. Among other things, FHLBB Mem. R-62 provided:

$ “While it is the responsibility of each director to comply with all regulations, board members have a far broader responsibility to the institution to meet their fiduciary duties and to exercise reasonable care and due diligence in supervising the management of their institution’s affairs.”

$ “[D]irectors must recognize that their institutions are primarily engaged in lending funds of their depositors or members to others. The director’s have a primary responsibility to assure that the institution is operated prudently and in a safe and sound manner so that these borrowed funds will be adequately protected.”

Ex. T-7137, Tab 1840.

R45.45. Further, FHLBB Mem. R-62 identified specific obligations imposed by a director’s duty of care to the institution. FHLBB Mem. R-62 provided: “The duty of care includes the responsibility of the directors to:

$ select and retain competent management . . .”

$ require that adequate and reliable information is provided upon which they can make decisions . . .”

$ carefully review the documentation which is provided . . .”

$ monitor the activities that are delegated to the officers of the institution to insure that the board of directors’ policies are being carried out . . .”

Ex. T-7137, Tab 1840.

R46.46. Moreover, FHLBB Mem. R-62 cited to a judicially recognized duty of directors established in Joy v. North, 692 F.2d 880, 896 (2d Cir. 1982): “Directors who willingly allow others to make major decisions affecting the future of the corporation wholly without supervision or oversight may not defend on their lack of knowledge, for that ignorance itself is a breach of fiduciary duty.” Ex. T-7137, Tab 1840.

R47.47. Regarding the duty of unqualified loyalty, FHLBB Mem. R-62 provided that: “A director . . . should consistently seek to avoid any transaction which would give the appearance of preferential treatment or usurpation of corporate opportunity.” Ex. T-7137, Tab 1840.

R48.48. Regarding lending operations, FHLBB Mem. R-62 provided:

$ “Loans constitute an institution’s major asset and as such warrant careful clear-cut policies in regard to their substance and the approval process.”

$ “Policy should require high-risk or unusual loans to be presented to the board for final approval. The institution’s capabilities and the risks involved should be carefully assessed, to insure that the institution has adequate resources to engage in the proposed activity and the return merits the risk undertaken.”

Ex. T-7137, Tab 1840.

R49.49. Finally, FHLBB Mem. R-62 recognized the environment in which savings and loan institutions were operating in the 1985 time frame:

The deregulated business environment places additional responsibilities on board members. It is incumbent upon the board of directors to thoroughly review any proposed new activity to assure themselves that the venture is pursued in a safe and sound manner and the risks assumed are reasonable ones for the institution to take under the circumstances.

Directors are responsible for operating results. As such, adherence to the following procedures should assist the board of directors in obtaining adequate and accurate information upon which to make informed decisions.

1. Documentation

Thorough documentation evidencing the details of all business transactions should be an integral part of an institution’s books and records. . . .  The directors should have full access to such records and should utilize them in decisionmaking relative to loan approvals, investment transactions, etc. The board of directors’ meeting minutes should indicate that the directors are cognizant of and have studied documentation upon which their decisionmaking is based.”

Ex. T-7137, Tab 1840.

VIII. Park 410

A. The Park 410 Joint Venture and the 1985 Purchase of Park 410

1. History

R50.50. During the fall of 1984, USAT attempted to purchase property known as Park 410 outside of San Antonio. Ex. T-7045, Tab 636; T-7047, Tab 638; Tr. 5,754:7-17.

R51.51. Park 410 was originally part of a larger tract of approximately 1,534 acres that sold in March 1980 for $13,345,000 ($8,700 per acre). In August 1981, 428.9 acres were carved out of the larger tract and sold to Notre Dame Development Corporation (“Notre Dame”) for $5,788,946 ($13,497 per acre). Ex. T-7069, Tab 634, p.51.

R52.52. In August 1983, Notre Dame sold the property (then comprising 427.388 acres) to Park 410 West, Ltd., a partnership of C.R. McClintick and Alamo Savings and Loan Association (the “Alamo Group”), for $13,426,410 ($31,415 per acre). Ex. T-7069, Tab 634, p. 51.

R53.53. Without the benefit of an appraisal, on September 27, 1984, USAT offered to purchase the Park 410 property for $35 million, or $81,604 per acre, with $5 million in cash and $30 million non-recourse seller financing. Ex. T-7045, Tab 636; Tr. 5,783:5 - 5,787:8 (Graham).

R54.54. This offer was apparently rejected because on October 22, 1984, USAT offered to purchase the same property for $37,250,000, or $86,850 per acre, with a $7,450,000 down payment and the balance with non-recourse seller financing. Ex. T-7047, Tab 638.

R55.55. One other party was also seeking to acquire the Park 410 property. Gulf Management Resources, Inc. (“GMR”), a development company, was negotiating for the purchase through their lawyer, Kenneth Gindy, of the San Antonio law firm, Oppenheimer, Rosenberg, Kelleher & Wheatley (“Oppenheimer, Rosenberg”). Tr. 9,337:19 - 9,339:7.

R56.56. Gindy testified that he had represented GMR in “eight or ten” transactions prior to their contacting him to represent them in their efforts to acquire the Park 410 site. Tr. 9,338:3-6.

R57.57. Gindy further testified that prior to accepting the engagement from GMR, he “checked to see whether the law firm had any possible conflicts of interest.” He found no conflicts. Tr. 9345:6 - 9,346:1.

R58.58. At some point before November 1984, USAT contacted Stanley Rosenberg (“Rosenberg”), Gindy’s partner at Oppenheimer, Rosenberg, to negotiate the transaction with the Alamo Group on USAT’s behalf. Ex. T-7048, Tab 639; Tr. 5,729:8 - 5,730:11 (Graham); Tr. 9,341:4 - 9,343:3 (Gindy).

R59.59. Gindy testified that in “probably the first week of November 1984,” he went with three or four of his GMR clients to meet with the Alamo Group partners to negotiate to purchase the property. While waiting for their meeting, Gindy saw Rosenberg exiting the elevator and only then learned that Rosenberg was representing USAT to purchase the same property. Tr. 9,341:11 - 9,343:3.

R60.60. After returning to his office and discussing the matter with Rosenberg, Gindy decided it was “improper . . . to have two clients seeking the same parcel, bidding against each other. Knowledge would step across and it would not be right. So, I told [GMR Chairman, Noel Simpson] that . . . I would not be able to prepare the letter of intent or work with him on preparing the letter of intent.” Ex. T-7049, Tab 635 p. CN086216; Tr. 9,341:11 - 9,346:1.

R61.61. On November 15, 1984, USAT forwarded a proposal for the Alamo Group to sell the land to USAT for $38 million, with a 20% ($7,600,000) down payment, if the sale closed during 1984, or $38,500,000, with a 20 % ($7,700,000) down payment, if the sale closed after 1984. The balance of the sale price would be a seller financed, non-recourse note. Ex.T-7048, Tab 639.

R62.62. This proposal did not result in a sale. On November 20, 1984, the Alamo Group returned USAT's November 7, 1984, proposal offer, unexecuted. Ex. T-7048, Tab 639; Tr. 5,788:15 - 5,789:12 (Graham).

R63.63. Shortly after this rejection, USAT withdrew from the negotiations. Tr. 5,788:15 - 5,789:12 (Graham).

2. Rosenberg

R64.64. Rosenberg was a close personal friend and business associate of Hurwitz in 1985. Tr. 5,730:12-22 (Graham); Tr. 9,304:21 - 9,306:14 (Gindy); Tr. 9,517:4-16 (Gindy); Tr. 20,518:1-6 (Gross).

R65.65. In addition to being a close, personal friend of Hurwitz, Rosenberg was also a shareholder and member of the Board of Directors of MCO, and was also a shareholder of UFG, USAT’s parent holding company. Ex. A-2057, Tab 211, p. DE005381; A-2058, Tab 212, p. 60 (VIII); T-7151, Tab 956, p. OW202162; A-2056, Tab 210, p. 60 (VIII); Tr. 9,304:21 - 9,305:14 (Gindy).

R66.66. On or about March 3, 1985, after USAT had withdrawn from the negotiations to purchase Park 410, GMR, Rosenberg, and Grieshaber and Roberts (“G&R”), a San Antonio real estate brokerage, entered into an agreement to become partners in Park 410 West Joint Venture (“Park 410 JV”), a partnership they formed to purchase the Park 410 property. Rosenberg had a 50% ownership interest in the partnership, GMR a 43.75% interest, and G&R a 6.25% interest. Ex. B-3822, Tab 637 (see Exhibit B).

3. The 1985 Acquisition and the Rosenberg/USAT Agreement

R67.67. The Park 410 West Joint Venture Agreement was entered March 3, 1985. The parties to the Joint Venture Agreement were: Rosenberg, Westplex Investment Corp. (a GMR subsidiary), and G&R. Ex. B-3822, Tab 637 (Exhibit B), p. CN080935.

R68.68. As a 50% partner in Park 410 JV, Rosenberg was required to advance 50% of the costs to “purchase, own, improve, hold for investment, lease or sell the [Park 410 property].” Ex. B-3822, Tab 637 (Exhibit B), pp. CN080905 and CN080914-21.

R69.69. The Park 410 Joint Venture Agreement obligated Rosenberg to contribute capital to the Joint Venture. Rosenberg’s share of the Venture’s financial obligations was as follows:

$ Initial Capital Contribution $ 155,000

$ Earnest Money Contract to acquire Park 410 $ 250,000

$ Letter of Credit to the Alamo Group $ 2,000,000

$ Westside Expressway contribution $ 200,000

Ex. B-3822, Tab 637, pp. CN080914-16, §§ 3.01 and 3.03(a), (b), and (d).

R70.70. In addition, Rosenberg was obligated to fund:

$ 50% of the annual interest due to the Alamo Group for financing

$ 50% of “Additional Working Capital Contributions” as required by the Venture

Ex. B-3822, Tab 637, pp. CN080915-17, §§ 3.03(c) and 3.04.

R71.71. Approximately a year later, on March 1, 1986, consistent with the terms of the Park 410 Joint Venture Agreement, the Joint Venture called for additional capital to make the annual interest payment to the Alamo Group. Rosenberg’s obligation under the annual interest payment provision was $1,738,417.22. Ex. B-3822, Tab 637, pp. CN080915 (Joint Venture Agreement §3.03(c)); B-3844, Tab 775A, p. US0004932 (Exhibit Tab 15).

R72.72. In early to mid-March 1985, Rosenberg offered USAT a one-half interest in his 50% interest in Park 410 JV in exchange for, among other things, USAT funding all of Rosenberg’s financial obligations to the Venture. Ex. A-1643, Tab 159.

R73.73. In 1985, investments by USAT, or its subsidiaries, in projects such as Park 410 were, according to USAT policies, the initial responsibility of USAT's Real Estate and Joint Venture Committee (“REIC”). Ex. A-1102, Tab 128, pg.16-17.

R74.74. As of February 14, 1985, the REIC members were: (1) C.E. Bentley; (2) Gerald R. Williams; (3) Jenard M. Gross; (4) Michael R. Crow; (5) Gem B. Childress; and, (6) David R. Graham. Ex. A-1102, Tab 128, p.16.

R75.75. According to the USAT Board of Directors’ Minutes of February 14, 1985, the REIC’s delegated authority was limited to $2.5 million: “Any Real Estate and/or Joint Venture Project which involves a total equity and/or debt exposure to the Association of $2.5 million or more shall require prior Board ratification.” Ex. A-1102, Tab 128, p. 17, emphasis added. Gross explained that the Board’s delegation meant that “[w]ithout board approval, investments in joint ventures were limited to $2 and a half million. . . .” Tr. 20,497:20 - 20,498:19.

R76.76. On March 18, 1985, the REIC approved the proposal to “enter into a partnership with Stanley Rosenberg and . . . become a venturer in Park 410 West Joint Venture” with the intention of acquiring “the tract for either a short-term investment or a long term phased development with a financial partner.” Ex. A-1643, Tab 159.

R77.77. The REIC approval provided:

$ “[E]ach partner shall share 50-50% in both the profits and losses; Mr. Rosenberg shall be personally liable for his share of the losses.”

$ “[USAT] shall be responsible for [USAT and Rosenberg’s] cash [obligations to Park 410 JV] during the next two years . . . . Any cost in the issuance of a letter of credit shall be borne by the [Rosenberg/USAT] partnership and all cash advances shall accrue at [the prime rate] +2%.”

$ The venture “will have the following ownership interests:

Rosenberg / USAT Partnership 50.00%

Westplex Investment Corp. N.V. 43.75%

Grieshaber and Roberts Investments, IV 6.25%

100.00%”

Ex. A-1643, Tab 159, p. 1, emphasis added.

R78.78. The REIC approval:

$ Obligated USAT to provide a $2,000,000 letter of credit payable to the Alamo Group.

$ Planned on a two-year period for repayment of the promissory notes, and

$ Envisioned total potential expenditures by USAT over the two-year period of at least $7,500,000 “in [letters of credit], interest payments and marketing/engineering costs.”

Ex. A-1643, Tab 159, p. 2.

R79.79. The REIC approval described the venture’s intentions for the two-year (through March 29, 1985) investment:

During the next two years the venture plans to spend $1,036,200 on utility commitments, marketing and engineering studies and the Northwest Freeway contribution. Thereafter, after a financial partner has been obtained (USAT will have the opportunity to enter later as the financial partner for a 50% interest in the project), a complete internal development program of utilities and streets shall be undertaken. This cost is estimated to be $6,500,000.

Ex. A-1643, Tab 159, p. 3; Ex. B-3844, Tab 775A (at Exhibit Tab 70, p. US0005704; Exhibit Tab 71, p. US0005671, and Exhibit Tab 72, p. US0005788).

R80.80. The REIC approval also explicitly described one of the possible courses of action available to USAT and the Joint Venture if they decided at the end of two years - March 1987 - that they did not want the downside risk associated with the park 410 property if it were not readily marketable. Specifically, the REIC approval estimated the market value for the property, and the cost to USAT to exit the venture at the end of two years, if it decided not to purchase the entire tract:

If the venture decides not to purchase the entire tract at the end of two years, USAT could, under the release provisions, make a $10,000,000 payment and release 71 acres at the Loop 410/Northwest Freeway corner and walk away from the rest of the tract and the remaining balance of the seller’s notes. The USAT/UFC basis in this acreage would be $5.65 per square foot, with market values for this acreage ranging from $10.00 to $20.00 per square foot. This provision in the contract could provide an escape if we found only a portion of the tract was readily marketable which certainly reduces our downside risks.

Ex. A-1643, Tab 159, p. 2. The source of the market value estimate, however, is not explained in the approval. Ex. A-1643, Tab 159.

R81.81. The REIC approval notes that the venture has run two different scenarios to calculate potential profits to the venturers. One, where the property can be “flipped” during the two year period. The other “assumes full development and sale out over 6 years.” The approval also states that G&R “intend to commence marketing investor tracts as soon as possible and anticipate that 100 acres could be sold in the first year. Ex. A-1643, Tab 159, p. 3.

R82.82. The March 18, 1985 REIC approval also made reference to an appraisal: “The present appraisal on a (sic) ‘as is’ basis is $72,550,000.” Ex. A-1643, Tab 159. However, no such written appraisal was ever located in USAT’s books and records.[3]

R83.83. Prior to the REIC approval on March 18, 1985, USAT had neither obtained, analyzed, nor reviewed, any appraisal information on the property. Ex. A-1643, Tab 159.

R84.84. The only “analysis” of the transaction are in two notations in the “Comments” section of the REIC approval:

This is the same tract that [Childress and Graham] tried to purchase last year from Alamo. The price in this contract is only slightly higher than the price we offered. We felt good about this tract then, and its location, and even more now.

. . . 

Mr. Rosenberg is very high on this tract based upon his knowledge of what is happening in this general area and [San Antonio Mayor] Cisneros’ commitment to the freeway and the full development of the western section of San Antonio.

Ex. A-1643, Tab 159.

R85.85. All of the documentary information obtained by USAT regarding the Park 410 project had been supplied by GMR, who, as a venturer, had a financial interest in the project. Ex. A-1643, Tab 159; T-7049, Tab 635; Tr. 20,542:3 - 20,543:7 (Gross). As of March 1985, the only information on the project were profit projections and a forecast of future value, both generated by GMR, viz., a client of Rosenberg's law firm, and Rosenberg’s partner on the project. Additionally, the project development plans were incomplete. Ex. A-1643, Tab 159; T-7049, Tab 635; A-10253, Tab 780. Moreover, Gross testified that at the time he signed the REIC approval, he had “no experience in the San Antonio market.” Tr. 20,590:4-8.

R86.86. Other than the comments in the REIC approval, none of USAT's Board of Directors minutes, senior management meeting minutes, REIC meeting minutes, or any other records of USAT reflect any review or analysis of independent appraisals, market studies, feasibility studies or any other due diligence prior to USAT’s March 18, 1985 investment decision regarding the Park 410 JV. Ex. A-1643, Tab 159; Tr. 5,761:8 - 5,762:4 (Graham); Tr. 5,786:16 - 5,787:8 (Graham).

R87.87. The Alamo Group sold the property on March 29, 1985, to Park 410 JV for $39,767,699.47, or $93,048.24 per acre, with non-recourse, 100% seller-financing. Ex. B-3844, Tab 775A (at Exhibit Tab 70, p. US0005704; Exhibit Tab 71, p. US0005671, and Exhibit Tab 72, p. US0005788). The financing arrangement gave Park 410 JV two years, until March 29, 1987, to pay off the debt. Ex. A-1643, Tab 159.

R88.88. Rosenberg and USAT executed their “agreement,” approved by the REIC, referenced in FOF R72 - R92 (the “Rosenberg/USAT Agreement”), on March 29, 1985. The agreement provides: “United Savings Association will advance all monies or arrange all letters of credit required for the acquisition, holding and development of the property which are required to be provided by Rosenberg under the terms of the attached Joint Venture Agreement.” Ex. B-3822, Tab 637, CN080901; T-7009, Tab 640.

R89.89. Rosenberg, in turn, agreed to repay USAT out of any profits generated by the project. Ex. B-3822, Tab 637, p. CN080902.

R90.90. USAT was a silent partner in the Rosenberg/USAT Agreement, and was not itself a party to the Joint Venture Agreement. Ex. B-3822, Tab 637, p. CN080905; Tr. 6,006:3-7 (Graham). The Rosenberg/USAT Agreement failed to provide USAT with the ability to assert any control over the Joint Venture. Ex. T-7009, Tab 640; T-7062, Tab 645. Further, the Rosenberg/USAT Agreement:

$ was merely a two-page letter drafted by Graham. Ex. B-3822, Tab 637; Tr. 5,765:16-18 (Graham); Tr. 21,845:13 - 21,847:1 (O’Connell).

$ was entered into without providing USAT with the benefit and protection of a secured interest in the Park 410 property. Ex. B-3822, Tab 637.

$ was never recorded in the official records of the State or County governments. Tr. 20,593:11 - 20,594:9.

R91.91. Despite the REIC’s delegation requirement that “any [project] which involves a total equity and or debt exposure . . . of $2.5 million or more shall” receive “ratification” from the USAT board of directors “prior” to “commencement of activity,” neither the March 18, 1985 REIC approval of the Park 410 transaction, nor the March 29, 1985 Rosenberg/USAT Agreement were presented to the USAT board of directors for review, and neither ever received board ratification. Ex. A-1102, Tab 128, p. 17, emphasis added; A-1104, Tab 130; A-10561, Tab 175; A-1108, Tab 131; Tr. 20,609:16 - 20,613:11 (Gross).

R92.92. Further, the Rosenberg/USAT Agreement exposed USAT to the possibility of funding as much as one-half of the $64,832,000 estimate of “Total Costs” referenced in GMR’s Investment Presentation as the cost of acquiring, holding, and developing Park 410. Ex. T-7049, Tab 635, p. CN086213. The Rosenberg/USAT Agreement obligated USAT to fund up to $32.4 million in costs ($64.8 million x 50% Rosenberg/USAT interest); $16.2 million on its own behalf, and $16.2 million on behalf of Rosenberg. Ex. B-3822, Tab 637; Tr. 21,848:15 - 21,849:3 (O’Connell). Rosenberg, on the other hand, had none of his own money invested in the project. Tr. 20,526:22 - 20,527:3 (Gross).

R93.93. Indeed, USAT calculated its own contingent liability on the Park 410 project as well in excess of $2.5 million. In a November 4, 1985 memorandum to Crow, USAT accountant Chuck Doolittle calculated USAT’s potential liability on the Park 410 project at $9,754,425. Ex. T-7663, Tab 1364C.

B. Events Leading To The 1986 Park 410 Loan

R94.94. The Joint Venture intended to utilize the first six months after formation of the Joint Venture to obtain financing “to cover the costs of paying down the land notes and funding the land development/infrastructure and associated costs in respect of the underlying property . . . .” Ex. T-7104, Tab 809; Tr. 7,537:20 - 7,538:5 (White).

R95.95. On May 13, 1985, Charles White, GMR’s Project Manager for Park 410, in a memorandum to Noel Simpson (“Simpson”), GMR’s Chairman, provided calculations of profitability for an assumed sale of Park 410 without developing it. Among White’s assumptions was that a sale of the property could take place on October 3, 1985, and that project costs would be limited. Ex. T-7331, Tab 811; Tr. 7,502:16-20.

R96.96. White’s analysis assumed a resale price of either $3.25 or $3.50 per square foot. At $3.25 a square foot, the property would have been valued at $48,178,111. At $3.50 a square foot, the property would have been valued at $51,884,119. Ex. T-7331, Tab 811.

R97.97. The Park 410 JV Status Report for the period of April 1, 1985 through June 30, 1985, reflects the fact that the venture’s objective was apparently amended, deciding against the development approach:

To acquire . . . [and] hold [the Park 410] property at least for the minimum time required to achieve capital gains tax status (ie., 6 months plus one day from Date of Purchase = 2 Oct 85).

Once the capital gains tax period has passed to sell the property to another entity at a profit, which would itself conduct the infrastructure development and tract sales.

Ex. T-7335, Tab 818, emphasis added.

R98.98. Adding to the confusion about the investment purpose of the Park 410 Joint Venture, the minutes to GMR’s June 27, 1985, Progress Review meeting state: “The Joint Venturers have agreed that no sales negotiations can be entertained at this time. The Joint Venture has no intention of developing the property or of selling individual tracts. The property is held as an investment. . . .” Ex. T-7334, Tab 973, emphasis added.

R99.99. With respect to Appraisals, the Progress Review meeting minutes state:

Two appraisals will be required in connection with arranging debt and equity:

- unimproved, and

- improved.

Following discussion with [J. Grieshaber], Love & Dugger identified as the most qualified appraiser at this time for the property (just completed similar exercises for Westover Hills).[4] [Charles White] to meet Richard Dugger and Gerald Schultz to identify fee basis, delivery dates, etc. Both appraisals are required by 30 Aug 85.

Ex. T-7334, Tab 973, emphasis added.

R100.100. Despite Park 410 JV’s stated intention not to develop the property, and notwithstanding the fact that the Park 410 JV had until March 29, 1987 to pay off the Alamo Group, between March 3, 1985 and October 2, 1985, Park 410 JV unsuccessfully sought an $80 million loan from at least ten sources, including banks, savings and loan associations (other than USAT), insurance companies, and mortgage brokers, to pay off the Alamo Group and to provide funds for development and holding (taxes, interest, etc.) of the project. Ex. T-7340, Tab 813, p. CN082615, §2.1; T-7182, Tab 816; T-7186, Tab 939 (required 20% equity investment by borrowers); T-7188, Tab 940; T-7189, Tab 941 (required 20% equity investment by borrowers); T-7183, Tab 817; Tr. 9,515:14 - 9,517:3 (Gindy); Tr. 7,570:17 - 7,572:1 (White).

1. Negotiations With USAT

R101.101. After Park 410 JV failed to obtain a loan from any other lenders on the terms it sought, it turned to USAT. Ex. T-7339, Tab 814; T-7186, Tab 939; T-7188, Tab 940; T-7189, Tab 941; T-7182, Tab 816; T-7183, Tab 817; Tr. 7,572:17 - 7,578:16 (White); Tr. 10,803:8 - 10,804:9 (Stone). According to White, the Joint Venturers were confident USAT would finance the project given Rosenberg’s relationship with Hurwitz. Tr. 7,578:6 - 7,579:12.

R102.102. In a letter dated October 29, 1985, USAT wrote to Park 410 JV setting out its proposal terms for a Park 410 loan, stating that “these are the typical terms and conditions under which our latest acquisition and development loans have been made.” Ex. T-7072, Tab 648. The proposed terms included:

$ “Loan Amount,” $75 million, however this amount could be modified after a more detailed review of the cost projections.

$ “Rate,” prime plus 2%.

$ “Origination Fee,” 2% at closing and 1% payable for each renewal based on remaining committed loan amount.

$ “Term,” three years with two one-year options to renew.

$ “Collateral,” 100% joint and several liability of the borrowing venture and the individual joint venturers.

$ The pledge of $15 million in certificates of deposit and/or irrevocable letters of credit to USAT.

$ “Profit Participation,” USAT shall have the option to receive either 35% of profits generated from sales and/or refinancing of the property or a minimum release fee of 3%.

$ “Bonding Requirements,” USAT shall not be obligated to provide any funds to cover costs associated with the project not listed in the loan budget.

Ex. T-7072, Tab 648.

R103.103. A November 12, 1985 memorandum from Simpson to his Joint Venture partners (Rosenberg and G&R), sets out the terms of the financing arrangement he would seek from USAT:

$ financing of 100% of the development costs

$ A term of “3 years with option to renew . . . for two years, ie., an effective primary term of 5 years; plus options to renew for two successive one year terms . . . .”

$ Interest at Prime plus 2%

$ Origination fees of 2%, plus 1/2 percent at the time options to extend are exercised.

$ Collateral consisting of:

a) a first lien deed of trust over the whole property;

b) Several guarantees of the general partners . . . amounting to 30% of the principal amount of the loan outstanding at the time repayment is due, the cash collateral referred to in c) below, being set off against such guarantees if and when called.

c) Pledge of up to $15,000,000 in Certificates of Deposit and/or Irrevocable letters of Credit . . . .

Ex. T-7339, Tab 814.

R104.104. By letter dated December 9, 1985, USAT wrote to Park 410 JV modifying its proposed terms for a Park 410 loan:

$ A revised loan amount of $79 million, subject to review of development costs.

$ “Term,” five years, with two one year extensions.

$ “Origination Fee,” 3% for the first five years and 1% for each subsequent extension.

$ “Collateral, Top 25% of the principal balance; guarantees can be several if at least 90% of the loan is guaranteed by either Stanley Rosenberg or the Gulf Resources group.”

$ The pledge of $10 million in CD’s or LOC’s; never to exceed 30% of the principal balance plus funds committed but not yet funded; e.g. if the loan is reduced to $20 million the collateral is reduced to $6 million.

$ “Profit Participation,” giving USAT the option to receive either 25% of the profits generated from the sale of land and/or refinancing of the property or a minimum release fee of 3% at USAT’s election.

Ex. B-686, Tab 649.

a. Hurwitz Participates In Loan Negotiations

R105.105. Hurwitz participated in negotiating terms of a Park 410 loan on behalf of USAT. Billing records of Oppenheimer, Rosenberg state that Rosenberg, Hurwitz, and Graham spoke on December 23, 1985. The billing reference to this phone call states that Rosenberg: “Negotiated with David Graham on important points. Called Charle (sic) Hurwitz, David Graham.” And, received a “[c]all from Noel Simpson.” Ex. T-7147, Tab 947.

R106.106. On December 30, 1985, Graham forwarded a memorandum to Hurwitz, Gross and Gerald Williams commenting on USAT’s proposal. Among other things, Graham reported that the borrower “would like some relief on the fees; in essence, a reduction, on the 3% origination fee and the 1% renewal fee.” Ex. T-7065, Tab 651.

R107.107. The memorandum stated Graham’s recommendation that “USAT reduce the fee structure to a 2 ½ percent origination fee and ½ percent fee for each renewal.” Ex. T-7065, Tab 651.

R108.108. Finally, the memorandum requested Hurwitz, Gross and Gerald Williams provide their “thoughts on [Graham’s] recommendations . . . .” Ex. T-7065, Tab 651; Tr. 5,859:15 - 5,860:2. Gross testified that he understood the memorandum to be seeking input on the Park 410 fees issue from Gross, Hurwitz, and Williams. Tr. 20,566:4-8.

R109.109. Gindy testified that he was called into Rosenberg’s office to answer a question Hurwitz had regarding loan fees:

[I] n January when you were in Mr. Rosenberg's office and Mr. Hurwitz was on the speakerphone.

Why does that stand out in your mind?

. . . 

A. Stanley called me into his office at one point to ask me a question about the points on the loan and he was -- he told me he was speaking with Charles [Hurwitz] on the phone. I heard a voice. I believe it was him on the other end of the phone, but I was asked a question regarding the points and that was all.

. . . 

A. We were having some discussions at the time regarding the points and how they were to be -- what was to be paid under the note and a desire to reduce the points to what -- to 2 points instead of 3.

Tr. 9,620:11 - 9,622:7

R110.110. On January 6, 1986, the USAT Senior Loan Committee (“SLC”) held a meeting at which Park 410 was only 1 of 7 items discussed during the 45 minute meeting. Although not an SLC member, nor an officer, director, nor employee of USAT, Hurwitz attended. Ex. T-7668, Tab 652.

R111.111. The minutes of the January 6, 1986 SLC meeting state: “There was discussion on the Park 410 West proposal. It was agreed that the minimum 3% release fee would remain, however, the renewal fees are to be reduced to 1/2% each.” Ex. T-7668, Tab 652; Tr. 5,864:1 - 5,865:3.

2. Park 410 JV and USAT’s Efforts To Obtain An Appraisal To

Support An $80,000,000 Loan

a. Love & Dugger Appraisal

R112.112. Love & Dugger, a San Antonio based real estate appraisal firm, had familiarity with the Park 410 site, having inspected and investigated the property for Alamo Savings Association of Texas in 1984. Love & Dugger’s market value estimate of the 427.388 acres, as of September 20, 1984, was $41,300,000 based on a $2.75 per square foot value multiplied by 15,028,200 square feet. Ex. T-7491, Tab 802.

R113.113. At some point between June 27 and August 13, 1985, Park 410 JV retained Love & Dugger to provide an appraisal of the site. Indeed, Park 410 JV had identified Love & Dugger as “the most qualified appraiser at this time for the property.” Ex. T-7334, Tab 973.

R114.114. On August 13, 1985, Love & Dugger forwarded a written appraisal to Park 410 JV valuing the property at $44,022,000. The appraisal concluded that this was the “most probable selling price of the appraised property as of July 31, 1985.” The appraisers reached this valuation based on a $2.60 per square foot selling price “multiplied by the 388.698 acres, or 16,931,685 square feet of the appraised property land area.” Ex. T-7069, Tab 634 (pp. ii, iv, 92).

R115.115. Love & Dugger’s principal, Richard Dugger, testified that this valuation represented an “as is” valuation and the appraisal accounted for the site being “prominently located at the northwest corner of Loop 410 and the proposed Westside Expressway in close proximity to the proposed location of Sea World.” Ex. T-7069, Tab 634, p. 92; Tr. 7,329:12-20.

R116.116. The appraisal states that it was “prepared to conform to the standards of the American Institute of Real Estate Appraisers and the regulations set forth in the Federal Home Loan Bank Board Memorandum R-41b.” Ex. T-7069, Tab 634, p. 1.

R117.117. GMR’s Park 410 Project Manager, Charles White (“White”), testified that Love & Dugger’s $44,022,000 “as is” valuation was not high enough to support a loan in the range of $80,000,000 and that he was instructed to collect these appraisals, void them, and return them to Love & Dugger because “we were looking for a higher number . . . we would have preferred to have a higher number in excess of the 44 million, and the intention was to return this to Love & Dugger and have them issue a new appraisal.” Tr. 7,593:7 - 19.

R118.118. According to Dugger, Dugger’s associate, Gerald Schulz met with White in early December 1985 and discussed increasing the appraised value over the August 1985 valuation. Shortly thereafter, White collected the August 1985 appraisals which he had been instructed to recall. Tr. 7,340:18 - 7,343:3 (Dugger); Tr. 7,592:22 - 7,593:19 (White).

R119.119. When asked whether USAT was aware of the August 1985 Love & Dugger appraisal, White testified that “the standard procedure was that all of these documents were going to United. Now, whether or not they actually received them and read them, I can’t testify to that. But my instruction was to send everything to United.” Tr. 7,593:20-22; Tr. 7,595:2-6; Tr. 9,511:4 - 9,512:5 (Gindy).

R120.120. Dugger testified that his associate, Gerald Schulz, informed him, on or about November 8, 1985, that Graham, on behalf of USAT, had spoken to Schulz and that:

They had discussed R-41B, and apparently Mr. Graham had told him they had never made a loan greater than an R-41B appraisal or market value. Then there is a note in the middle of the page, "75 million-dollar value needed."

. . .

Well, I can remember when Mr. Schulz came in to my office on this one because we had done this job before. And he just said he had talked with whomever -- and it appears to be David Graham -- and that we're going to do another appraisal of Park 410. And we just looked through the notes and he said they needed $75 million and they wanted to review certain things in the discounted cash flow analysis.

Tr. 7,331:7 - 7,334:21

R121.121. On December 23, 1985, (the original letter is misdated December 23, 1984; see Tr. 26,834-35:14-9), Love & Dugger wrote White, advising him that Love & Dugger had prepared a new market value appraisal of the Park 410 site. The letter refers to an appraisal as of November 30, 1985 with a discounted “as developed” total market value of $67,200,000. The letter states that the appraisal assumptions included that, “the appraised property is improved with streets and utilities and divided into 38 tracts for resale” Ex. T-7492, Tab 803. See also Ex. B-4377, Tab 1994.

b. Love & Dugger Could Not Reach An “As Developed” Value Higher Than $67,200,000

R122.122. Love & Dugger’s $67,200,000 “as developed” figure was still not high enough to support a loan in the $80 million range. White testified: “Well, it was clear by [late 1985] that Love & Dugger would not be able to give us an R-41B appraisal in that 90-million-dollar range. They were more like in the 67-million-dollar range, I believe.” Tr. 7,634:20 - 7,635:2.

R123.123. On October 6, 1985, White had prepared a Pro Forma Financial Analysis projecting gross sales for the 38 lots at $120,289,938. Ex. T-7070, Tab 821, p. 16.

R124.124. In testimony, White explained what happened next:

Q. Did Mr. Graham communicate to you a value needed for the property?

A. Yes. There came a time when Mr. Graham gave me a call and indicated that the revenue that I was showing in this [October 1985] pro forma probably needed to be more in the 124 to $125 million in terms of gross -- gross proceeds.

Q. When did he tell you that?

A. Well, there came a time when he called me and indicated that I should go see a different appraiser up here in Houston. And I was instructed to go present him the various -- similar to Love & Dugger, all the various documents that he would need in order to make an appraisal, including a pro forma which, by his estimates, needed to show more revenue.

Q. Do you know why Mr. Graham told you that?

A. Well, without an R-41B appraisal that would -- that would -- for his files that would get him a number that he felt he needed, there would be no way we could make the loan.

Q. And was Mr. Dugger able to reach the number that Mr. Graham needed?

A. No.

. . . 

Q. And did you communicate in that time to Mr. Graham that Love & Dugger was not going to be able to reach the number that you needed to support the loan?

A. Yes.

Q. Was that why Mr. Graham told you to go see Mr. Ed Schulz in Houston?

A. Yes. Yes. I mean, I was -- I received a call from Mr. Graham. He said, "Here is this appraiser in Houston, this Ed Schulz. He knows the number that we need to see." I mean, "we" in this case being United. And I was to prepare my materials and go see him.

Tr. 7,627:15 - 7,629:21, emphasis added.

R125.125. On January 24, 1986, Gindy forwarded White a copy of a January 15, 1986, letter from Graham to Gindy. In the January 15 letter, Graham stated that he had discussed the borrowers’ “proposal problem” with a Houston appraiser, Ed Schulz (“Schulz”), who USAT had used frequently in the past. Graham stated, “Mr. Schulz would be happy to undertake your appraisal needs and can accomplish the appraisal requirements within the time constraints we discussed.” Ex. T-7185, Tab 820.

R126.126. In the January 24 cover letter Gindy stated, “I would suggest we get our appraiser together with Mr. Schulz. If we can’t get a satisfactory appraisal out of San Antonio we should consider asking Mr. Schulz to prepare the requested appraisal. David [Graham] felt quite comfortable that we not have (sic) the same difficulties with Mr. Schulz.” Ex. T-7185, Tab 820, emphasis added.

R127.127. White explained:

Q. In the letter from Mr. Graham, he states, quote, "Mr. Schulz would be happy to undertake your appraisal needs and can accomplish the appraisal requirements within the time constraints we discussed." Do you know what Mr. Graham was referring to with regard to the comment in his letter that Mr. Ed Schulz can, quote, "accomplish the appraisal requirements," close quote?

A. Well, that would be an R-41B appraisal that would achieve a number that a lender would be happy with in order to make the loan.

Q. How do you know that he was referring to the appraised value?

A. Well, it was real clear at this time that if we weren't able to get an R-41B appraisal with the right number, that there would be no loan.

Tr. 7,627:15 - 7,631:20.

R128.128. Other testimony and exhibits support White’s testimony. On January 6, 1986, Graham wrote Rosenberg: “I have checked into the appraisal problem your group seems to be having and our appraisers here in Houston feel there is something significantly wrong with your appraiser’s approach. I would like to help you on this matter if I can or suggest you use another appraiser who is more understanding.” Ex. B-3953, Tab 974.

R129.129. In a February 6, 1986, letter from Simpson to Rosenberg and Gindy, Simpson describes a February 5, 1986, telephone conversation with Graham. Regarding obtaining a substitute R-41b Appraisal, the letter states: “United wants us to see Ed Schulz of Houston, dropping Love & Dugger. This will involve additional unbudgeted expense, but if it achieves the desired result, we had better do it. I will now seek to meet Schulz as quickly as possible.” Ex. T-7187, Tab 822.

R130.130. On the same day, February 6, 1986, Graham wrote Simpson a letter addressing the appraisal situation:

. . . I will first address the appraisal question and “pledge collateral” aspects we briefly discussed the other night. United proposes to make a $79,000,000 loan which includes funds for the development of Phase III. Accordingly, we will need and, quite frankly, you should not have a major problem obtaining, based on your sales projections of $120,289,938, an appraisal indicating a 41-B regulatory value of $98,000,000, which would indicate the loan to be 80% of appraised value which is typical. I really do not believe Ed Schulz should have a problem achieving this figure or, at least, something close to it.

Ex. T-7077, Tab 706, emphasis added.

c. None of the Love & Dugger Appraisals Were Located In USAT’s Files

R131.131. At all times from March 29, 1985, until April 8, 1986, USAT remained partners with Rosenberg under the Rosenberg/USAT Agreement and was funding both USAT’s and Rosenberg’s expenses to the joint venture. Ex. T-7067, Tab 714. The Love & Dugger appraisals were among the expenses incurred in this time period. Moreover, White testified that it was the “standard procedure” that “all of these documents were going to United. . . . [M]y instruction was to send everything to United.” Tr. 7,593:20-22; Tr. 7,595:2-6.

R132.132. Park 410 JV’s October 7, 1985 Application to USAT for a Development Loan specifically stated:

Love & Dugger of San Antonio have been instructed to appraise the property on two bases:

- ‘as is’, ie., upon the retail method of valuation;

- on the discounted market value basis (R.41.b).

The appraisals will be complete and dated end October 1985.

Ex. A-10289, Tab 770, p. OW013370.

R133.133. The “as is” Love and Dugger appraisal was prepared as of August 13, 1985 with a value of $44,022,000. Ex. T-7069, Tab 634. And, the November 30, 1985 discounted “as developed” Love and Dugger appraisal had a value of $67,200,000. Ex. T-7492, Tab 803.

R134.134. Another Love & Dugger appraisal was prepared as of December 31, 1985 and reached an “as is” value of $46,560,000. This appraisal was forwarded to the Park 410 Joint Venture on February 12, 1986. Ex. T-7143, Tab 711, pp. LD000150 and LD000152. Moreover, the February 12, 1986 Love and Dugger appraisal, among other things, reported increasing inventory and decreasing occupancy rates in the area near Park 410 for office and retail space, and multi-family housing, due to overbuilding and oversupply. Id. at LD000174-177.

R135.135. However, despite the fact that USAT had paid for the Love and Dugger appraisals, none of the Love & Dugger appraisals were located in USAT’s files. Kevin O’Connell, OTS’s expert on savings and loan supervision and examinations with regard to real estate underwriting testified:

The Love & Dugger appraisal was made for the joint venture. It was -- and the joint venture, of course, was a partner of the institution.

The Love & Dugger appraisal, made for the joint venture and ordered on the basis by the joint venture evidently for some business purpose, indicated that the 80-million-dollar deal wasn't doable. The joint venture appraisal said the value wasn't there. We have a 47-million-dollar appraised value. That is something that has to be in the books and records. That is something that the examiners have a right to see. That is something, frankly, the auditors have a right to see. That is something that would be required for an association to have a complete books and records in their files.

Tr. 22,319:9 - 22,320:3.

R136.136. Dr. William Wallace, Respondents’ expert on underwriting, testified that if the Love and Dugger appraisals were in USAT’s files, “then the chances are the examiners would have seen them.” Tr. 27,579:7 - 27,580:1. Moreover, Dr. Wallace testified that had the examiners seen more than one appraisal and saw “an inconsistency in the appraisals, that is, something that did not make sense in evaluating the loan” they would have raised it as an issue. Tr. 27,584:20 - 27,585:10.

R137.137. Rex Cool, the Examiner-in-Charge of the State of Texas 1986 examination of USAT, was asked whether he recalled “whether there were any additional appraisals that were found in the Park 410 loan file?” He testified that there were not: “To my knowledge, there were no other appraisal reports, nor were we provided any additional appraisal reports.” Tr. 7,595:2 - 6; Tr. 9,899:19 - 9,900:2.

R138.138. Cool testified that the Texas savings and loan examiners “definitely” would have been interested in any other appraisals because:

A. Well, we would have wanted to know if the other appraisal report had additional information that we would have needed to substantiate the value. And, of course, we would have been interested in the final value.

Q. So, if there had been an appraisal in the files for a lower amount of money than the $88 million, would that fact have been significant to the examiners?

A. Very significant and it would, as well, be presented in the write-up.

Tr. 9,898:20 - 9,899:14.

R139.139. Similarly, Vivian Carlton, the Examiner-in-Charge of the 1986 Federal Home Loan Bank Board examination of USAT testified that, “if you have two appraisals, if those values -- if the assumptions are greatly different, we would then question which appraisal fairly represented the true value of the property.” Tr. 17,068:22 - 17,069:5.

d. Graham Directed White To Generate a Pro Forma Budget Increasing Gross Revenues And To Provide Figures To Edward Schulz

R140.140. Graham testified that USAT would not have prepared its own pro forma analysis of the Park 410 project but would have “refined or modified the borrower’s projections.” Tr. 5,869:3-10.

R141.141. White testified that Graham instructed him that Park 410 would need to “push the gross revenues to the 124-, 125-million dollar range” in order “to reach an appraised value for the property as developed in the 87- to 90-million-dollar range[.]” Tr. 7,637:9-15.

R142.142. White had experience using computerized spreadsheet software known as Lotus 1-2-3. Using Lotus 1-2-3, White created various iterations of pro forma budgets for the Park 410 project, Tr. 7,528:6 - 7,530:6, and explained how he utilized the spreadsheet software to increase the gross sales figures to $123,448,953. Tr. 7,637:16 - 7,646:7. White then took the revised financial data to Schulz, a Houston-based appraiser with no apparent connection or familiarity with the San Antonio market. Ex. T-7084, Tab 709, p. OW015475-76; Tr. 7,632:3-4.

R143.143. White testified that Graham told him “that he had talked with Mr. Schulz, that Mr. Schulz knew the number that they needed, and that he would provide it:”

Q. When you met with Mr. Schulz, did he -- this is Mr. Ed Schulz -- did he already know what his assignment was going to be?

A. Yes.

Q. And did he already know the number that he was supposed to look for?

A. Yes.

Q. That was before you met with him?

A. Well, when I went to see him, he already knew that we needed an appraisal, an R-41B appraisal in the 87- to 90-million-dollar range.

Tr. 7,632:3 - 7,633:3.

R144.144. Finally, White summarized the process by which Park 410 JV and USAT reached the needed revenue figures, as Graham had arranged with Schulz:

A. Well, you have to understand here that we have -- well, what you have in this case is -- it's sort of like mission creep.

Q. What is that?

A. I mean, we started off a year earlier with some numbers and these numbers kept getting pushed in these pro formas as we went through time. So, the difference between one pro forma and the next is incremental. And so, the comparison of this one to the previous one increases the revenue by, oh, 3 or 4 million. But then there was another one in front of that that also increased it. And so, what you have in -- you're in this sort of intense circumstance. You're not really asking the question any longer of whether -- whether or not these numbers have any basis in reality but, rather, your question is: "Can we make an argument that we could achieve these kind of numbers?"

Q. Let me ask you this: Without Mr. Graham having asked you to reach a sales value of 123 -- gross sales of 123 to $125 million, would you have made these changes?

A. Probably not unless in subsequent discussions with the appraiser it looked as if we were needing more revenue. But probably would not have made those changes if it hadn't been required in order to meet the appraisal.

Tr. 7,637:9 - 7,648:17.

C. The 1986 Approval of the $80,000,000 Park 410 Loan

R145.145. In 1986, loans by USAT, for projects such as Park 410, were to be reviewed by the Senior Loan Committee (“SLC”). Ex. A-1110, Tab 133.

R146.146. On February 10, 1986, the SLC met for 20 minutes and discussed five items, one of which was Park 410. Despite the fact that the only appraisals of the Park 410 project existing at that time, the Love and Dugger appraisals, indicated that the property could not support an $80 million loan, the SLC meeting minutes reflect that “David Graham stated that the Park 410 loan is expected to close between March 1, 1986 and March 30, 1986.” Ex. A-1647, Tab 1041; T-7069, Tab 634; T-7492, Tab 803; T-7143, Tab 711. [5]

R147.147. As of February 13, 1986, the SLC members were: (1) Michael R. Crow; (2) David Graham or Gem Childress; (3) J.J. Gray, Jr.; (4) Jenard M. Gross; (5) Charles W. Patterson; and, (6) Gerald R. Williams. Ex. A-1110, Tab 133, p. 7. Only Gross and Williams were USAT Directors. All of the SLC members, including Gross and Williams, were USAT employees.

R148.148. According to the USAT Board of Directors minutes of February 13, 1986, the SLC’s delegated authority had a $70,000,000 limit: “Any loan to one borrower or guarantor in excess of $70,000,000 shall be presented to the Board of Directors for consideration after receiving a favorable recommendation from the Senior Loan Committee.” Ex. A-1110, Tab 133, p. 7.

R149.149. Regarding the SLC’s delegated authority, OTS’ safety and soundness expert, John Stone, testified that “it was absolutely derelict to give this much authority to staff,” Tr. 10,683:16 - 10,688:14, and that the implications of a $70 million delegation of authority are, “incomprehensible. . . . not only was the $70 million to me a totally improper delegation but a horribly excessive amount.” Id.

R150.150. On March 17, 1986, the SLC held a sixty-nine minute meeting at which the Park 410 loan and four other matters were addressed. The SLC approved the Park 410 loan. Although not an SLC member, Hurwitz attended. Ex. A-1649, Tab 653.

R151.151. The March 17, 1986 SLC meeting minutes state: “There was approval of a $80,000,000 loan to Park 410 West Joint Venture on 427 + acres. Terms and conditions are shown on the attached Senior Loan Committee Sheet.” Ex. A-1649, Tab 653.

R152.152. The SLC Approval Sheet provided only basic information about the loan and approved:

$ “[A] land acquisition and development loan for a 427+ acre site which will be developed and sold off as smaller commercial/multi-family tracts.”

$ “Pledge of $10,000,000 in either certificate of deposits and/or irrevocable letters of credit . . . .”

$ Joint, not several, guarantees of Rosenberg, G&R, and GMR’s parent company, IPIC, of “the top 25% of the principal balance.” However, “the $10,000,000 cash collateral to be provided shall be a part of this guarantee amount and shall serve as a credit on this guarantee obligation.”

Ex. T-7670, Tab 654.

R153.153. The SLC approval stated: “The borrowers shall complete the drainage work (full approvals from FEMA have now been obtained), complete the streets and necessary utilities and erect two bridges over the drainage right of way.” Ex. T-7670, Tab 654.

R154.154. The loan approved by the SLC included the following terms:

AMOUNT: $80,000,000; however, $7,000,000 of the loan is applicable to development and interest carry on the tract at the immediate corner of Loop 410 and Northwest Freeway. The initial funding of this loan shall be only $73,000,000 since initial concept is to sell this corner tract in bulk; if a decision is made to develop the tract, the $7,000,000 shall then be utilized.

TERM: Five (5) years with two one (1) year extensions. Any extension beyond the five year term shall require 10% annual principal reductions either through sales or borrower equity; however, borrowers would get credit for any principal reductions made during years 1-5 towards required principal reductions for years 6 and 7.

RATE: Prime +2%, payable monthly.

FEES: Three (3%) percent origination fee for first five years; one-half (1/2%) percent fee for each subsequent extension.

Ex. T-7670, Tab 654.

R155.155. USAT also held a “Profit Participation” giving it the option “to receive either 25% of the profits generated from the sale of the land and/or refinancing of the property or a minimum release fee of 3%.” Ex. T-7670, Tab 654.

R156.156. Regarding the property’s appraised value, the SLC approval stated:

Borrowers project sales through 1990 and cash payoffs through 1992; their projected sales total $123,448,000 with our share of profits projected to be $9,700,000+/-. Edward B. Schulz is presently completing a detailed R-41B appraisal which will indicate a present discounted economic value between $86,000,000 - $90,000,000. Assuming a $86,000,000 value, then:

Value of Real Estate $86,000,000

Value of Collateral 10,000,000

$96,000,000

x 80%

$76,800,000

Ex. T-7670, Tab 654, emphasis added.

R157.157. The SLC approval recognized that, “the initial loan amount shall be $73,000,000,” but also provided that:

Presently, any loan in excess of $70,000,000 or any loan to a guarantor whose total guarantees to USAT exceed $70,000,000 must be approved by the Board of Directors. Consequently, even though this loan amount will be $80,000,000, the total amount of funds that can be disbursed under this loan shall be limited to $70,000,000 until formal approval by the Board of Directors is obtained. If said approval is never obtained, then loan advances shall never exceed $70,000,000.

Ex. T-7670, Tab 654.

R158.158. The SLC approval provided that $17,434,308 would be allocated from the $80,000,000 loan for an “Interest Reserve,” and that $2,400,000 would be allocated for “Financing Fees.” Ex. T-7670, Tab 654.

R159.159. The March 17, 1986 SLC approval is signed by David Graham, Jenard Gross, Gerald Williams and Michael Crow. Ex. T-7670, Tab 654.

R160.160. Thus, security for the loan was:

$ A first lien on the property itself. Ex. B-3844, Tab 775A, p. US0004837 (Exhibit Tab 9); T-7670, Tab 654, pp. 2-3.

$ Personal joint, not several, guarantees of the borrowers amounting to 25% of the principal balance of the loan which would take effect, if at all, only after foreclosure and the declaration of a deficiency in the amount owed on the loan. Ex. T-7670, Tab 654, pp.1-3; B-3844, Tab 775A, pp. US0004945 - US0004998 (Exhibit Tabs 18-24).

$ $10 million in letters of credit, which would offset - dollar for dollar - any amounts owed under the joint guarantees. Ex. T-7670, Tab 654, pp.1-3; B-3844, Tab 775A, pp. US0005000 - US0005064 (Exhibit Tabs 25-35).

R161.161. Gross testified that at the time of the March 17, 1986 SLC meeting, he did not seek to verify information in the borrowers’ financial statements and that, it would not have made a difference to him in approving the loan if he had audited versus unaudited financial statements from the borrowers. Tr. 20,653:11 - 20,655:15.

R162.162. In a January 31, 1986, Management Letter, USAT’s outside auditors, Peat, Marwick, Mitchell & Co. (“PMM”), informed USAT management of deficiencies in USAT’s appraisal practices:

The review of loans receivable and real estate acquired for development or sale revealed certain deficiencies related to appraisals. We understand that the Association has initiated a review of existing appraisals to determine compliance with the applicable rules and regulations and established procedures to determine compliance for future appraisal reports.

Ex. A-7006, Tab 987, p. OW120498.

R163.163. The March 17, 1986 SLC approval sheet makes clear that at the time the SLC approved the loan USAT had neither received, analyzed nor reviewed any appraisals on the Park 410 property. Ex. T-7670, Tab 654; Tr. 5,884:1 - 6 (Graham); Tr. 14,659:6 - 16 (Crow); Tr. 20,659:4 - 16 (Gross). Indeed, Gross testified that with regard to the REIC and the SLC meetings there were no presentations either summarizing or analyzing appraisal documents related to real estate because “usually, we issued commitments subject to the issuance of an appraisal. And usually, the appraisal would come in after our approval; so, I wouldn't see it.” Tr. 20,559:13-16.

R164.164. The SLC approval of the Park 410 loan makes no reference to any underwriting documents supporting the loan, including oral discussions. Ex. T-7670, Tab 654. The SLC approval refers to an oral statement of value from Mr. Schulz, but no written appraisal or other underwriting documents. Mr. Schulz’ qualifications, however, list no apparent experience appraising property in San Antonio. Ex. T-7670, Tab 654; T-7084, Tab 709, pp. OW015475-76; Tr. 6,160:8-17.

R165.165. Likewise, there is no indication that USAT analyzed market conditions, or supply and demand of lodging, multi-family housing, offices, or any of the uses planned for the Park 410 property prior to approving the loan. Ex. B-1012, Tab 1045; Tr. 6,933:10 - 6,934:3 (Graham); Tr. 11,013:6-15 (Stone). Further, Graham testified that the SLC members assumed the Northwest Freeway would be built next to the Park 410 property. Tr. 6,954:15-22.

R166.166. During its earlier negotiations to purchase Park 410, USAT had access to GMR’s sales projections which assumed sales averaging 55 acres per year over a six year period. Ex. T-7049, Tab 635, p. CN086212. However, the pro forma appended to GMR’s October 7, 1985, Application to USAT for a Development Loan projects average sales of 69.5 acres per year over a four and one-half year period. Ex. A-10289, Tab 770, p. OW013412 (312.98 acres ) 4.5 years = 69.5 acres per year).

R167.167. The four and one-half year absorption rate, developed by White, also assumed absorption at rates not reflective of the current, then existing, market conditions. To the contrary:

$ Six months before the SLC approved the loan, an August 19, 1985 Lodging Study commissioned by GMR to project the impact of Sea World on the need for lodging facilities in the Park 410 area, “anticipated that the central business district will capture the largest percentage of Sea World lodging demand . . . .” Ex. T-7068, Tab 647, p.CN093123.

$ Four months before the SLC approved the loan, a December 15, 1985 newspaper article in the San Antonio Light reported:

Local real estate developers and land speculators have been riding high on a boom that a year ago seemed would never end. But the boom is turning to bust for some, just as it has in Dallas and Houston, as foreclosures mount and new construction slows to a crawl.

. . . 

Real estate experts say the boom’s recent derailment was driven by overbuilding in the office, retail and apartment markets . . . .

Speculators loaded themselves up with land and hoped to resell it at a big profit or perhaps build on it later. But land prices started flattening in late spring, and visions of big profits dimmed.

Ex. T-7005, Tab 650, emphasis added.

$ Graham testified that USAT “looked at [the Park 410 project] as a 10- to 12-year project” due to overbuilding in San Antonio and a “softness in the San Antonio real estate market. Tr. 5,844:15 - 5,848:19.

1. The Tremar Study

R168.168. The October 9, 1985 Tremar Study was prepared by Tremar Real Estate Research, Inc., which was retained by GMR “to provide an analysis of the market potential for mixed-use development on Park 410 West. This analysis includes a market assessment for multi-family housing, industrial/business park space and hotel/motel facilities at the Park 410 West site.” Ex. T-7127, Tab 710, p. OW012557.

R169.169. The Tremar Market Study was attached to the October 7, 1985 Park 410 JV Application to USAT for a Development Loan. Ex. A-10289, Tab 770, p. OW013372. Graham testified that he “probably” received it prior to the March 17, 1986 SLC meeting. Tr. 6,175:2-11. Gross testified, however, that he did not recall seeing the document other than in preparation for his hearing testimony. Tr. 20,701:14 - 20,702:3. Nevertheless, as a 50% partner with Rosenberg, USAT would have had a copy of the Tremar Study available for underwriting the Park 410 loan. See Finding R119 and R131.

R170.170. The Tremar Study:

$ Identified 13,947 acres of “Competitive Mixed-Use Developments” in the Park 410 area. Ex. T-7127, Tab 710, pp. OW012581-89.

$ Reported that “the number of new housing starts [in the Park 410 area] declined approximately 25 percent from those recorded in the first quarter of 1984 and the first quarter of 1985.” Ex. T-7127, Tab 710, p. OW012593. And that “housing sales for the area decreased by approximately 9.5 percent from the number of recorded sales during the first quarter 1984 and the first quarter of 1985. . . . the decrease in new starts and actual sales reflects the relatively large supply of existing housing units in the study area.” Ex. T-7127, Tab 710, p. OW01294.

$ Reported that average occupancy rates of business parks in the Park 410 area was 79 percent. Ex. T-7127, Tab 710, p. OW012633.

R171.171. OTS’s appraisal expert, Lovell, testified that:

In the case of office park development, 79 percent occupancy spells an absolute total abysmal failure, financial failure of a project. I mean, I, in my 26 years, don't know of any project anywhere in the United States that's ever succeeded with that level of vacancy that is going on in this marketplace.

Tr. 7,204:22 - 7,205:6. Respondents’ appraisal expert, Shuler, testified that the Tremar Study’s office occupancy rates were based on existing competitive office parks and did not include either the office parks then under construction, or those to be built at Park 410. Tr. 27,134:6 - 27,135:6.

R172.172. The Tremar Study also reported that average occupancy rates of multi-family apartments in the Park 410 area were 75.1 percent. Ex. T-7127, Tab 710, p. OW012596. OTS’s appraisal expert, Lovell, testified that: “Based on my experience, I don't know of any market, ever, in the United States where you can actually justify, on an economic feasibility basis, new apartment construction with a 75 percent average occupancy.” Tr. 7,206:18-22. Lovell further explained the significance of the Tremar Study’s findings:

Given the fact that we have 75 percent occupancy now, I would expect that what's generating this is an overbuilding in the market area. So, we've got -- on the next page, on 42, [p. OW012597], it's telling us we've gotten 10 new projects going on. What the application is that the market is deteriorating. It's moving away from us. Occupancy is going to fall over time. Vacancy levels are going to rise. Rent levels are likely to drop as a result of all of this. It would be ill-advised to begin any new ventures in this type of market environment. It's not financially feasible.

Tr. 7,207:13 - 7,208:3.

R173.173. Neither the SLC minutes nor any other books and records maintained by USAT indicate that any information in the Tremar Study was independently verified or analyzed by USAT, its officers, directors, or employees. Ex. T-7127, Tab 710; A-10289, Tab 770; T-7670, Tab 654; T-7068, Tab 647.

2. The Schulz Appraisal

R174.174. In his “preliminary” oral valuation referenced in the March 17, 1986 SLC approval, Schulz informed USAT of his opinion that the market value of the Park 410 property, as developed, was between $86-$90 million. Ex. T-7670, Tab 654. The Schulz valuation represented an “as developed” figure for the property rather than an “as is” value. An “as is” value would have given USAT an estimate of the value of the property “as it existed” at the time USAT obligated its funds. Tr. 7,091:1 - 7,092:11. In providing an “as developed” value, Schulz assumed that all aspects of developing the property, e.g. streets, curbs, drainage, utilities, etc., were completed and the property was ready for sale to third parties for construction of office, apartment, retail or other buildings.

R175.175. Two days after the March 17, 1986 decision by the SLC to approve the $80,000,000 loan, Schulz sent his written “appraisal.” Ex. T-7084, Tab 709; T-7670, Tab 654.

R176.176. In 1986, 12 C.F.R. § 563.17-1(c) was the FHLBB regulation governing the establishment and maintenance of thrifts’ records. With respect to loans on the security of real estate, among other things, the regulation required:

(1) The records of an insured institution with respect to each loan which such institution makes on the security of real estate shall include:

(iii) One or more written appraisal reports, prepared and signed, prior to the approval of such application, by a person or persons duly appointed and qualified as appraiser or appraisers by the board of directors of such institution, disclosing the market value of the security offered by the applicant and containing sufficient information and data concerning the appraised property to substantiate the market value of the security described in report.

Ex. T-7852, Tab 2006.

3. FHLBB Memorandum R-41b

R177.177. On September 15, 1977, the FHLBB published Regulatory Memorandum R-41a, Appraisal Policies and Practices of Insured Institutions and Service Corporations. Ex. T-7850, Tab 2003. The policy statement provided “Guidelines Regarding Appraisal Procedures and Management.” Id. On March 1, 1979, the FHLBB published Regulatory Memorandum R-41a-1, providing a definition of “Market Value” to be used in appraisals prepared for thrifts. Ex. T-7851, Tab 2004. The FHLBB combined those two existing documents into a single document, FHLBB Regulatory Memorandum R-41b (“FHLBB Mem. R-41b”), on March 12, 1982. Ex. T-7760, Tab 795. FHLBB Mem. R-41b was the governing policy statement regarding appraisals prepared for thrifts from its adoption on March 12, 1982 through publication of FHLBB Regulatory Memorandum R-41c on September 11, 1986. Ex. T-7136, Tab 843.

R178.178. Key provisions of FHLBB Mem. R-41b require savings and loan management to apply the following guidelines:

$ . . . Management should ensure that appraisal services provided, whether by fee or staff appraisers, meet the current needs of the association or service corporation.

$ An appraisal should serve an underwriter’s needs by providing a supported opinion of a property’s market value as of a specified date sufficiently current so as to reduce the likelihood of material fluctuations prior to the loan/investment decision.

$ In addition to providing estimated market value, the appraisal should give the appraiser’s opinion of the property’s feasibility and marketability.

$ An accurate and useful appraisal is most often produced by a capable and suitably equipped fee or staff appraiser who has ready access to current market information. Therefore, each association and service corporation should be able to demonstrate that its fee and staff appraisers are competent and knowledgeable of the relevant markets, and have the facilities necessary to perform adequate appraisals.

$ Specifically each appraisal report must:

1. be totally self contained so that:

a. it is a useful tool for prudent underwriting, REO and/or LTF decisions.

b. when read by any third party, the appraiser’s logic, reasoning, judgment and analysis in arriving at a final conclusion indicate to the reader the reasonableness of the market value reported.

c. it demonstrates professional competence, ethics and expertise.

. . . .

3. contain all recognized approaches to market value unless the appraiser fully explains and documents the rationale for eliminating one or more of the approaches to value.

4. take into consideration and make provision for all appropriate deductions and discounts for any development type property.

5. address itself to the market/economic feasibility prospects for any proposed major loan/investment real estate project, in sufficient detail to support the appraiser’s forecast of the probable success and the conclusion(s) of highest and best use. If a market/economic feasibility report is prepared by other than the appraiser, the appraiser will set forth the reasoning and rationale for accepting or rejecting said report. All such market/economic feasibility studies will be made a permanent part of the appraisal report.

Ex. T-7760, Tab 795, emphasis added.[6] Indeed, Respondents’ underwriting expert, Dr. William Wallace, testified that it was “important” for a thrift “to have an appraisal that is a useful underwriting tool.” Tr. 27,567:18-22, emphasis added.

R179.179. Notwithstanding these admonitions with respect to the use of appraisals, Gross testified that the single most important piece of collateral that a savings and loan relies upon is the land “[b]ecause that’s the first thing you look to as far as your value goes.” Tr. 20,705:13-22. Nevertheless, Graham testified that he was “not an appraisal expert” and that USAT did not have “in-house appraisal reviewers” in 1986, or any individual that specialized in appraisal review. Tr. 5,664:6-8; Tr. 6,140:6-17; Tr. 6,917:10-12; Tr. 6,918:22 - 6,919:6. Moreover, Graham testified that “it wasn’t standard procedure” to have any “written record made” or “summary analysis” or “other documentation that would go through what the appraisal highlighted.” Tr. 6,917:13 - 6,918:3. Similarly, Gross testified that he did not review appraisals but relied on Graham and his staff to perform that job. Tr. 20,513:19 - 20,514:12; Tr. 20,559:4-16; Tr. 21,653:22 - 21,654:7. Indeed, Gross testified that he left most of the underwriting of commercial loans to Graham and Childress, Tr. 20,555:5-9, and that he also “probably would not have” reviewed the Park 410 project budget, Tr. 20,579:9-16, and that he, and the other SLC members relied on Graham for: economic feasibility information, commercial location vacancy rates, the need in the market area for hotels, and potential and planned roads. Tr. 20,710:11 - 20,711:12. Likewise, Crow testified that he had no training in reviewing appraisals and that, in making lending decisions, he, too, relied on the real estate staff to review appraisals. Tr. 14,612:10-13; Tr. 14,630:6-10; Tr. 15,953:20 - 15,954:10.

a. Three Approaches to Value

R180.180. The March 19, 1986 Schulz appraisal briefly describes the appraisal process:

Appraisers generally utilize three approaches to value, they being the direct sales comparison approach (also known as the market approach), the cost approach, and the income approach. . . .  A final step in the appraisal process is the reconciliation or correlation of the value indications. In the correlation, the appraiser considers the applicability of each of the three approaches utilized, examines the range between his value indications, and places major emphasis on the one, or those, which appear to produce the most reliable and applicable solution to the specific appraisal problem.

T-7084, Tab 709, pp. OW015409-11.

R181.181. Respondents’ appraisal expert, Shuler, explained the three approaches to value:

There are essentially three approaches to value. One is what's called the market data or direct sales comparison approach. Very simply, what that means is you go out and find sales of properties that have occurred as recently as possible, properties that are as similar to the property that you're appraising as possible. You adjust those for the -- for the similar and dissimilar factors and arrive at an estimate of value from that.

The second approach is the cost approach. The cost approach generally entails both that approach, the market approach, in estimating the value of the land and then adds to that the cost of constructing the improvements, whatever they are, whether it's a land development or a building, and totals all of those costs. And you arrive at an estimate of value in that manner.

The third is the income approach where you estimate what the potential income to the property is -- again, whether it's selling lots in a land development or if it's leasing a building -- less the costs that are associated, the expenses that are associated with doing that. Then you use what is called a capitalization rate or a discount rate to process that into a value indication.

Tr. 26,835:15 - 26,836:19.

R182.182. Respondents’ expert Shuler testified that the three techniques compare “the various indications of value in order for each one of them to cross-check each other . . . because they actually are derived in a somewhat different manner.” Tr. 27,037:9-15.

i. The Schulz appraisal failed to provide all approaches to value.

R183.183. Despite the requirement in FHLBB Mem. R-41b that the appraisal “contain all recognized approaches to market value,” the Schulz appraisal did not. The “correlation” page of the Schulz appraisal states: “Only one approach was utilized to estimate the value of the subject property considering it is a proposed mixed use development for improved vacant sites. After analyzing data contained in this approach, the indicated value of the development at present is as follows: . . .  $88,000,000.” Ex. T-7670, Tab 795; T-7084, Tab 709, p. OW015470.

R184.184. Respondents’ expert Shuler admitted that the Schulz appraisal failed to calculate a valuation based on all approaches to value, and failed to explain the rationale for eliminating one or more of the approaches. Tr. 27,041:10-18.

ii. Schulz Accepted The Five-Month Old Tremar Study, Failed To Verify Or Update Its Data, And Failed To Make It A Permanent Part Of The Appraisal Report.

R185.185. Pages 16 through 20 of the Schulz appraisal, Ex. T-7084, Tab 709, pp. OW015425-29, contain his “analysis” of the Park 410 neighborhood. Those pages are lifted directly from portions of pages 4 through 38 of the Tremar Study, Ex. T-7127, Tab 710, pp. OW012559-93. Shuler agreed:

Q. . . .  Isn't it true, sir, that every piece of data Mr. Schulz relied on in his discussion of the Park 410 neighborhood analysis came directly from the Tremar market study?

A. Again, I believe that that's the source. Whether or not there were corroborating sources, I don't know. But I certainly believe that that's where it's from.

Tr. 27,070:18 - 27,071:4.

R186.186. Likewise, the “Highest and Best Use” section of the Schulz appraisal relies heavily on the Tremar Study. Ex. T-7084, Tab 709, pp. OW015440-42; Tr. 27,081:9-13. OTS’s appraisal expert, Douglas Lovell, explained the importance of an appraisal’s Highest and Best Use section:

Functionally, what we were looking for to be included in an appraisal -- and this is why we use the terminology "self-contained" -- is we felt like the highest and best use, which is really the heart and the soul of the appraisal report, needs to be appropriately documented and supported. And because it is so critical to the valuation of the property where an appraiser is relying on some third-party study that's been done out there, the appraiser needs to disclose in his appraisal report whether he concurs with that study or doesn't concur with it and incorporate as a part of his appraisal report some of the details from that study. To not just simply say, “Well, I've reviewed a study and I've relied solely on it. And so, I have no responsibility to verify whether that study makes any sense or not.”

Tr. 7,190:15 - 7,191:9.

R187.187. In his “Highest and Best Use” section, Schulz describes the physical attributes of Park 410, and then states: “The major factor affecting the development scheme is the economics of San Antonio and the market area. We have been provided a market study prepared by Tremar Real Estate Research, Inc. which analyzes demographic data relating to supply/demand characteristics and, basically, estimates a positive demand for the subject development.” Ex. T-7084, Tab 709, p. OW015441. In his testimony, Shuler acknowledged that Schulz fails to “explain anywhere what he means by ‘the economics of San Antonio and the market area’” or how it is “the major factor affecting the development scheme.” Tr. 27,084:2-6. However, as to this conclusion, Shuler acknowledged that Schulz “relies on the Tremar market study for the demographic data relating to supply and demand characteristics.” Tr. 27,082:4-14. And that, “much, if not all, of the stated statistics are from the Tremar report.” Tr. 27,076:4-12.

R188.188. The Tremar Study, which was prepared for GMR, is dated October 9, 1985, i.e., approximately five months before the Schulz appraisal was forwarded to USAT. Ex. T-7127, Tab 710, pp. OW012547 and OW012557; T-7084, Tab 709, p. OW015403.

R189.189. In preparing his Highest and Best Use analysis, Schulz relied on the information contained in the Tremar Study without either verifying or updating the information. Tr. 27,076:13-16.

R190.190. The Tremar Study was not made a permanent part of the Schulz appraisal. Shuler acknowledged that fact:

Q. And have you seen any indication anywhere that Mr. Schulz attached a copy of the Tremar report to his appraisal?

A. No.

Tr. 27,071:5-8.

iii. Schulz failed to take into consideration all

appropriate deductions.

R191.191. Schulz utilized the “Income Approach” as the “one approach” to estimate the “as developed” value of Park 410. Under the “Income Approach,” the appraiser estimates the potential income the sale of the lots will bring over the absorption period, and then deducts expenses associated with such sales; and then applies a “discount rate to process that into a value indication.” Tr. 26,836:11-19 (Shuler). OTS’s appraisal expert, Douglas Lovell, in his article, Appraisal Concerns of Thrift Institution Lenders, explained the process of deducting expenses and discounting the cash flow associated with the “Income Approach”:

The . . . analysis reflects the expected absorption of the property by the market and the anticipated gross sales proceeds to be received [over the expected sell out period.] From the gross sales proceeds the appraiser deducts the expenses associated with [selling the property], as of the date of completion. The resulting net cash flows are then discounted to arrive at their present worth by using a discount rate which reflects the composite cost of both borrowed and equity capital [and entrepreneurial profit].

Ex. T-7748, Tab 799, pp. 25-26.

R192.192. Although Park 410 was in a “raw land” condition, for purposes of arriving at an “as developed” valuation Schulz assumed that the development phase of construction, i.e. streets, curbs, utilities, etc., was complete. He then applied the Direct Sales Comparison or Market Approach to arrive at a market value of the “developed” property. Ex. T-7084, Tab 709, p. OW015446.

R193.193. Schulz’s appraisal methodology used the market data approach to reach an:

[E]stimate of the value of each tract in the proposed development and the resulting sum total. Next, absorption was estimated and value increases over the absorption term projected so as to estimate gross sales during absorption. In each period, for which gross sales was estimated, a deduction was made for marketing costs with the resulting figure being net sales proceeds. These net sale proceeds were then discounted to present value utilizing a rate indicative of investors’ attitudes. The sum total of these present values indicates the value of the proposed development to one purchaser.

Ex. T-7084, Tab 709, p. OW015444.

R194.194. Schulz cited statistics from five competing developments in the area of Park 410. The average annual sales among those five developments, i.e. absorption, was 44.3 acres. Schulz, however, projected absorption of the 38 Park 410 tracts “to occur over a five year period. This would require sales to approach 62.5 acres per year.” Ex. T-7084, Tab 709, pp. OW015464-65. That is, after development, 312.78 acres of Park 410 would be available for sale, Ex. T-7084, Tab 709, pp. OW015462-63, divided by a five year sell-out period equals 62.556 acres.

R195.195. After estimating his absorption rate, Schulz applied deductions of 7% for marketing expense and 12.13% for a discount rate. Ex. T-7084, Tab 709, p. OW015466; Tr. 27,166:9 - 27,167:3. Schulz did not identify any deduction for “developers’” or “entrepreneurial” profit. Ex. T-7084, Tab 709, p. OW015466.

R196.196. Shuler testified that some appraisers at the time included “developers’ profit” as a part of the overall “discount rate.” Tr. 27,159:1-5. However, Shuler acknowledged that Schulz did not explain whether the 12.13% discount rate he used included developers’ profit. Tr. 27,159:12-19. Moreover, Shuler recognized that a 12.5% discount rate was “not adequate if it included developer’s profit on top of just discount rate.” Tr. 27,160:7-15, emphasis added.

R197.197. Shuler further testified that in his own appraisal practice in the 1985-1986 time period, he listed developers’ profit as a “separate line item, the profit margin, depending on the stage of the development and the nature of the property, generally would be in the 10 to 15 percent range.” Tr. 27,162:7-10.

R198.198. Finally, Shuler acknowledged that applying a developer’s profit in the range of 10 to 15 percent to the Schulz valuation “certainly would have lowered the indicated value” below $88,000,000. Tr. 27,167:20 - 27,168:11.

iv. Schulz Failed To Analyze The Available Comparable Real Estate In The Area Of Park 410 And Failed To Provide An Analysis of Absorption.

R199.199. The October 1985 Tremar Study identified 13,947 acres of “Competitive Mixed-Use Developments” in the Park 410 area. Ex. T-7127, Tab 710, pp. OW012581-89.

R200.200. In reaching his conclusion that the Park 410 tracts could be absorbed into the marketplace at an average of 62.5 acres per year, however, Schulz cited statistics, derived from the Tremar Study, from only five competing developments, comprising less than half of the available acreage, none of which had average sales above 57 acres per year:

Development Total Sales Year Developed Average Annual Sales

Alamo Downs 100 acres 1981 25 acres/year

Big Country 160 acres 1983 53 acres/year

Borderbrook 150 acres 1982 37.5 acres/year

Crown Meadows 98 acres 1982 49 acres/year

West Lakes 228 acres 1982 57 acres/year

Ex. T-7084, Tab 709, p. OW015464; T-7127, Tab 710, pp. OW012582-86.

R201.201. Despite the availability of additional data, Schulz concluded: “Based upon an analysis of data and our estimation of demand over the near term, we project absorption to occur over a five year period. This would require sales to approach 62.5 acres per annum.” Ex. T-7084, Tab 709, pp. OW015464-65.

R202.202. Schulz ignored five other “Competitive Mixed-Use Developments” cited in the Tremar Market Study, but did not explain why he omitted them:

Development Total Sales Year Developed Average Annual Sales

Northwest Crossroads 49 acres 1982 12.25 acres/year

Westlakes

Technology Park 15 acres 1984 7.5 acres/year

Westover Hills 0 acres (Site of future 500 acre Sea World Park)

Westpark

Business Park 16 acres 1982 4 acres/year

Van de Walle

Industrial Park 330 acres 1974 27.5 acres/year

Ex. T-7127, Tab 710, pp. OW012585-89.

R203.203. In testimony, Shuler acknowledged that other than this discussion, Schulz provides the reader with no additional analysis. Tr. 27,142:1 - 27,144:1. Shuler further acknowledged that in analyzing absorption in his own appraisals during the 1985-1986 time frame he “went to as deep an analysis as the available data would allow. And typically, it would be beyond this.” Tr. 27144:2-9.

R204.204. Indeed, Graham testified that USAT expected an “eight- to ten-year sellout of all the property in [Park 410].” Tr. 6,983:7-21.

R205.205. Further, USAT’s outside auditors, PMM criticized the Schulz appraisal in a December 31, 1986 audit workpaper:

The appraiser assumes continued growth in the San Antonio area despite obvious competitive pressures in the area. Accordingly he assumes appreciation rates of 5% during the third and fourth semi-annual periods, 10% for the fifth and sixth semi-annual periods and 5% for the ninth semi-annual period. Based upon our knowledge of the San Antonio real estate market, we question the propriety of such appreciation assumptions. . . .  In light of the current soft real estate market in San Antonio and the discrepancies between the actual sales performance and the expected sales per the appraisal report, we would recommend that United perform [a net realizable value calculation] on the project using reasonable assumptions and sell out periods.

Ex. T-7793, Tab 988.

v. Schulz Used Comparables That Inflated Park 410’s Values Based On An Assumption That the Northwest Freeway Would Be Completed.

R206.206. In the Market Value Approach the appraiser identifies properties comparable to the property being appraised. Ex. T-7084, Tab 709, pp. OW015459-60. Within Park 410, 9 tracts, Lots 21-29, are situated along the “Proposed Northwest Freeway.”[7] Ex. T-7084, Tab709, p. OW015438. In deriving values for each of those 9 lots, Schulz used comparables situated along the existing Loop 410 expressway. Tr. 27,118:11-18 (Shuler). Schulz states: “Those sales most indicative of these tracts’ value include [comparables] sales five though eight.” Ex. T-7084, Tab 709, p. OW015460.

R207.207. Comparables five through eight are each located along the existing Loop 410 expressway with prices ranging from $8.12 to $14.50 per square foot. Ex. T-7084, Tab 709, pp. OW015448-50 and OW015458-59. Schulz’s values for Lots 21 through 29 in Park 410 along the proposed Northwest Freeway range from $10.50-$13.50 per square foot, among the highest prices of all 38 Lots. Ex. T-7084, Tab 709, p. OW015462; Tr. 27,119:13-19 (Shuler). The Schulz appraisal does not discuss “the non-existence or the possibility that the Northwest Freeway would not be completed as an item of adjustment to those sales.” Tr. 27,119:7-12 (Shuler).

R208.208. As of 1997, the Expressway was still not completed. Tr. 7,377:1 - 7,378:21 (Dugger).

D. The Loan Closing

R209.209. The Park 410 loan closed on April 17, 1986. Ex. A-10298, Tab 775.

R210.210. The borrower’s statement reveals that out of the loan proceeds:

$ USAT disbursed $45,617,766.52 to the borrowers.

$ USAT took loan fees of $2.4 million representing 3% of an $80 million loan.

Ex. A-10298, Tab 775.

R211.211. Disbursements from the loan proceeds also included:

$ a $400,000 “loan fee” to Rosenberg. Ex. A-10298, Tab 775.

$ a $380,620.80 “Commission” paid to G&R. Ex. A-10298, Tab 775.

$ a $250,000 “developer’s Fee” paid to GMR, Ex. A-10298, Tab 775.

$ $300,000 per year ($75,000 per quarter) management fees to GMR, from which Rosenberg received 25%, or $75,000 per year ($18,750 per quarter). Ex. B-3844, Tab 775A, p. US0005484; T-7560, Tab 1038.

R212.212. In all, USAT, via loan proceeds, paid Rosenberg more than half a million dollars for facilitating USAT's making of this $80 million loan. See FOF R209 - R212 and R408.

R213.213. In an August 21, 1986, memorandum to Texas Savings and Loan Department Assistant Examiner Jeff Nunn, Graham represented that: “the [Park 410] closing statement is clear as to where the funds were applied; the funds were applied to legal fees (Oppenheimer, Rosenberg and Schlanger, Cook) . . . .” Ex. B-1187, Tab 785.

E. Ratification of the SLC Action by the USAT Board

R214.214. The March 17, 1986 SLC approval sheet stated:

. . . even though this loan amount will be $80,000,000, the total amount of funds that can be disbursed under this loan shall be limited to $70,000,000 until formal approval by the Board of Directors is obtained. If said approval is never obtained, then loan advances shall never exceed $70,000,000.

Ex. T-7670, Tab 654, emphasis added.

R215.215. On May 8, 1986, three-weeks after more than $45.6 million had been disbursed by USAT on the loan, the USAT Board of Directors, with Hurwitz present, approved the SLC’s March 17, 1986, $80,000,000 loan to the Park 410 West Joint Venture on the terms and conditions of the SLC’s approval. Ex. T-7587, Tab 655, p.5.

R216.216. Graham testified that he:

$ was not present at the May 8, 1986 USAT Board of Directors meeting. Tr. 5,891:11-13.

$ made no presentation to the USAT Board of Directors regarding the Park 410 loan prior to the Board voting on the matter. Tr. 5,891:14-16.

$ had “no contact with the board members” to discuss the approval of the $80 million loan. Tr. 5,892:12 - 5,893:6.

R217.217. The Board’s action was taken, on motion of Munitz, over the objection of one outside director, Wayne Winters, who objected “as to the loan amount and the value of the property.” Ex. T-7587, Tab 655, p.5.

R218.218. Kevin O’Connell testified that despite the language in the SLC’s approval, Finding R157, the economic substance of the transaction was an $80,000,000 loan from the time the SLC approved it:

The problem is it doesn't make any economic sense. If, as the joint venture has proposed, that it's going to cost $77 million to develop the property, once you agree to make this loan, to cap it at $70 million is effectively saying "we're going to cap it before it's viable." Once they made this loan, they were stuck with funding the full amount of the loan or stopping development before it's complete.

Tr. 21,900:19 - 21,901:5.

R219.219. Mr. O’Connell also noted that :

[T]hey actually booked the 2.4-million-dollar fees based on 80 million at the time of closing. Not at the time that the board ratified it, but at the time of closing. And that is 3 percent of 80 million, not of 70 million.

So, from the standpoint of what actually closed, the economic substance of that transaction was an 80-million-dollar loan from the start.

Tr.22,196:16 - 22,197:2; see also Tr. 5,896:13 - 5,897:6 (Graham); Tr. 27,604:1-6 (Wallace).

1. Excessive Concentration

R220.220. The $80 million Park 410 loan was by far the largest loan USAT had ever made. Tr. 5,702:1-3 (Graham).

R221.221. Stone explained the risk associated with concentrating $80,000,000 of USAT’s assets in a single large loan:

Diversification is expected in regulatory -- pardon me -- in financial

institutions because financial institutions, by their nature, are highly leveraged compared to any other corporation and dependent largely on depositories as their creditors, their funding.

So, they have, first of all, a relatively low capital base to begin with compared to any other institution: Finance company, any other type of major corporation. Consequently, even though the principles (sic) the same regardless of the size of your capital account, consequently, risk is the prime determinant in extending any credit or making an investment. It's expected that any loan has risk. Any investment has risk. The attempt is to minimize the risk.

. . . 

[C]oncentration is the opposite of diversification. Diversification means risk spread over a multitude of investments that have different sources of repayment and different risks involved. That one catastrophe in one will not affect the capital of the particular institution beyond its own loss as opposed to having one large investment or one large loan that can affect a large part of your capital account and dissipate that buffer that exists, that capital as a buffer against losses to depositors. And you should not put that at risk with an undue concentration either by class or type.

Tr. 10,632:13 - 10,634:6

R222.222. Indeed, USAT Director Winters testified: “I voted against it because I didn't feel there was enough equity in the project by the borrower and that, also, it's too much of a concentration of -- too much money in one deal. It went against my theory of spreading the risk.” Tr. 7,034:1-5.

R223.223. Likewise, Graham testified that he “had some uncomfort” with the size of the loan due to its concentration of risk. Tr. 5,862:7-16.

F. Hurwitz’s Involvement In Park 410

R224.224. Hurwitz was directly involved in the Park 410 transaction both informally and in writing. In addition to receiving at least one memorandum, Ex. T-7065, Tab 651, and participating in a telephonic discussion of loan fees and renewal fees, see FOF R105 - R111, Hurwitz also personally attended at least three meetings at which Park 410 was discussed:

$ Hurwitz attended a 1985 meeting in San Antonio where representatives of Park 410 “made an elaborate presentation, graphs and layouts.” Tr. 6,908:21 - 6,909:20; Tr. 6,994:6 - 6,995:17. Regarding this meeting, Graham testified:

Specifically, I know that Mr. Hurwitz, Mr. Gross, Mr. Childress, myself, and probably Mr. Williams were there. Anybody else, I can't recall.

Q. Do you know why they went?

A. I think we had everybody who had a voice in voting on this thing to get very familiar with it because of the size and the magnitude. We wanted everybody to be familiar.

Tr. 5,747:1-9, emphasis added.

$ Hurwitz attended the January 6, 1986 USAT SLC meeting where the SLC agreed to reduce the borrower’s renewal fees while refusing to lower the origination fees. Ex. T-7668, Tab 652.

$ Hurwitz attended the March 17, 1986 USAT SLC meeting where the Park 410 loan was approved. Ex. A-1649, Tab 653.

R225.225. Graham, USAT’s Senior Vice President for Real Estate, testified that he spoke with Hurwitz about making a loan in connection with the Park 410 property and that Hurwitz supported making the Park 410 loan. Tr. 5,719:10-21; Tr. 5,813:14 - 5,814:3; Tr. 5,835:18 - 5,836:16. Graham further testified regarding the 1985 Park 410 investment:

A. I don't know. I mean, I think Charles probably gave us an opinion, but I don't know whether or not -- if he really didn't like it that we were doing it, probably, realistically, we wouldn't have done it if he disliked it immensely.

Q. (BY MR. LEIMAN) I'm sorry. I didn't understand it. You would not have done it?

A. If he was adamant about it, we probably would have would have passed on it, yes.

Q. Okay. Did you talk to Mr. Hurwitz about the opportunity with Stanley Rosenberg?

A. I assume I did, yes.

Tr. 5,733:11-22, emphasis added.

R226.226. Likewise, Gross testified that Hurwitz attended SLC meetings and would occasionally comment and that Hurwitz also voiced his belief that he considered the Park 410 loan to be a “good opportunity.” Tr. 20,562:10-21; Tr. 20,563:21 - 20,564:5.

G. Losses

R227.227. As of December 30, 1988, the date of the USAT receivership, USAT had disbursed $72,652,646.57 of the $80,000,000 authorized on the Park 410 loan. Ex. T-7252, Tab 1078. Following the receivership, no further advances were made on the loan other than to maintain the property.

R228.228. Jeff Seidman (“Seidman”), was hired by USAT in August 1987 as a Project Manager and eventually became Senior Asset Manager prior to the receivership. Tr. 11,300:2 - 11,301:4. After the appointment of the receiver, Seidman became Vice President of Bank United. Seidman’s responsibilities included supervising a portfolio of assets and active loans, including Park 410. Tr. 11,643:11 - 11,464:1.

R229.229. The Park 410 loan “matured” on April 8, 1991. Id. Prior to that date, no property within the development had ever been sold and no payments had been made on the loan, in either principal or interest, other than those funded by loan proceeds.

R230.230. Interest continued to accrue from the December 30, 1988 receivership through April 8, 1991, the date the loan “matured” under the terms of the Promissory Note. Ex. B-3844, Tab 775A, p. US0004830 (Exhibit Tab 8, Promissory Note). Unpaid interest from December 30, 1988 through April 8, 1991 totaled $12,375,023.19. Ex. T-7327, Tab 1095; Tr. 11,610:13 - 11,613:12; Tr. 11,640:12 - 11,641:6 (Seidman).

R231.231. On April 8, 1991, the date the loan matured, the principal outstanding balance on the Park 410 loan was $72,652,646.57. Ex. T-7327, Tab 1095; Tr. 11,610:13 - 11,613:12; Tr. 11,640:12 - 11,641:6 (Seidman).

R232.232. Interest continued to accrue even after the loan matured so long as the note remained unpaid. Ex. B-3844, Tab 775A, p. US0004844 (Exhibit Tab 9, Deed of Trust and Security Agreement, §11.6). Bank United calculated interest due under the Promissory Note from the date the loan matured, April 8, 1991, through November 15, 1993, totaled $16,978,992.72. Ex. T-7327, Tab 1095; Tr. 11,610:13 - 11,613:12; Tr. 11,640:12 - 11,641:6 (Seidman). Further, Bank United calculated interest accrued at $16,647.58 per diem. Ex. T-7327, Tab 1095.

R233.233. In addition to the principal balance, USAT, and the receiver, authorized expenditures of $2,261,508.94 to manage the property “in order to ensure the project’s continuing marketability.” Ex. T-7327, Tab 1095; Tr. 11,635:14-18. Seidman explained that, “[t]he borrowers did not advance funds to cover [real estate taxes, maintenance, repairs of the property], and we needed to.” Tr. 11,635:14-18. The Security Agreement and the Development Loan Agreement both authorized additional expenditures where necessary to manage and protect the property and that such expenses would be additional indebtedness under the Promissory Note. Ex. B-3844, Tab 775A, p. US0004844 (Exhibit Tab 9, Deed of Trust and Security Agreement, §11.6); and p. US0004887 (Exhibit Tab 10, Development Loan Agreement, §IX(r)(viii)).

R234.234. On or about September 22, 1993, Bank United sold the note securing Park 410 to a group of investors including Rosenberg for $5,950,000. Ex. T-7324, Tab 1094, p. OW165192; Tr. 11,608:5-14.

R235.235. Bank United collected $5,950,000 on the sale of the Park 410 Promissory Note on or about September 22, 1993. Ex. T-7324, Tab 1094, p. OW165192; Tr. 11,608:5-14.

R236.236. Eventually, Bank United collected on the $10,000,000 in letters of credit the borrowers had put up as collateral. Tr. 11,614:20 - 11,615:1. No other funds, under the guarantees, were ever collected.

R237.237. Subsequent to the sale of the note, Bank United prepared a calculation of the cumulative principal balance and interest which would have accrued on the loan through November 15, 1993. Ex. T-7327, Tab 1095; Tr. 11,610:13 - 11,613:12; Tr. 11,640:12 - 11,641:6 (Seidman).

R238.238. OTS is not seeking to recover interest following the sale of the Promissory Note. Interest from September 22, 1993 through November 15, 1993 can be calculated by multiplying the per diem rate of $16,647.58, times 54, the number of days between September 22, 1993 and November 15, 1993, resulting in a total of $898,969.32. Ex. T-7324, Tab 1094; T-7327, Tab 1095; Tr. 11,610:13 - 11,617:7.

R239.239. Utilizing the above information, the total loss on the Park 410 loan is $87,419,202.10, as summarized in the following chart:

Principal at loan maturity (4/8/91): $72,652,646.57

Plus Additional Indebtedness to maintain property: 2,261,508.94

Plus Unpaid interest through 4/8/91: 12,375,023.19

Plus Post maturity interest (4/8/91 through 11/15/93): 16,978,992.72

TOTAL PRINCIPAL & INTEREST THROUGH 11/15/93: $104,268,171.42

Less letters of credit collected: $10,000,000.00

Less amount received from 9/22/93

sale of Park 410 Promissory Note: 5,950,000.00

Less interest from 9/22/93 sale of note

through 11/15/93 (calculated at per diem

rate of $16,647.58 x 54 days between

sale of note (9/22/93) and 11/15/93): 898,969.32

TOTAL REDUCTIONS: $16,848,969.32

TOTAL PRINCIPAL & INTEREST THROUGH 11/15/93: $104,268,171.42

TOTAL REDUCTIONS: $16,848,969.32

TOTAL LOSS SUFFERED BY USAT ON PARK 410: $87,419,202.10
IX. Norwood/United Park JV –Transaction

A. History

1. The Deauville Loan

R240.240. On December 21, 1984, USAT’s SLC approved a land acquisition loan of $18,200,000 (the “Deauville Loan”) to Stephen Block (“Block”) and Thomas Gordon (“Gordon”). Block and Gordon had previously developed “Deauville Discount Malls” in the Houston area and were seeking to expand to the Austin area. (Hereinafter, the Austin tract is referred to as the “Norwood site.”) Ex. T-7008, Tab 663; Tr. 5,910:5 - 5,911:7.

R241.241. The SLC approval stated:

$ The purpose of the loan was to finance the acquisition of a 94.713 acre tract in Austin, Texas and give Block and Gordon “time to undertake a detailed engineering study and to request rezoning and replatting so that it can accommodate a 500,000 square foot Deauville Discount Mall.”

$ the loan amount was $18,200,000.

$ the term of the loan was six months.

Ex. T-7008, Tab 663.

R242.242. The SLC approval states that potential tenants had committed to rent 270,000+ sq. ft. of the proposed Deauville Discount Mall, i.e., approximately 54% of the proposed 500,000 square foot mall had prospective tenants. Ex. T-7008, Tab 663, p. OW190619. There is no evidence that this representation was ever verified by USAT.

R243.243. At the time the SLC approved the loan, USAT had neither received, analyzed, nor reviewed either a feasibility study, or a written appraisal. The SLC approval sheet states: “We have received a verbal from Bolin & Associates, appraisers, which indicates the as-is value of this tract to be $28,500,000 ($6.91/sq.ft.), which makes United’s loan 63.9% of appraised value.” Ex. T-7008, Tab 663, emphasis added; Tr. 5,926:6-12. However, the SLC approval also notes: “Loan approval and closing subject to review and approval of final appraisal report.” Id.

R244.244. There is no evidence that USAT ever received, reviewed, or approved either a feasibility study, or a final appraisal report prior to funding the Deauville Loan. A June 10, 1985 appraisal for the Norwood site was prepared by Bolin & Associates, valuing the 94.713 acres at $28,880,000 as of December 17, 1984. This appraisal, however, was prepared for one of the borrowers, “Mr. Tom Gordon,” and was not prepared for USAT. Ex. B-3828, Tab 777. Similarly, the appraisal does not indicate that it complies with Federal Home Loan Bank Board Regulatory Memorandum R-41(b). Id.; Tr. 5,926:6-12. Moreover, the purchase price for the land was $15,925,195, significantly lower than the appraised value. Ex. T-7008, Tab 663, p. 2.

R245.245. USAT closed the $18,200,000 loan to Block and Gordon, and disbursed funds, on December 28, 1984. Ex. T-7615, Tab 724. As collateral, Block and Gordon:

$ gave USAT a first lien on the 94.713 acres.

$ gave personal guarantees for the entire amount of the loan.

Ex. T-7620, Tab 658; T-7615, Tab 724.

R246.246. According to the Senior Loan Committee (“SLC”) approval of the Deauville Loan, Gordon and Block’s cumulative net worth at the time exceeded $24,262,000. Ex. T-7008, Tab 663.

R247.247. At some point prior to May 1985, a local Austin broker, Charlie Teeple, contacted Frank Krasovec (“Krasovec”) and Jeffrey Minch (“Minch”), local Austin developers, to assist in obtaining necessary approvals from the City of Austin. Tr. 6,454:21 - 6,455:8.

R248.248. On May 2, 1985, Block, Gordon, Krasovec and Minch entered into a Joint Venture Agreement giving Block and Gordon 50% ownership and Krasovec and Minch 50% ownership in the Joint Venture. Ex. T-7618, Tab 723.

R249.249. Prior to May 10, 1985, Block wrote Graham requesting a 50% reduction in Block and Gordon’s liability on the Deauville Loan guarantees. Ex. T-7716, Tab 665, p. KM000285. On May 10, 1985, Graham responded that USAT’s “initial comfort with this loan was based upon [Block and Gordon’s] full support of the debt.” Id. Graham testified that it was Gordon’s guarantee which USAT’s real comfort with the Deauville loan. Tr. 5,932:11-17; Tr. 5,934:21 - 5,935:1.

2. The Deauville Loan Increases to $21,000,000

R250.250. On May 14, 1985, Block wrote Graham: “Based upon our projections, it appears that it will be necessary to increase the loan amount to $21 million.” Ex. T-7716, Tab 665.

R251.251. The Deauville Loan was due on June 28, 1985. Ex. T-7615, Tab 724. On June 17, 1985, the SLC amended the December 1984 loan by extending it another six months, until December 28, 1985, and increasing the loan amount by $2,800,000 to a total $21,000,000 (“Original Norwood Loan”). Ex. T-7011, Tab 666; T-7629, Tab 659. The amendment added Krasovec and Minch to Block and Gordon as personal guarantors, again, on 100% of the indebtedness. Ex. T-7627, Tab 660; T-7624, Tab 661; T-7549, Tab 726; T-7550, Tab 727. The SLC’s June 17, 1985 amended authorization listed the borrowers’ financial condition as follows:

Cash/Liquidity Net Worth Date

Thomas Gordon $1,173,246 $37,289,045 5/31/84*

Stephen Block 195,000 1,570,399 12/31/84

Frank Krasovec 469,000 11,832,467 11/15/84

Jeffrey Minch 54,003 1,194,336 4/1/85

*Updated financial statement being prepared.

Ex. T-7011, Tab 666.

R252.252. According to the SLC approval, the purpose of the amendment was stated as:

The original purchasers, Thomas J. Gordon and Stephen M. Block, have entered into a joint venture with several Austin-based developers to mutually develop this property. They have requested that we renew, extend and increase our loan for an additional six months which will give them time to finalize zoning and cost figures for a new development loan which will be about $33,000,000.

Ex. T-7011, Tab 666.

R253.253. More than half of the additional $2.8 million went toward funding interest payments and fees to USAT, and avoided the borrowers having to contribute any equity to the project. Ex. T-7011, Tab 666; Tr. 21,920:2 - 21,921:7 (O’Connell).

R254.254. Regarding “Appraisal,” the amended authorization referred to the December 21, 1984 SLC approval and stated: “Previously Approved: Loan amount was 63.9% of the appraised value of $28,500,000 provided by Bolin & Associates, dated 12/20/84. Now Amended: Loan amount will be 73.7% of the appraised value.”[8] Ex. T-7011, Tab 666.

R255.255. The developers planned a discount “Deauville” shopping center to be constructed on the largest of seven parcels comprising the Norwood site. Block and Gordon were to develop the shopping center site which, Minch testified, was “very critical” to the overall success of the project, “because it initiated the development on the site which would generate traffic to the site which would make the adjoining sites more attractive.” Tr. 6,462:3 - 9; 6,512:11 - 20.

R256.256. By October 1985, USAT and Gordon, Block, Krasovec, and Minch were discussing a development loan for the Norwood site. In a letter to Krasovec, dated October 18, 1985, Graham proposed a $34,000,000 loan for a three-year term, with two, one year options to renew. As to collateral, the letter stated that USAT would require:

1) First lien deed of trust lien on the entire property.

2) 100% joint and several liability of Gordon, Block, Krasovec and Minch.

3) As additional collateral, the pledge of $4,400,000 in Certificate of Deposits or Irrevocable Letters of Credit.

Finally, Graham’s October 18, 1985 letter stated that “these are the typical terms and conditions under which our latest acquisition and development loans have been made.” Ex. T-7714, Tab 669. In his testimony, Graham summarized the advantage of having a borrower’s cash equity in a project, as opposed to a guarantee: “[A] guarantee is betting on the future. Cash equity is dollars in hand or if you have . . . something pledged that you can go after. That’s in hand. A guarantee is something that may or may not be there three years from now.” Tr. 6,961:6-17.

R257.257. By early December 1985, the parties had still not reached agreement on a development loan and the Original Norwood Loan was coming due on December 28, 1985. Ex. T-7629, Tab 659.

a. Gordon and Block Experience Financial Problems

R258.258. In a May 10, 1985 letter to Block, Graham stated that USAT’s “initial comfort with [the Deauville] loan was based upon Tommy [Gordon] and your full support of the debt . . . . ” Ex. T-7716, Tab 665, p. KM000285.

R259.259. By December 4, 1985, Gordon and Block were experiencing financial difficulty, and Graham advised the SLC that Gordon might not be able to meet his obligations. In a December 4, 1985 memorandum to the SLC, Graham referred to a meeting he had with Krasovec and Minch, and stated it was “hinted that Tommy [Gordon] cannot provide his share of the equity.” Ex. B-3821, Tab 783, p.4

R260.260. Graham’s December 4, 1985 memorandum to the SLC also set out the status of negotiations on a development loan and noted that:

$ Krasovec and Minch “had not planned to provide equity”

$ it was not USAT’s “policy to make loans with 100% financing which are simply secured by the land and personal guarantees.”

$ Graham told Krasovec and Minch “that if they could bring significant, firm sales to the table, we may consider reducing the pledged collateral amount.”

Ex. B-3821, Tab 783, p.4.

b. USAT Again Extends the Original Deauville Loan

R261.261. On December 16, 1985 with the June 1985 loan extension coming due on December 28, 1985, USAT again extended - for a second time - the Original Norwood Loan another six months to enable Block, Gordon, Krasovec and Minch “to obtain financing for the development loan.” Ex. T-7010, Tab 670.

R262.262. There is no evidence that USAT attempted to learn the nature of Gordon and Block’s financial problems before again extending the loan. Tr. 5,965:7 - 5,968:9 (Graham); Tr. 20,723:7 - 20,724:20 (Gross). Compare Ex. T-7010, Tab 670 (12/16/85 SLC approval) with Ex. T-7713, Tab 671 (12/17/85 letter requesting updated financials).

R263.263. The SLC’s December 16, 1985 Amended Authorization lists “Guarantors” as:

Joint and several liability of Thomas Gordon, Steven M. Block, Frank Krasovec and Jeffrey Minch.

Cash/Liquidity Net Worth Date

Thomas Gordon $1,312,240 $45,195,435 05/85

Stephen Block 195,000 1,570,399 12/84

Frank Krasovec 469,000 11,832,467 11/84

Jeffrey Minch 54,003 1,194,336 04/85

$2,030,243 $59,792,637

Ex. T-7010, Tab 670. As such, the loan retained Block, Gordon, Krasovec, and Minch, as joint and several guarantors on 100% of the indebtedness. Ex. T-7010, Tab 670; Ex. T-7610, Tab 728.

R264.264. Thus, USAT obtained updated financial statements only from Gordon, whose unaudited and unverified financial statement reflected an increase in his net worth from the extension approved in June 1985. The financial statements of the remaining borrowers were from 8 months to more than a year old. Ex. T-7010, Tab 670; T-7011, Tab 666.

R265.265. Minch testified that he did not “have the financial ability to pay up what was then $20 million in joint and several liability . . .  if these loans had gone into default.” Tr. 6,476:13 - 18.

R266.266. The SLC’s Amended Authorization also provides:

The following funds remain to be disbursed under the $2,800,000.00 second lien:

Consulting Fees $ 191,156.10

Engineering 340,665.13

Accounting and Insurance 94,519.00

Interest Reserve 706,232.39

$1,332,572.62

Ex. T-7010, Tab 670.

R267.267. Under “Appraisal,” the Amended Authorization again refers to a non-existent appraisal: “Loan amount is 73.7% of the appraised value of $28,500,000 provided by Bolin and Associates, dated 12-20-84.” Ex. T-7010, Tab 670.

R268.268. By February 1986, Block and Gordon’s financial problems had worsened. A February 4, 1986 letter referred to Block and Gordon’s problems as the “Houston disease.” Minch testified he was aware of Gordon’s financial problems and that Gordon would not be able to develop the Norwood shopping center. Ex. T-7503, Tab 729; Tr. 6,488:19 - 6,489:7.

B. USAT Negotiates A “New” Norwood Loan

R269.269. On February 13, 1986, Minch wrote Gross a letter, copied to Graham, discussing developing the Norwood site. The first page of the letter also contains a handwritten note to Graham from Minch stating: “David - Last week we had a visit with Mr. Hurwitz, as well as Messrs. Gross & Williams. This is the result of that meeting. . . .” Ex. T-7582, Tab 672.

R270.270. That February 13, 1986 letter proposed that

$ USAT would replace “Gordon in the land part of the deal,” and

$ that: “The mall is substantially pre-leased to national credit tenants. It is anticipated that the mall will be 65-75% pre-leased prior to groundbreaking.”

Ex. T-7582, Tab 672.

R271.271. There is no evidence that USAT took any steps to verify the accuracy of Minch’s assertions regarding pre-leasing activities in the February 13, 1986 letter. Tr. 5,974:8 - 15.

R272.272. In a February 4, 1986 letter, Krasovec and Minch wrote to Block and Gordon: “Our analysis and reflection results in the conclusion that the project is in a state of crisis caused by a falling market for offices/hotels . . . .” Ex. T-7503, Tab 729; emphasis in original.

R273.273. Minch testified that by February 1986 he was aware that, “the market for hotel and office sites [in Austin] was perhaps beginning to decline.” Tr. 6,487:10 - 20.

R274.274. On February 28, 1986, Graham responded to Minch’s February 13, 1986 letter by proposing a $36,000,000 loan:

$ with security of “100% joint and several liability on behalf of Krasovec and Minch.”

$ giving USAT “the right of first refusal to . . . purchase the mall site at the same price, terms and conditions that were available to Gordon/Block.”

Ex. T-7712, Tab 673; Tr. 5,978:2 - 5,979:16.

R275.275. On March 20, 1986, Graham proposed a $37,500,000 loan with USAT taking a 60% profit participation. While increasing the loan amount, the letter also reduced Krasovec and Minch’s guarantee obligations. USAT’s proposal indicated that only, “[t]he top 25% of the loans shall be jointly and severally guaranteed by Frank P. Krasovec and Jeffrey Minch.” Ex. T-7507, Tab 731.

R276.276. Despite the statement in Graham’s December 4, 1985 memorandum to the SLC that “I indicated [to Krasovec and Minch] that if they could bring significant, firm sales to the table, we may consider reducing the pledged collateral amount,” and the fact that no sales had been consummated, the March 20, 1986 proposal requested no pledged collateral. Ex. T-7507, Tab 731. And, although Graham had stated in his October 18, 1985 letter that USAT’s typical terms and conditions for acquisition and development loans require additional pledged borrower collateral, this requirement was dropped in the March 20, 1985 letter. Id.

R277.277. Minch testified that he and Krasovec were unwilling to “take substantial financial risk” in connection with the Norwood transaction, and that they were unwilling to accept a $37,500,000 loan from USAT, as proposed in Graham’s letter because: “The implication of this letter was that we would borrow 100 percent of the money, which we felt would expose us to too much financial liability.” Tr. 6,464:7-20; Tr. 6,500:2-14.

R278.278. Minch also testified about the proposal in Graham’s March 20, 1986 letter to reduce the level of Krasovec and Minch’s guarantees, from 100% guarantees down to guarantees of the “top 25%”: “Well, I believe they understood that we were sensitive to our liability. And I think this was an attempt on their part to obtain less than 100 percent liability.” Tr. 6501:4-14.

1. Krasovec and Minch Were Unwilling To Accept Any Financial Liability

R279.279. Minch testified that he and Krasovec were never willing to accept any “meaningful financial risk” in connection with their borrowing funds from USAT on the Norwood transaction:

Well, when we originally became involved with the property, our only interest was the sweat equity interest. We were only interested in doing work in return for an ownership in the property. We were never willing to take any meaningful or substantive financial risk. And so, we always viewed Tom Gordon as our financial partner. And so, when Tom had his difficulties and we were brought into the role of being the overall developer, we were not willing to change that. We were not willing to take any meaningful financial risk.

Tr. 6,515: 18 - 6,516: 7.

R280.280. On March 25, 1986, Minch responded to Graham’s March 20 letter with a proposal that USAT acquire the mall site for $6.35 per square foot. Ex. T-7504, Tab 732.

R281.281. This proposal was rejected. On April 14, 1986, Graham wrote Krasovec:

. . . the Loan Committee disapproved the loan request . . .  primarily due to the fact that the proposed borrower . . .  would not have any hard, cash equity in the tract. Since we have not closed a loan recently, without such equity, this was a major stumbling block.

The letter proposed an additional six month extension to work out terms of a development loan and raise additional capital, with the funds remaining under the Original Norwood Loan to be used to pay “the [loan] renewal fee of $105,000, and interest reserve of $108,336.36 . . . .” The letter noted that once those amounts had been advanced, “the original [$18.2 million and $2.8 million] loans shall be then fully disbursed.” Ex. T-7711, Tab 676.

R282.282. The April 14, 1986 letter acknowledged that the Original Norwood Loan was not current, and that the borrowers had not paid the March 30, 1986 interest payment. The letter also acknowledged that the balance in the loan’s interest reserve could not cover “$90,698.78 of the March 30, 1986 interest [payment due].” The letter stated that this amount was “not covered by the interest reserve must be paid by borrower.” Ex. T-7711, Tab 676.

R283.283. Regarding a development loan, the letter emphasized USAT’s “preference” to have the borrowers put up “cash equity” as security, and even set a “general target for the amount of cash equity” needed on a $37,500,000 loan, at “no less that 15% of the loan amount or $5,625,000.” USAT also proposed lowering the borrowers’ guarantees on a development loan from 100% guarantees, to “the top 25% of the loan amount . . . after credit for the cash equity.” Ex. T-7711, Tab 676.

R284.284. Graham also reiterated that no further credit could be extended “unless interest due March 30, 1986 is brought current. A savings and loan cannot legally extend, renew or restructure a delinquent loan, so unless the loan is brought current, our alternatives are limited.” Ex. T-7711, Tab 676.

R285.285. Minch testified that he and Krasovec were unwilling to provide any financial equity and, further, that they did not have access to any source of financial equity in March 1986. Tr. 6,505:15-22; Tr. 6,508:12-18.

R286.286. Thus, by March 30, 1986, the Original Norwood Loan made to Block, Gordon, Krasovec, and Minch became non-performing because the interest reserve upon which it relied for funding interest and all other payments was exhausted. Ex. T-7711, Tab 676; T-7016, Tab 681; Tr. 6,012:12 - 6,013:1; Ex. T-7032, Tab 701; Ex. T-7502, Tab 977, p. TXS&L00148.

R287.287. From December 1984 through April 1986, and, indeed, through July 1986, none of the borrowers made any payments on the $18,200,000 Deauville Loan or the $2,800,000 amended Deauville Loan from their personal funds, nor did they contribute any financial equity to the project. That is, all interest and other payments were made from loan proceeds funded by USAT. When the loan proceeds were exhausted in March 1986, the loans became delinquent. Rather than cutting losses, foreclosing on the property and collecting on the guarantees, USAT decided to “over-advance” the Original Norwood Loan. Ex. T-7526, Tab 680.

2. The National Western Life Insurance Tract

R288.288. On February 28, 1986, Krasovec and Minch, entered into an Earnest Money Contract to acquire an additional 4.717 acres (the “NatWest property”) adjacent to the 94.713 acre Norwood site from National Western Life Insurance Company (“NatWest”). Ex. T-7561, Tab 742.

R289.289. On April 30, 1986, Krasovec and Minch closed on the NatWest property for $2,391,700.13. USAT funded the down payment of $478,340[9] and NatWest held a note and a first lien on the 4.717 acre property in the amount of $1,913,360.10. Ex. T-7295, Tab 1059, p. 2; Tr. 6,585:1-12. The Nat West property becomes Lot 4 in the Norwood site.

R290.290. Thus, despite the fact that (1) the Original Norwood Loan was fully funded in March 1986, (2) interest payments and fees on the Original Norwood Loans were past due by March 30, 1986, (3) USAT’s SLC had not approved any further extensions of credit to Norwood on the Original Norwood Loans, and (4) the borrowers had put no personal equity into the project, USAT funded an additional $470,831.24 towards the down payment on the NatWest property. Ex. T-7538, Tab 700; T-7511, Tab 744; T-7509, Tab 743; T-7023, Tab 692; T-7701, Tab 734, p. KM000074; T-7295, Tab 1059, p. 2; Tr. 6,585:1-12.

R291.291. On April 15, 1986, Minch responded to Graham’s April 14, letter and stated, among other things, “We have received two (2) contracts which both are contingent upon the construction of the infrastructure improvements in a timely manner. These contracts will be finalized this week.” Ex. T- 7014, Tab 677.

R292.292. The two contracts referred to above in Finding R291, were “earnest money contracts” with Vernon Brown and Robert Tamminga. The contract with Brown is dated April 16, 1986, and the contract with Tamminga is dated April 20, 1986. Minch testified, however, that the Brown and Tamminga contracts were not only “contingent upon the construction of the infrastructure improvements in a timely manner” but that Brown and Tamminga could terminate their contracts “for any reason.” Neither the Brown nor the Tamminga contracts resulted in a sale of any property at the Norwood site. Ex. B-937, Tab 764; B-941, Tab 765; Tr. 6,513:12-22; 6,541:9-12; 6,705:11-14.

R293.293. Despite the delinquency in the existing loan, USAT and Norwood continued to negotiate a new loan. On May 8, 1986, Graham wrote the Albert Haegelin Construction Co. and stated that USAT “has agreed to advance the funds” to Krasovec and Minch “necessary to complete all the proposed improvements.” At the time this letter was sent, neither the SLC, nor the REIC had approved any agreement as represented in the letter. Ex. T-7707, Tab 682.

R294.294. Minch testified that he contacted an appraisal firm, Appraisal Associates of Austin (“AAA”), probably before April 1986, because USAT informed him that there was a requirement to have an appraisal on the property. Tr. 6,562:6 - 6,563:20.

R295.295. On May 8, 1986, Graham wrote Minch regarding an R-41(b) appraisal and a market feasibility study for the Norwood project:

In preparing for the upcoming examination [by the FHLBB], we have discovered that not only do we need a R41b appraisal on an acquisition and development loan, but also a separate market feasibility study.

I know you have already contacted Rex Bolin about a new appraisal of the property fully-developed. He needs to try and arrive at a R41b value of $47,000,000+ if at all possible. I also need for him to sign and return the attached engagement letter as soon as possible so I have proof in my files an appraisal has been ordered.

I have also attached copies of the language we need to see in a R41b appraisal as well as a list of the areas we hear the federal examiners have concentrated on in their reviews. This information should be helpful in Rex’s preparation of the appraisal; however, if he has any questions, have him call me.

As far as the feasibility study requirement, I will leave it up to your discretion to select the appropriate person for this job; however, we do need to start this task as soon as possible as well as starting the appraisal. The execution of our financing agreement, even if the legal papers are completed, can not be consummated until receipt of the appraised value.

Ex. T-7017, Tab 683.

R296.296. Minch testified that, per Graham’s instructions, he contacted the Houston appraisal firm of Bolin & Associates (“Bolin”) to obtain a new appraisal of the Norwood site, and that he contacted Burke, O’Hara, Fort Associates (“Burke, O’Hara”) to obtain the feasibility study. Ex. T-7138, Tab 690; Tr. 6,537:12-6,538:14.

R297.297. On May 22, 1986, Graham sent Minch a new proposal to finance the Norwood project. The new proposal comprised three parts: I. Renewal of the Present Debt; II. Commitment for a Development Loan; and III. Commitment for Partnership/Venture. The proposal specified that no part of the arrangement could close unless:

$ Krasovec and Minch “shall have made the May 1, 1986 interest payment of $187,946.09 and the June 1, 1986 interest payment (in approximately the same amount) when it comes due;” and

$ that the contracts with Brown and Tamminga “shall have closed and funded.”

Ex. T-7710, Tab 684, pp. KM000253-58; (emphasis in original).

R298.298. The “Commitment For Partnership/Venture” portion of the proposal provided that “The profit and losses shall be allocated according to the following percentage:

United Financial Corp. 62.5%

(a wholly owned subsidiary of USAT)

Krasovec/Minch 37.5%

Ex. T-7710, Tab 684, p. KM000257.

R299.299. Shortly after the May 22, 1986 proposal letter, Krasovec and Minch went to Houston to “make a presentation on the project to [USAT’s] loan committee.” Tr. 6,547:5-8.

R300.300. Minch explained the purpose of the presentation and reiterated his and Krasovec’s position that, “the most important thing underlying was that we were not to contribute any capital to the venture, that we were attempting to manage our risk to zero.” Tr. 6,549:22-6,550:16.

C. The $39.4 Million Norwood Transaction

R301.301. Despite the non-performing status of the loan, on June 2, 1986, the SLC met and approved a $30 million loan (“Norwood Loan”) and the REIC approved a $9.4 million infusion of capital (“Norwood Investment;” the Norwood Loan and the Norwood Investment are jointly referred to as the “Norwood Transaction”), by United Financial Corporation (“UFC”). The stated purpose of the Norwood Transaction was: “To consider a land acquisition and development loan for a 100 acre site which will be developed and sold off as smaller commercial/mixed-use tracts.” Ex. T-7020, Tab 687; T-7021, Tab 688.

R302.302. As of June 2, 1986, the SLC members were: (1) Michael R. Crow; (2) David Graham/Gem Childress; (3) J.J. Gray, Jr.; (4) Jenard M. Gross; (5) Charles W. Patterson; and, (6) Gerald R. Williams. Ex. A-1110, Tab 133, p. 7.

R303.303. As of June 2, 1986, the REIC members were: (1) Jenard M. Gross; (2) Gerald R. Williams; (3) Michael R. Crow; (4) Gem B. Childress; and, (5) David R. Graham. Ex. A-1110, Tab 133, p.15.

R304.304. The June 2, 1986 SLC approval identified the “Applicant” as:

A joint venture, tentatively styled Norwood/United Park to formed (sic) between United Financial Corporation and Frank P. Krasovec/Jeffrey Minch who are the principals of Norwood Properties, a real estate development firm in Austin, Texas. They are presently partners in another partnership which holds title to this tract.

Mr. Krasovec and Mr. Minch shall jointly and severally guarantee the top 25% of the principal balance and 100% of all interest and costs associated with the loan.

Guarantor Net Worth Cash Date

Frank P. Krasovec $13,451,417 $507,000 4/8/86

Jeffrey Minch 1,233,118 55,279 4/8/86

$14,684,535 $562,279

Ex. T-7020, Tab 687.

R305.305. The dates for the financial data of the borrowers in Finding R304 above, refers to an April 8, 1986 cover letter from Minch to Graham, but not the dates of the financial statements themselves. The April 8, cover letter states: “Enclosed please find the financial statements and cash flow projections which you requested.” The enclosures are unaudited financial statements of Jeffrey Minch, dated October 1, 1985, and Frank P. Krasovec, dated January 6, 1986. Ex. T-7013, Tab 675.

R306.306. At the time of the loan application, Krasovec and Minch submitted unverified and unaudited financial statements dated January 6, 1986 and October 1, 1985 respectively. Ex. T-7013, Tab 675; Tr. 5,998:20 - 5,999:10.

R307.307. Of Krasovec's stated net worth of $13.45 million, only $507,000 was in cash. The remainder of Krasovec's listed net worth consisted of notes receivable, partnership interests, personal residences, and convertible debentures and stock in various communications companies. Ex. T-7013, Tab 675. By the same token, Minch's financial statement showed $37,902 in cash, and almost $1 million in partnership interests. Id. Because virtually all of the assets listed on Minch’s financial statement were private interests and non-publicly traded securities, they were not readily subject to any form of independent, reliable market valuation. Id.; Tr. 5,992:21 - 5,994:19; Tr. 5,995:10-22.

1. The Original Norwood Loans Were Delinquent

R308.308. On June 2, 1986, when the SLC and the REIC met and approved the Norwood Loan and the Norwood Investment, the Original Norwood Loan, had “unpaid principal balances totaling $21,163,137” and was “four months delinquent.” Ex. T-7502, Tab 977, p. TXS&L 000148; T-7526, Tab 680.

R309.309. According to the April 14, 1986 and May 22, 1986 letters from Graham to Krasovec and Minch, the $21,000,000 Original Norwood Loan, was delinquent by a total of $571,590.96 calculated as follows:

Amount Interest/Fee Date Source

$ 105,000.00 Renewal fee December 28, 1985 T-7710, Tab 684, p.1.

90,698.78 Interest payment March 30, 1986 T-7711, Tab 676, p.2.

187,946.09 Interest payment May 1, 1986 T-7710, Tab 684, p.4.

187,946.09 Interest payment June 1, 1986 T-7710, Tab 684, p.4.

$ 571,590.96

R310.310. Despite the fact that interest and other amounts owing on the Original Norwood Loan had been delinquent since March 30, 1986, and, the loan was over $500,000 in arrears when the loan ultimately closed on July 29, 1986, the SLC’s action excused Gordon and Block from any and all obligations on the debt without payment of any consideration for the discharge of their liability. Tr. 6,618:14-17 (Minch); Tr. 6,927:1-20 (Graham); Tr. 14,593:6-10 (Crow); Tr. 20,753:9-11 (Gross); Tr. 21,951:12 - 21,952:2 (O’Connell); Finding R309.

2. No Written Appraisal Had Been Received, Reviewed, or Analyzed R311.311. Regarding an “Appraisal,” the SLC approval stated: “A new R41b appraisal is being prepared by Rex E. Bolin which should indicate a value of the raw land around $30,000,000 and the value of the tract fully developed at $45,000,000+. Based upon $45,000,000 our proposed loan would be 67% of value.” Ex. T-7020, Tab 687, emphasis added.

R312.312. The Bolin appraisal of the Norwood site was not transmitted to USAT until July 22, 1986, seven weeks after the SLC and REIC had approved the Norwood Transaction. Ex. T-7029, Tab 698, p. OW014986; T-7020, Tab 687; T-7021, Tab 688.

R313.313. Thus, at the time the SLC and REIC approved the $39,400,000 Norwood Transaction on June 2, 1986, no appraisal had been received, analyzed, or reviewed by USAT officers, directors, or employees. Ex. T-7020, Tab 687; T-7021, Tab 688; T-7029, Tab 698; Tr. 6,070:11-19 (Graham); Tr. 6,132:4-17 (Graham); Tr. 6,424:13 - 6,425:1 (G. Williams); Tr. 14,649:3-7 (Crow); Tr. 20,793:14 - 20,794:3 (Gross).

3. No Feasibility Study Had Been Received, Reviewed, or Analyzed

R314.314. Burke, O’Hara did not forward its “Market Analysis,” analyzing portions of the Norwood development until June 4, 1986, two days after the SLC and REIC had already approved the $39,400,000 Norwood Transaction. Ex. T-7138, Tab 690; Tr. 6,115:3-12 (Graham); Tr. 14,570:17 - 14,571:4 (Crow).

4. The Brown and Tamminga Contracts Had Not Closed

R315.315. The SLC approval also noted as “General Comments” that neither the Brown nor the Tamminga contracts had closed. Ex. T-7020, Tab 687.

R316.316. Thus, at the time the SLC and REIC approved the Norwood Transaction on June 2, 1986, the “contracts” with Tamminga and Brown were not “firm” contracts binding the prospective buyers to purchase any sites within the Norwood development. Tr. 6,542:9-22 (Minch).

R317.317. Despite Graham’s December 4, 1985 memorandum to the SLC that “I indicated [to Krasovec and Minch] that if they could bring significant, firm sales to the table, we may consider reducing the pledged collateral amount,” the Norwood Transaction was approved without Tamminga or Brown’s Earnest Money Contracts becoming firm obligations to purchase any of the Norwood lots. Indeed, Minch testified that United made no such demand on them:

Q. Do you recall whether United had a requirement during the negotiations -- during your back and forth negotiations that you had with them that in order for the full development loan funding to go through, contracts for Mr. Brown to build the shopping center and Mr. Tamminga to build the hotel had to be firm and final contracts?

A. They did not.

Ex. B-3821, Tab 783, p.4; Tr. 6,555:21 - 6,556:7.

R318.318. The June 2, 1986 SLC approval sheet provided that:

$ the loan would close on or about June 20, 1986.

$ USAT’s wholly owned subsidiary, UFC, would provide $9,400,000 as equity toward the project.

$ USAT’s initial funding would be approximately $15,000,000, of the $30,000,000 loan amount.

$ “The majority of these funds will be used to repay United’s existing debt balances, the origination fees, accrued developer’s costs/fees and engineering work. . . .” 

Ex. T-7020, Tab 687. Moreover, Krasovec and Minch were not required to provide any equity toward the project. Id.

R319.319. The June 2, 1986, SLC approval of the Norwood loan is signed by Graham, Gross, Gerald Williams, Crow, and one other unidentified individual. Ex. T-7020, Tab 687.

R320.320. The SLC meeting at which the Norwood Loan was approved lasted only 75 minutes, and, in addition to the Norwood Loan, addressed five other items. Ex. T-7589, Tab 1032A.

5. The Burke, O’Hara Market Analysis

R321.321. On June 4, 1986, two days after the SLC and REIC had approved the Norwood Transaction, Burke, O’Hara, forwarded its “Market Analysis” of the Norwood project to Minch. Ex. T-7138, Tab 690, p. OW193344.

R322.322. The Market Analysis stated as its purpose:

[T]o answer two basic questions concerning the market conditions affecting the development of uses planned within Lots 3, 4 and 5, exclusive of retail. Those questions are:

1. “Does the proposed product mix make sense?”

2. “If the product mix makes sense, how will it perform in the market and why?”

Ex. T-7138, Tab 690, pp. OW193346-47. Despite the second question, above, none of Burke, O’Hara’s conclusions are “based on an analysis of whether a profit can be made.” Ex. T-7138, Tab 690, p. OW193349.

R323.323. The Norwood site encompassed seven lots with useable acreage as follows:

Lot No. Useable Acreage

1 38.1675

2 11.3726

3 9.1039

4 4.4617

5 8.5930

6 14.0284

7 4.1254

However, the Burke, O’Hara Market Analysis only covered Lots 3, 4, and 5, representing 22.1586 acres of the total 89.8525 useable acres within the Norwood site, or approximately 25% of the development. Ex. T-7029, Tab 698, p. CN0594257. On June 17, 1986, Burke, O’Hara forwarded a two-page “Addendum” to the Burke, O’Hara report which purported to modify only the “Executive Summary” of the original June 5, 1986 Burke, O’Hara report by adding Lot 2 to its conclusions, without providing additional analysis. Ex. T-7523, Tab 711A. Adding Lot 2 acreage increased the area addressed by the Burke, O’Hara report to 33.5312 acres, or approximately 37% of the total development.

R324.324. The Executive Summary of the Burke, O’Hara Market Analysis, projected that 900,000 square feet of Norwood office space should be fully leased in 7.5 to 8.5 years, based on the assumptions that:

$ Norwood Park could “capture” 15% of the anticipated annual demand of all office space in Austin’s North and Northeast suburban markets.

$ Lots 3 and 5 would sell and 900,000 square feet of Norwood office space could enter the market within 18 months.

Ex. T-7138, Tab 690, p. OW193349. The Burke, O’Hara “Addendum” added Lot 2 office space and then lengthened the estimated time needed for the market to absorb the proposed office space of Lots 2, 3, and 5 to 11.5 to 12.5 years. Ex. T-7523, Tab 711A, p. OW193402.

R325.325. Regarding hotel/motel sites, the Burke, O’Hara Market Analysis projected that “the Lot 4 hotel site should be capable of supporting 380 hotel rooms” within 5 years after the office space enters the market place, i.e. in 6.5 years (5 years + 18 months), based on the assumptions that:

$ Norwood’s hotel would “capture” 40% of the “demand from neighboring office developments.”

$ “65% of the hotel is supported by the business user market segment.” The Burke, O’Hara Market Analysis does not define this phrase.

R326.326. Regarding restaurant sites, the Burke, O’Hara Market Analysis projected that the Lot 3 and 5 restaurant sites “should be supportable” within 5 years after the office space enters the market place, i.e. in 6.5 years (5 years + 18 months), based on the assumptions that:

$ Norwood’s restaurants could “capture” 12% of the “demand from neighboring office developments.”

$ “40% of the two restaurants are supported by area office employees” The Burke, O’Hara Market Analysis does not define this phrase.

Ex. T-7138, Tab 690, p. OW193349. The Burke, O’Hara “Addendum” added Lot 2 restaurant sites and then doubled the assumed “capture” to 24% of the “demand from neighboring office developments” to achieve absorption within 5 years after the Norwood office space enters the market. Ex. T-7523, Tab 711A, p. OW193403.

R327.327. Each of the absorption conclusions of the Burke, O’Hara Market Analysis recognizes that it “is not based on an analysis of whether a profit can be made.” Ex. T-7138, Tab 690, p. OW193349.

R328.328. Among other things, regarding the supply of office space in Austin, the June 4, 1986, Burke, O’Hara Market Analysis reported:

$ “For the past five years, and particularly the past three years, office development in the three-county Austin MSA has grown more rapidly than its population and employment base. . . .” Ex. T-7138, Tab 690, p. OW193366.

$ “Interviews with real estate professionals reveal a commonly-held view that the office space market is overbuilt and is likely to remain overbuilt. . . .” Ex. T-7138, Tab 690, p. OW193366.

$ “The success of the Norwood Park office product in the market will depend heavily on the effectiveness of its marketing program.” Ex. T-7138, Tab 690, p. OW193375.

$ “The oversupply anticipated in the Austin office market when the Norwood office product enters the market will be great.” Ex. T-7138, Tab 690, p. OW193375.

R329.329. Among other things, regarding the supply of hotel space in Austin, the June 4, 1986, Burke, O’Hara Market Analysis reported:

$ “Less predictably, Austin hotel room rates are relatively low. In 1985 the average rate was $41.63 per night, considerably less than the Gulf Coast area average of $51.87 . . . . Rates for upscale hotel rooms in Austin average around $60.00; mid-range $42.00; and budget, $34.00.” Ex. T-7138, Tab 690, p. OW193377.

$ “For a city the size of Austin these figures represent an unusually large hotel room inventory -- particularly in light of Austin’s inadequate convention and airport facilities.” Ex. T-7138, Tab 690, pp. OW193377-80.

$ “Lodging industry experts uniformly agree that Austin hotels will experience much lower occupancy rates in the next five years than in the past five years.” Ex. T-7138, Tab 690, p. OW193380.

$ “[T]hirty-two significant and planned hotels/motels lie within the Norwood Park hotel market area. . . .  The northeast hotel market area is considered to be overbuilt, but not as overbuilt as the central market area.” Ex. T-7138, Tab 690, p. OW193382.

R330.330. The information contained in the Burke, O’Hara Market Analysis was not reviewed or analyzed by USAT, or the members of the SLC or the REIC, prior to their approving the $39,400,000 Norwood Transaction. The Norwood Transaction was approved on June 2, 1986 and the Burke, O’Hara Market Analysis was not forwarded to Minch until June 4, 1986. Ex. T- 7138, Tab 690, p. OW193344; T-7020, Tab 687; T-7021, Tab 688.

6. The Bolin Appraisal

R331.331. The July 22, 1986 Bolin appraisal, among other things:

$ Recognized that, “the petroleum industry still has a great impact on the state . . . and trends in the energy industry have profound consequences on the state’s economy.” Ex. T-7029, Tab 698, p. OW014998, emphasis added.

$ Recognized that Texas was hurt by low oil prices: “Low oil prices since 1982 have hurt the state but diversification offers an opportunity for Texas to get back in the forefront of the nation’s economy.” Ex. T-7029, Tab 698, p. OW014997.

$ Stated: “The Texas economy is in transition, leaving a period of extraordinary rapid growth fueled by rapid increase of Texas oil and gas production and entering a period when oil and gas prices will decline or grow slowly, limiting growth in the energy industry.” Ex. T-7029, Tab 698, p. OW014998, emphasis added.

$ Reported that “job growth has slowed” and that “slower economic growth will attract fewer newcomers” to the state. Ex. T-7029, Tab 698, p. OW014997.

$ Cited a 1983 statistic, and a 1984 economic expectation, in a July 1986 appraisal, without explaining or analyzing whether the “expectation” proved true: “Texas’ personal income accounted for 7% of the nation’s total in 1983, and is expected to increase more than 9% in 1984. This growth lags behind the nation (sic) rate . . . .” Ex. T-7029, Tab 698, p. OW014997.

$ Reported that: “Building activity has slowed in the state in recent years with a surplus of residential and non-residential buildings. The outlook for the construction industry is only modest.” Ex. T-7029, Tab 698, p. OW014998, emphasis added.

R332.332. Bolin provided a limited sales history of the Norwood property by addressing only the December 1984 sale by Ivanhoe, Inc. to Block and Gordon and described that sale as “a distressed sales (sic) due to partnership complications within Ivanhoe, Inc.” and later described the sale as “under duress due to the internal partnership problems of the grantor.” The sales price in December 1984 was $4.09 per square foot. Ex. T-7029, Tab 698, pp. OW015017 and OW015075 (Land Sale No. 3). Respondents’ appraisal expert, Brian Shuler, testified that “beyond this statement, there is no discussion of the specifics of that.” Tr. 27,184:8-10. By contrast, the AAA appraisal traces the property sales history back to 1979 and also discusses the sale from Ivanhoe, Inc. to Block and Gordon revealing that:

1) The sale from Ivanhoe, Inc. to Block and Gordon was a “bona-fide, arms length sale.” Ex. T-7701, Tab 734, p. KM000104.

2) “[A]n agent of [Ivanhoe, Inc.] says that the sale was not a distress sale, the owners were well apprised of the value of the property and that they were happy with the sale price. Other parties closely connected with the sale say that it did not appear to them to be a distress sale. . . .  and it appears that the sale took place only very slightly below market, if at all.” Ex. T-7701, Tab 734, p. KM000104.

3) Ivanhoe received an offer of $4.29 per square foot from another potential buyer of the property but sold to Block and Gordon because they could close the sale more quickly. Ex. T-7701, Tab 734, p. KM000104.

These discrepancies are not explained or discussed in the Bolin appraisal.

a. The Bolin Appraisal Was Not Self-Contained

R333.333. Finding R176 cites the applicable regulation governing establishment and maintenance of thrift records.

R334.334. FOF R177 through R178 cite key provisions of FHLBB Mem. R-41b, the governing policy statement regarding appraisals prepared for thrifts from March 12, 1982 through September 11, 1986.

R335.335. The Bolin appraisal failed to disclose that the Brown and Tamminga contracts could terminate “for any reason” and, that no predevelopment contract had resulted in an actual sale of land. Nevertheless, Bolin stated: “As evidenced by predevelopment contracts, approximately 38% of the project has been committed.” Ex. T-7029, Tab 698, p. OW015025; Tr. 6,513:12-22 (Minch); Tr. 27,208:8-13 (Shuler).

R336.336. Moreover, in developing the Discounted Cash Flow analysis, Bolin, without explanation, assumed that 48% of Norwood would be sold before construction of the development phase was completed. Ex. T-7029, Tab 698, pp. OW015061-62; Tr. 27,251:10-16 (Shuler); Tr. 27,243:8-12 (Shuler).

b. The Burke, O’Hara Market Analysis Was Not Made A Permanent Part Of The Appraisal Report

R337.337. Although Bolin stated: “We have reviewed a feasibility study prepared by Burke, O’Hara and Associates and we are in agreement with the conclusion reached in the study,” other than the two-page Executive Summary, neither the Burke, O’Hara Market Analysis, nor the Burke, O’Hara Addendum, were made a “permanent part of the appraisal report” as required by FHLBB Mem. R-41b. Ex. T-7029, Tab 698, p. OW015019; T-7760, Tab 795, p.3; T-7138, Tab 690.

R338.338. Moreover, even though the Burke, O’Hara Market Analysis only analyzed Lots 3, 4, and 5 of the Norwood development, information contained in the Bolin appraisal contradicts information contained in the Burke, O’Hara Market Analysis:

$ The Bolin appraisal stated that “Austin has long enjoyed a stable economic picture due to the combined employment of over 35% of its workforce by the state government, the federal government, and the University of Texas at Austin.” Burke, O’Hara, however, stated in its “Public Administration” section, “Both sectors are strong but neither is expanding. Formulating program budget cuts in anticipation of another projected revenue shortfall is the most urgent issue facing the state government. Expansion of state and local government may be halted in the short term, and perhaps indefinitely, as a result.” . . . “Among the strongest sectors remains Public Administration attention to which should be seriously and aggressively given. However, it possesses weaknesses in that employment will probably not expand as rapidly (if at all) in the next five years in the Austin MSA economy because of anticipated state revenue shortfalls.” Ex. T-7029, Tab 698, p. OW015000; T-7138, Tab 690, p. OW193364. This distinction is not explained in the Bolin appraisal.

$ The Bolin appraisal stated that: “Employment opportunities have experienced rapid growth and expansion throughout the construction, trade and service sectors . . . .” Burke, O’Hara, however, states that: “Contract construction is . . . presently weak;” and that although the Business Services sector, “accounts for approximately 22% of local employment, it is growing only gradually.” Ex. T-7029, Tab 698, p. OW015000; T-7138, Tab 690, p. OW193362. This distinction is not explained in the Bolin appraisal.

$ The Burke, O’Hara Addendum extends the absorption period of Norwood office space into the Austin market to “11.5 to 12.5 years from market entry of Norwood office space,” which is predicted to be “18 months from the date of our report.” Thus, the June 1986 Burke, O’Hara report predicted that Norwood office space would enter the market 18 months later, i.e., in December 1987. Burke, O’Hara further predicted that that office space would be absorbed into the Austin market within 11.5 to 12.5 years from that point, i.e., in June 1999 to June 2000. Ex. T-7523, Tab 711A. Bolin does not address the feasibility of office lots being developed when absorption of the office space would take up to 12.5 years. Ex. T-7029, Tab 698, p. OW015097-98.

$ Moreover, Burke, O’Hara estimates that Norwood’s hotels and restaurants will be absorbed five years after entry of the Norwood office space. Ex. T-7523, Tab 711A (office product); T-7138, Tab 690, pp. OW193386 (hotel product), OW193394 (restaurant product). Bolin does not analyze the feasibility of the development given Burke, O’Hara’s absorption estimates for office space, hotels and restaurants.

$ The Bolin appraisal adopts Burke, O’Hara’s conclusions regarding “Marketability:” “With reference to the Burke, O’Hara, Fort Market Study, the projection conclusions are considered realistic and we are in agreement with the [11.5 to 12.5 year] absorption estimates that are quoted. We further feel that our three year projection period used in the Income Approach is representative of the Austin market and reasonable as a marketing time to attract builders/developers to the proposed subdivision.” Burke, O’Hara, however, stated in its “Overall Marketability” section: “Sufficient market demand exists to absorb all elements of the proposed projects by 1996.” Ex. T-7029, Tab 698, p. OW015025; T-7138, Tab 690, p. OW193348. This discrepancy is not explained in the Bolin appraisal.

$ The Bolin appraisal stated that hotels within the Norwood development “are expected to accommodate conference rooms and suite-type rooms that are more luxury oriented then (sic) the existing units in the neighborhood.” Burke, O’Hara, however, states that the hotel site it reviewed “is an exceptionally good location for a mid range hotel . . . .” Ex. T-7029, Tab 698, p. OW015022; T-7138, Tab 690, p. OW193348. This discrepancy is not explained in the Bolin appraisal.

c. The Bolin Appraisal Failed To Make Provision

For All Appropriate Deductions and Discounts

R339.339. The Bolin appraisal arrives at a value estimate for the Norwood development without analyzing or explaining certain deductions and discounts:

$ The Bolin appraisal stated that the Norwood lots should reasonably be absorbed into the marketplace within a three-year absorption period. However, in factoring the time value of money from the end of the three-year absorption period, Bolin applies only a two-year discount period, thus eliminating one year of discounting. Cf. Ex. T-7029, Tab 698, pp. OW015025 and OW015026.

$ The Bolin appraisal listed twenty “comparable land sales” for subdivided lots. However, in nine of the twenty sales, the appraisal failed to identify the terms of those sales. Ex. T-7029, Tab 698, pp. OW01528-39. And, in the Development Approach portion, the appraisal listed seven land sales comparisons, only three of which have identified terms of the sales. Ex. T-7029, Tab 698, pp. OW015068-71. Respondents’ appraisal expert, Brian Shuler, explained that, when looking at comparable properties, the terms of a sale, cash or financing, could be a significant factor in determining an appraised value. Tr. 27,108:22 - 27,109:10.

$ Bolin stated: “After reviewing the most recent coparable (sic) sales collected for this report it is our opinion that a 10.0% annual increase in property values is justified and reasonable for the subject property and surrounding neighborhoods.” Ex. T-7029, Tab 698, p. OW015060. No sales history for any comparable properties is provided in the Bolin appraisal and Bolin provided no further explanation of his analysis or source data to support a “10% annual increase in property values.”

$ Bolin assumed that 48% of the Norwood property will be presold before completion of the development phase. By making this assumption, Bolin was able to deduct 48% of the expenses, such as taxes, marketing, management expense, etc., which the developers would otherwise have incurred to carry the property. Tr. 27,239:19 - 27,241:2 (Shuler). By lowering the developers’ expenses, Bolin was able to increase the ultimate “appraised” value of the property. Shuler explained:

Q. And now, if I understand this correctly, the greater the expenses are, the lower the ultimate land value is; is that correct?

A. Again, all things being equal, that's right.

Q. So, as expenses go down, market value goes up?

A. Yes. The total discounted indication of market value would increase, that's correct.

Tr. 27,231:2-10 (Shuler). Shuler agreed that the Bolin appraisal does not “identify or describe or explain the risk associated with the presales not occurring.” Tr. 27,243:8-12.

$ Bolin valued Lot 4 and 7 Norwood hotel sites at $25.00 and $20.00 per square foot, respectively. However, Bolin relied on past sales of comparable land sold for proposed hotel sites ranging in value from $12.36 to $19.00 per square foot. This discrepancy is not explained in the Bolin appraisal. Ex. T-7029, Tab 698, pp. OW015044-54.

$ Bolin valued the Lot 2, 3, and 5 Norwood office sites at $21.00, $22.00, and $26.00 per square foot, respectively. However, Bolin relied on past sales of comparable land sold for proposed office sites ranging in value from $9.00 to $13.63 per square foot. This distinction is not explained in the Bolin appraisal. Ex. T-7029, Tab 698, pp. OW015044-54.

$ The Norwood developers intended that four of the seven lots (Lots 1, 2, 3, and 5) would be used for more than one purpose. Ex. T-7701, Tab 734, pp. KM000097-98; T-7138, Tab 690, p. OW193349; T-7523, Tab 711A. In a May 20, 1986, letter to Bolin, Minch described the intended mix of uses for each of the seven Norwood lots:

LOT

NO. PRODUCT

1 Retail, 425,000 SF

1 Restaurants, 2 EA

2 Office, 420,000 SF

2 Retail, 10,000 SF

2 Restaurants, 2 EA

3 Office, 360,000 SF

3 Retail, 12,500 SF

3 Restaurants, 1 EA

4 Hotel, 350 RMS

5 Office, 540,000 SF

5 Retail, 20,000 SF

5 Restaurant, 1 EA

6 Retail, 154,000 SF

7 Suite Hotel, 160 RMS

Ex. T-7513, Tab 735. The Bolin appraisal, however, valued the seven lots as if each lot was put to only one use. Ex. T-7029, Tab 698, p. OW015054. For example, the developers proposed that Lot 5 would contain three office buildings, a restaurant, and retail space. Ex. T-7701, Tab 734, pp. KM000097-98; T-7138, Tab 690, p. OW193349; T-7523, Tab 711A. Bolin, however, valued the entire square footage of Lot 5 at $26 per square foot based on past sales of comparable land proposed for office building construction. Ex. T-7029, Tab 698, pp. OW015051-53. By comparison, Bolin valued the retail space of Lots 1 and 6 at $10 per square foot based on past sales of comparable land proposed for retail construction. Ex. T-7029, Tab 698, pp. OW015050-51. Bolin failed to analyze what portions of Lot 5 would be used for retail and restaurant use and value the lot accordingly. Moreover, Bolin made no reference at all to the retail and restaurant uses the developers intended for Lot 5.

$ Regarding restaurant sites, Minch proposed that Norwood would include six restaurants, two on Lot 1, two on Lot 2, and one each on Lots 3 and 5. Ex. T-7513, Tab 735. Bolin, however, makes no reference to restaurant sites. Ex. T-7029, Tab 698.

d. The Bolin Appraisal Was Not A Useful Tool For

Underwriting

R340.340. Bolin’s appraisal, as demonstrated in FOF 331 through 339, lacked the “logic, reasoning, judgment and analysis” required by FHLBB Mem. R-41b. OTS’s appraisal expert, Douglas Lovell, testified that an appraisal is also not a “useful tool for underwriting” if the appraisal reflects a development proposal different from the development plan:

. . . . We've had other instances where a development plan was changed and the appraisal that's in the loan file reflects a development proposal that was never built.

Well, to be a useful tool, the appraisal needs to reflect the credit decision that we're actually making. And if we're building a particular type of venture, then the appraisal needs to reflect the values of the particular venture that we're building.

Tr. 7,254:11-20.

7. The AAA Appraisal

R341.341. The AAA appraisal had been transmitted to Minch on June 11, 1986 and provided both an “as is” and an “as developed value for the 99.430 acre Norwood site. AAA estimated that as of April 1, 1986, the “as is” value was $24,900,000. And, assuming completion of the development phase by October 1, 1986, AAA estimated the “as developed” value of Norwood to be $37,500,000. Ex. T-7701, Tab 734, pp. KM000066-67.

R342.342. OTS’s appraisal expert, Douglas Lovell, testified that:

A. Well, the 37-million-dollar number reflects what is the value of the property at the point of completion. That's the maximum value that this asset will ever attain which occurs at the point of completion in there. A lender who would extend any dollar of credit -- and this is really a mathematical exercise. But a lender who would extend any dollar of credit in excess of that 37,500,000-dollar number would discover that the simple arithmetic would not supply him with enough money to repay the credit.

So, for example, if you lent $40 million on the 37 million 5 number, your anticipation should be that you're going to suffer about a 2-and-a-half-million-dollar loss in that kind of example strictly because, after you deduct off of the gross cash flows, all the holding costs and disposition expenses over time, you get back to those net dollars that are available to actually repay debt service, not just interest but actually repay the debt itself.

Tr. 7,141:16 - 7,142:14.

R343.343. Minch testified that USAT provided the funds to pay for the AAA appraisal yet never asked for copies of any appraisals of the Norwood site, other than the Bolin appraisal. Minch further testified that he would have provided USAT with a copy of the AAA appraisal if USAT had requested one. Tr. 6,566:9 - 6,567:10.

R344.344. Unlike the Bolin appraisal, the AAA appraisal included a full description of the developers’ plans for the Norwood site, including discussion of all of the multiple uses intended for the various lots and their impact on the valuation. Ex. T-7701, Tab 734, pp. KM000116-126.

8. The City of Austin’s “Northeast Inventory Report”

R345.345. Other information publicly available prior to USAT approving the Norwood Transaction included a report published in March 1986 by the City of Austin, Office of Land Development Services, entitled “Northeast Inventory.” Norwood is located in the area discussed in the report. Ex. T-7651, Tab 689, pp. OW195358-OW195428.

R346.346. The Northeast Inventory report, “summarizes the most recent information available on land-use activity and trends in Austin’s northeast area” and found:

$ “Altogether, 6,643 acres are now in the planning stages of development. This accounts for over one-half of the vacant land in the area.” Ex. T-7651, Tab 689, p. OW195360.

$ “27 development projects have been approved or proposed for the area. These development plans total 26,385 dwelling units and 55 million square feet of non- residential floor area.” Ex. T-7651, Tab 689, p. OW195360.

$ “Approved development projects recently granted zoning or final subdivision approval total 1,457 acres. 3,088 dwelling units (63% multi-family) and 17 million square feet of non-residential development are planned for these approved projects.” Ex. T-7651, Tab 689, p. OW195364.

$ “Pending subdivision and zoning cases have been filed for another 5,148 acres. 23,297 dwelling units (57% multi-family) and 38 million square feet are being proposed for these projects.” Ex. T-7651, Tab 689, p. OW195364.

$ “55 million square feet of non-residential floor area are presently being planned for the area. By comparison, the Travis County Appraisal District reported 59 million square feet of non-governmental office and retail/commercial space existed in the county as of February 1986.” Ex. T-7651, Tab 689, p. OW195364.

$ “Current development plans average more than one acre of non-residential land for every acre of residential development. This is four times the city-wide ratio. If current plans are approved, the land-use mix at build out is likely to contain proportionately twice as much non-residential development as the city as a whole, with a much higher level of non-residential development than any similar-sized area of the city today.” Ex. T-7651, Tab 689, p. OW195364.

$ “In order for planned non-residential development to be absorbed by the year 2020, the area would have to capture 23 % of the employment growth projected for the metropolitan area. (The Northeast Property Owners Association expects an area ten times larger to capture only 20 percent of the housing and employment growth in the metropolitan area.)” Ex. T-7651, Tab 689, pp. OW195364-68.

$ “Even if the area should capture 25 percent of new office development in the metropolitan area, at the long-term absorption rate estimated by the Lindley Group (2.2 msf per year) it could take up to 45 years for the planned 25 million square feet of office space to be absorbed.” Ex. T-7651, Tab 689, p. OW195368.

$ “Given the amount of development already in the planning process, land-use in the area will be largely committed for the next 35-50 years, prior to completion of the Comprehensive Plan.” Ex. T-7651, Tab 689, p. OW195368.

$ The Northeast Inventory Report analyzed residential and non-residential planned and approved developments and reported:

Planned non-residential development . . . would probably take much longer to be absorbed, even if high-growth projections are realized. 55 million square feet is now planned for the area. . . .  [T]his translates into enough space to employ an estimated 157,000 workers, 23 percent of the projected employment growth for the entire 3-county metropolitan area for the next 35 years . . . . If approved and proposed projects are built as planned by the year 2020, the area employment base would be 5 and one-half times the [Austin Transportation Study] employment projection for 2020.

To assume that the Northeast Inventory Area will capture 23 percent of metropolitan employment growth would appear to be extremely optimistic. A recent market feasibility study . . . for example, estimates that a much larger Northeast Market Area encompassing 264 square miles might capture 20-25 percent of the metropolitan area’s industrial growth over the next 15 years . . . . Similarly, the Northeast Property Owners’ Association hopes that a similar-sized area might hope to capture 20 percent of metropolitan residential and non-residential growth over the next 35 years. Given the other large projects in the northeast outside of the Northeast Inventory Area . . . it is highly unlikely that the inventory area alone could capture all of the region’s projected growth.

The Lindley Group used a similar methodology to estimate the long-term absorption of office space over the next fifteen years. They estimate that about 2.2 million square feet will be absorbed each year from now until the year 2000 (Austin Insight Report, June 20, 1985). At this rate of absorption, and assuming that the northeast area captures one-quarter of the new office market for the metropolitan area, it would take 45 years for the planned 25 million square feet of office space . . . to be absorbed.”

Ex. T-7651, Tab 689, p. OW195388.

R347.347. The Norwood project plan proposed 2.45 million square feet of non-residential development in the Northeast Inventory Area. Ex. T-7651, Tab 689, p. OW195384 (reference to “Deauville”).

D. The Norwood Transaction Closing

R348.348. On July 29, 1986, USAT funded $13,816,263.70 of the $30 million Norwood Loan to pay off the Original Norwood Loan. The $9.4 million Norwood Investment by UFC also went to pay off the Original Norwood Loan for a total payment, in essence, to itself of $21,695,861.10. Ex. T-7538, Tab 700; Tr. 6,582:11-20 (Minch).

R349.349. The $9,400,000 Norwood Investment was funded by UFC, USAT’s wholly owned subsidiary, without prior authorization of the USAT Board of Directors and contrary to the $2,500,000 limitation of the REIC’s authority. The February 13, 1986 USAT Board of Director’s minutes provides:

That certain Real Estate and Joint Venture Projects which have received approval by the Association’s Real Estate and Joint Venture Committee, shall be brought to the Board of Directors for final ratification prior to commencement of activity. . . . 

Any Real Estate and/or Joint Venture Project which involves a total equity and/or debt exposure to the Association of $2.5 million or more shall require prior Board ratification.

Ex. A-1110, Tab 133. Gross testified that the $2.5 million limitation on the REIC’s authority was a “policy of [USAT] . . . a ground rule[ ] under which the institution operates.” Tr. 20,497:20 - 20,498:19.

R350.350. The next meeting of the USAT Board of Directors following the June 2, 1986 approval of the Norwood Investment, occurred on October 14, 1986, more than two and a half months after the $9.4 million Norwood Investment had been fully funded. Ex. A-1117, Tab 1447. The Norwood Transaction never received consideration or approval by the USAT Board of Directors.

R351.351. The Borrower’s Statement from the loan closing reflects, that out of an initial funding from USAT and UFC of $23,216,263.70, USAT received $22,551,971.23, distributed as follows:

Initial Funding:

Equity Funding - United Financial Corporation $ 9,400,000.00

First Draw - United Savings Association 13,816,263.70

Total Initial Funding $23,216,263.70

Amounts Received by USAT:

Origination fee to USAT $ 105,000.00

Payoff: United Savings 470,831.24

Original Norwood Loan 21,225,029.86

Past due interest on original Norwood Loan 751,110.13

Total received by USAT: $22,551,971.23

Ex. T-7538, Tab 700.

R352.352. Minch testified that the $105,000 “Origination Fee” as listed on the Borrower’s Statement was in fact to pay off the past due fee for the December 1985 extension of the Original Norwood Loan and that the actual 3% “Origination Fee” of $900,000 for the $30,000,000 Norwood Loan was not separately listed but was, instead, incorporated into the $13,816,263.70 “First Draw” amount. Tr. 6,584:9-22.

R353.353. Minch further explained that the $470,831.24 “Payoff - United Savings” amount was to reimburse USAT for funds advanced for the April 30, 1986 purchase of the NatWest property. Tr. 6,585:1-12, see FOF R288 - R289.

R354.354. Minch further testified that the borrowers on the Original Norwood Loan, who had made no payments of fees or interest from their personal funds before March 1986, also made no payments of fees or interest at any time after March 1986, when that loan became fully funded. Tr. 6,581:22 - 6,582:10; Tr. 6,584:1-22. Similarly, Gross testified that no payments had been made on the loans by the borrowers. Tr. 20,721:6 - 20,722:3.

R355.355. Neither Krasovec nor Minch contributed any financial equity to the Norwood/United JV. Tr. 6,515:18 - 6,516:7 (Minch); Tr. 6,960:8-15 (Graham); Tr. 14,634:9-12 (Crow). Further, all interest and fees on the “new” Norwood Loan were funded from loan proceeds. Ex. T-7036, Tab 738, pp. OW193039-40, ¶¶ V.(c), (e), and (g).

R356.356. Security for the Norwood Loan was:

$ A first lien on the 94.713 acre tract, Ex. 7518, Tab 739, and a second lien position on the 4.717 acre NatWest property, Ex. T-7509, Tab 743; T-7511, Tab 744; and,

$ A guaranty from Krasovec and Minch of 25% of the principal of the $30 million Norwood Loan, plus 100% of the interest; (as opposed to the 100% guarantees of Gordon, Block, Krasovec, and Minch on the Original Norwood Loan). Ex. T-7020, Tab 687; T-7536, Tab 746; T-7627, Tab 660; T-7624, Tab 661; T-7549, Tab 726; T-7550, Tab 727.

R357.357. At the time the Norwood Loan was funded, “accrued and uncollected interest” on the Original Norwood Loan “was paid from the proceeds of the new loan.” Ex. T-7502, Tab 977, p. TXS&L 000148; T-7538, Tab 700; Tr. 6,585:13-17.

R358.358. The loan proceeds also funded an ongoing, $22,000 per month, management fee paid to Krasovec and Minch’s company, Norwood Properties, to oversee the Norwood project. Ex. T-7581, Tab 1051, p. 2; Tr. 6,706:5-12 (Minch); Tr. 20,776:5-14 (Gross). The SLC Approval, Ex. T-7020, Tab 687, the REIC Approval, Ex. T-7021, Tab 688, the Loan Approval Letter, Ex. T-7019, Tab 686, the Development Loan Agreement, Ex. T-7036, Tab 738, and the Joint Venture Agreement, Ex. T-7033, Tab 702, all fail to disclose that Krasovec and Minch were to receive these payments.

E. The Joint Venture Agreement’s $10,000,000 Sales Requirement

R359.359. In addition, the Norwood/United Joint Venture Agreement provided that the personal guarantees, and indeed, any liability, could be extinguished, at UFC’s option, if the project failed to generate $10 million in sales by January 28, 1988. Ex. T-7033, Tab 702, p. OW193272; ¶ 2.04(b). Gross testified that he understood the Joint Venture Agreement provision to mean that “Krasovec and Minch would have no responsibility under their guarantee . . . if they were let go by United.” Tr. 20,751:6-22. Seidman testified that the converse was also true: “[I]f the project were successful and they sold $10 million in tracts before January 30th, [1989,] then they would remain as partners and participate in the profits.” Tr. 11,380:20 - 11,381:2.

R360.360. One stated purpose of the guarantee was to serve as a source of repayment in the event the borrowers failed to meet their obligations. Ex. T-7536, Tab 746. However, in the Norwood Loan, the transaction was structured in such a way that the guarantors could be released, and ultimately, were released of all liability on the loan, when the project failed. Ex. T-7033, Tab 702, p. OW193272; T-7462, Tab 758, pp. OW192926-28; Tr. 11,379:21 - 11,380:19. And indeed, Gross testified that the $10 million sales provision constituted an “absolute release of liability by USAT and UFC of Krasovec and Minch.” Tr. 20,777:11-14.

R361.361. The Joint Venture Agreement entered into between UFC and Krasovec and Minch provided, among other things:

The Venturers acknowledge that Norwood has induced UFC to enter into this Joint Venture and pay its initial capital contribution based on the representation of Norwood that Norwood could accomplish on or before eighteen (18) months after the date hereof, the closing of gross sales or portions of the Land in an amount equal to at least $10,000,000.00 at prices Approved by the Venturers. Notwithstanding any other provision of this Agreement to the contrary, in the even that sales aggregating $10,000,000.00 at prices Approved by the Venturers are not accomplished by the date stated herein, then UFC shall have the option to remove Norwood as Venturer. . . .  In the event that UFC elects to remove Norwood, . . . UFC shall cause Norwood, Krasovec and Minch to be released of liability on the Development Loan and from any debt owed by the Joint Venture . . . .

Ex. T-7033, Tab 702, p. OW193272.

R362.362. Minch testified that he objected to the suggestion that Norwood had induced UFC to enter into the Joint Venture, and summarized the relationship of the parties:

Q. What was offensive about it?

A. Well, we had always been the sweat equity guys. We hadn't been inducing anybody to do anything. This wasn't our deal. This was a deal where they had had a borrower. We jumped in to help what was their financial partner, and suddenly we were the ones who created everything. And that wasn't the case. We always were in a position that we were willing to create sweat equity. We were willing to work hard on it and do what we could uniquely do in Austin, but we were not the king makers and we were not inducing United to do this. We were helping them fix something that we all kind of collectively found ourselves in a position we hadn't bargained for. And it felt to me, when I read this, as if we were the ideal people behind this. We were trying to salvage something as opposed to the original developer.

Tr. 6,617:1-19, emphasis added.

R363.363. Approximately 18 months later, on December 9, 1987, UFC wrote Minch and pointed out that Norwood had “failed to generate any serious proposals to sell any of the land in accordance with the sales proforma.” Ex. T-7259, Tab 747, p. 2.

R364.364. On January 11, 1988, Norwood withdrew from the Joint Venture with UFC. Ex. T-7732, Tab 751.

R365.365. When asked whether he was “concerned about the potential liability that you could suffer . . . from withdrawing,” Minch testified that he was not: “Because we had $9.4 million worth of equity in front of us and we thought that the property was worth substantially more than the total -- the then current total debt.” Tr. 6,626:2-10. Minch explained that the “then current total debt” was the $21 million Original Norwood Loan. UFC’s $9.4 million equity contribution directly reduced Krasovec and Minch’s obligation on that $21 million debt. Minch testified that he felt the $9.4 million cushion, plus the value of the land if sold at foreclosure, would fully cover any remaining debt. Tr. 6,589:21 - 6,592:3.

R366.366. On February 12, 1988, Berner wrote Minch proposing modifications to the Loan Agreement and the Joint Venture Agreement. The letter also requested information regarding monthly management fees Norwood was collecting: “We would also like to receive information concerning the $22,000 per month which you have stated you are spending to manage the property. We would appreciate receiving a monthly breakdown of the actual costs incurred by Norwood Properties with respect to this property.” Ex. T-7730, Tab 753.

R367.367. Modifications to the Loan Agreement and the Joint Venture Agreement were ultimately agreed to on March 5, 1988, which:

1) extended the sales deadline date to January 30, 1989;

2) provided for the unconditional removal of Norwood, Krasovec, and Minch in the event they did not sell $10,000,000 in property prior to January 30, 1989; and

3) relieved Norwood, Krasovec and Minch from all liability on the Norwood Loan if they failed to meet the sales requirement:

[I]n the event such $10,000,000 of sales are not accomplished [January 30, 1989], instead of UFC having the option to remove Norwood as a Venturer in the Joint Venture (and UFC being obligated, upon such removal, to cause Norwood and Krasovec and Minch, the principals of Norwood, to be relieved from any liability on the hereinafter described “Loan” from United Savings Association of Texas to the Joint Venture in the face amount of $30,000,000), the Joint Venture would terminate and Norwood would automatically have no further interest in the Joint Venture or the assets of the Joint Venture and Norwood, Krasovec and Minch would be relieved from all liability on the Loan.

Ex. T-7462, Tab 758, pp. OW192926-27; Tr. 11,379:21 - 11,380:19 (Seidman).

R368.368. Between March 5, 1988, when USAT and Krasovec and Minch agreed to the modifications, and January 30, 1989, when the sales deadline expired and any liability Krasovec and Minch had under the loan was extinguished, no property was sold at Norwood. Ex. B-4183, Tab 1999, p. OW244692. (Indeed, no property had been sold even through April 30, 1989. Ex. T-7297, Tab 1060; Tr. 11,424:1-20 (Seidman).) Consequently, the Joint Venture relationship terminated on January 30, 1989. Ex. T-7297, Tab 1060, p. OW195162. UFC, subject to the USAT Note and the Modification Agreement, became the owner of Norwood Park. Id.; Ex. T-7462, Tab 758, p. OW192928.

R369.369. During the course of the relationship, Krasovec and Minch received a monthly management fee of $22,000 out of loan proceeds funded by USAT. Between July 29, 1986 and December 1, 1988, USAT paid them approximately $900,000 in such management fees. Ex. T-7462, Tab 758, p. OW192934.

F. Hurwitz Involvement

R370.370. Hurwitz was directly involved and participated in the Norwood Transaction both verbally and in writing. At least one internal memorandum and two pieces of written correspondence refer directly to Hurwitz’s participation in the Norwood Transaction:

$ The Buyer’s Settlement Statement for the December 1984 Norwood Loan includes a sales commission of 6%, or $955,511.70, paid to “Pinchback & Co.” Ex. T-7616, Tab 678. Pinchback & Co. was, apparently, affiliated with borrowers Block and Gordon who received a portion of the $955,511.70 broker’s commission. Hurwitz directly interceded with Gordon in an attempt to recover that commission. On April 24, 1986, Graham wrote Block and Gordon confirming a conversation between and Hurwitz and Gordon, inquiring about the Pinchback payment. Ex. T-7015, Tab 679; Tr. 6,038:5-16.

$ Hurwitz discussed and negotiated transaction arrangements and details. On February 13, 1986, prior to approval by the SLC and the REIC of the Norwood Loan and the Norwood Investment, Minch wrote Gross. The letter contains a handwritten notation to Graham: “David - Last week we had a visit with Mr. Hurwitz as well as Messrs. Gross and Williams. This is the result of that meeting. . . .” Ex. 7582, Tab 672. The letter then discusses details of the proposed loan transaction. Minch testified:

Q. Do you recall meeting with -- or attending a meeting or seeing Mr. Hurwitz and Mr. Gross in Houston?

A. Yes.

Q. What was the purpose of that meeting?

A. To discuss an approach by which we would go forward with Tom Gordon not being the prospective purchaser of the mall site but perhaps being a development manager.

Tr. 6,494:8-16. Similarly, Graham testified that it was his understanding that Hurwitz, Gross, and Williams met with Minch and “talked about the structure of the loan.” Tr. 5,970:5-10.

$ Graham testified: “Well, apparently, after they had met with Mr. Gross and Mr. Hurwitz and Mr. Williams, we discussed their proposal and wanted to submit a counterproposal to them, and this letter reflects our counterproposal to them.” Ex. 7712, Tab 673; Tr. 5,978:21 - 5,979:3.

$ Graham further testified that there were “probably numerous” conversations with Hurwitz in connection with restructuring the loan to Krasovec, Minch, Block and Gordon. Tr. 5,972:1-17.

$ On April 15, 1986, Minch wrote Graham a letter, copied to Hurwitz, discussing details of the Norwood loan negotiations. Ex. T-7014, Tab 677. Minch testified that he copied Hurwitz on the letter because he “wanted to make sure that everyone at United understood what was going on.” Tr. 7,514:13-19.

$ On March 4, 1986, Graham forwarded a memorandum to Gross, copied to Hurwitz, detailing financial aspects of the transaction. Ex. T-7012, Tab 674.

G. Losses

R371.371. On April 4, 1989, the FSLIC approved USAT, FSB’s request not to make further payments on Norwood’s Lot 4, allowing NatWest to foreclose its first lien. Ex. T-7295, Tab 1059. By allowing NatWest to foreclose, USAT lost the down payment of $471,460.04 it had paid out of the Norwood Loan proceeds for Lot 4, as well as annual interest payments, requiring USAT, FSB to incur a total loss of $899,280. Ex. T-7294, Tab 1058; T-7276, Tab 1054; T-7295, Tab 1059; Tr. 11,414:11 - 11,416:13 (Seidman).

R372.372. The Norwood Loan “matured” on July 29, 1989. Ex. T-7722, Tab 759, p. KM000357. Prior to that date, no payments had been made on the loan, in either principal or interest, other than those funded by loan proceeds. Id.

R373.373. USAT, FSB foreclosed its lien on the remaining six lots in the Norwood site in August, 1990. On November 2, 1993, the RTC, as Receiver for USAT, sold Lots 1, 2, 3, 5, 6, and 7, of the Norwood Park development for $4,465,874.03. Ex. T-7322, Tab 1066; T-7325, Tab 1067, p. OW192043. No land had been sold in the development prior to the foreclosure. Ex. T-7313, Tab 1061A.

R374.374. On July 24, 1990, USAT, FSB, through its lawyers, wrote UFC a letter demanding “full and immediate payment of the entire balance” of unpaid principal and interest under the Note and calculated the balance due under the note through July 20, 1990. Ex. T- 7722, Tab 759, p. KM000357.

R375.375. On July 29, 1989, the date the loan matured, the principal outstanding balance on the Norwood loan was $25,425,794.98. Ex. T-7722, Tab 759, p. KM000357; T-7313, Tab 1061A, p. 4; Tr. 11,435:20 - 11,439:17 (Seidman).

R376.376. Interest continued to accrue under the loan and was calculated through July 1, 1989. Accrued unpaid interest on the loan through July 1, 1989 totaled $5,041,066.81. Ex. T-7722, Tab 759, p. KM000357; Tr. 11,435:20 - 11,439:17 (Seidman).

R377.377. The Promissory Note called for penalties in the event the borrowers did not make timely payment of amounts due under the note. Ex. T-7460, Tab 740, p. OW192960. As of July 20, 1990, those late charges totaled $1,005,731.45. Ex. T-7722, Tab 759, p. KM000357; Tr. 11,435:20 - 11,439:17 (Seidman).

R378.378. Additionally, USAT, FSB, and the receiver, incurred expenditures of $340,139.20, to cover insurance premiums, taxes and other assessments required to maintain the property. Ex. T-7722, Tab 759, p. KM000357; Tr. 11,435:20 - 11,439:17 (Seidman).

R379.379. Finally, the $9,400,000 equity investment, paid by UFC was lost, as well. Ex. 7538, Tab 700; Tr. 11,460:8 - 11,461:15.

R380.380. Utilizing the above information, the total loss on the Norwood Transaction is $36,746,858.41, as summarized in the following chart:

Principal at loan maturity (7/29/89): $25,425,794.98

Plus Additional Indebtedness to maintain property: 340,139.20

Plus Unpaid interest through 7/1/89: 5,041,066.81

TOTAL PRINCIPAL & INTEREST THROUGH 7/20/90: $31,812,732.44

Plus UFC Equity Investment in Norwood 9,400,000.00

Total of Principal, Interest, and Equity Investment: $41,212,732.44

Less amount received from 11/2/93

sale of Norwood Lots 1, 2, 3, 5, 6, and 7: 4,465,874.03

TOTAL REDUCTIONS: $ 4,465,874.03

TOTAL LOSS SUFFERED BY USAT ON NORWOOD TRANSACTION:

$36,746,858.41

X. The 1986 State of Texas Report of Examination

R381.381. Shortly after September 1986, the State of Texas Savings and Loan Department forwarded to USAT the final draft of the 1986 State of Texas Report of Examination (“1986 Texas ROE”). The 1986 Texas ROE summarizes the findings of examiners from the State of Texas Savings and Loan Department following their review of USAT’s books and records as of April 30, 1986. Rex Cool served as the Examiner-In-Charge (“EIC”) of the 1986 State of Texas examination of USAT. Ex. T-7502, Tab 977, pp. TXS&L 000138-139 .

R382.382. In his “Report Summary,” EIC Cool summarized the findings and conclusions from his examination:

$ “The books and records of the Association are not maintained in accordance with [12 U.S.C.] Sections 563.17-1(c), 563.23-3 . . . .”

$ “A review [of loans/investments] disclosed questionable security values and instances of unsafe and unsound lending practices. . . .  A review of documentation disclosed violations of . . . [12 U.S.C. §] 563.17-1(c)(1) and [FHLBB Mem.] R-41b, as well as possible violations of Title 18.”

$ “Assets carried on the books of the Association totalling $67,455,401 that were acquired by deed in lieu of foreclosure and real estate acquired by a wholly owned subsidiary of $9,428,877 are actually real estate owned, and should be recognized as such, by the Association.”

$ “Net Worth remains below the minimum level required by [12 U.S.C. §] 563.13(b).”

Ex. T-7502, Tab 977, p. TXS&L 000143.

R383.383. A significant criticism throughout the 1986 Texas ROE involves deficiencies with USAT’s books and records:

$ In the “Summary of Foreclosed REO,” EIC Cool reported:

“Due to the Association’s inability to substantiate required documentation and proof of ownership, in addition to the volume of parcels purportedly on hand, an individual summary cannot be presented. . . .” Ex. T-7502, Tab 977, p. TXS&L000165.

$ In a general discussion of “Books and Records,” EIC Cool stated:

“A review and analysis of various records maintained by the Association revealed numerous deficiencies and mis-classifications in addition to instances wherein no records exist. As such, the records do not meet the requirements of Section 8.04(3) of the Texas Savings & Loan Act and FSLIC Rules and Regulations as well as safe and sound operating policies and accounting practices.” Ex. T-7502, Tab 977, p. TXS&L 000228.

$ Regarding “Real Estate Owned,” EIC Cool reported:

“. . . Association records are incomplete and, in some instances, non-existent.” Ex. T-7502, Tab 977, p. TXS&L 000229.

$ In a general discussion of “Major Loans,” EIC Cool reported:

“A review of seven loans aggregating $202,924,000 disclosed instances wherein Association records do not contain documentation required by regulations and prudent lending policies and practices. Furthermore, potential losses exist due to lack of sufficient funds to complete the projects and interest reserves are exhausted. These projects may result in additional real estate owned by the Association.” Ex. T-7502, Tab 977, p. TXS&L 000229.

$ In a section headed “Substandard Assets,” EIC Cool reported:

“[Assets] totalling $658,093,445 are considered substandard. These assets are composed of loans with appraisal reports which do not meet the requirements of [FHLBB] Memorandum R-41b and for which the security value is questionable; loans which are delinquent from 3 to 33 payments; . . . real estate owned, including 138 parcels for which the association records do not substantiate ownership . . . .” Ex. T-7502, Tab 977, p. TXS&L 000164.

$ EIC Cool testified that in his experience examining savings and loan institutions, he had never “experienced an institution with books and records in the condition that United’s were in.” Tr. 10,175:18 - 10,176:5.

R384.384. EIC Cool also discussed specific criticisms of USAT’s “Major Loans,” reporting:

The Association appears to lack proper internal control and safeguards to protect the major loan portfolio. Deficiencies include, but are not limited to:

A) Lack of Project Analysis/Feasibility Studies to insure that all areas of impacting the loan are addressed.

. . . .

C) “Take-Out” Commitments. None of the development loans appeared to have financing in place that would pay off USAT’s development loan upon completion of the project.

. . . .

Ex. T-7502, Tab 977, p. TXS&L 000241.

R385.385. The 1986 Texas ROE includes a “Subsequent Events” section commenting on conditions or events that occurred subsequent to the April 30, 1986 “as of” date, i.e., the examination start date. The “Subsequent Events” section included criticism of the July 29, 1986 Norwood loan funding:

. . . . Since the loan was granted subsequent to the examination date, an in depth review was not completed; however, it should be noted that the loans which were refinanced from the proceeds of the subject loan were not disclosed in the management questionnaire. Also, two of the loans, with unpaid principal balances totalling $21,163,137, were four months delinquent at the time of refiance (sic) and the accrued and uncollected interest was paid from the proceeds of the new loan. Therefore, the loan is subject to classification as a scheduled item.

Ex. T-7502, Tab 977, p. TXS&L 000148.

R386.386. The “Management Questionnaire,” a series of questions regarding various aspects of the institution’s operations, asked specifically, whether there had been, “any instances since the date of the last examination where loans . . . had been renewed or their due dates extended without collection of interest thereon?” USAT responded: “As of April 30, 1986, the Association was aware of no loans, advances or other extensions of credit that were renegotiated or their due dates extended without collection of interest thereon.” Ex. T-7502, Tab 977, pp. TXS&L 000169 and TXS&L 000175.

R387.387. The 1986 Texas ROE included a specific comment regarding the Park 410 loan, originally drafted by EIC Cool’s Assistant Examiner, Jeff Nunn. Ex. T-7501, Tab 1048B; Tr. 9,882:4-6. EIC Cool, as well as his superiors in the Texas Savings and Loan Department concurred with many of Mr. Nunn’s criticisms of the Park 410 loan and included those criticisms in the final 1986 Texas ROE. Compare Ex. T-7501, Tab 1048B and Ex. T-7502, Tab 977, pp. TXS&L000243-246; Tr. 9,955:11 - 9,956:1. Assistant Examiner Nunn prepared a “Major Loan Review Summary Sheet, “ Ex. T-7500, Tab 975, which identifies what Mr. Nun located in the Park 410 loan file. Tr. 9,882:7 - 9,884:9. EIC Cool testified that blank spaces on the “Major Loan Review Summary Sheet” indicates to him that documents were missing from the Park 410 loan file at the time Mr. Nunn reviewed it, including a credit report, or audited financial statement, and an attorney’s opinion or title policy. Ex. T-7500, Tab 975; Tr. 9,884:3-15.

R388.388. Specifically, the final 1986 Texas ROE criticized the loan closing and disbursement of funds where, “loan proceeds were utilized to pay commissions and fees to guarantors and venturers of the joint venture totalling $3,696,416, as well as to pay delinquent taxes.” Ex. T-7502, Tab 977, p. TXS&L000244.

R389.389. The 1986 Texas ROE also criticized the Schulz appraisal:

$ “In arriving at this value, the appraiser neglected to explain why he omitted the cost and the income approaches to value. Pro forma financial statements were prepared for the project which justified using the income approach.” Ex. T-7502, Tab 977, p. TXS&L000246.

$ “To support the land value, the appraiser used comparables ranging from $1.26 to 14.50 per square foot, and 14 of the 18 comparables are over 1, and up to 3 years old. Ex. T-7502, Tab 977, p. TXS&L000246

$ “The appraisal report as prepared does not meet the minimum requirements of . . . [12 U.S.C. §]563.17-1(c)(1)(iii) and [FHLBB] Memorandum R-41b.” Ex. T-7502, Tab 977, p. TXS&L000246

R390.390. Indeed, on August 21, 1986, Graham responded to certain criticisms of the Park 410 transaction raised by Assistant Examiner Nunn. Specifically, Graham responded to the criticism that all appraisal methodologies were not utilized in the appraisal. Graham responded that Schulz “can prepare [an appraisal based on the cost approach]; however, it will exceed the present appraised value of $88,000,000 so it will not affect the final value.” Ex. B-1187, Tab 785, p. OW120222.

R391.391. Finally, at the conclusion of his examination, EIC Cool evaluated various categories of USAT’s operations on a five point scale (with “1” being the highest possible rating, and “5” being the lowest possible rating). Ex. T-7502, Tab 977, p. TXS&L000293; Tr. 9,974:14-20. The categories were: “Management,” “Asset Quality,” Capital Adequacy,” “Risk Management,” and “Operating Results,” each of which received an overall “4” rating. Each category also included ratings of various factors comprising the elements of the category. Id. EIC Cool rated USAT’s “Management” an overall “4.” Individual elements of that rating included:

$ “ 4 Composition and Effectiveness of Directorate,” indicating “that the directorate wasn’t being responsible with respect to the operation of the institution.” Id.; Tr. 9,975:3-5.

$ “ 4 Capability of Executive Management,” reflecting “the problems that were found during the examination and appear in the examination report.” Id.; Tr. 9,975:13-15.

$ “ 4 Response to Supervision,” indicating, “any response that they had given to [the Texas Savings and Loan Department] supervision on prior examinations.”

$ “ 5 Compliance with Laws and Regulations,” indicating “a worst -case scenario . . . because of the numerous violation of the regulations that we found during the examination. Id.; Tr. 9,976:15-21. Indeed, EIC Cool testified that he “can’t state that they disregarded [regulations], but they surely didn’t regard it very much.” Tr. 9,977:4-7.

$ “ 5 Records, Systems and Controls,” referring to “the records that we reviewed, . . . the supporting documentations . . . .” Id.; Tr. 9,977:8-15.

Ex. T-7502, Tab 977, p. TXS&L000293.

R392.392. EIC Cool rated USAT’s “Asset Quality” an overall “4.” Individual elements of that rating included:

$ “ 4 Loan Underwriting.” Id.

$ “ 4 Appraisals/Feasibility Studies,” referring to “the items that we reported in the examination report wherein we felt that the appraisals didn’t meet the regulatory requirements.” Id.; Tr. 9,977:16 - 9,978:1.

$ “ 4 Credit Analysis” referring to “loan originations and involves analyzing the borrowers or borrower on that particular loan. . . . that there should be some kind of credit analysis made in regard to all investments, loans, et cetera.” Id.; Tr. 9,978:2-12.

R393.393. Regarding his ratings, EIC Cool testified that the Park 410 loan and his review of the Park 410 loan contributed to the ratings he gave USAT. Id.; Tr. 9,978:13-18.

XI. The 1986 FHLB-Dallas Report of Examination

R394.394. On April 16, 1987, the FHLB-Dallas forwarded to USAT the final draft of the 1986 Report of Examination (“1986 ROE”) for USAT. A full discussion of the process for preparing the 1986 ROE and its conclusions is found at FOF S85 - S132. The 1986 ROE summarizes a review of USAT’s books and records as of May 27, 1986. Vivian Carlton (“Carlton”) served as the Examiner-In-Charge of the 1986 examination of USAT. Ex. A-14020, Tab 1461, pp. OW078142 and OW078149. The State of Texas Savings and Loan Department had commenced their examination “two to three months” before the FHLB-Dallas examination commenced, and was “well underway” by the time the FHLB-Dallas examiners commenced their examination of USAT. Tr. 9,875:7-10 - 9,876:1.

A. The Park 410 Loan Write-Up

R395.395. EIC Cool testified that he “tried to provide every piece of material” that his team examined, as well as their “write-ups” to the Federal examiners. Tr. 9,876:10-22. Among the documents EIC Cool provided to EIC Carlton, was Assistant Examiner Nunn’s “write-up” of the Park 410 loan. Ex. T-7501, Tab 1048B.

R396.396. EIC Carlton testified that her examination team did not duplicate the work that had already been performed by the State of Texas’ examination team but that she reviewed State of Texas Assistant Examiner Nunn’s “write-up” and determined not to include the comments in her 1986 ROE. Tr. 17,066:21 - 17,068:10. EIC Cool explained that “since we had already begun the review of major loans, they went into other areas.” Tr. 9,877:12-14.

R397.397. EIC Carlton wrote “We will pass - weakness not material to classify” in the margin of the first page. Ex. T-7501, Tab 1048B; Tr. 17,053:19 - 17,054:1. EIC Carlton explained that her comment to “pass” the loan:

means that based on the data that was provided in this comment by the state examiner and the weaknesses noted at that time, that those weaknesses were not material to the date of the origination of this loan and its impact on the institution for me to include it in the classification of assets at that time.

. . . .

When we make classifications of a loan, we identify weaknesses that demonstrate an apparent loss in some form or that a loss and adverse trend or adverse impact will be immediate to the institution within an immediate short period of time or within a length of time prior to us re-entering the institution. Typically, we do an outlook, say, from 6 to 12 months which would address the period in which the next examination would take a place. If we feel, within that time frame, that some adverse action will impact the institution beyond the control that we would have in taking an action on it, we then make a decision to include it in that examination as a part of our analysis.

. . . .

Tr. 17,055:9 - 17,056:11, emphasis added.

R398.398. EIC Carlton further explained her reasoning for concluding that the Park 410 loan did not pose an “immediate” risk of loss to USAT:

This loan . . . had a built-in reserve which we describe as a "no default" type loan, meaning that . . . until that reserve was exhausted, this loan could not go delinquent because the interest payments would be paid out of that reserve within the period of time to us re-entering the institution; no way this loan could have gone delinquent. In addition to that, they also had pledged a letter of credit of $10 million that could also be used as a secondary source of repayment in the event something did happen with the reserve or it was depleted prior to that time. So, the first and secondary source of repayment was not in jeopardy; therefore, the weaknesses, although noted, were not material enough to classify as credit at that time.

Tr. 17,056:19 - 17,057:14.

R399.399. Finally, EIC Carlton explained that her decision to “pass” the Park 410 loan does not mean that the examiners “somehow approved the loan,” Tr. 17,058:20-22, and that, in fact, the Park 410 loan would automatically “be part of the next review” of USAT. Tr. 17,059:10 – 17,060:6.

B. The Norwood Loan Write-Up

R400.400. EIC Carlton determined that the Norwood loans would be classified “substandard” meaning:

that you have weaknesses within the loan that will identify the possibility that repayment or the ability of the borrower to service that debt or repay that debt is questionable. It can be either the first line of payment, being the note within itself, or you'll question the value of the collateral, which is the secondary course of repayment for the debt.

Ex. A-14020, Tab 1461, p. OW078157; Tr. 17,023:4-11.

R401.401. EIC Carlton classified the $21,163,137 Original Norwood Loan “substandard because of appraisal deficiencies, the inability of the borrower to retire the debt, and modification while four months delinquent.” Ex. A-14020, Tab 1461, p. OW078157.

R402.402. The comment in the 1986 ROE details EIC Carlton’s criticisms of the Original Norwood Loan:

. . . . Contrary to Federal Home Loan Bank Memorandum R 41b, the appraisal report fails to contain details regarding the proposed development and fails to address the feasibility or economic viability of the project at the time of the appraisal that would support the highest and best use of the project.

. . . .

USAT realized their security was in jeopardy, disbursed $177,437 to Mr. Block to pay outstanding fees, accounting and insurance expenses. This disbursement extended the balance beyond the note amount. The June 30, 1986 balance is $21,163,137 which is classified substandard.

On July 29, 1986 USAT granted [the Norwood Loan] for $30,000,000 . . . . The proceeds of this loan were used to pay off the two loans . . . that were four months contractually delinquent.

Ex. A-14020, Tab 1461, p. OW078167.

R403.403. The 1986 ROE also contains a “Special Comment” regarding the $30,000,000 Norwood Loan “because the proceeds of this loan was used to pay off [the Original Norwood Loan] that is classified substandard . . . .” Ex. A-14020, Tab 1461, p. OW078171.

R404.404. The comment criticizes other aspects of the Norwood Loan, as well:

$ “The documentation for this loan gives the appearance that this loan was granted in order to prevent the [Original Norwood Loan] from becoming a scheduled item.

Although interest was past due on the [Original Norwood Loan] in the amounts of $187,946, $184,867, and $185,177 for April, May and June, respectively, management disagrees with the classification of this loan.” Ex. A-14020, Tab 1461, p. OW078171.

$ “The property (94.713 acres) was appraised by Rex E. Bolin, M.A.I.-S.R.P.A., as of December 17, 1984 for $28,880,000. The new appraisal report on 99.43 acres of land was also prepared by Rex E. Bolin as of June 5, 1986 but at an estimated value of $46,000,000. Because the current real estate values are depreciating in Texas and the acres of the new loan only differ by 4.71 acres, the new appraisal appears to have an inflated market value. Using the value of the new appraisal report, the 4.71 acres would have a value of $3,634,819 per acre, which is unfounded. A new appraisal should be obtained.” Ex. A-14020, Tab 1461, p. OW078171.

$ “According to the financial statements of Jeffrey Minch and Frank Krasovec, the combined net worth of both as of January 1986 is $14,684,535. The joint venture agreement . . . allows if Norwood does not close sales of $10,000,000 within 18 months of the joint venture agreement, UFC could remove Norwood as a joint venture. This removal would cause Norwood, Krasovec and Minch to be released of liability of the loans.” Ex. A-14020, Tab 1461, p. OW078172.

R405.405. The comment regarding the $30,000,000 Norwood Loan concluded: “Due to the aforementioned items, this loan is subject to special comment for $13,988,765. This represents the amount [of the loan] disbursed.” Ex. A-14020, Tab 1461, p. OW078172.

XII. The 1987 FHLB-Dallas Report of Examination

R406.406. The next FHLB-Dallas examination of USAT commenced November 16, 1987. The final 1987 FHLB-Dallas Report of Examination (“1987 ROE”) was forwarded to USAT on July 28, 1988. Vivian Carlton served as Examiner-In-Charge of the 1987 FHLB-Dallas examination. Ex. A-14073, Tab 1502, p. OW077121.

R407.407. The 1987 ROE criticized both the Park 410 loan and the Norwood loan/investment as substandard. Ex. A-14073, Tab 1502, pp. OW077179, OW0177191, OW077223.

A. The Park 410 Loan

R408.408. The “Classified Asset” comment for the Park 410 loan criticized several aspects of the transaction, including:

$ the borrowers’ financial statements were unaudited and unverified, and, therefore, the adequacy of the borrowers’ net worth could not be determined. Ex. A-14073, Tab 1502, p. OW077192.

$ aspects of the transaction were not fully documented. Ex. A-14020, Tab 1502, p. OW077129.

$ “Contrary to safe and sound lending practices, partners of Park 410 West Joint Venture received a total of $6,084,954 at closing disbursed as follows:

Stanley D. Rosenberg $ 400,000

Park 410 West J.V. (Rosenberg-50.0 percent venture partner 4,454,333*

Charles R. McClintick (owns 42.0 percent of G&R Limited) 600,000

Gulf Management Resources 250,000

Grieshaber / Roberts, Inc. 380,000

Total loan proceeds to borrower $6,084,954

* $2,915,795 was cash, the balance paid off interest at Alamo Savings Association, San Antonio, Texas.” Ex. A-14073, Tab 1502, pp. OW077192-193.

$ “Mr. McClintick also received approximately $3,400,000 which was the difference in the note payable to Alamo Savings and the note payable to him from the joint venture. Contrary to Section 563.17-1(c)(1)(vii), the payoff of his note from loan proceeds was not disclosed in the settlement statement or corresponding disbursement sheet.” Ex. A-14073, Tab 1502, p. OW077193

$ “Timely repayment of principal is not likely. There have been no tract sales as of January 31, 1988. The borrower stated . . . that prices at which sales would occur in 1988 and thereafter would have to be less than originally planned and that it will take longer than originally forecast to repay the loan. Additionally, [the borrower has requested] a ten year extension.” Ex. A-14073, Tab 1502, p. OW077193.

$ “Contrary to Section 563.17-1(c)(1)(viii) and safe and sound lending practices, documentation with respect to the progress of construction of the proposed improvements was not found in the loan files of USAT nor readily available there.” Ex. A-14073, Tab 1502, p. OW077193.

$ “Finally, the appraisal report prepared by Edward B. Schulz, MAI, SRPA dated February 16, 1986, included only the market approach to value. Of the 18 comparable sales included, ten were outdated. Adjustments to comparable sales were not quantified or explained in the report. The highest and best use statement which relies on information concerning feasibility, was not included in the report or loan files of USAT. An “as vacant” value was not offered nor was a sales history of the subject property. The use of an appraisal report demonstrating the weakness outlined above violates Section 563.17-1(c).” Ex. A-14073, Tab 1502, p. OW077193.

R409.409. The 1987 ROE classified the Park 410 Loan substandard by $49,199,365, the amount that had been drawn on the loan up to that point in time. Ex. A-14073, Tab 1502, p. OW077191.

R410.410. EIC Carlton also explained that she decided to classify the Park 410 loan in 1987 when, in 1986 she had decided not to classify the loan:

In this write-up in 1987, you had the point where the institution had not reported any sales on the properties since its inception and the interest reserve would be depleted in 1989 and that the borrower had come in and petitioned to extend -- restructure the debt and extend the credit now, asking for another ten years on the note in addition to the already interest reserve that was built into the loan.

This had been demonstrated with no sales and with the borrower admitting that they were having financial difficulties, the well-defined weakness had surfaced and was apparent at this time. Therefore, we classified the loan.

Tr. 17,188:2-16.

B. The Norwood Transaction

R411.411. The “Classified Asset” comments for the Norwood transaction criticized several aspects of the transaction, including:

$ the borrowers’ financial statements were unaudited and unverified, and, therefore, the adequacy of the borrowers’ net worth could not be determined. Ex. A-14073, Tab 1502, p. OW077179.

$ the borrowers’ financial statements contained no income statements. Ex. A-14073, Tab 1502, p. OW077180.

$ “As of the date of this examination, there have been no lot sales.” Ex. A-14073, Tab 1502, p. OW077180.

$ “UFC made a $9.4 million capital contribution to the joint venture and USAT granted the joint venture a $30.0 million loan containing interest carry without which, given the complete lack of parcel sales and the financial condition of the guarantors, this loan would be severely delinquent.” Ex. A-14073, Tab 1502, p. OW077180.

$ “Additionally, the joint venture agreement contains an escape clause in which UFC would remove Norwood as a venturer and further, cause Norwood to be released of liability on the development loan if Norwood cannot produce $10.0 million in sales by February 12, 1988.” Ex. A-14073, Tab 1502, p. OW077180.

$ “UFC’s $9,400,000 . . .  investment was used to reduce the payoff of [the Original Norwood Loan] when the sale to Norwood/United closed, thus, increasing total committed funds from USAT and UFC from the original commitment of $30,000,000 to $39,400,000 giving the appearance of an in-substance foreclosure.” Ex. A-14073, Tab 1502, p. OW077223.

R412.412. The 1987 ROE classified the Norwood Loan substandard by $21,521,473, and the Norwood Investment by $9,400,000. Ex. A-14073, Tab 1502, pp. OW077179, OW077223.

---

[1] In its initial and unrevised quarterly financial report ending March 31, 1986, USAT had reported regulatory net worth of $190.2 million. Tr. 10,629:7-13.

[2] John Stone was certified as an expert in the supervision of financial institutions, including safety and soundness and underwriting policies and practices. Tr. 10,605:8-14. Mr. Stone served as the Deputy Federal Deposit Insurance Corporation (“FDIC”) Chairman, and Executive Director of the Divisions of Supervision, Resolutions and Compliance at the FDIC. Tr. 10,567:14-16; Tr. 10,563:17-19.

[3] A March 10, 1984 appraisal by Rafael Luebbert reached a “retail value” of $72,550,000 for the Park 410 site. The appraisal was not an “as is” appraisal, Ex. T-7139, Tab 1790, p. LD000113; Tr. 20,539:15-20, and was not prepared for USAT but was prepared, instead, for the Alamo Group. Ex. T-7139, Tab 1790, p. LD000065. To reach an “as developed” value, Luebbert would have discounted downward from the “retail value.” Ex. T-7139, Tab 1790, p. LD000112; B-4377, Tab 1994.

[4] Westover Hills is the property immediately adjacent to the Park 410 property and is the property upon which Sea World would be built. Tr. 9,396:7-12 (Gindy).

[5] Exhibit T-7143, Tab 711, was forwarded to USAT’s Park 410 Joint Venture partners on February 12, 1986 and reached an “as is” value of $46,560,000 for the Park 410 property. Id. at LD000152. Graham testified, however, that it was “common at United savings to obtain preliminary draft values from appraisers” prior to completion of the final draft. Tr. 6,129:10-20.

[6] FHLBB Memorandum R-41b is dated March 12, 1982, and is a consolidation of the provisions of FHLBB Memoranda R-41a, dated September 15, 1977, Ex. T-7850, Tab 2003, and R41a-1, dated March 1, 1979, Ex. T-7851, Tab 2004.

[7] The Northwest Freeway is also referred to as the Westside Expressway.

[8] As previously stated at FOF R243 - R244, USAT’s records did not contain an appraisal dated December 20, 1984. A subsequent June 22, 1986 Bolin & Associates appraisal of the Norwood site, which was prepared for USAT, refers to a “value estimate from our report dated December 17, 1984.” That appraisal 1) was not prepared for USAT, 2) was prepared for the borrower, Tom Gordon, 3) was not prepared to comply with FHLBB Memorandum R-41(b), and 4) makes no reference to any appraisal report dated December 20, 1984. Ex. B-3828, Tab 777; T-7029, Tab 698.

[9] A subsequent loan to Krasovec and Minch closed July 29, 1986. The settlement statement for that loan indicates that USAT received $470,831.24 from the loan proceeds to repay the down payment on the NatWest property. Ex. T-7538, Tab 700; Tr. 6,582:1-12.