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OVERSIGHT OF THE FEDERAL DEPOSIT 

INSURANCE CORPORATION’S STRUCTURED 

TRANSACTION PROGRAM 

HEARING 

BEFORE THE

SUBCOMMITTEE ON 

OVERSIGHT AND INVESTIGATIONS 

OF THE

COMMITTEE ON FINANCIAL SERVICES 

U.S. HOUSE OF REPRESENTATIVES 

ONE HUNDRED TWELFTH CONGRESS 

SECOND SESSION 

MAY 16, 2012 

Printed for the use of the Committee on Financial Services 

Serial No. 112–127 

( 

(II) 

HOUSE COMMITTEE ON FINANCIAL SERVICES 

SPENCER BACHUS, Alabama, Chairman 

JEB HENSARLING, Texas, Vice Chairman 

PETER T. KING, New York 

EDWARD R. ROYCE, California 

FRANK D. LUCAS, Oklahoma 

RON PAUL, Texas 

DONALD A. MANZULLO, Illinois 

WALTER B. JONES, North Carolina 

JUDY BIGGERT, Illinois 

GARY G. MILLER, California 

SHELLEY MOORE CAPITO, West Virginia 

SCOTT GARRETT, New Jersey 

RANDY NEUGEBAUER, Texas 

PATRICK T. MCHENRY, North Carolina 

JOHN CAMPBELL, California 

MICHELE BACHMANN, Minnesota 

THADDEUS G. McCOTTER, Michigan 

KEVIN McCARTHY, California 

STEVAN PEARCE, New Mexico 

BILL POSEY, Florida 

MICHAEL G. FITZPATRICK, Pennsylvania 

LYNN A. WESTMORELAND, Georgia 

BLAINE LUETKEMEYER, Missouri 

BILL HUIZENGA, Michigan 

SEAN P. DUFFY, Wisconsin 

NAN A. S. HAYWORTH, New York 

JAMES B. RENACCI, Ohio 

ROBERT HURT, Virginia 

ROBERT J. DOLD, Illinois 

DAVID SCHWEIKERT, Arizona 

MICHAEL G. GRIMM, New York 

FRANCISCO ‘‘QUICO’’ CANSECO, Texas 

STEVE STIVERS, Ohio 

STEPHEN LEE FINCHER, Tennessee 

BARNEY FRANK, Massachusetts, Ranking 

Member 

MAXINE WATERS, California 

CAROLYN B. MALONEY, New York 

LUIS V. GUTIERREZ, Illinois 

NYDIA M. VELA ́ ZQUEZ, New York 

MELVIN L. WATT, North Carolina 

GARY L. ACKERMAN, New York 

BRAD SHERMAN, California 

GREGORY W. MEEKS, New York 

MICHAEL E. CAPUANO, Massachusetts 

RUBE ́ N HINOJOSA, Texas 

WM. LACY CLAY, Missouri 

CAROLYN MCCARTHY, New York 

JOE BACA, California 

STEPHEN F. LYNCH, Massachusetts 

BRAD MILLER, North Carolina 

DAVID SCOTT, Georgia 

AL GREEN, Texas 

EMANUEL CLEAVER, Missouri 

GWEN MOORE, Wisconsin 

KEITH ELLISON, Minnesota 

ED PERLMUTTER, Colorado 

JOE DONNELLY, Indiana 

ANDRE ́ CARSON, Indiana 

JAMES A. HIMES, Connecticut 

GARY C. PETERS, Michigan 

JOHN C. CARNEY, JR., Delaware 

JAMES H. CLINGER, Staff Director and Chief Counsel 

(III) 

SUBCOMMITTEE ON OVERSIGHT AND INVESTIGATIONS

RANDY NEUGEBAUER, Texas, Chairman 

MICHAEL G. FITZPATRICK, Pennsylvania, 

Vice Chairman 

PETER T. KING, New York 

MICHELE BACHMANN, Minnesota 

STEVAN PEARCE, New Mexico 

BILL POSEY, Florida 

NAN A. S. HAYWORTH, New York 

JAMES B. RENACCI, Ohio 

FRANCISCO ‘‘QUICO’’ CANSECO, Texas 

STEPHEN LEE FINCHER, Tennessee 

MICHAEL E. CAPUANO, Massachusetts, 

Ranking Member 

STEPHEN F. LYNCH, Massachusetts 

MAXINE WATERS, California 

JOE BACA, California 

BRAD MILLER, North Carolina 

KEITH ELLISON, Minnesota 

JAMES A. HIMES, Connecticut 

JOHN C. CARNEY, JR., Delaware 

(V) 

C O N T E N T S 

Page 

Hearing held on: 

May 16, 2012 ..................................................................................................... 1 

Appendix: 

May 16, 2012 ..................................................................................................... 41 

WITNESSES 

WEDNESDAY, MAY 16, 2012 

Edwards, Bret D., Director, Division of Resolutions and Receiverships, Federal Deposit Insurance Corporation ................................................................... 2 

Fogg, Edward L., Owner, Fogg Construction Company and Fogg Mortgage 

Company ............................................................................................................... 31 

Leventhal, Scott L., President and Chief Executive Officer, Tivoli Properties, 

Inc. ......................................................................................................................... 29 

Miller, Stuart, Chief Executive Officer, Lennar Corporation ............................... 6 

Rymer, Hon. Jon T., Inspector General, Office of the Inspector General, Federal Deposit Insurance Corporation ................................................................... 4 

APPENDIX 

Prepared statements: 

Miller, Hon. Gary G. (with attachments) ....................................................... 42 

Edwards, Bret D. .............................................................................................. 51 

Fogg, Edward L. ............................................................................................... 63 

Leventhal, Scott L. ........................................................................................... 91 

Miller, Stuart .................................................................................................... 105 

Rymer, Hon. Jon T. .......................................................................................... 111 

ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD

Westmoreland, Hon. Lynn A.: 

Submission from the American Land Rights Association ............................. 118 

Written statement of the G&M Daniel Family Limited Partnership .......... 160 

Lennar Update .................................................................................................. 161 

Letter from Merolla & Gold, LLP, dated May 15, 2012 ................................ 166 

Written statement of Bransen Patch, MD Group, LLC ................................ 178 

Written statement of Robindale Industrial Park, LLC ................................. 180 

Written statement of IntuitivePAC, LP .......................................................... 181 

Montgomery County grants ............................................................................. 230 

Edwards, Bret D.: 

Written responses to questions submitted by Chairman Neugebauer ......... 235 

Written responses to questions submitted by Representative Capuano ...... 239 

Written responses to questions submitted by Representative Waters ......... 244 

Written responses to questions submitted by Representative Westmoreland ................................................................................................................ 250 

(1) 

OVERSIGHT OF THE FEDERAL DEPOSIT 

INSURANCE CORPORATION’S STRUCTURED 

TRANSACTION PROGRAM 

Wednesday, May 16, 2012 

U.S. HOUSE OF REPRESENTATIVES, 

SUBCOMMITTEE ON OVERSIGHT

AND INVESTIGATIONS, 

COMMITTEE ON FINANCIAL SERVICES, 

Washington, D.C. 

The subcommittee met, pursuant to notice, at 3:22 p.m., in room 

2220, Rayburn House Office Building, Hon. Randy Neugebauer 

[chairman of the subcommittee] presiding. 

Members present: Representatives Neugebauer, Fitzpatrick, 

Renacci; Capuano, Waters, and Carney. 

Also present: Representatives Westmoreland and Herrera 

Beutler. 

Chairman NEUGEBAUER. The Subcommittee on Oversight and Investigations will come to order. This hearing is entitled, ‘‘Oversight 

of the Federal Deposit Insurance Corporation’s (FDIC’s) Structured 

Transaction Program.’’ 

Each side will be limited to 10 minutes for opening statements. 

And I want to recognize the attendance of Members who are not 

assigned to the Oversight and Investigations Subcommittee. Representative Jamie Herrera Beutler is here, and we also expect Mr. 

Westmoreland to attend. I ask unanimous consent that they be allowed to participate as if they were on the committee today. 

I will now recognize myself for an opening statement. 

This hearing is focused on the oversight of the FDIC’s Structured 

Transaction Program. We will hear from the FDIC. We will also 

hear from some of the market participants today. The Structured 

Transaction Program was created to resolve the distressed assets 

program. It has transferred about 42,000 assets, with an unpaid 

balance of about $25.5 billion, into 32 public-private partnerships. 

One of the reasons that we are having this hearing is because 

there is not a lot of regulation that applies to structured transactions, and so we are going to learn more about the process. Also, 

we had an OIG audit of the Structured Transaction Program that 

found control deficiencies related to inadequate FDIC policies, and 

we will hear from the OIG on that as well. 

I think the goal here is to learn more about this program. This 

is a program designed to mitigate losses, ultimately, to the taxpayers. We want to make sure that everything is being handled 

properly. 

2 

But the program also has impact on some of the people who were 

banking with some of these entities that found themselves one day 

without a bank. We need to know how this process is playing out 

and if there are things that we need to be looking at from an oversight standpoint. So I look forward to learning more about the 

Structured Transaction Program. 

With that, I will yield to the gentleman, Mr. Capuano. 

Mr. CAPUANO. Thank you much, Mr. Chairman. 

I don’t have much of an opening statement. I am looking forward 

to the testimony from these gentlemen, and from the next panel, 

as well. 

I appreciate you calling this hearing. I think that the FDIC plays 

a very important role in this economy in protecting investors, and 

it is important that we make sure that they continue to be able to 

do that. That is their primary objective, and as far as I am concerned, anything that interferes with that is problematic to this 

Congress. Therefore, today I am looking forward to hearing testimony on this specific aspect of the difficulties we have recently 

gone through and I guess continue to go through in the economy 

and how it has played it out and how it has impacted the FDIC. 

Again, Mr. Chairman, thank you very much. 

Chairman NEUGEBAUER. I would remind Members that all Members’ opening statements will be made a part of the record. 

Now, I would like to introduce the first panel: Mr. Bret Edwards, 

Director, Division of Resolutions and Receiverships, Federal Deposit Insurance Corporation; the Honorable Jon T. Rymer, Inspector General, Federal Deposit Insurance Corporation; and Mr. Stuart Miller, Chief Executive Officer, Lennar Corporation. 

Gentlemen, your written testimony will be made a part of the 

record, and we will recognize each of you for 5 minutes for a summary of that. 

With that, Mr. Edwards, you are recognized for 5 minutes. 

STATEMENT OF BRET D. EDWARDS, DIRECTOR, DIVISION OF 

RESOLUTIONS AND RECEIVERSHIPS, FEDERAL DEPOSIT INSURANCE CORPORATION 

Mr. EDWARDS. Thank you, Mr. Chairman. 

Chairman Neugebauer, Ranking Member Capuano, and members 

of the subcommittee, I appreciate the opportunity to testify on behalf of the FDIC on our agency’s Structured Transaction Program. 

A structured transaction is only one of the asset disposition 

strategies the FDIC employs to fulfill our statutory duty to maximize the net present value return from the disposition of assets of 

failed institutions and to minimize the amount of loss realized in 

the resolution of those institutions. 

This type of transaction has been used for approximately 4 per- cent of the $670 billion in assets that the FDIC inherited from 

bank closures since January of 2008. Most of the time we are able 

to achieve the least costly resolution by transferring the failed 

banks’ deposits, assets, and certain liabilities immediately after the 

bank closing to an acquiring bank. 

Unfortunately, failing banks with little franchise value and poor 

asset quality do not attract sufficient interest from viable bidders. 

In those instances, depositors are paid the full amount of their inVerDate Nov 24 2008 13:11 Dec 04, 2012 Jkt 075733 PO 00000 Frm 00008 Fmt 6633 Sfmt 6633 K:\DOCS\75733.TXT TERRI
3 

sured deposits. The FDIC, as receiver, then chooses an alternative 

strategy for handling these failed bank assets, such as cash sales, 

securitizations, and structured transactions. 

Patterned after a successful program used by the former RTC, 

the FDIC initiated a structured transaction sales program in May 

of 2008. By using structured transactions, the FDIC avoids selling 

assets in distressed markets at prices below their intrinsic value 

and saves the costs associated with maintaining the infrastructure 

needed for long-term agency management of the assets. We estimate that we have saved approximately $4 billion by using structured transactions instead of cash sales. 

In structured transactions, the FDIC pools a group of similar assets from one or more failed bank receiverships and transfers them 

to a newly formed LLC. Through a competitive bidding process, the 

FDIC offers a portion of the equity in the LLC to prequalified private sector experts who have experience managing the types of assets in the pool and who have the economic resources to bear the 

obligations and risks of the agreement. The highest bidder pays 

cash for its equity interests in the LLC and becomes the managing 

member, with responsibility for the day-to-day management of the 

LLC and its assets. The percentage of book value that the bidder’s 

valuation represents is for the entire pool of the assets and cannot 

be attributed to any individual asset. 

Since 2009, to ensure robust bidding, many of the transactions 

have included leverage in the form of purchase money notes issued 

by an LLC to the failed bank receiverships as partial payment for 

the assets sold by the receiverships to the LLC. The purchase 

money notes represent debt owed by the LLC to the receiverships. 

In general, most transaction agreements require that these notes 

be repaid in full before there is any equity distribution to the members of the LLC. These notes do not finance the cash purchase price 

paid by the managing member for its equity interest in the LLC. 

The FDIC actively monitors these transactions through its staff 

and third-party contractors. On a regular basis, the FDIC and its 

contractors conduct on-site compliance reviews of each LLC’s operations. Additionally, the managing member must comply with 

stringent monthly, semi-annual, and annual reporting requirements. 

The FDIC’s Office of Inspector General has completed audits on 

two of the transactions. The FDIC agreed with all of the OIG’s recommendations and has implemented or is in the process of implementing these recommendations. 

At my request, the OIG has begun audits of two LLCs managed 

by an affiliate of Rialto Capital Management. These reports are expected to be delivered in the late third quarter of this year. 

We understand that a number of borrowers and guarantors have 

raised concerns about the managing members not achieving the 

resolution of their debts as the borrower or guarantor would desire. 

The FDIC investigates every borrower or guarantor inquiry and 

works with the managing member to address any of the concerns 

raised. We fully expect the managing members to pursue payoffs 

and loan modifications when these options would result in the 

highest return to the LLC. 

4 

With respect to single family residences, the managing members 

and their servicers are obligated to follow a federally-mandated 

loan modification program. Where a payoff, modification, or other 

loss mitigation is not feasible, the managing member is left with 

no other choice but to enforce the terms of the loan contracts 

through the courts and other legal means. 

To ensure that it receives the highest return on the assets, and 

that managing members treat failed bank borrowers fairly, the 

FDIC monitors compliance with transaction agreements, measures 

actual performance against projections, conducts regular site visitations, and thoroughly investigates borrower complaints with regard 

to the servicing and disposition of their loan by the managing 

member. 

Thank you for the invitation to testify, and I would be happy to 

answer your questions. 

[The prepared statement of Mr. Edwards can be found on page 

51 of the appendix.] 

Chairman NEUGEBAUER. I thank the gentleman. 

Mr. Rymer, you are recognized for 5 minutes. 

STATEMENT OF THE HONORABLE JON T. RYMER, INSPECTOR 

GENERAL, OFFICE OF THE INSPECTOR GENERAL, FEDERAL 

DEPOSIT INSURANCE CORPORATION 

Mr. RYMER. Thank you, Chairman Neugebauer, and Ranking 

Member Capuano. Thank you for your interest in the work performed by the FDIC Office of Inspector General (OIG) relating to 

the Corporation’s structured asset sales program. 

The OIG is an independent office within the FDIC established to 

conduct audits and investigations to prevent waste, fraud, and 

abuse, and to improve the efficiency and effectiveness of FDIC programs. 

In my written statement, I provide an overview of our audit coverage during the current crisis. Specifically, I describe work that 

we have done related to failed financial institutions and the FDIC’s 

resolution and receivership activities. 

Today, I am pleased to discuss our completed and ongoing work 

as it relates to one of those FDIC resolution approaches: the structured asset sale transaction. 

The OIG has completed performance audits of two structured 

asset sale transactions that we selected based on the size and type 

of assets involved. The first audit was of ANB Venture, which involved over 1,100 individual assets and an unpaid balance of about 

$1.2 billion. The second audit was of Corus Construction Venture. 

Corus involved 101 individuals assets and an unpaid balance of 

$4.4 billion. And Corus also contained an advance funding mechanism. 

My office contracted with CliftonLarsonAllen to conduct these audits. The objectives in both audits were to assess the compliance of 

the structured asset sales agreement and to assess the FDIC’s 

monitoring of these agreements. 

In our reports, we concluded that ANB, Corus, and their respective managing members complied with some provisions of the 

structured asset sales agreements and that the FDIC had implemented certain controls for monitoring these transactions. We also 

5 

noted that the FDIC had planned or was in the process of implementing significant control improvements. However, our audits 

identified a number of control deficiencies involving both compliance and monitoring that warranted FDIC management attention. 

To that end, the ANB audit report contained 10 findings and 24 

recommendations. According to the FDIC, actions have been taken 

on these recommendations. The Corus report contained 7 findings 

and 10 recommendations, and corrective actions for these recommendations are expected to be completed by September 30th of 

this year. 

My written statement describes in more detail the results of 

these audits. 

We are continuing our audit coverage of structured asset sales 

transactions with an audit of Rialto Capital Management. This 

audit, which was requested by FDIC management due to inquiries 

and complaints that it had received, will cover two transactions. 

The first transaction involves about 5,200 assets with an unpaid 

balance of approximately $2.3 billion. The majority of these assets 

pertain to residential acquisition, development, and construction 

projects. The second transaction involves 345 assets, primarily commercial ADC projects, with an unpaid principal balance of $799 

million. 

The Rialto audit included the same two objectives we used in 

conducting the ANB and Corus audits, with the addition of two 

more objectives, which involved the bidding and selection process 

and the terms and conditions of the structured asset sales agreements themselves. In designing our audit procedures, we are also 

placing particular emphasis on the controls over transactions with 

affiliates. 

As part of this audit, we have selected a representative sample 

of assets that were subject to the inquiries and complaints that we 

were aware of at the time we initiated our work. We are evaluating 

these assets, as part of a larger sample, to satisfy our audit objectives. 

The inquiries and complaints that we are aware of primarily deal 

with the LLC’s aggressiveness in pursuing balances owed on the 

loans, the LLC’s treatment of borrowers or guarantors and its loan 

servicing, and the FDIC’s handling of loans prior to the transfer to 

the LLC. 

We are scheduled to complete our field work in June of this year 

and issue a draft report in July. A final report incorporating FDIC 

management’s comments will be issued near the end of August. 

Going forward, we intend to continue our work related to each 

of the FDIC’s resolution approaches. With regard to structured 

asset sales approach, our next audit will focus on the FDIC’s overall control of these transactions. This plan, or this approach, is consistent with our earlier work in examining failed financial institutions and our more recent work of the shared loss program. As our 

resources permit, we look forward to conducting a study in the next 

year to evaluate the risk and effectiveness of all of the resolution 

approaches. 

This concludes my prepared statement. I thank you for the opportunity to discuss our work, and I am prepared to answer your 

questions. Thank you. 

6 

[The prepared statement of Inspector General Rymer can be 

found on page 111 of the appendix.] 

Chairman NEUGEBAUER. Thank you. 

Mr. Miller, you are recognized for 5 minutes. 

STATEMENT OF STUART MILLER, CHIEF EXECUTIVE OFFICER, 

LENNAR CORPORATION 

Mr. MILLER. Thank you, sir. 

Mr. Chairman, Mr. Ranking Member, and distinguished members of the subcommittee and guests, I want to thank you for the 

opportunity to speak to you here today. 

My name is Stuart Miller, and I am CEO of Lennar Corporation. 

We are the parent company of Rialto Capital, which is involved in 

the FDIC’s structured transactions that are the subject of this committee. 

We are certainly very pleased to be here and to discuss these 

transactions. It is our policy and program to remain transparent, 

to answer questions, and to be participatory in all instances and inquiries relative to our business. We look forward to responding to 

any thoughts or questions that you all may have. 

In that regard, in my opening statement, I would like to make 

six observations and points relative to our involvement with the 

structured finance transactions. 

Number one, Rialto was awarded the partnership with the FDIC 

in a pure bid program. The FDIC defined the documents, the pool 

of assets, the structured finance terms, the fees, and the relationship with the manager in a comprehensive program; and we evaluated the program and bid on that basis, as did all of the other bidders. There were no renegotiations. We took the program as it was 

defined. We were required to give a conforming bid, and the highest bid won. Our bid in two of these bids was the highest. 

Number two, Rialto and Lennar have invested cash of approxi- mately $250 million in the two FDIC ventures. Lennar will not receive any money back until the $627 million loan to the FDIC is 

paid in its entirety. After the loan is paid in full, Rialto/Lennar and 

the FDIC will split cash as it comes in in a 60–40 relationship— 

60 percent to the FDIC, and 40 percent to Lennar—until all invested cash is returned. Only then, which we expect to be 4 to 5 

years from now, will Lennar begin to receive a return on its investment. 

Number three, the portfolios are predominantly defaulted loans; 

over 90 percent of the portfolio is defaulted loans. Borrowers entered into loan agreements with their banks. There was a default. 

The bank depleted capital, failed, and then was seized. Twenty-two 

institutions failed and were seized by regulators. The FDIC packaged a portfolio of loans from these 22 institutions that were in 

FDIC receiverships into structured transactions in which it conducted a bid process to sell 40 percent interest to qualified buyers/ 

managers. We took over the management of these predominantly 

defaulted loans. We did not cause the defaults or negotiate the 

terms of the loans. It was and remains our job to use our expertise 

to find resolution. 

Number four, these assets are primarily sophisticated commercial transaction loans. They are not consumer residential loans on 

7 

homes. These were loans where sophisticated business borrowers 

negotiated for a loan, generally with each side represented by competent counsel, to borrow, in many instances, millions of dollars in 

order to generate business profit. The risks and rewards were 

clearly allocated within the loan documents negotiated at the time, 

with both parties clearly understanding that all of the rewards 

would be concentrated in the borrowers’ hands, and, accordingly, 

the various understood risks of the business proposition would rest 

with the borrower. 

Number five, because these were business transaction loans for 

the benefit of the borrower and because all of the rewards would 

go to the borrower, the bank carefully negotiated that the collateral 

for most of these loans would be both the business assets or properties, as well as an absolute personal guarantee. Borrowers, to be 

able to borrow, readily gave those guarantees to pay back the loan 

whether the business proposition was successful or not. 

Number six, we at Lennar/Rialto have over 20 years of experience in managing and resolving defaulted loans. Our process is 

time-tested and well-ordered. It is crafted around professionalism, 

with a high degree of respect and decency as we endeavor to work 

with each borrower individually and with propriety as we seek resolution. By definition, the relationship between a defaulted borrower and a lender seeking resolution is adversarial and sometimes 

contentious. Simply put, the parties have very different objectives. 

With that said, our program is to work within the four corners of 

every loan agreement individually, as well within the four corners 

of the rules and spirit of our court system and the laws. 

Thank you for your time, and I am happy to answer any questions. 

[The prepared statement of Mr. Miller can be found on page 105 

of the appendix.] 

Chairman NEUGEBAUER. Thank you, Mr. Miller. 

In consultation with the ranking member, I am going to recognize a couple of Members who came in and give them an opportunity to make a brief opening statement. I recognize Mr. Westmoreland for 2 minutes. 

Mr. WESTMORELAND. Thank you, Mr. Chairman, and I appreciate 

you holding this important hearing. 

I want to thank all the witnesses. I want to thank Mr. Miller for 

stepping up to the plate. I want to thank Mr. Leventhal and Mr. 

Fogg. 

Mr. Chairman, once again, we find the government picking winners and losers. Rialto, Colony Capital, Oak Tree Capital, and others are the winners. Builders, developers, and even their subcontractors and in some cases their purchasers that had previously 

purchased their product are the losers. 

Make no mistake, Rialto is the case that Mr. Miller was talking 

about, and the other managing partners are getting a great deal. 

They get financial information about their competitors for pennies 

on the dollar. In fact, Rialto only paid $241 million for $3 billion 

in loans. This is approximately 8 cents on the dollar. To add to this 

sweetheart deal, I think Rialto received a $600 million loan from 

the FDIC, interest free, nonrecourse, for 7 to 10 years. Now that 

is a deal that I think most of these borrowers would have taken 

8 

if they could have bought this loan for 8 cents or put up 8 cents 

on the dollar and then had the FDIC loan them the rest of it for 

7 years with no interest and no recourse. I think the FDIC would 

have recovered a lot more money. 

But wait, there is more. Rialto and these other managing part- ners are paid a management fee. On this particular case, the $3 

billion case, I believe the fee was $32 million for the first year. This 

is paid on the unpaid balance. 

So what incentive is there for any of these managing partners to 

settle the loan when they are getting a management fee on the 

whole deal? There is no incentive. If you take the $32 million and 

divide it by the number of loans, which I think was 5,200, they are 

being paid $6,100 per loan per year; and this is paid on the unpaid 

principal balance of the portfolio. 

In fact, many of my constituents have tried to negotiate with Rialto and the FDIC. The FDIC is probably the hardest agency that 

I am familiar with that is willing to negotiate anything. 

I will say that Rialto has stepped up in the last week or 2 weeks 

to try to settle some of these things. But earlier this year, I gave 

the FDIC verifiable proof that the FDIC was not maximizing return for the Deposit Insurance Fund, and let me tell you what happened. 

We had a gentleman who had a loan with a bank and he borrowed the money to buy stock in another bank—if you will give me 

just 30 more seconds—$500,000. The bank he bought stock in went 

broke. Silverton Bank went broke. He had a modified agreement 

for 85 percent of the $500,000 agreed to by the FDIC. Then, the 

FDIC sold that loan to a third party for 18 cents on the dollar. 

That is a problem. 

And so I hope that we will get some answers today to make sure 

that the FDIC is getting the maximum that they can for the money 

and that they are not killing small business and doing away with 

jobs. 

I yield back. 

Chairman NEUGEBAUER. I now recognize Ms. Waters from California for a brief opening statement as well. 

Ms. WATERS. Thank you very much, Mr. Chairman. 

I almost don’t need to give this opening statement. Mr. Westmoreland just spoke for me. Those are absolutely my concerns. 

But I want to thank you, Mr. Chairman. I welcome today’s hearing as an opportunity to closely examine the Structured Transaction Program the FDIC adopted in the wake of the 2008 financial 

collapse to manage and dispose of assets from failed institutions 

that may be more difficult to market and sell. While I understand 

that the FDIC has the legal responsibility to maximize recovery on 

the assets of failed banks and replenish the Deposit Insurance 

Fund, I am interested to learn more about the reports suggesting 

that FDIC’s practices and private sector partnerships may be creating additional hardships for small businesses and borrowers. 

In addition to that, I would also like to hear from the FDIC today 

about the steps it has taken to ensure that small enterprises, 

minority- and women-owned businesses have the opportunity to 

purchase FDIC assets or are in some way involved in these structured transactions. 

9 

In a 2010 Bloomberg article, one observer noted that the new 

FDIC strategy for managing assets seized from failed banks has 

turned the agency into a long-term investor making a multibillion 

dollar bet on the recovery of some of the most distressed condominium markets in the country. Instead of selling the assets to 

maximize cash in hand, the agency is offering its private sector 

partners zero percent financing, management fees, and new loans 

to complete construction of projects it can hold until markets recover. 

With that said, it is my understanding the regulators have determined that in certain situations, public-private structured transactions can offer a better chance to replenish the Deposit Insurance 

Fund. I therefore welcome the FDIC’s comments today on the level 

of success and savings the agency has achieved with this program, 

as well as the agency’s response to criticisms against the program. 

And, lastly, I am particularly interested in the FDIC’s new investor match program that was designed to encourage small investors 

and asset managers to partner with larger investors in order to 

participate in the FDIC’s structured transaction sales for loans and 

other assets from failed banks. In an effort to be inclusive of all 

firms, the FDIC launched the program to expand opportunities for 

participation by smaller investors and asset managers, including 

minority- and women-owned firms. I do look forward to hearing 

from the agency today regarding whether this program is working 

to extend opportunities to these types of firms that may have been 

otherwise excluded from these transactions, and I would like some 

specifics and some numbers to document if they are going to represent that they have done these things. 

I yield back the balance of my time. 

Chairman NEUGEBAUER. I thank the gentlewoman. 

And now the gentlewoman, Ms. Herrera Beutler, is recognized 

for a brief statement. 

Ms. HERRERA BEUTLER. Thank you, Mr. Chairman, and members 

of the subcommittee. Thanks for holding this hearing today. 

This topic is incredibly important, so important that I am here 

even though this isn’t actually my committee. I am grateful to be 

a part of this hearing today, because this is very important to the 

folks in southwest Washington in the district that I serve. 

Over the last year, I worked to understand what happened with 

small business owners like Mr. Fogg, who is here today, who had 

loans with the now-collapsed Bank of Clark County in my district. 

And the answers still aren’t very clear. What I do know is that the 

fallout resulted in destroyed businesses, bankruptcies, and the loss 

of livelihoods for folks in my area. 

So today, I want to find out what led the FDIC to give an extremely favorable deal to Rialto Capital, and consider the terms of 

the agreement between the FDIC and Rialto. In this ‘‘sweetheart 

deal’’ is what comes to mind—and my colleague uses the same 

term—Rialto was allowed to pay 8 cents, and it is worth repeating, 

8 cents on the dollar for $3 billion worth of assets. Further, the 

FDIC issued Rialto a 10-year, over $600 million loan at zero percent interest. That is a great deal. 

I believe that had Mr. Fogg or any other home builder in my 

area been given a 10-year zero interest loan, they would have proVerDate Nov 24 2008 13:11 Dec 04, 2012 Jkt 075733 PO 00000 Frm 00015 Fmt 6633 Sfmt 6633 K:\DOCS\75733.TXT TERRI
10 

vided a much higher return than 8 cents on the dollar. Instead, 

most were left to deal with Rialto. 

And excuse me, Mr. Miller, I know that you said you work with 

a high degree of respect and decency, but I can give you case after 

case—I have been in office for 15 months, and this is the one where 

I have had case after case after case. My church came to me and 

said, Rialto won’t negotiate with us. I have to tell you that they are 

not a for-profit entity. 

So I accept that businesses fail. That is part of the free enterprise system. What I don’t accept is when a government or quasigovernment agency that has a taxpayer guarantee makes a deal 

that puts small businesses at a disadvantage. That is what I don’t 

accept. 

And so today, I am hoping to understand the interest not only 

that Rialto has but Lennar Homes, who has now moved into my 

area, and what your plans are in Clark County. Technically, I 

know it is not allowed for Lennar to buy from Rialto the land it 

obtained under such agreeable terms. Yet, your Web site shows 

that they have moved into Vancouver, and I am very interested in 

that relationship. I am interested in the major tracts of land in my 

largest county that are now owned by Rialto, and hearing what the 

plans are moving forward and making sure that the FDIC does its 

job with regard to oversight. 

So I am grateful to be here, Mr. Chairman. Thank you. 

And I yield back. 

Chairman NEUGEBAUER. I thank the gentlewoman. 

That is all of our opening statements, and we will now go into 

a question-and-answer period. Each Member will have 5 minutes, 

and the Chair recognizes himself first. 

Mr. Edwards, in some of the structured transactions deals, some 

of the people have loans and some don’t. I think 22 of the 32 had 

nonrecourse loans; the other 10 did not. Can you distinguish the 

difference between a transaction where someone does not get financing and someone else gets the financing? What was the basis 

of that? 

Mr. EDWARDS. Yes. Thank you, Mr. Chairman. 

It might be helpful if I could give a little background into how 

the failed bank assets are slotted into the structured sales program. At the FDIC, we try very, very hard when a bank is failing 

to find a financial institution to take that failing bank over on a 

whole bank basis so that they take all the loans and all the deposits. 

In some instances, that is not possible. There are instances when 

banks fail for liquidity reasons and we have very little time to market the institution. Therefore, investors have very little time to look 

at the book of loans that a bank has, and so we end up taking them 

back in our receivership capacity. 

In other instances, the bank simply has very little franchise 

value. The assets are of very poor quality, and there is just no interest in acquiring those. 

So I want to repeat it is our goal to not take any failed bank assets back. In a perfect world, we would transfer those immediately 

to an acquiring institution. But early on in the crisis, it was very 

difficult to do that, because we did have more liquidity failures. 

11 

So with those assets that we have to take back in our receivership capacity, what we have done is to institute the structured sale 

program, mostly for real estate-related assets and, as some of the 

Members have said, mostly distressed assets. Sixty-plus percent of 

the real estate-related assets that went into these structured transactions were distressed assets. 

But, in any event, we try to group assets of like kind. For instance, in the Rialto transaction, those were all pretty much acquisition, development, and construction loans. We group those into 

packages. We use a financial adviser to assist us in figuring out the 

best structure for those, and then we put them into packages and 

attempt to sell them. 

There are some loans that we work ourselves. And I should mention that after the bank fails, there is usually a 6- to 9-month period where we do have to work the assets ourselves until that 

structured transaction closes. 

So if that gives you a flavor for—I am sorry, go ahead, sir? 

Chairman NEUGEBAUER. So the question is, of the 32 sales, 22 

of them involved in financing— 

Mr. EDWARDS. Yes. 

Chairman NEUGEBAUER. —10 of them did not. 

Mr. EDWARDS. Yes. 

Chairman NEUGEBAUER. I want to know why some people got financing and some didn’t. Does that change the deal? 

Mr. EDWARDS. I think we have done a less-than-perfect job of explaining the role of financing. 

When we create a structured sale, what happens is we create a 

limited liability company. We gather up the assets that are slotted 

for that sale, and the receiverships contribute those assets to the 

limited liability company. So once they have contributed those to 

the limited liability company, we then bid out a percentage of the 

equity to capital investors. 

We do add leverage to those transactions. And we started to do 

that, I believe it was in 2009, because what we were finding was 

the bidding was not as aggressive and there were not as many bidders there. By adding leverage to the transaction, we got better 

bids. 

Let me make one point clear: We are not financing the cash contribution of the LLC to these transactions. The note is issued by 

the LLC we have created to the receiver in partial payment for the 

assets that the receiver contributed to the LLC. 

Chairman NEUGEBAUER. So basically, the ones that don’t have financing, it is because they made a bid on a certain percentage of 

the equity of that— 

Mr. EDWARDS. That is correct. 

Chairman NEUGEBAUER. And they didn’t leverage up. So this 

could have been a smaller pool or an investor that had— 

Mr. EDWARDS. Correct. 

And I will say, just from an historical perspective, early on in the 

crisis, we did not have the LLC structure. We actually had a partnership structure. And part of the reason we changed to an LLC 

structure was because that allowed us to issue the debt. 

Chairman NEUGEBAUER. One last question. Mr. Edwards, let’s 

say I was banking at bank ‘‘X,’’ I was current on my loan, but the 

12 

bank had a bunch of other bad paper in there. My loan was current, and in fact I had 2 years left on my note, and I am in the 

middle of a development. What happens to me? You have closed my 

bank, but I am in the middle of a project here, and it is 2 more 

years on the note, and I have room on my line of credit for an advance. What happens to me? 

Mr. EDWARDS. Thank you for that question. That is an excellent 

question. 

It is one of the most difficult things we face when a bank closes. 

We are talking about unfunded commitments. Somebody, as you 

point out, is in the middle of the development, they haven’t missed 

any of their payments. We look at each of those unfunded commitments—one of the first things our credit people do when they go 

in the night of the bank failure is to find out where we are on 

those. On a case-by-case basis, we look at those and make a decision on which ones we should fund and which ones we shouldn’t. 

And really, the litmus test for that is if you put a dollar in, will 

you get a dollar back? 

This is very analogous to the situation in a bankruptcy—a Chapter 7 bankruptcy where the trustee is faced with the same kind of 

situation. They need to make a decision. If I put a dollar in, will 

I get that dollar back out? 

I will give you an example. Suppose in that situation you had 4 

spec homes and they were all 75 percent complete. In that fact pattern, we would almost assuredly go ahead and fund those, absent 

other circumstances we haven’t talked about. Because it makes 

sense. We will finish the homes. They are almost complete. We will 

continue to fund the loan. And when those are done, we will work 

with the borrower to figure out where to go from there. That has 

been our policy throughout this crisis. 

Chairman NEUGEBAUER. Thank you. 

And now the gentlewoman from California, Ms. Waters, is recognized for 5 minutes. 

Ms. WATERS. Thank you very much. 

Mr. Chairman, there is a long history to many of our concerns 

about the resolution procedures of the FDIC. Many of us go back 

to the resolution corporation and how they disposed of failed assets, 

and what we see with the FDIC is quite different. Many of us are 

not only concerned about some of the issues that were raised here 

today about what happens to those banks, those individuals who 

are left when you take over a failed institution and they are in development and how they are going to continue to get funding, 

loans, etc. But many of us, whether we are talking about the resolution of assets and how you dispose of failed assets, many of us 

are concerned about how you get rid of or you put out to bid or you 

make available these assets. We are concerned about that as we 

are concerned about REOs on the housing market side. 

What we find is, too often, we get these big institutions or corporations who have the ability to put in smart bids and to leverage 

and to do all kinds of things. And it looks as if, in the case of Rialto, they had additional assistance in being able to be financed in 

some shape, form, or fashion. 

But what many of us know and understand is, to the degree that 

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tions or organizations, it improves economic development in all of 

our communities. 

And so, when we hear about what appears to be sweetheart 

deals, we are going to have to spend a lot of time. And I think you 

are going to see that on both sides of the aisle, we really want to 

know what is happening with all of this. 

We understand that the FDIC was trying to take all of the assets 

of a failed bank and move them all at one time to another bank 

or to individuals. And we have people who came in to us and said, 

‘‘We put together a group from our community with substantial dollars, but the FDIC in this particular package wants us to take the 

barn and the equipment and the animals, and we don’t need all of 

that.’’ But just like with RTC, we could take the savings accounts, 

we could take this, we could take that. 

We can’t we do that? And why are we still going down the same 

road of making available to the big guys the opportunity to not 

only be successful in these bids but to get our help in doing so in 

the way that we finance them? 

Mr. Edwards? 

Mr. EDWARDS. Thank you very much. I appreciate your question, 

and I do share your concern. 

I know you asked a question about inclusion of smaller investors. 

We started a small investor program. Under the structured sale 

program, 3 of the 32 sales themselves have been to small investors. 

We did hear the feedback of the market, as well as folks here on 

Capitol Hill about the concerns, and so we created a pilot program 

and it is out on our Web site. It is called the Small Investor Program, or SIP. Instead of these large, large packages, what we do 

is we limit these to just one receivership. We try and concentrate 

the assets geographically. We do offer technical assistance to potential buyers. And we lengthen the due diligence period so that they 

have adequate time to look over these packages. 

And I will have to say that the pilot has been deemed a success— 

Ms. WATERS. Excuse me, I have to interrupt you for one moment, 

because I want to make sure I understand— 

Mr. EDWARDS. Sure. 

Ms. WATERS. —what is in this. Are these the assets that you find 

very difficult to get rid of? 

Mr. EDWARDS. Yes, that is correct. 

Ms. WATERS. Why would a small business want to be involved 

with getting very difficult assets to manage and to try and make 

money on? 

Mr. EDWARDS. There are plenty of folks who don’t have the capital that a larger deal requires, but have the expertise. 

And I will tell you, for those of you who have a real estate background, working distressed real estate credits is a tough business. 

It requires a lot of technical knowledge. And some of these folks 

have that, but what they don’t have are the funds to bid on these 

larger deals. 

So we have found great success in breaking these packages into 

smaller packages and bidding these out. These folks are very happy 

with these deals, and they are working on them now. 

With respect to the Investor Match Program, I know you mentioned that, so I just wanted to say quickly: It is the equivalent of, 

14 

sort of, a match.com. It is a Web site where both investors and people with expertise, but not necessarily capital, can exchange emails 

and say, ‘‘I have ‘X’ amount, and I want to invest in one of these 

deals;’’ or, ‘‘I have a lot of expertise, or my firm has a lot of expertise, but I don’t really have a lot of capital.’’ 

So we have put that Web site together. The numbers have really 

doubled since the very beginning when there was a small number. 

And there are quite a few minority- and women-owned businesses 

that have partaken in that Web site. So we hope— 

Ms. WATERS. What is ‘‘quite a few?’’ 

Mr. EDWARDS. I don’t have the exact numbers, but I can certainly get those for you. 

Ms. WATERS. Remember, that is what I said. I want to know. 

Mr. EDWARDS. Yes. And I can certainly get those for you. 

Ms. WATERS. Thank you, Mr. Chairman. 

Chairman NEUGEBAUER. I thank the gentlelady. 

And now the gentleman, Mr. Fitzpatrick, the vice chairman of 

the subcommittee, is recognized for 5 minutes. 

Mr. FITZPATRICK. Thank you, Mr. Chairman. 

Director Edwards, have the FDIC Office of Inspector General audits prompted any changes or improvements to the way the FDIC 

structures the LLC transactions? 

Mr. EDWARDS. Yes, thank you for that question. That is an excellent question. 

Absolutely. Our relationship with the Inspector General is respectful, cordial, and professional. But we are very grateful for the 

work they have done in this area, because, as you know, they did 

one audit of the ANB transaction, another one of Corus. And I 

thought they did a very thorough and reasonable job. 

I would like to say that we adopted what we had done during the 

RTC days and began this program in May of 2008. We are constantly revising policies and procedures. We are constantly revising 

the agreement based on lessons learned and things that come up. 

So a lot of what Mr. Rymer’s people and his contractors pointed 

out to us, we took to heart. As you see in my testimony, on the 

ANB venture, for instance, there were a large number of findings 

and recommendations. We addressed every single one of them with 

our managing member. And I expect when his people go in, they 

will find things much improved. I would say the same about Corus. 

In Corus, in particular, I would like to talk about one issue, and 

that has to do with the definitions that are spelled out in our LLC 

agreements. As those of you with a real estate background or those 

of you with a legal background would understand, these agreements are lengthy, complex, and difficult to administer. And we 

have some very fine people who do that. Nevertheless, the people 

we are dealing with on the other side of the table, like Mr. Miller, 

are very sophisticated, and they have their own set of attorneys 

and bright minds working on this. And reasonable people can interpret contracts differently. 

We work very diligently to work those differences out. And where 

we find that, in retrospect, the contract should have had tighter 

language or more clarity to it, we go ahead on a prospective basis 

and amend the contract. 

15 

Mr. FITZPATRICK. Mr. Miller, what are some of the concerns that 

have been raised by borrowers whose loans have been transferred 

to one of the subsidiaries of your organization? 

Mr. MILLER. Remembering that in these transactions approximately 90 percent of the loans had already defaulted, most of the 

borrowers were concerned as to how they would reach resolution 

and what the process would be. Many of them had gone from bank 

holding to—or bank as their lender to FDIC as their lender and 

then ultimately to us. So an initial concern or question—and we 

have 20 years of experience with this—is, who is my new lender 

and how will we interact? So there is some skepticism. 

Unfortunately, in the context of a market turn and a great number of defaults, there is some turmoil in the business and there is 

some reconciliation in terms of relationship that has to take place. 

I think that there are always questions where borrowers feel 

they have had representations made by either their bank or by the 

FDIC, and there is a discovery process that ensues. Those are concerns that are raised by borrowers. And the discovery process is, 

in many instances, one that comes down to he said/she said and 

trying to figure out what the actual facts and landscape are. 

Remember that, with us, in these 2 transactions, we very quickly 

had to take over 5,500 loans—again, 90 percent defaulted—very 

quickly read every document and define the landscape. So the concerns of borrowers would range anything from, how will my loan 

be administered, to how long will it take until we can sit down and 

have a conversation? 

Mr. FITZPATRICK. Attorney General Rymer, I think my time is 

about to run out, but I was wondering whether you believe that the 

structured transaction sales pose a risk to the Deposit Insurance 

Fund. 

Mr. RYMER. They certainly do, sir. They are principally the reason we began this audit process. 

I think we have to put it in context. There are some $668 billion 

that have passed through, in various forms of resolution, through 

the failure. This program—$25 billion or so is in this particular 

program. 

We were concerned that, because this program is somewhat 

unique, there were not standing control mechanisms in place. That 

is why we did an audit early on of ANB and why we did an audit 

of Corus. In the case of ANB, we saw very little of a control environment to oversee that transaction. We have not yet done an overall audit to look at the entire control environment, but we did look 

at the controls of that particular transaction. 

We have seen some anecdotal evidence, not yet proven through 

an audit, but we have seen evidence that the compliance process 

is maturing. There are compliance contractors in place now that 

management is hiring to review these transactions in great detail 

and with more regularity than they were in the past. And in terms 

of corporate governance, the FDIC Audit Committee, which is a 

committee of the board of directors, routinely receives reports on 

oversight of this program. 

So oversight was minimal, I would say, early on, but we have 

seen some growth. We do plan, as I mentioned in my opening stateVerDate Nov 24 2008 13:11 Dec 04, 2012 Jkt 075733 PO 00000 Frm 00021 Fmt 6633 Sfmt 6633 K:\DOCS\75733.TXT TERRI
16 

ment, to do a more comprehensive review of the oversight program 

a little later, probably early next year. 

Mr. FITZPATRICK. Thank you, Mr. Chairman. 

Chairman NEUGEBAUER. I thank the gentleman. 

And now the gentleman from Ohio, Mr. Renacci, is recognized for 

5 minutes. 

Mr. RENACCI. Thank you, Mr. Chairman. 

I am trying to understand the transaction. I think I do, but I am 

going to walk through it, and maybe start with you, Mr. Edwards, 

and then ask you, Mr. Miller. 

It sounds like you bundle a group of assets from a troubled organization—and somebody testified 90 percent of them are normally 

defaulted already, defaulted loans—you bundle them together, and 

you put them in an LLC. And then you bid this LLC out, and the 

owner gets 40 percent of that LLC for a note taken back in this 

case, a nonrecourse note. 

But that owner of the 40 percent has to, at least in this case— 

I think it was $900,000 or whatever it was—has to recover 

$900,000 first, pay the note back, and then the difference is split, 

60 to the FDIC and 40 to the owner of the—40 percent share in 

the LLC. Correct? 

Mr. EDWARDS. Yes, in most aspects. 

It might be helpful if I just—since Mr. Miller is here—generally, 

the cash flows for our managing members in these LLC transactions are nonpublic information. But since most of those were in 

his statement, maybe I could just walk through that transaction for 

you, and hopefully I will get to it. 

First of all— 

Mr. RENACCI. Before do you that, though— 

Mr. EDWARDS. Yes. Please. 

Mr. RENACCI. —because I am really trying to stay top in— 

Mr. EDWARDS. Sure. 

Mr. RENACCI. —but that is kind of a top— 

Mr. EDWARDS. Yes. You are correct. So the receivership contributes assets to an LLC we create. We then bid out the LLC to private sector entities. 

Before we do that, we specify a few things: Are we going to allow 

leverage, yes or no? If we are, what ratio of leverage? In the case 

of Rialto, it was one-to-one— 

Mr. RENACCI. But those are all the procedures. I want to come 

back to you, because I only have 5 minutes. 

Mr. EDWARDS. Okay. 

Mr. RENACCI. I want to go over to Mr. Miller, and then I am 

going to come back to you. 

Mr. EDWARDS. Okay. 

Mr. RENACCI. Mr. Miller, when you get these, if you own 40 percent of this LLC and you are now managing it, do you change the 

loan terms in any way? Are the loan terms the exact loan terms 

that the individuals already had signed up for, already had guaranteed, already had interest rates, already had terms? Are you changing any of that? 

Mr. MILLER. Now, when you ask about the loan terms, you are 

not talking about the loan with the FDIC? 

17 

Mr. RENACCI. No, no. I am talking about the loans that are bundled in that LLC. 

Mr. MILLER. Okay. So we, in the transactions that we have purchased, become the manager of—part-owner and manager of those 

loans. 

Mr. RENACCI. I understand that. Are you changing the loan 

terms? 

Mr. MILLER. We do. We negotiate with borrowers to sit down and 

to rethink and to find common ground as it relates to either extending the loan or terminating the loan or something like that. 

We do not have absolute authority nor do we have FDIC authority to alter the loan terms unilaterally. So it is only as a negotiation with the borrower or through the court system that there is 

any alteration to those loan terms. 

Mr. RENACCI. So do you make the loan terms any worse than 

they have already signed on, or do you make them better? In other 

words, you can’t say, well, you had a 15-year mortgage, you are 

only 2 years in, but I want it all paid today. 

Mr. MILLER. That is correct. We cannot alter the loan terms to 

the detriment of the borrower unilaterally. 

Mr. RENACCI. Okay. So the borrower still has the same loan, in 

most cases, that he had signed up for or she had signed up for 

years ago, months ago, whatever. You now have that. 

Mr. MILLER. We have the same loan terms that we have inherited from the FDIC. The FDIC might have altered in some way. 

Mr. RENACCI. Okay. So with that being said, my next question 

is, who decides how they are bundled? Because at this point in 

time, ultimately the borrower, in my opinion, hasn’t been hurt just 

yet, because they are still signed up for the same debt they agreed 

to pay you a long time ago. So who now bundles them to make the 

decision of what goes in the LLC? 

Mr. EDWARDS. Thank you. We work with a financial advisor to 

figure out what the best structure for a particular loan sale is. So 

we go through the inventory of assets that we have taken back 

from the failed banks that we were unsuccessful in selling to an 

acquiring institution, and they will look through the portfolio with 

us, and we will figure out, okay, what is a rational way to market 

these loans. That is how we package them up. 

Your point about the loan terms is absolutely essential. Borrowers have the same rights and responsibilities that they did with 

the bank. We don’t change the loan terms unless it is by mutual 

agreement. 

Mr. RENACCI. So how do you—so then you bid these out to a 

third party. How do you decide—I know it is to the highest bidder, 

but— 

Mr. EDWARDS. Right. 

Mr. RENACCI. —how do you decide who gets a chance to bid? 

Mr. EDWARDS. We have an extensive prequalification process. It 

is all laid out on our Web site. You have to have the financial capacity and the technical expertise. And you have to have a good 

background; you cannot have caused a loss to the Deposit Insurance Fund, for instance. 

And so if somebody goes through that prequalification process, 

then as specific loan packages become available, they are invited 

18 

to bid. And if they choose to do so, they can sign up for due diligence and go ahead and bid. 

Mr. RENACCI. Thank you. 

Now, Mr. Miller, some of those loans that you get in this package 

that you are now managing, some of them are worthless and some 

of them you are going to get more than 8, 10, 20 percent, whatever 

you are buying them for? 

Mr. MILLER. Yes, sir. Thank you. 

First of all, I want to correct—we don’t pay 8 cents on the dollar 

for, or we haven’t in this instance paid 8 cents on the dollar for the 

loans. 

And, yes, some of them will be worth absolutely zero, and have 

been. Some of them will be worth substantially worth more than 

what we paid. That is the expectation. 

Mr. RENACCI. I don’t know how you could pay 8 cents when you 

are—whatever you are paying, you are still going to get—once you 

pay that back, you still have to contribute 60 percent back to the 

FDIC. 

Mr. MILLER. That is correct, sir. 

Mr. RENACCI. It looks like I am running out of time. Thank you. 

Chairman NEUGEBAUER. I thank the gentleman. 

And now, Mr. Westmoreland is recognized for 5 minutes. 

Mr. WESTMORELAND. Thank you, Mr. Chairman. 

Mr. Edwards, you mentioned to Ms. Waters that you were making these in smaller amounts. The smallest amount I have seen is 

$101 million. Is that a small amount to you? 

Mr. EDWARDS. It is in terms of what a potential investor would 

have to contribute, and again, that is the book value, perhaps, of 

the transaction, but not the terms of the actual cash contribution 

that somebody would have to put up. We have not found— 

Mr. WESTMORELAND. That is okay. That is just what I wanted you to—the smallest one so far I have seen is $100 million. 

Now, there was one made to a realty group that if you divide the number of assets into the amount, it came up to about $50,000 per 

asset. Couldn’t you have divided those up into smaller things 

where more people could want to get in on this deal where they pay 

8 cents down and then you loan them the balance at zero percent 

interest for 7 to 10 years with no recourse? Don’t you think people 

would be interested in that? 

Mr. EDWARDS. Again, maybe I should talk first about the 8 cents. 

The loans that Rialto ended up purchasing, the equity partnership, 

they had a book value of $3.1 billion. The estimated market value, 

the implied value based on their bid, was about $1.2 billion. 

Mr. WESTMORELAND. Who did that estimate come from? 

Mr. EDWARDS. We had a financial advisor who gave us— 

Mr. WESTMORELAND. Okay. 

Mr. EDWARDS. Yes. 

Mr. WESTMORELAND. Thank you. Who is your financial advisor? 

Mr. EDWARDS. We have a range of financial advisors, such people 

as Barclays, and Stifel Nicolaus. I can get you a list. 

Mr. WESTMORELAND. So you are the FDIC and you don’t have 

anybody who can advise you on the finances? 

Mr. EDWARDS. No, I think that our— 

Mr. WESTMORELAND. You have all outside financial advisors? 

19 

Mr. EDWARDS. Correct. 

Mr. WESTMORELAND. Now, you said that the Inspector General 

was doing a good job. 

Mr. EDWARDS. Yes. 

Mr. WESTMORELAND. Do you think he is doing it appropriately? 

Mr. EDWARDS. I have all the respect, professional respect in the 

world for Jon. You can read his background. I think he has a 

very— 

Mr. WESTMORELAND. Okay. Do you realize that your partner in 

this deal said that the Inspector General was being invasive? Do 

you agree with that? 

Mr. EDWARDS. I don’t agree with it, and I am not aware that 

comment was ever made. 

Mr. WESTMORELAND. Okay. 

Can you give me, not right now but in writing, an example of 

where you went in to some unfinished homes and worked it out 

with the borrower to finish those homes up? I want to know where 

those are at, because I don’t know of any of them. And, in fact, people have had a terrible time even getting in touch with somebody 

about the FDIC, and the FDIC said we are not a bank, we don’t 

do that. So I would like to know where those are, exactly. 

But, Mr. Miller, in your testimony, you say that the borrowers 

you deal with are advised by counsel at every point in the negotiations. Is that correct? 

Mr. MILLER. To the best of my knowledge, they are, sir. 

Mr. WESTMORELAND. However, we have heard from different people that Rialto’s prenegotiation letter sent to borrowers includes a 

clause that prevents the borrower from bringing legal counsel to 

negotiations. In fact, I have heard reports that Rialto will not engage with borrowers who have counsel present. 

Is this the open process that you are claiming—that you are 

holding up as a model? 

Mr. MILLER. No, sir. And thank you for your question. As you 

know, we have talked about this before. 

It is very much our policy to engage in conversation and communication with our borrowers. And while I respect and understand 

that you might have heard one side of the story, I have always 

found that anytime I hear one side of the story, it is always very 

compelling. 

Mr. WESTMORELAND. I know. And I heard your side, and that is 

the reason I went to get another side. 

Mr. MILLER. Yes, sir. Thank you. 

But the reality is, from the prenegotiation letter all the way 

through to every negotiation that we have with our borrowers, we 

engage borrowers with counsel, without counsel. 

Mr. WESTMORELAND. Okay. 

Mr. MILLER. We try to engage our borrowers properly and respectfully. And I think— 

Mr. WESTMORELAND. So if I brought you a prenegotiation letter 

that was sent to a borrower who said that they were not allowed 

to have an attorney, you would find that troubling? 

Mr. MILLER. I am not sure of the context of that letter, so I won’t 

speak hypothetically. What I would say is that in all instances, any 

20 

communication with borrowers starts at point ‘‘A’’ and is subject to 

discussion and negotiation. So if a borrower— 

Mr. WESTMORELAND. Okay, but if I brought— 

Mr. MILLER. Excuse me, sir. 

Mr. WESTMORELAND. —a letter from Rialto— 

Mr. MILLER. If the borrower would like to have an attorney 

present, the borrower can speak to us and say, ‘‘I would like to 

have an attorney present, and I would like that as part of my written record.’’ 

Mr. WESTMORELAND. I am just asking you if you would look at 

a notification from Rialto to a borrower telling them that they 

could not have counsel during the negotiations. 

Mr. MILLER. Sir, I would certainly look at a communication. 

Mr. WESTMORELAND. Thank you. Yes, sir. 

Now, what percentage of your negotiators are attorneys? 

Mr. MILLER. I would have to get back with the real number, but 

I would say probably 30 percent. 

Mr. WESTMORELAND. Okay. So it is possible that somebody who 

was not being represented by counsel was actually negotiating with 

an attorney. Is that possible? 

Mr. MILLER. I would venture to say probably not. 

Mr. WESTMORELAND. Okay. 

Mr. MILLER. We generally do not—I can’t speak absolutely, but 

I believe not. 

Mr. WESTMORELAND. Mr. Edwards, the last time we spoke on the 

record, which I think was August 2011— 

Mr. EDWARDS. Yes, sir. 

Mr. WESTMORELAND. —on structured transactions, I asked you if 

it would be best for a managing partner to go to court and obtain 

a judgment and allow the borrower to continue to accrue the interest in the taxes rather than foreclosing and taking the collateral 

first. Your response was that it seemed to be a case-specific situation. 

Do you remember that conversation? 

Mr. EDWARDS. Yes, I do. 

Mr. WESTMORELAND. So my office sent you case after case to 

prove our claim that Rialto specifically is litigating over negotiating. However, your answers are the equivalent of giving me and 

this Congress the finger. 

In your letter to Mr. Scott Leventhal, who will testify later—and 

I hope that all three of you gentlemen will stay tuned and hear 

some of the other side of this story—dated March 27, 2002, you 

said, the FDIC states, ‘‘Although the FDIC holds an equity interest 

in the LLC, such as Rialto, we do not manage or service the assets 

that were conveyed to the LLCs or Rialto itself. Therefore, the 

FDIC is not in a position to control the resolution strategy to loans 

owned by the LLC.’’ 

So you are saying that even though you are a 60 percent partner in the deal, that you have fronted $642 million, that you have no 

say-so in it? 

Mr. EDWARDS. No, I wouldn’t say that. We do exercise an oversight responsibility. But if you look at how and why we put these 

transactions together, it was specifically to make use of the private 

sector’s expertise in working out these credits. 

21 

It would not be a true sale if, in fact, we were involved in the 

day-to-day management of the LLC. And, in fact, that is exactly 

why we created these transactions: so that the government was not 

involved in the day-to-day aspects of those transactions. 

Mr. WESTMORELAND. Are we going to do another round, Mr. 

Chairman? 

Chairman NEUGEBAUER. We are going to try. 

Mr. WESTMORELAND. I yield back, since my time is up. 

Chairman NEUGEBAUER. Okay. Thank you for yielding back. 

Ms. Herrera Beutler is recognized for 5 minutes. 

Ms. HERRERA BEUTLER. Thank you, Mr. Chairman. 

I have a couple of questions. Mr. Westmoreland made a very important point. Now, I understand that you are saying, in concept 

you set up this LLC by way of trying to protect the depositors, and 

you are working with the private sector and they are putting in 

some skin, and it is supposed to work. We are not opposed to that 

idea. The problem is, in practice, we have seen very different 

things. 

I think you have about 150—or had—loans; some were defaulted, 

some were performing. And I have instance after instance after instance of cases—people who did not talk, they were not related— 

I shared my church, they are nonprofits, they are developers, it is 

across-the-board—who have come to me and said, we cannot negotiate in good faith with Rialto, because they will not work, they 

won’t negotiate. I almost laugh to hear you say ‘‘negotiate.’’ It is 

like the bully on the playground coming up to the skinny kid and 

saying, ‘‘Give me your lunch.’’ That is not negotiating. Yes, the kid 

could say no, but he is going to lose his lunch and get a black eye 

anyway. 

So where this comes to you, if you were operating on your own 

with your own capital, you wouldn’t have me here questioning it. 

My problem is when an agency steps in and says to a construction 

loan that is performing, we are not going to extend any more payment to you, and then we are going to sell the loan to a business 

which has over 20 years of experience and understands how to develop this and has unlimited or very—I shouldn’t say unlimited, 

but significant access to capital and a tremendous sweetheart loan 

deal, we have a problem. 

And so, to hear you say that there is a negotiation taking place 

in good faith, I guess that is one thing that I would ask: Is that 

something you are willing to go back on? If I present to you cases, 

probably 80 of them, where people have not been able to negotiate—many of them are in foreclosure at this point or have lost it 

all in bankruptcy—is that something you are willing to work with 

us on? 

Mr. MILLER. Is that for me? 

Ms. HERRERA BEUTLER. Yes, Mr. Miller. 

Mr. MILLER. Yes, thank you for your question. 

We have had numerous inquiries through various Members that 

we have responded to in writing over and over again. And, of 

course, we are always open to and willing to listen to, understand, 

and rethink any program or any negotiation that we have in place. 

The answer to your question simply is, yes, of course we will go 

back, and we want to hear any concerns that people have. 

22 

Ms. HERRERA BEUTLER. Great. 

Mr. MILLER. That is why I am here today. 

Let me just say that it is very important to know that, number 

one, you might only be getting one side of a story. Number two, the 

terms and conditions of loan documents are very clear. The simplest answer is, the borrower is always able to pay off their loan. 

At the end of the day, they are looking for a compromise. And what 

one person might consider responsible or reasonable, another person might say, I need to know the factual landscape. 

Ms. HERRERA BEUTLER. That is fair. And in reclaiming my time, 

part of my concern is, when someone is—by nature of home construction or commercial development, the way that the loan works 

is the money comes in phases. So if the FDIC says, ‘‘Sorry, we are 

going to cut you off, you don’t get to finish it,’’ it makes it very difficult then when you have the new owner of a loan who comes in 

and says, ‘‘We want it all, we want it all now.’’ You are, by definition, picking winners and losers. And the government shouldn’t be 

in that business. 

Mr. Edwards, I have a question. It is kind of a two-parter. Actually, between the two of you, I have heard this now. But, Mr. Miller, your testimony stated that Rialto purchased the 5,500 distressed loans with an unpaid balance of $3 billion with a purchase 

price of 1.2. However, Rialto paid the 250, which is 8 cents on the 

dollar down, and the FDIC picked up the remaining 600-plus million. 

So you put down 8 cents on the dollar, and I have two questions 

with that. First, how were these deals negotiated? And, second— 

perhaps this is more for Mr. Edwards—was the highest bidder really 8 cents? I do have folks in my neck of the words who maybe 

couldn’t have hit the whole 100 percent but they could have hit 60 

cents, they could have hit 80 cents. But was the highest bidder 

really 8 cents? 

Mr. EDWARDS. First of all, I will answer your question on the bidding. These transactions are widely, widely marketed. As I was indicating before, we have a prequalification process. In the case of 

the two Rialto deals, there were 16 bidders and 42 bids on the first 

deal that they bought from us. They were the highest bidder. In 

the second deal, there were 11 bidders and 18 separate bids, and 

they were the highest bidder. This is a very, very competitive process. 

Ms. HERRERA BEUTLER. So 8 cents was the highest bid? 

Mr. EDWARDS. I think the issue here is, what they bid is a dollar 

amount for the percentage equity that they are getting in the LLC. 

In this case, it was 40 percent of an LLC with loans that are worth 

$1.2 billion. They paid— 

Ms. HERRERA BEUTLER. Worth on paper. 

Mr. EDWARDS. No, worth with regard to our financial advisor’s 

estimate, worth $1.2 billion. They paid $243 million for their 40 

percent share of the equity portion of the deal. Fifty percent of the 

deal was debt, 50 percent was equity. 

Ms. HERRERA BEUTLER. So— 

Mr. EDWARDS. So, in other words, yes, they bought— 

Ms. HERRERA BEUTLER. —8 cents was the highest bidder in 

terms of recovering. Okay, so these— 

23 

Mr. EDWARDS. If you look at this as a metric of percentage of 

book value, the 8 cents is correct, but— 

Ms. HERRERA BEUTLER. I have to tell you— 

Mr. EDWARDS. Yes. 

Ms. HERRERA BEUTLER. —one thing I keep hearing is, I ask a 

question and then sometimes it is, with the whole portfolio we can’t 

pick and choose pieces of it. And then I hear, you can’t break it 

down. I keep hearing different points made in response to questions. 

In my mind, we had willing people who could have performed, 

and it was the FDIC who stepped in. And it was one of the first 

banks that went down in our region. Granted, I don’t think you all 

knew what you were doing, and we are bearing the consequences. 

But, with that, we will keep going. Thank you, Mr. Chairman. 

Mr. MILLER. Mr. Chairman, should I answer my portion of the 

question? 

Chairman NEUGEBAUER. I think we are going to try to come back 

around. 

Mr. MILLER. Okay. 

Chairman NEUGEBAUER. We are going to have to vote here in 

just a little bit. 

The Chair now recognizes Mr. Capuano, the ranking member of 

the subcommittee, for 5 minutes. 

Mr. CAPUANO. Thank you, Mr. Chairman. 

And, gentlemen, I am kind of put off on this, because the truth 

is, I have not dealt with this, so this is kind of a new issue to me. 

My office has gotten no calls on this, so I am kind of learning as 

we go along. But I have been listening, and I have read the testimony. And, Mr. Inspector General, I have a couple of questions. 

I believe you said it in your testimony, but you also put it in your 

written statement. You said, according to the FDIC, actions have 

been taken to address the suggestions you made. 

Mr. RYMER. Yes. 

Mr. CAPUANO. Have you not checked with the FDIC? 

Mr. RYMER. No, sir, not yet. We have not completed the audit follow-ups where we would routinely get back to those. 

Mr. CAPUANO. Okay. But you will be doing that? 

Mr. RYMER. Yes, sir. 

Mr. CAPUANO. You have no reason to believe that anything other 

than what they have told you is true? 

Mr. RYMER. Not at this point, sir, but we certainly will verify 

that. 

Mr. CAPUANO. Okay. And when you did your audit, did you check 

any potential conflict of interest on these things? Was that part of 

the audit or no? 

Mr. RYMER. The two we completed, no, we did not, sir. But the 

one we are doing now, the Rialto work, there is a bidding and selection process portion of that audit that will look at that. 

Mr. CAPUANO. Okay. Great. Thank you. And you expect that to 

be done, give or take, in August? 

Mr. RYMER. Yes, sir, late August. 

Mr. CAPUANO. Great. Thank you. 

Mr. Edwards, most of my questions—I was going ask you about 

that 8 cents on the dollar. I think you just answered it as you see 

24 

it. I wouldn’t mind seeing that in writing at a later time, because 

it is hard to follow some of the numbers that get thrown around 

when you are not that familiar with it. So I would like to hear 

about that a bit little more, because 8 cents on a dollar? I am in. 

I have 8 cents. Don’t get me wrong; that is all you are going to get. 

But I will get a buck for it. But I understand that there are differences of opinion, and I would like to follow it a little bit better. 

But I would like to ask you on—actually, I am not sure if it was 

Mr. Edwards or Mr. Miller. I believe one of you, maybe both of you, 

said that of the loans in the package here, 90 percent of them were 

in default. Am I right to believe that most of these loans that are 

in default are construction loans? They are not typical mortgage 

loans, they are loans that are in the middle of construction, so the 

asset you have is possibly a pile of dirt or a hole in the ground? 

Is that a fair assessment or not a fair assessment? Understanding, 

not assessment. 

Mr. MILLER. Sir, if you look at the 5,500 loans, they are a range 

of loans. They are not consumer loans, they are not loans on homes 

that are occupied by families. They are generally either, really, 

land, dirt, or land that is partially developed, homes that are under 

construction, shopping centers, office buildings, warehouses. 

Mr. CAPUANO. That are mostly under construction. So these are 

mostly, for all intents and purposes, construction loans. 

Mr. MILLER. Some under construction. Some of them are completed projects. It is a panoply of property types. 

Mr. CAPUANO. The reason I ask is because—I think the point was 

made—you can’t pay off a construction loan. If you pull a loan in 

a middle of a construction, you just can’t do it. I have had construction loans. They are really just bridge loans until have you an asset 

that you can then take if I ever finish it. So I think that is an important point to make. 

Mr. Edwards, I guess the one question that hasn’t been asked 

that I am aware of is, okay, you have 4 percent of all the assets 

in this. And that 4 percent is based on book value, not actual value, 

and that is fair enough, but whatever, some very relatively small 

percentage. 

Mr. EDWARDS. Right. 

Mr. CAPUANO. There have to be other—or maybe there isn’t—but 

I presume there are other bad loans that don’t go into this 4 percent that you handle another way. And I am just curious, if you 

get rid of the structured asset sale transaction, what do you do 

with these assets? 

Mr. EDWARDS. Yes, thank you for the question. 

With respect to the $670 billion of assets that were from failed 

banks since the beginning of 2008, the lion’s share of those have 

gone to acquiring institutions. In the instances where we cannot, 

as I described earlier, where we cannot pass those to acquiring institutions with or without a loss share agreement— 

Mr. CAPUANO. Hang on. 

Mr. EDWARDS. Yes. 

Mr. CAPUANO. I need to hear it in English. So I am going to 

translate for you, and tell me if I am right. 

Mr. EDWARDS. Yes. 

25 

Mr. CAPUANO. Bank ‘‘A’’ fails. You want to sell most of bank ‘‘A’’ 

to bank ‘‘B.’’ 

Mr. EDWARDS. Absolutely. 

Mr. CAPUANO. You go to bank ‘‘B,’’ and bank ‘‘B’’ says, ‘‘Wait a 

minute. I will take it, but I don’t want these 200 loans.’’ 

Mr. EDWARDS. Correct. 

Mr. CAPUANO. ‘‘These are no good. I don’t want them. I will take 

everything but those 200 loans.’’ 

Mr. EDWARDS. Yes. 

Mr. CAPUANO. Okay. 

Mr. EDWARDS. Yes. And then once we get those loans, by definition, since the bank fails and there is no acquirer, we have to start 

working them ourselves. 

And as I suggested, there is a percentage that we end up just retaining in the portfolio and working out. In other instances, we 

work them for a while and then put them into these Structured 

Transaction Programs. There are also instances where we can, 

mostly with performing loans, put them into securitizations. 

Really, the only other alternative is you sell them for cash. The 

whole reason that we are doing this program is because cash sales 

in a distressed market right out of the bank get incredibly low bids. 

As a matter of fact, early in the crisis, we did put some of these 

loans in a standard whole loan sale package, and the prices that 

we got were very low. 

Mr. CAPUANO. Have you or Mr. Rymer or anyone else, have you 

done maybe a comparison, for the sake of discussion, take 200 of 

these exact same loans that maybe you did just spin them out right 

away, take the loss up front, versus the ones you have held? I am 

just curious. Your point makes sense to me, but is there any statistical analysis to back that up to say generally that is correct? 

Mr. RYMER. Sir, in my statement, we identified an audit that we 

have yet to do but that we certainly plan to do. And that is, if you 

go back to the $668 billion in total that has passed through the resolution process, there are three or four different resolution methods 

that have been used principally, and the most popular one is the 

purchase and assumption through a bank. Then, there are the loss 

share agreement arrangements. And then at the end, the smaller 

piece is the one we are talking about today, the structured asset 

sales. 

I believe it is very important for an independent assessment of 

the value of those three resolution methods to be compared to each 

other, and to consider the risk associated to the FDIC and certainly 

the risk or potential damage or harm that may be happening in a 

particular market— 

Mr. CAPUANO. And you plan on doing that, Mr. Rymer? 

Mr. RYMER. Yes, sir, we do. 

Mr. CAPUANO. When you do that, I presume—again, the different 

approach is one thing. But as it was explained, as I heard it anyway, one method is all the so-called good loans and the other method is all the so-called bad loans. I am sure you do, but I need to 

make sure of it: You are going to be doing apples to apples. Comparing the return on value for a bad loan to a good loan, very interesting but it doesn’t help. I am sure I know the answer, but I need 

to ask. 

26 

Mr. RYMER. Yes, sir. The point we would make is that for like 

collections of assets, we would do a comparison. 

Mr. CAPUANO. Thank you. 

Mr. EDWARDS. I think it would be helpful if I just add one point. 

Early on in the crisis, as I indicated, we tried to do cash sales; the 

prices were just very, very low. At this point in the crisis, as we 

market LLC transactions, we market them both as an LLC transaction and as a whole loan sale. If the whole loan sale price is better, we take that, because the market has now recovered. And, in 

fact, we had a transaction with some hotel loans last year, and that 

is exactly what happened. 

Mr. CAPUANO. Thank you. 

Thank you, Mr. Chairman. 

Chairman NEUGEBAUER. I thank the gentlemen. 

I am going to do a very quick lightning round. I am going to give 

Mr. Westmoreland 2 minutes, and I am going to hold him to it. 

So, you are recognized for 2 minutes. 

Mr. WESTMORELAND. Thank you, Mr. Chairman. 

I would like to ask unanimous consent to I submit for the record 

a letter from American Land Rights and any attached material 

submitted by borrowers whose loans have been transferred into one 

of these LLCs; a letter from Merolla & Gold, LLP; and a letter from 

Tom Carson, a doctor of appraising, really. 

Chairman NEUGEBAUER. Without objection, it is so ordered. 

Mr. WESTMORELAND. Mr. Edwards, did you go to—or did anybody 

go to any of the specific borrowers and say, if you can come up with 

8 percent of what the loan is, we will give you a loan for the remainder of it, we will be a partner with you at 60 percent, and we 

will give you 7 to 10 years to do this, and it will be at no interest 

and there will be no recourse to you? Did you give any of those borrowers that opportunity? 

Mr. EDWARDS. No, we did not. What we do— 

Mr. WESTMORELAND. Do you think any of those borrowers would 

have taken that opportunity? 

Mr. EDWARDS. I am certain they would have. But I will tell you— 

Mr. WESTMORELAND. Me, too. 

Mr. EDWARDS. —what we do when a bank fails is, when an asset 

is put into a receivership because we haven’t been able to pass it 

to an acquiring institution, we will work with the borrower. If they 

give us their current financial statements and we are able to get 

an appraisal on the collateral, we will try and do some kind of 

workout with them before we even put these loans in a structured 

sale. It is a 6- to 9-month period, generally, before that happens. 

So we do work with these borrowers. 

Mr. WESTMORELAND. You were at the hearing that we had in Atlanta, and Mr. Miller. We had it at noon in Georgia, and we had 

people from Washington State, California, Nevada, Texas, Florida, 

and New Jersey who came, who had problems with Rialto. There 

was not one mention of Starwood, Four Squared, Colony, or anybody else. These people traveled on their own dime to come to that 

hearing. 

That is just one side of the story, and I can’t wait to get yours 

on some of these other things. But that is a problem, when you 

27 

have people traveling across the country just to come to a hearing 

at which they are not even going to get to testify. 

Mr. Edwards, I just find it very, very troubling that the FDIC 

has not done more to make sure that at least some of these people 

have an opportunity to have the same deal you are offering other 

folks. That just makes sense. 

And, with that, I yield back. 

Chairman NEUGEBAUER. I thank the gentleman. 

The gentlewoman from California is recognized for 2 minutes. 

Ms. WATERS. Mr. Chairman, I think that what the FDIC is hearing today is our dissatisfaction with the way that they are disposing of these assets in one or two or three different ways. 

Mr. Miller, you have the ability, in negotiating with these borrowers, to decide whether or not you are going to demand a payoff, 

whether or not you are going to do a loan modification, or what 

have you. We have been going through this on housing, and so we 

are very concerned about the way loan modifications work or don’t 

work. And we have been trying to keep people in their homes. 

And while we understand that you have to get the most you can 

get for these assets—that is kind of dictated to you—we want some 

balance. And we want you to be able to sell these assets and make 

a reasonable return on the sales. But we also want to keep these 

businesses and we want to give people an opportunity, rather than 

taking what they have invested in and giving it to somebody else 

for the 8 cents on the dollar that you have been hearing. 

So do you hear us, Mr. Edwards? 

Mr. EDWARDS. Yes, we do. And believe me, we are very concerned 

about how this impacts communities and borrowers. As you just 

pointed out, we have a statutory duty under our enabling legislation to maximize the recovery of these receiverships. The structured sale transactions, as I pointed out in my oral and my written 

testimony, under best estimates have netted the receiverships over 

$4 billion more than just a straight cash sale. 

I will tell you this, to anybody on the committee: We have said 

and we will say again, if there are individual fact-specific borrower 

issues that you would like to bring to our attention, we spend a lot 

of time looking through those complaints and trying to make sure 

that our partners have not violated the LLC agreements in any 

way and are acting in a respectful and businesslike manner. 

Ms. WATERS. Mr. Chairman, may I—Mr. Rymer, do you audit the 

negotiated arrangements with the borrowers that Mr. Miller is 

doing, and if so, are you able to determine whether some are more 

favorable than others or what have you? Do you audit that? 

Mr. RYMER. No, ma’am, we have not. 

Ms. WATERS. How do you know what he is doing? 

Mr. RYMER. We audited his compliance with the terms and conditions of the contract. That report is not complete, ma’am, but it is 

expected to be finished in August. 

But I can tell you that the objective of that audit was to audit 

his compliance with the terms and conditions of the contract, to 

audit the FDIC’s oversight of that contract, to audit the bidding 

and selection process that Rialto went through to— 

Ms. WATERS. That is not what I am talking about, and I will cut 

you off. My time is up. 

28 

Would you make sure that we get a copy of that report? I want 

to take a look at what has happened to all of these negotiations. 

Chairman NEUGEBAUER. Absolutely. We will get those, and we 

will ask the FDIC to furnish us a copy of that report. 

Going to go back to a lightning round. Ms. Herrera Beutler? 

Ms. HERRERA BEUTLER. All right, lightning, I am going to speak 

fast. Thank you, Mr. Chairman. 

I understand, Mr. Miller, Lennar is not actually—legally allowed 

to buy land acquired by Rialto in this agreement. However, Lennar 

has recently decided to begin buying land and building homes in 

southwest Washington, in the same area in which Rialto owns 

huge amounts of undeveloped land that remains deadlocked. 

Can you explain this decision? Are there laws prohibiting Lennar 

and Rialto from discussing the loans and the land that they own? 

Meaning, you have access to competitors, other developers; you 

have their financials, basically. Can you share that information? 

And, further, what is to stop Rialto from sitting on the undeveloped 

land to jack up the price of development Lennar is planning? 

Mr. MILLER. Thank you for your question. 

Boy, there are so many things. I feel like I am sitting here as 

a villain, and I don’t get to answer any of the questions. Let me 

say— 

Ms. HERRERA BEUTLER. To a lot of broken homes in my neck of 

the woods, you are a villain. And that is not my personal—but I 

have a lot of broken homes. 

Mr. MILLER. Thank you. I understand that, and we remain sensitive to that in our offices every day. We are engaged to do a business that is difficult, and sometimes it is a little bit—it is adversarial and uncomfortable. And there is no question about that. We 

are very sensitive to that. We recognize the landscape. 

I have to start by answering the question and telling you, we did 

not pay 8 cents for these loans. 

Ms. HERRERA BEUTLER. Okay, that is not my question, Mr. Miller. And I have a very limited amount of time. It is more specific 

to Lennar and Rialto, the land that is held, the information that 

is shared, and the financials. 

Mr. MILLER. Okay. 

Ms. HERRERA BEUTLER. And you can provide the rest in writing, 

as far as the 8 cents. I am happy—we will all continue the dialogue. 

Mr. MILLER. Thank you. 

We have to recognize that Lennar put $250 million of cash that 

sits behind the loan and comes out pari passu with money to the 

FDIC. We do not play games for our homebuilding business or anything else by investing in loans in any area of this country. Our 

homebuilding operation enters various areas of the country having 

nothing to do with the activities of Rialto. 

Ms. HERRERA BEUTLER. Reclaiming my time, I actually find it interesting that when Clark County was the largest and fastestgrowing county in the State of Washington, Lennar wasn’t there. 

Every homebuilder in, like, the west coast was there, but Lennar 

wasn’t there until everything went down. And there are these holdings by a company that isn’t the same but they are cousins, so to 

speak. 

29 

Mr. MILLER. At that time, it was not economically feasible when 

prices were high and it was very difficult for us to enter that market. We are entering that market for different reasons. 

Yes, we have loans in the Rialto portfolios and the FDIC portfolios in those areas. Understand that every time we end up 

through Rialto taking back a piece of land and unfortunately taking it back from one developer, we cannot sell that land to our 

homebuilding operation and don’t intend to— 

Ms. HERRERA BEUTLER. I understand that. 

Mr. MILLER. But we are enabling a competitor, another home 

builder, to build on that piece of land at a lower basis. So we are 

actually invigorating the economy by putting the land in someone 

else’s hands. We are not holding these tracts of land for some future date or for some other reason. 

Ms. HERRERA BEUTLER. And there is no financial information 

that is shared between the two on the land that is held, financials? 

Mr. MILLER. Recognize—there is no financial information that is 

shared, nor would it matter. Remember, our financial information 

as a public company is available to everyone. There are no trade 

secrets in that. And we certainly don’t seek financial information 

on any of our competitors, either through loans that we have or 

through other means. 

Mr. RYMER. Ma’am, if I could quickly tell you that in the audit 

we are doing now with Rialto, we are paying particular attention 

to the controls over transactions with affiliates. That is an audit 

step that will be in the audit report that you should expect later 

this summer. 

Chairman NEUGEBAUER. I want to thank our witnesses. I appreciate your testimony. 

The Chair notes that some Members may have additional questions for this panel, which they may wish to submit in writing. 

Without objection, the hearing record will remain open for 30 days 

for Members to submit written questions to these witnesses and to 

place their responses in the record. 

With that, this panel is dismissed, and we will call up the second 

panel: Mr. Scott Leventhal, president of Tivoli Properties, Inc.; and 

Mr. Edward Fogg, owner of Fogg Construction Company and Fogg 

Mortgage Company. If you would take your places, please. 

We are trying to get these opening statements as quickly as we 

can. We think there are going to be some votes here in a while, and 

it will be a fairly lengthy vote. 

And so, with that, Mr. Leventhal, thank you for being here. You 

are recognized for 5 minutes to summarize your written testimony. 

STATEMENT OF SCOTT L. LEVENTHAL, PRESIDENT AND CHIEF 

EXECUTIVE OFFICER, TIVOLI PROPERTIES, INC. 

Mr. LEVENTHAL. Thank you, Mr. Chairman, and members of the 

subcommittee. My name is Scott Leventhal. I am the president and 

CEO of Atlanta-based Tivoli Properties, Inc. Tivoli is a developer 

of high-rise condominiums, apartment projects, mixed-use projects, 

subdivisions, both in-fill subdivisions, lifestyle communities, and 

entry-level communities. 

I appreciate the time to speak to this committee and would note 

that we are all here today because the world has been turned 

30 

upsidedown. And by turning the world upsidedown, there is obviously some fallout and things that should be reviewed and addressed. 

As an Atlanta-based developer, I am particularly affected by the 

fact that Georgia has seen more bank closures than any other State 

in the country. For me, that has resulted in multiple banks being 

closed, the assets of those failed banking institutions being transferred through whole bank purchasing assumption agreements 

where the FDIC will backstop the losses sustained on those loans 

through a loss share, through structured transactions with private 

partners, multiple partners, as well as directly liquidated to private 

investors. 

The subcommittee and the prior witnesses talked previously 

about the methodologies and how these loans are liquidated and 

transferred, and it is important that we do analyze that. 

The whole bank purchasing assumption is a situation where the 

FDIC is capable of taking all the assets of a failed banking institution and transferring those assets to a financially solvent institution. That institution doesn’t get to choose the good or the bad. 

They take the loans, they work the loans out. The loans that are 

unable to be sold through a whole bank purchasing assumption end 

up in these structured transactions. 

The primary difference between these two methods of liquidation 

is that when a bank fails and an acquiring bank purchases the assets, the borrower is dealing with the bank. When a bank fails and 

the FDIC is incapable of selling those assets to another acquiring 

bank, they end up in the hands of a private partner, and in most 

instances that private partner is a direct competitor of the borrower. 

These structures provide, as previously discussed, management 

fees to be paid on the unpaid balance of the loans. They also provide for interest-free financing for a significant term. 

Further, something that has not been addressed in this hearing 

is that these structures actually have a disincentive for the private 

partner to perform. Meaning that for the private partner to liquidate the assets in the structured transaction, they will get to a 

point where the profits that are being split between the private 

partner and the FDIC will actually increase to the FDIC and decrease to the private partner, thereby diluting the amount of asset 

management fees that are available to be collected. If you have 7 

years, why finish anything? Why liquidate? Why deal with it? 

Another matter which has been touched on today is, when a 

bank fails and the FDIC comes in and takes over the assets of the 

failed institution through a receivership, and elects to not fulfill the 

obligations that are required under the loan agreement, that issue 

has a very specific legal term; it is called repudiation. 

Now, the consequences of repudiation are very significant. In 

many instances, borrowers have borrowed moneys for the purposes 

of construction projects. Depending on what point in time the assets or the bank fails, that borrower may be subject to repudiation. 

And the FDIC, because of other problems the bank may have, will 

elect not to proceed forward. Many borrowers around the country 

are facing this issue, and it is resulting in very dire consequences 

and dire situations. 

31 

Now, the acquiring bank or the private partner through the 

structured transaction also then has the opportunity to pursue the 

borrower, pursue the guarantor for the full amount that has been 

drawn, except for the lender failed to perform. They repudiated. It 

is interesting that the rules are written in pencil in some instances. 

I think that the subcommittee should take consideration of the 

fact that structured transactions are important. They are important to the FDIC’s ability to liquidate assets. But what we need to 

do is we need to resolve the issue where direct competitors are 

coming in and they are being given access to private borrowers’ financial information. It creates an unfair advantage, particularly 

when the Federal Government assists and is driving competition 

out of the marketplace. 

Tremendous litigation is ensuing around the country; and while 

many borrowers have the right under the Federal Bankruptcy Code 

to seek some sort of debtor protection, they should not be forced to 

if the opportunity exists to work those loans out. 

I am moving very quickly. I have one last point, Mr. Chairman, 

if you would allow my indulgence. I see the clock has changed. 

It is very important that we recognize that in a lot of litigation 

which is going on around the country, while structured transaction 

partners are seeking to recover and get judgments on the obligation, meaning the note and the guarantee without first foreclosing 

on the property or the collateral that secures the loan, you see communities all over, particularly in Georgia, wasting. And that means 

that the surrounding properties have severe effects from the fact 

that the neighboring property is just wasting away because a dispute is going on between two different parties and it is unrelated. 

So Mr. Jones, who lives in a home that is right next door to a 

partially developed house or partially constructed house where the 

FDIC has come in and repudiated the loan, a successor has then 

come in and wants to litigate for the amount of that debt, that 

homeowner living next door’s appraised value has declined. They 

can’t get new financing. That borrower is now upside down. 

[The prepared statement of Mr. Leventhal can be found on page 

91 of the appendix.] 

Chairman NEUGEBAUER. I thank the gentleman. 

Mr. Fogg, you are recognized for 5 minutes. 

STATEMENT OF EDWARD L. FOGG, OWNER, FOGG 

CONSTRUCTION COMPANY AND FOGG MORTGAGE COMPANY 

Mr. FOGG. Good afternoon, Chairman Neugebauer, and members 

of the subcommittee. 

My name is Ed Fogg, and I am grateful to be here. I would have 

never in my wildest dreams believed that my company’s ultimate 

failure would come directly from the governmental policy of the 

FDIC and the partners they selected— 

Mr. WESTMORELAND. Mr. Fogg, would you speak into the microphone? 

Mr. FOGG. Yes, sir—only because my bank failed. My story is not 

one of a borrower who gave up and walked away from any of his 

obligations. I am not a borrower who took out loans with a bank 

with no intention of paying them back. 

32 

In late 2008, the Bank of Clark County approached me to purchase some of their distressed properties and develop rental homes. 

We closed our last construction loan on Christmas Eve, 2008, and 

the bank failed 23 days later. 

Without any of the promised help from the FDIC, I still completed my construction projects out-of-pocket and paid every subcontractor. All of our loans were current at the time of the bank 

failure. 

I am one of the many borrowers whose loans were repudiated for 

no good reason, and this has created my problems. I am sure you 

know that when a loan is repudiated, it requires me to hold up my 

end of the deal, but the FDIC does not have to the hold up the end 

of the deal of the failed bank. In my case, it did not fund approximately $650,000 of the original loan commitment. To many small 

businesses, this is devastating. 

Put yourself in my shoes. Your bank just failed, the FDIC says 

there are no funds available to complete your project, and there is 

no construction financing in 2009. But, today, I really feel I am 

here to represent the little guy who unfortunately just banked with 

the wrong bank, and then eventually our loans were sold into some 

sort of structured transaction. 

I heard Ms. Sheila Bair speak about the responsibilities of the 

American public to make their mortgage payments. I have done 

this, and it has really meant nothing. 

I have also read the FDIC book called, ‘‘Managing the Crisis’’ and 

the clear message is that the FDIC recognized in the past the need 

to protect and not hurt communities by not cutting off credit to 

businesses and to work with the local communities. I hope in the 

future, they emphasize these actions once again. 

I do believe the FDIC needs to recover as much money as possible to reimburse the American taxpayer, but it should never be 

done by creating further economic harm in the communities where 

they have unfortunately closed banks. Structured relationships 

with the FDIC need to be much more careful in selecting their 

long-term partners. The partners’ goals should not be to become 

the prize of Wall Street but the solution for Main Street. 

The FDIC’s partnership with Rialto/Lennar was tricky from the 

beginning. All of the loans were basically primarily construction 

loans, land development loans, and it is obviously the same line of 

work that their parent company Lennar is in. Unfortunately, what 

incentive do they have to work out the problems of their competitors? It doesn’t make much sense to hire someone that is your direct competitor to try to help you fix your problems. 

In my case, with Rialto, we never had missed any sort of payments on any programs, even after they repudiated our loans and 

we had to come up with the $650,000 out-of-pocket. They eventually negotiated four different settlements with us, but every time, 

they would back out of the settlement. When they finally did offer 

me a settlement, they told me to pay my upside down home off 

completely or they would foreclose on me. 

But they did come back with another option. They offered me a 

rate of 8 percent with a $10,000 up-front loan fee on a $250,000 

loan. It took me a year-and-a-half to negotiate this loan extension, 

and the only extension they would give me was for an additional 

33 

year-and-a-half. I am a mortgage broker, and if I had offered this 

to one of my clients it would have been conceived as predatory 

lending, as the APR in this loan is 38 percent. 

Also, with the attractive financing the FDIC has offered their 

partners, it should be able to be passed along to the so-called experts of the community. 

We understand what is in our projects. None of us went into 

these loans with the idea of not paying them back. We are experts 

in our local markets. We are experts in the product that we are 

putting out there. And we alone should be allowed to try to work 

with the FDIC to maximize the return to the American taxpayer. 

None of us wants to see our projects fail or not succeed. 

The problem also isn’t just with structured transactions. I have 

five loans with another bank called Frontier Bank. It was acquired 

by Union Bank of California. We worked for years and years to 

come up with a long-term solution and provided thousands of pages 

of income documentation and assets. We finally did receive a denial 

for our modification from this bank a few months ago, and the most 

amazing part about our denial is they actually mailed the decline 

of my modifications to a friend of mine’s P.O. Box. Union Bank 

cared so little that they could not even get my address right. The 

FDIC should be disgraced by the actions of this partner. 

We, the borrowers, did not go into these banks with the goal of 

defrauding them or not paying them back. I truly believe that 

given the time and acceptable terms, the FDIC would recover much 

more money and not force borrowers like myself into bankruptcy or 

foreclosure. 

I thank you for letting me be here. 

[The prepared statement of Mr. Fogg can be found on page 63 

of the appendix.] 

Chairman NEUGEBAUER. I thank the gentleman. 

We now have votes, and so I am going to recess the hearing until 

after this series of votes. 

With that, we are in recess. 

[recess] 

Chairman NEUGEBAUER. The committee will reconvene. 

We will go to questions with Members, and I will recognize myself for 5 minutes. 

Mr. Leventhal and Mr. Fogg, you know the basics of why FDIC 

is doing these structured transactions. There has been a pretty unprecedented amount of bank closures over the last few years, taking on a lot of assets. Some of these assets the acquiring banks 

don’t want to take on, and you are familiar with that. Tell me what 

you would change about the way the FDIC is handling the structured asset program? 

Mr. LEVENTHAL. Thank you, Mr. Chairman. 

As I mentioned earlier, the Structured Transaction Program is 

an important tool for the FDIC to be able to liquidate assets, and 

it is very sensible that the FDIC goes into partnership with private 

partners who are experts in the field. It would not make sense to 

get someone who is not an expert. 

I think that the primary issue that needs to be addressed is that 

borrowers should have an expectation that they are doing business 

with banks. Banks operate in a manner that borrowers are accusVerDate Nov 24 2008 13:11 Dec 04, 2012 Jkt 075733 PO 00000 Frm 00039 Fmt 6633 Sfmt 6633 K:\DOCS\75733.TXT TERRI
34 

tomed to. If we could divest the obligations of some of these individual borrowers in these structured transactions before they are 

entered into, where the private partner comes in and they acquire 

all the assets and they take the skill set they have and the assistance they are getting from the FDIC to be able to improve on the 

assets, I think that a structure could come about that would result 

in one, a better financial reward to the FDIC, and two, an improvement within local economies. 

Chairman NEUGEBAUER. Mr. Fogg? 

Mr. FOGG. Why does the FDIC think that for their 40 percent 

stake in the deal, they are actually getting a better deal than working with the local communities? Why is somebody like Rialto more 

of an expert on my project than I am? Why do they have to go out 

and hire somebody to try to liquidate it, to try and recover, when 

I obviously have a vested interest in getting through it? 

We didn’t go into these transactions trying to commit fraud. We 

went into them to try to make money for our families. 

So by the FDIC putting them in a big structured transaction, hiring some guys from who knows where in the country, how are they 

more of an expert on my piece of property or my particular grocery 

store or high-rise building than I am? All they do is they go out 

and, after they get the property, they come back and hire other 

people from our community to be their so-called experts when we 

were there to begin with. 

Chairman NEUGEBAUER. So you heard the FDIC say that there 

is a transition period between the time when they acquire those assets and when they put them into the structured transaction. That 

period of time is in the neighborhood of 9 to 12 months. In your 

own experience, Mr. Leventhal, in that 12-month period before 

your loans were put into the structured transaction, tell me a little 

bit about your dealings with the FDIC. 

Mr. LEVENTHAL. Thank you, Mr. Chairman. 

First, I think I would be remiss if I didn’t let this committee 

know that I have been very fortunate, and I have recently settled 

my disputes, which I had one with Rialto. I have had other matters 

with other structured transactions which have not resulted in any 

poor experiences for me. 

And I can say that my experience with the FDIC may be a little 

bit surprising, but during the term of receivership, I worked well 

with them. Unfortunately for me, during the term of receivership, 

which I believe was approximately October or the fall of 2009 for 

about 10 or 12 months, we were facing one of the worst real estate 

recessions this country has ever seen. And the FDIC’s willingness 

to compromise with me did not lead me to have the ability of raising the necessary capital to come in and acquire and resolve it. But 

I did have a very pleasant experience with the receiver during that 

time period. 

Chairman NEUGEBAUER. So while they were cooperating with 

you, you were in a market where going out and getting additional 

financing to take that loan out was not available to you? 

Mr. LEVENTHAL. Capital was completely scarce, in particular for 

the type of property that was the subject of that loan. It just was 

not available. And it still in large part is not available. 

Chairman NEUGEBAUER. Was that a condo project? 

35 

Mr. LEVENTHAL. No, the FDIC receivership and Rialto transaction were an anomaly for the business I am actually involved in. 

It was a suburban townhome project. I had acquired the property 

because it was all presold to a major national builder. Three weeks 

after I bought the property, the builder canceled on it, terminated. 

And that is where I think the Lennars of the world would have an 

opportunity of creating value in partnership with the FDIC. 

Chairman NEUGEBAUER. All right. Thank you. 

I now yield to the ranking member, Mr. Capuano. 

You pass? 

I will go to Mr. Westmoreland. You are recognized for 5 minutes. 

Mr. WESTMORELAND. Thank you, Mr. Chairman, and thank you 

for doing this. And I want to thank Mr. Edwards from the FDIC 

for sticking around. 

Mr. Leventhal, when did you have a settlement with Rialto? 

Mr. LEVENTHAL. The settlement has occurred within the last 7 

days. 

Mr. WESTMORELAND. Okay. 

And, Mr. Fogg, did you have any instances where you had some 

houses—were you in the residential business? 

Mr. FOGG. I am a residential contractor. But I also build a number of rental properties and maintain those and keep those. 

Mr. WESTMORELAND. Did you have any projects that were maybe 

partially completed when the bank failed and you could not continue on with the construction? 

Mr. FOGG. I would like to also answer the chairman’s question 

with this, because it kind of ties together. 

The bank had approached me to purchase their distressed properties to build rental housing, because we were experts in that 

arena, to get them off their books. The bank failed 23 days later. 

We had purchased the land, bought the permits, and put the foundations in. And at that point, we met with the FDIC when they 

called us in on the weekend. They said, please come in on Monday 

morning and talk to us. It is a pretty unpleasant surprise when 

you sit in their meeting and they have an armed guard sitting next 

to you. It is not exactly what you expect from your financial institution. 

They asked me to provide them with a business plan of what I 

wanted to do to work out the problem. Being in a situation I could 

not fail, because obviously I have a lot of other real estate assets 

going on, I came up with a plan where I had loans of approximately 

$285,000 a unit. My plan was, okay, you don’t need to give me 

$285,000; I will do $200,000 a unit. 

The contractor at that time thanked me for the plan and said it 

is the best business plan that they had ever written. Please proceed. 

I never got anything in writing. I am an honorable guy. So I took 

my own funds and any money I could scrape up to complete my 

project. 

At the time of completing the project, I brought them lien releases, paid bills, you name it. And at the end of the day, the FDIC 

contractor said, I am sorry, there is someone at the FDIC who, unfortunately, has made the business decision to not honor their 

36 

funding commitment. I didn’t have anything in writing; shame on 

me. 

During that period of time, we constantly talked to them. I 

talked to them 2 or 3 times a week, trying to see, who do I speak 

with? How do I resolve this? I have other unresolved issues. And 

they always led me down the path. They led me down the path 

every single time. 

Mr. WESTMORELAND. This was the FDIC? And was it a branch 

or was it the FDIC in D.C. or— 

Mr. FOGG. When you deal with the local contractor, they are not 

actually—I guess— 

Mr. WESTMORELAND. This was an FDIC contractor? Somebody 

the FDIC had contracted with? 

Mr. FOGG. It was called Quantum Services—Quantum Investments—or whatever they wanted to call themselves. But they are 

the figurehead or the face of the FDIC that you meet in your local 

community. 

Mr. WESTMORELAND. Okay. 

Mr. FOGG. You never get a chance to speak to anybody actually 

at the FDIC. 

Mr. WESTMORELAND. Mr. Leventhal, do you know of any—and I 

know you dealt with Starwood, I think. Is that not true? 

Mr. LEVENTHAL. Yes, sir. 

Mr. WESTMORELAND. And that was a pretty decent experience 

there? 

Mr. LEVENTHAL. No. I lost a great building that I had constructed. I turned it in from a condo project. It was at the worst 

time to have built a condo project. Made it a hundred percent cash 

flowing building at 90 percent occupancy. 

Starwood had a great deal. They came in and they foreclosed out the building because the building that I spent $51 million building 

was not even worth $29 million. That is a really staggering thought 

when you consider it. And I had investors that lost upwards of $15 

million in the transaction. 

Personally, it wasn’t a bad experience. It was a nonrecourse loan. 

I wasn’t made to suffer, as some debt collection efforts would. And 

Starwood has since come in and they have taken back lots of collateral. And Atlanta is now in a good position because condominiums 

have sold so much that it almost makes sense to build another 

condo building—almost. 

Mr. WESTMORELAND. One last question. Are any of you familiar 

with any subdivisions that were halfway completed or developed, 

say that phase one was finished and sold out, had 22 homes in it 

or whatever number, phase two was being developed, and all of a 

sudden the bank went out of business financing it, and the FDIC 

sold that to a structured loan agreement, and they couldn’t work 

it out or sued immediately and it sat there? And the 22 finished 

houses suffered the loss—or at least the previous homeowners were 

suffering a loss for their equity and their investment. 

Mr. FOGG. I own those homes. I purchased a property from the 

Bank of Clark County, built those homes out-of-pocket, as I said. 

And then within the same subdivision, there were probably 5 or 6 

other bare lots, half-finished houses, holes cut, overturning weeds, 

houses turned into drug houses. 

37 

I am a direct victim of that in my unfortunate situation of the houses that I spent $285,000 to build are not worth that due to the 

fact that they let this property languish. 

And if you drive anywhere within Clark County, you are going 

to find subdivisions car-high in weeds. It is a bad situation for a 

lot of guys. 

So, yes. Personal knowledge? I own those subdivisions. I own the 

homes in those subdivisions. 

Mr. LEVENTHAL. I drive past many of them in Georgia. 

Chairman NEUGEBAUER. The gentleman’s time has expired. 

Ms. Herrera Beutler is recognized for 5 minutes. 

Ms. HERRERA BEUTLER. Thank you. 

I am glad you asked that question, because I wanted to reiterate 

that it is not that you got out over your skis. You did it in good 

faith, you put your own money up, and then the FDIC was the one, 

from my understanding, that came in and said, okay, that is not 

a deal. 

So one of the things that I heard Mr. Edwards talk about was 

that period of time, the transition period. And I understand that 

during our transition period in some of the cases I have worked 

with people were getting good back and forth, there was a negotiation taking place, and people—borrowers actually felt like they 

were in a good place. But then they made the sale, and those deals 

were all null and void. If they weren’t completed before it went to 

Rialto, whatever the FDIC had negotiated was voided. 

But it sounds like in your case Quantum told you— 

Mr. FOGG. Yes. 

Ms. HERRERA BEUTLER. —before— 

Mr. FOGG. We have lots of different issues. 

So the first thing is, yes, Quantum did tell me that they would 

have no problem getting the approvals from the FDIC for me to get 

a reduced amount of funds to finish my construction project. When 

that didn’t happen, obviously, I spent hundreds of phone calls and 

meetings with those contractors to try to resolve something. The 

gentleman at the FDIC I think felt so bad at the end, or the Quantum, of unable to resolve anything with the FDIC that they actually, on one of my notes at the time of being prepared for sale to 

Rialto, they actually prepared a 1-year extension on one of my 

notes that had matured so that I would have adequate time to 

hopefully work with Rialto. 

When my attorney and I brought that note to Rialto, Rialto’s response was, that note is not signed. That is not valid. You are in 

maturity default. 

I am like, I have gone this far. Do you really believe that I would 

fake a note from the FDIC to try to gain a six-more-months extension? 

The only reason we had done it at that time was so that once 

we did get somebody in place that could hopefully make some sort 

of a decision to help us get through these assets, we would be able 

to show we were still in good standing. Because we had never 

missed a payment on one loan at that time. 

Ms. HERRERA BEUTLER. This brings me to the point—from your 

first to final communication with Rialto, the first one that you got, 

was it a letter saying that you cannot use a lawyer? Were those 

38 

precondition notices that they sent out? Was that how they started 

it with you? Or were you already in that? 

Mr. FOGG. It has been so long ago on that. The only thing I remember from those conversations was I was supposed to sign a 

pre-negotiation agreement that said I could not bring any legal action against them for any reason. They wanted, obviously, all my 

financial data and all my documentation. But that was kind of the 

first hello, I am your lender, give me all your information. That 

was basically it. We never signed the agreement. At that point, I 

felt I wasn’t going to sign my rights away in the beginning. 

Ms. HERRERA BEUTLER. Very good. 

With that, I yield back. 

Actually, if I could ask one more quick question? 

Chairman NEUGEBAUER. Sure. 

Ms. HERRERA BEUTLER. Thank you, Mr. Chairman. 

In meeting with some folks—and I will say this is more for the 

record—I have had a number of folks who were in similar situations in our area who will not—do not want me to use their names 

or their companies, because they are terrified of repercussions, because Rialto now owns part or all of them, and they don’t want to 

go on record. 

But I have had them talk to me, and one of the ones brought up 

the question of—and I don’t know if you can even answer this question—two Quantums. There is a Quantum contractor through the 

FDIC, but I believe there is another Quantum that is in or a subsidiary of Rialto. And there is confusion. The borrowers don’t know 

who they are talking to. Can you bring— 

Mr. FOGG. Yes. Initially, when the FDIC closed the bank, they 

brought in Quantum—I don’t know—Quantum somebody. And 

their job was to unwind the operations of the daily bank who collects your information and gets your loans off to whoever at the 

FDIC. 

When Rialto took over the loans, they hired a company called 

Quantum Servicing, and they are the ones who are supposed to do 

your payment processing of your checks. I would say it is probably 

one of the poorest organizations I have ever dealt with. I had never 

missed a payment to those guys, until, unfortunately, we had to file 

Chapter 11 last week. But they could not track your payments. 

They didn’t have billing statements. 

So there are two distinct Quantums, and neither of them are 

very good. 

Ms. HERRERA BEUTLER. Thank you. I yield back. 

Chairman NEUGEBAUER. Thank you. 

And I thank the witnesses for coming. I think we had two good 

panels. 

My takeaway is that, while this process probably has some merit 

to it and it is helping work through a tremendous amount of inventory, we have heard concerns. We have folks from the FDIC who 

stayed over, and we appreciate that. Hopefully, they are listening 

to those concerns. 

And the Inspector General is doing an audit and has done an 

audit. I think we will want to review the findings of that. 

39 

It is unfortunate that we had these kind of market conditions 

that created the need for these kinds of activities. But we appreciate the thoughtful testimony that the witnesses gave. 

If there are no other— 

Mr. WESTMORELAND. Could I ask one question? 

Chairman NEUGEBAUER. Yes. 

Mr. WESTMORELAND. Mr. Fogg, could you furnish a letter for the 

record of the first letter you received? Do you still have that? 

Mr. FOGG. I am sure my attorneys have it. 

Mr. WESTMORELAND. Okay. 

Mr. FOGG. I can get that for you. 

Mr. WESTMORELAND. If you could just get that to us, I would like 

to put that in the record, if there is no objection. 

Chairman NEUGEBAUER. Without objection, it is so ordered. If 

there are no other questions, this committee is adjourned. 

The Chair notes that some Members may have additional questions for this panel, which they may wish to submit in writing. 

Without objection, the hearing record will remain open for 30 days 

for Members to submit written questions to these witnesses and to 

place their responses in the record. 

[Whereupon, at 5:58 p.m., the hearing was adjourned.] 

(41) 

A P P E N D I X 

May 16, 2012 

42 


75733.001

Statement o[Congressman Gary G. Miller 

Subcommittee on Oversight and Investigations Hearing 

"Oversight of the Federal Deposit Insurance 

Corporation's Structured Transaction Program" 

2012 

The purpose of this hearing was to examine the use of structured transaction sales by the Federal 

Deposit Insurance Corporation (FDIC) in which the FDIC partners with private-sector entities to 

dispose of assets acquired by the FDIC when it resolves a failed bank. 

I appreciate Chairman Neugebauer convening this hearing. I have received statements from: (I.) 

Mr. Mike Mugel of Red Mountain Retail Group and (2.) Ms. Sharon Newby Gilbert and Ms. 

Sondra Newby Mayer of Rancho Santa Fe, Califomia that I would ask to be included in the 

hearing record. These statements recount real life examples of the flawed process endured by 

borrowers when their banks were placed into Receivership by the FDIC. This testimony 

provides the Committee with poignant examples of viable construction projects that ultimately 

failed as a direct result of bank failures, where the FDIC took over as Receiver. I appreciate these 

individuals sharing the details of their own personal stories with the Committee. 

The examples contained in this testimony raise serious coneems about FDIC policy and practice 

toward existing construction loans when a bank fails. In many cases, thc FDIC takes over as 

Receiver of a bank literally months before the construction projects are complete but the process 

does not allow for such projects to be completed. Instead, the apparent protocol is to cease 

construction loan payments, which makes it impossible to complete the project. 

If the FDIC had not taken over as Receiver, funds for these projects would have continued and 

the contractors building the project would have completed construction and paid off the loan as 

planned. Clearly, the FDIC should take over banks that are failing. However, when the FDIC 

takes over as Receiver, it should separate out the viable loans from the loans that caused the 

bank's failure and make sure those viable projects are not harmed during the receivership. When 

a viable loan is forced to be called early, it oftentimes torees the project to fail and actually 

creates losses for the FDIC. I have introduced legislation, which is cosponsored by 105 House 

members, to prevent bank examiners from forcing banks to call construction loans that are 

current and in compliance with loan terms. If a bank fails, such protection should also be 

extended for those borrowers. 

T am pleased the Oversight Subcommittee is looking at this program as these are egregious 

examples that have been raised about people who, through no fault of their own, have lost 

substantial sums of money for no reason. I thank Chaimlan Neugebauer for his leadership on 

this important issue and urge all of my colleagues to read the testimony ofMr. Mugel and orMs. 

Gilbert and Ms. Mayer. 
43 


75733.002

Testimony of Mike Mugel, CEO Red Mountain Rctail Group 

Prepared for Submission for the Rccord to the 

Subcommittee on Oversight and Investigations 

May 16, 2012 Hearing 

"Oversight of the Federal Deposit Insurance 

Corporation's Structured Transaction Program" 

LACK OF GOOD FAITH AND FAIR DEALING 

An unintended consequence of the recently enacted bank/FDIC lV structured program is that 

these new structures have no incentives for their principals to act in good faith and certainly do 

not favor fair dealing when working with their existing Borrowers. 

My name is Michael Mugel and I am the CEO of a shopping center and residential redevelopment company headquartered in Santa Ana, California. I currently do business in nine 

states in the country and I have created over 15,000 jobs through re-development over the past 

20 years. 

I know this may sound obvious but most Borrowers borrow money trom banks because they do 

not have endless amounts of cash on hand. 

Real estate financing is essentially a form of collateral based lending. That is, the an10unt of the 

loan is based on the value of the collateral. When a Borrower looks to obtain financing for the 

acquisition or development of a piece of real estate, the loan is underwritten by a bank using thc 

real estate as the primary piece of collateral, not the financial strcngth of the Borrower. In most 

instances, a principal or other related entity of the Borrowcr also provides additional personal 

guaranties securing the Borrower's repayment of the loan, which is used by the bank to lllrther 

protect itself in the event of the Borrower's failure to perform under the terms of the loan and in 

the cvent the collatcral docs not maintain its value. 

Well, what happens then when the bank that madc the loan is taken over by the FDIC and an 

acquiring new bank/FDIC .TV defaults under the loan documents and does not act in good faith 

with a Borrower'? 

What happens when one's bank fails and another bank takes over and stops funding a project 

immediately so that the project cannot be completed? 

How can a Borrower fulfill his or her obligations under their loan documents when the new 

FDIC/JV new Bank's first action is for them to turn off a Borrower's loan mid-development? 

1 
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75733.003

In these situations, the Borrower has not breached or committed any default under his or her loan 

documents and please remember that this loan was underwritten using the real estate as the 

primary source of collateral. 

The FDiC/JV Bank is choosing to shut a project down mid-development and as a result have 

intentionally or unintentionally collapsed the value of the asset. Those actions now put thc 

Borrower and/or its guarantors in harm's way under the tenns of the loan documents and the 

personal guarantees that signed as part of their loan agreement (But the Borrower has not 

defaulted so how can they be held personally liable?). 

The FDiC/JV Bank does not care about being held to a loan agreement as the FDIC "washes" 

clean the new lender from being liable under the old loan agreement. The new acquiring 

FDiC/JV Bank entity can do whatever they believe is in their best interests. 

The FDIC/JV Bank then begins the process of chasing the Borrower and its guarantors on his or 

her personal guarantees and this new venture bcgins collecting fees for managing the very long 

legal process that is about to ensue. They collect fees for foreclosing the property, they collect 

fees for managing, leasing and asset managing the property, and they collect fees for ultimately 

selling the property. 

Certainly this cannot be seen as using Good Faith nor Fair Dealing with Borrowers when the 

FDiC/JV new Bank are the ones who are choosing to stop the funding of the project contrary to 

the terms of the loan documents and absent any default by the borrower. 

Under this scenario, the Borrower cannot complete the project, the economic value of the project 

collateral plummets, as the unfinished project is now seen as a "broken project", massive jobs are 

lost because the project cannot be completed and the project sits on the servicer's books for years 

booking servicing fees to their balance sheets. 

These scenarios are not storytelling and I have included some real life examples. 

Example number one (2009): 

Sugar House Redevelopment, Salt Lake City Utah 

I purchased 343,000 square feet of abandoned industrial, warchousc and retail buildings in the 

City of Sugar House, Utah for purposes of converting the buildings into a new hotel, Apartment 

and strip retail project (1,000 new jobs for thc area). My bank was Pacific National Bank which 

was owned by a group of nine banks out of Chicago. 

We purchased all the buildings in late 2007/08 under an acquisition loan and upon receiving our 

entitlements from the City of Salt Lake, Pacific National Bank ensured us that we would he 

receiving our second round of funding or $6MM to complete the project. 

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75733.004

Of course, Pacific National Bank then failed and the FDIC under a 90%-10% loss share 

agreement gave thc bank to US Bank. We were happy about this because we had just paid otT in 

full another re-dcvelopment loan with US Bank. 

We met with US Bank at their offices in San Francisco and they notified me immediately that 

they had started the process of putting a charging order against my home and that they werc 

looking tor me to personally pay the loan off myself. 

I flew up to San Francisco to build a new relationship with my ncw bank and they notified me 

that even though the bank that made me thc loan defaulted on its funding obligations that thc 

loan was now due and I would bc held personally liable. 

The new bank notified me that they wanted me to agree to a "friendly foreclosure" and give the 

project to them and that they wanted me to write an additional cheek for $500K. Then and only 

then would they. the bank. stop chasing me and let me otT the hook for my personal recourse. 

You see, under the loss/share arrangement, the new acquiring banks make more money (fees) if 

the real estate is owned by them (REO) and thcy certainly cannot lose money in their new 

venture with the government unless the property value is diminished by over 90%. 

When US Bank took over my bank, 3 local brokers opinions of value were solicitcd by them for 

thc project with all the brokers values coming in around $14-$ISMM for an "as is" value of the 

property. 

My loan was $IOMM. 

Clearly the FDIC/IV Bank was protected and my $5MM of equity was protected. 

US Bank ignored their own opinions of value and began the foreelosure process immediately and 

went after my home with a charging order. 

This project was the 5th project where my lender had failed and I simply could not sustain 5 

lawsuits. 

Under incredible duress, I called my Partners and shared with them the position that I was in as 

the guarantor of the loan and I told them that I was going to have to reluctantly write a check for 

$500K and give the keys to our property to US Bank. That is exactly what I did as I could not 

jeopardize my family to fight a system set up by the Federal Government to help the banks and 

not the borrowers. 

Here is the most difficult part of the story. 1 112 to 2 years later US Bank sold the property for 

just $6MM wasting millions of dollars in US Taxpayers money. 

However, US Bank, through its fee structure and revenue sharing with the FDIC, only made 

money. 

Example number two (currently taking place now); 

Upland, California 10 acres ofland 

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75733.005

I own 10 acres of land in the City of Upland, California which has an old 80,000 square foot rose 

packing plant located on it. It has views of the mountains and is ideally located in the "Colonies" 

which brings top dollar for residential values and retail rents. Originally, the project was going 

to be a mixed use retail and residential re-development. 

My bank on this project and 3 other projects was Wachovia Bank. 

Of course Wachovia Bank failed and Wells Fargo was given the assets of Wachovia under a 

loss/share arrangement by the FDIC. 

I met the Wells Fargo Bank people at my office back in 2009 and they immediately threatened 

me with all my recourse provisions in my original Wachovia loan documents and immediately 

threatened to tum orfmy loans. One employee literally chased me around my office demanding 

that I place a second trust deed on my house and any other real estate that I own with little debt 

so that Wells Fargo would be more secured in their loan positions. 

I threatened to sue Wells Fargo for their actions and after some vcry difficult ncgotiations they 

reluctantly agreed to "extend" all 4 of my loans. For the extension, I paid all of Wells Fargo's 

additional fees and points to "extend" my loans and to date I have never missed a payment. In 

fact three of the four loans, including a $1 MM unsecured credit were repaid carly. 

I should be considered to be by Wclls Fargo what would otherwise be known at any other bank 

as a A1\A borrower. 

My only loan left with Wells Fargo is tbe $4MM loan on the 10 acres ofland in Upland. 

I currently have the 10 acre property in escrow for $5.850MM with an all cash buyer with a 

scheduled closing date for the end of this ycar. 

Thc loan recently came due and I need a 6 month extcnsion of the loan terms from Wells Fargo 

to get enough time to close the escrow. 

I approached Wells Fargo 45 days ago and they threatened me with my personal guarantees and 

stated to me that they are not going to extend my loan and have repeatedly told mc that they are 

going to foreclose the property. In fact they have already commenced a foreclosure action. 

Even though I am in escrow on the property for $1.850MM more than their $4MM loan and 

regardless of the fact that I have 7 other otTers on the property for $5.750-$5.850MM and 

regardless of the fact that I have never missed a payment, paid off 3 othcr loans and carried the 

mortgage payments on this property for the past 3 years without fail, Well Fargo has now taken 

action to foreclose the property. 

I evcn offcred Wells Fargo an additional $IMM in free and clear property that I own as 

additional collateral for their $4MM loan on my Upland property and they declined it saying 

they were only interested in foreclosing on the property and chasing my personal guarantees. 

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75733.006

This is happening in real time right now. 

How is this acting in Good Faith and Fair Dealing? 

I only need a 6 month extension and the value ofthc property is clearly worth much, much more 

than Wells Fargo's loan. 

This is just abuse of course. 

I will have to tile a law suit to protect my assct. 

Why as a BOlTower am I being put into this position by an FDIC/Wells Fargo structure in thc 

first placc? Clearly their approach to acting in Good Faith or Fair Dealing is a waste of their 

time, my time, a waste of money, a killer of jobs (2 years per project at a time), a clogging of our 

court systems and an abuse on Main Strcct pcoplc. 

Why do they do this? 

Wells Fargo has nothing at risk in their FDlC/JV Structurcs. They do not lose if the property 

value is diminished and thc only remedy a BOlTower can act upon is the legal system. 2-6 years 

of time and a $1.5-$2MM cost per lawsuit does not make for a very realistic business plan for 

most borrowers. We are Main Street people not Wall Street people. 

GOOD FAITH AND FAIR DEALING must be brought back into lending immediately. Six (6) 

of my banks failed and this FDIC/IV Bank scenario has caused me and my company to suffer 

incredible losses and endure what I can only describe as much unnecessary abuse and economic 

waste. 

On several occasions now T have had to notify my Partners that although we had done nothing 

wrong and although we were on track with our projects that we would indeed be giving our 

propcrty back to the FDIC/new Bank because I as the Guarantor of the loan did not have 

adequate resources or suftlcient capital to sue each and every onc of our 6 banks. 

In conclusion, it is imperative that the Federal Government enact legislation that would obligate 

the lending industry to observe and maintain a system that is based on a standard of "good faith" 

and "fair dealing" with their bOlTowcrs. In other words, the system must be based on what is 

best to maintain the value of the real estate collateral at issue and not what is just best for the 

lenders or their services in order for them to minimize their perceived risk or maximize their fees 

and other revenue. 

Thank you for your time in listening to our concerns with these matters. 
48 


75733.007

Written Testimony of 

Sharon Newby GilbeJ1 of Riverside, California 

and 

Sondra Newby Mayer of Rancho Santa Fe, California 

House Committee on Financial Services 

Subcommittee on Oversight and Investigations 

Hearing entitled "Oversight of the Federal Deposit Insurance Corporation's 

Structured Transaction Program" 

Wednesday, May 16,20122:00 PM 

2220 Rayburn House Office Building 
49 


75733.008

Chainnan Neugebauer, Ranking Member Capuano and members of the Ilousc Committee on Financial 

Serviccs, Oversight and Investigations Subcommittee: 

Thank you tlX the opportunity to provide this written testimony. 

Our parents, Ken and W0l1hene Newby, lived and worked in Southern California for decades after 

migrating trom Oklahoma. While in California, they worked tirelessly and slowly built a life based on 

hard work and honesty. They also raised a beautiful family of two daughters and three grandchildren. Mr. 

Newby started as a laborer and worked his way up to a mason, then a masonry contractor, and eventually 

became thc owner of a well-known and successful gencral contracting and building company. He built 

many important and historic buildings in the City of Riverside, where he and his family resided, and other 

parts of Southern California, including Riverside Polytechnic High School and the tirst mall in Riverside 

County, The Plaza. His wife, Mrs. Newby, ran the office oftheir dynamic development company. 

They paid their taxes, followed the law, voted in elections, and utilized honest business practices. 

At some point, our parents purchased a substantial hill-top parcel on which they planned to build a gated 

condominium community named Rocky Pointe Springs in Riverside, California. These semi-custom 

homes would include 5 single family units and 16 duplex-type units totaling 21 condominiums, all in a 

prime location. Before they could realize their plans to build it, our mother, Worthene Newby, passed 

away in December 2002. 

Subsequently, our father started the project. Before he could even put a shovel in the ground, he paid 

$500,000 for school taxes and $1,000,000 for a builder's insurance policy. Since he did not want to pay 

high interest rates or become overextended by accumulating debt, Ken paid for everything himself using 

the maiority of his life savings. These side-of-the-hilliots were more expensive than customary lots since 

many ofthem had to be engineered with steel caissons and Verdugo retaining walls. 

After spending over $7,000,000 of his own money, Ken got a construction loan from I st Centennial Bank 

of Redlands to finish the project. The bank called him their "Star Borrower" since he had previously 

invested so much of his own money and also because he was known throughout Riverside as a highquality builder. The bank valued the property he encumbered at $13 million. He signed a construction 

loan for halC $6.7 million. As is customary, it would become due and payable after one year, in this case. 

Oct. 12, 2008. 

Unbeknownst to our !ather, as early as January, 2008, the FDIC was investigating 1st Centennial Bank for 

fraud, gross negligence, recklessness, and willful misconduct, citing amongst other things officers who 

were taking large improper commissions. In June ofthat year, FDIC representatives had ordered the bank 

to bring in $30 million because they were woefully under capitalized, according to an FDIC Investigatory 

Report from August 2009. By July, 2008, the bank vouchers approved by the job superintendant and the 

bank inspector were becoming routinely late for payment, and very lew were paid in August and 

September, apparently in a futile effort to artificially boost the bank's cash reserves. 

This slowed construction down considerably, created anxiety for remaining contractors, and made it 

impossible for our father, Ken Newby, to finish construction in a timely manner. In decades of building, 

many times with larger projects than this one, he had never had such a problem. Over $600,000 in unpaid 

vouchers were ultimately not paid by the bank. 

Mr. Newby got a short six-week extension in October 2008. When that ran out, the bank personnel told 

him that he needed to commit more of the property he had worked his entire life acquiring in order to 

1 
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75733.009

extend the loan five more months until April 2009. Don Bruner, then Vice-President of 1st Centelmial 

Bank, knowing full well that FDIC was closing the bank. went to Ken and olTered a loan extension. 

At this time our father, at age 88, had endured two back surgeries, both with complications, and was 

spending most of his time in bed. With no legal counsel, on heavy medication, and suffering from early 

onset of what appeared to be Alzheimer's Disease, Mr. Bruner went to our father's home and had him 

sign all of the documents for the extension and also coerced him into encumhering three additional 

properties in order for him to get a loan extension. These properties, like the earlier one, Rocky Point. 

were owned free and clear at the time the properties were used as collateral for the 1st Centennial 

construction loan. 

Our father seriously believed that ifhc did not sign over his three collateral properties, he would not get 

the loan extension and would lose the very project he had put almost his entire life savings into building. 

He believed he had no choice. On November 30, be encumbered three more properties, including his 

personal residence, all valued by the bank at well over $3 million. 

During this very time period when bank personnel were falsely telling the public that the bank was "well 

capitalized", the FDIC was preparing a Cease and Desist Order and working to shut the bank down. On 

January 23, 2009, the FDIC acted and closed the bank. The bank's breach of contract and breach oftrust 

not only jeopardized almost all he had built financially, it also severely impacted our father's precarious 

health and his life. 

When the bank was taken over, all disbursements stopped even though $2.4 million was left to disburse to 

Mr. Newby to finish construction. The subcontractors did not get paid and our father had no money left to 

continue the project. 

Ken Newhy died on September 1,2010, after 6 weeks in the hospital. He never gavc up hope that his 

beautiful project would be completed and sold. To this day, it stands empty and unfInished. 

On February 9, 2010, the FDIC sold our father's note and loan along with hundreds ofothcrs to MultiBank. Latcr they were transferred to a subsidiary, Rialto Capital! RES-CA NFT, LLC, a Florida based 

LLC. 

We have had many opportunities to sell Rocky Pointe Springs, but without RES-CA's willingness to 

negotiate, aUf potential buyers with legitimate alTers have gone somewhere else. They have now sued our 

father's estate and the trust he set up with our mother and they are threatening to come after anything len 

in order to satisfy the loan. We have had to hire legal counsel to represent us at great expense to defend 

ourselves. 

At one point, a top oilkial for Rialto Capital told us that they intended "to take everything we have left:' 

[n an effort to accomplish their goal RES-CA filed suit against us in April 2011. This is not the way our 

0"'11 government should treat honest law-abiding citizens like our parents or us. If not lor the breach of 

eonlraet and trust, the fraud, and financial elder abuse, the project would have been completed and all of 

this could have been avoided. Instead, we are being harassed and threatened with financial ruin. 

We hope your august committee will investigate the abuse of power and threats of which we have been 

subjected. 

Again, thank you for the opportunity to provide this written testimony. 

2 -
51 


75733.010

STATEMENT OF 

BRET EDWARDS 

DIRECTOR, DIVISION OF RESOLUTIONS AND RECEIVERSHIPS 

FEDERAL DEPOSIT INSURANCE CORPORATION 

on 

OVERSIGHT 

of the 

STRUCTURED TRANSACTION PROGRAM 

SUBCOMMITTEE ON OVERSIGHT AND 

INVESTIGATIONS 

COMMITTEE ON FINANCIAL SERVICES 

u.s. HOUSE OF REPRESENT A TIVES 

May 16,2012 

Washington, D.C. 
52 


75733.011

Chainnan Neugebauer, Ranking Member Capuano, and members of the 

Subcommittee, we appreciate thc opportunity to testily on behalf of the Federal Deposit 

Insurance Corporation (FDIC) on the FDIC's role as receiver for failed insured 

depository institutions. As requested, our testimony will focus on how structured 

transactions are used as a strategy to maximize the value of assets secured by real estate 

for the benefit of the Deposit Insurance Fund (DIF) and the depositors and other creditors 

of the failed institutions. 

As described in more detail below, an FDIC structured transaction refers to a 

resolution strategy that involves the creation of a legal structure to manage failed banks' 

assets. This type of transaction has been used for approximately 4 percent of $668.8 

billion of the book value of failed bank assets inherited from bank closures from January 

2008 through May 12, 2012. 

The Challenging Environment for FDIC-Insured Institutions 

The banking industry has undergone a difficult proeess of balance sheet 

strengthening. Capital has been increased, asset quality has improved and banks have 

bolstered their liquidity. However, levels of troubled assets and problem banks are still 

high. While the economy is showing signs of improvement, downside risks remain a 

coneern. 
53 


75733.012

Nationally, through May 11,2012, there have been 437 bank failures since the 

beginning 0[2008. While still high, the current pace of failures is slowing. There have 

been 23 failures so far this year compared to 40 failures at this same point last year. 

The FDIC is keenly aware of the significant hardship bank failures impose on 

communities across the country. The FDIC's supervisory goal is to avoid bank failures 

whenever possible by initiating timely corrective measures. Historically, most problem 

banks do not tail and continue to serve their communities. In addition, most banks 

across the country are in sound condition, well capitalized, and profitable. 

FDIC's Duty to Resolve Failed Banks 

Throughout the financial crisis, the FDIC has worked to maintain financial 

stability and public confidence in the banking system by giving depositors offailed 

banks quick and easy access to their funds. When the chartering authority closes an 

FDIC-insured institution, the law requires the FDIC to use the least costly method of 

resolving the failing institution. The least costly method minimizes the cost of bank 

failures not only to the DIF but also to the thousands of banks and thrifts that fund the 

DIF through insurance premiums. 

In resolving failing banks consistent with the least cost mandate, the FDIC returns 

as many of the bank's assets and liabilities to the private-sector as quickly as possible. 

Hence, we strive to effect a "purchase and assumption" agreement for the whole bank, in 

which the reeeivcr transfers all of the failed bank's deposits, assets and certain liabilities 

immediately after the bank closing to an acquiring bank. This type of transfer includes 

performing and non-performing assets at a competitive price. Unfortunately, the FDIC is 

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75733.013

not always successful in resolving banks in this manner. Often, failing banks with little 

or no franchise valuc and poor asset quality do not attract sut1icient intercst from viable 

bidders to allow for a whole bank purchase and assumption. In those instances, insured 

depositors are paid the full amount of their insured deposits. Uninsured depositors and 

other general creditors are given receivership certificates entitling them to a share of the 

net proceeds from the sale and liquidation of the failed institution's assets. The FDIC as 

receiver then uses an alternative disposition stratcgy for these failed bank assets, such as 

cash sales, structured transactions and sccuritizations, to maximize recoveries to the 

receivership. 

Disposition of Failed Bank Assets 

During the last banking and savings and loan crisis in the late 1980s and early 

1990s, the FDIC retained many of the failed bank assets it could not sell to acquirers and 

managed those assets utilizing in-house resources. This practice often resulted in selling 

assets into distressed markets at prices below their intrinsic value and also required that 

the FDIC maintain a costly asset management infrastructure that was less et1icient and 

not as nimble as that of the private sector. As a result of these experiences, the former 

Resolution Trust Corporation (RTC) entered into various joint ventures and partnerships 

with the private-sector to sell a significant number of failed thrift assets, and those 

programs proved successfuL Consequently, the FDIC initiated its own structured 

transaction sales program in May 2008 patterned after the program used by the fonner 

RTC. For the 32 structured transactions completed to date, the FDIC estimates savings of 

3 
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75733.014

over $4 billion versus the recoveries it would have realized in cash sales at the time these 

structured sales transactions were consummated. 

The structured transactions allow the FDIC to facilitate the sale of many assets 

that are difficult to market and sell. The FDIC as receiver generally retains a majority 

interest in the proceeds from the assets, while transferring a minority interest in the net 

recovery and day-to-day managemcnt responsibility to private-sector experts. Because 

they have an ownership interest in newly formed limited liability companies (LLCs) that 

own thc assets, and because they share the costs and risks of managing those assets, the 

private-sector experts have a vested interest in maximizing the assets' realizable value. 

What is a Structured Transaction Sale? 

In structured transactions, the FDIC pools a group of similar assets, such as 

single-family, commercial real estate, or construction-type loans from one or more 

failed bank receiverships and transfers them to a newly formed Lec. In exchange for 

contributing the assets, the FDIC receives all of the ownership interests, or equity, in the 

LLC. Through a competitive bid process, the FDIC offers a portion of the equity in the 

LLC to pre-qualified private-sector asset management experts. Once a pool of real 

estate assets has been identified, the FDIC engages a financial advisor to evaluate the 

portfolio and market the equity interest in the transaction. The financial advisor 

analyzes the portfolio and recommends to the FDIC an optimum structure and terms for 

(he transaction. Of the $25.5 billion in assets originally included in structured 

transactions, $16.4 billion or 64 perccnt were nonperforming as of the respective 

closing dates. 

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75733.015

Structured transactions are only ofTered to sophisticated counterparties that are 

qualified to engage in the types of transactions offered by the FDIC, and only to those 

counterpartics that are able to demonstrate to the FDIC that they can bear the economic 

risk associated with the acquisition of an equity interest in the LLC (including the 

potential that they may suffer a complete loss of their equity investment in the LLC). 

The Structured Transaction Entity or LLC 

Prior to marketing the transaction, the FDIC determines the amount of equity 

interest in the LLC to be sold. The interest sold has ranged from 20 to 50 percent. The 

winning bidder in a structured transaction sale pays cash for its equity interest in the 

LLC and takes on responsibility for day-to-day management of the LLC and its assets. 

The price paid by the winning bidder for its equity interest in the LLC ref1ects its 

valuation of the entire portfolio of assets held by the LLC. The percentage of book 

value that the winning bidder's valuation represents should not be attributed to an 

individual asset. 

Since September 2009, many of the structured transactions have included 

leverage in the form of purchase money notes (PMNs) issued by the LLC to the FDIC 

receiverships for partial payment ofthc assets sold by the receiverships to the LLCs. 

The FDIC's decision to offer structured transactions with leverage was driven by the 

scvcrely distressed credit market, which affected the costs and availability of crcdit and 

liquidity. Leveraged transactions helped ensure a robust and competitive bidding 

proccss for the LLC equity. In the majority of the structured transactions, the 

transaction agreements require that, if the LLC issues a PMN, cash proceeds generated 

5 
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75733.016

from the opcration and sale of the LLC's assets, after deducting certain costs, generally 

must be used to pay down the PMNs and any other debt outstanding (such as a 

construction lending facility) before the LLC's members receive any distributions on 

their equity interests. Costs deducted to manage the LLC before payments on the PMN 

include taxes and insurance, property protection expcnscs, the fees of document 

custodians and similar third party contractors, and the management fee paid to the 

managing member (discussed more fully below). 

The PMNs constitute dcbt owed by the LLC, and do not finance the cash 

purchase price paid by the winning bidder for its share of the LLC's equity. Upon 

issuance, the PMNs are issucd to the FDIC as receiver. Some PMNs are guaranteed by 

the FDIC in its corporate capacity and may be sold to third party investors. In the case 

where FDIC corporate guarantees the PMNs, it receives a guarantee fee. Because the 

amount ofleverage is based on the risk profile of the underlying pool of assets, the 

FDIC, in its corporate capacity, has not cxperienccd any losses to datc and docs not 

expect any future losses as a result of its guarantee of the PMN s. The amount of debt 

the LLC issues will dcpcnd on the transaction's expected cash flows and the ability of 

the LLC to repay the debt. In the aggregate, for the 29 structured transactions closed 

through September 2011, the managing members project the total distributions to the 

FDIC, as of March 31, 2012, to be $13.8 billion. 

Managing Member Responsibilities 

Managing members are responsible for the servicing and disposition of the LLC 

assets as well as all credit decisions. Thc managing member is required to hirc a 

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75733.017

qualificd servicer to scrvicc the assets, prepare and provide tax infonnation to members, 

to prepare LLC financial statcments and repOlis, to retain an auditor to audit the LLC's 

financial statements, and to provide other resources neccssary to conduct the LLC's 

business. 

The managing member receives a monthly management fec from the LLC, 

specified prior to the bid date and calculated as a percentage ofthc unpaid principal 

balance of the loans or the net fair value of real propcrty owned by the LLC. This is the 

only compcnsation received by the managing member for its asset management 

obligations, which include the obligation to pay servicers and any sub-servicers, general 

and administrative overhead costs, and any other costs associatcd with its asset 

management responsibilities. The managemcnt fec and property expenses, such as 

brokerage, preservation, and leasing fees, are paid by the LLC. 

Monitoring Structured Transactions 

The FDIC actively monitors these transactions through its staff and third-party 

contractors. On a regular basis, the FDIC conducts on-site compliance reviews of each 

LLC's operations, including the obligation to service loans in compliance with the 

transaction agreements, applicable law, and the terms of the loan documents. 

Additionally, the managing member must comply with stringent monthly, semi-annual, 

and annual reporting requirements, including providing audited financial statements for 

the LLC, auditor attestations, and certifications that it is in compliance with all 

transaction agreements. 

7 
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75733.018

In addition, the FDIC's Office of the Inspector (Jcncral (OIG) conducts periodic 

audits of selected structured transactions to assess thc managing member's compliance 

with the transaction agreements and the FDIC's monitoring of the managing member. To 

date, the OIG has completed audits for ANB Venture, LLC and Corus Construction 

Venturc (CCV), LLC. The FDIC agreed with all of the orG recommendations and has 

implemented or is in the process of implemcnting thcm. Specifically, the ANB V cnlure, 

LLC audit questioned claims havc been resolved. The CCV Venture, LLC audit 

corrective actions are in process and all are expected to be rcsolved by September 30, 

2012. 

One important result of FDIC contractor reviews and these orG audits is the 

FDIC undertook a comprehensive review of the transaction documents and revised 

certain provisions to clarify their intent for future transactioIls. The FDIC's main 

revisions to transaction agreements in response to the OIG's recommendations were to 

clarity the ealculation of the management fee and to expand on the requirements for 

documented policies and proeedures. These revisions were implemented beginning with 

transactions that closed in July 20 I O. Further, field work is ongoing for the audit of the 

two LLCs managed by an affiliate of Rialto Capital Management and its report is 

expeeted to be delivered in late third quarter of this year. 

In the event of a managing member's uneured default or its uncured 

noncompliance with the transaction agreements, the FDIC can declare a default and 

pursue certain contractual remedies, including removing the managing member or its 

servieer and appointing a replacement, foreelosing the assets of the LLC or the equity 

interest of the managing member, initiating a buy-out of the equity interest of the 

8 
60 


75733.019

managing member, accelerating the paymcnt due on a PMN, drawing on depositcd cash 

or letters-of-credit posted by the managing member, seeking indemnity for losses, and 

offsetting costs against amounts otherwise due the managing member. The FDIC has 

not found the need to exercise such remedies in connection with any of the LLCs. 

Treatmcnt of Borrowers/Guarantors 

The FDIC understands how disruptivc bank failures are to thc borrowers ofthc 

failed entity and strivcs to ensure all borrowers arc treated fairly and respectfully. Every 

borrower with a loan from a failed bank in reccivership is sent a notice within a few days 

of the bank's failure that their loan will be sold, with instructions on where to direct their 

loan payments, and who to contact with any questions. Depcnding on the type and status 

of the borrower's loan, a second notice may be sent shortly after the first notice. For 

example, borrowers that have missed payments or have unfunded commitments will 

receive further instructions from the FDIC. To the cxtcnt borrowers are in the midst of 

negotiating a workout or resolution of their loan with the FDIC or its interim serviccr, 

borrowers arc strongly encouraged to finalize those negotiations before the structurcd 

sale cut-off date. In addition, borrowers are also notified when the structured sale is 

completed and their loan is transferred to the managing member's servicer. 

The managing members are required by thc transaction agreements to maximize 

the return on assets of the LLCs. Under the right circumstances, rcasonablc pay-offs or 

loan modifications represent the highest net present value disposition options, and we 

fully expect the managing members to pursue pay-otIs and loan modifications, when 

financial analysis indicates those options would result in the highest return to the LLC. 

9 
61 


75733.020

With respect to single-family owncr-occupied residences, the managing members and 

their servicers are obligated to follow a federally mandated loan modification program 

designed to assist troubled borrowers in managing their mortgage obligations. Where a 

pay-off or modification is not feasible or fails, there are other loss mitigation methods 

available, such as short sales and acceptanee of deeds-in-lieu of foreclosure, which may 

be least loss alternatives to more expensive litigated foreclosures. However, when these 

loss mitigation methods are not an option, the managing member is left with no othcr 

choice but to enforce the terms of the loan contracts, including enforcing any mortgages 

and guarantces, through the courts and other legal means. 

The FDIC clearly communicates its expectations to all managing members that 

all borrowers or guarantors are to be treated fairly and respeetfully and that any 

concerns the borrowers or guarantors raise are to be addressed in a timely manner. 

Nevertheless, a number of borrowers and guarantors have raised coneerns about the 

managing members not aehieving the resolution the borrower or guarantor would 

desire. Thc FDIC investigates every borrower or guarantor inquiry and works with the 

managing member to address any of the coneerns raised. It is important to note that the 

legal rights and obligations of borrowers and guarantors do not change for any loans or 

other assets transferred to the LLC. The managing members are only seeking to enf()rce 

the default remedies in the loan documents in order to maximize the recovery value of 

the assets. Borrower and guarantor cooperation with respect to distressed credits is a 

key to aehieving a cooperative resolution. The managing member must have timely and 

current finaneial infonnation from the borrowers and guarantors in order to assess their 

abilities to make a meaningful contribution to any settlement. Additionally, the 

10 
62 


75733.021

managing member must assess the current market valuc ofthc collateral, and borrower 

cooperation in this regard can accelerate the time to a mutually agreeable resolution. 

Conclusion 

As the FDIC does with any resolution ofa failed bank, we strive to implement the 

least costly resolution method in a manner that is the least disruptive to depositors, 

borrowers, and communities. Further, structured transactions minimize the FDIC's 

holding and asset management expenses for the assets by transf(:rring the management 

responsibility to private-sector asset management experts. As the managing member has 

a significant financial interest in the assets and shares in the costs and risks associated 

with ownership of the LLC, the managing member's interests are aligned with the 

FDIC's interests in maximizing the value of the LLC's assets. As noted above, the 

estimated savings to the FDIC of having entered into the structured transactions instead 

of selling assets for cash is approximately $4 billion. To ensure the FDIC receives the 

highest return on the assets and that the managing members treat failed bank borrowers 

fairly, it monitors the managing member's compliance with the transaction agreements by 

rcviewing regular reports, measuring actual performance against performanee projections 

in the consolidated business plans, conducting regular site visitations, and thoroughly 

investigating borrower or guarantor complaints with regard to the servicing and 

dispositions of their loans by the managing members. 

Thank you, I would be pleased to respond to any questions. 

II 
63 


75733.022

Randy Neugebauer, TX, Chairman 

House Financial Services Committee 

Oversight and Investigations Subcommittee 

u.s. House of Representatives 

Washington, DC. 20515 

Edward L. Fogg 

Fogg Construction Company 

Fogg Mortgage Company 

Wednesday May 16,2012 

Written Testimony for Hearing entitled "Oversight of the Structured Transaction 

Program" 

Dear Chairman Neugebauer and other Members of the Committee. 

Thank you for allowing me to be here today. 

I come to you today with my story of banking struggles which began with FDIC closure of 

the Bank of Clark County and continued on with other bank closures that have now created 

a cascade effect into all aspects of our Company's financial lives. As you can see from the 

resume that I provided, I am the owner of Fogg Construction Company since 1999, and 

have been a Mortgage Broker since 1992. I have owned Fogg Mortgage Company since 

1995. I also have 27 rental units and a commercial building having been a landlord since 

1995. 

It has been 3 Yz exhausting years of constant work to attempt to keep things current. 

But, after trying to work things out personally and proactively, through legal counsel, 

attempting to get advice from Senators and our Congresswoman, it has led us to Chapter 11 

bankruptcy. 

I have heard Ms. Sheila Bair speak about the responsibility of the American public to 

make their mortgage payments and I can hold my head high in my community knowing 

that I have made every effort to keep those responsibilities. My integrity to honor the loans 

is on record. 

Despite these struggles, I am a lucky man in that I still have a strong family, and a loving 

marriage which have unfortunately been the fall out for many other people in this situation. 

I still have a good reputation in the community since I have always paid my sub-contractors 

and completed my projects. I have kept all of my rental properties in excellent shape. 

In the FDIC book, "Managing the Crisis" it is clear that the FDIC has recognized in the 

past the need to protect and not hurt communities by not cutting off credit to businesses 

and working with the local communities. I hope to see those values emphasized in their 

future actions. 

Fogg Construction was forced to file Chapter 11 Bankruptcy May 3,2012. The Mortgage 

Company and us personally will follow shortly. . 

Unfortunately, I have come to learn it is my only viable option. After 3 Yz years of trying 

to be proactive, keep my business and financial life solvent by communicating and working 

with banks and the FDIC, I have found that there are no other options for those of us 
64 


75733.023

who attempted to do what our government has asked us to do in this very difficult 

recession; to do our fair share and pay our monthly obligations. 

Throughout this entire process, I made sure to keep in communication with all my 

creditors; I provided suggestions and thousands of pages of documentation. I enlisted help 

from attorneys, and contacted our local representatives in attempt to find ways to proceed. 

I made payments even after balloon payments were due. Despite perfect payment 

histories, my credit was damaged and a snowball effect led me to my filing chapter 11. 

FDIC and their structured partnership (Rialto / Lennar) 

I believe The FDIC needs to recover as much money from each individual loan to 

reimburse the American tax payer from failed banks as possible. But, this should never be 

done by creating further additional economic problems in these communities. 

Structured relationships should require the FDIC to be much more careful in selecting a 

long term structured partner than a standard loan sale. There needs to be well published 

guidelines on how a partner is to handle the work out process. The partner's goal should 

be to obtain the best results for the FDIC while not creating more harm to the American 

tax payer. 

In this structured transaction the loans are primarily residential, land development and 

homes that were speculative in nature. Unfortunately, the private capital markets were 

paying very little for this type of asset thus giving life to the structured partnership by the 

FDIC. 

Trouble from the start: Rialto / Lennar is given access to the majority of the Developers 

financial information from when the loan originated. This allows Rialto / Lennar very 

privileged access to developer's assets and project information with their direct 

competition in the horne building arena. 

Private companies would not be able to obtain the non-recourse, favorable terms in 

financing provided by the FDIC to the Rialto / Lennar partnership. Their agreement 

creates little pressure for Rialto to corne to any agreement or negotiate quickly with 

borrowers and corne to a favorable resolution for all parties involved. 

Also with Rialto / Lennar, it really gives them little incentive to want to see their 

competition work through the problem loans. If so, is there any incentive for Rialto to 

work with a borrower of a failed bank? And, If so, could this information become public? 

A place for Rialto I Lennar in today's market place 

If Rialto / Lennar are given a portfolio of Bank owned REO properties and the goal is to 

market or develop them and also get the American tax payer back as much as possible, they 

would be an excellent partner. But this structured partnership does not allow Lennar to 

purchase or acquire the land for development. 

Our Story: 

Bank of Clark Coun1;y 
65 


75733.024

Our problems began when I was approached by the Bank of Clark County. Specifically, 

Mike Worthy and the CFO David Kennelly about taking out a loan to purchase some 

distressed property that was held by the bank. The Bank of Clark County asked me to 

purchase five properties for the development of rental homes to help the bank turn some 

negative assets into more positive assets. 

In October 2008 all 5 lots, and 2 permits were purchased. We started 2 foundations, 

framed and roofed the first 2 homes. On December 24 Christmas Eve 2008, we closed on 2 

more additional construction loans. 

The Bank was seized on Jan 16, 2009 just 23 days after securing the second round of 

financing. Fogg Construction received a portion of the money available under the 

construction loan agreements from the Bank of Clark County for the initial phases of 

building of the five rental homes. 

We were entitled to receive the remainder of the funds on the loans that would pay the 

subcontractors to finish the project. For some reason, after the bank was seized, the FDIC 

was not required to provide the remaining loan funding. Yet the partial amount lent by the 

Bank of Clark County remained due by Fogg Construction to the FDIC. We learned that the 

FDIC repudiated our loans with a simple form letter received in the mail. 

The week following the bank closure, as an armed security guard watched, I had a 

meeting with James Colton from Quantum and Kelly Dixon formally of the Bank of Clark 

County. They told me that bad things happen to good people and to do what it takes to hold 

my family together during this tough time. I was asked to come up with a business plan to 

work out my current loans and to provide updated financials. 

Our file was turned over to a representative of the FDIC from Quantum Jerry Schlife. 

Within a week of the request, I submitted a detailed business plan for the construction 

project with a line-item budget and bids to support it. I provided a complete set of 

financials. The plan I proposed was to complete 4 homes in the project within the budget 

provided, with lien releases from all subcontractors showing proof of payment. The FDIC 

would not have to provide me with construction draws, but only fund approximately 75% 

of the originally committed loan amount upon completion. Mr. Jerry Schlife told me it was 

one of the best business plans he had ever had presented and would be getting the pending 

approval but not to worry. 

I held up my end ofthe bargain. Paid and completed the entire project in record time 

with every penny we could scrape up, beg for and borrow at higher rates. I kept in contact 

with Jerry Schlife throughout the construction phase, but when I returned with the signed 

lien releases, he told me he was sorry but someone up the food chain said it was a bad 

investment for the FDIC. 

At that point, I was shorted $650,000.00 

Lot 7 - Received approximately $135,000.00 of $285,000.00 loan - Shortage of 

$150,000.00 

Lot 10- Received approximately $115,000.00 of $285,000.00 loan- Shortage of $150,000.00 

Lot 3 - Received approximately $115,000.00 of $285,000.00 loan - Shortage of 

$175,000.00 

Lot 4 - Received approximately $115,000.00 of $285,000.00 loan - Shortage of 

$175,000.00 

Also, a $90,000.00 land loan that had no access to construction funds. 
66 


75733.025

Lot 17 of Zachary's Landing 

Fogg Construction built this home in 200B, and we were due to sign extension documents 

to extend the loan to some reasonable period of time for the real estate market to work 

itself out. We received a last minute email the very day the Bank of Clark County was 

seized to come sign the paperwork but we were unable to re-arrange our schedule that day. 

We owe $242,000 on this property. After the bank failure, we received an all cash offer 

of approximately $175,000.00 to purchase the home. Mr. Schlife indicated he would submit 

the file to the FDIC for approval. He indicated that the file had made it through the many 

layers of the approval process, but was denied as the loan was sold in a structured 

transaction. As Mr. Schlife was leaving for another assignment, the FDIC prepaid a one year 

extension of the note for Lot 17 to help us work with the future purchaser ofthe note. 

FDIC and Rialto 

The FDIC transferred the Bank of Clark County loans on the 5 properties to Rialto. Rialto 

(or MultiBank) hired a servicing company, Quantum; they were in charge of the loans at 

this point. 

Once the transfer occurred we were surprised at the lack of billing statements. We 

contacted Quantum directly and were told that according to their records we didn't need to 

make payments until 2013 and not to send a payment until their computer system was 

corrected. 

We continued to send certified payments on all 5 separate loans requesting separate 

return receipts on each loan. We kept copies of the checks each month. Months would go 

by without any statements, and then only one or two ofthe loan statements would come 

sporadically. 

Because of this we were required to calculate our own payments for about a year and a 

half. Our contact at Rialto at the time was James Tapscot. He told us on several occasions 

that we were in default on all of our loans and we would have to come up with proof that 

we made all the payments. He would say that Rialto was going to sue me and my wife and 

take anything and everything that we have. 

When we showed Rialto the copy of the extension issued by the FDIC for Lot 17, they 

said that they had no record of it and that it was invalid since our copy was not a signed 

copy. They actually verbally accused me of faking the document. 

At this point we obtained legal counsel to help us work with Rialto. Rialto eventually 

acknowledged that the note on lot 17 had been extended by the FDIC, but they did not have a copy. 

Our attorney Scott Anders had a number of deals agreed to in principle with Rialto, but 

every time he thought the deal was done, they would raise a fee, the rate (or both), or shorten the term. 

They finally offered a 1 Yz year extension to our loan at aprox B% with a $10,000.00 loan 

fee (which equals 4 points). This works out to an APR of3B.376%. We had been working 

on this process with and without a lawyer for about a year and a half, therefore, a year and 
67 


75733.026

a half extension would only make us have to re-start working on the next extension as soon as it was finalized. 

As a mortgage broker, this offer, with such high fees, would be considered predatory 

lending if I were to offer it to one of my mortgage clients. Accepting it would not be a solution, only an extension of our current problem. 

The loss ofliquidity due to self-funding this construction project and the inability to 

work out a solution with the FDIC and Rialto caused us to lose a HUD project that was in its 

last stages of approval. It was a project to build 65 rental houses and would have employed 

over 200 people for up to 2 years in Clark County. These jobs would have been 

construction workers and suppliers who were the hardest hit by the economic downturn in 

our area. 

Failure of Frontier and FDIC appointment of Union Bank 

Other bank failures overseen by the FDIC have affected our family as well and caused 

loans to fall into the no-man's land of refinance or modification. We constructed 2 homes 

in 2006 for rental properties using the Bank of Salem that was later acquired by Frontier 

Bank. 

We finished these homes in 2007 when the bottom started falling out of the mortgage 

security market. We were unable to get a lender to fund a long-term takeout loan even though we had a strong track record, perfect credit history, verifiable income and a long 

history of being landlords. 

We worked with Frontier Bank to come up with a solution. They asked us to attempt to 

sell the homes or to look at lease option to purchase clients to rent the homes. 

We went on to sell both homes on lease option to purchase: 

Lot 1 Mary's Circle: We sold the home to husband and wife with four daughters. They had 

a few credit issues that could be worked out in the time of the lease option. Both had good 

jobs and wanted to purchase the home. 

Over a year into the contract, the husband was deployed to Iraq. The stress of raising 4 

children on her own with her husband deployed overseas in a War was very trying. She came to us asking to get out of the contract; she needed to be closer to her family to help 

raise her children. 

Lot 3 Mary's Circle: We entered into a lease-to-purchase contract with a husband and 

wife that had transferred from the Midwest. The Future borrowers were in the end of a Chapter 13 Bankruptcy. They applied for a loan through Frontier Bank as their lease-topurchase agreement was ending. 

They were ultimately declined because they paid off their chapter 13 bankruptcy off a 

few months early which did not meet the terms of the Chapter 13. The wife was diagnosed 

with Breast cancer so they left the contract and moved back to the Midwest. 

We kept the loans current and continued to rent these properties and communicate with 

the bank regarding ways to refinance the loan before it came due, however, the bank failed 

and Union Bank was appointed as receiver. We attempted to work with staff at Union 

regarding our loan problems. We had the 2 Mary's Circle loans in our personal name but 
68 


75733.027

also 2 loans in the name of Fogg Construction that needed to be addressed within the next 

few years that were now owned by Union bank. 

We were assigned to a special asset loan officer Patrick Baker for both the personal loans 

and the Fogg Construction loans. Eventually our personal loans were assigned to Nancy 

Boyd of Union Bank San Diego office. 

She told us that they had to adhere to the FDIC's mandates but that there may be 

something she could submit within the FDIC's framework. We supplied thousands of pages 

of paperwork, taxes, financials, resumes, bank statements, we proved every tenant 

payment of rent/ deposit. A year went by. Even after inquiring we were never told what 

we were applying for but continued to provide the supporting documentation. 

Our loan had come due but we continued to supply payments directly to our contact 

Patrick Baker. We began to contact our local Senators and Congresswoman's offices. The 

Office of the President at Union Bank assured Patty Murray and Maria Cantwell's office that 

they would be working with us and would have a timely resolution in the future. However, 

soon after, despite making payments, Union bank reported over 13 missed mortgages on 

our credit report. We discovered this after receiving a letter saying that our company 

credit line would be frozen and payments increased. 

The office of the President of Union Bank immediately held a conference call with us and 

sent us a letter stating that our credit would be corrected, but the damage was done. A few 

months later, Union Bank, again reported the delinquencies despite receiving payments. 

We inquired with Patrick Baker on how to manage the 2 loans in the Construction 

Company's name but they only wanted to work on the two loans in our personal name for 

some reason. We were told that the Union Bank staff and the FDIC said that we were 

nothing but a complainer and a letter writer. 

Patrick Baker, I believe, was an advocate for us and wanted to attempt to work 

something out, but he was let go from the company. After his release, we were never 

provided a replacement contact, and a after a few months of no contact a formal decline 

letter was sent to the wrong address. A post office box that has never been a personal or 

company address for us but someone we know. 

This person who owns the post office box delivered it to us personally. Union Bank 

continues to send statements to that address. As I have said before, we sent thousands of 

pages of paperwork to them at their request for over a year, and they do not know our 

address. So how much effort could they really have put into finding a solution for us, if they 

cannot even get our address correct? 

Unsecure lines of credit 

Situs companies and our unsecured credit lines, these lines of credit were not sold to any 

other bank and had been managed by Situs companies for the FDIC after the seizure of the 

Bank of Clark County. After working for approx. 2 years with Situs to come up with a 

solution to settle these debts, Situs and I came to a resolution. 

They said they would send me the official paperwork in the next few weeks. However, at 

that point, they stopped all contact for approximately one year. By the time they contacted 

us again, the damage was done from Union Bank's late reporting of mortgage credit. The 

loans were then sold to Key Bank, and then sold immediately to WM Partners who's in the 

process of suing us. This too will now be settled through the chapter 11. 
69 


75733.028

I am simply an average citizen. I pay my bills. I keep my obligations. After all that I have 

learned, there are still some serious questions that are unanswered: 

• How can it be that a person has a contract that has to be held up and honored, but 

the FDIC or its private sector partner Rialto can walk away from their end of the 

contractual obligation? 

• Within the partnership with the FDIC, Is there any incentive in place for Rialto to 

work out solutions with the consumer or is there a greater incentive within their 

agreement to liquidate and sue the borrower at any cost? 

• I don't understand why there are contracted representatives of the FDIC available 

after a Bank take-over who can request your time and request that we present a 

business plan but they are unable to render a decision or tell you what you are 

applying for. What purpose does that serve? 

• The FDIC has documented in the past that their goal is not to ruin communities and 

small businesses. Is that still in place? And if not, when did those policies change? 

I thank you for your time and attention. 

Sincerely, 

Ed Fogg 

Fogg Construction / Fogg Mortgage 
70 


75733.029

Attachments 

A) lot 17 extension. Bank asking us to sign for an extension 2 hours before FDIC seized Bank 01 

Clark County 

B) Email between Ed Fogg and Jerry Schlife the contract employee of FDIC after Bank of Clark 

County seized. Shows actively trying to sell lot 17 

C) Emails between us and Rialto showing their lack of accounting regarding payment history 

D) Email Correspondence between our attorney and Rialto's attorney 

E) Email from Rialto representative regarding our payments and responding to Congresswoman 

Jaime Herrera Beutler's input 

F) A letter from Ed Fogg to Ms larue of the FDIC explaining our situation. She indicated she 

worked in managing and monitoring the structured sales of the FDIC 

G) A letter from Ed Fogg to Sheila Bair explaining our situation and possible affect on multiple 

banks. 

H) letter from Union Bank responding to Senator Patty Murray's office and letter to us from 

Patty Murray's office relaying that they were told Union Bank would have a resolution 

I) letter to us from Union Bank after they reported delinquencies on our credit stating that we 

had made all of our payments and they would correct the mistake. Another letter stating that 

we had made all of our payments after Union Bank reported against our credit report for a 

second time 

J) Email between Ed Fogg and Patrick Baker Special Assets loan Officer September 2011 

showing no response regarding our re-finance at that point 
71 


75733.030

Ed Fogg 

From-: 

Sent; 

To: 

Subject: 

~<.::-:.::: Kelley)JilColl·.····· " .... ASSISTANT VICE'PRESIDENT 

Kelley Dixon [KelleyD@bocc.com] 

Friday, Janu8IY 16, 2D09 4:02 PM 

Ed Fogg.' 

Doqs a~ re~dy fgr you fO sign. 

RESIDENTIAL cONSffiUcnON & DEVELOPMENT 

1307 CQLU M8lA STREET 

P.O. BOX 61725 

VANCOUVER; WA 98666-1725 

PHONE: 360-906-9518 

FAX: 360-735-0318 

www.baec.cDm 

"(E)' . '. ',' '" '. ' ..... ' ............ ' ., , ~ ....•... '. 
72 


75733.031

Ed Fogg 

From: 

Sent:-

To: 

Subject: 

Kelley Dixon [KelleyD@bocc.comJ 

Monday, January 05, 200S. 12:04 PM. Ed Fogg . 

RE:Lot 17 

" . '" ..... : 

Thanks Ed, I will see ~hat I can d? to' extend thIs .out _ 

.~ ... 1<:~li~'Y'i,)ix~n,< ; .. ASSlSTiWr VICE PRESIDENT 

RESIDENTIAL CONSTRUCTION" OEVELOPMENT 

1307 COLUMBJA STREET 

P.o. BOX 61]25 

VANCOUVER, WA 98555-1725 

PHONE: 350-905-9518 

FAX: 350-735--0318 

WW'N .hacc.com 

From: Ed Fogg [mailto:ed@faggmoltgage.com] 

Sent: Monday, January OS, 2009 11:35 AM 

To: Kelley Dixon 

Subject: FW: Lot 17 

-

.® - ... 

•..... ...... ' • 

The sales In the area have basically shut down as I figure you are aware of. I rented-the house to a guy that Is a perfect 

example of what is going on. -

Money in the bank, good Job, perfect credit but do,," not Want to buy at this poinl I wish things were different. 

I wfll forward you the Information. 

Thank you 

Ed Fogg 

From: Ed Fogg [mallto:ed@faggmorlgage.com] 

Sent: Monday, September 15, 2008 8:42 AM 

To: 'Kelley Dixon' 

Subject: FW: Lot 17 

From: Kelley Dixon [mallto:KelleyD@bocc.com] 

Sent: Friday, September 12, 2.008 9:5S AM 

~~bJt~~ti;: . --, _. :;'.~.,::\,.,::\~\:'~ i·.·~". ," ... ~:.:;~.'; , 

HiEd, 
73 


75733.032

Just fal/awing up to my email earlier In the week regarding Lot 17. 

I will need to do some.thing with it befQre month end. 

Any word on your u~dated financial info? 

Thanks Ed, talk to you soon. 

KEl!ley Dix~~ •. : ...•• , ..•.•........ ASSISTANT VICE PRESIDENT '. . . . 

:RI'is!p~!'i\"W-j:ii~U010N & QEVELOPMENT '. 130l,COLUMBIA ·STREET. :-.. :'.' .. 

. P."O;.:sox·.i;iili,:'·.·.·,': .. ·.,· ...... VANCOWER, WA 98655-1725 

PHONE: 360-905-9518 

FAX: 350-735-0318 

www.boa:.cgm 

. ',: 
74 


75733.033

Ed Fogg 

From: 

Sent: 

To: 

Subject: 

Jeny Schllfe ilschlife@qnnancial.comj 

. Monday, December 07,20093:07 PM Ed Fogg ". 

RE: Lot17 ··.([J· ... ·'.·:V\·····.····> . ":'..):.>" . "," I'll write the.case almS,OOO gross. Need the ,mlllterfD the coniractlhuve, ana.,; up rl~tedBUD:. '. < .......•.•.......•..•..... " 

JerrySch!ife .•.•. ::,-.;.,: .••.• ':" .. ':.': .. ' , .••. 

.Asset Servicing ProfessionalJQuEID~ Joint Venture 

FDic a.; Rec~ive~ f~~BBrikot Clark county· ' . Phcrne: (360) 713-6421 

E-mail: ischlife@qfinandal,[!om( 

-Original MessageFrom: Ed Fogg [mailto:ed@foggmurt"""".coml 

Sent Mon 12/712009 4:08PM 

To: Jell)' Scblifo 

Subject: Lot 17 

I just got a verbal from buyer th.tthey wJll go up $6,000 grand, but I do 

not have it in writing until tomorrow best case. 

Total would be $176,000 ull other itemncmain the SIlIIle. !have not been 

able fD get a hold ofBnrrowers loan officer for a updated jetter of 

approval. 

So this is where we nrc at. 

Going tlJ: doctors appointment and do not expcct10 receive anything in 

writing until we get yonr verbal. 

Tbankyou 

Ed Fogg 

5037054589 phone 

.----:~ .. -.~-.-:--,~.-:-~--.." -; -:._.;_._...., :.~--..,-~-.- -:- .,~~~.-.-:-.-.:-... -.. -;.--.--,.,.-... - : ..... ,':. 

~' .. ' 
75 


75733.034

Ed Fogg 

-Original MessageFrom: Ed Fogg [maj!to:<d@fogrunortga.e.comJ 

Sent Fri 12/181200910:57 AM 

To: Jorry Schlifu 

SUbject lot 17 

RoBllor indicated Ibe borrowerWlll be out oftown through the holidays. 

>From my Doles you thought the FDIC would meet on lhis IDe around Christmas. 

Tbankyou 

Ed Fogg 
76 


75733.035

Ed Fogg 

From: 

Sent: 

To, 

Subject: 

Attachments: 

James Tapscott Uames.tapscott@rlaitocapital.com] ,.' 

Wednesday, December 29,20102:39 PM ":.., . . . '. , 

...• G~:,:;~apaYHI~;ir.~".·· ::';'",>, i,,' .", .. . " FoggConstructlon \lpdated Pay History.pdt, Addendum to Agreement date~ November15.pdF ,.". ",. ".,..... ."; ;.,-.- ..... ,-

. :>/'::'·":i:·:·;. __ i:~ ... ;'··:· .".",. ". :.,:.>,':':-, . " '.', .~,:,; - -. - .,:,.:;:.,,-,:,'.,.;:,::' ", '"'."." .. :-:;:.-,., 

Ed,... • .•..• i.' 'iF'" iJ~~r~~~ilr~~W~Itf~f~~~:~p'Ji~~~'~¥Y::~i,#i>& fi9~Ruaht~;,~:~~j~P9~n,t,ly;·ItW~(Yd~'~~\i~~~~ ~~~~d ..•. 12/27/2010 for two loans. Please use thIs when reconciling with your checking account and get back to me to discuss 

when complele. 

In addition, I've attached the Addendum to the Pre-Negotiation Agreement which I think I previously sent to you and 

have not received back.! need this signed and returned before We can further discuss your [Dans. 

Please also include a current Personal FinandalStatement and Current Rnancial Statement for Fogg Constructionl Inc. 

Finally, you mentioned that you did not file a tax return for 2009. Please send me an e-mail conflrmfngthis statement. 

Piease provide me with the requested document') and get back to me once you have reconciled your loan payments 

against our records. 

Jim 

75733.036

Q ,oW M," '0" "" "''' "', W W." 

FDIC Loan #::. . 513213 5 

. : ........: 

>'.5124/2010 $ 6 

- 671.17 583.35 $ 583.91 

676.15 $ 580.48 $ 583.91 $ 661.37 

676.15 $ 583.35 $ 583.91 $ 661.37 

66!.37 $ 583.91 

$ 583.91 $ 661.37 

1,273.11 $ 676.15 $ 583.35 $ 583.91 $ 661.37 

1,273.11 $ 583.35 $ 583.91 

676.15 661.37 

: •... h":St: fY?rY,ded fAt jl't7rr /apSc:.oit-; It 

0A'Yt0IA../";i-s (XUd w"h.,d... I..OZ- 0or..-eCJ{-eo( -A-

.. b'1- pY()'l1'cM1 1M I1-- alSo snl'VJG:;{ . 

. ..... n:()seo! Pc:.bL{yr.enis Wh1cM.. CoYrecAcd b1 -/u"",-:-

....•... {¥.. CCV1 ce{ te.ol o(",e c.tL-S . 

i1i 

'!,

: . : ..... . 

75733.037

Q I . Date rec:e!ved:;Arnaunt:\'i" Date received Amount Date received Amount Data received Amount Date received Amount ' : 24-May 661.98 24-May 575.36 24-May 575.91 24-May 652.31" 

.' ·" .. 14-Juit"·'::\:865;71 14-Jun 671.17 14-Jun 583.35 14-Jun 583.91 14-Jun 661.37 

24,::;Jun:::"::/a{(1i 19-Jut 676.15 19-Jut 583.35 19-Jut 583.91 19-Jut 661.37 

. ··'·19,.1ul:,',·'··1273;·11 19-Aug 676.15 19-Aug 583.35 1S-Aug 583.91 19-Aug 661.37 . 

'.:. :·19-Aug>.·:: .. 1273.j.j 13-Sep 661.37 13-Ssp 583.91 14-Ssp 583.91 14-Sep 661.37 

'·:13-Sep:·,::;':j2.s1i';7.$ 18-0ct 576.15 18-0ct 583.35 18-0ct 583.91 18-0ct 661.37 . 

. . 16-0ct' ..... 1273';.1.1 22-Nov 676.15 22-Nov 583.35 22-Nov 583.91 22-Nov 661.37' 

22-Nov' '1 ,12.73;1·1 27-0sc 676.15 27-0se 661.37' 27-0ec;: :1273011 

.... ":: .. : .. , 

Wln... 'i:J.,e CClt'(CctrtJY,S pvvld.ed 

--thaI- tV-e- 6+i il 5h,"-tJlj wer-e. wf- Quan/urn. 

iN- V.-..Q. -rna had haT- pl/.-f- t1wn fht()/.L{f" 

C».au-ce! lxvrLL- '-/'ha- d.ahJ / 
79 


75733.038

Ed Fogg 

From: . Anders, SCott [scoltanders@bulllvanlcomJ Sent: . Sunday, March 27,.2011 9:.5SAM '. . . .. To: Kosydar, Christin~ ... . . , ., 

~.~bjec~: . "':~~ .. ~j?!tf?J.~~>Qg ". .' .', . " .... 

;!;~~ig~!¥~i~g~~~Si1~}J~4fi1~~.~1i,i!~"~ now." 

Mr. Fogg wants as little to do with Rialto/Multibank as possible thus the application through anotherfinanclal 

institution. It's not as If Rialto has been some great outfit to work with. Quite frankly Rialto has broken several 

agreements and so their representations leave much to be desired. My client would prefer to never have to deal with 

them again. 

As for my being out oftown It Is something that I have planned for quite some time with my daughter. 

I respectfully request reconsideration ofthe continuance decision. By the time I return Mr. Fogg should have an answer 

from the flnanciallnstitution that is considering his application. I do not see how a planned, agreed to delay will cost 

anything addltlonal. It will require no action on the part of you or your client. 

Should my elieht not accept by 10 am on April 12 then the offer is done whether by a negative response or no response. 

If he does choose to aceeptthe offer then it gives him time to make the arrangements With me for the deposit upon my 

return to the office. . 

Regards} 

Scott S. Anders 

Scott S. An ders r Attorney 

Bullivant Houser Bailey PC I 805 Broadway St. I Suite 400 I Vancouver, WA 98550-3310 

T 360.737.2308 I F 360.695.8504 I Bio I Email I Website 

Seattle. \!ancoUver. Portland. San Frandsco • Las Veg;:ts 

From: Kosydar, Christine [mallto:CAKOSYDAR@stQel.com] 

Sent: Friday, March 25, 2011 7:11 PM . 

To: Anders, Scott; Friedman, Todd L. 

ee: Friedman, Todd L. 

Subject: RE: Rialto/Fogg 

Scott: 

This is not acceptable, We spoke weeks ago about these Issues and it Was left with you to advise If·your client wanted to 

se1:i:le this along the lines wedlscuss~d, wh.ere.h.e provides a $5,000 retainer. The baJI has been.ln his court for weeks. 

We.fplJowed ·up with you on March 10 and the excuse at that time was thatthe father"in-Iaw w.is" in surgerY but you 

",aUld resP'0'1dl:)y.M'\r~h.l.4. We heard npthing, however, so We followed up, again, and.thfstlme yoil'want another 2 

Neeks to contemplate, who knowswliat now; :.:: .•. ,.. ' .. :; .. ' . ..... . .. . .. · .• :0··; :.;: . " .. ' . , .. 

J~I~f~~~i;;!1~~J~~1,6ii~fE~;;~:~~i&j~~~:~#i~:~~:s~~~~~:n~6~~:;~iseW~0~:va~:a~:~~;:~s .. , ,'.:."" ...•.... ,.; .. ,:...... . .......... :. : •......• ',:1. ..•.... . .... .,.,._.. .. . . . ..... . 

li~~~~E~~~l~~~fr~~~~it~i~1w;~s;~~~ 
80 


75733.039

noon) or negotiations may weI,! be over and my client may choose to proceed. I must also add thatthe delays require 

follow up and thi~ in turn erodes the $5;000 retainer. 

. Regards, 

'chris "'@' r.!Ti$llft#l~~~L;~1~:i""'"'1":K'"'' ........ :.J " .. FiL· ....... :ifii~':i£' may,'Oi)ti)inro~\:~ii~lthatJ~~~~fide~tlal,.pniiileged a'~d/oi~d~r~~~:~~Ck'pr~duct;o~t~~ sole USE of the . ',' 

intended redpient~ Any unauthorized revl~w, use, or distribution is prohibited and may be unlawful. 

From: Anders, Scott [mallto:scotlanders@bullivantcom] 

Sent: Friday, March 25, 201112:30 PM 

To: Friedman, Todd l. 

ee: Kosydar, Christine 

Subject: RE: Rialto/FDgg . 

Todd, 

I have been out at meetings since yesterday afternoon and just received your e-mail and volee mail. Flrst,l request an 

extension on behalf of my client for the deadline due to certain circumstances. I will be out of town and not available by 

phone.or e-mail for the bulk of the next two weeks. I will be bade In the office on Aprllll and so would request an 

extension until the 12'" of April. The other reason is because my client is in the process ofa refinance with a financial 

institution. The process Is well under way but it will take some extra time forthe financial institution to give Mr. Fogg a 

decision. 

1 do have a question about the Interest rate as well. My understanding from my previous discussions with Rialto was 

that the rate Was 6.25%. Rialto said they were extending the terms under the existing conditions. Can you tell me how 

they arrived at 7.5%7 It may be correct but I need to make sure for my client. 

Sincerely, 

Scott S. Anders 

Scotts. Anders I Attorney 

Bullivant Houser Bailey PC I 805 Broadway St. I Suite 400 I Vancouver, WA 98660-3310 

T 360.737.2308 I F 360.695.8504 I Bio I Email ! Website 

Seattle. Vancouver. Portland .5an Francisco. L;;s Vegas 

From: Friedman, Todd L. [mailto:TLFRIEDMAN@stoel.com] 

Sent: Thursday, March 24, 2011 3:51 PM 

~~i:~~~,~~stlne" ';, ' .. SU!ljepcI:UaltD/F999, 

.. \ \\:.~.::<-~:< " " t _". .' .• " •• 

:~~~ .. ". '. .. - -.. : 

To follow up 6n my Yoicemail from ear.lier.tod.y. please note·the foll.owlng: .' .. ,: .... :.: <,' .. , 

:'/{~i~~~~~~~~~~~ijl,j~i~e~~S~~liijt~fltS~~S~{~i'fd~tiioi~:~:~~ ........... ; ....... , .. :... . ...... : 

';i~"£id,~J:~L~;;.~i~~",~lt2'"~;;;;'~~~~ 
81 


75733.040

Ed Fa 

From: 

Sent: 

To: 

Cc: 

Subject: 

Jon Levy [jonathan.levy@rialtocapital.com) 

Monday, August 29, 2011 4:23 PM 

Ed Fogg 

michael. yaffe@rialtocapital.com; Leo Abaunza 

RE: Fogg info for your review 

Ed, I am now the a>set manager for this loan relationship. 

In order to minimize any confusion, all further communication should be directed solely to me. 

Jonathan 

On Aug 29, 2011 7:18 PM, "Ed Fogg" <"!:i@foggmortgage.com>wrote: 

> You have the copies of the letters a, attachment in the last cmaiL 

> 

> Ed Fogg 

> 

> -----Original Mcssage-----

> From: pllchaeLyaffe@rialtocapital.com 

> [mailto:michaeLyaffe@rialtocapital.coml 

> Sent: Monday, August 29, 2011 4:02 PM 

> To: Ed Fogg; 10nathanLevy 

> Subject: Re: Fogg info for your review 

> 

> The senator isn't your lender or servicer. He wouldn't know when the 

> payments were received or when they cleared. Plcase send his letter you are 

> describing. You are in maturity default. 

> 

> Best, 

> Michael 

> Sent from my Verizon Wireless BlackBerry 

> 

> -----Original Message-----

> From: "Ed Fogg" <ed@foggmortgage.com> 

> Date: Man, 29 Aug 2011 15:43:37 

> To: 'Jonathan Levy'<jonathan.levy@!ialtocapital.com> 

> Cc: <leo.abaunza@rialtocapital.com>; <michael.yaffe@rialtocapital.com> 

> Subject: Fogg info for your review 

> 

> Lettcr from Senator that indicates all payment applied correctly 

> 

> Lettcr the same day from Quantum that indicates I am in default on all my 

> loans. (received the same day as Senator letter) 

> 

> Postal receipts for the July payments. (Once again the loan scrvicer has 

> never sent us a payment coupon) 

> 

>Tbankyou 
82 


75733.041

FDIC· 

Mrs. Larue 

Dallas, Texas 

Ma~ch 28,2011 

.... '. '. : ... ~:. '.:' ', ..... : . 

1h~nk~~~V~::k;~::~ti~~t~'~p~ak\v~~h m~on Frld~V ~egardlng ~ur sli~~il~i,'that ~~·~;~:L/~02\Lf~iI~r~ of Bank ofOark County, Jan. 16'\ 2009. . 

Durlngthlstlme we have done what the government has asked every American to do, we have keep up our 

monthly payments, keep our properties from further devaluing, worked tirelessly to create opportunIties for 

ourselves and others. 

HIstory: 

We were asked by the BOCC to purchase land and obtain construction loans for rental propertIes in Sept OB. We 

have fair number of r~ntals and have proven to be good property managers, 50 the loan officer and chief credit· 

officer approached us about purchasing lots ror rentals. We knew the bank was In trouble but was assured by all 

atthe bank, that if the Bank Was sold or dosed our 5 year can~uctlon loans woUld be honored by the new 

institution, we had never been told about the term repudiation. 

We dosed on the land in late Oct with 2 constructlon loans, then we dosed on 2 additional constructlon loans 

Christmas Eve 2008. (The bank failed Jan 16"'.) We had a 5th loan with FDIC that WilS for.$90,000 and we found a 

buyer for the lot at $60,000 and was 1099 for the difference In income. 

At the point of dosIng the bank we had basically just started the homes and had aprox $620,000 remaining to be 

drawn out to compiete the project. 

We worked with the FDIC contractor to come up with a solution to potentially finish the houses /we did finish 

them wIth basIcally every penny we could scrape up, beg for and borrow at higher rates. 

Durlngthls perfod, we h~d Joans that other Institutions worked out to posItive outcomes, and we have had a loan 

come due with FrontIer / UnIon Bank come due, and wIth the help of Patrick Baker, special assets LO with Frontier, 

we are on the verge of an acceptable solution. 

problems as of today: 

loan on lot 17 of Zachary's landing: This property was built as a spec home, then upon advlee from the bank 

turned int~.areJl1:a.".II\I"..had negot;l~ted. w!t!JJheb~nk.~'9ng ter(l1 refln~nce.(see emails#1l 

The loan for lot'17 came due January of this year and the loan 15 for more than the value of the home by 

approximately $40,000 - $60,000. When the FDIC was.stfll with t~e Bank of Clark County we had a~ offer of aprox 

the value of what It Is today. (see email #2) . , , 
83 


75733.042

/ 

For some reason it was notcccepted ctthe tJme. We thought we had actually worked out deals on all of the FDIC 

loans but for one reason or another, the contract!lr ind!cat~d he did n?t haye"!be tIme to complete th~ transaction 

and work with th.e neW oWners oft~e I~a~s. < 

Problems wlt~ RI,.ltD 

l~~·~~·'h'~~~:~~.~~:~':~i~h· ~I~J~.~ }Ince' ~~r~~ 29fO, "d~;J~~ ~~i~~~:~.r;;~.P. ~f~~·~"~~~~.~Y~ ~~~~ r~'~~~~'~':~~ ;.c~~.ra~~ billing statement the servlcer Quanium,JiJilri~ hassibpped sendlngth~iT) out I~ge;rieial, '1j!.Vh~vethreaien~d 

u~ ~ith J'~~~'I~, th~Vte;lj'~ie'~~'~'~e' g~I~g~~"~k~' ~~~thlrig"~~ 'h'~~~;~~'~a th'~"ha~~ b'~~ ~h'~iiil~g :t~" .. " .," ." . 

compromise to maxlmi •• the best possible outcome for all parties. * set. 5pl'( t1.iSh«,f!, 

We have good credit, but there is basically no secondary market for mortg<lge lending for real estate Investors with 

morethan 10 properties. We have attempted to self properties with no luckj Rialto lndlcat5 they have zero 

optIons to work with us. We are tryfng to flnd solutions butthey keep threatening us. 

See email received from Rialto attorney (email #3). 

In our conversatIon with you regarding the FDIC and these loans, you indicated that the manager gets to make the 

call as a business decIsion on that property. When you sa1d this, I totally agree with your statement. 

As a business: declsfon to protect myfamliYJ we are forced to took i3t chapter ll/"aU-the-whlle having perfect credft. 

Even after being shorted $620,000 from the bankfallur •. 

Rialto wIll create a tidal wave of problems for other instItutfons, as they will be caught up In the fall out. Bank of 

America, Wells Fargo, UnIon Bank, US Bank, (sma!! banks) Washington Federal) Padfic: West,"Rivervlew SavIngs 

Bank. Our goaJ would be t~ keep everything we have~ 

I think the goal ofafl parttes Involved should be to attempt to make the situation better notworse and to improve. 

not worsen the economy. I understand that RIalto's on!yfunctlon in lIfe 15to make as much money as they can, 

butthe FDIC as a partner in the transaction/should be lookIng outfortheAmerican public above and beyond all 

else. 

Thank you for looking Into thl~ 

Ed & Marta Fogg 2 j.o::' ~l6't ~9' 6405 NE 116~ Ave, #103 ~ " () 0-

Vancou\rer, WA 98662 

503 70S 4589 mobile 

360 8B2 4n6 office 

ed@foggmortgage.com 

866 6,57 8768 fax 
84 


75733.043

Ms. Sheila Bair 

Chairman 

FDIC 

550 17tll Street NW 

Washington, DC 20429 

RE: Ed & Maria Fogg 

RE: Fogg Construction 

R.E: Rialto Capital Management 

RE: Closing of the Bank of Clark County 

~t -ft:, K/Yl-\ Jvl6TJ're (}(', M®re" 

Dear; Ms. Sheila Bair, NH-H B 3/3'f) 1/ 

I first want to say that our story is not one you have heard a thousand times before. We have 

never missed a payment, never, not-paid a sub contractor, and never not-completed a project. 

We have heard you speak about the responsibility of the American public to make their 

mortgage payments. And we have done exactly what you have asked every American to do; we 

have made every mortgage payment. 

So today my wife and I can still hold our heads high in our community and as it appears that we 

will be doing this in the courts sooner than later. As now with the way the Bank of Clark County 

was closed and the loan's sold off to Rialto Capital Management. They have threatened us with 

Foreclosure on homes, even when the payments have been always been made. They are 

threatening us with lawsuits. 

We are (what I assume)to the FDIC, statistically insignificant, and the unfortunate fall-out from 

the closing of a bad Bank. Our loans were repudiated, our projects were completed out of 

pocket, and we have been able to rent an the properties and not sell a single one. 

The FDIC has lost by not worldng with US; we stand to potentially lose everything. 

We understand that it always comes down to a business decision, but your partner's business 

decisions will not help the economy or monetary outcome for your organization and will 

ultimately hurt many more financial institutions. 

In the FDIC book, 'Managing the. Crisis', it is very clear that the FDIC recognized the need not to 

hurt communities by not cutting off credit to businesses and working with the local 

communities. I would like you to re-read that book to understand the importance of helping 

entrepreneurs as they are the backbone of the communities for economic opportunities. 
85 


75733.044

I am writing this lettcr to you as my wife completes the paperwork for an attorney to evaluate 

what is the hcst outcome of a chapter 11 or chapter 13 hankruptcy. It seems odd to us to he 

forced down this path when we have good credit and have never missed a payment on any of our 

ohligations. We have always felt morally ohligated to our responsihilities and have worked 

tirelessly for several years now, hut have come to the realization that we are going to have to 

educate ourselves and possihly pursue hankruptcy. All from the process of the government 

closing a Bad Bank, that we had no way of knowing. 

What do I tell my children ahout right and wrong, as this will ultimately have a large impact on 

their lives? 

I am attaching documentation that will suhstantiate my story for your review. 

I hope you actually take the time to read this and the following documentation. 

Sincerely 

Ed Fogg 

15609 SE Rivershore Drive 

Vancouver, WA 98683 

5037054589 

CC: Senator Patty Murray 

1323 Officer's Row 

Vancouver, Washington 98661 

CC: Senator Maria Cantwell 

Marshall House 

1313 Officers Row 

Vancouver, WA 98661 

CC: Congresswoman Jaime Herrera-Beutler 

750 Anderson Street, Suite B 

Vancouver, WA 98661 
86 


75733.045

Union Bank 

October 27,.2010 

. R~preSen~ti~e 6~vid HOd9"'!!' 

SW Was~ington Representative 

132,3 Officers' Row '. 

: VancOUve'(, WA 9.8661. . . . 

DeaF ReptesootaUve.bh;ldg'es: _ . .... ;.. 

\t(\'l' ·_ll~~.-·. 

~~~.~ . 

[jniooB~nlris in reCeiPt of yourlelter d;3t~ September 15; 2010 to Mr. Pal S"ahey, Paclfic 

Northwest. Chairman, which was received on September 22, 2010. Attached to your lelter 

Wefe 'copies of letters which'~ ~nd Maria FQgg senUo Senator Patti MUrfayand 'Senator . 

M",ria GaritvveiL lanuespondiog io you on behalf of the Office of the Presiderit.th~nkyou . 

for youF:pa.tie·ni;;8 whila.wailing for a respon~8. . . • . 

. The Offi<;e-of theF!~sjdent\Vishes to advise you that Union Bahk is W~rking.cjiligehtlY with· . 

Mr. ainj'Mfs. f'oijg:to·address theirconcems. Mr. and Mrs. Fogg.have.exPresse(ftfi~jt ,'. 

gratitU<le to1,he Bank for' its resppns[viin!lSS to their cIlflcems.·..··· '.' .. 

.. :;,' 

T];u:!n!:\Y9JJ; &lPr. .. ~nti!tiv.?HoJlg~,ior.Y()\lrinte/'!stinour c1klflt's cOljrems.W~. app!<!Giate the oPportunity \0 respond to ybUr l(li.t~~: ....... •... .. -.. . . 

. .. I"fea~edo ilOt hesitate toc(mta~ .me:SQbylif you iiavea~y Q~estiorn; ;~this.Watteraj 7~~" ,~~,~~J.)3",: . . . ', ..... ~'" . '.' . ~':-.. :: ..... "'. ':.'.' 

affice~ofj:he ~fdent/CU$mer.care· ~i!I!I Cods·So2-021 .. P.O. Box 45'obo" . 

... al1~raiTclsc:CI,:99.414S 

-: r:i~r'(l!?e:;~f~F~ a~!pb!! flMn¢.li-!a~p 

'" ' 

~ ~'. ;'" "" .' :.:~ :.: . 

T-cL 415 765 390a 

;.~'V4~537~4:_' 

...... " ':. 

. ~-. ; ... 

: J. 

,;.:,' 
87 


75733.046

PATIYMURRAY 

WASHINGTOi";f 

Ed &Iio.M:"paFpgg. 

Fogg Cbnsllu~oIl Illc .. 6405NE li6thAVE#103 . Vancouver;'Washi1lgwn9S662 

ncar Eq @4J1.:IaJ;i>l; 

tlnittd ~tatts ~rnatt WASHINGTON, DC 20510--4704 

No"ember 8., 2910 

[;OMMlT1T:Es; 

APPflOPRIA1l0Nf; 

BUDGET 

HEA.LTIf, EDUCATION, LABOR. 

AND PENS!ONS 

. RUtEs AND .ADMINI5rnATION 

~'IIS'Af!A!AS 

Enclosed pIcaBO iiili! "'linterim response Uiy ofi'lGe:rt;ceiv;:d,m;r:C1fPonse tQ my iuquW on your 

behalf to'Urii!\ti Biuik. As you cansee, they aie ,jill working .01' th.<i issue!Jlld have as~ed me . 

tha't they Will IDLve a timely resolution in thenear future., ..' . . .... ;.:.', -,' " 

If you ~ve any Q1!e.mons or concerns please daRt hesitate. to ~olltactDavid Hodges in lIlY 

S@thwest W aSbingtonoj'ficeat (360) 69!i-7797. •... . . . 

'. :' '. 

,'j".' : 

, ',";" 

~USS01L~ENATEOI'I'ICEBUIl.p!Ml • 1,611 .... 1.HllliAvn,UE,NE mQ'~OJJFAVENUE 2S8B.Lo.o:soNFEna!At.SIJll..l»iG 

_>TON.,. DC2051D-47D4 • Surre;2-14 ~0C!l" . SlS<.NqAveruE, 

~~;;_:' .. '~.~, .,)~~~{~or:~;::~;~~9~~~~1Q?·'_·.~f~;;:;;,~a ',',' 

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;H[;·::P'Ifl. '~""~'.' . '.'.' '. '., .<fIll~;!J»,R.Ei:y~P~8'I 

-".:-;>' ",: ;.~, ." <:.: .: .. ~ ',> 

501~MlJNA\I9IlIIO 

SlJfJEBQ2 ' 

Sf'[lICANE,WA9!l2[11;-OO1J 

',I6D9}q2~5.l5 

, ".' 

,95[1 PACACAveJl..Il; 

S~65D . -TACOMA. WA9S40~ 

'!.2l!m-5?~. 

-4D;ZEAsrVAKlMAAVENUE 

SJ.Jm;390 . 

Y~WA98901.-v6D 

1~D!l)~~4?2, " 
88 


75733.047

© .... ~ ... 

~, 

~ ..... . . ,'. . 

Dear Mr. 'arid Mrs. Fcigg: 

Union Bank is in receipt of your letter addressed to the Office of the President received 

today! January 2B, 2011. . 

In your letter youmentjon, you received notification .from US Bank, informing you of a 

credit limit reduction on your Business .Line of Credit, as ",elias an interest. rate 

increase. You state; Lis Bank too.k this action as a resultof. de[()gatQrycredit reporting 

by Union Bank (formerly; ;~frontier Bank"). You. indi,Gat~ yO\Js~bmitted the necflssary 

inform~lioll.for a loan mQ,di~cation re~uest, anc:Lhaite a~ked thisreyjew to be expedited 

on'. your behalf. Ai!ditiona.lJy, you are. requ~sting that .Union B,mk remove d13rogatory 

.information from your credit file. " . ' . . -. . ... j 

Th~Qfli~.ef 'th~tp:Ee$W~nl:wo!-lldJike.to thank;yO\:lfof .theopp(Jrt~llity t(J sl?~,,*withY()u tog?y rE!gfil~Qir.Jg tlJe.c)n:;ilffistfiliJ¢e"pn. Yi:J.yr;lqaJi, .filIJd t1W irif~ni1.qtion reMctjng 9n YO\lr 

credit fije.Pleaseaf:Gept o.ur apcilogiils for the inCollV~riience t\}is;may ha.ve c'!used yOll . . ,- .... '-." " '.' .' .' ..... , 

Upon :receipt:of.yourl~tter,·. ih~ OffiCe. oJ the .. p,resid\1Dt ,cClDdugted a (evieW of yoW 

ciq::YmstflhceaM we.aq)liij'ethe illfo.rmatiorl$!Jpm)tt~dto tref:re~itbureaus .w'~re ,as a 

re.sultof}he cyrrf1nt st"ll\ls on your I09A!i.I.n rec(Jgniti.o110fYQurloan.rneqifif:<3tiQn 

applic,itiQnreceived;bYl)nion. Bank, aSilGOllrtesytoyou, Union Banis: has submitteqa 

r~quest torettio~:edeJO!:latclry inf0nTIation frem; your tr:edMile .. Tl)e. update ell you(creqit 

fil~Wi!ltt!keilPprq~imilt€ll)' thirty d~ys to. wp~tatefrpm ttJ~dllteofthisl'rtt.er. Fo~rerrncire, 

w~ .sul:Jiriiiti;>d '8 r(iquest .to ~xpediteltiecreqit review precess on' your lean modification 

r~quest. -: .. ': . .' . 

rh~llk youJorth.€?,PPJlQrtunitYio .r~vi~W and resol,-:ey()ur ion~erris;aJld a'pweci~t€l your 

pati€lri~ew'hilewa.itirgJora reselutiorl0l1 yourJo"n rnQdificalien req~est..· '..... .' 
89 


75733.048

II UnlonBank 

Consumer Lending Customer Service 

P.O. Box 85643, Mail Code M-910 

San Diego, CA 92186-5643 

July 15, 2011 

EDWARD FOGG 

MARIA FOGG 

LOT 3 107TH SPEC 

15609 SE RIVERSHORE DRIVE 

VANCOUVER WA 98683 

Re: Account Number 6015242016 & 6005649014 

Dear Customer (s): 

This is to confirm that your accounts are in good standing and your payments have 

been received in a timely manner monthly. 

Union Bank's decision to place a hold on the refinance of your accounts referenced 

above should not have impacted your credit. 

You can present this letter to any potential lender as confirmation that your accounts 

are not delinquent and all derogatory remarks will be removed upon completion of 

the refinance process. 

If we can be of further assistance, please contact our Customer Service Department -' ..... s~~ Regina Bradshaw 

Customer Service Specialist 

Consumer Lending Customer Service ~~~ -sJ 

~/fJ4 p~ 
90 


75733.049

Ed Fogg 

From: 

::\ent: 

.0: 

Subject: 

From: Patrick Baker 

Ed Fogg [ed@foggmortgage.comj 

Wednesday, September 07, 2011 11:08 AM 

'Ed Fogg' 

FW: Any news? 

Sent: Tuesday, September 06, 2011 3:25 PM 

To: Ed Fogg 

Subject: RE: Any news? 

Sorry no response yet 

Bakerl Patrick 

Special Assets Officer 

Special Assets Group 

Union Bank! 332 EVerett Mall Way 

Everett, WA 98204 

bUnionBank 

From: Ed Fogg [mailto:ed@foggmortgage.cQill} 

Sent: Tuesday, September 06, 2011 02:46 PM 

To: Patrick Baker 

Subject: Any news? 

Ed Fogg 

·k**************************************",,************ ************"'************* This communication (including any attach.l1ents) may contain privileged or 

confidential information intended for a specific individual and purpose, 

and is protected by law. If you are not the intended recipient, you should 

delete this co:m..'rtunication and/or shred the materials and any attachments and 

are hereby notified that any disclosure, copying, or distribution of this 

communication, or the taking of any action based on it, is strictly prohibited. 

Thank you. 
91 


75733.050

1344l-1 

UNITED STATES HOUSE OF REPRESENTATIVES 

COMMITTEE ON FINANCIAL SERVICES 

SUBCOMMITTEE ON OVERSHIGIIT AND INVESTIGATION 

OVERSIGHT OF THE STRUCTURED TRANSACTION PROGRAM 

SUMMARY OF TESTIMONY OF SCOTT L. LEVENTHAL 

May 16,2012 

Mr. Scott L. Leventhal 

President and Chief Executive Officer 

TIVOLI PROPERTIES, INC. 

One Overton Park, Suite 1 150 

3625 Cumberland Boulevard 

Atlanta, Georgia 30339 

Telephone: (770) 272-9495 

Telecopy: (770) 272-7460 

E-mail: sll@tivoli-properties.com 
92 


75733.051

STATEMENT OF INTEREST OF SCOTT L. LEVENTHAL 

This summary of testimony (this "Summary") is respectfully submitted by 

Scott L. Leventhal for use in the United States I-louse of Representatives' 

Committee of Financial Services Subcommittee on Oversight and Investigation 

hearing on Oversight of the Structured Transaction Program. 

r am an Atlanta-based real estate investor and developer and the president 

and chief executive officer of Tivoli Properties, Inc. During my tenure as a real 

estate investor and developer, I have developed urban high- and mid-rise 

condominiums, apartments and mixed-use projects, single-family subdivisions, 

both lifestyle communities and entry-level suburban communities, as well as 

planned the development of hotels. See, Background of Scott L. Leventhal 

attached hereto. My developments have been primarily financed through the use 

of recourse and non-recourse debt from banking institutions, insurance 

companies, real estate investment trusts and equity through funds and private 

investors. 

Since the beginning of the Great Recession, sevcral banks that originated 

my real estate loans have been seized by federal and state regulators. The Federal 

Deposit Insurance Corporation (the "FDIC") subsequently transferred the loans 

from the defunct banking institutions to other banks through whole-bank purchase 

and assumption agreements that have loss-share arrangements with the FDIC or 

13441-3 
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75733.052

joint ventures between the FDIC and private partners through structured 

transactions ("Structured Transactions"). One was liquidated directly to a 

private investor. 

INTRODUCTION 

It is unquestionable that this country is still experiencing significant turmoil 

in the financial markets that began with the Great Recession. Capital for smallbusiness borrowers, which are the pillars of job creation, still remains scarce and 

many small-business borrowers have been rendered financially insolvent. 

Borrowers of failed banking institutions have found themselves in strained 

relationships with federal regulators and their successors over a myriad of claims. 

Real-estate values have plummeted and many Americans have seen homes values 

decline to less than their mortgage. Our nation's ability to heal from the effects of 

the Great Recession rests, in part, on Washington's and the FDIC's ability to 

strengthen our banking system and allow our communities to rebuild. 

Since January 1,2008, federal and state banking regulators have closed 449 

banks with 67 in Georgia alone. See, FDIC website. Many of these were 

community banks provided funding for small-business borrowers such as local 

builders and developers. Because the doors to mega-banking institutions are 

typically not open to smaller builders and developers, many builders and 

developers have found themselves in desperate situations. 

J3441-3 2 
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75733.053

In the modem era, there are many aspects of these bank failures that are 

worth this Subcommittee's eonsideration. First, when a bank is closed by federal 

regulators, federal law allows for the repudiation of the failed bank's contractual 

obligations with the borrower. This is causing significant damage around the 

eounty such as unnecessary litigation between the bank's borrower and the 

borrower's contraetors who cannot be paid without bank funding. Seeond, 

Congress should require the FDIC to dispose of the assets of the failed banking 

institutions in a manner that promotes the best chance for recovery for the nation as 

a whole. 

It is worth looking at the methods that the FDIC utilizes to liquidate the 

assets of failed banking institutions. One method of liquidation is through 

arrangements with finaneially sound banking institutions to transfer the assets of 

the failed banking institution. These assets are usually transferred by whole-bank 

purehase and assumptions and the FDIC backstops the losses that may be sustained 

on the loans of the failed bank. These transfers are to other banks that are still 

regulated by state and federal agencies and are not competitors of the borrowers. 

Another way that the FDIC liquidates assets of failed banking institutions is 

through Struetured Transaetions with private partners in a joint venture. These 

Struetured Transactions usually involve attractive finaneing and are meant to allow 

private partners with expertise in the real estate industry to recover on the assets. 

13441-3 3 
95 


75733.054

These private partners are typically non-regulated entities and in some instances 

are direct competitors of the borrowers' under the loans of the failed bank. 

There are several unintended consequences to Structured Transactions that 

respectfully require examination. First, in many instances, the private pminers in 

Structured Transactions are experienced real estate investors, developers and 

builders, and are in fact direct competitors to the borrowers of the loans of the 

failed banking institution. These private-partner competitors are able to gain access 

to the borrowers' sensitive financial information as a result of these Structured 

Transactions. Most borrowers would have never applied for a loan from their 

competitor. 

Second, the depth of the litigation over collections between borrowers and 

joint ventures under Structured Transactions has, in many cases, drastic 

consequences. This litigation is causing many quality builders and developers to 

seek insolvency protection. 

Third, while the joint ventures attempt to collect on loan guaranties rather 

than seeking to first recover on the collateral securing the loan, the collateral 

wastes away and surrounding properties experience depressed values. This results 

in a vicious cycle that has prolonged the recovery of many local economies, when 

we should be resurrecting development activity to spur the creation of new jobs. 

These joint ventures are purchasing the assets of failed institutions at a 

4 
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75733.055

fraction of book values. They are doing so with assistance from the federal 

govemmen1. This provides them with the opportunity to use their talents and 

resources to reinvigorate the assets, not let them waste. 

BACKGROUND AND ORGANIZATION OF STRUCTURED 

TRANSACTIONS 

Structured Transactions were created by the FDIC following the FDIC's 

experiences in the early 1990s when the Resolution Trust Corporation (the "RTC") 

was formed and the FDIC entered into a number of joint ventures or partnerships 

with the private investors. The purpose of those joint ventures was to facilitate the 

disposition of assets from primarily failed savings and loan institutions. These 

joint ventures purported to provide a greater chance of recovery on the assets of 

failed banks and thrifts by aligning the interests of the FDIC and its private 

partners, as opposed to liquidating the assets through conventional sales methods. 

Since 2008, the FDIC has liquidated certain assets through Structured 

Transactions with private partners. At leasllhirty two Structured Transactions have 

been completed in the last four years involving more than forty-two thousand loans 

having book values exceeding $25 billion. l See, FDIC website. 

Because the Structured Transactions allow the FDIC to retain an interest in 

1 Approximately 17% of the total book value of loans transferred through 

Structured Transactions was from the Corus Bank portfolio which was mostly, if 

not all, non-recourse loans. 

5 
97 


75733.056

the assets that that have been transferred, the FDIC believes that it has a better 

opportunity to recover on the loans of failed banking institutions than if the loans 

were just sold to private investors. Most of the FDIC's private investors that 

participate in Structured Transactions are distressed-debt funds and are not 

regulated by typical banking regulators. 

The FDIC transfers the day-to-day management responsibility to the private 

partners and are responsible for the managing and servicing the loans held by the 

joint venture. In consideration of these management responsibilities, the private 

partner is paid a monthly management fee usually calculated on the gross asset 

value ofthe joint venture, as well as a negotiated share of the profits earned by the 

joint venture upon on the liquidation of its assets. Ostensibly these private partners 

have little to no incentive to promptly resolve the loans because of the dilution to 

their fees resulting from early liquidation of the portfolios. 

While the private partner IS responsible to adhering to reporting 

requirements to the FDIC, these private partners are not remotely monitored at the 

same levels as federally insured banking institutions. Additionally they do not 

operate in the same manner as banking institutions. 

Many Structured Transactions also include seller-financing from the FDIC 

on favorable terms. In some cases the FDIC provides sixty percent of the total 

6 
98 


75733.057

capitalization for the joint venture at zero percent interest for five years. The FDIC 

also then invests a pOliion of the equity capital necessary to fund the joint 

venture's acquisition of the loans, thereby leaving as little as twenty percent to be 

invested by its private partner. 

Some Structured Transactions include provisions that provide for the 

ownership percentage (i.e., the right to profits) to increase in favor of the FDIC 

once the joint venture has achieved celiain return thresholds, as opposed to 

increasing to the private partner. This is contrary to many traditional equity joint 

ventures where the manager is incentivized to generate more profits. The design of 

this structure is intended to prevent the private partners from earning windfalls 

over the FDIC and is part of the inherent issue in Structured Transactions because. 

THE FDIC'S ABILITY TO REPUDIATE LOANS AND ITS EFFECTS 

Bank's that are seized by federal and state regulators hold commercial real 

estate loans such as construction and development loans where the failed bank still 

remains obligated to advance funds. Because of federal preemption law, the FDIC 

is however permitted to repudiate those contractual obligations and may force the 

borrower to scramble to procure capital from other sources to complete the project. 

All the while the borrower is unable to pay its contractors and vendors because the 

loan advances have terminated. This, in and of itself, is causing contractors to file 

IJ441~3 7 
99 


75733.058

liens and litigate to collect the amounts owed from the borrower for the 

improvements made to the project. In addition to starving the contractor from lack 

of payment, damages trom federal repudiation causes many single-family 

communities to become abandoned with partially completed homes and negatively 

impacts values of surrounding properties. 

Meanwhile, the successor creditor to the failed banking institution, which in 

some cases is the FDIC in a receiver capacity, still seeks to collect on the loan 

despite the fact that the creditor has failed to perform its contractual obligations. 

Thosc collection efforts include pursuing the guarantors of the loan for the amount 

of the funds that were previously advanced by the failed banking institution. Even 

though the ability to repay the debt was contingent on the completion and sale of 

the project, these collection efforts are still continuing to be pursued. 

CONFLICTS WITHIN STRUCTURED TRANSACTIONS 

The FDIC's decision to partncr with private partners that are experts in the 

real estate industry - since many of these loans involve real estate IS very 

sensible. However, we need to address the conflict when a borrower now has an 

FDIC private partner, who in some cases is a direct competitor, as its lender. 

First, a majority ofthe loans that are sold through Structural Transactions are 

recourse to the borrower and/or its principals pursuant to a guaranty. Since the 

obligations under the guaranties are also transferred, these guarantors are 

13441-3 8 
100 


75733.059

defending collection efforts from a private patiner - and not a regulated bank. 

Most borrowers or guarantors would not have agreed to provide guarantees to 

these private partners because they never would have applied for a loan from a 

competitor. However, now that there competitor holds the loan, the competitor is 

privy to the confidential and personal financial information of the 

borrower/guarantor, including sensitive financial information relating not only to 

the subject loan, but usually also to the global investments that the borrower 

maintains. 

Borrowers should feel comfortable that when they apply for loans that the 

financial information that is being submitted will remain strictly confidential and 

not worry that the information will end up in the hands of their competitors. 

Consider the sensitive financial information that is provided when a loan is sought. 

A borrower and its principals usually provide, in addition to the financial 

information of the project, personal and corporate tax returns, bank records and 

personal financial statements. This financial information is provided based on a 

clear expectation of eonfidentiality and incumbent duties of the banking institution 

to maintain customer records. When regulators close a bank and transfer the assets 

to a joint venture through Structured Transactions, all of the customers' sensitive 

financial information is also transferred. 

13441-3 9 
101 


75733.060

Second, there is tremendous litigation transpiring around the county brought 

by Structured Transaction joint ventures for claims on guaranties? Under most 

state laws, guarantors are fully obligated on the guaranties they sign. However, the 

Great Recession has prevented many willing guarantors from being able to fulfill 

their obligation. While it is true that some guarantors are capable of paying, but 

unwilling to do so, a majority are not. 

In order to defend collection dTorts from this litigation, many borrowers 

have been forced to seek insolvency protection such as personal bankruptcy. Since 

it is the goal of the FDIC to maximize recovery on assets of failed institutions, 

some joint venture partners of Structured Transactions are forcing same to occur. 

This eliminates competition within the real estate industry and has created an 

unfair advantage for certain private partners which should not be facilitated by the 

federal government. 

Lastly, by pursuing the loan guarantors without realizing on the collateral 

first, many communities around the country - and particularly the State of Georgia 

- have begun wasting away. This waste is causing a prolonged negative effect to a 

recovery from the Great Recession. 

'Notably, I was a borrower of a failed bank that ended up transferring a recourse 

loan to a private partner through a Structured Transaction. Litigation ensued over 

claims against the lender and against me as a guarantor that were ultimately settled. 

13441-3 10 
102 


75733.061

For example, consider a single-family community where half of the planned 

homes have been constructed and the other half are vacant lots. The 

builder/developer of that community has its loan transferred to a joint venture 

through a Structured Transaction and faces collection efforts from the joint venture 

on the guaranties. Rather than pursuing the collateral securing the loan (i.e., the 

vacant lots) and liquidating them to another builder, the joint venture is simply 

suing on the notes and guaranties. During the time that this litigation is 

proceeding, the family that lives in one of the completed houses in the subdivision 

is living next door to a lot or lots that are becoming weed infested and 

accumulating trash. The value of this family's home is directly impacted by the 

waste in this community and the uncertainly of the financial stability of the 

community. When appraisers then value homes for new mortgage financing, they 

lower the value of properties that are proximate to these troubled communities. In 

order to rectifY this situation, we must stabilize our communities and not let them 

waste, create jobs and allow real-estate values to increase to pre-recession levels. 

EXAMPLES OF SOUND STRUCTURED TRANSACTIONS 

Not all Structured Transactions, however, have resulted in the unpleasant 

situations described above. Because some Structured Transactions are primarily 

comprised of loans that are non-recourse to the principals' of the borrower, some 

J3441-3 11 
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75733.062

private partners have focused on collecting and liquidating the collateral as 

opposed to pursuing guarantors. 

For example, a majority of the loans that were made by Chicago-based 

Corus Bank were non-recourse to the borrowers' principals. Following the closure 

of Corus Bank, the FDIC transferred the majority of Corus' assets to a joint 

venture through a Structured Transaction. 3 The joint venture proceeded to take 

control of the collateral securing the loans and used its skill set to liquidate the 

properties. Through these efforts in Atlanta, Georgia alone, the joint venture has 

sold so many condominium units in the last two years Atlanta's condominium 

inventory is nearing nonnallevels. 

CONCLUSION 

The FDIC has done an admirable job working through the effects of the 

Great Recession. My hope is that the FDIC will consider the unintended 

consequences of Structured Transactions and the types of debt obligations that are 

transferred. Bank customers should not be forced to resolve their loan obligations 

3 At the time of Corus' seizure, I had two outstanding loans. I was able to payoff 

one of the two loans but, because ofthe dramatic decline in value of the property, 

was unable to pay the other and the property was foreclosed. The inability to 

payoff the other loan was despite the fact that the units in this project were 

intended to be sold as condominiums and I was able to convert the entire project 

into a rental apartment project, and lease-up the project to over 90% occupancy 

with positive cash flow. While stabilized and cash flowing, the value of the 

property had been so severally impacted by the Great Recession that I was still 

unable to refinance the loan. 

12 
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75733.063

with non-regulated entities, many of whom are direct competitors of the borrower. 

There is significant financial plight that is compounded upon these borrowers. 

Also, there is collateral damaged that is being sustained within local communities. 

It is important that we all focus on rebuilding our economy to bring the Great 

Recession to conclusion. While the concept of Structured Transactions makes 

sense, Structured Transactions should be limited to loans that are non-recourse to 

the principals' of the bon-ower where private partners who are experts in the real 

estate industry can improve the assets and create value to the FDIC and local 

communities. This will permit local economies to start growing by allowing the 

small-business bon"ower to resolve its obligations with federally regulated banking 

institutions and be in a position to focus on the creation of jobs. As we have all 

seen in so many parts of the world, sometimes we have to accept the reality of our 

situation, learn from our mistakes and work towards rectifYing them. 

This 15th day of May, 2012. 

One Overton Park, Suite 1150 

3625 Cumberland Boulevard 

Atlanta, Georgia 30339 

Telephone: (770) 272-9495 

Telecopy: (770) 272-7460 

E-mail: sll@tivoIi-properties.com 

1344\-3 

Respectfully submitted, 

SCOTT L. LEVENTHAL 

13 
105 


75733.064

Prepared Testimony of 

Stuart Miller - Chief Executive Officer 

Lennar Corporation 

Committee 011 Financial Services 

Before the Subcommittee on Oversight and Investigations 

"The ~Federal Deposit Insurance Corporation's 

Structured Transaction Program" 

Room 2220 Rayburn House Offiee Building 

Wednesday, May 16, 2012 
106 


75733.065

INTRODUCTION 

Chairman Neugebauer, Ranking Member Capuano, members of the Subcommittee, thank 

you for tbe opportunity to testify on the impol1ant issue of FDIC structured transactions. 

My name is Stuart Miller, and I am the Chief Executive Officer of Lennar Corporation. 

Lennar is a public company founded in 1954 and traded on the NYSE under the symbol 

LEN. We arc one of the nation1s leading builders of quality homes with operations across 

thc country. 

Tn addition to homebuilding activities, we engage in other business lines, and Lenl1ar's 

Rialto segment is one of those. Rialto Capital Management, LLC, a 100% owned 

subsidiary of Lcona1', is a leading real estate investment and asset management company 

focused on distressed and value-add investments and asset management, workout and 

tumaround strategies. 

Lennar first entered into the business of managing distressed assets in the 1970s and 

dist·essed loans in the early 1990s. Lennar's subsidiary at that time, LNR Property 

Corporation, was formed and managcd by myself and Jeffrey Krasnoff, the current CEO 

of Rialto, who is here with me today. Since 2007, Rialto and its affiliated entities have 

underwritten and/or invested in or commenced the workout and/or oversight of billions of 

dollars of real estate assets, including distressed commercial and residential real estate 

loans and properties, as well as mortgage backed securities. These investments and 

management responsibilities include partnerships in structured transactions with the 

Federal Deposit Insurance Corporation, and Rialto and is a sub-advisor to one ofthe eight 

managers of a Fund under the U.S. Department of Treasury's Public Private Investment 

Partnership Program. 

THE FDIC STRUCTURED TRANSACTION PROGRAM 

As it has in many past downward rcal estate cycles, the FDIC faces the challenge of 

accomplishing its mission of protecting bank depositors who made deposits in failed 

financial institutions without passing the cost of that protection on to taxpayers. The 

FDIC states on its website that it has the following responsibility: 

The FDIC, as receiver for a failed institution) bas a legal responsibility to 

maximize recovery on assets. 

To fulfill that responsibility, the FDIC has created the structured transaction program, 

based upon its past successes with public/private partnerships, which the FDIC describes 

as follows: 

The structured transactions allow the FDIC to retain an interest in the asscts, 

while transferring day-to-day management responsibility to expeli private sector 

2 
107 


75733.066

professionals who also have a financial interest in the assets and share in the costs 

and risks associated with ownership, 

Bidders must be pre-qualified, have demonstrated financial capacity and the 

expCliisc to manage and dispose of the asset portfolio, and have certified 

eligibility to purchase FDIC receivership assets. 

The Private Owner acting as the managing partner must adhere to stringent 

monthly, semiannual, and annual reporting requirements. The FDIC conducts 

compliance monitoring of the transactions on a regular basis in addition to an 

annual agreed upon procedures review of entity operations. 

THE RIALTO/FDIC TRANSACTION 

Rialto is proud to have the opportunity, as one of the successful bidders in a competitive 

bidding process, to partner with the FDIC in its structured transaction program. Rialto 

has partnered with the FDIC to maximize the value of a portfolio of loans acquired from 

failed financial institutions. The loans in this portfolio consist primarily of loans made in 

commercial transactions with sophisticated business bon-owers and real estate investors. 

Rialto, with the benefit of Me Krasnoff's twenty years of experience in these types of 

transactions, is uniquely capable of assisting the FDIC in accomplishing its mission. 

Rialto's experience offers the following speciJ1c beneJ1ts: 

Collection of amounts owed by these sophisticated business borrowers is essential 

to allow the FDIC to protect bank customer deposits after bank failures, reduce 

losses to the FDIC's Deposit Insurance Fund and to help prevent losses 

being passed along to taxpayers. The failure of a financial institution in no 

excuses perfonnanee by the borrowers who acceptcd money to fund 

ventures in exchange for a promise to repay that money. 

Rialto operates in accordance with the loan documents negotiated, approved 

signed by these sophisticated business borrowers, applicable laws, and the 

the court system, both in the spirit and the letter of the law. Rialto's 

assures that bon-owers and guarantors are treated fairly as required by 

further assures that borrowers and guarantors receive the benefits and prcnce,ucms 

afforded them by the loan documents that they negotiated, in most cases with 

assistance of legal counsel, with the financial institutions that agreed to 

them credit. 

The process of recovering amounts owed by sophisticated business 

who defaulted on their loans is actually helping to stimulate the economy. 

example, Rialto often brings current significant deficiencies in property 

payments to often struggling local municipalities and communities, and 

collection and foreclosure efforts place unused or llndemtilizcd property in 

hands of owners who have the financial wherewithal and willingness to 

properties to their highest and best economic uses. 
108 


75733.067

RiaIto, because of its extensive experience in this business, is able to respond to 

and deal effectively with sophisticated business bon-owers and loan guarantors 

who in some cases try to hide their ability to pay debts lhey legitimately owe 

through frivolous litigation tactics and by concealing their assets. 

Rialto effectively uses the judicial discovery process, which is oftcn thc only 

mechanism available to lenders to determine the tmth of borrower claims and to 

achieve the collection allowed by law, pat1icularly with sophisticated business 

borrowers who were well represented by counsel and negotiated transactions with 

risks and rewards they knowingly undertook. 

RIALTO/FDIC TRANSACTION TERMS 

In February 2010, the Rialto Investment Segment of Lelmar acquired indirectly 40% 

managing member equity interests in two limited liability companies ("LLCs"), in 

partnership Witll the FDIC, for approximately $243 million. The LLCs hold perfOlming 

and non-perfornling loans fonnerly owned by 22 failed financial institutions. The two 

portfolios originally consisted of more than 5,500 distressed commercial and residential 

acquisition, development and construction real estate loans with an aggregate unpaid 

p11ncipal balance of approximately $3 billion and an initial total purchase price of 

approximately $1.2 billion. The FDIC retained a 60% equity interest in the LLCs and 

provided $626.9 million of notes with 0% interest. The notes are secured by the assets 

held by the LLCs. Additionally, if the LLCs exceed expectations and meet certain 

internal rate of return and distrihution thresholds, our equity interest in the LLCs could be 

reduced from 40% down to 30%, with a corresponding increase to the FDIC's equity 

interest from 60% up to 70%. As of both November 30, 20 II and 20 I 0, the notes 

payable balance was $626.9 million; however, as of November 30, 2011 and 2010, 

$219.4 million and $101.3 million, respectively, of cash collections on loans in excess of 

expenses were deposited in a defeasance account, established for the repayment of thc 

notes payable, under the agreement with the FDIC. The funds in the defeasance account 

will be used to retire the notes payable upon their maturity. At November 30, 2011, these 

consolidated LLCs had total combined assets and liabilitics of $1.4 billion and $0.7 

billion, respectively. As specified in the original bid documents, RialtolLennar earns a 

0.5% fec io offset its operating costs in perfonning its duties as manager. 

SIX POINTS TO REMEMBER 

I. Rialto was awarded the paltnership with the FDIC in a pure bid program. The 

FDIC defined the doeuments, the pool of assets, the structured finance tenTIs, the 

fees and the relationship with lhe manager in a comprehensive progranl, and we 

evaluated that progranl and bid on that basis, as did every other bidder. There 

was no renegotiation. We took it as defined. We were required to give a 

confonning bid, and the highest bid won. 

2. Rialto/Lennar has invested cash of approximately $250 million in the two FDIC 

4 
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75733.068

ventures. Lennar will not receive any money back until the $627 million loan to 

the FDIC is paid in full first. After the loan is paid in full, Rialto/Lennar and the 

FDIC will split net cash Dow in a 60/40 FDIC/Lennar proportion until all invested 

eash is retumed. Only then, which we expect to be 4-5 years from now, will 

Lennar begin to receive a return on its investment. 

3. The p0l1folios are predominantly defaulted loans (over 90%). Borrowers entered 

into loan agreements with their banks. There was a default. The banks depleted 

capital, failed and were seized. Twenty-two institutions failed and were seized 

by regulators. The FDlC packaged a portfolio of loans from these twenty-two 

institutions that were in FDIC receiverships into structured transactions in which 

it conducted a bid process to seJl40% interests to qualified buyers/managers. We 

took over the management of these predominantly defaulted loans. We did not 

cause the defaults Of negotiate the loan terms, It was and remains our job to use 

our expertise to find resolution, 

4. These assets arc primarily sophisticated commercial transaction loans. They are 

not consumer residential loans. These were loans where sophisticated business 

bOlTowers negotiated for a loan generally with each side represented by 

competent counsel, to borrow in many cases millions of dollars in order to 

generate a business profit. The risks and rewards were elearly allocated within 

the loan documents negotiated at the time, with both parties clearly understanding 

that all the rewards would be concentrated in the borrowers' hands, and 

accordingly, the various risks of business proposition would rest with the 

borrower as well. 

5. BecauBe these were business loans for the benefit of the borrower~ and because all 

of the reward would go to the borrower, the banks carefully negotiated that 

collateral for most of these loans would be both the business assets or propelties 

as well as absolute personal guarantees. Borrowers, to be able to borrow, readily 

gave those guarantees to pay back the loan whether the business proposition was 

successful or not. 

6. We have over twenty years experience in managing and resolving defaulted loans, 

Our process is time tested and well organized. It is crafted around 

professionalism and decency as we endeavor to work with each borrower 

individually and with propliety as we seck resolution. By definition, the 

relationship between a defaulted bon-ower and a lender seeking resolution is 

adversarial and sometimes contentious, Simp1y put, the parties have very 

different objectives. With that said, our program is to work within the foUl' 

comers of every loan agreement, each individually considered, and as well within 

the four comers of the rules and the spirit OrOUT court system and the law. 
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SUMMARY 

Lcnnar and Rialto appreciate the opportunity to be here today. As CEO, T felt it 

important to personally come and speak to you, to answer your questions and 10 

your input as our Company always endeavors to always be transparent and responsive 

all our interactions. Rialto utilizes its extensive experience in management of 

portfolios to assure that the FDIC receives maximum value for the loans it assumed 

failed financial institutions, all while complying with applicable laws and 

obligations owed to borrowers in the collection process. We are doing what the 

requires and what our patiner, the FDIC, and Americans expect. Thank you for 

consideration. 
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75733.070

EMBARGOED 

For Release on 

Delivery Expected at 

2 p_m. Wednesday, 

May 16,2012 

Office of Inspector General 

Testimony 

Before the Committee on Financial Services 

Subcommittee on Oversight and Investigations 

U.S. House of Representatives 

Hearing on Oversight of the FDIC's 

Structured Transaction Program 

Statement of Jon T. Rymer 

Inspector General 

Federal Deposit Insurance Corporation 
112 


75733.071

Statement of .Jon T. Rymer 

Inspector General, I<'ederal Deposit Insurance Corporation 

May 16,2012 

House Financial Services Committee 

Subcommittee on Oversight and Investigations 

Chairman Ncugebauer and Members of the Subcommittee: 

Thank you for your interest in the work performed by the Office of Inspector General (OIG) of 

the Federal Deposit Insurance Corporation (FDIC) relating to the Corporation's structured asset 

sales program. The FDIC uses structured asset sale transactions as a part ofa broader resolution 

strategy for the assets of failed financial institutions. 

The orG is an independent office within thc FDIC, established to conduct audits and 

investigations to prevent and detect waste, fraud, and abuse relating to the programs and 

operations of the FDIC, and to improve the etIiciency and cflectiveness of those programs and 

operations. I was appointed as the Inspector Gencral of the FDIC by President Bush, and 

confirmcd by the Senate in Junc 2006. 

The OIG conduets audits that address FDIC programs and operations. Some of these audits are 

required by law; othcrs are initiatcd based on our assessment of various risks confronting the 

FDIC. These audits assess such things as program etlcctiveness, adequacy of internal controls, 

and compliance with statutory requirements and corporate policies and procedurcs. We pcrform 

our work using internally available resources, supplemented by contracts with independent 

accounting firms when expertisc in a particular area is needed or when internal resources are not 

available. Our work, as well as that of our contractors, is performcd in accordance with 

Government Auditing Standards. 

During the current crisis, the OIG has issued nearly 100 reviews offailcd financial institutions. 

These reviews, pursuant to statute, describe the events that contributed to the institutions' 

failures and the FDIC's supervision of those failed institutions. While we will continuc to 

review each failure of an FDIC-supervised institution, our approach to that work evolved to 

taking a more comprehensive view of common characteristics ,md trends. We communicated 

those trends to FDIC management, and in response, the FDIC undertook a number of initiatives 

to enhance the supervision program. 

In early 20 I 0, we began to [ocus our audit attention on the Corporation's rapidly growing 

rcsolution and receivership management activities, including such risk-sharing arrangements as 

shared loss agreements (SLA) and structured assct sale transactions. The FDIC's financial risk 

exposure pcrtaining to these risk-sharing arrangements is significant, and wc designed our audits 

to assess compliance with the arrangemcnts and the internal controls that the FDIC has 

established and implemented to protect the interests of the Deposit Insurance Fund (DIF) in these 

arrangements. 
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75733.072

I am pleased to discuss the results of our work. As requested in your invitation to testify, I will 

be describing the findings and recommendations of my oilice's two completed audits of 

structured asset sale transactions: the scope and methodology of my office's ongoing work on 

these types of transactions; and, to the extent possible, our review of the complaints tiled by 

borrowers impacted by these transactions. In addition, I will briefly discuss our planned work in 

this area. Before I begin describing the OIG's work, I would like to discuss, at a high level, the 

FDIC's resolution process and the tools that it has been using during the financial crisis. 

The FDIC's Resolution of Failed Banks 

FDIC-insured financial institutions can fail for a number of reasons, including a lack of capital or 

liquidity, poor management, or fraud. When an institution fails, the FDIC serves as the receiver 

for the institution's assets and liabilities. Since January 1,2008, the FDIC has been appointed as 

receiver for 437 failed institutions, with total assets at inception in excess of$670 billion. 

As required by the Federal Deposit Insurance Corporation Improvement Act of 1991, the FDIC 

must use the least costly alternative when it resolves a failed institution. Specifically, the law 

requires the FDIC to maximize the net present value return hom the sale or disposition of assets 

of a failed institution and to minimize the amount 0 f loss realized in the resolution of the 

institution. To fund the cost of resolutions and pay insured depositors when a bank fails, the 

FDIC maintains the DIF, which has experienced an estimated loss of $88 billion as a result of 

these 437 failures. 

In resolving failed institutions, the FDIC markets failing institutions to all interested and 

qualified bidders, offering multiple alternative resolution structures. The FDIC's preferred 

approach is to sell all or a part of the failing institution's assets to an open financial institution 

that also assumes thc failed institution's deposit liabilities. To inccntivize the acquiring 

institution to take on some of the assets of the failed institution, the FDIC may enter into an SLA, 

a risk-sharing arrangement discussed below. 

Any remaining unsold assets become part of the receivership. Thc FDIC may later market and 

sell those residual assets to qualified purchasers through a variety of means, including a 

structured asset sale transaction. This type of risk-sharing arrangement is also discussed below. 

Shared Loss Agreements 

An SLA, which is part of a purchase and assumption agreement with an acquiring institution, 

includes provisions under which the FDIC agrees to absorb a portion of the losses experienced 

by an acquiring institution on a specified pool of assets. While the FDIC generally absorbs 

80 percent of certain losses, in some SLAs during the crisis, the FDIC agreed to absorb up to 

95 percent of certain losses. As of March 3 J, 2012, the FDIC reported that it had entered into 

285 SLAs with an original principal balance of$212.7 billion in assets. 

Given the number ofSLAs and the associated risks to the DIF, we initially identified individual, 

large SLA transactions that, in our judgment, presented significant financial risk to the FDIC, 

and from which we believed we could derive lessons that would help management to develop 

2 
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75733.073

and improve controls. We conducted seven audits of individual SLAs, resulting in 93 

recommendations, of which numerous recommendations related to the establishment of program 

level controls. With the development by FDIC management of more robust internal control 

structures at the transaction level, we later shifted the focus of our work with regard to these 

agreements to the FDI C' s controls at a higher program level. This approach is consistent with 

the one we undertook for our reviews of failed institutions~that is, a more individual focus 

followed by a more global view of trends. 

Structured Asset Sale Transactions 

Not all assets from the failed institutions are sold to acquiring institutions. These residual assets 

consist largely of distressed and non-perf0ll11ing single-family and commercial real estate loans 

and real property that pass into and are held in FDIC receiverships. It is the FDIC's objective to 

return these assets to the private sector as promptly as possible, while maximizing the net prescnt 

value rcturn from the sale and minimizing loss to the DIF, consistent with the FDIC's statutory 

obligations. 

Thc FDIC utilizes multiple vehicles to sell these assets, among which are structurcd asset sale 

transactions. Structured assct sale transactions involve pools of assets trom onc or more FDIC 

receiverships. The FDIC sells or contributes assets to a limited liability company (LLC) formed 

by the FDIC as receivcr. These transactions are competitively bid to prcqualified purchasers. 

The receiver then sclls an interest in the LLC to a private third-party, which manages the LLC. 

The receiver retains either an equity interest in the LLC or a participation interest in the net cash 

collected through the servicing and liquidation of the LLC's assets. Once ownership of the 

assets is conveyed to the LLC, control over the LtC is passed to the privatc third-party. 

The FDIC, acting as receiver for failed banks, rcported that it has consummatcd 32 structured 

sale transactions involving 42,314 assets with a total unpaid principal balance of approximately 

$25.5 billion, as of April 25. 2012. My testimony today addresses the work my office has 

completed on two of thesc structurcd asset sale transactions and describes the scope and 

methodology of our ongoing audit of two other such transactions. 

Completed OIG Audits of Structured Asset Sale Transactions 

The OIG has completed performancc audits of two structured asset sale transactions that we 

selected based on their size and the types of assets involved. The first audit was of ANB 

Venture, LLC (ANB). ANB involved 1,112 individual assets with an unpaid principal balance at 

closing of$1.I67 billion. The Managing Member of ANB is Kingston Management Services, 

LLC. We issued a report on this audit in November 2010 and discussed its findings in our 

semiannual report to the Congress, for the period October I, 2010 through March 31, 2011. 

The second audit my oihce performed on a structured asset sale transaction was of Corus 

Construction Venture, LLC (Corus). Corus involved 101 individual assets with an unpaid 

principal balance at closing of $4.4 billion, and contained an advance funding mechanism of up 

to $1.15 billion to fund the construction of incomplete buildings and provide other asset-related 

working capital. The Managing Member of Corus is ST Residential. We issued a report on this 

3 
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75733.074

audit in April 2012, and summarized its results in an executive summary posted on our public 

Web site. 

My office contracted with CliftonLarsonAlIen LLP to conduct the audits of ANB and Corus. 

The objectives of the audits were to assess compliance with the structured asset sale agreements, 

and to assess the FDIC's monitoring of the agreements. Specifically, to assess compliance, we: 

• reviewed the terms and conditions of the structured asset sale agreements; 

• tested the completeness and accuracy of the initial recording of the assets on the books 

and records of the LLC and the monthly financial reports submitted to the FDIC 

(including management fecs and servicing expenses reported by the Managing 

Member); 

• determined whether the Managing Member employed "customary and usual standards 

of practice" with respect to managing and liquidating assets; and 

• rcviewcd the allocation of cash Hows for compliance with the agreements. 

In assessing the FDIC's monitoring of these transactions, we: 

• reviewed the FDIC's policies, procedures, and guidance pertaining to structured asset 

sale transactions; 

• intcrviewed legal and resolutions personnel responsible for negotiating and oversceing 

the transactions; and 

• reviewed the work of FDIC contractors engaged by managemcnt to perform quality 

control services. 

We concluded that ANB, Corus, and their respective Managing Members complied with certain 

provisions of the structured asset sale agreements, and that the FDIC had implemented certain 

controls for monitoring the transactions. We also noted that the FDIC had planned or was in the 

process of implcmcnting significant control improvements at the time of our audits. However, 

our audits identified a number of control deficiencies involving both compliance and monitoring 

that warranted FDIC management's attention. 

With respect to compliance with the agrcements, both reports included questioned costs relating 

to servicing expenses and management fees. In the case ofANB, questioned costs of$634,412 

consisted primarily of expenses incurred by the LLC that were inappropriately treated as 

liquidation costs instead of servicing costs covered by the management fee. In addition, 

questioned costs included management fees charged on assets that had no value but that had not 

been written-off by the Managing Member. The report also noted that the FDIC could 

prospectively achieve an estimatcd $3.1 million in funds put to better use by addressing issues 

involving ANB' s accounting practices for servicing costs paid to contractors and for worthless 

assets. The Corus report included $6.3 million in questioned costs, consisting primarily of 

unallowable servicing costs, such as professional services provided by real estate development 

firms and travel, meals, and entertainment expenses that were prohibited under the terms of the 

structured asset sale agreement. 

4 
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75733.075

Both audit reports, particularly the report on Corus, found that the policies and procedures used 

by the Managing Members to service and liquidate the LLC's assets were not consistent with 

customary and usual standards of practice. The reports also noted that loan servicing practices 

were not compliant in certain key respccts with the scrvicing standards defined in the 

agreements. We also concluded that ANB and Corus did not implement customary and usual 

standards of practice for safcguarding sensitive, personally identifiable information. 

With regard to the Corus audit, we determined that the Managing Member for Corus reccived 

significant management fees pertaining to nonaccrual and capitalized interest. In the experience 

of Clifton Larson Allen, who performed this work on our behalf, paying such fces is not a 

customary or usual practice. However, the terms of the agreement were not clear on this mattcr. 

Because of this lack of clarity, thc fees were not questioned, but we recommendcd that the FDIC 

revicw the matter further and provide additional clarification regarding the (rca(ment of 

nonaccrual or capitalized interest in futurc structured asset sale agreements. 

In (he ANB audit, we detennined that thc Managing Member of ANB did not maintain sufticicnt 

documentation regarding its asset disposition strategies, and that for more than a ycar, thc 

Managing Membcr did not have ample accounting staff to ensure propcr scparation of dutics 

when authorizing, recording, reconciling, and rcviewing accounting entries and expenses. 

Based in largc measure on thesc compliance-related findings, wc dctermined that the FDIC's 

controls for monitoring structured asset sales needed improvement, particularly in the areas of 

policies, procedures, and guidance, and compliance monitoring program controls and practices. 

During or subsequent to our field work on the Corus audit, the FDIC advised us that it had cither 

establishcd or planned a number of control improvements related to its structured asset sale 

transactions. Such improvements included, among othcr things, issuing policies and procedures 

for monitoring structured asset sale transactions, engaging compliance monitoring contractors to 

perform periodic compliance rcviews of LLCs and Managing Members, assigning additional 

resources for monitoring, and beginning a process for quarterly reporting to the FDIC's Audit 

Committce, an FDIC Board~lcvel committee. 

To summarize, the ANB report contained 10 findings and 24 recommendations. According to 

tbe FDIC, actions had been taken to address all ofthese recommendations, as of October 2011. 

The Corus report contained 7lindings and 10 recommendations. Corrective actions for all of 

these recommendations are expected to be completed by September 30, 2012. 

Ongoing Work Relating to Rialto Structured Asset Sale Transactions 

We are presently conducting an audit of two structured asset sale transactions, both of which arc 

being managcd by Rialto Capital Management, LLC (Rialto). The first transaction involves 

5,166 rcsidual assets with an unpaid principal balance of $2.3 billion. Thc majority ofthcsc 

assets pertain to residential acquisition, development, and construction (ADC) projects. The 

second transaction involves 345 residual assets (primarily commercial ADC projects) with an 

unpaid principal balance of $799 million. 

5 
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75733.076

This audit was requested by FDIC management on October 13,2011, based on inquiries or 

complaints that the FDIC had received concerning the transactions. As of April 30, 2012, the 

FDIC reported that it had received a total of 57 inquiries or complaints associated with 

approximately 65 loans, from members of the Congress, the public, or the media. Thc inquiries 

and complaints dealt with Rialto's aggressiveness in pursuing balances owed on the loans; an 

unwillingness to compromise with borrowers; Rialto's treatment of the borrowers or guarantors; 

the FDIC's handling of the loans prior to their transfer to Rialto; the servicing of the loans by the 

loan servicer engaged by Rialto; and other general inquiries regarding Rialto's operations. 

The objectives of the Rialto audit include the same two objectives ofthc ANB and Corus audits, 

namely to assess compliance with the structured asset sale agreements and to assess the FDIC's 

monitoring of the agreements. In addition, we will assess the FDIC's bidding and selection 

process, and the tenns and conditions ofthe structured asset sale agreements themselves. Rased 

on the nature of some of the inquiries and complaints pertaining to these transactions, we placed 

particular emphasis on the Managing Member's controls over transactions with at1iliates in 

designing our audit procedures for this audit. We also selected a representative sample of assets 

that were the subject of the inquiries and complaints of which we were aware at the time we 

initiated our work. 

Field work for this audit is scheduled to be completed in June 2012. We plan to issue a draft 

report in July, and a final rcport incorporating FDIC management's commcnts will be issued at 

the end of August 2012. Consistent with our practices, the final report will not be publicly 

available, but the report's Executive Summary will be posted on our Web site. 

Audit Work Going Forward 

We intend to continue audits of individual SLA and structured asset sale transactions going 

forward because of the dollar value of the transactions and to provide a deterrent effect as it 

relates to the risk of fraud. However, we also anticipate a shift in the focus of our work 

regarding structured asset sale transactions. That is, we have not yet assessed the effectiveness 

of all of the control improvements we recommended for that program and that the FDI C has 

advised it has implemented. As the structured asset sale program matures and as resources 

permit, wc plan to elevate our focus to a program-level review that assesses overall monitoring 

and oversight controls. Such an approach is consistent with our earlier work examining 

institution failures and our more recent review ofthe SLA program. Upon completing such a 

review, as a next step, we are considering taking a broad, comparative look at the various 

resolution strategies that the FDIC has employed during the crisis in order to assist the 

Corporation in carrying out future resolution and receivership activities. 

* * * * * 

This concludes my prepared statement. Thank you for the opportunity to discuss our work in 

these areas. [am prepared to answer any questions that you may have. 

6 
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75733.077

Statement of Representative Lynn Westmoreland 

Hearing: "Oversight of the Federal Deposit Insurance Corporation's Structured 

Transaction Program" 

2012 

Attached is a submission for the record submitted by American Land Rights Association. This 

includes the personal testimonies of borrowers who have been impacted the FDIC's structured 

transaction program. 
119 


75733.078

American Land Rights Association 

Nationallnholders Association 

"Unlock the Bureaucracy." 

National Headquarters: 

30218 NE 820d Avenue (PO Box 400) 

Battle Ground, Washington 98604 

Phone: (360) 687-3087 

ALRA@pacifier.com 

Honorable Robcrt R. "Randy" Neugebauer, Chairman, 

Michael Ecrett "Mike" Capuano, Ranking Member 

Testimony For Thc Record On FDIC Oversight 

For the Hearing held May 16,2012 

I louse Financial Services Committee 

Subcommittee On Oversight and Investigations 

US House of Rcprcsentatives, Washington, DC 20515 

Updated Testimony by Chuck Cushman, Exccutive 

Director of American Land Rights and Chris Pridgcn. 

American Land Rights Association May 11,2012 

Legislative Office: 

507 Seward Square SE 

Washington, DC 20003 

FAX: (360) 687 -2973 

www.landrights.org 

FDIC Bank Closure Policies and FDIC Authorized Aggressive 

Tactics by FDIC Partners Lennar, Rialto and Others Are 

Destroying Jobs, Small Businesses, and CommunitiesHolding Back Economic Recovery and Job Creation 

Problem: The FDIC's methodology, policies. and procedures, while closing an aVS;@g£"Qftwo banks 

pcr weck have created significant, unnecessary hardships on American citizens, bonowers, and vendors 

of failed hanks. FDIC policies have bcen a driving f()[ce in the destruction of local and the national 

economies, markcts and industries, destroyed hundreds of thousands of jobs and promoted the grow1h 

and market share increases of national banks (too big to lail) to the detriment of community banks, the 

American people and the free market system. 

Thc FDIC's use of Loss Share Banks (Banks or equity group formed banks, that purchase tailed bank 

asscts at deep discounts, which are further indemnified up to 80% of collection loses by the FDIC 

(Loss share banks receive reimbursement of 80% to 95% of losses on assets that don't yield a 

stated return) and Public-Privatc Investment Program or PPIP's [partnerships with publicly-traded 

Wall Street hedge fund companies (such as Rialto/Lennar Multibank. Colony, Kingston, Starwood, 

Roundpoint, and othcr FDIC partners)]. 

These partnerships have fueled and accelerated the degradation of market economies and real estate 

values, artificially prolonged and deepened the cunent economic recession currently impacting the 

country. All this for the pro lit ofthc FDIC's privatc hcdge fund partners. The FDIC has apparently 

unintentionally become an active partner in victimizing hard working Americans and businesses. 

The statutory powers of the FDIC do not cntitle them to piek winners and losers or to create different 

classes of citizens (bonowers versus depositors or the wealthy few versus the American public) 

especially with taxpayer money in violation of federal law (sec TARP) Troubled Asset Relief Program 

requirements). In addition, FDIC procedures and methods have squandered the Deposit Insurance Fund 

in the conduct of their Receiverships and Loss Share Bank Agreements. Finally, let's face it, the FDIC 

has been inconsistent and done a poor job regulating the banking industry. 
120 


75733.079

With re!'ards to the PPIP's. the FDIC is usin!' taxllaver/US Treasurv funded interest free loans to 

finance the lIublic/private structured sales. with little or no return to the tax paver. The FDIC has 

shown no consideration of the unintended consequences to qualitv small businesses with strong track 

records (who were in good standing before the bank closure) and all for the nrofit of the FDIC and their 

publiclv traded partners. These businesses are being destroved by foreclosures created by FDIC policy 

of choosing to partner with the huge Wall Street hedge funds. 

These local businesses are ultimately forced into bankruptcy eliminating most from hiring workers and 

rebuilding the economy. 

The ForC drafted the PPIP documents, which require the minority structured sale participant, 

Rialto/l.ennar (in this partnership called Multibank 2009-1), to pursue borrowers without regard or 

consideration of to the circumstances surrounding their individual loans) until thcy cannot be legally 

pursued anymore. FDIC policy does not even consider whether most borrowers were current on 

their loans. 

Rialto, Multibank, and other FDIC PPIP partners aggressively litigate borrowers, attempt to 

force them into bankruptcy, obtain judgments and further pursue those judgments against 

personal assets and savings and generally attempt to ruin all borrowers and guarantors, unless 

thcy pay the loans off or gain an unappealable court decision in the borrower's favor. They 

aggressively use the court system in their tactics and will punish and outspend borrowers with 

legal fees until they are broken as their legal budget is unlimited and paid by the FDIC using 

taxpayer dollars. There is no way for the average citizen to fight back in court when all the court 

costs and legal fees are being paid by the FDIC (taxpayer). 

These unlucky borrowers had their loan at a bank that just happencd to be closcd by the FDIC. 

Overwhelmingly these borrowers wcrc currcnt with their loans but the FDIC bank reccivership froze all 

loans, funding, and loan provisions. Rialto (FDIC Partner) aggressively uses the threat of the IRS as 

part of their tactics and thcy fund their efforts with taxpayer dollars at no cost to them. Tbere is no 

effort to work with borrowers already damaged by the FDIC's tactics. 

All of this economic disaster has been orchestrated by the FDIC. The FDIC policy requires full 

pursuit of all judgmcnts as a condition for the participating PPI!' minority partner to get paid its 

share. (This statement is repeated below in context.) (Sce attached statements by affected borrowers.) 

The Pl'lP's are rewarded for employing FDIC scorched earth tactics against the borrowers of the 

failed banks and the effect of destroying local economies, jobs, and property values in addition to the 

borrowers' ability to support themselves going-forward. The borrowers did not cause the bank to fail 

and did not cause the disruption of their loans that result from the FDIC's process and usc of outside 

contractors with little or no oversight from FDIC or Congrcss. 

Solution: The FDIC sponsored attacks on small business must stop. Congress must limit the ability of 

the FDIC and their partners to go after deficiencies and personal assets. Collections must be limited to 

collateral securing the loans they acquire. 

What is needed is a simple amendment to the FDI Act and FIRREA, that is a variation on the "Bridge 

Bank" concept, which is already in the FDIC playbook. This will eliminate the waste and misery forced 

on the American public and economy by the FDIC and its partner companics. Together, they are 

destroying local businesses (borrower's) and other members of the local communities, victims of the 

bank closures that were not direct customers of the tided banks nationwide. 

Without diminishing the FDIC's authority or autonomy, this amendment provides a Preferred Least 

Cost Resolution methodology, which proteets depositors, borrowers and vendors of failed banks and 

the markets they serve and the people living and working within those markets whether they banked at 

the failed institution or not. The Preferred Least Cost Resolution protects everyone. 

It treats everyone fairly, equally and with respect. lt eliminates the need for Loss Share Banks and 

FDIC PPIP's partners such as Rialto and Multibank. It docs not create different classes of eitizens and it 

docs not favor equity groups and hedge funds over the borrowers and jobs producers in the local market, 

2 
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75733.080

as do current FDIC methods. It is demonstrably less expensive to the deposit insurance fund than 

current methods utilized by the FDIC. However, ifthe FDIC is allowed by Congress "to do things the 

way they have always been done'" which is clearly not the Least Cost Resolution as required by statute. 

then the destructive effects oftheir efforts and alliances arc reduced and contained by limiting the extent 

oftheir collections to realizing on the collateral securing the loans they acquire. It is still their choice. 

PROPOSED LEGISLATION 

THE PERFERRED LEAST COST RESOLUTION AMENDMENT 

Without diminishing the role, historical purpose or authority of the FDIC as defined within the FDl Act 

and or FIRREA, we propose the following supplemental provision to the body of Jaw known as The FD! 

Aet and 12 USC 1821( e) and its various counterparts in thcir entirety known as FlRREA referred to 

herein as "THE ACTS": 

"Notwithstanding anything contained within THE ACTS to the contTaTy, in which case this provision 

shall control and govern: The Preferred Least Cost Resolution for the Tesolution of the Receivership's 

assets shall be the contribution of capital by the FDIC, from the Deposit Insurance Fund, in an amount 

sufficient to adequately capitalize the Receivership's Capital Account as defined by prevailing 

regulatory standards for banks, in return for a pTcferred return not to exceed 10% peT annum. During the 

teml of the investment: 

-----1. The Receiver shall retain the former bank's name, management and employees to operate the 

ReeeiveTship and manage the Receivers assets and liabilities in the ordinary course and to honor all 

agreements, contracts and responsibilities including but not limited to all depository accounts and loan 

relationships of the formeT institution, thereby protecting all depositors, borToweTs and vendoTs of the 

Receivership. The Receivership will also continue to make advances against valid loan contTacts and 

Tenew loans for qualitied borrowers in the ordinary course. 

-----2. The ReeeiveT shall not allow incentive compensation or excessive salary compensation to be paid 

to OT accrued for the future payment to the former bank's management, now Receivership manageTs. 

ShareholdeT dividends will cease. Committee MembeT I DiTector compensation will be limited. The 

Receiver will employ a new Executive Manager to supervise the activities ofthe ReceiveTship's 

managers and implementation of the regulatoT's safety and soundness recommendations by the 

Receiver's managers on the opeTation. The Executive Manager shall Teport solely to the FDIC as 

regulator in all malters and insure the implementation of the FDIC's policies and regulations. 

-----3. Upon payment of the preferred return and return of all contributions of capital to the Deposit 

Insurance Fund lmmaged by the FDIC, the Receiver and related State Banking Department will Teturn 

sole control of the capital stock to the shareholders and reinstate the charteT of the former bank to the 

shaTeholders and then managers of the former Receivership. 

In the event the FDIC, in its sole discretion, pursues an alternate method as the Least Cost Resolution in 

lieu of the Preferred Least Cost Re.wlllt;on for the assets ofthe Reeeivership, then the collection etforts 

of the Receiver, and any assignees of or successors-in-interest to the ReeeiveT, by statute, will be limited 

to the disposition of collateral securing the Receivership's, assignee's and or suceessors-in-interes!'s 

note(s) in full satisfaction or Borrower's and Guarantor's obligations for the debt outstanding without 

exception. 

No deficiency will be allowed or sought by the Receiver or i!'s assignees or suecessors-in- interest as a 

condition of note acquisition. If the Borrower desires to Tetain the collateral and maintain the loan 

payments on a current basis, then the Receiver will renew the note at a fixed market rate of interest 

limited to a maximum of 6% pcr annum including fees, for a term to maturity of not less than 60 

months, on the same terms, conditions and amortization that were contained in the original contract as of 

the day ofthe ReceiveT's appointment, in which case a default by borroweT will reinstate the ReceiveT's 

contractual right to pursue deficiencies and any othcr remedy allowed by law and enumerated in the 

original loan contract, in the event of borrower default." 

3 
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CURRENT ACTIVITY OF PPIP'S PENDING INVESTIGATION 

Federal law, state law and the Uniform Commercial Code prohibit a party to a contract from bencliting 

from any illegality. It appears that Multibank and other FDIC created PPIP structured sale entities arc 

clearly benefiting n'om an illegal act. 

The transaction funding the FDIC PPIP's appears to be illegal because it does not meet the requirements 

of TAR I' to borrow from the US Treasury. TARP required the borrower to provide the US Treasury 

with an equity interest in thc borrower, so that the US Treasury could participate in the up side if a profit 

was rcalized. It is an essential component of the TARP program. 

The FDIC publicly advertised that these PPIP's would be funded by TARP. These PPJP's failed to comply with 

the law and therefore, their usc oftaxpaycr money appears to be illegal under the law (Troubled Asset Relief 

Program). The US Treasury / taxpayers were not provided an equity ownership position in the PPJ? borrowers, 

that received the public funds interest tree. THE TAXPAYER IS NOT EVEN EARNING A RETURN ON THE 

RISK OF TAXPAYER DOLLARS. The Multibank / Rialto PPIP alone spans 11 states across the country, 

representing 22 failed banks and 5,500 borrowers and $3.02 Billion Dollars. 

To date, there are 31 FDIC PPIP's impacting some 39,000 borrowers nationwide and represent over $23 

billion ofloans and property in jeopardy. Many borrowers have already lost deficiency judgments, assets 

and everything they own to these tactics and many more litigations arc on-going. 

We respectfully request our elected representative in Congress: 

-----1. Halt all funding by the US Treasury for the FDIC Public Private Partnership program until a 

compiete audit is made by the FDIC Inspector General and the GAO (Government Accountability 

Oilice). Further, that the Congress freeze the lands taken by the FDIC and their partners with the 

ultimate goal ofrevesting these properties with the original owners where the abuse of power by FDIC 

and its partner companies have resulted in taking lands inappropriately and using the FDIC extreme 

powcrs inappropriately. 

-----2. Congress must intervene to stop the attack on private owner assets and guarantees until thesc 

public audits arc complete. The mass slaughter of small businesses and the damage to local 

communities must be brought to an end as quickly as possible. In other words, impose an immediate 

injunction against their collection activitics and lawsuits until a thorough investigation can be 

performed. 

-----3. Defund the Multibank I, and any PPIP's not in compliance with TARP, or using TARP funds. 

-----4. Intervene and mandate that judgments already awarded to the Multibank & othcr PPIP's against 

borrowers be vaeatcd due to their participation in an illegal act ecntral to their benefit. 

-----5. Intervene for a mass settlement between the Multibank & PPIP's and borrowers based solelv on 

thc transfer of collateral in full satisfaction of the debt. ' 

-----6. Pass immediate Feeleral Anti-Deficiencv Law that is based on reeentlv aooroved Nevada Law 

AB 273- Anti-Deficiencv Law. This law limits PPIP's (like MultibankiRialto/Lennar) or Private Loan 

Soeculators who re-/Jurchase these notes (or /Jennies on the dollar at deoressed market values and make 

immense IJrofits. These Loan soeculators would be IJrevented from then also suin!! local borrowers 

(or the personal deficiencies to make even more obscene profits after buying already depressed valued 

property or "double dipping". 

Background Explanation: RE: Amendment to the FDI Act and FIRREA: The FDI Act and FIRREA 

allow the FDIC in its sole discretion to resolve the assets for the failed bank in any way it sces fit. It has 

absolutely no responsihility for its results and impact on the economy. It is allowed to violate the most 

basic concepts of common law and contract law with immunity. It has no constraints on its methods or 

procedures and has demonstrated a preference for procedures that arc slow in performance, waste 

Deposit Insurance Fund Dollars 3: I or 4: I as compared to the Preferred Least Cost Resolution proposed, 

4 
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aggregates t()reclosures, destroys local markets, businesses and jobs and rewards the monied partners at 

the expense of the local borrowers, who have lost their investment. These results are completely 

unnecessary. 

Moreover, absolute power corrupts absolutely. The FDIC will pursuc its agenda and make claims of 

default against borrowers that are simply not true, in an effort to mask or defeat claims of "repudiation" 

by the Receiver, which by statute charges the default against the Receiver and effectively eliminates thc 

Receiver~s claims against the bOlTowcr and guarantor. 

Since that is undesirable from their perspectivc (according to the FDIC and its paliners everyone is 

guilty of something if they borrowcd), the FDIC will persist in their claims in haDes of getting their way 

in court or using litigation as a means to get the borrower to stop delete tbc borrower from fighting 

their will. To those ends, the FDIC prefers to hide behind othcrs to obfuscate thc truth, their actions and 

intentions. They routinely use contractors in failed banks to talk with Borrowcrs and dispense the line 

the FDIC wants to project. They hide behind minority partners like Rialto/Lennar in the PPIP's or Loss 

Share Banks [or the same reasons. 

The FDIC managers are career bureaucrats and do not want to be accountable for making decisions to 

their superiors. So they will literally defer a resolution offer from a bOlTower that may be 75-85% oftbe 

loan balance in favor of selling assets off in the debt auctions for pennies on the dollar or for 20-35 cents 

on the dollar to PPIP's or Loss Share Banks, so they can hide behind the claim that it was out of their 

hands. The lesser sum was just the result ofthe "market" mechanism. They have literally refused 100 

cent recoveries from borrowers because it was inconvenient to remove the loan from a block of loans 

going to auction or because they worked an alternate deal with some loan participant behind the scenes, 

that resulted in a discount. 

The FDIC and PPIP partners' methods of operating receiverships is very disruptive to the operation and 

administrative processes of the loan portfolios they take over. Borrowers are often caught in the act of 

renewing their loans just prior to the bank's failure and those maturing loans don't get renewed. So the 

loan matures in the Receiver's possession or with an over-whelmed Loss Share Bank and the borrower 

is declared in default due to maturity. 

Once the bank fails and routine loan billing is interrupted for any reason, the loans that arc shown as past 

due in the system without regard to reason are placed on non-accrual at 3 months and statements stop 

being generated by the loan system, assuming statements were being sent from the outset. The point is 

closing a bank is very disruptive to the borrower and the administration of his note. People not 

receiving statements and are reluctant to send money into the big black hole and hope it gets applied 

properly. Months and literally a year can go by before the new, often overwhelmed note holder gets to 

you regarding your loan, by which time you are in default. 

The FDIC requires their partners to pursue a borrower until they cannot he pursued legally anymore. 

They reward their pmners with Loss Share arrangements that reimburse them for "losses" realized when 

an asset brings less than the loan balance as a result of foreclosure. The Loss Share Banks typically get 

an 80% reimbursement for such losses. Here is an easy example. The loan has a $100,000 balance. 

The Loss Share Bank only paid $35,000for it. The collateral is appraised for $50,000 in a spiral down 

market heavily influenced by the FDIC's procedures and impact in that market. 

So the Loss Share Bank gets a $50,000 asset FMV(fair market value) for a $35,000 investment and the 

FDIC reimburses them $40,000 cash (80% of a $50,000 loss). The Loss Share Bank just realized 

$90,000 ($50,000 FMV + $40,000 cash) on a $35,000 investment. That's a 257% return with no risk. 

The FDIC only offers this kind of deal to Loss Share Banks, not other smaller businesses. 

The PPIP's are back-stopped or 100% guaranteed against deficiency losses using the same formula so 

they make even more. Meanwhile, the borrower has lost his or her investment and the note-holder is 

going after all ofthe loan holder's remaining assets to make up for a theoretical $50,000 loss. This is 

required by the FDIC in return for heing back-stopped. In theory, it allows the 1'1'11' a way to minimize 

the FDIC's back-stop exposure because the PPIP's are pursuing a scorched earth collection policy. 
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The Preferred Least Cost Resolution would have the FDIC using Deposit Insurance Fund (DIF) dollars 

to invest the amount of capital needed to heal the bank's capital account at a preferred return. Then, the 

Deposit Insurance Fund would have an earning asset instead ofa loss related to the receivership of the 

bank. Example: American Southern Bank j'liled April 24,2009. The FDIC estimated the loss to the 

Deposit Insurance Fund would be $41.9 Million Dollars. 

American Southern had been attempting to raise $14 Million Dollars to heal its capital account and meet 

regulatory standards. Therefore, the Least Cost Resolution would have the FDIC investing $14 Million 

at 10% preferTed return to the lund instead of doing it their way and losing $41.9 Million. That's a 

$27.9 Million savings before considering a preferred 10% return on $14 Million invested. Community 

Bank of West Georgia failed 6/26/2009. It was estimated that they needed $25 Million to recapitalize 

their capital account. The FDIC was appointed receiver and estimated a $85 Million loss to the fund. 

That's a 3.5:1 loss versus using the Preferred Least Cost Resolntion. 

This is the end of prui one ofthe American Land Rights Association Corrected House FDIC Testimony. 

Look to Part Two. The pages will start again at number one in Pari Two. Thank you. 
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Part Two ~ 5.11.12 Corrected FD I C Testimony for the House Oversight and 

Jm~sti gat!QillLS_l! ~9Qmmittee 

This document has pew page number stllrting at one. 

By Chuck Cushman. Executive Director. and Chris Pridgen for the American Land 

Rights Association. PO Box 400. Battle Ground. W A 989604. 

060) 6873087 ccushman@pacifieLcom. 

To demonstrate the impact on local markets and the aggregating of foreclosures. consider 

this. It is estimated that the 2009 - 2010 Loss Share Banks will dump $3.5 Billion 

Dollars of real estate on the north Georgia foreclosure market in 2014 to take advantage 

of and maximize the 80% Loss Share reimbursement before it expires. The Loss Share 

Agreements only last for 5 years. This one single event will erush the north Georgia 

economy again in 2014 and delay the state's full recovery until 2025 or 2030. 

In addition, it is estimated that there is a current 2012 over-hang of troubled real estate 

assets held by all note-holders (FDIC, PPIP's, Loss Share Banks and non-failed banks) of 

$10 Billion in nOl1h Georgia alone. All ofthe assets held by Loss Share banks, PPIP's 

and FDIC will get dumped prior to losing access to Loss Share Agreements and taxpayer 

dollars. This is not the market at work. 

This is a designed failure that uses artificial tenns and methods to clear assets trom failed 

banks that benefit a powerful few. at a far greater expense than simply selling the assets 

on the open market, using tax payer dollars at the expense of the tax payer, local 

borrowers and innocent members of the communities so destroyed by these tactics. 

Congress must stop the madness. 

Congress must investigate and curtail funding the PPIP's in violation ofTARP, 

suspend PPIP Collection Activity of all FDIC PPIP's (like 2009-1 Multibank RES-ADC 

Venture, LLC and 2009-1 Multibank CML-ADC Venture, LLC 40% owned by 

Rialto/Lennar,) and promote a class settlement between all PPIP's and borrowers. 

For example, two FDIC PPIP's entities known as Multibank 2009-1 RES-ADC Venture, 

LLC and Multibank 2009-1 CML-ADC Venture, LLC, purchased $3.02 Billion dollars of 

distressed loans in bulk, with knowledge of the loans' distressed condition, using taxpayer 

dollars at 0% interest for up to 7 years under the T ARP program. The FDIC PPIP's are 

Public Private Partnerships in which FDIC retains a 60% interest and the private hedge 

funds (like Rialto/Lennar) retains a 40% interest). There are 27 PPIP's a1Iecting over 

39,000 borrowers and $23 Billion in loans. 

The Muitibank 2009 RES-ADC borrowed $441,698,466 and Multibank 2009 CML-ADC 

borrowed $185,207,975 from the US Treasury and both have arranged the opportunity to 

borrow more. Together Multibank RES and Multibank CML alone have borrowed more 

than Yz Billion Dollars. The American taxpayer earns no interest or return on the use of 

its money. Only Wall Street traded company hedge funds like Rialto Capital, a wholly 

owned subsidiary of a NYSE traded national homebuilder called Lennar Corporation 

profit trom free use of taxpayer money. 

(This is a restatement from the Problem section above.) The FDIC drafted the PPIP 

documents, which require the minority structured sale participant, Rialto (in this 

partnership called Multibank 2009-1), to pursue borrowers (without regard to the facts 

surrounding their individual loans) until they cannot be legally pursued anymore. Never 

mind that many ifnot most were current on their loans. 

Riaito/Lennar, Multibank, and others aggressively litigate borrowers, attempt to force 

them into bankruptcy, obtain judgments and further pursue those judgments and generally 

attempt to ruin all borrowers and guarantors, unless they pay the loans off or gain an 
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unappealable court dccision in thc borrower's favor. They aggrcssively use the court 

system in their tactics and will punish and outspend borrowcrs with legal fees until they 

are brokcn as their legal budget is unlimited and paid by the FDIC using tax paycr 

dollars. 

These are unlucky borrowers who had their loan at a bank that just happened to be closed 

by the FDIC. Ovcrwhelmingly these borrowers were current with their loans but thc 

FDIC bank receivership froze all loans, funding, and loan provisions. 

Rialto aggrcssively uses the threat of the IRS as part of their tactics and they fund their 

efforts with taxpayer dollars at no cost to thcm. Thcre is no effort to work with 

borrowcrs already damaged by the FDIC's tactics. 

All of this has been orchestrated by the FDIC, required by the FDIC and performed with 

the FDIC's full knowledge and rcquirement as a condition for the minority partner(like 

Rialto/Lennar) to participate in thc PPIP. 

The FDIC further guarantees to fund any deficiency realized after collateral is sold, so 

Multibank and the participant Rialto have no risk ofloss on the loans. They are 100% 

guarantecd against loss by thc FDIC. NO RISK. 

They not only take the collateral for pcnnies on the dollar to make a guaranteed profit but 

also seek to take all assets of the borrowers in addition to the collateral on the loan. The 

PPIP are indemnified allainst loss on the disoosition of collateral relative to the loan 

balance. which Iluarantee that the FDIC will reimburse thc orivate soeculators for 

any losses in their attemot to foreclose" on loans. and the FDIC oavs all bloatcd legal I 

litigation expenses and loan management fees of the private speculator minority partners 

(like Rialto/Lcnnar). 

Multibank. Rialto and other PPIP's are rewarded for emDlovin!?: scorched earth 

tactics (total destruction of an borrower's resources. Durelv for historic FDIC anti-business 

policy reasnns rather than economic solution orientated reasons) against the borrowers of the 

failed banks and the effect is to destroy local economies, jobs, and property values in 

addition to the borrowers' ability to support themselves going-fonvard. The 

borrowers did not cause the bank to fail and did not cause the disruption of their 

loans that result from the FDIC's process and use of outside contractors. 

The transaction funding the Multibank PPlP's appears to be illegal because it does not 

meet the federal requirements of T ARP to borrow from the US Treasurv. Delete the 

sentence here and add this: The FDIC arranged for financing from the US Treasury under 

T ARP. TARP required the borrower to provide the US Treasury with an equity interest 

in the borrower, so that the US Treasury could participate in the upside if a profit was 

realized. It is an essential component of the T ARP program. The FDIC publicly 

advertised that these PPIP's would be funded by T ARP. 

The borrowing entities, Multibank ADC and Multibank CML (FDIC and Rialto Capital 

members) borrowed approximately $627MM from the US Treasury but failed to give the 

US treasury an cquity stake or ownership in the borrowing entities Mutlibank ADC and 

Multibank CML. 

Therefore, these PPIP's appear to havc failed to comply with thc law. Therefore, their use 

of taxpayer money is illegal under the law (Troubled Asset Relief Program). Just the 

Multibank 2009-I1Rialto transaction soans I I states across the country. reoresentinll22 

failed banks. As of March 2011 Mav 2012. the FDIC has closed a total of 3127 (illellal) 

structured sale transactions transferrinll almost 39.000 asset loans and $23.3 billion in 

unoaid orincioal balance. This spans a majority of the states and represents hundreds of 

failed banks across the US. 

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171e National Anti-Deficiencv Law would limit the imvacts of the FDIC/Federal 

Government Dolicv eSDeciallv when creatinz DubhciDrivate structured uartnerships with 

national hedge fund speculators (like FDIC partners MultibanklRialto/Lel1l1w). 

This le.eislation needs to be adOf}fed in conjunction with the Preferred Least Cost 

Resolution Amendment vrovosed. It would allow the orizinallender the rizht to vursue a 

versonal deficiencv as lonz as the orizinallender was allowed to continue to overate ill 

'ReceivershiD under the DrolJosed amendment. Drovided FMV of the underlying collateral 

was deducted/rom the outstanding loan balance. 

J{the FDIC decides to close the bank in lieu of the Preferred Least Cost Resolution. then 

the FDIC as Receiver would lose the rizht to [Jursue deficiencies. This lezislation needs 

to be ado/Jled as Federal Law as il musl also avvlv 10 Federal Azencies. the FDIC and 

PPIP's who have already started to claim that they are not subject to state Laws like AB 

273- Anti-Deficiency Law. 

It is critical that the Congress take immediate action to stop the abuses by the FDIC and 

its partncr companies. Pleasc consider and support the recommendations contained 

within this testimony and proposed legislation. The FDIC and their partners are 

destroying small businesses, killing jobs, and worsening our chance for recovery. 

Regarding FDIC openness and accountability. Numerous letters wcre sent by various 

borrowers to the FDIC Chairman Sheila Bair over more than a year. To our knowledge, 

none were responded to. So much for transparency. 

Respectfully submitted for your consideration, 

Chuck Cushman, Executive Director, Amcrican Land Rights Association 

(360) 687-3087 - ccushman(ci)pacifier.com - www.landrights.org 

Contact the two coalitions working to stop this extrcme FDIC abuse: FDIC Rialto 

Affected Borrowers Coalition (FRABCo), 10013 NE Hazel Dell Ave #237, Vancouver, 

WA 98685-FRABCo.org@gmail.com n 503-972-4080. Check out the Frabco 

website: http://reactioncommittee.eom/ 

Second coalition is the FDIC Bank Closure and Foreclosure Coalition section, formed by 

the American Land Rights Association, PO Box 400, Battle Ground. WA 98604, (360) 

687-3087 

It is operating under American Land Rights. Website: www.landrights.org 

Contact: Chuck Cushman at ecushman@pacifier.com 

See attached testimony by other FDIC Bank Closure Victims and other infonnation 

below. 

Other attachments, links, and references that show impact to almost 39,000 FDIC failed 

bank borrowers across the US: 

http://www.nytimes.com/2009/04/07 /business/07 sorkin.html 

The New FDIC Partner "Banks" FDIC Structured Sales Transactions 

Sinee Mav of2008. the FDIC turned to a "oartnershio model to sell lame numbers of 

distressed assets (orimarilv non-oerforminl!: sinl!:le family and commercial real 

estate loans and related real orooertv) held bv recently failed financial institutions." 

(Editors note: Manv of the commercial real estate loans were oerforminl!: but were 

bundled uo in the structured sales giving tens of thousands of innocent small 

businesses no way out.) 

As of March 201 L the FDIC has closed 24 structured sale transactions transferring 

38,800 assets and $23.3 billion in unpaid principal balance. The FDIC stays on as a 

3 
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75733.087

partner in these transactions with the stated goal of capturing upside and appreciation as 

the loans are worked through and the economy and asset values recover. 

.For the borrowers of failed banks whose loans were aeauired in the structured 

transactions. the new .FDIC entities have become. in essence. the borrower's new 

bank as the loans are worked out and resolved with the new owners. (However. 

thev are rarelv worked out. Rialto. Multibank. and other PPIP' throw so manv 

roadblocks into the process that they appear to be deliberately forcing foreclosure 

and bankruptcy. 

Four investor groups (highlighted in vellow below) have dominated the bidding. in some 

cases winning multiple bids. and together accounting for nearlv 60% of the book value 

purchased in structured transactions as well as now controlling over 50% ofloans 

assumed by the FDIC LLC's. 

Winning .FDIC [No. of Implicd Pricc Book Value 

Structured Sale Bidder Loans millions) millions) 

Cache Valley Bank 

761 $63 $279 

Colony Capital 

[Acquisitions, LLC ~,104 $1904 $4,035 

Diversified Business 

Strategies 147 $205 $702 

Gul f Coast Bank & Trust 

733 $48 $146 

Hudson Realty Capital 

Fund V LP 110 $19 $102 

Kingston Management 

Services U12 $101 $1,120 

Mariner Real Estate 

Partners, LLC 1,062 $264 $762 

One West Ventures 

Holdings LLC 3,044 $271 $1,652 

Penny Mac 

2.829 $215 $558 

PMO Loan Acquisition 

Venture, LLC (OakTree 

Capital) 279 $695 :li1,703 

Residential Credit 

Solutions, Inc. 9,230 $1,191 $2,218 

Rialto Capital 

Management LLC 5511 :Ii 1,235 )3,052 

Roundpoint Capital 

Group 6,786 $416 $1,094 

Square Mile Capital LLC 

57 $346 $421 

Starwood (Northwest 

Operating Company) 

LLC 101 )2,725 $4,402 

Steams Bank 

520 $161 $733 

Tuming Point Asset 

Management, LP 1.456 $1 II $314 

Totals 138,842 $9,971 $ 23,293 

4 
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75733.088

We urge and support Congress to pass immediilte Federal Anti-Deficiency 

Law Legislation that is based on recently approved Nevada Law AB 273- AntiQ",DgCI1CY La..'Y 

This law limits bv National Builders or Private Loan Speculators (like 

MultibankJRialto/Lennar) who re-purchase these notes for /Jennies on the dollar at 

de/Jressed market values and make immense /Jrofits. These Loan soeculators would be 

/Jrevented from then also suinz local borrowers for the oersonal deficiencies to make 

wofits that are even more obscene afier buvinz alreadv de/Jressed valued orooertv or 

'''double divoinz". The orizinallender still has the rizht to pursue a oersonal deficiency 

as long as thefair market value of the property is deducted/i'om the note value. 

A national Anti-Deficiencv Law will helo put local businesses 017 a level /Jlavinz field 

with the national comoetitors builders/orivate soeculators 'who are trvinz to drive local 

businesses out of the market. This lezislation needs to be adooted as Federal Law as it 

must also aoolv to Federal Azencies (/ike the FDIC) who through use of taxpayer/US 

Treasurv fimded techniaues of /Jublic/Drivate structured sales 

trv to disoose of [i'DIC closed bank assets with no consideration of the unintended 

consequences. 

The Anti-Deficiencv Law would limit the imoacts of the FDIC/~Federal Government 

volicv esoeciallv when creatinz oubliciwivate structured partnerships with national 

homebuilder competitors (like AfultibankJRialto/Lennar). 

The FDIC has been zivinz awav 7-vear. no-interest. non-recourse fZuaranteed loans with 

aI/ached Loss Share A.fZreements. which zuarantee that the Federal zovernment will 

reimburse Ihe orivate sveculalors fiJr anv losses in their atfemf}! 10 "double di/J" on loans. 

and the FDIC also af{rees to pay bloated legalfees and loan management oflhe private 

speculators. 

In the case of Bulk Sale Portfolio Loans. the aggregate orice oaid for a oortfolio ofloans 

will be oro-rated and applied to each individual loan in the oortfolio. (e.g. if Loan 

Purchaser ourehased $100 Million dollars in loans for $20 Million dollars. the assigned 

price paid for each loan in the portfolio would equal 20 cents on the dollar.) 

The Anti-Deficiencv Law Federal Lefdslation will also add provisiolls to fIive borrowers 

the option to fIet back the oWllership foreclosed properties if desired (now held bv the 

FDIClMultibanklRialtolLellnar) who were previouslv wronfIfully stripped o/their 

propertv bv uniust foreclosure actions that this Anti-Deficiency 

Law Fedeml Legislation would now prevellt. 

This Nevada Law is explained in a video interview at: 

http://www.vegasinc.comlvideos/2011/junl13/5227/ 

A link to the text of the Law is at: 

http://www.leg.state.nv.usI76th2011IReportslhistory.cfm?ID=586 

What does loss share mean and how it works. 

The FDIC uses two fonus of loss sharing. The first is for commercial assets and the other 

is for residential mortgages. 

For commercial assets, the agreements typically cover an eight-year period with the first 

five years for losses and recoveries and the final 3 years for recoveries only. FDIC will 

reimburse 80 percent of losses incurred by acquirer on covered assets up to a stated 

threshold amount (generally FDIC's dollar estimate of the total projected losses on loss 

share assets), with the assuming bank picking up 20 percent. Any losses above the stated 

threshold amount will be reimbursed at 95 percent of the losses booked by the acquirer. 

5 
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For single family mortgages, the length of the agreements tend to run for 10 years and 

have the same 80/20 and 95/5 split as the commercial assets. The FDIC provides 

coverage for four basic loss events: modification, shOl1 sale, foreclosure, and charge-off 

for some second liens. Loss coverage is also provided for loan sales but such sales require 

prior approval by the FDIC. Recoveries on loans which experience loss events are shared 

in the same proportion as the original loss. 

End of Part Two, Testimony by Chuck Cushman and Chris Pridgen for tbe American 

Land Rights Association. 

See additional testimony by other victims sent separately. 

6 
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75733.090

Chuck Cushman, American Land Rights Tcstimony Part Thrce 

I {anorable Robert R. "Randy" Neugebauer, Chairman, 

Michael Evcrett "Mike" Capuano, Ranking Member 

Testimony For The R~.£Q[d On FDIC Oversight 

For the I lcaring held May 16,2012 

Ilollse Financial Services Committee 

Subcommittee On Oversight and Investigations 

US House of Representativcs, Wasbington, DC 20515 

Land Rights Network 

American Land Rights Association 

PO Box 400 Battle Ground, W A 98604 

Phone: 360-687-3087 Fax: 360-687-2973 

E-mail: alra@paeifieLcom 

Web Address: http://www.landrights.org 

Legislative Omee: 507 Seward Square SE - Washington, DC 20003 

FDIC, Lennar, Rialto Wall Street Deals Killing Jobs And Undermining Recovery 

Please read attorney Bryan Knight's "Lennar-Rialto Incentive Analysis" below this FDIC Bank Closure 

Victim overview writtcn by Chuck Cushman. 

The FDIC is closing an average of two banks a weck. In the process they are damaging thousands of 

landowners and small businesses. 

The FDIC bank closure loan resolution partnership with Lennar. Rialto and other Wall Strect hcdge funds is 

forcing the closure of thousands of businesses and dcstroying hundreds of thousands of jobs as well as 

preventing the creation of hundreds of thousands of new jobs to help the US through the economic recovery. 

The FDIC designed incentives for Lennar, Rialto and other FDIC partners are all wrong. 

Below is a document written by attomey Bryan Knight who has had numerous cases dealing with Lennar and 

Rialto. It looks at why the incentives created by the FDIC to get its partners to help resolve the loans 

involved in the bank-closing crisis are actually working against the economic recovery and destroying jobs. 

Lennar and Rialto and other FDIC partners are destroying thousands of businesses costing the country many 

thousands of jobs while being unwilling to work with borrower-victims of Banks closed by the FDIC. 

This document will help the reader understand the poorly designed incentives created by FDIC to deal with 

their closing an average of two banks a week over the past two years. This bank closure process is 

continuing now. The FDIC created process is undermining the economic recovery and destroying thousands 

of jobs. 

This is why Lennar and Rialto and other FDIC partners are forcing borrowers into foreclosure and going 

after their homes and other personal assets. 

This process, in which the Obarna FOIC is an active 60% partner, is working against the stated plan of 

President Obarna to create jobs. It is destroying businessmen who, after losing their personal assets, cannot 

come back and hire people in the future to help the economy recovery. The overall FDIC bank closure loan 

resolution process is undermining the economic recovery, not helping it. 

Chuck Cushman, American Land Rights Association 

(360) 687-3087 - ceushman@pacifieLeom 
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Lcnnar-Rialto Incentive Analysis 

By Bryan Knight 

Here's a synopsis of my thoughts on Lennar/Rialto's role in the FD1C take over of banks: 

1n this country right now the biggest waste of government spending and most damaging program to the 

American public is the FDIC's partnership with various Private-Public Investment Programs ("PPIP's"), such 

as Lennar/Rialto, Through the FDIC's compensation structure to Rialto, the sole motivation for the PPIPs is 

money rather than helping Americans through this countryls worst financial crisis. 

The FDIC and companies like Rialto seek to flush out all troubled assets offailed banks by immediately 

filing suit refusing to work out the loan and refusing to agree to a payment plan that benefits all parties. 

This uncompromising and litigious strategy is implemented by Rialto because it produces the most money 

lor them, which I explain marc fully. 

There is an inherent conflict of in teres! between Lennar/Rialto and their duties to collect on loans of failed 

banks. First, Lennar/Rialto arc paid asset management fees based on the amount of assets under 

management which provides incentive for them to either do nothing or sue, rather than work out a settlement 

with the borrower. If a settlement if achieved, Lennar/Rialto do not get paid management fees. 

Second, Rialto was given a $600 Million interest frec non recourse loan by the Federal Government to 

purchase assets of failed banks. Therefore, Rialto has no risk in collecting on assets because no interest is 

accruing and Rialto is not liable to pay back the loan since the loan is a non-recourse. This gives Rialto even 

more incentive to refuse loan workouts and to collect asset management fees, It is not rocket science, a bank 

that has risk of taking a loss is more likely work with a borrower. Here Rialto has no risk. 

Typically when a bank fails the FDIC allows other banks to bid on the assets. The winning bank then enters 

into a Loss-Share Agreement where the FDIC agrees to pay 85% of any losses the bank takes on the assets. 

This structure gives the bank incentive to work out a loan and entertain settlement because they have the 

potential for a 15% loss. This is how the first of the failed banks were handled by the FDIC. The PPIP 

program stemmed Jrom the onslaught of bank failures. Unlike the loss-share agreements, PPIPs like Rialto 

have no risk of a loss due to the interest free non-recourse loan, giving them no incentive to compromise. 

Third, Rialto is paid at least 60% of its attorneys' fees and sometimes 100%. Given the fact that Rialto will 

incur little to no attorneysl fees motivates Rialto to sue first and ask questions later because instituting 

litigation keeps the assets under management for years. Even if Rialto is required to pay a portion of their 

attorneys' fees, it is paid by the Federal Government's $680 Million dollar interest free, non-recourse loan. 

Inequitable federal laws provide the FDIC and Rialto with aclditionalleverage against borrowers because 

almost all defenses and counterclaims are precluded by D'Oeneh Duhme Doctrine and the Financial 

Institutions Reform, Recovery, and Enforcement Act of 1989 ("FlERREA"). The D'Oench Duhme doctrine stems from D'Oeneh, Duhme & Co. v. FDIC, 315 U.S, 447, 459 (1942), which is a product of the Great 

Depression and the creation ofthe FDIC. This case sought to invalidate secret agreements between 

borrowers and a failed bank. 

The purpose of the D'Oench Duhme doctrine is to provide the FDIC with notice of any loan modifications or 

variances from loan documents. D'Oench Duhme prohibits any claim or defense against a predecessor bank 

or the FDIC unless it is: (1) in wTiting, (2) executed by the bank, (3) approved by the board of directors of 

the bank and (4) the writing was maintained as an oHicial record of the bank. Porras v, Petroplex Sav. Ass'n, 

903 F.2d 379 (5th Cir. 1990). 

This doctrine precludes all claims and defenses against the bank or FDIC that don't meet all four elements, 

which include verbal loan extensions, modifications and payment modifications, fraudulent representations 

by the bank and negligent lending practices. 

For instance, if a bank tells a borrower that their loan will be extended, modified or that lesser payments will 

be allowable and then the bank is taken over by the FDIC the borrower cannot enforce these representations. 

An even more egregious example is if a bank induces a borrower to enter into an acquisition and 
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development loan with the promise that the bank will provide a construction loan and later refuses, the 

borrower is stuck with the loan and cannot claim damages resulting from the tl'audulent representation. 

During the Savings and Loan crisis of the 1980's Congress passed FIERREA to providc powers and 

procedurcs for the FDIC to follow, Sec 12 U.S.c. 1821. One procedural hurdle, eoditled by 12 USC 

1821(d), requircs a borrower to tile any claim against a predecessor bank or the FDIC within 90 days orthe 

FDIC taking over the predecessor bank, even though thc FDIC docs not have to give notice of this 

requirement. See FDIC v. Vernon Real Estate Invs., Ltd, 798 F. Supp. 1009, 1017 (S.D.N. Y. 1992); 

McCarthy v. FDIC, 348 F.3d 1075 (200]). 

If the borrower fails to make a claim with the FDIC within 90 days of take over, all claims are waived. Here, 

there are due process concerns since the FDIC does not even have to give notice of this procedure. Most 

citizens arc not aware of FIERREA and almost always waive their claims. 

D'Oeneh Duhme solely affects those borrowers that have trusted relations with their banks, such that would 

not require written modifications or documentation l(lr payment adjustments. Most banks that have been 

taken over by the FDIC are small community banks that lend to have this precise relationship with their 

clients. 

FJERREA wipes out a borrowers ability to make any kind of claim even ifil is in writing sul1icient to pass 

l)'Oench Duhme. Evcryday citizens cannot be expected to know about this 90 day deadline. The FDIC at 

the very leasel should be responsible for sending notice of the claims deadline. 

These two legal doctrines have in essence invalided hundreds of years oflegal precedent coneerning contract 

and tort law, which gives Lennar/Rialto tremendous leverage against borrowers, because borrowers are 

stripped of any defcnse or counterclaim and left to the mcrcy of I "ennar/Rialto who take full advantage of 

this power. 

The big picture is that no one could have foreseen the real estate crash or this financial crisis, which is why 

the federal government bailed out the big banks that were too big to fail. However, the everyday eitizen has 

received no semblance of help, but instead has been forced to bare the brunt of these negligent lending 

practices. 

Rather than give Rialto $600 Million in interest free loans and millions in asset management fees, the federal 

government should put that money into programs 10 help workout these loans to keep eitizens from tinical 

ruin and businesses from closing, similar to Obama's mortgage laws. 

Bryan M. Knight, Esq. 

KNIGHT JOHNSON, LLC 

Promenade Two 119th Floor 

1230 Peachtree Street 

Atlanta, Georgia 30309 

P: (404) 228-4822 

F: (404) 228-4821 

bknight@knighljohnson.com 

www.knightjohnson.com 

For more infonnation go to www.1andrights.org or 

hltp:/ireaetioncommittee,com/ or call Chuck Cushman at (360) 687-3087 al the American Land Rights 

Association. 

Social Networking Update: The American Land Rights Association has a Page on Facebook. Please sign 

on as a Friend or Fan. Please click on the Like button. 

Also Executive Director Chuck Cushman is also on Facebook.com. You can also tind the American Land 

Rights Association and Chuck Cushman on Linkedln.com. We arc especially active on LinkedIn.com so 

send an invitation to connect and join up. 

American Land Rights and Chuck Cushman are On Twilter as ArnLandrights. 
134 


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Chuck Cushman 

Executive Director 

American Land Rights Association 

(360) 687-3087 

ccushman0~pacificr.com 
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FROf1 : PERFORMRNCFRERL ESTATE GRP FAX NO. : 7705490193 

Press Releases 

(

Joint Statement by 5ecmtary ofthc Treasury Timothy F. Gelthn&., 

Chalnnan of the Board of Governors of the Fedef'31 Reserve System 

Ben S. Bamanke, and Chalnnan of the Federal Deposit Insurance 

Corporation Sheila Bal. 

Contact: Andmw Gray (202) 898-7192 

Legacy Ass&t Program 

To view the Letterof/ntent and Term Sheets, please viSit lillk - PDf 417K 

(PDF Help). 

To view the Conflict of In/eros! Rules, please visit Hnk - P.PE (eQ£HgJill. 

To lI1ew the LB!}BCY SecuriUes FAQs, please visit Unk..c.E'IlE (ED F !-lela). 

The Financial Stability Plan, announOO(l in February, outlined a frarreworl< to 

bring capital into the financial system and address the problem of legacy real 

estale-related assets. 

f On Marm 23. 2009, the Treasury Department, the Federal Reserve, and !he 

FDIC announced the detailed designs for the Legacy Loan and Legacy 

Securities Programs. Since that announcement. we have boon working jointly 

to put in place the operational structure for these programs, inclUding selling 

guidelines to ensure that the laJepayer is adequately protected, addressing 

compensation matters, setting program participation limits, and establishing 

stringent conflict of intems! rules and procedures. Recently released rules 

are detaIled separately in the Summary of Conflicts of lnterast Rules and 

Ethical Guidelines. 

Today, the Treasury Departtrenl, the Federal Reserve, and the FDIC are 

pleased !o describe the continued progress on implementing these programs 

including Treasury's launch ofthe Legacy Securities Publia-Private 

Investment Program. 

Financial market conditions have improved since the early part of this year, 

-and many financial institutions have raised subst.arltial amounts of capital as 

a buffer against weaker than expected economc conditions. While Utilization 

of legacy asset programs will depend on how actual economic and financial 

marl<et condiUons evolve, the programs are capable of being quickly 

expanded ff these conditions deteriorate. Thus, wh~e the programs will 

initially be modest in sim, we are prepared 10 expand the amount of 

reSQurces corrmitted to these programs. 

Legacy Securities Program 

Jun. 15 2011 10: 378M P2 

". ~ t£i, illS AOl'<II1C{':r;SU,:,·cl-. 
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FRO)1 ! PERFORMRNCERERL ESTRTE GRP FAX ND. : 7706490193 Jun. 15 2.011 10:38RH P3 

[ 

The Legacy Seculities prograrn is designed to support market functioning 

and facilitate price discovery in the asset-backed securities markets, aUowing 

banks and otoor financial institutions to re-deploy capital and extend new 

credit to households and businesses. IrT4'fOved market function and 

increased price discovery should serve to reinforce the progress made by 

U.S. financial Institutions in raising private capital in the wake ofthe 

Supervisory Capitat Assessment PfOgram (SCAP) completed in May 2009. 

ThE> Legacy Securities Program consists of two related parts, each of which 

is designed to d",w privata capital into these markets. 

Legacy Secvtlties Pvblic-Private Investment Program ("PPIPj 

Under this program, Tnoasury will invest up to $30 billion of equity and debt in 

PPIFs established with private sector fund rrenngers and private investom for 

the purpose of purchasing legacy securities. Thus, Legacy Securities PPIP 

allows the Treasury to partner with leading inveslrnent management firms in a 

way thaI incre8$S the flow of private capital into these markets while 

maintaining equity 'upside' for US taxpayers, 

IniUaUy. the Legacy SaCUlities PPIP will participate in the ""rket for 

commerctal mortgage-backed securities and non-agency residential 

rmrtgage-backed securities. To qualify, for purchase by a Legacy Securities 

PPIP, th""" securitiQS must have been issued prior to 2009 and have 

ollglnally been ",ted AAA. - or an equivalent rating by two or frora nationally 

recognized statistical ",Hng organizations - without ",lings enhancement and 

must be secured dimctly by the adual mortgage loans. teases, or other 

assets ("Eligible Assets"). 

Following a comprehensive two-rmnth appUcation evaluation and selection 

process, durtng which over 100 unique applications to participate in Legacy 

Securities PPIP were received, Treasury hes prB"<lualified the following firms 

(in alphabetical order) to participate as timd managers in tha inilial round of 

the program: 

• A1lianceBemstein. LP ~nd its sub-advisors Greenfield Partners. lLC and ~ 10 

-7 RialtO Capital Management, LLC; - [' ( 

• Angel", Gordon & Co., LP. and GE CapllaJ Real Estate; J1. t • BlackRook, Inc.; 

a Invesco Ud.; 

• Marathon ~set Management, LP.; 

• Oaktl'ea Capital Management. LP.: 

• RLJ Western Asset Management, LP.; 

• The TCW Group, Inc_; and 

• Welfinglon Management Company, LLP. 

Treasury eveluated these applications according to established criteria, 

including: (i) dernonslfated capacity to raise at least $500 million of private 

capital; (it) derronsttated experience invesUng in Eligible Assets, including 

through perfofmance tracl< records; (iii) a minlrrum of $10 billion (rrar!<et 

value) of Eligible Assets under managermnt; (iv) dermnBtmted operational 

capacity to manege the Legacy Securities PPIP funds In a manner consistent 

with Treasury's stated Inveslrnent Objective while also protecting taxpayem; 

and (Iv) headquartered in the UnilBd States. To ensure robust participation 

by both srml1 and Ial'ge finns, these criteria were evaluated on 8 holistic basis 

and failure. to meet anyone crirerton did not necessarily disqualify an 

"' ........ 11,··'0·.: ....... 
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FRiJM : PERFORMRNCERERL ESTRTE GRP FRX NO. ; 77[3549.0193 

f. Each Legacy Securities PPlP fund manager will receive an equal allocation 

( of capital from Treasury. These Legacy Securities PPIP fund managets have 

also established meaningful partnership roles for small-, veteran-, minority-, 

and wOlll9n-owned businesses. These roles include, soong others, asset 

management, capital raising, broker-dealer, investment sourcing, research, 

advisory, cash man(lgement and fund administration servk:es. Colledively, 

the nine pr6-qualified PPIP fund managers have established 10 unique 

relationships with leading Srn.::iU-. veteran-, minotity-, and women-owned 

financial seNices businesses, located in five different $tatesf pursuant to the 

Legacy Securities PPIP4 Moreover~ as Treasury previously announced. 

small-. veteran~. minority-. and women-owned businesses will continue to 

have the opportunity to partner with selected fund managers follOWing prequalification. Sat forth below is a list (in alphabetical order) of the established 

smallw • veteran-, mlnority-, and women..-owned businesses partnerships; 

• Advent capital Managerrent, LLC; 

• Altura Capital Group LLC; 

• Arctic Slope Regional Corporation; 

• AIlanta Life Financial Group, through its subsidiary Jackson Securities 

LLC; . 

• Blaylock Robert Van. L.LC.; 

• CastleOak Securities. lP; 

• Muriel Siebert & Co., Tnc.; 

• Park Madison Partners LLC; 

• The Wdliams capital Group, L.P.; and 

• Utendahl capilal Management. 

In addition to the evaluation of appjic:ntions. Treasury has condUctad legal. 

compliance and business due diligence on eacn pre--quaJified Legacy 

Seculilies PPIP fund manager. The due dlligence process encompassed, 

among other things, in-person managermnt presentations and lim~ed partner 

reference calls. Treasury has negotiated equity and debt term sheels (see 

attached link for the term; of Treasury's equity and debt investments in the 

Legacy Securities PPIP funds) for each pre-qualmed Legacy Securities PPIP 

fund manager. Treasury will continue to negotiate final documentation with 

each pt&-quaUfied fund rmnager wIth the expectation of announcing a first 

closing of a PPIF in ea~y August. 

Each pre-quafified Legacy Securities PPlP fund manager will have up 10 12 

weaks to raise at least $500 mllio" of capital from private investors for the 

PPIF. The equity capital rei.ed from private investors will be matched by 

Treasury. Each pre-qualified Legacy ~CUtitl9S pptp fund manager will also 

invast a rrinimum of $20 miUion offinn capital into the PPlF. Upon raising this 

private capital, pr<>-qualffied Legacy Securilies PPIP fund managers can 

begin purchasing Eligible ~sets. Treasury will also provide debt financing up 

10100% of the total equity of the PPIF.ln addition, PPIFs will be able to obtain debt financing raised from private sources, and leverage through tile 

Federel Reserve\; and Treasury's Tarm Asset-Backed Securities Loan 

Facilily (T ALF). for those assets eligible for that program, svbject to total 

leverage limits and covenants. 

Legacy SflCurifies end the Term Asset-Backed Securities Loan Facility 

On May 19, 2009, the Federal Resetve Board announced tIlat, starting in .,.1, • .............. ~~ ........ ! ... .... ;_ ... _ • ..-1:..... ____ ~:_I _ .......... __ "' __ I~~,", __ ~ • • -u: ... _ ;:... ......... '" 

Ju.n. 15 2011 10:38A!1 P4 
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75733.097

FRDM ; PERFORMANCEREAL ESTA rE GRP FAX NO. : 7706490193 

"JUly LUV~. u::l tdll I IUijll"'(.flIdIUY lAJln!IIt:l'I\.oldllllUl~!:J~-JJo ... tu::O ::.el...UfIU~~ ~~ut:;:tJ 

before January 1, 2009, ("'<>!lacy CMBSj would becorm eligible collateral 

under the T ALF. The Federal Reserve and the Treasury also continue to 

v.ssess whether to expand T ALF to lndude legacy residential mortgage--

backed securities as an eligible asset class. 

The CMBS rrarket, which has financed approxirrately 20 percent of 

outstanding commercial roortgages, including mortgages on offices and multifamify residential, retail and indus1rial properties, came to a standstill in mjd~ 

2008. The extension of eligible TALF collateral to include legacy CMBS Is 

intended to prorrote price discovery and liquidity for legacy CMBS. The 

anoouncements about the acceptance of CMBS as TAlF collateral are 

already having a nolable impact on rrarkets for eligible securities. 

Legacy Loan Program 

In order to help deans. bank balan<:a sheets of troubled l<>!Iacy loans and 

reduce thf;J overhang of uncertainty associated with these assots, the FDIC 

and 1reasuty designed the Legacy loan Program alongside the leg~ey 

Securities PPIP. 

The Legacy Loan Program is intended to boost private demand for distressed 

assets and facilitate rrar1<et-priced sales of troubled assets. The FDIC would 

provide ove~fght for the fonnation, funding, and operation of a nur't'ber of 

va-hides that will purchase 'I:hest!I assets frOm bankS or directly from the FDIC. 

Private investors would invest equily capital and the FDIC will provide a 

guarantee for debt finaO£iml issued by these vehicles to fund asset 

£urchases. The FDIC's guarantee would be collateralized by the purchased 

assets. The FDIC would receive a fee in return for tts guarantee. 

On March 26, 2009. the FDIC anl'lOunced a comment period for the Legacy 

Loan Pmgram. and has now incorporated this feedback into the design of the 

program The FDIC has announced that it will test the funding !'1"1BChsnism 

contemplated by the LLP in a sale of receivership assets this summer. This 

funding mechanism draws upon concepts successfully employed by the 

Resolution Trust Corporation in the 1990s, which routinely assisted in the 

financing of asset sales through responsible use of leverage. The FDIC 

expects to saricH: bids fOT this sale of rec&lYership assets in July. The FDIC 

remain's COITlITitted to building at successful Legaey Loan Program for open 

banks and will be prepared \0 offer tt in the future as needed to cleanse bank 

balance sheets and bolster their ability to support the credit needs of the 

economy. In addition, the FDIC will continue to work on ways to Increase the 

·JizaUon of this program by open banks and investors. 

### 

Congress created the Federal Deposillnsurance Corporation in 1933 to 

restore pubnc confidence in the nation's benking system. The FDIC insures 

deposits at the nation's 8,246 banks and savings associations and it 

promotes the safety and soundness of these institutions by identifying, 

monitoring and addressing risks to which they are exposed. The FDIC 

receiVes no federal tax dollars insured financial institutions fund its 

operations. 

FDIC press releases and other information are available on the Internet at 

'!;'Ww.fgic gQ\'. by subscription electronically (go to . ,.,ww.fd;c,goY/about!subscriptionslindex html) and may also be obtained 

Jun. 15 2fJl1 10=3SAM P5 
139 


75733.098

FROM : PERFORMANCEREAL ESTRTE GRP FAX NO. : 77064901'33 Jun. 15 2011 10: 398M P6 

5/10J121i!~SIJf'1 

/ Public-Private Investment Program for Legacy 

Assets 

From Wikipedia, the free encyclopedia 

On March 23,2009, the United States Federal Deposit Insurance Corpomtion (FDIC), the federal Reserve, and the 

United States Treasury Departrrent anooUllCcd the Public-Private Investment Pmgmm for Legacy Assets. The 

program .. desigruxllo provide lXtuidity lOr so-called "toxic assets" on the bahnce sheets offinanchl institufuns. This 

program .. one of1lle initiatives coming out of the iIllplmrentatlon of1lle ThoubledAsset Reliefl'rogrom (TARP) as 

impJmnentcd by the U.s. Treasmy under Secretary Tirmthy Geithner. The rrnjor stock muket indexes in the United 

Stales mllied on the day of the announcement rning by o..,,,r six percent wi1h the sbares ofbank stocks leading the 

way,[lJ As ofearJy June 2009, the program had not been implemented yet and is considered deJayed.[2] Yet, the 

~ Legacy Securities Program inplemented by Ute federal Reserve hls begun by full 2009 and the Legacy Loans 

Program is being tested by the FDIC. The proposed size of the program bas been drasfualJy reduced rehtive to its 

proposed size when it was rolled ouL 

Contents 

• 1 Background 

• 2 Three basic principles 

• 3 Two assets types 

• 3.1 Legaey loam 

• 3.2 Legaey securiti>s 

• 4 Criticism 

• 5 Refurences 

• 6 External1inks 

Background 

One majorproxitmte caose of the Fironchlcrisis of2007-2008 is the pmblemof"legaeyassets"bothrealestale bru 

held directly on the books ofbanks (''legacy loans" and securities (ADS's and MBS's) backed by loan portli>lios 

(''legaey securitks'? These assets create UlICerlainty around the balance sheets ofiliese financid institutions, 

colI1'rornising ilicir ability to raise capital and their willingness to irrrease lending. 

EorOCrin1he decade, inrespome to the economic downturn caused by the September II, 2001 attacks, the Federal 

Reserve lowered ita target interest rates which, along with sccuriti2ed credit instrlltOOis (Ilgacy assets), caused 

increased credit availability fur real estate loans. This increase in the availability of credit pwh:<i up housing prices, 

causing a bubble. 

The problerncame with the burstmg of the housing bubble in 2007, which geoetated losses lOr inwstots and banks. 

Losses were COIIl"Olnded by the bx uOOerwriting standards that had been med by SOItll Enders ani by the 
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Fro(OM : PERFORMRNCERERL ESTRTE GRP FRX NO. : 770649121193 Jun. 15 212111 1121: c1(1RM 

5/l.Q/12,1Z:S0P]I. 

prolifurafun offuecomp1cx securitization instruments, satre of whose risks were not fully umerstoad. The resulting 

reed by investors and banks to reduce risk triggered a wide-scale deleveraging in fuese nmkets and led to lire sales. 

As pri:es declined, many traditional investors exited tOOse markets, causing declire. in nmket lituidity, As a result, a 

regative cycle developed where dec!iniQg asset prices have lriggered further deJevemging, whi:h bas in tmn led to 

furtber price deeIines. The excessive d"""unts enbedded in some iell""Y asset prices are now straining Iho capital of 

U. S. financial institutioDS, Jimiting 1beir ability to lend and increasing the cost of credit throughout the financial system 

11\e lack of clarity about the value of these legacy assets also nude it difficult ror sotre Jinancnl institutions to raEe new 

private capital on fueir own. 

It is widely but oot universally held that fue true value of each asset can be determined by swift, scrupuhus research 

using appropriate sol!ware; and that many banks' and financial funs' ~ to do this is caused by tIci' refi=l 

to acknowledge responsibility fur dangerously sloppy past sales and plllChase pracfues.[citation needed] 

Three basic principles 

( Using $75 to $100 billion in TARP capital and capital :If",n private investo"" the Pub&:-Private Investtrent Program 

(P-PIP) will generate $500 bilOOn in purchasing power to buy 1eIl""Y assets with fue potential to expanl to $1 trilli.m 

over tirre. (3) The PubJil-Private lnvesttmnt Program will be designed around 1hree basic principles: 

• Ma:xlmi2ing the irqlact of each taxpayer dollar: first, by using governrrent financing in partnership with the FDIC 

and Federal Reserve and co-investrnent with private sector investors, substanlial p>=hasingpower will be 

created, rmking the tOOst of taxpayer "'60>=" •. 

• Shared risk and profits witbprivate sector participallts: secon:!, fue Public-Private lnvesttrent Program ensures 

fuat private sector participants invest akmgskle the taxpayer, with fue private sector investors standing to bse 

their entire inves1ment in a downside scenario and the tnxpayer s~ m. profitable returns. 

• Private sector price discovery: 1hird, to reduce the likelihood that the govemrtI'Ilt will overPay ror these assets, 

private sector investors competing with one another will establish 1he price of1he loans and securires purctnsed 

under the program [citation needed} 

Two assets types 

The Pub&:-Private Investtrent Program bas two parts, addressing both the legacy blltlS and lel?llCY SCClll'iOOs chgging 

the balance sheets OffinaIlCial funs. The funds will com: in many inslances in equal parts from the U.S, Treasury's 

Troubled Asset ReliefProgtam mmies, private investors, and from loans from dle Federal Reserve's Term AssetJlacked Securities Loan Facility (rALF). 

Legacy loans 

The overbang oftroublcd legacy hans stuck OIl bank balance sheets has nnde it difli:uh fur banks to access private 

nmlrets roroow capital and limited their ability to lend. To cleanse bank babnce sheets of troubled IegJICYloans and 

reda:e the overhang of uncertainty associated with these assets, tIxly will attract private capital to purchase eligible 

legacy loam from participating banks through fue provisi:Jn of FDIC debt guarantees and Treasury equily coinvestment, The Treasury I?epartmmt currently anticipates \hat approxinntely baIf oflho TARP resomres JOr kg;wy 
141 


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FRX NO. :7706490.193 Jun. 152011 10:41R!1 P8 

5/10(1212:50PII 

{ assets will be deyotro to the Lel'!lo/ Loans Program, but ihe ptOg><lI1l will albw fur ~iIi!y to alkx;ate resources lOr 

l 1be greatest impact. 

A broad array ofinvesrors are expectod to participate in the LeglCY Loans ~ro~ The part:i;ipafun ?f iOOMIwl 

imeslors, pension plans, insurnnce companies and other long-term mveslors .. parti;ularly ~ncouraged. The Legacy 

Loans Program will fucilitate the creation ofindMiual Public-Pnvate fuves\roellt Funds which will purohase assct pooh 

on a dEcrete basis. TIle prog><lI1l will boost private denand fur distressed assets that are currently held by banks and 

tilcilitate muket-prieed sales of troubled assets. 

f

The FDIC will provide oversigbt fur the funretion, fimding, am operafun of these new funds that will purchase assets 

from banks. TreasUty and private capilal will provide equity financing and tOO FDIC will prome a guarantee fur debt 

financ!!g issued by the Public-Private fuves\roellt Funds to fund asset purcbases~ will manage its 

itiVe.tment on behalf of1l.!Xpayem to ensure tbe public interest is protected. The Treasury intends to proVide 50 perce! 

of tOO equity capital fur each fund, but private mmagem will retain conlrol of asset manage=nt subject 10 oversight 

from the FDIC. 

Parchasing assets in tOO Legacy Loans Prog><lI1l will occur through tOO fulbwing process: 

o Banks identiJythe assets trey wish to sell: to start tI.., process, banks wiIldeciie wbi:h asse1s usually a pool of 

loans they would like 10 sell The FDIC willcomu;t an analysi< to detennioo the amount offundingit is willing 

to guanmtee. Leverage will not exceed a 6-10-1 debt-To-equity rafu. Assets eligible fur purchase will be 

determined by the participating banks, tOO .. prinmy regulators, 1be FDIC and Treaswy. Fimncial institufuns 0 

all sires will be eligible to sell asse1s. 

o Pools are auctioned off to the highest bidder: the FDIC will conduct anaucthn fur these pools of loans. The 

highest bWer will have access to the Public-Priv>te Investment Program 10 fund 50 percent of the equity 

requirement of their purohase. 

to

" Financin£ is Eroviled 1hrough FDI~ejf.the seller accepts the EUlChase ~, the buyer woukl recejv 

financingbyissningdebt~ by the FDIC. The FDIC-guaranteed debt woukl be collareraJi2ed b~ 

~ed llSSe1s and tI"C FDIC would receive a ree in ret;ym lOr its ~e. 

Private sector partners tmnage the assets: once the assets have been ~~te fimd managers will control 

and mmage the assets tmtiJ. finalli)uidation, subject to str:i::t FDIC oversigbt. 

Legacy securities 

Secondary tnaIkets have become highly illiquid, and are trading at prices bebw where they would be in nonnally 

functioning markets, These semnities are hell by banks as wen as insuJ:ance compani:s, pension funds, nrutual funds, 

and funds bell in individwlretirelrent accounts. 

The goal of the Legacy Securitios Program!; to restart the muleet fur leS/ICY securities, allowing banks and other 

:financial instilDtions to free up capital and stimulate the extenshn ofnew credit The TteasUty anti;4>ates that the 

resulting process ofprk:e discovery win also red""" the uncertaintysmrouolingthe financial institutions boldingthese 

securities, potentially enabling them to raise new private capital Tbe Leg;ocy Securitios Program consists of two relat 

parts designed 10 draw private capilal into these muke1s by provning debt:financing liom the Federal Reserve lIIlle 

the Tenn Asset-Backed Securities Loan Facility (TALF) and Ihrough matching private capilal taBed fur dedi:ated 

funds wgeting Jegncy securities. The lending prog><lI1l will address the broken mukets fur securitios tied 10 residenti 
142 


75733.101

FROM : F'ERFORMANCEREAL ESTATE GRP 

Holland & Knight 

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White Conar DefenRlf Alert. ~ May 

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In II case of first impression, the U.S. 

Court of Appeals for the Ninth Cin:Llit 

recently heM mat: i'J party who provide!; 

C!ttorney-cUent prtvileged materials to the government mpy not therol'!after 

claim the privilegfi! in r;jvill1tIgation. 

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Business: ahd Tax.: Alert - MillY 7, 

2012 

On April 19, 20121 me O.S. Department 

of the Treasury iss:ued fil1al regulations- that requll"e l'l!PQrtjng of inf;E!.n!'st on deposits maint3ined at the U,S. offices 

of certain financial instibJtions and paid 

to ('1QI'lre$ldent OIlien IndIViduals who iU@ 

residents in certain counlTies. The;e 

regulations are the latest development 

in the broader U.S, government tdfort to crack down on tax eva~lon by U.S. 

persons and on the foreign jnstibJtions 

that assist them. 

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FAX NO. : 7706490193 Jun. 15 2011 10:41AM P9 

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FInancial Recovery Alert - March 26, 2009 

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u.s~ Trei'l5Urv De~rtment Releases Details on Publlc-prtvate Partnel"5hip lnvC$bne:nt ProgI'.ilQ1 to Purchmse DI5b'es5ed/Legacy Assets: 

From Finaru;;i.,t Institutions Nationwide. 

March 25, 2009 

u.s. T~ o.PII~ .. 1It Rlilll.a- Dlt.1k on PUlltk>ftriw.-te Part~p Jnv-t.....t prog,.m ta purdla_ J)ldrem!ed/Ulgaqr "'~ F,...,. FlNI'fldof IMtftutkIN Nlltkl""",,60 

In a continuing effort to encourage ftnanc:tallnstitutions r;o increa.se their lending 

activities and In Drder to jump start cn!!dit markets throughout the country, the U,S 

Tre~sury, Department (Treasury) In conjunction with the Federal DeposIt InsurancE Corporation (FDIC) and the Federal Reserve has announced the Publlc-PrNate 

Investment Pro~ram (PPIP). 

Set forUt belOw is ;an overView of PPIP whicn was roDeti out earlier this weeK. M 

more details with respect to PP}P bec;ome availabk:;~ Holland a Knight s Financial 

Recovery Team will provide furtfter infunnation. 

TbnJe ails!!; p.nnd.pletJ. 

[

Using $75 to $100 billion in Tro\.lbled .Assets Relief Program (TARP) fUnding 

supplemented by an Infusfon of capital from private invEStors, PPIP is intended to 

generate ovet" $500 billion in purchaSing power to buy what are chal'<Jderized by l::t1e Admlrtistr"etlon as Leg~cy Assets'" (formerly toxic assets"'). Legacy Assets Will 

Indude whole loans secured by re.1:d@state, additional bank asS"~ts and wrnmeroal 

mortgage-backed securities and ceside:ntil;d mortg~e--bad;ed securities Jssued 

prior to 2009, but limited to such $el;ulities originally rated AAA or equivalent by a 

least MO naHonally r'ecogni1:ed rating ag.encies, PIPP nps been designed around 

tfJ.ree basic prindpies: 

.1, leveraging the Impaeto' the Government Fund$~ By using gClvernment finandng :as well as co~inve$tment by priv~te sector invL'!smrs, substantial purchasing power wit! be created, making the most of government tesaUC'CeS and lncerrtfvizing private in~tment, 

2. Sharing of Both AJsk aM Pr'l)fns With Private Sector Participants! 

PPIP enables prtv;"te sedor partlclpants 

to inve.it alongside the government: agencies. Private sector 

~ I f inves~rs loss Is capped at their eQul IrlVeslmllmt and the will 

(.G.tA-tft' -=>'" share In pro a n9 w gov.emmen 

3, Private Secb;Jr Sets pricing: In ordt!ll" to redure ltIe likelihood thatthl govemmeflt may overpay for I'he-s~ ""sst!\:!:., private sednr lnvestors 

will bid against one another In auc.ttons to establish the pril;e of the 

asset pools and securities purchased under the PPIP. 
143 


75733.102

FROM : PERFORMRNCERERL ESTATE CiRP FAX NO. : T?06490193 Jun. 15 2011 10: 42RM P10 

Two Components ror Two Typo. af AsIlatR 

PIPP has two parts~ addressing both l~gacy loans and legacy securities on the 

balance sheets of finanela' firms: 

1. l.egacy Loan_: The glut of troubled legacy lo~ns remlllnlng on bank 

balance sheets tws m~de it difficult fQr- banks to access priVi!lte 

markets for new capital and. coupled with .-eserve requirements, has 

limited their ability to lend. 

2, Legacy $ecurJU .. : Seamdary markets have become highly IJIlquldl 

and, to the exrent they are tTadlng at all, ore t/'i!dlnlJ at prfces beloW 

those eXPe(:ted In normally fundfoning markets. l11ese securitie$ ate currently held by banks as well as insur3i'l-ce companies. pension funds. muruaf fi,lnd:s and fUnl:l5 held in indiviaual reHrement at;.coun~. 

Pprt One! The wIlIJG"Y lmJns prog'lfm 

To assist banks in. clearing ba~nc~ sheets- of troubled legacy loans~ thE! FDIC and 

Treasury are seeking to a~ct private capital (0. putchase eligible legacy foaM from partlclpatlng banks through the proviSion of FDIC debt guaranb!es and 

'freasul'Y equity co .. investment. 'The criteria fer bank loans and .$$f!t!s whIch 

constJtute Eligible Assets'" will be set: by the 

• PrlvlItt! InJl"stors.56'I" Prices: PrMpectlva partfdpanl.s In the Progrom will 

be subject to FDIC qualification; hOwever- the AdminIstration has sta~d that executiVe compensaoon restrictions will not apply to paS$ive private 

investors. The PlI,ticipatltm Df Indlvld,utllnv •• ton, pe_ion plans, InsurMnDlI wm~nlfu; and offJer Ir:""II-&l,.,,. Investol'$ Is. beIng 

enO()ur8(lfJd. The Legacy Loans J:'rogram will create individual Publ1c~ 

Pr-lI,'ate Investment funds which will purchase asset pools on a discrete 

basis. The aim of the Program is to boost private demand far distressed 

assets that are l:urrently held by banks and facilimte mBrket~prlced sales of 

the troubled loans and other bank assets.. The FDIC will seek public 

comment concerning the legacy LDans Program and while no Stilft date has 

been set, the Admmi$b'.,')tlof"i N$ JI1Q'I~tec;f that It hopes to launch the 

Program as quickly as possible. 

• FDZCr:o ProvfdfJ Ovef$lgh~ Thill! FDIC will provide oversIght for the 

ror-mation~ funding and opernUon of these new fUMs that Will purt:h3se pools 

of Eligible As~ets from banks, 

• Joint Rnandng F,."", T,.. .. UI')'I Pt'/ttal.e OJplbJ/ .nd FDIC: Treasury and private capital will prOVide matclung infusions of equIty and the FDIC 

will pro\(Jde a guarantee fer tfebt flnandng Issued by the Public-PrIVate 

Investment Funds to fund the: purchase of pools of assets. Treasury intends to provide 50 petcent of the equity capltat tor e.:tch fund. Under this PrograrT' private managers ",,\II t'etain control of <Jfi"5et management subject to oversight by tne FDlC. 

• Purdrll$iltQ AIrs-etc TlrrDuglt the I..IIIJII'Y lDan1 Program: • BlInks Identify the blrGIS They Wl.sh f)) 5,,11: 

TQ start the. proceS5, banb will designate thos.e 8S$ets that they 

would like tn seH usu~lly a pool of loam: (and based upon me 

information reJeased by dle AdmInIstration thls week; such 1003115 are likely to indl.ld@. In large part,. real eSC!lIb! mortgage IOttf"iS)4 The Fele::: 

Will conduct an 'IIn"lysls 1D determine the amount of funding It is 

willing to guarantee. leverage will not eKc;eed a 6~tD-l debt-to-i'!"quito, 

ratio. Assets eligible for purchase wDi be. determined by the 

~ttidpatlng bankst tflelr prfmary reglJlatol'S, the rolC and Treasury 

The Program is intended to lncllJde fioandal Institutions of aU sizes. 

• Pools.Are A4t1ioned f)) ttl. fflghut IIIddl!lr: A thlrdMpartY valuation firm, sell!!cted by the FOrC, will prvvidol! independent va-ll.I!ltJon advic;:e to rt'll'! FDIC with respect b:J ee.c:h jX'Iof c 

Eligible Asset5.. The fDIC win conduct- an auction ror these pools of Eligible Assets. The hlgllest bidder 'Wih have ao::ess to ,,"PIP to fund 51 

percent of the eqUlty ~qutred for purchase. 
144 


75733.103

FROI'1 : PERFDRMRNCERERL ESTRTE GRP FRX NO. : 7705490193 Jun. 15 2011 10; 43RM P11 

t 

. Financing Is SUpPGrfrld by FDIC Guarantee: If the seller accepts the purchase prices the buyer wilt receive finanong by IssUlOg debt guaranteed by the FOre. The FDle- guaranteed debt will be collateralized by the purchased assets. The 

FDIC will receIve a fee tor issuing Its guarante~, 

7. . hlvllte Sector Fund Nan"lIen Han_fie Ute As.setIR: 

~ Once the assets hl!ive been soW, pnvate rund managers WIlt conll"QI J '4<--"J() -~ Bnd. manage the a$.5ets until final liqUIdation. subject to roIC 

overs1ght 

S~~e lnYlUltmef1f iJrd.,.. \11& bgaJ;l' l.<J1lr$1"tQg.;rn 

Sl.1"11I! ... J;.<.<f1\:fu.,,,p-,d<i .... ;.'knti"'I~II8""lthH~f_ .. ~du!ili,~illlrt>o~t.tt-...I:t:o~""'"l.-J 

~~""'''''h Ih .. FDIC 

~f~f>~!n ... FDlc'"'~It..I .......... ,,, .... ,,."'~~!h. .. ~~lIndNr!W.~chl.td.e,·~h<:wllilnf:"'" 

1" ...... ntV'J ... I'''." .. , ...... t..>.l~,...,. ..... 1'.;IY ...... i>J.,.._ .. _t><*"'.oI .. ..IIto."...,.,~'"''''''..J..rl'MP,. 

:;"_I",.·!h,,,p.:..:J ... """1Jo1..,1."" ...... ,joM...t~th.omc..,.,.ilh~,u:\Ipn'<:I.""_l:oIdJc..,..dr.,,..ltlnrl>i&.. ~h~h 

:ll\"lhld..-rn'''''«-~·r<>'· in tI"'''l.W,{!k-. S-~_~1db:-Il>e",,,,~,",,,l>r<:>tlldb,,ITUa: P .. l:o;·r", __ l",,,","I_IlIF~ Ii::'< 

fUP.l\~".ll('p''''d~rt~~ 

SRl'~IOlli.h~~~'qO\.i,:M'"....,...d~~DlC ... 0l1dFI'.I'4k~I"r~11<ifm:rrr ... lI\.n~Di!H~.::a16'{1>i~ 

~!~jlifl"'-JI1' ... ( ... IJtt..:-.. f'·"·l.kS<.'~~I\Is:i'"~ity~mquiRdobl~.lt;~MiJ."'jmltw:-i""·o:o. __ 

l"d"" ...... t.1f!J.., Tl\I" .. "'tj' ... '"".lJi",..,..t·"fJ"1'\'1(Im>~vt6 • ..,d!lf.I:.pri\ ... lI!i~ooa~jldS6 

;::;;~{~·::t::'.:~'::;.::~:.!:;:~ .... ....,~~~.:~~r:'~~OOtin:dit:>d;~'fI- ~l> 

PBrtTwo: The l.agacy Securltfes PrQgqrm 

The gO<:l1 of this program is to restart the currently dormant market for legacy 

securltles, allowing banks and otIler financial in$titutions to free up capltal and 

stimulate the extension of new r:redir. The L.egltcy Securities Program consists of 

two related parts designed to dntw private capl:t311nto these markets. Debt 

finandng will be provldecf I;)y the r-ederaf Reserve under !:he Tenn A$Set-Backed 

Securities Loan FacUltY (TAlF) introduced I;)y the Administration earlier thl$ month 

and tflrough matching private capiliJlr~lsed for dedicated funds targeting legacy 

Securities, 

1. Expanding TALF to AAA rated 5eQIrTfTes Issued Prior to 20(19. 

The l.egClq Securities Program wUI focus on the markets for 

mortgage-backed securitIes lied to residential and commen::ial real 

es~te. The Intention i$ to expand the previously announced TALF 

Program tQ iru;h.lde legacy SecuriHes. 

• EtlCDUf'agl,.g ZtI",,:IlfOn tv #/a,,& Ci"rea"'r ConR""ltoo l",d to ~rr::lJase 1Bgar;y ~b: It Is expected that the PIVviSlOI 

of leveretge through this program wilt encourage investors to 

purchase these assets and as a result wlll increase mar1cet 

I1quld.lty. 

• Fundinv PUt'dJa$e of .teg3cr Ssa/rltles: Through tfle 

Legacv Secun"'tJes ProgrBm, non-recourse loans will be made ilvailabte to lnvesmrs tD woo purchases of legacy securitization assets. These assets are expected to include 

certain non-ageocy resUientJaf mortgage-backed securities 

(RMBS) and oommerdal mortgage-bY;icked securities 

origInated prior to 2009 that were originally '""ted MA, or Its 

equivalent, by at least two nationaUy recognlzel.1 rating 

agencies, and ot.ltstanding comrt'lerclal Mortgage-backed 

sea,u1ues (CMBS) and asset-oodced securities {ABS) that are 

rated AAA. 

_ Working with HIIrlcIIt PDnldt»ftbs: Investors will need I:c 

meet spec:lnc ellglblllty critEria. lendIng rates, minimum loan 

sizes and lOan durations hi;1ve not been determined. These ar 

othel' tenns of the programs remain to be ~lIzed after 

ag1mcy discussions with market partictpants. 

Z, Tr~!J'"Y to PiJ~" WIttr PrIvate Zlfvest(1,.. lit lAgacy 

Secvr;t;e$ Invesbnfff71: FUndi;: 'treasury will make CO~ 

1I'IVl!!Istmc:nt a:nd non--rec:our ... loa ... Qyuilable to plllrbler-will 

prhl-.te capital Pf"OVldl!!lPII such a. private equity ftrma, hudgl 
145 


75733.104

FROf"i : PERFORMANCERECJL ESTATE GRP FRX NO. : 7706490193 Jun. 15 2011 10: 43RM Pi;.!. 

JI'!!II B. HIGHElEAM 

.... USINESS ARRNe 

PkEPJl.RED '-~~~ ___ ~~~ ___ --' (Mcl;,"C3 

Opportunities For Real Estate Funds In Troubled 

Assets Program. 

AnJcle frOm: Mondaq Business Briefing I March 30, 20091 ~ 

Mk::lfJ by Jameg M. Broderick, Philip H. Ebling, Gilbert G. Menna: , ArlcIJv,v C. Sucaif, Jacob A. 

Warden and Adam N. Wei~ 

"This~. 

~ 

Ute U.s. TIl!Ia8UJy announced U18 tJIt.ICh.9rr1Jcl~ed ~ils of the Public Prhate 

p~ rpplP") lhBt was, IntrocIuced h13umrn~ry fcm1 by Treasury Secretary TImothy 

GoiIhner last mMth.1 The proQ'r'BI't'l, which kI paI1 of the Obama AdmmisJmtiOfT's blUldar -Finan::! .. 

Stability Pm'I." 1ocu$es on tl'I;I ~ afW1Bt WNa daseribGd as ,.trDubI~ .;v;set&" uMer-tr~ 

~li~~ts=r:~~~~~A~~~O:=~~~~~~ ~ b"troubkd loans and: mortgage.backed lJeo:;:~. the Bush Administrotion apP'iecJ llle find 

pcfti~ of Ule TAR? pn.x:eeds Wward di*:t OflPit.&! lnfi.,JsiMS into benkJng i~f1\UI;iOflS, 1h!it objec\iws 

of the PPIP Bre much etaser to the origInal objecIiws of thEt TARP; to tl1f:rW the rnrlial's credit 

m~rkFJb;, W mtM.-.;Il9gaCy ~S$ dfthH balance Slhests of1'inancial instituliDns so those financiaJ 

fns1itutlons c:lIn ~pand tl1elf It"$ldIng ~hities, 

The PPIP consim of two com program$ !he legacy LoaM Program and the Legacy Seeuri'ttas 

Pmgnmt. Both am WIlt arwnd the same baaic ~ pricing estabffshad by prllQto IfJ\O&t~ 

and mJdIt support pf'Olided by the~. TreasUtY. usioo TAR? fUnds, win create a series of 

joint 'I'E.VlIUte Publlc Pri\Qte lmestment Fundi ("PPlFs-) fo pute;MsO pools ofleans find asset-backed 

socvritiOJB. .., 

TM$Oty's initial irMstment wiil be $15 10 $100 bl1llan,. 'NhIch whon combiMd with pIi'4te ' ~ 

,he 

The deteriI(I of the PPIP am d"ISCU$Sed in GoodoMn Procter's MEirch 24, 2009 Flmll1clal SeNcee AkIrt. 

tn this Ac/'I.f(;;ory. WG addmss potential cpportunflies lOr n:'$I estl'lte in..estM> In each ofth9lVri'o types 

of PPIF8. We elso present our thoughts on the pI;mnod W(pim$il;lO of the TALI= a$ P"lrt of the legacy 

Securities f'l"OgnIm. 

f 

Legacy l..oans Program 'the legacy t.oana. PIDgmm 11; a Pint progr.am e:stabli&t)ed by TrMs:ury end 

the FDlCtn eoable domestic banks and SS\logs instIMlon6 to seltpools ofdlstteSsed loans in 

portfbIio auctfoo& run by tf1e FDIC. It is expected tttat bidd6ts: will include pension limds, mUllJOJf 

tVnds, hOOgo fi./rld$, priwoo aquity funds, insurance <.:ompanies and other /ong-tetm real estate 

imestors. Sueooosftd hiddGr$. wlH g&t eqUity (;()oif1'llOO!ment from Trea6UfY uSing TAR? !uncI",.and 

debt gummtees pro\oided by Ina FDC. Although tha detailed mquirements Of tile \.egQcy Loan:!. 

p~ will w subjaet 10 noIrOo and c:om.ment rulemaklng (oommo;.!nls win be <lCCQplad un!il ApoiJ 

10.. 20(0), T~ury he:;; 1B'id out the follC'lolNlng basIc structure. 

FDte and Treat.UIj' will estabUeh minimum mquitMllJnts for 10BIl pools 

Road allgfthis article and millionsJl'lQrfL. with a fREE 7 -day Irian 

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146 


75733.105

rROI'j : PERFORMRHCERERL ESTRTE GRP FAX NO. : 770649211 ':)3 

s: Summary of Public-Private Investment Program 

( Friday, April 3, 2009 

Written by Anlrew Auerbach 

,Tun. 15 2011 10: 44AM P13 

S/lO/12 1:45 

On March 23, 2009, the U.S. Treasmy Department ( Treasury") announced tho detai5 of tile PubOO-Private 

I!Jye~trnent Prn&lllffi ( PPIP"). The program 1<; designed to purchase tmrtgage backed securities and certain 

troubled loans rom U.S. banks. PPIP is part of the broader Financial Stability Plan" inIroduced by President 

ObaIm. The ~a1 ofPPIP is to clearne the balance sh:ets of US. banks of troubled assets as part oflb: Troubled 

Asset Relief Program ( T ARP") and to create access to liquXIity fur banks and other finalJcial iostilutions in order to 

cause Ib: exlenskm of new credit PPIP 1<; broken up into two key components the LeI?Jl£Y Loans Program and 

the Legacy Securifus Progmm. 

Legacy Loans Program 

The Legacy Loam Program will be launched by Treasury and the Federal Deposit Insurance Corporation 

( FDIC". The intent oftbi< jom program 1<; to combine (i) private capita~ (ii) equity co-investmmt from Treasury 

and (iiI) FDIC debt guarantees in order to assist nmket pri:ed saks of distressed assets and Uq.row the private 

demand fur distressed assets. The FDIC will supervise the furmation, Jimiing and operntion of a series of PublicPrivate Invest:nEnt Funds ( PPIF s"l which will purchase assets from U.S. hanks. Each PPIF will he COtqlriscd of; 

jomventore betweenpriwte investors and the 1Teasury. Treasury will manage iIs nves1ment in !he PPIF to emure 

!hat the interest of tile puboo 1<; protected and preserved. However, private investors will retain control of the asset 

rmnagement subject to rigorous supetVision" of the FDIC. 

Private investors in the Leg;lCY Loans Program are expected to inclOOe but are oot limited to Jinancial institutions, 

individuab, insurnnce companies, nrutual funds, pubooly managed investIrent fimds, pension funds, fureign investors 

with a headquarters in the United Slates, priwre equity ftmds, hedge funds and other hug-term real estate investors. 

u.s. banks ofd am will be eligible 10 participate in the program U.S. banks pazticipatiog in the program will 

consult with the FDIC, banking regulators and Treasury to identi(yassets that they propose 10 sell. Eligible assets 

are required 10 be prcdorninalely situated in the United S13tcs. The FDIC will hire third party valuatioll consultants 

to anaIya> the assets and detennine the level of debt that the FDIC will be ~ to guarantee on such properties. 

( The debtguanmteed by tho FDIC willootexceed a 6 to I debt-to-equityratio. The FDIC willreceive an annual 

( ree fur providing the guarnntyand such guaranty will be colhterali=l by the pool of assets purcMsed. 

Prlv.<te investors that are pre-qualified with the FDIC will bid tor the assets in an auction conducted by the FDIC. 

Each bidder will be required to post a deposit equal to 5% of its bid value which will be refunded if such bid is not 

accepted. In an eilOrt to maintain mimess, private investors will be prohibited from cooperating with ore al101l1er 

once the auctxm process is COIIJrencoo. The equity contrlbufun together with Ib: lUlllunt of debt pre,1Qusly agree 

10 be guaranteed by the FDIC will comprise the purchase price of the assets. The US. bank seIliog such assets wil 

then be pennitted to decide whether oroot to accept the oiler price. 

If the bid is accepted by the bank selling the assets, the private investors that won the bid will contribute 50% of the 

equity to the PPIF, and Treasury will contribute the remaining 50%. However, private investors rmy be pennitted 

to accept a snnller equity contribution from Treasury subject to a minimum equity COIlfributi>n yet to he determine< 
147 


75733.106

FR[]~1 : PERFORMA!"lCERERL ESTnTE GRP FAX NO. : "(706490193 Jun. 15 2011 10:45RM P14 

Summary-of Publ;c·ptivao~ Irm!stmerot Pmgtam! Bi!nllBIy.Jn Ca'lle 5/10/121:<1$1'1 

In accordance wilh the ~ Ecooomk Stabilizamn Act of2oo8 (tOO EESA,,), Treaswywill akJ receive 

wmranIs in tOO PPIF fur its equity contributims. The term<; of such wmranIs have yet to be di;closed by Treasury-. 

The debt issued by a PPIF in connecoon with the purchase of a pool of assets is expecll:d to be initially placed at the 

bank that sold such pool of assets. The selling bank will be able 10 resen tOO debt into the marlcel It is 

conlcmphtcd that the c",dit-enhancement of the FDIC gwnmtywilllmke tOO debt trore attracti\e to potential 

buyers in the mu:ket 

100 executive C<JII:FCIlSaOOn restti>tions that currenrly apply to T ARP will not apply to a passire private inw.;toi" in 

tim program At tIm.-mge it is wrh:arwhe!ber or rot !be et1Iit.es that manage the PPIF will be impacted by the 

eJreCutive compensaoon restri:lions. The exact structure of the Le!!pcy Loans Program will be subject to the 

stanlard conm:nt and ruJemakingprocedures oflbe FDIC. The FDIC is currertly in the process ofac<:epting 

public conmen!S UII!il April 10, 2009. 

Legacy Securities Program 

The Legacy Securities Program, which will be administered by Treasury, i; designed to provide both equil;y and debt 

:firmJcing to nnke it possible to acquire legacy securities that will initially include resiiential and comnercial trorlgage 

backed securities. The Legacy Securities Progrnm consists of two components. The first component invoM:s the 

selection of approximately five (5) fund n:o:nagers (each an FM" by Treasury wilh wb¥:h Trca,rury will eo-invest in 

PPIFs to acquire legacy securit:i:s. The other component is the expansion of the TennAsset-Backed Securities 

Loan Facility ( TALF") to proviie non-recourse hans to investors to be utiIi2ed inthe purchase ofJegacysecurity 

assets. 

Legacy Securities PPlFs 

The Legacy securities PPIFs cotqlonent of the program will provide each of the FMs a limited period of titre to 

rai;e at least $500 million in prMIte equity capital through a private investrrent vehicle. Private investors will be 

prohibited from withdrawing any IIDroy invested in the private inves_ vehicle ror three years aiIer the private 

inveslImnt vehl:1e s !irst investment in a legacy security. ERISA plam will be permitted to invest in the private 

inves1ment vebicles, but the amnmts of such investments will be leli to !be FM ln determine. Once the PM ntis .. at 

least $500 million, the PM would contribute the private equity capital rniled by it to a PPIF. Treaswywould invest 

TARP funds in the newly =fed PPIF matching the funds mised by the FM doUar-fur-dollar. One major coooern 

that FMs need to be aware ofis that Treaswy n:nintains the right, in its sole discretim, 1D refuse to fund any 

commilted but undrawn Treaswy equity capital and debt 1inancing (des<;ribed below) at any time. In addition to 

Treasury s equity interest in the PPIF, Treasury will receive warrants in accordance with the EIlSA Dr its investrrenl 

in the PPIF. The terms ofsooh warrants have yet to be di<!closed by Treaswy. 

Provided that the structure of the PPIF meets certain guiielines yet to be determiood, tOO FMs will have the 

oppo1'bmityto apply fur senior debt from TreasllI)' in atrount up to 50% of the PPIF s total equity capital, but 

Treasury will consider requests fur up 1D 100% oftbe PPIF s equity capital subject to asset Ievellornmlge, 

redemption rights, dispositkm pdorities and any other fuctors deemed re1ev.mt by Treasury. Treas1llY intends !hi<; 

debt to have the S!ll'l'e durntion as the underlying fund and such debt shaD be repaid on a pro-tala basis as proceeds 

are rea1i2ed by the PPIF. The hans described above will be structuIally subordinared ln any loans muie by the 
148 


75733.107

FROM : F'ERFORMRNCERERL ESTRTE GRP FRX NO. : 77064913193 Jun. 15 2011 10:45AM P1S 

~/IO/l2).'AS I 

New York Federal Reserve under TALF. 

Treasury expects the PPIFs to mmJ\y target comrrercialmortgpged back secu:iti:s and res&ntial nnrtgaged 

backed sccuritios that received an AAA rati]lg or an equivalent rating by at least two nationallY recogni2>ld ratings 

oIgllllizations which are secured directly by the acinal nDrtgpge loans, leases and other assets. Nevertboless, each 

FM will control the asset selecOOn, pti:ing, Iifuidation, trsding ani dispositi::m of such assets. 'I'OO PPIFs will be 

prohibited frum purchising Iegpcy securities frum (Q affiliates ofits PM, (it) 1000lo-or-larger private investors investe( 

in the PPIF or (m) any other FM or such FM s affiliates. FMs will be permitted to charge a:fixed mlDagement lee b 

Treasury aoo private investors based on a percentage of equity capital invested by such party. An:li:es and 

expenses pail by Treasury in connection with the PPIF will be paid out of the equity contributions made by Treasu:: 

to the PPIF. 

Treasury phns to Imke its preliminary selectkms ofFMs by May 1, 2009. Fund mmagers interested in participatin 

in the Ug;J0' Securitios Program have until April I 0, 2009 to submit an appli:afun to Treasury. Per Treasury, ead 

candidate must (Q be able to raise at least $500 million of private equity capital, (it) have experience ani a track 

",oom investing in comparable assets, (ill) have $10 billion of cO"l'arable assets. under mmagen:eut ani (lv) 

den:Dnstrate the capacity to manage the PPIF in accordance with guidelines establi;l:ed by Treasury. 

T ALF Expansion 

The seco~ con.,.,neut of1he LelllJCY secw;ities Program deal< with the expansim ofTALF eligible assets to 

inchxle certain llOIragency COQIIK:roiaJ and residential nnrtgaged back securities that weI\) originally AAA rated. 

T AlP f; cmrently governed by the New York Federal Reserve. Although the interest rates, minitmm loan size and 

term ofTAIF kJam ror tim program have not been established, 'freasury his irxfuated that it is working with the 

New York Federal Reserve to modiJY the current slructure ofT ALF hans So !hat TALF can accon:modate this 

new chss ofeligibJe assets. Borrowers will need to llEet certain criteria in order to be eligible:!Pr TALF finis, but 

this criteria has yet to be established. As stared eartier, an T ALF loans will be s1ructurnlly senm to any Treasury 

loans mille uroer the Legpcy Securities Program because of certain requirements of the New York Federal 

Reserve. Many additioml questiollS regarding !be expansbn of the T ALF program will hopefully be addressed 

when program specifics are df!serninated by the New York Federal Reserve IlIld Treasury. 

Conclusion 

>. Treasurypbmto inmllyinvest an aggregate 0[$75 to $100 billbnofTARP finis betweenhoth the Legacy Loan 

Program and the legacy Securities Program TIlli investment, together with the capital invested by prMrte investor 

willproduce $500 billion iiI purchasing power with the ability to expand to $1 trillion over tiriJl to help inJm>ve the 

health offioancial institutiom and unlock 1he credk markets. 

Resources: 

• Publie Private hweslmellt Pregmm Feet Sheet; MMeh 23, 2999 

• PublXl-PrivatelnyestmentProgramPress Release, March 23 2009 

• PHIllie P ..... ""lftves_Progrem'NhileP"l''''', Mttreh23, 2009 

• Legaey LeItilSPreI\flllnTeomSbeet; Mareh23, 2009 
149 


75733.108

~!3IJi'1 : PE:RFIJRMRNCEREAL ESTATE GRP FRX NO. : 7706490193 Jun. 15 2011 10: .::l6AM PiS 

Bwk Rkk Aut"nmll:0111.,000 U.S. BanklJ, An>l~d f'ree Trilll- Bara;-N~~tQr~ 

~O©!Dll~~ IRU5K CDtl;JttIU Uptn 2.58% APY oten A Djsc~rBank HigllYleklCD AccountOnhToday. FDIC~fmured! ~ 

F! NANCJ;; ... ECONOMICS TodIy'!i "igbettCD lWes Cotnparc CD Rates ftom FDIC In:suredBanks. Plw News aoo.Tips.!~ MCIQceI,teGet 11 FRRE.IGn~;re wMnyou OPen 3ndfnnd a new Opt)!J~ 

Tl)E.SDA Y. APRIL 07, 2009 

The PPIP and the FDIC 

Why au the PPIP """" coming from the FDIC'! 

Apparently to avoid askiog Congress foc .diIitional ~ 

Andrew Sorkin writes in the NY Times: ~ 

IU$w'Bl\Ce at F PI C. 

rrh. F.Dl.C.;';) going!O be insuring lis pe=n! of 

til. debt, provided by the Treasmy, that private 

in ... ton; will .... '0 __ thclr acquisitions of 

tlJXic asseu. Tbe program. _ is the equivalent of 

TARP 2..0. 0Dly this lime. Congtess didn't get a 

~tovote:. 

~ 

12,000 U.S. Banks An;,lyzed Free irial • 

Bank Navigator ~('e)lll--inf.ll. 

lnW!:!i'trpelnt Bank BootntMP 3~Week AtllrmiJ lBank &. PE Valuation 

Tmlnlng tlv Sr BlInkers $217 Bi!&:ln ~ . .ibl{jl~ 

EverBank® OffICial: Site 

Baoking - le.nding ~ Inwsting. Bank SlTIlIrt 

with 

~. 

EverSal1k. 

Tod;OC$ Top CD Rab\$ $E!a.n;h lOOs of ~ CD ~nk Riltes Plus 

Cales,News, T~ &. Mol""'!, y,w.:.,eanktilW wI!! AdCtIoic8Bt> 

TbeF.DJ.c.i&insuringthe __ calledtbePubre-Private~~by 

usiag. spedaI provision in as charter that aIIaws it to take ext<aotdinarr step> wIren an 

emexgency determinatiou by secretary of the Tt-P.asury- is. made to mitigate system:k:. 

rlslc" 

{tl]aw mudl does the F nI.c. think it might lose? 

We prqjeet no 1osses~" sheila Hair, thec'bairwotn.ant tdd me in an interview. Zero? 

Really? Our """"",tani. have signed off on 00 net losses: she said. 

Here's- the F .D.J:.c.·s~: It says it ,l)Jans ro ~ "et every loan that gets 

made and it wiD reedY-I;! ~ and ooD.a.[eraI in exclmnge..ADiI then there's the saftdy nct::: 

If it loses mOIlt!Y froJn insuring those ~ it will assess the fi::nancial i:odustry B 

IOe to pay the ilIl"""Y bad<. 

Th<se potentially higher fees must make a few baIlks nervous. And if the losses ",.ally pileup, tile 

~ wID be bailed oat, and it -will be the taxpayers on the hookm ......... o 

Weekly Scbe<lule Graph OaUerfus 

Last 10 Posts 

• M:oy10>;lt5:19PMJPtII:J2 

i bBIIon~loI-.on 

ftyrthotll;craditpoaitb:1 

• '-\J)'H'lat-4:44.PMlII_l9r. 

Til" rA8lutsomand 

JUfflI:bsura. IQr SeIodad. 

..... , .. !-Ao.y10st2:30PM 

. ~nto:Po~Iltaglt<lf 

lktnIsaedtb.o5alcslnc~-1IlIghttynApil. 

• M!1ylQ~'2:3BPMNAHB:: 

BI.IlIda!'~b1h"+ 

Iobalng Mark-llf. tncMMOtI 

.. ~10I'ltg;05AMTnldel)Bflcl, 

~INded&lllardltoS51--8 I 

...... • M;iy10 8018:30 .M!WQ.., 

1:nHIo!1Un&rn.pkttma-ntaah1a 

at3GT,DDG 

• MlyOOat9:59PMLoofI:I\II(NII;l: 

Trl:dto.ftclt.~nt 

<to ... 

.. May09 PlB~ PMQooece 

, UpcMtos:P'I:IfII;JFl:IUtft 

'. May091tt2:55PMLawlDc"rPEO 

~vr""Fs"ar:dPt..S 

:" M1y09-aI10:47AMF1InnIolia • • r.portsS2.TbCIQgI\b\~8, 

Ra>IIwI.n:torydtdlnu","Q'I 20,. 
150 


75733.109

FROM : PERFORMAt~CERERL ESTATE GRP FRX ND. : 7705490193 

Enhanced Deposit Insurance Extended Through 2013 

Thursday, May 21,2009 

Written by Robert Klingler 

Jun. 15 2011 10:47AM Pi? 

S/lD/12 2:l5 

On May 20, 2009, PresDent Obann signed the Helping Familils Save Their Hotres Act of2009 (Senate BiI1896) 

Atrongothertl1iJ:lg<, the Act: 

• extended the $250,000 depositinsuran;e lirnitthrou!1l Decenber 31,2013; 

• extended the length ofm the FDIC has to restore the Deposit Instrance Fund from five to eigbt years; 

• increased the FDIC s borrowing wtimity wi1h the Treasury Dep~ from $30 billbn to S100 billbn; 

• itIDreased the SIGTARP s auiliority vis-a-vis publiJ-privalc inveslm:nt fimds urxIer PPIP (incluWngthe 

~lementation of confli:t of mrest requireml11ts, quarwrly reporting oblig;l.ti:lIl<, coordinaOOn with the 

TALF prof1Blll}; and 

• rerreved the requiremmt, irqJlemellted by the AIretican Recovery and Reinvestnm: Act of2oo9. fur the 

Treasury to liquklate warrants of conpanics that redeexred T ARP Capital Purchase Progpun prefurred 

inveslm:nts. The Treasury is now permitted to liIuiIate such wananls at current muket values, but is not 

required to do so. 

This extension does not aeect the Tran.'l8Ctk>n Account Guarantee proWled by the FDIC s Temporary LiIuidity 

Guarantee. The Transaction Account Guarantee, which provides an IIllIimited guarantee offunds rell mnoninteres 

bearing transaction accomts, is still scheduled to expire on December 31, 2009. 

The FDIC bil& not revised the ollieR! FDIC ftl!l~ sign, whklh still speaks ofinsw:aoce fimits ofup to $100,000. 

However, ifa Jinancial instituOOn bas previously posted a notioe of the irnrease to $250,000 through December 31, 

2009, it sboukl update that notX:e. As stated by !he FDIC, a limncial inst:ituthn ImY post the fullowing sta1emmt 

next to the ollieR! FDIC sign; 

The stanlard insurance BI1Dunt of$250,000 per depositor is in effect through DecerWer 31, 2013. On 

January 1, 2014, the standard insurance atroun! will retum to $100,000 per depositor fur all account 

categories except IRAs and other certain retirem:nt accounts, whioh will remain at $250,000 per 

depositor. 

The attorneys of Bryan Cave LLP mdce this site available to yOu only fur the edooafunal purposes of~artlng 

general inIDnmtion and a general urxIerstarrling of the law. This site dOes not o~r specific Je!?f1l advi:e. Your use 0 

this site does not create an attorrey-client relafu .... hip between you and Bryan Cave LIP or any ofits attorneys. 0. 

not use 1his site as a substitute fur specifu lefllll advice from a liJensed attorney. Much of the infunmtion on this site 

is based upon preliminary discmskms in the absence of definitive advX:e or policy statements and thereill'e may 

change as soon as m:>re definitive advi;e is available. Please review our fi.tlI disclaimer. 

© 2008-2012 BryanCaye UP AD RigIns Reserved 
151 


75733.110

FROM : PERFDRMPNCERERL ESTATE GRP rA>< NO. :7706490193 Jun. 15 2011 i0:47RM PIS 

------_.- Enterti:lcar S)mbol. company or fund 

( 

New FDIC toxic asset plan: Sell the 

assets of failed banks 

It}' Lita Epstein I'o.gts4ZIlDPMIlB!05I09 

f'o.,.tl!-du"dN:F ..«morn~.lf"<\le'5~nq 

Now that the banks have rh;?.ir training wheels on .. - now 

that they'\.'e shown they can raise prhrate funds: and cle-an 

up thcir b~ sheets without depending: on the. FDIC!) 

Legacy Loan Program (ak.~ •• "toxic-assets program") 

the FDIC pbns to use the TARP funds. slated fw the 

program tC)-scD troubled. ilSl>ets uf[ailed baNts. 

The re\'lsed program is. ex.pected to look$Omething like the 

proeess developed for the Rerolution Trw;.t Corporation. which shut failed sa ... ings-andloans in the 19Bosand1990s. Yesoorday.itboked1iketb.? LLP maybe dead. Uqtit's 

not dead. It's j~t being reborn as wmething else. Sponaore4 Llllin. 

~ FDIC is e~ to solicit tbefirstbitis in July 

to smrt assessing thedet~ oftbe tmub1ed-tI.'ioSet 

pn:tgrams. The (uuds to be used are part of the 

Pub6c-Pm'Ute IIIVt!Sbnent Program, ..... 'hit.h 

President obama announcedinMarch as a 

oenteqOOce in his effort to shore up the tinandaJ 

system. Funding from the program wiD. include $75 

billion to $100 billion fMm. TARP. whlclt m£m1S-the 

program wun't OO'Vl! b;I ~ s.up~ completely by 

the FDICs insntanee ftmd. 

PPIP is a ooto:bination oifederal money and funds 

T0I19Y.'l5D%OffOogDlllat 

Sa..e ~yOfl Your Pull Toda~ Find. 

Qre>lt~I!iI!ll'YQUfO/lgt 

<:!QllQ)4DQI,cotrlt!leiIY-::lOG-tlQal 

lIJ...O;ty H~prt ,ltt ... ~b 

Yowr .BodyWi!lwam You 60 DB)$. 

BelOm <l Hoo.rlAItack R_d M:>m. 

.9bQddng .JoInt ""Ihtf 

S<>ft "' __ .,au CSlII ..,1'- ~Uf Joint.!. 1Irl\h 

Ihi$ hJ$lI;Inl;.1 (!;IISYUlcta 

E"""'r<l8I'lirt!ty!M.~ 

raisOOfrom priYate investors. 'The. combined funds would be used to buy troubled 

mortga,ge~ bal:,ked .l:SSets. Banks balked atpaIticlpating in the fDIC's tOxb:-assets 

program 'beeause they were rool':lCel'7ted about ~vermnent ~te in the process. 

'When PPIP lefr;islatiob was p~d, it included conflict¥of~intere5t restrictions on buyers 

and sdlers. Btmlcs clearly want to get awt{y from apy kind of goVt!mment inte~rence, 

making applic:atiaos to rid ther:n:selves. ofTARP oomplerely. 

lM .. ttiDg aside these _ to clean tIP the mess IImtthe FDIC is already dealiogwil;h 

OI1faiJed. banks' toxic ~ makes more senst: anyway. \Vb)-should we continue to fuel 

the big banks, which already have taken billions of dollars and still won.1t work ,~;th the 

gO\-'Unm«!nt to free up consumer.and SIWill busines,s credit aceess? [DSteact. the:funds 

can be usedlJ)Ore appropriafelytO p~ aprobl:e.m'\\ith FDICslnsuranoe fund ~~ 1:'he 

true baclcbone .IU.S ... _ deposit protection. 

Portfolios 

Track Your InVfJl>tmoRtS tJere! 

51le why 1:0 many people lise 1he Dlli!yFiMnce portfolio 

tool ntl,ecorn9fSlO'IW of their investi1l9 "'-rat .. gy 

Sign In or R~i$Nr Now 

75733.111

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ii 

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CSl 

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LL 

CL 

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IIII 

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LL 

ti( * Public-Private Investment Proaram 

13 

/ 

- .. -. 

9.1!Hital 

Investment funds 

• Winning private investor bid forms a Public - Private Investment Fund to purchase the pool of loa

from the bank. 

•• For every $84, private investors put up $6, government puts up $6 and the fund borrows up to $7

with a FDIC guarantee. 

Pepper Hamilto

--.:.-;:'-------Attorney
153 


75733.112

FROM : PERFORMANCERERL ESTATE GRP FRX NO. : 7706490193 Jun. 15 2011 10: 49AM P20 

' .... 

RinisturJQt'i"t'ftft 

FlratTlI'It.Httn1 

Fho"",,,DI>dBllnkinW 

trm ~tllnlto 

Avlallon, N:lMafl!Ag" 

A .... ""'I"'DOvoif4rttm. 

"'"""'Cow ilm, CaplmlMII1<elS 

ComrercJal L.>Jw 

n.cmoo~ IlDlriva' 

""""'""" OYpQrateFIIlIlflW 

~nC1'k.l!!;8M1No 

~&;onor<lC 

~<I\lImA.ct 

--"-"""" 

p.,r()mHl.rd~$1IlIW 

~lbt'lAct 

~A~ls 

R1ancQ/ Rmilwctumg 

FflSncJalS!!,r,i~ 

FIoCIII&~Fbi;y 

FlI1Iatbm.FOII& 

"' ... .Ilfis:o'lbn 

FumlM!:~.Hedg .. 

~,~tm3lIle!c. 

nWardlRlfeigtln-~ 

lOQM.Mlr1gBg~all(t 

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Pt"'''''''~8.U'JCI'OW 

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.~~~!~U::!!"~.'> _.~ _,._ 

~.~.~~~.~~~~~~.!,~.II 

!'i:~~.~~~.r:'.~~~"_ 

QelWrl'l.., .. nt .. Publlc 

~~~- .... ,. 

Intgrrnatign Tudlnology 

~_l!~_T.!!,!.~~~ .. _._ .. ____ ._ 

~~.~~!.~~~. 

~!!,~~1O~_~~~ .. ,, __ 

A1tRillOlOntI -:>;.lI!A« C_~lhI U{ ~ ow.hon AaIaPac/ft:; AMirde ~AIn.,g II'lchllaEMr&Afrkll 

YQUA.re~ $bgwAllContllnt Anarwv lind rr-klnl'l {)I) USA(XJ 

JONES [)A\: 

Unlflld Stabao-c FDIC reavs'Jbt prlP Lagsc:r Loan Progt.m Tv Foc:usOn ~ .. 

~~SellAe.eI$FmntF"!lldBa~ 

~ •• IIC:~ldm .,Gltnn&Ardsn.Y.e!er_p.~b"t1. A._ttP.BIIr~ _,lInv. 

UlnCOI1.,J' ..... "'a(;,i:»IIgn. attdSlrahH.iEberhard 

S'I'I~ ~TwllW I]F~ ':'_~Digg In 

On J\InO 3, Ih9 FcdBtal Deposit lnawsnce ~ (tho "FD1C1 oonouneed.1hB't R pilot 1AI4e of assatt; 

lII'dettte l.egu;y 1.J:lI!ln!I Program ~ oTthe PubI\c-P!ilate ~menl pmgram rPPIP'), IntttaIIy 

s.chMUed br-.kllle. witl be p;lIStp:nlrllndefinile/y. The FDIC Indloorled it WllI contI"~ to"MJrtt to &rcrIop 

ihe l..IIg3z=y L..oans progmm BS banlcll take -eddffiQl1ll1 timo to tJG$~ the nutgnItude end timing of 

troubled BS3etB8Ies"~ It~ that the FDIC's bc:\,I$. y,\IJ tum 1o~8Ild~thefunclng 

~fM, afthe l.Jl;acy leans Program for-sakIfr;; off$i1ecl bank a&S~ hold by the FDIC. 881VGUMr. 

keCllliVllnnlp publle-Pri1tata PsrtnefSllips 

100 FDiC; lW lholt 1'ltC8i_ Clffullad ~Itor)' !nsllwtiooQ;, hss the OtIfJgalm ta liI1Ncttn a "'flIitSt cost" 

nraclutlQfl, Many banks hmoa mill;'Id, 8fId tho FDIC tmu. had to tako, for lsler sahI, \1 t.!tgi:t $ITJOllf1t d1he 

f!:iIled banks' loans. and othoraooet.s. Th& FDIC troditionalt)' soil&. poQ1e Ofloans 'Il61h simiar 

eha~oris\jC$1D tho. Wghatt bldo.1etb th~gh ouI~iOO final'Clal ad\ol&ors $1IGh as Am FjnarJ:;;jal ~ 

"""""""I """""enliaJIy""""'- V'~~ 7":';TJ'I"f In May 2008, tha FDIC k1unchud I:f pubJic.p;l..rue parirttmlhip strwtl,.ll'$ (Ihe .~"" PPP") by 

salUng 8 JlOOI 01 IoIms fom tha NetBank recei\Et'$hip in a ·slJUett,Jrnd Dale ~." ~ FOIC I-m COITIpI8ted fNg. Raari'tielllhip PPP tmnsoctlons to di6Po&v of loaM aeq.drtid from biJed barb. and it has 

sold $681 mifliln oflnf~ in 1orao9; to priwtG PUI1':Iu!:8mB b-- 1:1 tQ\a/ $ales pnca of' $1f;f6 mlllkln. The 

lcrtaI pat 101 ..... aftha ISlfJer1r\ns:lloans In iha.sa fr3n!mcth;Jrls ....as $3,2 bilflOn. 1m ~11Ip ppp has 

1m oog/r18 In thG Resolution Trust Company rFm:;"} IBqUity pa~h!p prog~m. 

fto*>lullco TMII: Company Equity ParinGrd\ip Pwgrllm 

In 1M 19001>. the R1C ~ ;;an -equity partMr$hlp program~ lO ~e r:I asMtS mat it held as.Q 

I!;"SlIit «failed thrifI's. lhB RTC e&t$b(~hed hUm9l'CU1!. pm \eflI:Ut'8:5, In ¥lhb;;l"I it WlB tho. 1iM'iktd partner, 

.and accorofng to ~ths ~ (FDIC. AugtJoiI1900).a pri-.at~or ~tor, rypI~ If jeirrt 

wntut&batweenan ~lty ImeslOrmxlan ilS~1 mtltJa9E!IJIOl1I. company. wa:su-..~oortnet_ lha 

RIC COf11I1buted.oo.stl!: pool:!> (typically 5ubper1Ormlns lo&ns, nonpe!'formlng lDarI1J, Ifnlj Gther real eslato 

~ rOREo-»and an-anged lina~ng rortha ~hip. Tlle5jener.l:l partl"l(wcontrit.:..rted equ,'1y 

capItaIalJd pelfamedasset m1!lfl3G8mB!"lt seroicetJ.. Thoseequlr.y p:!I'tM'tShips required tMt e;;sth 

pmceeds ~e(j rrom the llquJd'allon of IiIsset!J be appJled first II) \lle ralrernettt riboMS held by 1M 

RTC, ard thtim to the.~. PID mtJ <JC~on:Iing to each pmtnet's percentage irIteraGt In till: 

partnQr;hip. Unlike a direct iBoot sa\o, the RTC reblntd an in\ereat, vm;ch-enlK!edit tg recehe PIOCOOds 

at closing and a ptYeentageofsubsequentJl1CLlITIe fIorn the 8Ssm. irrl.xt'1IlQ Dales cffhe 35sets. 

The FDIC has &.toted tl'lat the RTC equity parmO:f$hi~ were established 10 ifl¢rva5e the ~ 'IeIue of 

recowr\M by capturing !he i\'IaI'1agoo1~nt eftIcieocl.oc. anti a.:partiue oft~ ~ f;EIdot', w.tile- 1'08~ 

1ixtoo RTC PQtfWItIaI proIit fA:I'n impnM!lTlfJl1tti in II1llBldlftnt fit illiquid ~ orunexpeetOO~. 1ljs 

&tmtegysleo eoobIed lhe RTC to $u(;Cm;Gfully ma-e If Iwge numDer Ot'<tSt;a15 Qlfuflts to::Iks. 

lha Arc ~ 72 eqOOy partnerships betwl)en Oooember 1992 and October 1995, with iI!i$et& ha\irlg 

a tqlal book ..alue m$21.4 billiaJ. Slmll<vty, th~ FDlCW<IS. a partl'l9rin two partnerships w.ftr'l $3.7 billion 

of assets based on book \I8IUe9 under Ass~1 ManagEmerd and Disposition "£ireemenls. 

IMlclclAj" 

lltUU!l (1lIPlIUU: ~~ij~lft 1I101:IllfOit 

RBI.ISO ,11fonn.tion 

):In.IlCII Mt4 Bml"11IQ' 

...,...,- """' ....... o.aO'sIl:an!Iha~.,. 

~S1Ill'oIIQ;etIOnAet "'--

l.o.!M.~.!Irdl.Nl~ 

~"'A'M!.Rw'!c~R'P&ffi 

ReI.1IoN. .... _dlinuB 

Flnanclal~AIet!(Is&uw 

I:lurfn{J The Most Recent 

Ouartol!lr ~ May B, :W1~' 

(GeI:xWM PIOOter L1.P) 

Michigan Cow1 Of Appeals 

Dedsion May Pmdl.l;le Lendet's 

From Forecla.,:tng By 

Adll,wtisement And SuIng 

Guarantors At The Same Tlroo 

(Dtddr'l$oo Wriyht PUC) 

FINRA To In!roduce Now 

EtlllCtronic Filing System For 

Publie OIferlfJIiP (Morrison & 

Foartlo\B!'llP) 

OCR Eases R8strkt~ m PI_of"""""Y~ 

StOCk (NlM« Ba1lk Report, ""'" 2(12) _ t.<cC>.Vm 

&FlshUPJ 

U.S. Coosumar FlMociaJ 

ProtBelion BUrBatI Ru/emakJng: 

A N6w Ff'OrlI/OI' FQ' Cost* 

9enefAAnalysis(lJectII::Jt) 

Anandal S~ Bulletin: 

At;tion At "!he CFTC (p8I'k1ns 

CoieL1.P) 

TtM CFPBu ~~o.HJy On 

ArbitI<ltIor1 Clal.$9&: Tha Rtut 

SWP To Unr-ao.eu~ COtIl:Opcion 

In ~erTrensactlons'? 

(.kJnasDsy) 

The Nett CF1C and SEC Swap 

"EMilY' 0eI.-.. ><gffighb 

(MeoyerbltlWn ) 

NEJ'N lJi$'Cfasure ObIlg!II:~ br 

Span$OIS ofERlSA Plans. tII1d 

(FinanciBi ~ AIM * May 1, 2012) (Goodwin ~ter l..l,P) 

~ADAStandatt1sOn 

A«e&slblilty To AThb ForThe 

Vlsualty !rt\pab'ed Now In Ekt 

(tluano M"",,, UP) 

LatMtVldeo 

RIII .. 1Bd Fun=ons 

AuIo:~~ .. <PJ8th'1 

&n:ola~ .... IthB 

... ",........ ... ~_"'tt. ... 
154 


75733.113

FROM ; PERFORMRNCEREAL ESTRTE GRP FAX NO. : 7706490193 15 2011 10: 49AM P21 

rrlV","'~"'''''''~'''''''<\joO'l'''''''9't>;;'''m,o'''''''I''''''''''l<''''m'''~r~..,<r<>:;''';(.uJ~~PcmF''''''iJ;l~b.r;_''''''1I:I'~'~51l1!: .. -- la~~~r~~ ~P~otrt 

lFfWNl~", Ma-",~~'" 

.~l~!I~~!!.~, 

~~~.~.~to~~;~~~-'" 

~~;~'.~.~~,:;~, ~~!E2!.~.t_~,~ ~~~.~~, 

r:~~.!":!to.~ 

~!! .• ~!,!.~U4" 

.... , Tostlm""lIIlt. 

Hudl1lM1A1eIJ* 

RQdbadt FQrm 

Pl'htttct'~me.nt: 

Mrlll,.bqparillal'B 

Co"","."".lIrdS 

Coprrlgbl 

~'[;1,.'" 

Behind on your; ~. 

=~~~~~~~tl'l£!fte8~aflhaequ;typa~ps.~Foa~1c.oM 

• R8cOloleritt«.'MIfl::~1\Ighot1or$MOllarpoois. 

~ .. <:J _.r .. """ .... " ... """ 

• ~es \M;lfe DIS(! higher....oora the ass.::ts were idMtikd in 8d\Rnce ofbi~ Q9 ~ to bUild poole. 

• Equity pal1Mrship stlUCturns c:an tr.m!>feJ rafge 'tQIU/'rIes of i1S>Iets to. too pl'i1Qla (lector Quickly • 

.. The~~nd!/'J,ej~lors·a~ m~'jnteresb noecIto bQalir.mOOMttle8trur;tUf8 • 

• I=~ng- prWr:.b1 by lhe RTC prQmGloo :lIl(I6~8(I soles. reci.Iced Intw:ing cu:ta, .md IrIcrea$od ecwnpettUon, Mnund. ;:n1 

pncmg br ttIB awets hOld B!i reo::el'tQl'. 

Legac;yLoaM ~m and th& Rl:lcelvon.hlp ppp 

:.n~:O'M~be ~~ ~~e:.nd thQ RTC equity partoon;hip pn:.gram$ may ~oe8 madrnGpbrhow the L.agacy low1s ~ 

General RII~hHtMilp ppp T.~ 

Kl'!Yterfl\aoflhe~f')!pPPPlncll.d!.ttheblll'All!M: 

• LAgel EntIty, h FDIC, ilia H'>e l'l'lCoMr at It fuiled deposl{Qty i..tltutlon, bmIJ B limIted 1I$1b11}£y COI11F"I"Y (the "lLC").am contributes 

tuan:l1mm 11'18 ttIladdepos.ltofy InsMution. In exchangctnihe cOllQ1butt1d kiana. the U.C iSauw the FDIC 100 percent oflhQ 

membership il'1tata.!;t& in the LLC. 

• ParUdpation Agrtomont Tha LLC altem intQa PartlcipaliM 9I1d SoNdrrJA!)tearnunt IMth lho F1JK: Md i:fSLlmSa participation 

intererltoIheFDIC(tile"ParUclpatlorllnterest}lnthell;NIDS. l'hePfdl;:ipallon.!nterest1s IyJically 80~, buffhe~ mlctmt 

~ by ~ The LLC seNotIIillhe loans through Ii 5eNcJng ~ ~ 8 qu:aiIIIed~. Th8lLCahoenters InIQ 01' 

Q.estodlal Agreement 'tfnlh.a q&Jali'!ed ducumcnl cusWdian. 

.. EllbUriJ)b' to BId. The FDIC au:I~ in 100 p9reoot m.emben>hip j~t in the lLC to ~1JIfIl'I ~ rEI!91b1e 8uyeI:v.-). 

EllgIbte Buyers mu:s.t hallie demonstratCM3 financJ(:d ~clly. t11e ability tQ mWQ98l11'1d dlJpcsll ofslrr'lilar-lwn3, and b& GUglbIe 

~y to purchase: FOlc tacai~hlp 3S89ts. 

.. Mtlmbvl1lf11p 1nt.rHt. 1M MoniI1Q bklOOt (the ·PrMne Purchaset1, acqWlBS 100 ~ tn~ wlhB L1C's; interest SuijBet 

10 the FDIC'& P;ri:Ipation Irrlaest In the L\.C'9jQatlS. The PI'i'flrte p~haser Is entithd totl'le IncomB tQm the loans ~ \han the 

FOIC'sParl:lcipalfonInterest 

• Gu.anlrdy. ThePlfwtapurcheserisreqoll1!dtn~its.qnjthnlLC'&ObIJgatIonsEIG IhesokJ~memberalthftIl.C. 

.. Management F ••. Tho UC Is MtItIod 101;1 monthly rnan~ fee'" an.amount d!'!tam!Tned by thR m~ prll7to ttte bidding ..,..,.,. 

• DI.ltributiona. 0aIIIh Ijaws fi'MI the loans, aflet dadLx:ling the rrvomhIy ~ roo and ~ htmws.I~. aro prt;opIII'ty pmlacIioo ~pemteS. aJ1iI dlsll1butad mOoltNy to 1M FOIC eM ttJe Priwte purt;hasat- bas8d on .tmlr~ ~~. 

• Reducud FDiC IntahlBl Up:!I'I the Iatarof 1M dale 0) on wfllCh thI!laggmg:ate'lhtributfons (fncTIJd1I13 ttal~aJ ~e ~paid 

by the PtNrte PtlI'cl!aser) to 100 FDIC reach a cmain threshold. specltl~ to e6ch lntnsar::tJon ao:I pstabiished end. tiscfmuld b)' the 

FDIC pr/ortD thlt rAd dato. and (ii)which Is 0I1I'l y"..t Mer the c!cslng dale rJlthe ~ tI'Ie FOiC's plItIlcIpa:tJM irItomst is 

reduced by a specl§e pemanlpge and too partlclpEJtiPll 01 the: Pmme P~aI'~ by an equiWltant~. 

• Clllanof.lp c.JI. TheFD!C/tas.tha right to mquimthellquiOOtiQn.and68loofMJf'I.'ItIla"ri~loonsheldby(he LLCat any Ultla-Msrtha 

GraI"IiM rA (f) IWI'tM YMI'& (10 ~ b' l!Iir.glo-farnily mmentl:I,)J loars) 31teI' the dar&ofthtJ PmtIdpatiort and SefokI1!Q AgreeMent. and 

(H) the liBta Q'1 ¥6Ikh Ihe ~d princlPl'i b8Iomce h3S boen redUCed 10 10 ~Ilnho bdanca at doslngCIIltMI &a!AtAthe uc 

MM'lbar&1'Ilp lnI:amat&. 

• AManmallt,nd Re.ee.kt.. The FDIC rt13y sell or as&lgl'I all (1M rot pmt)Clfrts partlcipatit.ll inlerestIn Ihsloona. 'The Priwfe 

Purchasar rna)' clie.pose of IlII (but not part) 01 ne membor$tJip interest (or peR'1\l!; any cl'mgs In C(tII:roI) only It among Dfhew" U*Ip. 

~ 

the 1fan5b'ee 

tlOOf;!Ssary 

{i} is a 

In 

npecial 

pafurm 

pUfpOSft 

It5 obIroetiCinli 

antlly \'Ath 

liSu90Je 

(a) a net 

memberoflha 

worth of more 

il.c, 

rha:n 

{c)h8s 

$5 rnilfio'l. 

~ 

(b) ha!I. the: 

Bnd 

licen&es 

~perilMCEl 

aoo: m cttw 

tt.eotlglnatJon, 

~ 

a(f"f&cing. $ale. ~cr~ uJpefbmHngand ~ing ordis!1'8!J$OCI loa,., and (d,tt.e gljlity to belirthe accn;wnIc ris~ or 

IMUMrdI'l'\ent (lndtdng:a total k;ma.); (ii) ltw;ttn.:lf1S~ 1$ ecqulnngthe~F1Ipi....turwthlta ~u;:c:oumand l'lOI.'l/IIClha'o6l1W 

taward resalej aNt Oil) the tmflll.~ has obb!ned the prior o,wiltM etWIDant tJflM FDIC. 

TD date. the FDiC hIE f!Ilg!IIged two pqmmy ornuJ6E, 1Inenc!B1 Bd<J\iiorB to mariwl1he LLC rmant.sh\p InlarfIrN; to potf:I'IUM~, 

Glml8~ Qnd Xeetl. Bn:yeue & W~. 

Compamon of the RecaTvunINp PPP to LflQaq- l..<wiIn Program 

IXW QnI OXptlCtOO to ~ a.en ITIMt duos to how' the FDIC \'All SlNclUn!!o InflJrd h pPFQ l.egQcy l.r..1arW'~, W$ h<we f1jghIighted below eMaIn key turna of~ ~s. ThE! FOIC may rnake~ d1mgas to the!.J:lgooy l.(IaI:JtiI f:>n:v'an bBtsed C/I1 Its. ~".;ththB~rnppI"P$. 

~ The Ruc;~h1pPPPa. \\Hch ha'II!l b89n (lj'XIfatlngslnce May 2008, ~!he ~\Jrdog and1ewaga.~b)'th&FDIC. 
155 


75733.114

FROM : PERFORMRNCERERL ESTRTE GRP 

gal EntityNahide 

FRX NO, : 7706490193 

PermltJ.slble r~!o be deo.eioped-by 

100 FDIC. boooel;l in par! 00 ttJe PPIP 

Jun. 15 2011 10: 50RM P22 

:\/IOfI2l: 
156 


75733.115

FROM : PERFORMANCEREAL ESTATE GRP FRX NO. :7705490193 Jun. 15 2011 10:51RM P23 

ThQ contlMl' Qftf,k urtitJ6 is tn1~1n provklo a 98~ ~ f\') 1M $ubJIlCf msffat: S{J6t!kIIL<>t 'lNMf;f1 shr;iUIt1 lUI $.lJLI{Iht Dboui ~ 

apocifj(f~~ce>i'. 

Speeil'il;l ~ons re\l)ting ttl t~ anlcl9 I>houId be eddre$sed dlredly ttl t1'l9lJU11-q-, 

othertnformlltlon abOut Jo"". Day f> Viow summary ofullll"lfOlmatiQll COl1l1'1butwod by ~ Day 

~ \Ilt3w Film's Weblilm 

VlIIw POfMll-.t" Rtletlld~. 011 'F.!"lInC6 and 881"1111\9 from USA 

JOBS Act _ On Rcgu!ailal A. R$g\.IlaI.lon 0 And Cn:w.'dfi.Jndirg PI'CI'I4&I.ons (Day Pilnay UP) 

~B.~tnd'<IttIiI&t"Q)ngrQII ... ~mtaCb:m"Rs:tJnwlM~M.().wew~~Ad{..Q3S 

l\C'Ilon/\prl5.2012. 
157 


75733.116

FROM : PERFORMRNCERERL ESTRTE GRP FRX NO. : 7766490193 Jun. 15 2011 10:51RM P24 

Home >- leg.al Ul;tr.'lry ;. Article 

mlJlfindBk.CDfJJ 

Legal Ubt'ary 

~9f:1~ Ubrary 

Advanced Sean:h 

Brows~ by Practir;e A.-ea 

Browse by JndV$try 

Practice Area Resource 

Centers 

~r~~~(~ .. JOt" Now! 

CUlrtDmI!Ir SUpcort 900-5264902 

1$ Half a PPIP Belter than None? 

by: 

HarDld P. Reie.hwaJd 

E;llenMaI"$h311 

Mttn1:ltt Phel~ I!.. Phillips, UJ> - Los: Aftgelo:):$ Office. 

A~lJ!>t3.~ 

previously P\.IbijShed on July 10.200.9 

AftBr rnom:'n: 0' prepillri.tUon, t". Treill5l1.llY baSi ""1111.,. ilI"nounced Its pros".'" 1'01' dealing: With .o--C=BIIQd I.V_CY •• :IIi!.m on the booil.& uf tt .. : n.ation $ banks. ~yer, u... PflOQr.'" 

u "ttno_rl .. ddrlil" ... onty I'> "'arro .... cliU5 of trl)l.It)lf>d JIIel:l.lrftll!ls. 

Th~ .-c'V18e.d' pm" does n<Jt «JvCr l<"Wbled whOle tOMS and b;Jnk:s holdill'IiI tn~se OS$ets .,.,,11 !I~t rro 

immlied/;!ltc bene.nt kom the pl.m. Ori'ilifltJl~y. f'PIP was Sl,Jpposed tEl cc ... ~r botfl ttlltlc S<leur'II:i~$1JIld 

b)X~ 10<ln~. but pot:entifll purchners of wholl!. Iu;ltl'l~ bltlked at the po,tE:ntl<d ~l:s, Irtdutling politiC<lt 

risk&, IJIlO decjd~r1 !nat ~g proposed that p!Jrtiofl.of the PPIP .. as not worth it. 

TbI1 rC':YiGe4 pIVQri!m I:llso dOIl!~ not COver ~!I type!> of troub!oo s"E!{:urities., or eyen 0311 typeS onroubled 

Bsset~!)tjeked secv(itll,u:. only mo~elle-tlbCkeD S!;:Qlritil!S in i!I dass ttlat was originaU)' rated AAA aro 

included. Omi1:/:l!d are tt:ecurm(!$ backed by .othnr types 0' ittCeb!edneS!>, sud! i!S iluto 1tI;,m;- ar'ld 

credit cardloiln$. AI$t) omitle'd are classes of sec."itJell iss"ued in mortgage securitizatiOn$: that we~ 

oriQ'ir'lalivrlltl'.dbti!loWAAP.. 

1lte r<r'<'i1;;eCl P:PIP pI.'m has as its &tbto!d g~l to suppart mori<et t<,ll'lctlonlng and h,,:mtJ~ pri~ 

discovery In. the ~-bac~d ~urmeg marltets" .... GiVen that !nUl!- rnarlre~ tomlm.lc w be frozen 

becaust. o( pl'lce dis~l:y bei:vtl!:en what POterTtii;11 purth~se~ /lite wi!flng to bid lind trw Pl'M lI1"t 

selle'li "r~ Willing. to otcept, the J:at:e§t propollaf offers [he hape Itlat wilt! Tre.,!I$Ury c.apltalaM 

rro/:ll'lClf\9, prIVate eql;lty wI!! til"ld me !eyerage attl"i'ctiYe enough tD I'r8rrant tHgher bid prices. 

proposed 5t)"Uquts 

The pmpos~<:I 8tfl.ICtUre I:;QIlt4mp!/I't'eS lI1e formEltion Df" series ct funds, e"I;;h to be- f1'JlHU1geo by II 

$po,,~r chooon by the: 'trEasury, Th~ Ttea!rul)' has ChN;1!I1'I nirre IOI'ell-knol"fl BsSet Mllu'W'.lgera to form me funds and m&noge: the acqui$iUOn and dlsPDlilt/QII ttf m... lega!:'r secum;w;. EDo;h man.!lger will 

Invest $4:0 mllflon of ill!; 0,"," capita! In the fun4 it willsport5'tlf and h1l.6 itldicatl!ll an !Ilti!rrtloo to r;lIite 0; 

least $SOO mlt!lo(\ of capita! from priVate sourC:;ef; fOr \he hind, with ~ Trt:&wry matching '\:holt d.oi13f 

for d{){l>!Ir. Once up and rutln'ng,. 2ach fund is ~)<~~ted fD be']in purcha$ll1g legacy Sf!.Ulliti~5 mm~ln9 

1:1 <:ombinatiM of debt fmam:ing up to the amount of l:h~ tol:!ll eQ.,ity of the hllld, with llddlr!of1i)\ 

leveroge avail'3bh: through the exiSti~ TenT' As!"~~B<ld<el1 Se(:.,r,des Loan Fac:ilit.,. 

Eligible A£sets /:Ire limited to wrnl11en::b,1 morb;la'lle-ooclc:ed sl1Cl.Iritllls; al'ld nOrNIgencv resideolial 

m\)rt!l;)ge-baded sceurtt1e5 iSSU'ed .prio"l& 2009 that we...e ori\linally rated AM or ttle I/:qu"/vlllent. 

90% of wnlcl1 iJtJ;! U,S. !l:l>5ets. Seiling in~:j.ih.Kooll1;l are t:ont..mp~te(ll:O bE! U.S. flnandal institul:WM, 

riot loreign y.oYernmc!'It ~gencies, 

Tf1:t!: Tetm Sn.l1lillt ~0\IIT\pan.,.ln9 th~ Tr",,,,~ry s "nrwun..,.,me,,"t 1I1~ C:;OVCr"S ",:attet"9 s.ucl! a,., th'i!! 

diYQDilicetlon and investment Imitoticl'lI Of sam fUIld. • .-e!lVl<:tion an ttm Nod $p(I1'I1!IQI's. penoltl£d 

dlstTjbutivn& and ell:pen~$, e:.::du~iYlty and INDldance of po~nti!ll connlcts, 

Whether this newlm: plan acnieves its Stilted goal remains m be 1!Ieen. Sotrn:! of th~ ooncerns earlier 

expressed remain. The G(!v-emrn~nt will have ttle right to audlt ~e woks aru:t I'e(X)I'ds of1tle 1\tnds 

ill1d mose affiliated With!t. em !he: other hand, ttle Treasury hal al'l!'lOurn:Cd ttl~t the executive 

compensation Imitation!. of e>:istinQ Ii!gisfl)tiOfl ~lll nat apply b:'> II'IVe5W1'S In the I'uru:!s .!I~ tanQ as. the 

ft.Irn:!s- are 5;~ 1O'llm that Mset managers tI'Hl:mselYel' and their employees art! not employees 

of or <:ontrDlli1"lg In'''estl:lrs in the fund!i.~ Passi"e mves:lOr.; will (lot be sub]ectto t!'Iese re5trh;lmn.s. 

The tlolltiw"1 dimension fD thr.; (eyl5ed pb:Jn rem.::lfns. ·the Tre/ll$ury ..... ants the pr .... "'lt!: market tEl 

become: 4"gnli'ieitntpl1!y,\,r!I. in tnls va~i"l'1 ot PPll>. Pri ... ./Iie plElyerll have to be CMv$nl:ed l:Mi'lt by 

lJ::trticlpatlt1\,ll;hey ~m not b(!ClJMe sti!r?~o;Io!Jll: bee" ..... se 9o'Jllff1rnent fUndlng wlll cl'I:;!Ible !hem to make 

a profit. The pll~l)jlit( of same type of afiE!r!h1/: fact" c.rlth::i:sm Of limitations about ttIe poten.".,l 

prontablllty of ~ ~If.tn for the or,..,,,te 5&tLlr is stl!l M1rri:;>llml! t1) many. 

ws of,PIP for Whole toan5 

If!twas no[alroody deM t'rQm ttw=mMetlts of the FDIC IMt month, a PPIP ror pLtrChPsel> ofwfJote 

1(101'1$ IS no loflgv on me drawing board. In U;t: latert 1rea5ury 3nnG1.mtement.. me TreosufY made mention ofi\! pos$"ible future expanSion attn!! p~ogrllm ttl wtlofe 1~l\s.lIIter In the yaw. W¢l'lly for 

h~&ns tllatllfOl,1Id be! soW by the FDrc froTn the re{;f"jve~ips of fulled b>!IrtkS:. Ni) det;:t.1k Qfthetiming, 

SCDP'!'or r\3wreoflNCf.otl\ll1: PrtJ9"~'" wefe provide<!. I"offl.Ow, there $¢eInsetrmmttn 00"" 

=::~!.ty:::~::;t."'o~:'~~:ejOr: ~~~:~~7 ;: .. cr J~~r;~::t::~~r:u~ ~nb In 

cieanc\rlg tt\lllr b;:.larJU: sheets of wxlc aswt$. 

E-m..,il Tbis DOcument 

Printer FriQndly Vl!ll"Sion 
158 


75733.117

FROM : PERFORMANCERERL ESTATE GRP FAX NO. : 7706490193 Jun. 15 2011 10: 52RM P25 

HQITle Page for !;he W(lrld'lJ.Bu~ml1is L~nder5 

PPIP Ready To Pop .l'lshua Z1Jrrbnm, 09.11.09", tl7:15 AM EDT 

TrA.aJ,lry9llys. a IIClIIled down VtU1J1of1 of Ita pUbJJe- : prtyalu fflV.stlnltm pta" 11'18)' bourn pllrl)hqllil1g ___ hI 

I "'oryslJon.' 

WAst-INlTON - TreQswy Sm:retary !-tinry Pau'!5on's c~al 

plan W$ to t(lscue thl!. fifJandal $)'5bm1 bybuyirrlJ to.wfc as:sets 

off or bi.tnk ba$ance sheets. WI'I~n TlIIlOthy Geilhner IOQk over 

in February, he ~1he icte3./-ts pl,lbfl()..P'r"iviM investment 

PBrtner&tr.ip 'M)UJd ~ $100 billion 1fom the TI'Ga""'Y plUG 

tlWAnlgc rro.m 61. Federol RaMrve .t111d It'lo FDlC Ie dBate 3 

$1 I!ilIIon tmdc ussnt fund. 

teal1f a year after 1OO-1d0a ffrst sur1acad, a cUpped versiOn or 

!he progrQrrl may finallY got und8fWaV by the efld of 

Septornb8r. 

GeittlnN'a PPIP 'MIS Driglna/ly 

e-nV\slQnad1olliU1tw:1CQ~~ 

on~ to pufCt\8::$6 entl"" IQ.iilIl!i and 

one to purchaM s:ec;s.,rttia6. The 

loans WJu!d be purdlasod through 

an FDIC prog:4dm and the 

aaeur/llas through 9 F(Id program 

EJutnawtho FDIC half of the 

prt'IgTB.m Is OIl k;o, "'$IncIt baNta ~ 11t11e to ro.ioe enpllal 

!here'w. not Ih:9 I:3fT1j urgl.l'lq in haVIng Ihu PfOgram au:t 1t11l11'l1,~ 

says; AndmwGnly. a ~n for the FDIC. SlIlI. Grlly fW~ 

1110 FDIC haG been b!:stfng the process -Il5Iing a9get$lt acquired 

fn;Nn bank fa\lure:a (0 '"get lJ1e1tB~rkin place,n case Its 

.....!.-eeded... --

~ l\Irmn!.1ha:I ttl ... Pf'P.t1l be col'TIJloloiyaband'g.nttd. 

the Tr.easury and flImb ImIQIv9d say1t1e. FlId',B; part cf the plan 

i.!;. mo~ fo~. "'No uJq)l;)d. trattsactlono \Q begin very 

S<XlIl," says Mag R8~. a pPO~mlJl'I forTrsasury. in an email. The period for thl.l' funds to ralss thir money BOOS in 

"'","orbor. 

S1~.61 4.37%, ih'IprovorronlQ ""the seaJ~ 

~~ market.jl.$the~layt;lem 

~ has smbli2ed, tha ...aIU8 of m~my Qi.1S~;:;;";~'()&l~r,:;~ oo-calledtol4cassetshas 

incmaood-ihe Troasury and Fed long cont61ldtld that the 

SoeCLIritieS Mre undeMJkJed. In a surramry ofTARP efforts on 

Thursday, GaIUlntlf' polnte4 outthut ~ ftJil!d-rate I)6(:1lrities,. 

It'le. sort onee envisioned Sf; pUrtiI~ fQJ It'le program, twlrn 

------

FlI1TH THIRD BANK 

TJ1e curiouS bank. 

"'BAlIK IDEAS !WI 

YOU DON'T NEEP 

A BANK. YOU 

NEED A BANI(ER~ 

Saml:O!\1< Who " .. U pettet 

qucstjOlJ~, And has acet:n 

tlJ a c:omorehe~$Ne suite 

of ~T\I1t'C'S, inc!uding 

prllMfum banlo'lng, Ollnd 

9 .. d(llln<:'1onl,.,,,.,$~e"u; 

;I .. dtnSurant:eftlol"",IIr"1 

inv"l'\m".ntprol"" .. ior> ... l. 

F"orm'lf.""form",tiQn"'" 

be.:ommg " Pt",rerrEd 

Pf09r.~m !Ttl!rrtbl!'r, did:; YMtf_. 

We're FIlth Ttmd 9allll:. 

T/>t"CUllQLU han);, 

Fb:rbes 
159 


75733.118

FROM : PERFORt1RNCEREAL ESTATE GRP FRX NO. : 7705490193 Jun. 15 2011 10: 52AM P26 

jncma~ in valuS' by 40% lftlliquidity flag eoIm back to 

tnarkeln. 

Irr ..lily the TI'EI.!1'Bury 8e'~ pillie manu!ilers to ea.d1 mise at 

lea:rl $500 mlilon. That $I.Im _II be oombin8d \lith 8!iI m.Jch Oil!; 

$30 tJiI1Jon of Treasury equity ond d~bt to begin ~rd1lJSing 

l10ubted IIssets. 

The nina selsd9d' funds 310 AJIIarn:e BarnetQin.. lIngeio 

BornslaIn. Blac:kRock( BU<- ne\M;_ paopkl ),It'IVNCO, 

Morathon Asset Managen'll!lnt. OBkInHI Capftat Managfl:me/'1t. 

RLJ Westem ASSet M9nagemom. Trust ~ny of tf'IA WI'I~t 

and WelliflI;jton MlnagemGnl. (This I'l;3pon.er has aasets in II 

WQllin:gton bond fUnd.) 

Fund managors contacted by F0rb6s dedined' Iu spBak en the 

rooord Md deferred queUtions It! Treasury. Speaking on 

backgl'DlJnQ, onamanagarfitl:1d ~t8Ithough-r(9OlSUryhas 

Ooon uJow, they seem cormitted to the plUgllun and haw an 

irnpcessive te&m VoOr1Qng OJ\. it. There nWi besJ1 ~ hoollhy 

amount of IntBr8st In inVB&1ing through !he funds. he said. 

Tho mnafler 'oI8IlIicn of PPP raisa& tile quMHon of WIst ....." 

hOJPpen 10 ~ unused funds. Too TI'9EtSUry says It has $12B 

biUionafunaHo<:medTARPfUndlir. ManyofU1e intended 

~iI"" \,Inlblyto~c:h IhM aKDcafed sbB. freeing IJP 

tNBn tI1Of'8 fundB. and !he armtInt of avallabls billions ¥oQI.I1d 

COfIt\nue to gl"C'W'iII3 banks repuy the TARP. ''!he Trool,lury he.1i/. 

plans few the lJDnev, it is lu:eping mJm, saying only that Uw 

t'urnfs "mrmin a:vaIable." 

Wsmfm' *1 Arn!Ity Flaw. "'!II.!w.:$migrA,,"l!ityN""'.m Don't: 8lJy Any Annl.iltr Unrll You WatdllttJs sped31 VldeCi A.eport. 

l:15,,*,No ckWno CMt btl GI'I<tnllgfln.Oi'nS mmf86.5 

No CID~ln9 CMt APR ReA. Quote AS seen on CNN 

News, CelllOclayJ 

~~.:D!P~ F'mnmiuG!!M"_Mm 

FI'Dnmlgl!l> start1ng Under $30,IHI0 F1,,(t The RIght 

Bu§lnl!§'5 For'Y'oul 

Getthner'8 Deadbuts 

~w Leade:rshlp at Margan Sbn"y C8 

Jobs DilI.a. Earnings Outlook Fllel. GaJns 

lIorgan StanteyCEO 5:t:otp.0t>-.m U:..' 

T(J(byOl\'~.J:llI!t 

An lnaidAt'a r.k. On Applo In The PPfJt~ 

&: ..... Jab. Era 

fOJbes Blosr.; 

~~~~wllf" ... ~i'I$<:B>'hClikI 

~~cIoelll'td:stlhakAtrrl.hliltIB8p..dm~,;IIronmrAppkI 

IIeflio;rvCe~'dBr#IlIlr1'. 

Mwd:Popular 

AS"QIInl!nQSIlf!wa ... 

~firlbr1Q 

~ 

1. Ho-orfgeCl!m.AZ1.V .. ....owauw--&ooc..u.., 

1. ,.,...$1>:"hm "'" ... d~(.-d~ll 

Mog 

:J. JuIlI\Tno.~:McnPn;oof .. W"~NIW~* 

U.IIIi'IOIfuf~",dAMadllt*'IJ 

.t. 'Don' Qo To lBw SchDaI,' "'-'T ....... Arod 211 

OIbaf Paella orWillcQn 1U2012 ~'" I bkIg 

$, $cottWCllto>'UPIg$tOD"IIIIonOlT~MClnly 

T(I~IdDff~lbl£ld 

8. MIlIlI)q.,--~YouW.AlTllugld:lrI~1 

.... 1'. Top&.....u-Rltcri.ll'M,..tv-'1l8ftl .... 1DnIy 

TImI.TNeJQb ............. CMo~I'*'ra 

8. TwiHlllrFlghtl,PtOMC1Itofa8Mkq,~ 

Pfml'l;lBr's D:m w.tt-rtWtlrrantj tq 

9. ~~Ir/.OYIImal6d:Whll1YOllRtalotNMdTo 

Sv=wdlbk'U 

'D. BlllWu;h .. "nptFotN..w0>.9da:AIMcI!III%omJoIa. 

OIr"h.z...ck"'rt..nJArldMON'I~ 
160 


75733.119

Testimony - G&M Daniel Family Limited Partnership 

In September of 2007 Silver State Bank loaned me $4,000,000 to start construction on an 11,000 SF 

retail building. After the project was completed the economy and commercial retail market was not 

looking healthy. Because of that, I found it difficult to lease the retail units. The entire economic 

forecast of Nevada changed drastically after the recession. Approximately fifty percent of the 

building remains unoccupied after 5 years of aggressive marketing. During the term of my note, 

Sliver State Bank when bankrupt and the FDIC took over the note. When the FDIC took over the 

note, they demanded that I make the interest payments current. I was not able to repay any of 

these debts at the time and I tried to negotiate with the FDIC, but they said I must pay immediately 

otherwise they would not considering extending the term of my note. I was then forced to take out 

another loan at $1,120,000. From this $1.2 million dollar loan, I paid the FDIC approximately 

$550,000 to make the note current. The FDIC told me that after I made the interest payments 

current they would work with me. Approximately a year later the FDIC did not work with me and 

they ended up selling the note to Rialto. When I received my first call from Rialto, they demanded 

that I fly to New York to discuss the note. First, I contacted my attorney to get a better 

understanding of the situation. My attorney contacted Rialto and requested that we have a phone 

conference to discuss these matters. Rialto said that they will not have a conversation over the 

phone and that we must fly to New York immediately. My attorney and I flew to New York for a 

meeting with Rialto which lasted only 20 minutes in which nothing was accomplished. At this 

meeting Rialto said that they want the note paid in fulL They also said that they do not care if I file 

for bankruptcy or take any legal action because they would still foreclose the property and attacked 

every single one of my unencumbered assets to pursue any deficiencies. The meeting was not 

intended to discuss a plan to payoff the note in which both the lender and borrower are 

comfortable. Instead, the meeting was intended to threaten me into paying off the note 

immediately. My attorney started negotiating with Rialto in September of 2010. Rialto requested 

that all revenues generated by the shopping center be sent directly to them each month. I have 

made 8 payments of $18,000 to Rialto. For the past 4 month our consultants have sent numerous 

proposals to Rialto. Rialto has rejected all of the proposals we have sent, but they have not given us 

any type of direction as to what they are willing to accept. About 1 month ago I received a notice of 

foreclosure. I am not asking Rialto or the FDIC to sell me back the property at pennies on the dollar. 

I am simply asking that they take my situation and the current market value into account. I am not 

trying to walk away from my financial responsibilities. I am only asking for a chance to get back on 

my feet and stabilize my investments. I fully intend on paying my debts and honoring my 

commitments to the best of my abilities. 
161 


75733.120

Update May 14, 2012 

Summary 

Lennar has continued to use tactics that approach extortion in order cower note holders to pay 

them more money not to sue them under their personal guarantees. This approach is not in 

the FDIC's or the US tax payer's best interest. New management that knows how to work with 

debt halders to wark aut these loans needs ta be installed in these pragrams. The debt 

halders knaw best haw ta maximize the value af the praperty. 

Discussion (see prior letter to Sheila Blair below for more background) 

It took four more confirmation hearings and over a year and a half in Chapter 11 before Lennar would 

agree to a Ch 11 confirmation plan. After Lennar changed law firms we were able to get the seventh 

amended plan confirmed at a cost of over $500,000 to us, over $100,000 to the NTCIC and close to 

$1,000,000 spent by Lennar (the FDIC and US Tax payers). During the course of these hearings Lennar 

continued to try every means they could think of to stop the plan from being confirmed. There was no 

reason for them not to accept an earlier plan or negotiate in good faith for changes. But their model 

was to maximize their return by forcing us into bankruptcy and taking the property. If they were able to 

do that then they wouldn't have to pay the Portland Development Commission the $700,000 they were 

owned. Nor would they have to pay any of the other investors that were owed money on the project. 

Under the plan these taxpayers all received some level of payment and the Portland Development 

Commission received almost $700,000. 

The principals in the property had to invest another $300,000 in the property under the bankruptcy 

rules in order to maintain their equity position in the project. Lennar has now informed us that they 

have added over $1,400,000 in penalties and default interest to the project and is suing the principals in 

the project under their personal guarantees for a total of $10,400,000. This is on a project that was not 

in default when the bank failed and only had a loan on it of $8.1M. In fact the only reason he project 

went into default was because the new note holder, Lennar, would not honor the bank's commitment to 

convert the construction loan to a permanent loan. 

These tactics of increasing the loan amount are nothing more that extortion by Lennar to get the 

principals to pay more or face unbridled and continuous litigation by Lennar. Guarantors have no choice 

but to continue to litigate until they can't any longer and declare personal bankruptcy. How is this 

approach helping US tax payers? Entrepreneurs are using the last vestiges of their capital that could be 

used to start a new business to defend themselves in court until they have no resources left. This capital 

could be used to start new businesses and create new jobs but instead it is going to pay attorney's to 

defend themselves from Lennar's litigation machine. Once entrepreneurs exhausted their capital and 

have destroyed their credit by declaring bankruptcy they have very few options left. 

The FDIC should not allow structured debt buyers the ability to buy notes at a discount and then inflate 

their value through excessive default interest, penalties and legal fees, only to sell the property to 
162 


75733.121

themselves at a discount on the court house steps. And then pursue inflated deficiency amounts from 

private citizens. This approach has only exacerbated the economic slump and the unemployment in 

many areas of the country. Nevada's AB273 is one approach to limit this type of injustice. 

The FDIC only needs to look at how other firms have negotiated and worked out their notes with the 

various note holders to see that Lennar's approach is not good for the FDIC, the economy, or the 

American taxpayer. The FDIC needs to dismiss Lennar as the manager and bring in management that 

understands they need to work-out these loans with the people that know them best, the current 

debtors. They are the ones that can bring the jobs back and find the most value out of these projects 

that are now in the FDIC's hands due to bank failures. 

Below is more background on the project and the unintended consequences of the current approach 

outlined in my prior correspondence with Ms. Sheila Blair dated March 14,2011. 

March 14,2011 

Ms. Sheila Bair 

Chainnan 

FDIC 

550 17th StreetNW 

Washington, DC 20429 

Dear Ms. Bair: 

Subject: Rialto Capital Management, Lennar, Multibank 

Summary: 

The unintended consequence of the Multibank structured loan sale in cooperation with the 

FDIC is not maximizing the relllrn to the FDIC or tax payers. In addition, it is prolonging tlte 

high unemployment rate affecting local communities by bankrupting local entrepreneurs and 

investors. TIre big winners from this relationship appear to be Wall Street debt collectors and a 

Florida land developer. 

As you will read, LennarlRialto is a bad partner and tire FDTC needs to be aware of the 

consequences oflhe partnership with tltem. We have done nothing wrong and do not deserve 

to be treated in this manner. You need to look illto this matter. 

Background: 

For the last 20 years I have been involved in helping small businesses find capital in the Portland Metro 

Area. Portland Venture Group·s members have invested in over 100 companies in the Portland metro 
163 


75733.122

area helping small businesses grow and proposer. This is vital to the Portland metro area since 

entrepreneurship is the key to employment growth throughout this country. 

In 2005 I made a significant investment in a real estate project managed by Foundation Real Estate and 

Development (FRED) to bring commercial condos to the Portland, Oregon, downtown core. The 

construction loan was with the Bank of Clark County which failed in January of2009. Although the 

project had guarantees from the Bank of Clark County to convert that loan from a constmction loan to a 

telln loan, neither the FDIC receiver nor the subsequent purchaser orthe note, Multibank, agreed to honor 

that commitment. 

In January of201 0 the loan was sold to Lennar/Multibank who have pursued a path of minimizing the 

value of the property while attempting to bankrupt the entrepreneurs who have created jobs in our 

community in order to ingratiate themselves. 

Discussion 

In January 2009 the FDIC placed into Receivership the Bank of Clark County ("BOCC"). BOCC had 

provided an $8,160,000 construction loan for the renovation of a historic, seven-story, 35,000 sq.ft. office 

building located in Portland, Oregon. At the time of the failure the loan was performing. FRED, I and 

others have invested over $2.2 million in the building. Thc renovation generated historic tax credits that 

were sold through a partnership with The National Trust for Historic Preservation (NTCIC). This 

provided an additional $2.4 million that is contingent upon procuring a permanent loan that was originally 

committed to by BOCC. After the failure, the FDIC continued to withdraw interest payments from the 

construction loan but funds to finish improvcments already underway were unavailable. Working 

cooperatively with the FDIC we used net rents and additional funds I provided to payoff eontraetors and 

remove workman~s liens. 

Over the next several months we worked with the FDIC to purchase our note with funding from a new 

bank. In December 2009 the FDIC agreed to allow us to purchase our note for $5.6 million a value 

$500,000 greater than the asset value detellnined by two FDIC appraisals. Given the status of the 

financial markets in December 2009, we were able to secure only a traction of the value of the building 

from new lenders and had to combine our t<L,( credit money to reach the $5.6M purchase price. It should 

also be noted at this time the FDIC was making it a policy to accept offers of at least 80% or more ofthe 

appraised value. Our offer which was accepted on December 5 was $500,000 over the appraised value. 

Less than 15 days after agreeing to the purchase price, the FDIC placed our note in a pool to be sold to 

Lennar/Multibank. That sale was consummated by the end of January, way short of the time we needed 

to close on a new loan. 

Upon reading about the purchase in the Wall Street Journal, I contacted Lennar to find out what our 

options were. They said I needed to talk with Rialto in NYC. April was the earliest they would meet, and 

prior to the meeting they required us to sign a pre-negotiation agreement as a condition of speaking with 

them. At my expense I traveled to New York with the Developer and provided a complete financial 

picture ofthe asset and our personal financials to senior Rialto management. At this meeting Rialto 

management stated that it was unfortunate we hadn't closed the deal with the FDIC, that they would not 
164 


75733.123

honor it and that they would seek full payment on the note, plus default interest calculated from a year 

prior when the loan tenned, attorney fees, etc. The FDIC with whom we had been working with prior to 

Rialto never put our loan into default, clearly seeking to optimize the FDIC's return. However, Rialto 

calculated detimlt intercst trom thc time the loan tenned out and has indicated the total owed is now in 

excess of $9.4M on an asset worth approximately $3.5M in an auction. Further, any shortfall from the 

sale ofthe asset they said would he made up by pursuing the guarantors. 

Our tax credit structure with the NTCIC is extremely complicated and any change in o\'mership triggers 

recapture and loss of the $2.4 million cash that is ready to fund subject to a pennanent loan. [t was clear 

that $5.6 million was our total resources available to satisfY the debt and was approximately $2 million 

higher than the value they would realize through foreclosure. Our financial statements which we had 

provided also clearly demonstrated that our guarantees havc nominal value. 

At the cnd ofthe mecting, Rialto management said "send us the incomc based upon a budget we will 

approve, we won't move to appoint a receiver and we'll work toward a resolution". For the next several 

months we complied with thcir requests but at the end ofJnly - in spite of the commitment they made in 

April and without warning - Rialto moved to foreclose and simultaneously sued the guarantors. They 

showed neither understanding nor concern with the loss of the tax credit funds. In ordcr to protect thc tax 

credits I retained council and filed Chapter II. Since August this has cost over $300K in legal fees. 

Rather than these funds going to resolvc the purchase of the note they arc going to attorneys. These legal 

costs have signiticantly sapped my resources and that of FRED's, ruined our credit, complicated our 

ability to obtain financing, and further reduced the building's value. I wonder what Rialtos legal fees 

have cost the FDIC; my guess they are in excess of$500K on this casc alone. 

Rialto obtained two broker opinions of value that estimated the building would sell for no more than $3.5 

million. Furthcnnorc, in a foreclosure Rialto will incur hundreds of thousands of dollars in future tenant 

improvemcnt costs and leasing commissions. In order to keep the existing tenant/owners they will need 

to reduce the rents up to 50% to equal rents in similar nearby buildings. Rialto has nevcr cven toured the 

property and appcars to be focused on driving towards a foreclosure. Free money makes for strange 

business decisions. 

On my second trip to NYC (at my expense) to try to negotiate a resolution, Rialto made it clear that thcy 

pay nothing for capital it is provided by the FD[C at no charge and therefore they have no incentive to 

settle. In addition, their management fees from the partnership and our $30K a month rent checks to them 

are more than enough of a return on free money to keep the legal process moving forward at full steam 

and not ncgotiate a settlement. Clearly these actions are designed to do nothing more than pressure us to 

raise more money to purchase a building for much more than it is wotih. We have otTered $5M on a 

building that has a market value of $3.5 and they still want to continue the legal maneuvering. For Rialto 

cost is no object and their goal is to extract as much as possibJe out of the local community at any cost to 

fill their own coffers. 

Is Rialto helping the FDIC or US tax Payers? 
165 


75733.124

Rialto's tactics discussed in the attachment shows a litigious approach focused on bankrupting the job 

creation engine of this country. With legal fees in excess of$500K on a propelty that is worth between 

$3.5M and $4.5M, it is hard to see this as a good use of resources. especially when they have becn offered 

$5M for the asset. The business rational to continue to pursue a legal resolution and not negotiate a 

settlement is not fathomable. 

During the construction and renovation of our building we were employing well over 100 workers for two 

years. Many oflhese firms were minority owned and small sale proprietors, others were businesses that 

have had a long standing in the community. Below is a listing of some of the types of firm and skills we 

employed during the 24 month construction period including but not limited to: carpenters, plumbers, 

electricians, paintcrs, installcrs, appraisers, metal workers, geotechnical engineers, architects. roofers. 

mechanical HV AC contractors, etc. 

Over $1 OM of rehabilitation services were spent on this building because of the vision and financial 

resources of the project owners. Once these entrepreneurs and visionaries, the backbone of the 

community, are bankrupt who will provide the nceded capital and expertise to hire these workcrs in thc 

future - the debt collectors sitting in the high rise offices in NYC? It will take a long time for the Portland 

Metro market to recover from the dcvastation caused by Rialto's scorched earth strategy. 

What to do and Where to start 

Recently. Senator Cantwell met with several companies currently dealing with Rialto so I have copied her 

on this letter and spoken personally with Brad Bare on her staff. There needs to be a congressional 

inquiry for our legislators to better understand the implications of this program: 

Are all communities being impacted by the unintended consequences of this structure? 

Are other managers performing more in the spirit of the structure to solve problems quickly and 

efficiently to maximize returns to the FDIC? 

What is Rialto spending on legal fees compared to other managers? 

1I0w many loans have been resolved by Rialto vs other mangers? 

How has the resolution of these loans effected job creation in the local communities? 

How is Lennar bcnefiting beyond the financial gain from Rialto? 

o Low cost land for future development? 

o Use of tax payer money to grow their business and improve their balance sheet? 

I have also been in contact with Senators Ron Wyden and Jeff Merkley. If you have any questions about 

this matter, please contact them or if I can offer further insights or assistance of any kind, please do not 

hesitate to contact me. 
166 


75733.125

MEROLLA & GOLD, LLP 

A, 'I odd M<'rolL-), p,e. (GA, FL & NY) 

Congressman Lynn A. Westmoreland 

2433 Rayblll11 House omcc Building 

Washington, DC20515 

AfrORNEYS AT LAW 

2018 POWERS FEl\RY ROA D 

PARK\Io;'OOD POINT, SUITE 800 

ATLANTA, GEORGIA 30339 

TEUPHOl'\E: 770-984-2300 

FACSIM!LE: 770-984-0098 

\vw w, mpwlJagold ,com 

May 15, 2012 

I~Ol:ald T Gold, P.c. (GA & Fe) 

RE: Federal Deposit J/lslIl'a/lce Corporatioll 's Structured Tl'ailSactioll Program 

HO'lse Committee on Financial Services Hearing on May 16, 2012 

Dear Congressman Westmoreland: 

Please accept this letter and enclosure as testimony on behalf of my clients regarding the 

Oversight of the Federal Deposit Jnsmance Corporation's Structured Transaction Program hearing, 

currently scheduled for May 16, 2012 before the House Committee on Financial Services. 1 am 

privileged to represent Mssrs. ROll. Avi, and Moshe Manoah, as well as their companies, in 

litigation with an affiliated company of Lcnnar Corporation ("Lennar") and Rialto Capital 

Management, LLC ("Rialto") ill the civil action pending in the Superior COlili of DeKalb County, 

Georgia, styled C!o,fL-GA Rame, LLC v. Rame Properties, LLC, Case No. 1O-ev-9919-8 (the 

"Manaoh Litigation"). I am expressly authorized to tender this testimony on their behalves. , 

In my professional experience in Georgia with Lennar/Rialto affiliated-plaintiffs, which are 

partners with the Federal Deposit Insurance Corporation (the "FDIC") on a 40-60 ownership basis. 

they have cngageo in the following strategy: 

Ignore deb1or~s requests to "'work~ont" existing loans, regardless of whether thc:y are 

pcrfornling. 

Sue on the notes and guaranties, rather than foreclose on the property. 

o Georgia is a non-judicial foreclosure state with a confinnation statute 

regarding proof of the foreclosure price being "fair market value" before 

pursuing any alleged deficiency. 

Se~k the immediate appointment of a receiver, sometimes without notice and a 

hearing lo the debtor, thereby seeking to control the asset witholll securing legal title. 

o Only if a receiver is not appointed will they foreclose. 

o Alier foreclosure, then confinll the sale and pursue deficiency judgments 

against the guarantors. 

Pursue a judgment against the makers of the note and the guarantors. 

Should ajudgment be elltered, they would then be able to foreclose on the property 
167 


75733.126

at some price well below "fair market value," as the foreclosure would NOT be 

sub;ect to a confirmation proceeding in order to pursue a deficiency - instead, the 

actual foreclosure price is simply deducted from the outstanding judgment. 

I had the o'Jportunity to review the prepared testimony of Stuart Miller, the Chief Executive 

Officer of Lennar Corporation for May 16,2012 and take issue with at least two of his statements 

based on my personal experience. The tirst being on page three, where he states "Rialto operates in 

accordance with the loan documents negotiated, approved and signed by these sophisticated 

business borrowers, applicable laws, and the rules of the court system, both in the spirit and the 

letter of the law." The second being the last sentence on page six, he states "OUf program is to work 

within the four corners of every loan agreement, each individually considereci, and as well within 

the four corners or the rules and the spirit of our court system and the law." 

As you can see in tIle enclosed memorandum, which is a sUlllmary of our statement of 

underlying facts fer a motion summary jUdgment, currently sub judice, the Lennar/Rialto affiliated 

PlaintifTcannot state with ,my accuracy the alleged principal balance due: (1) whcn they delivered 

dcmand letters on May 21,2010 (about 3 months after closing all the $3.05BB deal with the FDIC); 

(2) when they received the immediate appointment of a receiver without notice and a hearing on 

August 17, 2010; or (3) today -nearly twenty-one months after they initiated litigation. in fact, they 

do not even possess the loan history with Omni National Bank or the FDIC for the loans at issue. 

In this cas~, which involves seven commercial properties in the metro-Atlanta area having 

10,01s with the failed Oml1i National Bank (where some former executives were cOllvicted of federal 

crimcs), the FDIC admittedly incotTectly overcharged my clients over $300,000.00 in principal and 

interest before assigning the loan documents to its new business partner, Lennar/Rialto. Thereafter, 

Lcnnar/Rialto did not engage in any good-faith discussions regarding the overpayment before 

wrongfully and maliciously seizing control of the properties in August 20 I O. I submit these 

undisputed facts cia not evidence working "within the four corners of every loan agreement," nor 

"the spirit of our caurt system." 

Thank you, on behalf of my clients and myself, for the OPP0l1tlllity to be heard on an issue 

that not only affects these individuals, but also Ollr great Nation at large, which continues to struggle 

to recover, in part, from the failure of so many community banks. If you have any questions, please 

contact me at yotl1"convenicnce. 

/no 

Enclosure 

CC: Clients 
168 


75733.127

MEMORANDUM 

IN THE SUPERIOR COURT O.F DEK<\LB COUNTY 

STATE OF GEORGIA 

CML-GA RAME, LLC, 

Plaintiff: 

v. CIVIL ACTION 

FILE NO. 10-CV-9919-8 

RAME PROPERTIES, LLC, et.aL 

Defendants. 

Plaintiff initiated this action on August 16, 201 0 against 13 defendants relating to 

7 properties developed in the metro-Atlanta area, and immediately received the 

appointment of a receiver without notice to any defendant The following day, on August 

17,2010, Plaintiff served the Sllmmons and complaint, along with the motion and order 

appointing a receiver. Approximately a month later, one of the Defendants, William 

Brinson, died of a stroke. Thereafter, Plaintiff sought to substitute in as a party the 

Widow Brinson as the executor of the Brinson estate. This despite the fact that there 

were no identifiable assets in the Brinson estate and the Widow Brinson being soon 

evicted from her home after a reverse mortgage foreclosure. 

The gravamen of the complaint, which contains t\venty nine counts, lies in alleged 

breach of contract based upon promissory notes and guaranties Plaintiff received after its 

parent company (Lennar Corporation (NYSE: LEN) purchased $3.05 BILLION dollars in 

real estate related debt from the Federal Deposit Insurance Company as Receiver 

CFDIC-R") for 40 cents on the dollar, borrowing half of the S1.22BB purchase price 
169 


75733.128

from the United States taxpayers through a seven-year interest free loan from its partner-" 

the FDIC. 

The undisputed evidence in this case indicates that Plaintiff fai lcd to deliver 

adequate and proper notices of default to accelerate the total indebtedness under the 

applicable loan docllments" Further, and more imp01iantly, Plaintiff had no right to seize 

the properties at issue from the control of the Moving Defendants on Allgust 16, 2010, 

and in so doing committed an unlawful conversion. In addition, the loan guaranties at 

issue were procured through fraud by the loan originators, Omni National Bank 

("0111111"), which was closed by the Office of the Comptroller (lfthe CUlTency on March 

29,2012, and appointed the FDIC-R as receiver thereof. One of 011111i's co-founders, 

leftIey L. Levine, is currently serving a five-year sentence in federal prison related to his 

activities in Omni, and its fooner CEO Stephen M" Klein, the signatory to the 

COllsolidat~d Loan Agreement at issue in tl]is case, was recently sued by the FDIC 

seeking $37.2 million dollars in damages. 

STATEMENT OF FACTS 

1. RAME Properties and the Manoah Brothers. 

RAME Properties, LLC is a Georgia limited liability company owned and 

managed by three of the individual defendants that arc brothers: Ron Manoah, Avi 

Manoah, and Moshe Manoah" RAME Properties, LLC owns an interest in the seven 

other limited liability company defendants herein, and sought to develop real estate 

through loans frol11 0111ni fi-om2005 through 2007. The original loans from Om11i are 

sllmmarized in the following table: 

2 
170 


75733.129

['roperl v/Borrowe~e ___ . ____ ._._~oan Amount_ 

Hwy 1-85 January 4, 2007 $ 340,000.00 

Scales 

East Atlanta 

Chattahoocllee 

McGinnis Ferry 

January 6,2005 

March 29, 2006 

June 16, 2005 

November 6, 2006 

$ 2,03S,OOO.OO 

$ 6S0,OOO.00 

5) 1,250,000.00 

$ 5,083,000.00 

Ridgeview November 2,2006 $ l,312,SOO.00 

,",A",s!.Chfi",o:.c;rd"-",D",u"-,n.:.:w-o:o""o-'CdY.1.---,S"-,e",p,,,te,,,l1=lb~I 28,2006 $ 1,782,400.00_ 

TOTAL LOANS: $12,452,900.00 

Guarantor(s) 

Ron Manoah 

William Brinson 

Brinson Fmy Partners 

Ron Manoah 

Moshe Manoah 

Avi Manoah 

Ron Manoah 

William Brinson 

Brinson Fmy Partners 

Avi Manoah 

Moshe Manoal! 

In the Summer and Fall of 200S, the above-referenced loans being in good 

standing, Omni and the RAME entities entered into a Consolidated Loan Agreement 

dated December 1, 2008 extending the teml for the outstanding loans. As o[December 1, 

200S, the loans and their appraised values were as follows: 

Property/Borrower Loan Amount Appraised Value Date of Appraisal 

Hwy 1-8S S 318,SOO.OO 5) 490,000.00 June 19,2008 

Scales $ 2,03S,OOO.00 $ 2,800,000.00 June 23, 2008 

East Atlanta 5) 448,SOO.00 $ 690,000.00 June 19, 2008 

Chattahoochee $ 1,242,642.00 $ 2,600,000.00 ltme 4, 2008 

McGinnis Ferry S S,SOO,OOO.OO S 7,500,000.00 December 18, 2008 

Ridgeview $ 1,107,500.00 $ 1,740,000.00 June 20, 2008 

Ashford Dunwoody $ 3,200,000.00 $ 4,000,000.00 October 10, 2QQ~ 

TOTAL: $13,852,142.00 $19,820,000.00 LTV: 70.0% 

While Plaintiff contends that all three Manoah's executed guaranties related to all seven 

loans in connection with the December 1, 2008 Consolidated Loan Agreement, this is 

denied by all three brothers. Rather, they each only continued to personally guaranty the 

original loans; as aptly stated by Moshe Manoah: 

RAME at Chattahoochee, I mean, this is not my loan, so I would never 

again, after the fact when the market is down, I would never sign a personal 

guaranty 011 something I never signed at the beginning, There was no 

reason for me to do that. 
171 


75733.130

II. The Closing of Omni and Mismanagement bv the FDIC-R. 

Less than [our months after the execution of the Consolidated Loan Agreement on 

December 1,2008, Omni was closed by the Office of the Comptroller of the Currency on 

March 29, 2012, and appointed the FDIC-R as receiver thereof. One ofOmni's cofounders, lefiiey L. Levine, is cunently serving a five-year sentence in federal prison 

related to his activities in Omni, and its Conner CEO Stephen M. Klein, the signatory to 

the Consolidated Loan Agreement at issue in this case, was recently sued by the FDIC 

seeking $37.2 million dollars in damages. 

At this time, the Rame entities were all current on the seven loans at issue in this 

litigation. But since the outstanding notes all had interest rates tied to the "Omni Prime 

Rate," which no longer existed as of March 29,2009, the applicable interest rate became 

the Wall Street Journal Prime Rate of interest. However, over the next year, the FDIC-R 

delivered erroneous loan statements that failed to contain the proper calculations as to 

principal and interest due and owing on a monthly basis, and the RAME entities brought 

the discrepancies to the attention of the FDIC-RI According to the RAME entities, it 

overpaid the true amounts due by over $312,000.00. However, it was not until December 

2009 that the FDIC-R recognized and acknowledged the problem. Incredibly, rather than 

refund the $312,000.00 to the Rame entities, which "iOuld be critical to cash flow in an 

aggressively failing real estate market, the FDIC-R simply wrote down the overpayment 

against the principal balances in February 2010. The changes to the principal balances 

from Febmary 20 J 0 to March 20 10 per the FDIC-R statements to the RAME entities can 

be summarized as follows: 

1 Indeed, a few months after the FDIC-R came into play, it agreed \vith 

the contentions of the RAME entities regarding wrongfully holding funds 

in escrow, and then allowed the escrow payments be applied ::0 certai.n 
172 


75733.131

ProQertv/Borrow~_l'rincipal due 1LlLlSLJ'rincipal Olle 3/l1J 0 

Hwy 1-85 $ 288,108_81 $ 262,362.90 

Scales .Ii 2,035,000.00 .Ii 2,035,000.00 

East Atlanta $ 405,691.94 $ 369,479_60 

Chattahoochee .Ii 1,218,051.62 .Ii 1, I 54,451.1S 

McGinnis Ferry $ 5,495,000.00 $ 5,495,000.00 

Ridgeview 5 1,107,500.00 .]; 1, I 07 ,SOO.OO 

Ashford Dlll1Woodv $ 3,076,292.81 .Ii 2,888,886.05 

TOTAL: $13,625,645.18 $13,312,679.73 

III. The Assignment from the FDIC-R to Plaintiff 

Difference 

.5 25,745.91 

.Ii NIL 

5 36,212.34 

$ 63,600.44 

NIL 

NIL 

.5 IS7.406.76 

$ 312,965.45 

On February 9,2010, Lennar COlvoration (NYSE: LEN) through its subsidiary 

Rialto, closed two transactions for the assignment of 53.05 BILLION of distressed rea! 

estate loans through creation of a multi-layered public-private partnership with the FDIC. 

The loans at issue herein were among the group of loans assigned on February 9, 2010. 

In effect, Rialto/Lel1l1ar formed a variety of limitcd liability companies with the FDIC as 

its partner on a 60-40 basis on the following terms: 

53.05BB in RE-related debt for a purchase price of51.22BB (40% of par) 

o Rialto holds a 40% equity interest for 5243MM in equity 

o FDIC holds a 60% equity interest for $365MM in equity 

o LLC borrows $627MM, no interest, no recourse, seven year loan 

• 5500 loans are purchased, involving 22 failed banks 

• 90'% of the loans are non-perfonning, with 33% coming from Georgia 

FDIC funds $32MM in working capital 

• Rialto eams a management fee 

For every $0.10 of resolution value over the $0.40 purchase price creates 

SI22i\'lM in profit 

Given the foregoing, Rialto controls 53.05BB in RE for an 8% investment 

($243MM) that canies no future risk (because the FDIC loan is non-recourse), allows 

thcm to earn a management fec regardless of recovery, and has a substantial working 

capital fund to "recover" non-perfol1ning loans (typically through litigation). Indeed, as a 

----------------------------- monthly loan payments. 

5 
173 


75733.132

general matter and specific to this litigation, Rialto and the FDIC have engaged in the 

following strategy: 

• Ignore debtor requests to "work-out" existing loans, regardless on whether 

they are performing 

• Sue on the Notes and guaranties, rather than foreclose on the property 

• Seek the immediate appointment of a receiver (thereby controlling the 

asset, though not securing legal title) 

o Only if a receiver is not appointed will they foreclose 

o After foreclosure, then confinn the sale and pursue deficiency 

judgments against the guarantors 

• Pursue a judgment against the Maker ofthe note and the guarantors 

• If judgment in entered, foreclose on the property at some priee well below 

"fair market value," as the foreclosure is NOT subject to a confirmation 

proceeding to pursue a deficiency - instead, the actual foreclosure price is 

simply deducted from the outstanding judgment 

The structure oftlle FDIC-LennariRialto deal results in a disincentive to "workout" loans with willing debtors, regardless of whether they are non-performing, and 

regardless of whether they are deemed non-performing by regulatory rules regarding a 

severe decline in collateral value. That is, because the acquisition cost of these loans (8% 

of face value) is miniscule, and the time-cost of money for the first seven years is SNIL 

(no interest payments on the "loan" from the FDIC), and the potential returns are 

enonnous ($1 22MM in profit for every 10 cents of resolution value over the 40 cent 

purchase price), there is no incentive to "flip" the property for a quick profit into the 

hands of the nExt generation of home building entrepreneurs (i.e., John Wieland Homes 

in the early 1990s). Rather, the incentive is to ruin the existing builders through pursuit 

of guaranties on the notes regardless of the current market value oftlle real estate used as 

collateral, and regardless ofthe bOlTowers' willingness to stay with the deal (and ride out 

temporary declines in value). 

6 
174 


75733.133

IV. Plaintiff's Declaration of Default and the Appointment of a Receiver. 

True to the aforementioned fonn, Plaintiff showed no interest in a working 

lender-borrower relationship with the RAME entities and declared a default by letter 

from its counsel dated May 21,2010 to each of the seven properties. The fatal problem 

with these "default" letters is that they contain some unverifiable amount claimed to be 

due that is entirely unsupported by the record. When asked [or the basis for the amount 

claimed due, Plainti ff could J10t explain the basis for the calculation of the various 

demand figures. A summary of the principal amounts claimed due as of May 21,2010 

compared to that stated by the FDIC-R as of March 1,2010 follows: 

Property/Borrower Claimed .",0,-,-n-=5"-,/2"-1,",-/-"I",,O~P,-1,-,·i,"-l1c,,,i,,"p~a,-1 ",D,-,llc~e..o3"-i-,,,1 /,-,I,-"O,---,D~l,-,-' f""ference 

Hwy 1-85 $ 295,843.00 S 262,362.90 S 33,480.10 

Scales $ 2,035,000.00 $ 2,035,000.00 $ NIL 

East Atlanta $ 416,589.00 $ 369,479.60 $ 47,109.40 

Chattahoochee $ 1,227,299.00 $ 1,154,451.18 $ 72,847.82 

McGinnis Ferry $ 5,495,000.00 S 5,495,000.00 NIL 

Ridgeview $ 1,107,500.00 S 1,107,500.00 NIL 

Ashford DUllWOp.sI.,Y ___ ..$. __ 3, 113,549.00 $ 2,888,886.05 $ 224,662.95 

TOTAL: $13,690,780.00 $13,312,679.73 $ 378,100.27 

That is, when Plaintiff rushed to declare a default regarding the seven properties at issue 

in this litigation, it was in error by over $378,000.00. Further, asserted monthly amounts 

due all a go-forward basis were grossly overstated by the FDIC-R for each and every one 

of the seven.J)J:QP.£rties at issue, which apparently cannot even calculate a simple interestonly loan at 3.50%. This amount represents nearly six months of monthly principal and 

interest paymenls supposedly due per the last FDIC-R statement dated March 1,20] 0, 

summarized as follows: 

7 
175 


75733.134

Monthly P&I Due Terms 

Propet1y1Borrower ._per FDIC-R on 311/10 ofLoag 

Hwy 1-85 $ 6,234.83 P&I amort over 84 mtlls 

Scales $ 6,133.26 Interest Only 

East Atlanta $ 8,780.36 P&I amort over 84 mths 

Chattahoochee $ 27,434.53 P&I amort. over 300 mths 

McGinnis Ferry $ 16,561.32 Interest Only 

Ridgeview S 3,337.88 Interest Only 

Ashford Qttjlwoody $ 66,651.86 P&I amorLover 180 mtlls 

TOTAL MONTHLY P&l: $ 135,134,04 

True 

Monthlv P&! Due 

$ 4,280.59 

$ 5,935.42 

$ 6,027.77 

$ 6,220.96 

$ 16,041.67 

$ 3,230.21 

$22,876.24 

$ 64,612.86 

That is, the FDIC-R over stated the monthly obligation by $70.521.18. Conple these 

figures with the fact that the seven properties at issue generate over nearly $900,000.00 in 

yearly income (Defendants' Deposition Exhibit 0), not only were the RAME cntities not 

in default on May 21, 2010, but there were not in default on August 16, 2010 when 

control over the properties was wrongfully and maliciously converted from them through 

an improper appointment of a receiver that violated all notions of due process. 

During discovery Plaintiff admitted that the amounts claimed due in the various 

demand letters dated May 21, 2010 were not only incorrect, but were also based upon 

inadmissible hearsay. In particular, Jonathan Horowitz, Plaintiffs Vice President of 

Asset Management, testified as follows: 

Q: You based getting a receiver without noticing a hearing on an alleged 

default on the principal al110tmt due, the loan payments that were due, correct? 

A: That's our position. 

Q: And I'd ask for you to take a look at Exhibit 15. Can you identify Exhibit 

IS? 

A: Appears to be a demand letter from my counsel to the obligors and the 

borrower, RAME at Highway 1-85 dated May 2 I, 201 O. 

Q: Now, on page 2 it identifies that the full amount of monies due and owing 

in the principal <Ullount 01'$295,843. Do you see that? 

A: I see that. 

Q: And - and this is the demand letter on which you based the receivership 

motion, correct? 

A: If that's what it says. 

Q: You're asserting that that amount was due and owing and that RAME at 

Highway 1-85 failed to pay that amount? 
176 


75733.135

A: At thaI time, yes. 

Q: Okay. How did you calculate that number? 

A: It was based on pay histories provided in the file. 

Q: And can you identify those documents? 

A: If you have something to show me. 

Q: No, I don't know. I didn't see anything in yonr document production 

to indicate that $295,843 was due. 

A: '"Veil, if you don't have a document to show me, I don't know, I can't 

really opine. I'm just saying it would on what the letter says. 

The [act is, Plaintiff did not provide the "pay histories provided in the file" during 

discovery. Further, in suppon of its motion for pmiial summary judgment, Plaintiff failed to 

properly authenticatc the "payment history records" it received from the FDIC and/or ONB 

to show the demand letters were proper - which they were not. 

Indeed, during deposition, Mr. Horowitz confinned be has absolutely 110 idea what the 

proper amount on each loan was due. To wit: 

Q: Okay. This is a document [Exhibit PJ that you produced in this case, 

which is a payoff statement from Quantum regarding Highway 1-85, and it's got a 

littIe RAME 1361 in the bottom left-hand corner. Do you see tbat? 

A: Yes. 

Q: Okay. What's tbe - what's the total unpaid principal balance as of 

November 12,20107 

A: 288,108.81. 

Q: Okay. Were any payments made to draw dO\vn the principal between May 

21",2010 and November 12, 2010? 

A: Without looking well, looking beyond this, I don't know what is this 

RAME at Highway 1-85? I don't know if there was any payments applied. 

Obviollsly, the mOllnt is less, so we took a more conservativc amount to the 

benefit of the borrower. 

Q: 'Vllat do you mean a conservative amount? 

A: Well, we went with the lowest pl'illcipal amonnt that's displayed 

ultimately on the on the pay amounts after the defanlt letters were sent. It 

says 288,108. That's the latest amount we showed from them. And I don't 

know if since May through November here, because it doesn't say it was provided 

here, whether any payments were applied to reduce it from, say rent monies from 

somewhere else or anything like that. We had no payments from the borrower. 

Q: SO you think that you may have gotten rent payments directly in between 

May 21 51 ,2010 andA: Well, this is a vacant property, so there's no rent to come from it, butQ: Right. So I'm trying to understand why is there a difference between 

your demand letter and the payoff amount fOl' the principal of this payoff 

9 
177 


75733.136

statemellt from Quantum 011 November 12'\ 2010. Do vou have allv 

explanatioll for that? 

A: Probably jllst becanse like I said before, the number here, the 292,582 

- well, that's close to this, but it's not exact. The 295,843 number you see 011 

Bates stamp 1364. 

While "close" typically suffices for horseshoes and grenades, it should not v'/'hen a 

publicalJy controlled company that enjoys a sweetheart deal with the FDIC tries to steal 

$20,000,000.00 of rea! estate ii-Oln developers that always acted in the utmost good faith 

with its lenders. In fact, Plaintiff admitted its demand letter contained a false amount 

alleged to be due: 

Q: Okay. So again, why would you use a balance as of July 2009 in your 

May 21", 2010 demand letter? 

A: I don't kllOw why there's a difference on hel'e between the demand 

and what the pay amount owes, but I would sav that the amount owed now is 

$288,108 principal. 

Q: SO the demand letter was inconect in (he dollar amount demanded? 

A: It's not consistent with what is here what is on here. 

Q: And as you sit here today, do you believe that your demand letter was - is 

an accurate amollnt that was demanded, the 295,843'1 

A: I think the demand letter is consistent with other documentation in Exhibit 

P that shows that the amount - amount outstanding was 295,843, which is in the 

leller, for example Bats stamp 1368, which is the last page oftlle summary. You 

call it again asset summary, is probably the best description for it, which says 

the current principal is 295. So I don't want to speculate on when this pay history 

was reviewed, but in any event the amount on some of these documents show 295 

l.ll1d toerr on th", side of caution the pay history or rather the payoff statement 

shows 288 as the lowest amount possible due. And that seems to be the 

appropriate amount to ask. 

Q: Well, actually, it's higher than the amount due. You didn't use the 

conservative number. You used the higher amount, 295,843 rather than the 

288,109? 

A: Yeah, I can't say to whv the letter is not consistent with the pay 

historv. I don't l-ecall whv it's different there. 

The fact is, Plaintiff has absolutely no idea what the true amounts due are as to the seven 

properties at issue. 

10 
178 


75733.137

Bransen Patch, MD Group, LLC Testimony 

The Honorable Robert R. "Randy" Neugebauer, Chairman 

Michael Everett "Mike" Capuano, Ranking Member 

Testimony for The Record On "Oversight OF FDIC's Structured Sale Program" 

For the Hearing held May 16, 2012 

House Financial Services Committee 

Oversight and Investigations Subcommittee 

us House of Representatives, Washington, DC 20515 

MD Group, LLC 

3122-100 Fincher Farm Rd, Box 520 

Matthews, NC 28105 

Phone: 704-651-5939 

Email: bpatch@blpatch.com 

Bransen L. Patch, Managing Member 

FDIC, Lennar, Rialto Wall Street Deals Killing Jobs and Undermining Recovery 

I am a small business owner and developer in the Charlotte Metro Area. I have worked in this 

market for over 25 years and have successfully completed many commercial, medical and 

mixed-use projects. I am writing to share my story of the unfair treatment I have received from 

Multibank 2009-1 CML-ADC Venture, LlC, the joint venture between the FDIC and Lennar 

Homes/Rialto Capital Management, LlC. 

In February 2009, I was constructing a 26,000 square foot medical building in Waxhaw, North 

Carolina for the purpose of bringing much needed medical services to this small community. 

The building's shell was complete, leases and letters of intent were in place and tenant upfits 

were ready to begin, when I received notice that MagnetBank, the bank financing my project 

had failed and was taken into receivership by the FDIC. 

On February 9,2010, my loan was bundled with 5,500 other loans and sold for pennies on the 

dollar to Multibank 2009-1 CML-ADC Venture, LlC, of which the FDIC is a 60% stakeholder. 

After numerous attempts at a workout and a year long legal battle with Multibank (FDIC-lennar 

HomeS/Rialto), my property was fraudulently foreclosed upon and sold in May 2011. At the 

foreclosure sale, Multibank (FDIC-Lennar HomeS/Rialto) bid on my property for much less than 

the amount of the origin a! note. Now they are legally pursuing me for the deficiency. !t's not 

enough for them to take my building; they want to steal my family's livelihood, too. I have 

Page 1 of 2 
179 


75733.138

spent well over $200,000.00 in legal bills to defend myself and my family against these 

predators, wiping out my entire savings and taking a second mortgage on my home. I don't 

understand how this can happen when I'VE WORKED SO HARD, HONORED MY CONTRACT 

OBLIGATIONS and NEVER MISSED A PAYMENT. 

I am not alone. I have met many others across the United States whose properties are also 

being unfairly foreclosed upon by the joint venture between the FDIC and Lennar Homes/Rialto 

Capital. Like me, these builders and developers had performing loans in good standing when 

their banks failed them. Like me, they suddenly found themselves forced into foreclosure, 

stripped of their property, and fighting deficiencies. 

The FDIC's joint venture with Lennar Homes/Rialto Capital Management, LLC is purposely and 

systematically damaging many small businesses and the families that depend on them. Please 

stop the predatory practices of the FDIC and their partners. 

End of Testimony 

Page Z of Z 
180 


75733.139

Testimony - Robindale Industrial Park, LLC 

In 2008, I bought a piece of property on Sahara and Boulder Hwy for $750,000. Shortly after I 

purchased this property, Silver State Bank offered me a $4,000,000 loan so that I could start 

construction on a commercial shopping center. Silver State Bank had also given me a $285,000 

start-up construction loan. Three months into construction Silver State Bank went bankrupt. 

Because of the bankruptcy, I was forced to pay the construction company approximately $400,000 

out of pocket for the last payments application and to clear all the mechanic liens. When the FDIC 

took over the loans, they demanded that I make the interest payments current and repay the startup construction loan. I was not able to repay any of these debts at the time and I tried to negotiate 

with the FDIC, but they said I must pay immediately otherwise they would not considering 

extending the term of my note. Then I was forced to take out another loan at $1,120,000. From this 

$1.2 million dollar loan, I paid the FDIC approximately $550,000 to clear the start-up construction 

loan and accrued interest Even though I repaid the start-up construction loan, the FDIC did not 

release the collateral property from which the loan was given. I nstead of releasing the collateral 

property, the FDIC added this property to the $4,000,000 loan. The FDIC told me that after I made 

the interest payments current they would work with me. Approximately a year later the FDIC did 

not work with me and they ended up selling the note to Rialto. The first demand that Rialto made 

was that I needed to fly to New York immediately to discuss the note. First, I contacted my attorney 

get a better understanding of the situation. My attorney contacted Rialto and requested that we 

should have a phone conference to discuss these matters. Rialto said that they will not discuss 

matters over the phone and that is was mandatory to discuss matters face to face. My attorney and I 

flew to New York for a meeting with Rialto which lasted 20 minutes and nothing was accomplished. 

At this meeting Rialto said that they want the note paid in full. They also said that they do not care if 

I file for bankruptcy or take any legal action because they would still foreclose the property and 

attacked every single one of my unencumbered assets to pursue any deficiencies. I was under the 

impression that the meeting was intended to discuss a plan to pay the note in which both the lender 

and borrower are comfortable. Instead, the meeting was intended to threaten me into paying off the 

note immediately. My attorney and consultants have been sending Rialto many proposals in the 

attempts to resolve this issue. Rialto keeps rejecting my proposals and they are not being 

responsive. About 1 month ago I received a notice of foreclosure. At the time I received the 

foreclosure notices, I assumed Rialto and I were still in good faith negotiations. It seems that they 

have no problem rejecting my proposals, but they will not give me an idea as to what they are 

willing to accept Please keep in mind that this property is only 53% complete. This building has 

been sitting for approximately 3 years in terrible weather conditions. The building has been subject 

to vandalism, copper thief, and etc. As the building continues to deteriorate, I pay about $500 per 

month to have the graffiti cleaned subject to the county requirements. I also have many other 

expenses such as property taxes, equipment storage, insurance, and fence rental. I am not asking 

Rialto or the FDIC to sell me back the property at pennies on the dollar. It is my wish to work out 

some kind of deal that is both beneficial to the lender and affordable for the borrower. Due to the 

damage that the building has received, the cost to complete the structure keeps rising. I would like 

to complete the construction as soon as possible and generate revenue in order to make payments 

to Rialto. 
181 


75733.140

June 14, 2012 

J 5950 N. Dallas Parkw<lY, Suite 400, Dallas, TX 75248 

Phone q72~361 ~8086 I Facsimile 972-361 "8005 

\\WW !n1Ill!i\cPA~~com 

Office of Congressman Lynn Westmoreland R-GA 3'd Dist. 

Attn: Ellen Johnson 

2433 Rayburn House Office Bldg. 

cc: House Committee on Financial Services 

Attn: Gisele G. Roget 

2129 Rayburn House Office Bldg. 

cc: Office of Congressman Randy Neugebauer R-TX 19th Dist. 

Attn: Erik Johnson 

1424 Longworth Bldg., 202-225-4005 

Congressman Westmoreland, 

IntuitivePAC, LP ("IPAC") is please to present this letter along with the following pages for inclusion in 

the record of the May 16, 2012 2:00 p.m. hearing on the FDIC's Structured Transaction Program held 

by the House Financial Services Committee, and specifically its Investigations and Oversight 

Subcommittee. The professionals of IPAC have extensive prior experience helping the FDIC achieve 

better than "pool sale" returns on over $4 Billion in loans by achieving compromises between borrowers 

and the FDIC. IPAC believes this approach to maximize FDIC's returns while preserving the small 

businesses which are the foundation of our economy. The following pages embody a current, real time 

effort by IPAC to achieve in its representation of borrowers what IPAC's key professionals, prior to the 

formation of IPAC, achieved while serving the FDIC as resolution assistance contractors. IPAC submitted 

a question to various committee and subcommittee members just prior to the May 16 hearing. That 

question has been revised and is included below, to be followed by additional remarks concerning the 

remainder of this 50 page submission (inclusive of this letter and spreadsheet exhibit). 

I. QUESTION: 

If it could be demonstrated that ... 

either. .. 

or. .. 

and 

then 

II. EXPLANATION: 

(1) a submitted Offer in Compromise, if approved, would likely produce 

a better return than sale of the debt in a pool sale; 

(2) with reasonable negotiation, and no additional cost, an agreed 

compromise amount could be reached that would likely produce a 

better return than sale of the debt in a pool sale; 

that the pursuit of options 1 and/or 2 above, on a regular basis, could 

potentially have a positive impact on FDIC's efforts to restore the 

coverage ratio to more acceptable levels, and perhaps reduce the time 

to reach a 1.35% coverage ratio to significantly less than 8 years; 

shouldn't FDIC manifest an inclination toward compromise, even if the 

reduction sought exceeds 15%? 
182 


75733.141

Assets of a closed bank that are not purchased by an acquiring institution will eventually be sold per ORR 

guidelines, most to be auctioned off to approved bidders in pools sales. An exception to this end result 

is for the FDIC to compromise a given debt with the borrower. Compromise is better for the borrower 

because, in addition to reducing the borrower's debt, it allows the borrower an opportunity to select a 

lien holder whose business practices are more consistent with, and complementary to, its own. 

Compromise can also create advantages for the FDIC, consistent with its mandated objective of 

maximizing the return to the receivership. More specifically, compromise leads to a higher sales price 

for a given asset than the same asset would bring in a pool sale. Of course, inclusion of a seriously 

distressed asset in a pool of better loans can lift the value of the more toxic loan; however, the converse 

is true as well. A comparison of compromise to sale, observing distinctions on a loan by loan basis as 

well as distinctions between the two approaches over time and with a cumulative analysis, will very 

likely demonstrate that compromise can significantly increase returns to the FDIC, and consequently the 

American taxpayers, when viewed over time and aid it in reaching a 1.35% coverage ratio significantly 

sooner than what is currently estimated. Compromises approved during the receivership of Franklin 

Bank, S.S.B., Houston, Texas evidence the positive returns generated for the FDIC through compromise. 

(Records are available and can be provided almost immediately.) Parties that do not benefit from 

compromise may include the sales agent entity that prepares asset pools for bid, the private contractor 

assisting the FDIC with the resolution of the receivership estate, and the fund that wins the bid and 

acquires the sold assets. 

In contrast, the sale of a borrower's debt in a pool sale places it in the hands of a lien holder who 

typically wants only to foreclose on the underlying asset and is unwilling to provide any discount of the 

debt to the borrower. Furthermore, FDIC'S returns tend to be less from the sale of assets in a pool sale, 

and this tendency, which is Significant, can be demonstrated through a proper analysis of pool sale 

historical data as compared to that accomplished at Franklin Bank, S.S.B, Houston, Texas and those 

compromises proposed by borrowers of Tennessee Commerce Bank. 

Tennessee Commerce Bank went into receivership January 27, 2012. The acquiring institution under a 

loss share agreement - Republic Bank - has purchased at least 20% of the bank's loans. The remaining 

loans are now held by FDIC as Receiver and are destined to be auctioned at pool sale. Certain borrowers 

of TCB whose loans were not acquired by Republic Bank have submitted offers in compromise, requests 

for restructure, or other requests that FDIC take certain authorized actions. 

Testimony at subcommittee hearing has evidenced FDIC's reluctance to prioritize compromise as an 

effective solution. 

III. Possible Answers 

Yes, FDIC should manifest such an inclination. FDIC should memorialize this inclination in the form of a 

directive or memorandum. By way of an example, FDIC manifests an express disinclination to use its 

power of RepUdiation, only implementing it as an act of last resort. This disinclination toward the use of 

Repudiation is memorialized by directive and/or memorandum delivered to the various receivership 

personnel and resolution assistance contractors. In like manner, an inclination toward compromises 

that, while they may be greater than 15%, could reasonably be believed to achieve a better economic 

result to FDIC than sale of the compromised assets at pool sale, should be memorialized by directive 

and/or memorandum delivered to the various receivership personnel and resolution assistance 

contractors. FDIC should provide sufficient information about their budget, specifically as it relates to 

achievement of the 1.35% coverage ratio anticipated in about 8 years, to allow a valid comparison and 

revision of FDIC's estimate upon proper analysis of the potential impact of adopting a policy that favors 

compromise and allows reasonable offers the opportunity to be considered, deliberated, and approved 

where appropriate. 

2 
183 


75733.142

The pages that follow contain cases, in the format used by FDIC to support each decision made with 

respect to a borrower's debt, which have been prepared by IPAC on behalf of the borrowers who have 

engaged IPAC to aid them in submitting offers in compromise to FDIC. Immediately following this cover 

letter is a chart showing the 12 borrowers of the former Tennessee Commerce Bank which IPAC is 

assisting. The chart also indicates the individual cases IPAC has prepared on behalf ofthose borrowers 

to accompany each offer. Not all cases have been included in the following pages since this submission 

has been limited to 50 pages. One case, prepared for Capital Leasing and Finance, Inc., has been 

provided in its entirety to show exactly what a submitted case looks like. The remainder of the cases 

included have been reduced via spacing adjustment and deletion of text related to offers to purchase 

and other matters not material to the committee's efforts, and we have attempted to clearly indicate 

where such deletions have been made. For two borrowers, we have not included a case though one has 

been prepared for each of them; they are represented on the chart. For one borrower, two cases are 

included, one of which is actually a hybrid of two cases that were actually submitted separately; 

explanation is provided in the case. 

It is our sincere belief, and actual experience, that our efforts benefit both the borrower and the FDIC 

and we are prepared to assist interested members of Congress in demonstrating this. Key individuals 

within IPAC are introduced below. Thank you for this opportunity to contributing our understanding to 

the committee's efforts. 

At your service, 

William K. Peebles 

William K. Peebles is managing partner of IPAC and a champion of the benefits of compromise, having 

been pursuing such solutions since the closure of Netbank in Alpharetta, GA. He is primarily responsible 

for negotiations. This is his vision. 

Matthew E. Haddock is manager of client relations for IPAC, and is primarily responsible for the pages 

that follow, including their construction and credit analysis. These are his words. 

Daniel Duplantis has on many occasions served as a subject matter expert to the FDIC and is primarily 

responsible for valuation analysis. These are his numbers. 

Special thanks to Scott Warren, asset manager and IPAC employee. 

3 
184 


75733.143

April 30, 2012 

MEMORANDUM TO: Receiver-in-Charge 

FROM: (Case Author's Name, Title) 

Loan Officer, Title 

Case No.: ____ _ 

Log No.: ____ _ 

SUBJECT: DRR, Jacksonville Field Operations Branch 

10423, Tennessee Commerce Bank, Franklin, TN 

In Receivership: January 27, 2012 

Asset Number: (7022, P-3388, et al.) ($1,441,955.07-BV) 

Asset Name: Capital Leasing and Finance, Inc. 

RECOMMENDATION: That authority is granted to: 

I. Compromise Asset by accepting $502,881.83 representing 34.875% of the outstanding 

balance ($1,441,955.07 as of April 26, 2012), as full settlement of the principal obligations. 

B I (i) 

2. Write off the remaining principal balance, accrued interest, and all other fees after settlement, 

and release any and all collateral serving as security for the debt. B25(i) 

Issue 10997 Yes --_. X No 

(Case Author's Name, Title)Datc 

RAC, Loan Officer, Title 

Robert W. Chamberlain 

Receiver-in-Charge 

FDICIDRR 

APPROVED UNDER DELEGATED AUTHORITY: B I (i) & B25 (i) 

Rcceiver-in-Charge 

Date 

4 
185 


75733.144

""sset 

Number 

7022, P3388 & See 

Exhibit 3 

, Footnote 

** Footnote 

Asset Name 

Capital 

Leasing & 

Finance, Inc. 

EXECUTIVE SUMMARY: 

Rook Valu" Accrued lot. Collateral Value' Prior Lien * * 

$1,441,955.07 Paid Monthly $0,000.000 as is N/A 

$0,000,000 quick 

Tennessee Commerce Bank ("TCB") provided financing to Capital Leasing & Finance, Inc. 

("Borrower" or "CL&F") through two separate Revolving Lines of Credit totaling $2,750,000. 

Loan P-3388 

Loan number P-3388, originated November 1,2008 in the amount of $2,500,000, provided truck 

and equipment lease financing to CL&F's clients. The UPB on loan number P-3388 may be, and 

likely is, redundant and duplicative to the aggregate UPB on 102 individual promissory notes as 

described in more detail in the "Description of Assets" section below. The aggregate UPB of 

these 102 loans, or synonymously the UPB orp-3388, is approximately $1,254,457.41, leaving 

an unfunded commitment of approximately $1,245,542.59. Borrower has not executed the "No 

Fund" letter with respect to either these 102 individual promissory notes or Loan P-3388. 

Loan 7022 

Loan number 7022, originated April 30, 2011 for $250,000, made up for any payment 

deficiencies from delinquent customer payments to CL&F and covered any other miscellaneous 

operating expenses. With a UPB of $187,497.66, this loan carried an unfunded commitment 

through January 27, 2012, the bank closure date, of$62,502.34. Borrower signed the "No Fund" 

5 
186 


75733.145

letter sent from the FDIC March 9, 2012 although the circumstances of its execution, as further 

described in Holly Paetz's affidavit, may bring into question its enforceability. See Exhibit/, 

Affidavit ofIlolly Ann Paetz, April 27, 2012. 

The combined book value of the assets described above is $1,441,955.07 plus accrued interest. 

Loan 7022 (BV $187,497.66) matures April 30, 2012 -today. The remainder oflhe combined 

book value, being actually comprised of 102 individual small loans, has multiple maturity dates 

ranging from the earliest of May 17,2012 to the latest of October 29,2016. All loans are 

current. Borrower is arranging financing for the takeout through XMI Financial Services, LtC, 

in an amount su!1icient to finance Borrower's offer herein of$502,881.8 representing 34.875% 

ofBV as full satisfaction of Borrower's entire indebtedness. The takeout letter from XMI 

Financial Services, LLC will be forwarded as soon as it has been received by Borrower. The 

Borrower's offer represents the highest value as detailed later in the case and provides the FDIC 

with the quickest resolution of this asset. 

It is recommended the FDIC approve this case authorizing the compromise of Asset Numbers 

7022,3388, and the multiple assets listed on the exhibit attached to this case as Exhibit 3, and 

release the collateral in exchange for $502,881.83; and write off the remaining principal balance 

and all additional interest and fees. 

DESCRIPTION OF ASSETS: 

Borrower: Capital Leasing & Finance, Inc. 

Line of Credit $250,000 

Loan Number: 7022 

Originatiou Date: 04/30/11 

Borrower: Capital Leasing & Finance, Inc. 

Line of Credit $2,500,000 

See also Spreadsheet of 102 individual 

loans attached hereto as Exhibit 3, which 

are believed to be duplicative and 

6 
187 


75733.146

Maturity Date: 04/30112 

Loan Amount: $250,000 

Current Balance: $187,497.66 

Unfunded Commitment: $62,502.34 

Interest Rate: 6.25% 

Accrued Interest: Paid Monthly 

Status of Loan: Current 

Collateral: 102 Transactions/leases and 

related equipment 

Date of and most recent valuation of the 

collateral: FDIC Appraisal Review 

1111/1111/1111 $111111,11## 

Guarantor: Holly Ann Paetz 

redundant to the UPB on this Line of 

Credit 

Loan Number: 1'-3388, ct aJ. 

Origination Date: 11/01108 

Maturity Date: Multiple see Exhibit 3 

Loan Amount: $2,500,000 

Current Balance: $1,254,457.41 

Unfunded Commitment: $1,245,542.59 

Interest Rate: Prime + .50% Floor = 

6.25% 

Aecrued Interest: Paid Monthly 

Status of Loan: Current 

Collateral: 102 Transactions/leases and 

related equipment (See Exhibit 3) 

Date of and most recent valuation of the 

collateral: rDlc Appraisal Review 

##/1111/11# $###,### 

Guarantor: None 

CL&F is an equipment leasing company that focuses on the over-thc-road trucking industry, 

specifically geared towards the small, independent trucker. Many ofCL&F's customers can be 

categorized as "!3 grade" or "alternative grade" credits. CL&F has successfully carved out a 

niche in the truck leasing business due to many lenders applying increasingly stringent 

underwriting guidelines dictated by the depressed economy. Although very labor intensive, this 

niche market has proven a successful formula for CL&f. Each customer relationship has been 

based on a comprehensive knowledge of the credit and customer history. CL&F does not lend 

solely based on a credit score; they take the time to understand the full sccnario and custom tailor 

each decision. An Affidavit of Holly Ann Paetz, owner ofCL&F, is attached hereto as Exhibit 1 

to aid in understanding the history and function of this credit facility, as well as the 

circumstances that have occurred since bank closure. 

At the time of bank closure, TCB held 102 individual promissory notes in the name ofCL&F 

secured by 102 individual leases between CL&F as lessor and multiple individual lessees. See 

7 
188 


75733.147

Exhibit 30. CL&F Receivables, April 27. 2012. Each time CL&F entered into a lease 

transaction, CL&F submitted a lease package to TCB along with a note and security instrument 

package. TCB advanced funds to CL&F based on the total amount of payments to be collected 

during the lease term. Each leasc and loan package for all 102 loans was executed using unifom1 

documents. The entire loan and lease package for David F. Sellers as the lessee, CL&F as the 

lessor/borrower, and TCB a~ the lender is attached hereto as an example. See Exhibit 4, 

Promissory Note, January 17, 2012, together with Assignment of Equipment Lease. Lease 

Agreement, and ancillary documents. The lessees remit monthly payments to CL&F pursuant to 

the 102 leases. CL&F remits individual payments to TCB pursuant to the 102 loans. As 

structured, CL&F cams a payment spread on each of the 102 monthly payment remittances. The 

number of leases CL&F could usc as security for individual notes was subject to a cap in the 

aggregate 0[$2,500,000. To evidence this cap, CL&F and TCB executed Loan P-3388 

discussed below. The parties eventually determined there was no need to renew this note and 

continued to observc the $2,500,000 cap. Attached is recent evidence-in this case 

$1,50 I ,302.67---{)fthe additional commitment available with respect to these individual loans. 

See Exhibit 3b, Balance Sheet, December 14,2011. 

Loan P-3388 has been described previously herein as being redundant and duplicative to the 102 

individual loans in Exhibit 3. This conclusion is based on the Borrower's understanding of the 

evolution of this credit as well as the documents in Borrower's possession and attached hereto. 

This loan began as a $300,000 line of credit in September 2003. Over the years, this loan was 

renewed, extended and increased, eventually to the amount of$2,500,000. The last renewal in 

Borrower's possession was executed in November 0[2008 and shows a maturity date o[ 

8 
189 


75733.148

November 1, 2009. See Exhibit 5, Change in Terms Agreement & Commercial Security 

Agreement, November 1,2008. It is the belief of Holly Paetz, owner ofCF&L, that no payment 

was directly applied to TCB to Loan P-3388. Being unfamiliar with the bank's accounting and 

reconciliation procedures, she is uncertain whether this loan was actually renewed at its maturity. 

Her understanding is that her company's debt on the 102 individual loans is now synonymous 

with the debt on Loan P-3388 or, in the alternative, that Loan P-3388 is no longer an enforceable 

debt instrument. 

Loan number 7022, a revolving line of credit in the amount of $250,000 executed April 30, 2011, 

provided "gap fill" for the times borrowers went delinquent on their monthly payments. See 

Exhibit 6. Promissory Note, together with Commercial Guaranty. and ancillary documents. April 

30, 20] 1. This was the mechanism that insured CL&F was never late on its monthly obligation 

to TCI3, regardless of the performance of Borrower's clients. It matures April 30, 2012, is 

personally guarantced by Holly A. Paetz, and carries an unfunded commitment of $62,502.34. 

Borrowcr executed a "No Fund" letter submitted to her by the FDIC which may purport to 

eliminate the possibility of drawing further funds from this line of credit. However, the 

circumstances of its presentation, including a phone conversation between Ms. Paetz and an asset 

manager believed to be employed by the private RAC contractor on behalf of the FDIC, may 

raise questions of its enforceability. Thesc facts are set forth in the Affidavit of Holly A. Paetz 

previously referenccd. 

The 102 individual loans shown on Exhibit 3, Loan 7022, and Loan P-3388, ifit is even a "live" 

document, are all current. All loans are in the name of a single borrower: Capital Leasing & 

Finance, Inc. The smaller ofthe two loans, Number 7022 is personally guaranteed by Holly Ann 

9 
190 


75733.149

Paetz. As for the 102 individual loans, they carry no personal guaranty on the part of Holly Ann 

Paetz; however, each individual lease transaction provides for the personal guaranty of the 

executing lessee which may, by assignment, extend to TCn, and therefore FDIC, as the holder of 

the debt secured by the leases. 

BACKGROUND: 

Due to the nature of the business of Cl.&F, borrowing monies to re-loan to their customers, it 

has become increasingly difficult to find a lender to step into the shoes left by the closure of 

TCB. As stated in Holly Paetz's affidavit, most banks have now enacted a new policy ornot 

lending to fim1s that resell those funds. In some instances banks have decided to exit lending on 

the transportation industry as a whole. This has left CL&F in a difficult spot. 

With the closure of TCn, and other banks exiting the sector, revenue for CL&F has been 

drastically reduced, approaching half of what it was prior to bank failure. CL&F is forced to tum 

away new and repeat customers seeking financing, not to mention that when combined with the 

standard lease runoffs, the outlook is bleak for ilie continued survivability of this company 

without a significant reduction in UPB which will allow CL&F to move this facility to a new 

lender, providing additionallinancing capacity wbich in tum will allow them to capture and 

retain business. Without this CL&F will be forced to close their doors. 

One of two loans with TCB, Loan 7022, was drawn on whenever CL&F had a no-payor a slowpay customer. This facility "filled the gap" until CL&F could collect payment and resolve the 

situation. With this credit facility no longer advancing when needed, due to the bank's closure 

and execution, albeit circumspect, of the FDIC's No Fund letter, CL&F is now forced into 

10 
191 


75733.150

making up that difference from monthly cash flow or capital reserves, placing a tremendous 

burden on the company, which cannot be sustained, 

DISCUSSION: 

Several factors come into play in the valuation of/his asset. The analysis is the same for the 102 

individual loans as it is for Loan P-3388 so no distinction is made in this discussion section 

between the two, The fact that there are 102 individual loans to CL&F instead of a single loan to 

CL&F sccured by 102 leases essentially makes CL&F a "servicer" with respect to TCB/FDIC, 

Applying this analogy, potential purchasers of FDIC pool sale assets will generally pay 

substantially less for assets where they are unable to act as servicer of the debt they just 

purchased, 

The value of the underlying collateral (over-the-road tractors, trailers, and/or equipment) for 

these 102 leases does not support the cun-ent UPB which also reduces the potential payment by a 

pool purchaser, CL&F did not lease new tractors, trailers, and equipment, it lease used, Further, 

when repossession of the collateral is required, a substantial amount of recovery resources will 

be expended in locating, acquiring and transporting the equipment. This type of collateral 

potentially can be spread across the country, Again, potential pool purchasers give little value 

when the above circumstances are presented as part or a pool. 

Original Financials 

Capital Leasing & Finance, Inc. 

Current Financials (12/3112011) 

Capital Leasing & Finance, Inc, 

Cash: $--c----cc-.,--

Cash Equivalent: $ _____ _ 

Total Assets: $ _______ _ 

'--__ c::T""o"'ta:::I:...:L"'iabilities: $ 

Cash: $ 16,63o _____ _ 

Cash Equivalent: $_86,750 

Total Assets: $_1,789,607 

11 
192 


75733.151

· Net Worth: $ · Total Liahilities: $"),682,709 

· Net Worth: $ 106,898 ---_. "- Original Financials Current Financials (12/3l/2011} 

Holly Paetz Holly Paetz 

· Cash: S · Cash: $ 18,000 

· Cash Eguivalent: $ · Cash Eguivalent: $ ° · Total Assets: $ . Total Assets: $ 1.531,600 

· Total Liabilities: S . Total Liabilities: $ 707268 

· NetWorth: $ · Net Worth: $ 824.332 

Borrower's and Guarantor's Financial Statements do not warrant alternatives to the Receivership 

for resolving this asset See Exhibit 7, Borrower's Tax Returns, 2008-2010," see also Exhibit 8, 

Borrower's Year-end Balance Sheets, 2009-2011," see also Exhibit 9, Personal Financial 

Statement of Holly A" Paetz, April 9, 2012" 

Borrower maintains little hope in staying in business without a reduction in UPB allowing for a 

refinance with another len deL Even with the benefits of a minority-owned business, Borrower 

has found banks unwilling to refinance this portfolio at its current UPR Considering the above, 

the benefit of a substantially and warranted reduction in UPB will give a female-owned small 

business the desperate help needed to stay in business. Furthermore, by the FDIC granting this 

request for compromise, the FDIC is directly fueling the over-the-road truckers that without 

CL&F, would find themselves facing little access to credit which they also need to stay in 

business. These small business O\\1)ers call CL&F every week asking "Has anything changed? 

Can you help us out again yet?" Borrower submits this Offer in Compromise of $502,881.83 

which produces a much higher economic recovery for the Receivership and thus should be 

accepted. 

The unfunded commitment of$I,245,542"59, supported both by written agreement and course of 

business dealing, is almost equal to the current UPB and if not repudiated, will reduce the 

12 
193 


75733.152

effective balance almost to zero when being bid on in a pool sale. Purchasers must consider the 

high costs of recovery, when needed, the continual depreciation of used and steadily devaluing 

assets, the presence of an unfunded commitment virtually equal to the UPB, the absence of a 

guarantor on the note; all of which has a direct and negative cffcct on price. Historically, 

credits that present with these issues command a near zero price. 

CONCLUSION: 

The settlement offcr of $502,881.83 produces a higher economic recovery for the Receivership 

and thus should be accepted. Additionally, a modification of the loan will not bc required ofthc 

Receivcrship. 

Concur: 

First Last 

Asset Manager 

RAC 

EXHIBITS: 

Date 

EXHIBIT-i 

Concurrence Signature Page 

Concur: 

First Last 

Project Manager 

RAC 

I. Affidavit of Holly Am Paetz - April 27, 2012 

2. Takeout Lettcr from XMI Financial Services, LtC 

3. Capital Leasing & Financing Receivables- April 27, 2012 

4. Promissory Note & Lcasc Agreement, January 17,2012 

5. Change in Terms Agreemcnt, Nov. 1,2008 

Date 

13 
194 


75733.153

6. Promissory Note, Commercial Guaranty, ancillary documents, April 2012 

7. Borrower's Tax Returns 2010,2009,2008 

8. Borrower's Year-end Balance Sheets - 2011, 2010, 2009 

9. Personal Financial Statement of Holly A. Paetz - 2012 

CONTACTS: 

14 
195 


75733.154

April 24, 2012 Asset Number: ##### - $7,859,278.42-BV 

Asset Name: A+ Storage Downtown @ the Gulch, LP 

RECOMMENDATION: Compromise Asset by accepting $4,300,000.00 representing 54.71 % 

of the outstanding balance ($7,859,278.42), as full settlement of the principal obligations. BI (i) 

EXECUTIVE SUMMARY: Tennessee Commerce Bank ("TCB") providcd financing of 

$7,898,814.00 to A+ Storage Downtown @ the Gulch, LP ("Borrower" or "Downtown") on 

October 18, 20 II to refinance two prior TCB acquisition and construction loans, loan # 11040 in 

the amount of $7,448,814.62 and loan # 15821 in the amount of $450,000.00 respectfully. The 

original loans financed the acquisition and development and conversion of an old warehouse into 

a 556 unit storage facility near Nashville (Downtown), Tennessee. The loans were fully drawn 

and construction completed in May of2008. The Downtown storage facility opened in June 

2008. 

The facility consists ofa single loan with a book value of$7,898,814 and the loan is current. 

The note is subject to an interest rate of 6.0%. Despite absorption rates that are more than 57% 

below budget projections, Borrower has continued to make timely payments. The loan matures 

October 18,2015 with a tinal balloon payment of$7,371,858.93. Borrower has obtained 

alternate financing as evidcnced by the exhibited commitment letter from Pinnacle National 

Bank. See Ex.i, Commitment Letter, April 27, 2012. The take out bank's commitment is 

$4,300,000 representing 54.71% ofBV as full satisfaction ofTCB's entire indebtedness. The 

Borrower's offer represents the highest value to the Receivership and provides the FDIC with 

both the best and quickest resolution of this asset. 

It is recommended the FDIC approve this case authorizing the compromise of this Asset and 

release the collateral in exchange for $4,300,000; and write off the remaining principal balance 

and all additional interest and fees. 

DESCRIPTION OF ASSETS: Borrower purchased an existing warehouse in an urban area 

close to downtown Nashville, Tcnnessee and converted it into a storage facility. The 556 unit 

storage facility opened in June of2008 after 7 months of construction. For the acquisition, TCB 

provided financing with Loan Number 15821. TCB provided the funds to complete the facility 

with Loan Number 11040. Both of these loans were later refinanced with the loan that is the 

subject of this case. See Ex. 2, Disbursement Request and Authorization, dated October 18, 

2011. 

To accomplish this refinance, Borrower executed a promissory note on October 18,2011 in the 

amount of$7,898,814.00 payable to TCB. See Ex. 3a. Downtown @ the Gulch Promissory 

Note, October 18, 2011; see also Ex. 3b. Business Loan Agreement, October 18, 20li. The note 

is subject to an interest rate of 6.00%. Monthly payments of principal and interest began on 

November 18,2011, in the amount of $45,000.00 that have since increased to $51,500.00 on 

April 18,2012 and there is a final balloon payment in the amount of $7,371,858.93 on the 

maturity date of October 18,2015. The completed 556 unit storage facility serves as collateral 

for this loan. The loan is personally guaranteed by Thomas H. Pierce. 

BACKGROUND: 

15 
196 


75733.155

Borrower has remained current since bank closure on January 27, 2012, despite absorption rates 

of 57.2% less than budgeted projections. Evidence of Insurance is in effect and attached. See Ex. 

4, Certificate of Liability Insurance, dated April J 7, 2012. 

DISCUSSION: Subject property is income producing and therefore, capitalization of the net 

operating income is the bcst indicator of value. Using net income for 2011 of$443,463 

capitalized at 9% indicates a Fair Markct Value of$4,900,000. Applying for a new loan to takeout the Receivership will require Debt Service Coverage Ratio of 1.2% and requires a loan 

amount 0[$4,298,535. Consequently, borrower has proposed a Compromise Offer of 

$4,300,000. Borrower's and Guarantor's financial statement does not warrant the pursuit of any 

losses incurred by the Receivership as eurrent market conditions have deteriorated their financial 

statements. 

The Downtown location was built close to the central business district of Nashville, Tennessee. 

The land and warehouse were purchased at the top of the market and prices for like properties in 

the immediate area havc been cut in half duc to the recession. Several nearby high-rise condos 

and apartment complexes wcre completed in 2008 and wcre initially 90% sold out or leased. The 

recession caused 80% of those commitments to back out and many of those condos were sold at 

auction. Two (2) of the four (4) high-rise complexes were bankrupt and several other planned 

projects were cancellcd. In 201 0, one (I) mixed-usc apartment complex in The Gulch, a 10 Story 

undevelopcd 123 acre property sold for halfthe original acquisition cost. The property sold for 

$1.75 million (all cash) and was 50.72% ofthe original cost $3.45 million in 2008. The propcrty 

is .30 miles from the Downtown storage property. 

Conversion of an older facility tends to increase costs over new construction. Other factors, such 

as access to the greater demand that comes with being located in a central business district, often 

justify these increased construction costs. With respect to this specific project, structural issues 

in this old warehouse dictated that all phases of this warehouse conversion be built out at onec, 

increasing the initial debt substantially. Increasing costs of taxes, insurance, and utilities 

burdened this facility with an additional $25,000 in monthly expenses. Borrower anticipated 

absorption in the 99% range. Requests for home building permits, the strongest indicator of 

future absorption for storage facilities, dropped dramatically, existing demand for supplemental 

storage disappeared, and anticipated demand never materialized. The operating budget 

forecasted leasing 19 units per month (228 annually). Actual leases were drastically lower than 

budgeted. In the last 24 months only 191 units have been leased, 265 less than predicted. This 

represents a 57.2% shortfall from budgeted estimates. Delinquencies have increased by 78% 

since 20 I 0, and actual absorption rate is 41.8% on anticipated performance. 

Typically in the self storage industry stabilization can be reached within two years, but this 

facility has been open almost four years and has not reached stabilization. At the time of TCE's 

failure, the Downtown storage facility was not generating enough income to successfully find 

aitemative financing for the outstanding balance. With occupancy rates and net operating 

income at minimal levels, Borrower is unable to obtain new financing unless granted a 

significant principal reduction on the outstanding balance. 

No altematives are available other than placing the loan in a proposed pool sale. Based on this 

information, accepting the current offer of $4,300,000 yields a higher return to the Receiver. 

16 
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75733.156

June 15,2012 

Asset Number: 7764 ($2,940,000-BV) 

Asset Name: BORROWER 

RECOMMENDATION: 

Compromise Asset by accepting $450,000.00 representing 15.31 % of the outstanding balance 

($2,940,000), as full settlement ofthe principal obligations. B I (i) 

EXECUTIVE SUMMARY: 

Tennessee Commerce Bank ("TCB") provided financing of $2,950,717.73 to BORROWER 

("Borrower") on April 30, 2010 to finance Borrower's acquisition, rehabilitation, and expansion 

of the shopping center located at [ADDRESS], [CITY), Tennessee. Community First Bank & 

Trust ("Community First"), of Columbia, Tennessee, actually originated the loan in the total 

amount of$ll,802,870.92 and sold a 25% participation interest to TCB. Community First, 

currently under a consent order, remains the lead bank. The loan was fully drawn and all 

planned rehabilitation and cxpansion was completed in March 2012. 

The book value of 100% of the asset is $1 1.760,000.00 (as of April I, 2012) including all 

accrued interest. The book valuc ofTCB's 25% participation interest is $2,940,000.00. The 

loan matures April 30, 2015 and is current. Borrower has obtaincd alternate financing as 

evidenced by the exhibited commitment letter from USB. The take out bank's commitment is 

$450,000.00 representing 15.31 % ofBV as full satisfaction of Borrower's entire indebtedness to 

TCB. The Borrower's offcr represents the highest value as detailed latcr in the case and provides 

the FDIC with both the best return and thc quickcst resolution of this assct. 

It is recommended the FDIC approve this case authorizing the compromise of Asset Number 

#### and release all collateral, including all additional collateral pledged subsequent to the loan's 

inception, in exchange for $450,000.00; and write off the remaining principal balance and all 

additional interest and fees. 

DESCRIPTION OF ASSETS: 

Borrower buys underperforming properties and turns them into performing propertics. With 

financing [rom Community First, a bank with which Borrowcr has maintained a long and 

mutually beneficial relationship, Borrower purchased a shopping center in Columbia, Tennessee. 

The shopping center was virtually vacant when Borrower bought it. Borrower rehabbed the 

existing structure, added two large suites to it, and added two detached structures, one with four 

suites and one with six suites. Today, only one suite in the entire center is vacant. 

To finance the project. Borrower turned to its trusted lender, Community First, and executed a 

promissory note payable to Community First in the amount of$II,802,870.92. See Ex. 2, 

Promissory Note. April 30. 2010. At some point, Community First sold a 25% participation 

interest in the loan to TCB. Payments originally included principal and interest but a 

modification converted the loan to interest only until this past April 1,2012, when the loan 

converted back to P&l with an interest rate of5.9%. 

The loan is personally guaranteed by [Mr.J Borrower and his wife, [Mrs.l Borrower. 

17 
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75733.157

There are several properties that serve as security for this loan and each is identified below. 

Subject Shopping Center 

The shopping center at 1412 Trotwood Avenue in Columbia, Tennessee is the primary collateral 

for this loan as well as its purpose. See Ex. TITLE, April 30, 2010 (security document not 

presently available to Borrower). There are 53 units (including a billboard) serving 46 tenants; 

only one space is currently vacant. Tennessee Career Institute, Good Will, Family Dollar, two 

restaurants, and a sporting goods store, each operated by local and regional business owners, 

serve as anchor tenants. 

9 Vacant Alabama Lots 

As additional security for the subject note, and on the same date as the subject note, Mr. 

Borrower and his wife, Mrs. Borrower, granted to Community First a subordinate mortgage on 9 

lots in [deleted] County, Alabama. See Ex. __ , Mortgage, April 30, 2010. These are all 

vacant lots in [deleted], Alabama that the Borrowers acquired previously. Community First's 

lien instrument states that it is subordinate to a "Future Advance Mortgage" of April 20, 2007 in 

the amount of$70,OOO. For tax purposes, Community First acknowledged that these Alabama 

properties secured $165,240.20 of the subject loan. It arrived at this amount as follows: the 

value of the Alabama collateral was $2 I 6,800.00; the value of all collateral securing the subject 

debt was $15,415,800.00; the Alabama properties comprised 1.4% of the total collateral value 

and so secured 1.4% of the total debt, which was $165,240.20. See Ex. same # as Mortgage 

above . . ' Sworn Statement attached thereto. 

1 Small Vacant !deleted/Lot 

As additional security for the subject note, and on the same date as the subject note, [Mr.] 

Borrower granted to Community First a mortgage on a single vacant lot located at [Address] in 

[deleted] County, Tennessee. See Ex. __ , Deed o/Trusi, April 30, 2010. 

BACKGROUND: 

FDIC representatives, or an employee of a private contractor on the FDIC's behalf, stated that it 

would be selling its participated interest promptly, leading to the reasonable inference on the part 

of Borrower that it had the power to do so. In reliance on this misrepresentation of the 

Receiver's ability to sell Borrower's loan to an opportunistic investment fund salivating at the 

thought offoreclosing on this asset after Borrower has done all the rehab, Borrower hired an 

advisor firm, IntuitivePAC LP, a Texas LP ("IPAC"), to assist it in dealing with the effects of 

TCB's closure. However, after Borrower engaged IPAC, IPAC discussed with Community First 

its participation interest and discovered that FDIC could not sell its participation interest without 

the written consent of Community First. If Borrower had known this fact, it would not have 

engaged IPAC and incurred this additional expense. 

Community First, as stated above, is the lead bank on the subject note in which it retains a 75% 

participation interest. It is also the holder of the following three additional notes payable by 

Borrower: 

1. Original amount: $1,250,000.00; payoff as of June 8, 2012: $1,017,651.00 

2. Original amount: $1,750,000.00; payoff as of June 8, 2012: $1,535,724.00 

18 
199 


75733.158

3. Original amount: $2,622,900.00; payoff as of June 8, 2012: $1,774,627.00 

Notes 1 and 2 abovc wcrc originally sccured by commercial property but each is now separately 

secured by a group of residential lots. The changc in collateral for thesc two notes is thc rcsult of 

a swap between Borrower and another dcveloper. Borrower was seeking to diversify its property 

mix, which was previously all commercial, so it tradcd the commercial collatcral for thc other 

devcloper's signiticantly distressed residential lots. Borrower rehabbed the residcntiallots and 

they are now generating income. The third note remains secured by commercial property. There 

is no cross-collateralization as between the security for thesc three other notes held by 

Community First and the subject participated loan. 

DISCUSSION: 

The additional collateral has minimal impact when detennining the value of the collateral for this 

loan: the degree of security provided by the Athens lots was limited by express acknowledgment 

(see above) while the [deleted] County lot simply holds little present value, and in fact the costs 

to foreclose on and hold the 10 vacant lots could exceed their value. Consequently, only the 

shopping center is relevant to this discussion. 

The economic performance of the shopping center must be taken within a historical context. A 

snapshot taken today might lead one to conclude this is a money making asset. However, the 

property has been struggling for two years and has only recently begun performing, and even 

"performing" should be defined. This is a "B" center with "B" tenants. B tenants tend toward 

undcrperformancc, and this center is no exception, with many paying about 50% below market 

rates. Truc, the center may not be experiencing the significant number of vacancies that have 

plagued it in recent years. However, that single struggle is now replaced with two: (I) making 

up for past losses and expenses with today's revenue; (2) which means that the center continues 

to be practically nonperforming until these losses are made up, despite its profitable appearancc. 

As a specific example, Borrower is $500,000.00 behind in property taxes. If not paid by 

December 2012, the ccnter will go to tax sale. 

19 
200 


75733.159

June 8, 2012 

RECOMMENDATION: 

Asset Numbers: 13648,14046,13821 (Non-Recourse) and 

Multiple Additional Recourse Notes 

($1,289,147.68-BV) 

Asset Name: Central Fleet Leasing, L.L.C. 

Compromise above referenced Assets by accepting $400,000.00 representing 31.03% of the 

outstanding balance ($1,289,147.68), as full settlement of the principal obligations. B1(i) 

EXECUTIVE SUMMARY: 

Tennessee Commerce Bank ("TCB") provided financing through eighteen (18) promissory notes 

in the aggregate amount of $2,453,286.23 to Central Fleet Leasing, L.L.e. ("Borrower" or "CFL 

LLC") from March 2008 through December 2011. The 18 loans funded CFL LLC's business of 

acquiring over-the-road trucks and equipment and leasing them to end users. All of the loans 

were fully funded. Two of the notes are non-recourse and the other sixteen notes are recourse. 

The combined book value of the 18 loan assets is $1,289,147.68, including all accrued interest. 

Three of the loans have already matured. The next of the loans to mature will mature on 

September 11,2012, one more will maturc in Scptember, two mature in October, and the 

reminder of the 18 loans mature in 2013 and 2014. Six of the loans are current and 12 of the 

loans are not current by at least 30 days. CFL LLC has obtained alternate financing for thc 18 

loans as evidenced by the exhibited takeout lettcr from XXXXXx. See Ex. 1, Takeout Letter, 

June 2012. The take out bank's commitment is $400,000.00 representing 31.03% ofBV as full 

satisfaction ofCFL LLC's entire indebtedness. The Borrower's offer on the 18 loans represents 

the highest value as detailed later in the case and provides the FDIC with both the best rctum and 

the quickest resolution of these assets. 

It is recommcndcd the FDIC approve this case authorizing the compromise of the multiple assets 

as listed on Exhibit 2 attached hercto and release all collateral in exchange for $400,000.00; and 

write off the remaining principal balancc and all additional interest and fees. 

DESCRIPTION OF ASSETS: 

CFL LLC is an equipment leasing eompany that focuses on the over-the-road trucking industry, 

specifically gearcd towards the small, independent trucker. Many ofCFL LLC's customers can 

be categorized as "B grade" or "alternative grade" credits. Borrower has successfully carved out 

a niche in the truck leasing business due to many lenders applying increasingly stringent 

underwriting guidelines dictated by the depressed economy. Although very labor intensive, this 

niche market has proven a successful formula for CFL LLC. Each customer relationship has 

been based on a comprehensive knowledge of the credit and customer history. CFL LLC does 

not lend solely based on a credit score; they take the time to understand the full scenario and 

custom tailor each decision. 

Between 2008 and 20 II, CFL LLC originated leases as Lessor with various end users/customers 

of CFL LLC as lessees. CFL LLC assigned each of these leases as security for promissory notes 

it executed in favor of TCB. Each of the Master Lease Agreements relevant to this case is 

20 
201 


75733.160

identical and this fact has been confim1ed by a review of each Master Lease Agreement. One of 

these Master Lease Agreements is attached hereto as an example. See Exhibit 3, Central Fleet 

Leasing, LLC Masler Lease Agreement (CFL309 re Pilot Fi'eight Service. Inc.). April 17, 200S. 

Lease terms were typically for 3-5 years with a single automatic I-year renewal provision unless 

the lessee exercises the purchasc option, which requires 180 days written notice. See Ex. 3, 

Seclion 1, par. 2 & section 12. If not purchased, the lessee bears the cost of return but receives a 

refund of the security deposit if it has tully pcrformed. Worth mentioning, though minimal in its 

potential economic benefit, is lessor's discretionary right to charge lessee a $100 monthly 

administrative fee; CFL LLC never charged this fcc. See Ex. 3, Section 1, par. 3. 

A review of several actual lease packages reveals that the underlying leases are personally 

guaranteed by the lessee and it is assumed this is the case with each lease. See Ex. 4, Personal 

Guaranty (CFL309 as in Ex. 3 above), April 17. 200S. However, CFL LLC's noles payable to 

TCE do not carry any personal guaranty. 

Promissory notes executed by CFL LLC are of two types: non-recourse and recourse. 

2 Non-Recourse Notes: 1364 &, 14046: 

There are two non-recourse notes---13648 and 14046-and they utilize an identical form along 

with an identical assignment. One of these non-recourse notes, and its corresponding assignment 

of the lease as security, is attached hereto as an example. See Ex. 5a, Non-Recourse PromissOlY 

Note (CFL311-Sch 2, Commercial Floor Care, LLC--·-Lessee), May 29. 200S. see also Ex. 5b. 

Security Agreement and Assignment oj Lease. May 29, 200S. The aggregate UPB of these two 

non-recourse notes is $17,500.00. 

The only exceptions to the express non-recourse provision applicable to these two loans (in 

paragraph 5 of the note) are as follows: (I) Section 12 of the Security Agreement defines the 

lease as a "Finance Lcase" under Alabama law (no real economic impact); (2) falsity of any 

reprcsentation or warranty set forth in Section 5 of the Security Agreement; (3) violation of any 

covenant in Section 7 of the Security Agreement; or (4) misapplication of proceeds. 

The two non-recourse loans are not personally guaranteed; however, as stated above, each 

underlying lease is personally guaranteed by the executing lessee which may, by assignment, 

extend to TCB, and therefore FOTC, as the holder of the debt secured by the leases. 

16 Recourse Notes: 

There are 16 recourse notes. One of the notes, along with its related documents-Loan 14377 

(M&H Pine straw as Lessee}-is missing from Borrower's files and is assumed to utilize 

documents identical to the other recourse notes. As for the rest of the notes, with one exception, 

and with an assumption because six ofthe notes are missing their assignments, the notes and 

security agreements are identical. An example of the uniform notcs and assignments is attached. 

See Exhibit 6a, Promissory Note, September 25, 2005; see also Exhibit 6b. Collateral 

Assignment oJEquipment Lease and Security Agreement, September 25, 2005. The aggregate 

UPB of these 16 recourse notes is $1,271,647.68. Three of these recourse loans-14846, 8214, 

& I 5730--are already matured. 

21 
202 


75733.161

The single note that uses a unique assignment (assuming the six missing security agreements are 

identical to the ones available) is Loan 17005 (Everett Millcr as Lcssee). See Ex. 7 a. Promissmy 

Note, Septemher 8, 2009; see also Ex. 7h. Assignment of Lease, Novemher ]4, 2011; see also Ex. 

7e, Master Lease Agreement, January 18. 2011. The dates of the documents just eited for Loan 

17005 raise an obvious issue as to their correlation. The reason the dates do not coincide is 

because the original lessee (not Everett Miller) defaulted on the lcase and CFL LLC executed a 

new lease of the same equipment to Everett Miller which it then assigned to TCB, via the unique 

one page assignment, as security for the same September 2009 note cited above. 

T11e uniform promissory note for these 18 loans contains a highly unusual event of default. 

Among the customary default triggers -nonpayment, breach of rep & warranty, BK-is the 

following event of default that this author has never before seen in a promissory note appearing 

at thc top of page two in most instances, sub (h) in the "evcnts ofdefaulC paragraph: 

"(h) the occurrence of any event or the presence or condition that causes holder in good 

faith to feel insecure regarding the likelihood of its receiving orderly and eomplcte 

payment according to the terms of this note without proceeding against any collateral or 

seeking payment from any guarantor, surety, or endorser ... " See Ex. 7a, page 2. 

suhprovision (h). 

While it's not unusual for promissory notes to contain events of default that are tied to a note 

holder's assessment of present conditions and their impact on the likelihood of nonpayment, the 

language just quoted is extremely broad and arguably without limit. Consequently. a purchaser 

of these notes could draw ilie conclusion that all of these notes are in default, significantly 

reducing their cstimated value. 

Serviced bv CFL LLC 

The answer to the question of who serviced the underlying leases is significant: if CFL LLC is 

deemed the servicer, the value at pool sale is diminished; if TCB/FDIC is deemed the servieer, 

that negative impact of the servicing question is neutralized. The answer to this question can be 

found by contract and course of business dealing. A careful examination of the contractual 

assignments and the parties' almost daily interaction reveals that CFL LLC is, and shall remain 

until amended in writing, the servicer of the underlying leases. Contractual obligations of CFL 

LLC include the following: (1) payment of taxes, etc.; (2) insurance procurement; (3) perform as 

set forth in lease, i.e., receive lease payments; (4) secure lessee's performance. Furthermore, 

CFL LLC has consistently performed functions relinquished by TCB, namely the pursuit of the 

underlying collateral. In every instance where the underlying lessee has defaulted, CFL LLC has 

responded by dealing with the lessee, foreclosing, auctioning, or finding a new lessee. Not only 

was TCB completely passive in this arrangement, without exception, the parties discussed each 

and every lease default when it occurred, acknowledged that CFL LLC would effect a solution, 

TCB would forebear in the meantime (with extensions to the promissory note, or interest only 

periods, when necessary), and they both agreed that at the very end, they would even everything 

out wiili an accounting, dealing at that time with the financial gap both experienced in the 

process. 

22 
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75733.162

The value of the security for thesc 1610ans-thc underlying leases and the leased equipment--is 

severely diminished by slow pays, re-lets, along with resulting payments gaps, repo' s and no 

pays without repossession. The 16 recourse loans are personally guaranteed by Doug Mills. 

BACKGROUND: 

CFt LLC provides financing to small business owners in the transportation industry who have 

found it difficult to borrow from more traditional lenders. Of course, with the closure of TCB, 

CFL LLC now finds it difficult to furnish this credit access to these small business O\\;l1ers. In 

some instances banks havc decided to exit lending on the transportation industry as a whole. 

This has left CFL LLC and its customers in a difficult spot. 

With the closure of TCB, the closure of other banks that previously furnished credit lines to eFL 

LLC, and the general exiting of other open banks from this sector, revenue for CFL LLC has 

been drastically reduced, approaching half of what it was prior to bank failure. CFL LLC is 

forced to tum away new and repeat customers seeking financing, not to mention that whcn 

combined with the standard lease runoffs, the outlook is bleak for the continued survivability of 

this company without a significant reduction in UPB which will allow CFL LLC to move this 

facility to a new lender, providing additional financing capacity which in turn will allow them to 

capture and retain business. Without this CFL LLC will be forced to close its doors. 

DISCUSSION: 

Several factors come into play in the valuation of this asset. First, therc are 18 individual loans 

to CFL LLC secured by 18 leases instead of a single loan to CFL LLC, with CFL LLC servicing 

the underlying leases. Potential purchasers of FDIC pool sale assets will generally pay 

substantially less for assets where they are unable to act as servicer of the debt they just 

purchased. 

Second, the value of the undcrlying collateral (over-the-road tractors, trailers, and/or equipment 

and the leases thereof), which is actually two steps removed from TCB/FDIC, does not support 

the current UPB which also reduces the potential payment by a pool purchaser. With one 

exception (17006) CFL LLC did not lease new tractors, trailers, and equipment; it leased used. 

Further, when repossession of the collateral is required, a substantial amount of recovery 

resources will be expended in locating, acquiring and transporting the equipment. This type of 

collateral potentially can be spread across the country. Again, potential pool purchasers give 

little value when the above cireumstanccs are presented as part of a pool. As for the status of the 

underlying leases, the discussion above demonstrates the low value of this security. 

Third, despite the presence of Doug Mills's pcrsonal guaranty on certain loans, specific cvents 

that have occurred over the last several years, set forth below, along with Borrowcr's and 

Guarantor's Financial Statements, do not warrant alternatives to the Receivership for resolving 

this asset. Three critical events have occurred that negatively impact the borrowing entity, as 

well as owner Doug Mills individually, that will make it extremely difficult for FDIC to recover 

anything beyond the collateral: (I) an embezzlement of$I,250,000 during 2009-2010; (2) a 

$3,500,000 accounting error discovercd in 2011; and (3) fraud by a customer in 2009 which 

caused almost $400,000 in damages. Detailed descriptions of these events and their impact-not 

the least of which was that CFL LLC had to borrow funds from other sources to make up [or 

23 
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75733.163

these losses---along with other infonnation regarding CFL LLC's business operations, are set 

forth in Doug Mills's affidavit attached hereto. See Ex. 8. Affidavit of Doug Mills. June. 2012. 

Infonnation related to Borrower's and Guarantor's financial condition is attachcd as well. See. 

Borrower's Tax Returns. 2009-2011; Borrower's Corporate Financials- 2009-2011; 

Borrower's 2012 Year to Date Financials; Doug Mills--l'ersonal Financial Statement-June 

2012; Doug Mills-Tax Returns 2009-2011-

Finally, because of the highly unusual default provision described above, and being uncertain 

whether TCB felt insecure, or whether FDIC presently feels insecure, an investor performing 

thorough due diligence on these loans will likely dov'lI1grade these notes. 

Borrower maintains little hope in staying in business without a reduction in UPB allowing for a 

refinance with another lender. Borrowcr has found banks unwilling to refinance this portfolio at 

its current UPB. Considering the above, the benefit of a substantially and warranted reduction in 

UPB will give Borrower the desperate help needed to stay in business. Furthennore, by the 

FDIC granting this request for compromise, the FDIC is directly fueling the over-the-road 

truckers that without CFL LLC, would find themselves facing little acccss to crcdit which they 

also need to stay in business. These small business owners call CFL LLC every week asking 

"Has anything changed? Can you help us out again yet?" Borrower submits this Otler in 

Compromise of$400,000.00 which produces a much higher economic recovery for the 

Receivership and thus should be accepted. 

24 
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75733.164

May 21, 2012 

Asset Number: 

Asset Name: 

Asset Number: 

Asset Name: 

RECOMMENDATION: 

19651-Amerimex ($7,959,232.17-BV) 

MCP Funding I, LLC 

19931-Turnkey ($12,576,716.03-BV) 

MCP Drilling II, LLC 

Compromise Asset 19651 -Amerimex by accepting $2,400,000.00 representing 30.15% of the 

outstanding balance ($7,959,232.17 as of May 8, 2012), as full settlement of the principal 

obligations. Bl (i) 

Compromise Asset 19931-Turnkey by accepting $3,700,000.00 representing 29.42% of the 

outstanding balance ($12,576,716.03 as of May 8, 2012), as full settlement of the principal 

obligations. BI(i) 

EXECUTIVE SUMMARY: 

Tennessee Commerce Bank ("TCB") provided financing in the amount of $8,013,1 00.91 to MCP 

Funding I, LLC ("Funding I") on September I, 20 II in connection with two oil drilling rigs. 

Borrower and TeB referred to this note as ·'Amerimex." TCB also provided tinancing of 

$12,896,716.03 to MCP Drilling II, LLC ("Drilling 11") on January 25, 2012 in connection with 

four oil drilling rigs. Borrower and TCB referred to this note as "Turnkey." Both loans were 

fully drawn. TCB funded other loans to Funding I, five of which (in addition to and not 

including 19931-Turnkey and 19651-Amerimcx) wcre still outstanding at the time of takeover. 

The Acquiring Institution of TCB purchased three of these tive additional loans that were 

performing at time of takeover. The remaining two loans from these five additional loans arc 

identified as "Related Debt" below. 

Because Funding 1 owns 100% of Drilling 11, and because the financial statements of both of 

these entities, and others related thereto, are all consolidated into one statement, throughout this 

case, unless otherwise indicated, "MCP" and/or "Borrower" will be used herein to refer 

collectively to both Funding I-Amerimex and Drilling II-Turnkey. 

The combined book value ofthesc two assets is $20,704,279.71 including all accrued interest. 

The loans mature April 1, 2015 (Turnkey) and September 1,2016 (Amerimex) and until 

April/May of2012, both loans werc current. Borrower has obtained alternate financing as 

evidenced by the exhibited commitment letter from First Business Equipment Finance. See Ex. 

1. Takeout LeIter. 5//1/2012. The take out bank's commitment is $6,100,000.00 [or both the 

Amerimex and Turnkcy notes representing 29.70% ofthc combined BV as full satisfaction of 

MCP's entire indebtedness. The Borrower's otTer represents the highest value as detailed Iatcr in 

the case and provides the FDIC with both the best return and the quickest resolution of this asset. 

It is recommended the FDIC approve this case authorizing the compromise of Asset Numbers 

J 9651-Amerimex & 1993 I-Turnkey and release the collateral in exchange for $6,100,000.00; 

and writc off the remaining principal balance and all additional interest and fees. 

DESCRIPTION OF ASSETS: 

Borrower executed two promissory notes payable to TCB: (1) one on September I, 20 J I in the 

amount of$8,013,100.91 (Amerimex); and (2) one on January 25, 2012 in the amount of 

25 
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75733.165

$12,896,716.03 (Turnkey). See. respee/ively. Ex. 2a, Wi/hou/ Recourse Promissory No/e. 

September I. 2011 (Amerimex); and Ex. 3a. Without Recourse Promiss01Y Note, January 25. 

2012 (Turnkey). Thc Loan and Security Agrcemcnt for the Turnkey facility is attached as 

Exhibit 3b. See Ex. 3b, Loan and Security Agreement, January 25. 2012. Security for thc 

Amcrimex facility is more complex and is described in dctail below. 

Loan 19651 Amerimex 

With respect to the Amerimex credit facility, monthly payments were interest only lor the first 

six months. Thc interest rate is 7.66%. The first principal payment of$53,868.74 was duc April 

8,2012 and has been made together with interest; Borrower made the May 8, 2012 payment of 

interest, but not principal. The "last pay date" (language contained in the promissory note alkJa 

the maturity date) is Septcmber 1,2016. 

Security for this note is comprised of two drilling rigs (Rig #1 and Rig 112) which are owned by 

MCP Drilling III, LLC ("Drilling III"), a wholly owned subsidiary of Funding I. How these two 

drilling rigs camc to serve as the security for the note is somewhat complicated, but 

understanding this will placc several otherwise confusing documents into context. See Ex. 2b. 

Four Visuals on Amerimex Securi/y; see also Ex. 2e, Collateral Assignment o/No/es and 

Colia/eral. September 1, 2011. 

Background on Security jor 19651: 

(1) Amerimex Drilling I, Ltd. ("Amerimex") borrowed $3,923,000 from Funding I (this is the 

borrower in this case) on May 9, 2007, secured by Rig #1. On the same day, Amerimex 

borrowed another $5,077,000 from Funding I, secured by Rig #2. Funding I financed these 

loans in part with loans from TCB. Cross Collateral Agreements, also executed on the same 

date, made both Rigs security for both notes to Amerimex. See Ex. 2b, "May 9,2007". 

(2) Drilling III was formed in April of 2011. It was formed by Funding I to repossess Rig #1 and 

Rig #2 as Amerimex was in default. As part of this formation, Funding I assigned all of its 

rights in the loans to Amerimex, including its security interests in Rig #1 and Rig #2 to Drilling 

III. See Ex. 2b, "As of Aug. 31, 2011". 

(3) On September 1,2011, Funding I refinanced the earlier loans from TCB. In connection with 

this refinancing, Drilling III collaterally assigned all of its rights in its loans to Amerimex, 

including its security interests in Rig #1 and Rig #2, to TCB as security for Funding I's 

promissory note dated September 1, 2011 which is the subject of this case. See Ex. 2b, 

"Sep. 1, 2011 ". 

(4) Because of the continuing defaults of Amerimex, Drilling III foreclosed on Rig #1 and Rig #2 

in October, 2011. Thus, Drilling III owns Rig #1 and Rig #2 and, by operation of the 

assignment in item (3) above, they now serve as direct collateral for Funding I's note. See 

Ex. 2b, "After Amerimex Foreclosure". 

One of the two rigs is located near Sweetwater, Texas and the other near Stanton, Texas. Rig #1 

is in storage and consequently not producing income. Rig #2 is in production with Stack 

Enterprises - Midland ("Stack"). Stack leases Rig #2 under a Lease with a purchase option. This 

purchasc option will remain a cloud on the collateral should the note bc sold in a pool sale. 

There is a significant batch of casing drives, also part of the collateral, stored in Waukomis, 

Oklahoma and consequently not generating income. See r.x. 2d. CPG Inventory Casing Drives. 

26 
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75733.166

Loan 19651 is expressly without recourse-there is expressly no recourse, whether to the 

borrowing entity or any principal thereof-and there are no guarantors. 

Loan 19931 Turnkey 

This note refinanced previous TCB loan 19172. Monthly installment payments of$160,000.00 

in principal, together with accrued interest, began February 8,2012. Payments continue each 

month thereafter through March 8, 2015 and a final balloon payment, together with accrued 

interest and all other charges hcreunder, is due on April 1,2015. 1be interest rate for this note is 

5.66% and the "last pay date" (language contained in the promissory note a/k/a the maturity date) 

is April 1,2015. Borrower made the April 8,2012 payment of interest, but not principal; 

Borrower did not make the May 8, 2012 payment of inter cst or principal. 

Backgroulld 011 Security for 19931: [Tire case as actually submitted illcluded all expositioll of 

security as provided 011 Amerimex, but because the security is more direct alld apparellt, tlris 

sectioll was omitted ill tlris cOlldellsed version.} 

Three of the rigs-Beta, Gamma. & Omega-are located in Waukomis, Oklahoma and are in 

storage and therefore not generating income. Alpha is in the possession of Lamunyon Drilling 

pursuant to an operating agrccmcnt and is deployed in the field north of Enid Oklahoma. 

Specific dcscriptions of the Alpha. Beta. Gamma. and Omega Drilling Rigs are attach cd hereto. 

See Exhihits 4a (Alpha Rig), 4h (Bela Rig), 4c (Gamma Rig), and 4d (Omega Rig). 

Loan 19931 is expressly without recourse-there is expressly no recoursc. whether to the 

borrowing entity or any principal thereof-and there are no guarantors. 

BACKGROUND: 

Oil and Gas is a highly volatile industry. As a lessor and reseller of drilling rigs, MCP must be 

able to respond quickly to the realities of owning physical assets that break down. need frequent 

maintenance and repair. and alternate between periods of high income production. periods of 

zero income production. and in fact, with the costs of storage. sometimes negative income 

production. Flexible financing relationships that allow MCP to shift between periods of 

amortization when income is good and interest only when times are tough are critical to the 

success of any drilling rig owner/operator, including MCP. Loan modifications, often with 

additional advances, are typical and frequent. allowing rig owners to capitalize on opportunities 

of production and scale back to interest only when rigs are not in the field. 

FDIC's administrative procedures do not allow for the flexible financing described above and arc 

therefore prohibitive to conducting business in the oil and gas industry. This lack of flexible 

financing makes it impossible for MCP to deal with the constant ebb and flow of income 

production from the rigs. Even if these loans go to pool sale and are no longer administered by 

FDIC, Borrower is concerned that the loans may not be purchased by an investor that 

understands and can adapt to the oil and gas industry. 

DISCUSSION: 

Funding I owns 100% of three LLC's used for acquiring the assets of defaulted parties as 

described above. The financial statements are therefore consolidated but reflect no other 

27 
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75733.167

resources to satisfy the current debts held by the Receivership. See Ex. 5, Mep Funding I 

Consolidated CharI. As stated above, there is no recourse to either the borrowing entity or any 

of the individual principals and no guarantees. 

As clearly evidenced by the Acquiring Institution purchasing the other loans of Funding I and 

not these loans, the value a potential purchaser will pay is minimal. The basis of value for the 

assets securing these loans (drilling rigs, drill pipe and related equipment) is best reflected when 

they are working at a drill site. When they are stored, as is the case for most of this asset, very 

little value is given. Any purchaser would have to transport the equipment to a working location 

and upgrade prior to production. To help evaluate the potential, a review of capitalizing the NOI 

provides the following: assuming that a drilling rig is active 10 months per year and operates at 

80% capacity per month, with a day rate of$15,000, the NOr generated would be $644,225 (not 

including property taxes and moving expenses that generally occur every other year). Capitalized 

at 8% would show a value of $6, 166,796. Borrower offers to compromise the debt at $6,100,000 

which would maximize the return to the Receivership. 

With no recourse, no guarantors, most of the collateral not generating income, low collateral 

value compared to the debt, the necessity of a flexible financing partner to respond to volatile 

market conditions inherent in the oil and gas industry, and the fact that these loans are now 

considered delinquent, the best course of action for the FDIC to pursue is to approve Borrower's 

otler. 

28 
209 


75733.168

April 16,2012 

Asset Number: 11303 $4,394,000-BV 

Asset Name: KNA lIospitality, A Tennessee GP 

RECOMMENDATION: 

Compromise Asset by accepting $2,770,000 representing 63% of the outstanding balance 

($4,394,000), as full settlement of the principal obligations. B1 (i) 

EXECUTIVE SUMMARY: 

Tennessee Commerce Bank ("TCB") providcd purchase financing of $4,685,000 to KNA 

Hospitality, a Tcnnessee General Partnership ("KNA") on September 17,2007 to acquire an 

existing hotel in Nashville, Tenncssee. The loan was fully funded. 

There is a single asset associated with this borrowcr and its book value is $4,394,000. KNA has 

obtained alternate financing as evidenced by the commitment letter from Citizen's First. See Ex. 

I, Commitment Letter, April 10, 2012. The take out bank's commitment is $2,770,000 

representing 63% ofBV as full satisfaction ofKNA's entire indebtedness. The Borrower's offer 

represents the highest value as detailed latcr in this case and provides the FDIC with both the 

best return and the quickest resolution of this asset. 

It is recommended the FDIC approve this case authorizing the compromise of Asset Number 

11303 and release all collateral, including CDs 8572,13377, and 1347, in exchange for 

$2,770,000; and write off the remaining principal balance and all additional interest and fees. 

DESCRIPTION OF ASSETS: 

KNA is an independent, minority owned small business that owns and operates a hotcl in the 

vicinity of Nashville International Airport. Within a 1.5-mile radius, with an inventory of 4,800 

rooms dominated by corporate hotel chains, there are only two independent hotels. One is the 

hotel securing this asset: Club-Hotel Nashville Inn & Suites, located at 4325 Atrium Way, 

Nashville, TN 37214 ("Club-Hotel"). Thc other is an affiliate hotel of the guarantors. 

To finance the purchase of Club-Hotel, KNA executed a promissory notc on Septcmber 17,2007 

payable to Tennessee Commerce Bank ("TCB") in the amount of $4,685,000.00. See Ex. 2, 

Promissory Note, September 17, 2007. The loan provided an interest rate of 7%, with monthly 

payments of$16,794.52 and a final estimated balloon payment of$4,318,528.55 due on the 

maturity date of October 16,2012. The UPB as of 1111111 was approximately $4,394,000 and 

the loan is current. 

Security for the note consists of an independent single limited service hotel, Club-Hotel 

Nashville Inn & Suites, located at 4325 Atrium Way, Nashville, TN 37214, along with three 

CDs. See Ex. 3. Certificates of Deposit. The three CDs are as follows: 

1. CD 8572 issued to Natva Patel & Pushpa Patel: $121,447.53 

2. CD 13377 issued to Kirrit Bhikha & Lata K. Bhikha: $242,895.10 

3. CD 1347 issued to Atul Kapadia & Dharini A. Kapadia: $242,895.10 

The loan is guaranteed by Natva Patel, Kirrit Bhikha, and Atul Kapadia. See Ex. 4, Commercial 

Guaranty(ies}. 

29 
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75733.169

BACKGROUND: 

After overcoming serious setbacks due to the Nashville Flood in May, 2010, KNA prepared to 

expand and approached TCB to fund additional acquisitions. See Ex. 5. 2010 Tennessee Floods, 

Wikipedia article updated February 7, 2012. However, as a result ofTCB's closure, KNA must 

seek new financial relationships. This is a uniquely difficult task for KNA. As a minority 

owncd business, KNA considers its relationship with the former TCB difficult to replace. 

Cultural and language differences arc not easily overcome and KNA is extremely concerned that 

its loan will be sold to an opportunistic lender that does not value KNA as a customer the way 

TCB did. 

Loss of this banking relationship with TCB is not only impairing KNA 's ability to capitalize on 

its recent efforts by expanding its business, it is causing significant strain on day to day business 

operations. Half of KNA's 23 non-seasonal employees are minorities. In its entire history, KNA 

has never had to lay any of these employees off. However, having lost a significant and hard-toreplace banking relationship, KNA is preparing to adapt to its restricted operating cash flows with 

layoffs. The closing ofTCB has impacted the individual owncrs ofKNA on a personallcvcl as 

well. For example, the original balance of the note having been sufficiently reduced, Kirrit 

Bhikha anticipated the release of his CD and intended to use those funds for a home purchase. 

He was actively engaged in contract negotiations which have had to be suspended as a result of 

TCB's closure. 

Release of the security interest in Club-Hotel, as well as the guarantees and the three CDs 

serving as additional collateral, will help KNA in its search for a new banking relationship. 

DISCUSSION: 

Using recent sales from subject hotel's competing neighborhood (13-mile radius), value for a 

Comparable Sales approach indicated at $3,100,000. See Ex. 6, Nashville Hotel Sales. TCB used 

a 1.25 Debt Service Coverage Ratio and if that was applied to NOI for 2011 of$463,856, and 

then capitalized at a rate of II %, an Income Approach to Value would indicate $3,373,000. This 

Income Approach supports the Comparable Sales approach and is reconciled to a Fair Market 

Value of$3,100,000. To refinance the loan currently held in Receivership, a 70% LTV would be 

required of the $3,roO,ooo current value. Using the $600,000 CD's currently held as security, an 

additional $330,000 is needed. Therefore, the request is for a settlement of $2,770,000. 

Financial Analysis: 

Borrower is a Tennessee General Partnership and the only asset of the Borrower securing the 

loan apart from the CDs, is the hotel. The three guarantors have provided current Personal 

Financial Statements and an Affidavit of Financial Condition. 

The majority of the assets of the three guarantors is comprised primarily of real estate and as 

noted in Attachment A, the value of the properties is less than acquisition cost including subject 

property. A majority of the liquid assets for the guarantors is currently held as collateral for 

subject properly. 

Market Conditions: 

Within the last four years the US hotel supply has increased 17.5%; over 750,000 new rooms. 

See E.x. 7, Letterfrom Magnuson Hotels, undated. This has been recorded as the largest supply 

30 
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75733.170

expansion in history for the US hotel industry. While the U.S. lodging sector continues to 

demonstrate recovery momentum, a resetting of the national economic outlook lowers 

expectations for the lodging sector's performance in the next year or two ahead. Earlier, it was 

believed that slower economic growth was explained by temporary factors, and that the U.S. 

economy would soon regain momentum. This view has been altered by recent events, including 

incoming data reflecting a faltering economy, the evolving European sovereign debt crisis, U.S. 

debt negotiations, and deteriorating financial conditions. Slower economic growth in reccnt 

quarters, reduced business and consumer confidence, and greater uncertainty sun'ounding the 

economic outlook have reduced most forecasts of lodging recovery, but not reversed it. Aspects 

of travel closely linked to the economic cycle are expected to pull back while some trips will be 

shortened or cancelled. These factors impact the value of collateral backing this asset and further 

support approving the request for settlement of $2,770,000. 

Alternatives to Compromise 

The alternative to compromise is for the Receivership to place this asset in a pool sale. Thc loan 

matures October 16,2012. Without modification, the loan will go into default, yielding a 

substantially lower price at pool sale. Even with modification, the ultimate yield at pool sale will 

still be far less than can be achieved with the proposed compromise. 

31 
212 


75733.171

June 3, 2012 Asset Number: ##### ($2,1 79,221.21-BV) 

Asset Name: Equipment Leasing Services, LLC 

RECOMMENDATION: 

Compromise Asset by accepting $459,308.00 representing 21.08% of the outstanding balance 

($2,179,221.21), as full settlement of the principal obligations. B I (i) 

EXECUTIVE SUMMARY: 

Tennessee Commerce Bank ("TCB") provided a financing commitment of$6,000,000 to 

Equipment Leasing Services, LLC eELS" or "Borrower") on June 15,2007 to fund ELS's 

business of acquiring equipment and leasing it to end users. TCB fulfilled this commitment 

using various notes as more speeifically described throughout the remainder of this case. The 

commitment was not fully drawn and there remains an unfunded amount of $5, 190,895.00. 

The current combined book value of the loan assets provided to TCB pursuant to the above 

described commitment, based on their UPB, is $2,179,221.21 ineluding all accrued interest. The 

primary loan (sec discussion below) matures on April 15, 2014 and is current. Borrower has 

obtained alternate tinaneing as evidenced by the exhibited commitment letter from USB 

Investment. See Ex. I, Takeout LeIter, June 2012. The take out bank's commitment is 

$459,308.00 representing 21.08% ofBV as tull satisfaction ofELS's entire indebtedness. The 

Borrower's offer represents the highest value as detailed later in the case and provides the FDIC 

with both the best return and the quickest resolution o[this asset. 

It is recommended the FDIC approve this case authorizing the compromise of Asset Numbers 

#### and release all collateral in exchange [or $459,308,00, and write off the remaining principal 

balance and all additional interest and fees, 

DESCRIPTION OF ASSETS: 

ELS is an equipment leasing company. In the summer 0[2007, ELS and TCB agreed to a 

$6,000,000 line of credit. See EX. 2, TCB Commitment Letter, June 15, 2007, Pursuant to this 

$6,000,000 line of credit, ELS, as lessor, would lease equipment to its various customers/lessees 

and, as each lease was executed, ELS would assign it as security for a corresponding promissory 

note that ELS executed payable to TCE. The maximum aggregate UPB that could be 

outstanding at any time was $6,000,000 and there were multiple individual notes at any given 

time. About four years later, ELS and TeB decided to roll all ofthe multiple individual notes--

with one exception, the Silver State Deficiency Note-into one single note for easier 

administration, See Ex. 3, Omnibus Amendment, October 12, 20 I 1; see also Ex. 4, Amended and 

Restated Note (Business Entity), October 12,201 I, 

The new note, the one that refinanced the multiple individual notes which were executed as ELS 

assigned each lease to TCB, bears an original amount 0[$2,143,508.10 and matures April 15, 

2014, See Ex. 4, The note (in sec. 1//) provides for mandatory prepayment of pass-through items 

as described in the Omnibus Amendment. See Ex. 3, sec. 3, Scott Powell and Kathleen Powell 

personally guaranteed this refinance loan which rolled all the others up into a single asset. See 

Ex. 3, sec, 5, The underlying leases and equipment collectively secure this note as set forth in 

the Omnibus Amendment and two examples arc provided below. 

32 
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75733.172

There arc two other loan assets addressed by this casco One is a $1 Million revolvcr. See Ex. 5a, 

Warehouse Note, November 1, 2007; see also Ex. 5b. Revolving Warehouse Credit Agreement, 

November 1, 2007. ELS used this I-year, $1 Million commitment from TCB as bridge financing 

for its various leases and the note provided for annual renewals. See Ex. 5b, sec. 2.01 (a). The 

current Maturity Date, on which the parties would typically anticipate the next renewal, is 

November 1,2012. It is uncertain whether the parties continued to expressly renew this loan but 

they conducted business as ifit was still a valid loan and commitment as ofTCB's closure. In 

June of2011, only one lease was connected with a balance on this line·~·the Wildwood lease. 

This balance was moved to its own note in June 201 J, and then in October 2011, it was 

refinanced in the $2.14 Million note discussed above along with all of the other individual notes. 

Consequently, since June 2011 and continuing through today, this line has a zero balance and the 

entire $1,000,000 line was available for draw as o[TCB's closure January 27, 2012. The Credit 

Agreement secures the note with whatever the money is used [Of. See Ex. 5b, sec. 4.01. Because 

ELS used the proceeds to purchase equipment it leased to end users, all ofthe security for this 

note is assumed to also secure the $6 Million commitment. 

The remaining note addressed by this case originated in the amount of $41 0, 116.21. See Ex. 6a, 

First Amended and Restated PromissOlY Note, May 28, 2009. This loan was for a very specific 

purpose-the deficiency on the Silver State lease. Whcn Silver State defaulted on its helicopter 

lease and declared bankruptcy, TCI3 (alone or in conjunction with an investor) repossessed and 

sold the collateral. ELS executed this promissory note for the deficiency; however, there is no 

recourse to ELS nor arc there any guaranties and the note is completely unsecured. In September 

2011 the parties established the then current principal balance at $370,116.21 and set the new 

Maturity Date at March 30, 2014. See Ex. 6b, Amendment to First Amended and Restated 

Promissory Note Dated May 28, 2009, September 30, 2011. The reduction in the principle 

balance reflects TCB's receipt of insurance proceeds that were applied to the balance. Arguably, 

there are no payments due until the note's maturity when a single balloon payment, including all 

accrued interest, is due. Under the May 2009 note, there was no principal due until maturity but 

130rrower agreed to make "two" annual interest payments, in arrears, on May 31 of both 2010 

and 2011. See Ex. 6a, sec. 4a(i}. The amended version expressly reduced the principal balance 

and extended the maturity date, but lefl all other tenns intact. Consequently, there is no express 

duty to continue making annual interest payments in arrears and so ELS remains current until the 

loan's maturity with no payments due. The $6M commitment and the $IM commitment shared 

the same security: underlying leases and equipment. ELS leased a variety of equipment. Two 

examples are discussed here with attached exhibits, one an equipment lease and one a TRAC 

vehicle lease. 

Equipment Lease Example 

ELS leased signage and showcase equipment to a jewelry business for 36 months with a 

purchase option. See Ex. 7a, Master Lease Agreement, October 21,2009; see also Ex. 7b, 

Appendix A to said Master Lease Agreement. Tfthe lessee exercises the purchase option, then 

ELS and Marquee will consult and detennine the fair market value (ex. 7b, Appendix A, sec. Ie), 

subject to a maximum 0[20% ofELS's cost (ex. 7b, Appendix A, sec. 1 b). For purposes of 

calculating a stipulated loss value .. -an option the lessee can elect in the cvent of irreparable 

damage to the leased equipment-ELS and Marquee (the lessee) agreed to $48,747.97 as the 

value of the leased items. See Ex. 7a, sec. 13c; and see Ex. 7c, Schedule No. Ito Master Lease 

33 
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75733.173

Agreement. This lease expires October 21, 2012 but will continue with rolling 4 month 

extensions unless terminated with 4 month's notice (see ex. 7a, sec. 2b) or expressly renewed for 

12 months with 120 day's notice {-vee ex. 7b, sec. Ia}. Alternatively, lessee can purchase the 

equipment with 120 day's notice (see ex. 7b, sec. 1 b). Marquee provided additional collateral of 

$13,864.00 cash, held by ELS, which is eligible for return to Marquee at the end of the lease or 

will be applied to the cost of the purchasc option. See Ex. 7d, Appendix B, together with Exhibit 

A to Appendix B. Lease payments arc made via automatic draft. See Ex. 7e, Authorization 

Agreementfor Direct Payments (ACH Debits), November 25,2009. Two oflessee's 

shareholders and their spouses provided personal guaranties of the lease. See Ex. 7f Two 

Continuing Personal Guaranties, Octoher 21, 2009. The lease to Marquee secured ELS's 

promissory note to TCB in the amount of $53,092.36. See Ex. fia, Promissory Note & Ex. 8b. 

Security Agreement, December 1. 2009. Of course, this note, along with the other individual 

lease-secured notes, was refinanced with the $2.14M note described above. 

TRAC Lease Example 

The second lease example provided is a TRAC lease. ELS leased a 2007 Dodge Mega Cab to 

Cast Nevada Resource, Inc. See Ex. 9a. Commercial Lease, June I, 2009. TRAC, common in 

vehicle leases, stands for "tenninal rental adjustment clause" and means the lessee gets a 

guaranteed residual price. Payments are by automatic draft {-see Ex. 917, Authorization Agreement 

for Direct Payments (ACH Debits), June 9, 2009) and lessee retains dealer/manufacturer 

discounts, rebates, and incentives. See Ex. 9a, sec. 2a. By supplement, the parties fixed the term 

of this '07 Dodge lease at 36 months, identified the capitalized cost at $34,198.00, and assumed 

the residual would be $6,840.00. See Ex. 9a, pp. 8-9. Robert S. Lipic provided a personal 

guaranty of the lease (I'ee Ex. 9c, Continuing Personal Guaranty, June J, 2009) and the 

corporation provided its guaranty (see Ex. 9d, Continuing Guaranty, June 1, 2009). The lease to 

Cast Nevada secured ELS's promissory note to TCB in the amount of$38,521.54. See Ex. lOa, 

Promissory Note & Ex. 1017, Security Agreement, July 3, 2009. Of course, this note, along with 

the other lease-secured notes, was refinanced with the $2.14M note described above. 

A spreadsheet is attached setting forth each of the underlying leases that collateralize ELS's debt. 

See Ex. 1 I, Client Listing Remaining Payment. June 2012. 

BACKGROUND: 

LEFT INTENTIONALLY BLANK 

))ISCUSSION: 

The single most important and dispositive factor in this case is the unfunded commitment 

amount. It is 2.38 times the UPB. FDIC would virtually have to write a check to the sales agent 

to offer this loan in a pool sale. While it is admittedly difficult to place a precise value, Of 

negative value, on a single, or even three, loan(s) when placed in a large pool, this loan will 

obviously drive the value of whatever pool it's in down, by a tremendous amount. 

Consequently, any reasonable offer by the ELS should be accepted by the FDIC. Given the 

present circumstances, ELS has presented an entirely reasonable offcr and the FDIC would be 

remiss not to accept it. There is no question that the acceptance ofELS's offer maximizes the 

FDIC's return. The unfunded commitment is so material that any discussion of the underlying 

collateral is an unnecessary use ofthe FDIC's resources in its analysis. 

34 
215 


75733.174

May 21, 2012 

Asset Number: 14562 - $7,648,037.00-BV 

Asset Name: Leo M. Sand 2007 Revocable Trust 

RECOMMENDATION: 

Compromise Asset by accepting $2,700,000.00 representing 35.30% orthe outstanding balance 

($7,648,037.00 as ofJune 13,2012), as full settlement of the principal obligations. BICi) 

EXECUTIVE SUMMARY: 

Tennessee Commerce Bank ("TCB") provided a revolving commitment in the amount of 

$8,900,000 to the Leo M. Sand 2007 Revocable Trust ("Sand" and/or "Borrower") on June 23, 

2008 to finance Sand Lodging, Inc.'s ("Sand Lodging's") purchase and improvement ora hotel. 

Crown Bank, a Minnesota Corporation ("Crown"), actually originated the commitment of 

$] 0,000,000 and remains the lead bank. TCB' s commitment reflects its purchase of an 89% 

participation interest whieh cannot be sold without the lead bank's written approval. All 

improvements are complete and while the current UPB reflects funding up to the present ceiling 

amount (described in detail below), Sand may potentially be entitled to future draws as the UPB 

is paid down and other requirements are satisfied. 

The current book value ofTCB's participation interest in the asset is $7,648,037.00. The loan 

matures July 1,2013 and is current. The Borrower's offer represents the highest value as 

detailed later in the case and provides the FDIC with both the best return and the quickest 

resolution of this asset. 

It is recommended the FDIC approve this case authorizing the compromise of Asset Number 

]4562 and release the collateral in exchange for $2,700,000; and write off the remaining 

principal balance and all additional interest and fees. 

DESCRIPTION OF ASSETS: 

Sand Lodging is active in various aspects of the hotel business, including, but not limited to, 

ownership, improvement and management. Sand Lodging owns various LLC's, which in tum 

own approximately ]8 hotels. All of these hotels are flagged, most bearing the brand Country 

Inns & Suites. Crown issued a $]0,000,000 revolving commitment to Sand on June 23,2008 to 

finance the acquisition and improvement of one or more hotel properties. See Ex. 1, Revolving 

Note, June 23, 2008; see also Ex. 2, Loan Agreement, June 23, 2008. Crown retained an II % 

lead interest ($], 100,000) and sold the remaining 89% ($8,900,000) participation interest to 

TCB. See Ex. 3, Participation Agreement, June 2008. The current UPB on TCB's portion is 

$7,648,037.00, leaving an unfunded commitment on the part ofTCB of$1,251,963.00. 

The loan contains a mechanism which, over time and in even increments, lowered the total 

eonunitment to $9,280,000. However, Section 1.1 of the Third Amendment to Loan Agreement 

evidences Crown's intent as lead bank to treat the overall credit as a $10,000,000 commitment, 

despite some of these incremental reductions having already occurred. See nxhibits 4, 5, 6, and 

7~First, Second, Third, and Fourth Amendments to Loan Agreement, respectively, most recent 

June 10, 2010. In fact, prior to closure of TCB, Crown was prepared to formally reinstate the 

original commitment amount of$lO,OOO,OOO. 

35 
216 


75733.175

Borrower has maintained a perfect payment history and the loan matures July 1,2013. 

The note is subject to an interest rate of 5.5%. Borrower remains current but is considering 

alternatives, including bankruptcy. The following two pieces of collateral secure this credit: 1) a 

$9,000,000 term life policy on Leo M. Sand; and 2) 100% of the stock of Sand Lodging. See Ex. 

B. Letter from Leo Sand to Crown Bank and Assignment of Life Insurance Policy as Collateral, 

October 24, 2011; see also Ex. 9, Stock Pledge Agreement. June 23, 2008. 

Both Leo M. Sand and Sand are subject to loan covenants requiring they maintain the following: 

1. Net Worth of $35 million measured at end of each calendar year; Ex. 6, Sec. 1.1 

2. Liquid Assets of at least $2 million using GAAP; Ex. 6, Sec. 1.1 

3. Contingent Liabilities of no more than $75 million; Ex. 6, Sec. 1.1 

4. Net Cash Flow of at least $2 million on a global basis; Ex. 6, Sec. 1.1 

5. Cash deposits with Crown of $500,000. Ex. 3, sec. Sic). 

With continued cooperation from Crown, including waivers of noncompliance when necessary, 

Borrower has been able to avoid a covenant default. Because Crown considers Leo M. Sand a 

highly valued customer, and because of his perfect payment history on this loan and all other 

loans Crown has ever extended to him, Crown was prepared to reinstate the original commitment 

amount of $ 10,000,000 when TCB closed. 

Leo M. Sand is the sole guarantor. See tx. 10, Guaranty, June 23, 2008. 

BACKGROUND: 

The subject loan provided operating capital for Sand Lodging/Sand. TCB automatically 

withdrew the monthly payment from Borrower's checking account between the 1

st and the 5th of 

each month. Each payment makes additional funds available for future draw requests, subject to 

the gradually declining ceiling which mayor may not stand frozen at $9,280,000, depending on 

the interpretation one give to Section 1.1 of the Third Amendment as described above. Prior to 

the closure ofTCB, and in fact throughout 2011, Mr. Sand, Crown, and TCB (Dick Myers was 

the bank officer working on the matter) were working on terms under which the additional 

$720,000 under the original commitment would be made expressly available due to Sand's 

perfect pay history, his long term relationship with Crown, and the apparent value of maintaining 

him as a customer ofTCR 

The FDIC notified Sand via certified mail on February 10,2012 that there would be no 

additional funding under this loan. If Leo must pay the full book value of this loan, whether to 

the FDIC or anyone elsc, without the corresponding access to additional credit he has always 

depended upon, both Leo and his business will bc unable to survive financially. Consequently, 

he is contemplating bankruptcy as his only alternative. 

While the FDIC may ultimately desire to transfer its interest in participations generally, the terms 

set forth in the participation agrcement with Crown require the Crown's written approval of any 

such transfer ofTCB's interest. See Ex. 3, Participation Agreement, Sec. B, June 200B. 

DISCUSSION: 

Neither Crown nor the FDIC can accomplish anything on Sand's Loan without the cooperation 

of the other. Crown, the lead bank on this participation loan with the former TCB, has expressed 

an interest in working with another bank to take out the FDIC's participation interest. Crown is 

36 
217 


75733.176

even willing to negotiate new tenns and conditions on Sand's current principal balance since 

they value Leo Sand as a customcr with a perfect pay history. Howevcr, thcy are unable to 

accomplish this without a corresponding negotiation of the portion of the principal balance hcld 

by the FDIC. With a compromise ofthc FDIC's balance to $2,700,000, they are prepared to 

move forward. 

FDIC's options are few. In fact, without Crown's written approval, the only alternative to 

compromise is to takc no action. The inevitable result of no action is that Sand will declare 

bankruptcy and any value of this credit to the FDIC in a salc will be eliminated. Even without 

Sand's bankruptcy declaration, this loan will add little to the overall value of any pool of assets. 

These hotels have seen substantially reduced cash flows, severely diminishing their value, thus 

motivating Crown to waive the cash flow covenant for this credit for the past two years in order 

to keep this credit out of covenant default. Again, all because Leo M. Sand is a highly valued 

customer. Add to that the unfunded commitment which remains potentially valid, enough to 

ncgatively impact the cstimated value of this asset in a pool sale, and compromise becomes an 

even more favorable option. 

Additionally, the majority of Sand's assets are owned by other corporations which in tum own 

the hotels which themselves are illiquid and have dramatically declined in value as real estate 

and add little to any net worth calculation. The majority of guarantor's assets consist of Sand's 

stock. A vast amount of resources and time would be required to bring about any fonn of 

liquidation the results of which would be grossly insufficient to satisfy the current obligation. 

Consequently, the best option, and the only real viable option for the FDIC to pursue on this 

loan, is the proposed compromise. This reduction will provide the Receivership with the highest 

return on this asset, it will remove an otherwise difficult-to-deal-with participation interest from 

its books, Mr. Sand may not have to declare bankruptcy, and Crown may be able to keep a 

valued customer, one whose survival may bode well for its own. 

37 
218 


75733.177

May 15,2012 

Asset Numbers-Loans: 16221,14650,18986,18188, 

& 14649 ($7,343,550.00- Aggregate BV) 

Asset Name: TAMCO Financial Serviccs, LLC 

RECOMMENDATION: 

Compromise Asset by accepting $3,524,904.00 representing 48% of the outstanding balance 

($7,343,550.00), as full scttlement of the principal obligations. BI(i) 

EXECUTIVE SUMMARY: 

Tennessee Commcrce Bank ("TCB") providcd aggregate financing of$13,750,000.00 to 

TAMCO Financial Services, LLC ("TAM CO") from July 2008 through Fcbruary 2011 to fund 

various and spccific aspects of its business operations. Detail on each individual credit facility, 

including any reductions from the original amount, is set forth in the Description of Assets 

section below. One ofTAMCO's loans still carries an unfunded commitment of $1,500,000.00 

and another carries an unfunded commitment of$152,296.00. The remaining three loans were 

fully drawn. 

The combined book value of the assets is $7,343,550.00 including all accrued interest. Each 

loan has a different maturity; Loan 14650 (the smallest) matures first-August 2012. All five 

loans are currently 90+ days delinquent; TCB and Borrower were finalizing the restructure of the 

loans when TCB closed and Borrower has not made any payments since. T AMCO has obtained 

alternate tinancing as evidenced by the exhibited commitment letter from XXXXX. See Ex. 1, 

Takeout Letterfrom XXYX DATE. The take out bank's commitment is $4,677,106.28. Of this 

amount, $3,524,904.00 is allocatcd to thc five loans representing 48% of BV as full satisfaction 

ofTAMCO's entire indebtedness and $1,152,202.28 is allocated [This case as actually 

submitted included an offer to repurchase the lease pools but as a repurchase of assets is 

not germane to the objectives of the House Financial Services Committee's investigation 

into FDIC policies and procedures and their impact on borrowers, all references to any 

repurchase, other than this paragraph and the lists below, have been deleted) TAMCO's 

offer represents the highcst value for the loans and the highest net present value for thc lease 

pool as detailed later in the case and provides the FDIC with both the best return and the quickest 

resolution of these assets. 

It is recommended the FDIC approve this case authorizing tlle compromise of Asset Numbers 

16221, 14650, 18986, 18188, and 14649 and release all collateral in exchange for the combined 

offer amount of $4,677, I 06.28; and write off thc remaining principal balance and all additional 

interest and fees. 

DESCRIPTION OF ASSETS: 

TAMCO is a financial services company and functions in the following capacities: (1) as a 

lessor that leases telecommunications equipment to lessees; (2) as a lender that lends to end users 

of telecommunications equipment tilc money to buy or lease it. T AMCO focuses exclusively on 

solutions for small and mid-size businesses. TAMCO funds its operations with five different 

loans from TCn. 

38 
219 


75733.178

The five loans are in the name of a single borrower: TAMCO financial Services, LLC, a Florida 

limited liability company. All five loans are guaranteed by both Telecommunications Asset 

Management Company, Inc. and Jack Thompson. One of the loans carries additional guaranties 

as described in the relevant discussion below. The following chronology is provided to aid in 

understanding the overall relationship between TAMCO and TCB. 

INSURANCE LINE 14649 

In some situations, TAMCO perfonned a servicing function, which includcd obtaining forccd 

placed insurance whcn nccessary. T AMCO funded insurancc premiums with Loan Number 

14649 which bears a variable interest rate of prime + I %. See Ex, 2a, Promissory Note, June la, 

2010; see also Ex, 2b, Change in Terms Agreement, February 10.2011; see also Ex, 3. Business 

Loan Agreement, June 10, 2010. These documents supersede others executed on July 21, 2008, 

attached hereto as Exhibit 4. Originally a revolving line of credit in the amount of$750,000, 

future advances were terminated by a provision in the Omnibus Agreement (designated so 

simply because it includes in a single agreement provisions that amend multiple other 

agreements) of February 2011. See Ex, 12, Omnibus Agreement, February 2, 2011, Sec. 2(c). 

As of April 25, 2012, the UPB is $300,845,74 and the loan matures February 3, 2016. 

WH LINE 14650 

TAMCO obtained a revolving warehouse line for the following two purposes: (1) as bridge 

financing of equipment leases which would subsequently be refinanced with a permanent lender 

.- either TCB or a third-party lender; and (2) Progress Payment Advances CPPAs") payments 

due to vendors before the lessee accepted the leased product. See/irst Ex. 7, Chronological 

Summary o(Warehouse Line 14650, describing the history of this loanfrom its July '08 

inception; see also Ex, 5, Revolving Warehouse Credit Agreement, June 10, 2010, TCB's 

financial commitment to TAMCO on Loan 14650 stood at $750,000.00 when TCB closed 

January 27, 2012. See Ex. 6, Warehouse Note, August 3,2011. TAMCO's UPB on this line as 

of April 25, 2012 was $597,705.00, leaving available for draw the amount of$152,295.00. The 

loan bears a variable interest rate (prime + 1.0%). The loan is secured by the underlying 

transactions (leases and/or loans) and TAM CO's security interest in leased telecommunications 

equipment. Individual transactions were generally cither refinanced by, or sold to, either TCB or 

another bank, resulting in a pay-down on the Warehouse Line, and a corresponding increase in 

available credit under the Warehouse Line. This line was rencwable annually and next renews 

on June 10,2012, 

TERM NOTE 16221 

To provide working capital and payoff existing term loans with USAmeriBank, Borrower 

executed a promissory note on April 23, 2009 in the amount of$5,000,000.00 payablc to TCB, 

See Ex. 8, Term Note, April 23, 2009; see also E'(, 9, Term Loan Agreement, April 23, 2009. As 

of April 25, 2012, the UPB on this loan was $3,650,000.00. The commitment having never been 

reduced or terminated, there remains an unfunded commitment of approximately $1,350,000.00. 

The note is subject to an interest rate of 8% and a graduated payment schedule, Payments of 

principal and interest are currently $90,000.00, will increase to $110,000.00 on June 1,2012, and 

will increase again on June 1,2013 to $140,000,00. The loan matures on May 1,2014. The loan 

is secured by the following Northwestern Mutual Life Insurance Policies on the life of Jack A. 

39 
220 


75733.179

Thompson: (a) Policy 15-546-003 in the amount of$3,300,000; (b) Policy 16-352-865 in the 

amount of $2,000,000. 

Though TCB is additionally secured by the underlying lease transactions, this security interest is 

subordinate to one of the financial entities named bclow. TCB and TAMCO defined certain 

transactions as "pledged transactions", meaning TCB acknowledged that they were pledged to 

"permanent lenders" as collateral and that TCB's security interest was subordinate to that of the 

permanent lender. In every instance, other lenders-PNClNat'1 City, US Bank, USABprovided the permanent financing and TCW s security interest is therefore subordinate. Only 

where TCB provided the permanent financing to the underlying lessee would its security interest 

be superior; TCB never did this. See Ex. 9, Term Loan Agreement, Sec. 4. 02(d). A spreadsheet 

attached hereto shows the 903 leases assigned to other lenders as superior security, meaning 

TCB's and thcrcfore FDIC's lien position in those leases is subordinate. See Ex. 17. Pledged 

Transactions, TeB's Security Subordinate. TCB's, and therefore FDIC's only superior security 

interest is in the insurance policies set forth abovc. 

As discussed, TCB's primary asset used for collateral are the future residual profits to be derived 

from the portfolio of contacts both sold (Wells Fargo, TCF Bank, RCAP, and DLL) and assigned 

(US Bank, PNClNat'l City, USAB, and TCB). Residual profits are defined as earnings net of 

residual obligations to the various funding sources. Residual profits are derived from contract 

renewal, sale of equipment to lessec/customers, and sale of returned equipment to used 

equipment dealers. 

we LINE 18188 

TCB provided additional working capital of $3,000,000.00, memorialized by two loan 

agreements of $1 ,500,000.00 each. The first, Loan Number 18188, is simple and 

straightforward; the second, Loan Number 18986, contains "omnibus" provisions that amend 

multiple extraneous agreements. Only those omnibus provisions directly impacting this case are 

specifically referenced herein. With respect to the first working capital line-Loan Number 

181 88-Borrower executed a promissory note on June 10, 20 lOin the amount of $ I ,500,000.00 

payable to TCB. See Ex. 14, Promissory Note, June la, 2010; see also Ex. 15, Business Loan 

Agreement, June la, 2010. The note is subject to a variable rate ofintcrest (prime + 1%) which 

has a floor rate of 6%. This twelve month revolving loan was renewed for six months, thcn 

converted to an 18 month amortizing loan with a maturity date of August 3, 2013. This 

conversion to a closed end amortizing loan was supposed to have occurred this past February 

but, after bank closure, no action has been taken to accomplish this. At each advance, Borrower 

granted a security interest in the respective undcrlying collateral. 

we LINE 18986 OMNIBUS 

With respect to the second working capital line-Loan Number I 8986-Borrower executed a 

promissory note on February 2, 201 I in the amount of $1,500,000.00 payable to TCB. See Ex. 

16, Promissory Note, dated February 2, 2011; see also Ex. 12, Omnibus Agreement, February 2, 

2011. The note is subject to a variable rate of interest (prime + I %) which was 6% at 

origination. By reference to the Omnibus Agreement, which in tum references the Business 

Loan Agrecment on 18 I 88 above, this twelve month revolving loan was renewed for six months. 

then converted to an 18 month amortizing loan with a maturity date of Fcbruary 3, 2014. This 

40 
221 


75733.180

conversion to a closed-end credit is supposed to take place this next August, 2012. Like all other 

loans at TCB, Telecommunications Asset Management Company and Jack Thompson serve as 

guarantors. This loan, and none of the others, adds Paul T. Metzheiser, Todd C. Frankel, and 

Joseph M. Privitera, as guarantors. At each advance, Borrower granted a security interest in the 

respective underlying collateral. Omnibus provisions made the following amendments, each of 

which is discussed along with the affected facility: (1) terminated future advances on the 

insurance line; (2) capped the lease sale arrangement at $1,000,000. 

BACKGROUND: 

TCB and Borrower were finalizing the restructure of the loans when TCB was taken over and 

Borrower has not made any loan payments since. 

DISCUSSION: 

Several factors come into play when evaluating the five loan assets for a pool sale, all of which 

favor the proposed compromise: (1) FDIC's security interest in the collateral (underlying leases) 

is subordinate to that of other institutions; (2) Two of the loans still carry unfunded 

commitments, one of which is in the amount of$I,500,000.00; 

(3) TAMCO's intended restructure having been stopped by the bank's closure, it has allowed all 

five loans to fall into delinquency until a resolution can be achieved; 

(4) Though the loans carry personal and corporate guarantees, guarantors have insufficient assets 

to cover the debt; (5) Residual profits comprise the upside; however, these only come into play at 

the end of each respective lease, meaning FDIC, or a purchaser in a pool sale, would have to 

hold this matter open until such time, and that is based on the rather critical assumption that in 

either case, servicing could continue without disruption; and (6) Finally, Residual profits belong 

to T AMCO and only transfer to FDIC or a subsequent holder upon foreclosure of the security 

interest therein. To send any of these assets to pool sale would not be in the best interest of 

FDIC. 

Neither the Borrower nor the Guarantors has the assets necessary to provide much if any 

liquidation of the assets held by the Receivership. 

The compromise offer by the Borrower offers the best resolution to the Receivership. 

41 
222 


75733.181

May 7, 2012 

Asset Number: ##### $9,707,881.69-BV 

Asset Name: BORROWER - AA Aircraft 

[On Aprilll, 2012, Borrower submitted its Request for Restructure and case in support 

thereof in order to reduce Borrower's monthly payment to match that approved by the 

Bankruptcy court in the American Airlines Bankruptcy. The "Recommendation" section 

is excerpted here prior to the case in support of Borrower's Offer in Compromise. As of 

June 13, 2012, Borrower has received no official written response from FDIC regarding its 

Request for Restructure.) 

RECOMMENDATION: 

Restructure the debt, without reduction in BV, and therefore without necessity of legal 

conculTcnce or review, in accordance with the following: (a) adjust the contractual intercst rate 

from 7% to 3%; (b) adjust the payment amount from $105,900 to $65,000; (c) make a 

concomitant and appropriate adjustment to the maturity date by extending it from September 29, 

2013 until fully amortized. B(6)(a) Waive any and all late charges on the debt. B(22) 

RECOMMENDATION: 

Compromise Asset by accepting $4,368,546.76 representing 45% of the outstanding balance 

($9,707,881.69), as full settlement of the principal obligations. Bl(i) Waive any and all late 

charges on the debt. B22 

EXECUTIVE SUMMARY: 

Tcnnessee Commerce Bank ("TCB") provided financing of$10,473,142.00 to BORROWER 

("BORROWER") on September 30, 2010 to finance its purchase of an aircraft leased to 

American Airlines ("American"). See Ex. 1, Term Promissory Note. September 30. 2010. The 

loan was tully drawn at the time of acquisition. American Airlines is in bankruptcy and an 

agreed settlement, affirming American's lease of BORROWER's aircraft but at a significantly 

reduced rate, has been submitted to thc court for approval. 

The book value of the asset as of March 19,2012 is $9,707,881.69 including all accrued interest. 

The loan matures on September 29,2013 and, until the April 2012 payment, had a perfect pay 

history. See £x. 2. Note Modification Aweement. September 29.2011. American has not made a 

payment on the aircraft since November 2011 due to its bankruptcy. A more detailed description 

of post-closure events related to American's lease paymcnts and BORROWER's note payments 

is included in the Background Section below. 

BORROWER has obtained alternate financing as evidenced by the exhibitcd commitment letter 

See Ex 9. Blanket Commitment Leller, April 27, 2012. This commitment letter provides evidence 

of takeout financing for all of BORROWER's offers presented concurrently herewith pursuant to 

a Master Submission. See Ex. 10, Master Submission, May 7, 2012. Of the total commitment 

amount set forth in tllis blanket commitment letter, $4,368,546.76 has been allocated to Asset 

##### representing 45% ofRV as full satisfaction of BORROWER's entire indebtedness related 

to Asset #####. BORROWER's offer represents the highest value as detailed later in the case 

and provides ilie FDIC with the quickest resolution of this asset. 

42 
223 


75733.182

Borrower's offcr represcnts the highcst value as detailed later in the case and providcs the FDIC 

with both the best return and the quickest resolution of this asset. It is recommended the FDIC 

approve this case authorizing the compromise of Asset Number ##### and release the collateral 

in exchange for $4,368,546.76; and "''Tite off the remaining principal balance and all additional 

interest and fces. 

DESCRIPTION OF ASSETS: 

BORROWER purchased from The Air Trustee, on September 30, 20 I 0, a 100% participation 

interest in an MD-83 aircraft being leased to American Airlines. See ~X. 3a, Participation 

Agreement, September 30, 2010; see also Ex. 3b, Subservicing Agreement with Respect to [The 

Air Trustee] Investment Trust, September 30, 20 10; for applicable lease documents relating to 

the subject asset. see Exhibits 7a-7h. To finance the acquisition, BORROWER executed a 

promissory note on the same datc payable to TCB. See Ex. 1. Term Promissory Note, September 

30.2010. The note is suhject to an interest rate of7.0%. The aircraft and the lease thereof, 

together with certain beneficial interests, stock, and a deposit account, serve as collateral for this 

loan. See ~x.4a-4h. "Security Agreements", September 30,2010. 

As the plane has been leased to American Airlines since BORROWER acquired it, 

BORROWER's monthly payment of $1 05,900.00 has historically been covered by the rental 

stream. However, with its recent bankruptcy, American Airlines made its last regular lease 

payment on November 1,2011 and has made no payments since. American's agreement to 

make reduccd payments of$65,000 has been approved by the appropriate parties and the trustee, 

but has yet to receive the bankruptcy court's approval. American will make no payments until 

that occurs. The loan matures September 29, 2013. The UPB was $9,707,881.69 as of April 16, 

2012. 

BORROWER, with the assistance of [an Advisor Firm] ("[ADVISOR]"), submitted to TCB a 

proposed loan modification, which would have made the following changes to the loan tenus: 

reduce the interest rate to 3%; reduce monthly payments from $105,900 to $65,000; and extend 

the maturity date until fully amortized. See Ex. 5a & 5b, Principal Terms of Restructuring 

Proposal and Senior Secured Loan Subject to a Restructure Operating Lease to American 

Airlines. These changes would have enabled BORROWER to at least make its April 1,2012 

payment and avoid default. The Borrower's relationship manager approved the proposed 

modification and placed it on the agenda of the January 27, 2012 board meeting. The bank 

closed that day and the board meeting, at which the modification would most likely have been 

approved, never took place. 

The loan is not personally guaranteed and Borrower entered into the transaction with the 

understanding that all financing would be without recourse. See Ex. 6, [Trustee Name] 

Equipment Finance, LLC, American Airlines, Inc. Lessee, Commercial Aircraft Lease 

Transaction Term Sheet, prepared to summarize closing to occur on or before September 30, 

2010. No circumstance has occurred, or will occur, to trigger any indemnification provision 

applicable to the facility. See Ex. 4e. Purchase and Transfer Guaranty Indemnity, September 30, 

20 I O. Consequently, any potential recovery beyond the aircraft and its lease is uncertain. 

43 
224 


75733.183

BACKGROUND: 

American's monthly lease payment due BORROWER is $139,000.00. BORROWER's monthly 

loan payment to TCB is $105,900.00. Prior to November 2011, American made full and timely 

payments under its lease agreement with BORROWER. BORROWER did the same under its 

note with TCB. American made its last regular payment to BORROWER on November I, 

2011. American filed for bankruptcy protection on November 29,2011. Since that time, 

American has made two reduced payments: $65,000.00 on February 21, 2012 and $65,000.00 

on March 21,2012. American did not make these two payments directly to BORROWER but 

transferred the funds into a DDA account at the Federal Home Loan Bank ("FHLB"). 

BORROWER is attempting to have these funds at FHLB transferred into BORROWER's 

account. 

BORROWER has continued to make full and timely payments to TCB (now FDIC), despite 

receiving absolutely no income from this asset following receipt of American's November 1, 

2011 payment. However, BORROWER has not made its April 1,2012 payment, which is now 

considered late, and refuses to do so until it obtains the $130,000.00 being held at the HILB. 

FDIC has indicated it will waive any and all late fees for this April 1,2012 payment while the 

matter is resolved. This loan is now in default. 

When American declared bankruptcy, BORROWER was very concerned that its aircraft would 

be rejected from the terms of settlement and that the lease would be terminated. BORROWER 

paid ADVISOR $65,000 to help it prevent this from happening. ADVISOR and BORROWER 

were successful and BORROWER's aircraft was included among those aircraft approved for 

retention by the bankruptcy court. TeB did not hire ADVISOR to assist it with the Tail 974 

aircraft it owned. However, [Borrower's 

President), President of BORROWER, made a personal phone call to a board member of 

American Airlines to request assistance in making sure TeB's aircraft was also included in those 

planes approved for retention. The bankruptcy court approved TeB's plane for retention. 

BORROWER has not only mitigated the potential loss on its own plane, but on a plane now 

owned by the Receiver as well. 

Pursuant to an agreed draft teml sheet submitted to the bankruptcy court, American will make a 

reduced payment of $65,000 dating back to December 1,2011. However, the monthly shortfall 

of $40,900 from December 1, 2011 on will never be recovered from American. Moreover, 

American will not pay BORROWER anything until the final term sheet has been approved by 

the bankruptcy judge, which won't happen until at least June 2012. There is potential for further 

delay as certain provisions in all leases of retained aircraft, which are many and various, must be 

made unifonn to facilitate the orderly administration of the bankruptcy estate. Furthennore, 

American willlikcly seize every opportunity to delay the commencement of lease payments. 

BORROWER fully anticipated the term sheet to be approved in early April 2012. At that time, it 

would have received $195,000.00. This amount represents the reduced payment of $65,000 for 

December through February and would have helped BORROWER keep its loan current. 

BORROWER cannot afford to make payments on an asset that exceed the asset's income stream. 

Current income generated by the aircraft is zero. Under no circumstances will BORROWER be 

44 
225 


75733.184

able to afford a payment greater than the agreed and approved amount of II.merican's futurc leasc 

payments on this aircraft. The proposal before the hankruptcy eourt fixes American's monthly 

lease payment on this aircraft at $65,000. If the agreed and proposed settlement is not approved 

by the bankruptcy court, BORROWER will default. 

DISCUSSION: 

American's bankruptcy has a direct and immediate impact on the aircraft leasing market. 

American was leasing approximately 253 aircraft, including BORROWER's, when it filed for 

bankruptcy protection. The order that has already been entered by the court allows American to 

keep 160 of those aircraft, flooding the market with the remaining 93 aircraft. With a Hungarian 

Airline and a Spanish Airline dumping another 51 (aggregate) aircraft into the market, resale 

value of the collateral has dropped dramatically. See Ex. 8a. Spanair Collapses, Stranding 

20,000 People, BBC News Online, January 30, 2012; see also Ex. 8b, Hungarian Airline Malev 

Col/apses, February 3, 2012. 

Alternatives to Compromise: 

Administer and attempt to sell a defaulted note. 

45 
226 


75733.185

May 7, 2012 

Asset Number: ##### $2,068,677.62-BV 

Asset Name: BORROWER 

RECOMMENDATION: 

Compromise Asset by accepting $1,034,338.81 representing 50% of the outstanding balance 

($2,068,677.62), as full settlement of the principal obligations. BI(i) 

EXECUTIVE SUMMARY: 

BORROWER, ("BORROWER" or "Borrower"), executed a $5,000,000 revolving promissory 

note on April 15,2009 payable to Tennessee Commerce Bank ("TCB") to fund its business 

operations as a seller of data products and data supplies. Borrower and TCB amended the note 

on September 15,2011, reducing the total amount to $3,000,000.00. Currently, the UPB on this 

note is $2,068,677.62, with an available unfunded commitment of $931,322.38. FDIC 

previously sent a "No Funding" Letter to BORROWER which BORROWER has not 

countersigned. 

BORROWER had maintained a perfect payment history on this and all related debt currently 

with Receiver. However, this loan matured on April 15, 2012, and now must be retinanced with 

a new lender or a defaulted loan will find its way to pool sale and [etch a substantially reduced 

price. 

Closure ofTCB caused a disruption in the administration of BORROWER's credit facility, 

resulting in the late payment of vendors and the corresponding loss of rebate revenue, which has 

in tum caused BORROWER to lose virtually all revenue associated with this credit. There have 

been three monthly losses to date as follows: January end: $63,256.00; February end: 

$78,530.00; March end: $66,476.00. Loss for the end of April is estimated to be between 

$60,000.00 and $80,000.00. 

BORROWER has obtained alternate financing as evidenced by the exhibited commitment letter. 

See Ex 1, Blanket Commitment Letter. April 27, 2012. This commitment letter provides evidence 

of takeout financing for all of BORROWER's offers presented concurrently herewith pursuant to 

a Master Submission. See Ex. 2, Master Submission, May 7, 2012. Of the total commitment 

amount set forth in this blanket commitment letter, $1,034,338.81 has been allocated to Asset 

##### representing 50% ofBV as full satisfaction of BORROWER's entire indebtedness related 

to Asset #####. BORROWER's offer represents the highest value as detailed later in the case 

and provides the FDIC with the quickest resolution of this asset. 

It is recommended the FDIC approve this case authorizing the compromise of Asset Number 

##### and release the collateral, including all LOCs, in exchange for $1,034,338.81, notify 

BORROWER and/or its representative via email regarding the FDIC's approval or other decision 

in response to BORROWER's Offer, and refrain [rom reporting information regarding this asset 

to any credit reporting bureau or agency. 

DESCRIPTION OF ASSETS: 

46 
227 


75733.186

BORROWER, through its wholly owned subsidiary, [SUBl, sells data products and data 

supplies. Throughout this case, the use of "BORROWER" is intended to refer to 

BORROWER's actions as carried out through [SUB]. BORROWER functions as a contract 

fulfillmcnt partner helping small volumc purchascrs receive large volume discounts. As an 

example, when a vendor, such as Lexmark Business Printers, receives a 6,000 unit order from a 

large volume customer such as Walgreens and a 200 unit order from a small volume customer 

such as Duane Reed, it will often fulfill the large order itself and pay BORROWER a rebate to 

fulfill the small order. The price to the customer in each instance remains the same. By doing 

this, the vendor can achieve efficiencies of scale while still providing discounts to smaller 

businesses. This enables [SUB] to remain very cost competitivc. 

BORROWER must pay its vendors net 30 days from product shipment. Volume rcbates are 

awarded monthly based on ordcr volume and timely payments (net 30). These rebates are 

processed at the end of each month and comprise virtually all the revenue strcam associated with 

Asset #####. See Ex 7, Fulfillment Partner Transaction. prepared/or this submission. 

Consequently, there is a significant delay between BORROWER's expense and its 

corresponding revenue. BORROWER obtained the subject revolving warehouse credit line from 

TCB, described in detail below, to fill this financial gap. BORROWER and TCB expressed the 

loan's purpose as follows: (1) purchase of equipment by borrowcr for leasing to lessees; (2) to 

allow borrower to provide bridge financing to "buyers" (also called lessees in the documents for 

convenience) who purchase equipment from Borrower; (3) purchase equipment for resale. See 

Ex 6. Revolving Warehouse Credit Agreement. April 15. 2009. Other general conditions are 

typical to most revolving credit facilities. 

Loan Number ##### is the mechanism that insures rcgular timely monthly payments in 

compliance with the net 30-day requirement allowing BORROWER the ability to collect the 

rebates from the vendor. These rebates cover BORROWER's overhead costs and arc the sole 

source of profit associated with this loan. Without the rcbate, the company cannot survive. 

BORROWER cannot obtain temporary financing because the Receivership holds a security 

interest in all of the BORROWER's future purchases from Vendors and new lenders will not 

provide funding without some security interest in the new purchases. 

BORROWER executed a rcvolving promissory note on April 15,2009 in the maximum amount 

01'$5,000,000.00 payable to TCB and bearing an interest ratc of6.25%. See Ex 4. Warehouse 

Note, April 15, 2009. An amendment to the notc established a maturity date of April 15,2012 

and reduced the dcbt ceiling to $3,000,000.00. See Ex 5. Amended and Restated Warehouse 

Note, September 15, 2011. 

Security for this facility can be generally described as Accounts Receivable. More specifically 

the security is defincd as follows: (1) transactions, chattel paper, accounts receivable, subject 

properties; (2) records and data relating to item 1; (3) insurance proceeds; (4) Borrower's 

promise to do and execute whatevcr is necessary to evidence and perfect the lien such as UCC 

financing statements. 

Any personal guaranty for this note was subject to and arose only upon the satisfaction ofthe 

following event: the notc was past due for 60 days. As this loan matured without this trigger 

47 
228 


75733.187

having been satisfied, the loan matured without the personal guaranty of [Name Omitted] and so 

is not personally guaranteed. 

BACKGROUND: 

As usual, BORROWER submitted its regular draw request on January 30, 2012 in order to fund 

payments due its vendors. Its request was denied by FDIC as Receiver for TCB on or about 

February 1,2012. Consequently,for the first time ever, BORROWER ([SUB]) has been unable 

to make its vendor payments on time. On Tuesday morning, March 27, 2012, BORROWER 

observed a significant reduction in gross margin even though revenne remained at predictable 

levels. BORROWER, through its subsidiary [SUB], consistently has experienced, per vendor, 

gross profit on gross sales of 16-18%. It has dropped below 10%. Upon further investigation, it 

was discovered that it was thc lateness of BORROWER's payments to its vendors that resulted 

in the loss of the rebate payments, something that had never occurred. 

Why have BORROWER's vendor payments been late? BORROWER's paymcnts havc bcen 

late as a direct result of FDIC's failure to fund. Because rebates are capitalized at the end of 

each month, BORROWER has only recently discovered the losses caused by this disruption in 

what has otherwise consistently been a smoothly operating and regularly recurring administrative 

function. Monthly losses, directly attributable to the bank's closing and failure to properly 

administer this credit in accordance with the agreement and course of busincss dealing, to date 

are as follows: January end: $63,256.00; February end: $78,530.00; March end: $66,476.00. 

Loss for the end of April is estimated to be between $60,000.00 and $80,000.00. BORROWER 

will continue to incur this amount ofloss on a monthly basis until the currcnt situation is 

resolved. 

Critical to BORROWER's business success is availability of capital, which allows it to perform 

fulfillment of contracts, which in turn earns BORROWER rebates. The profit/revenue received 

from the security of the note is in the rebate. FDIC's refusal to honor the closed bank's 

commitment to advance has virtually e1iminatcd BORROWER's profit stream associated with 

this credit facility, the very purpose for which the credit was originally extended. With the 

Rcccivership not funding on the Commitment, BORROWER is receiving no rebates. 

Furthermorc, this interference by FDIC in BORROWER's ongoing vendor relationships has 

placed BORROWER in jeopardy oflosing both its vendor base and its customer base. Loss of 

this revenue, coupled with the overhead of fulfilling its contractual obligations, actually places 

BORROWER, whieh employs 20, in a negative profit situation with respect to this credit facility. 

DISCUSSION: 

Loan ##### is now matured, and having not been extended prior to maturity, investors cannot be 

expected to offer much for this asset. The maturity of this loan without payment is an indicator 

of future delinquency, something investors consider in their valuation and bid. BORROWER 

has indicated to the Receivership that its losses since the Receivership declined further funding 

of its commitment have exceeded $225,000 from the rebates it receives from the manufactures in 

their Fulfillment Partner program. 

Profit and overhead income only comes from the Rebate negotiated. This is true for 

BORROWER and it will be true for the pool purchaser. For a pool purchaser to benefit from the 

48 
229 


75733.188

purchase of this asset, they will need to be approved by the manufacturer as a Fulfillment Partner 

and negotiate a rebate program that allows for them to be profitable with the amount of rebate 

because the structure of the Fulfillment Partncr program requires the partner to sell the product at 

the same price they purchase from the manufactory. Success in this regard is not guaranteed. 

Most pool purchasers will not want to venture into this water unless they are already in it, agaill 

reducillg potelltial pricillg 011 pool sale. 

As indicated above, the BORROWER's only source of profit is from rebates because of their 

requirement to sell the items from the manufacture at the same price as they purchase from the 

manufacture. This Offer to Compromise takes the asset off the books of the Receivership at 50% 

ofTIV. 

49 
230 


75733.189

JPAC'S SUBMITTED CASE CHART FOR CONGRESSIOVAL RECORD 

J J5~~!~vl/ / I J~ 11.8 j /~ !E 9 ~6 § }~ §' !J $ s B' ~f1 ..... C ~~ 

~s 

$~ 

(j I,~ II /hI ;;1 IN f :s" ~ 2 If! ~ i2 ~ C Q'<: 0 '" Co 

~BORROWER SUPB COLl.ATERAL EST VALliE 

v~ VIN YIN 

~g:;Do\'.T!{O\V11 $ 7.859,278.42 Storage units $ 4,750,000 Y Y N N 5!2!J2 4,3OQ,00(tOO 

At' Storage LaVergne $ 248,761.00 Stor,!gl?uni{s $ 20.000 Y Y Y N N 5/2112 to,OOO.OO 

A+ Storage Murfreesboro $ 2,622,208.18 Storage units $ 1,2SQ,f){)0 Y Y Y ~ N 512112 1,00Q,{)OO.OO 

A ~ Storage Providence $ 134,100,00 Storage units $ 1.500.000 Y Y Y N N 5/2/12 U50,OOO.OO 

A~E~g~;;pnn I Ill! $ 296,669.00 Stofa'eunits $ 550,000 Y Y N N 512/12 375,000.00 

;riSl01 Development Grp $ },{)00,000.00 FF&E $ 1,750,000 Y Y N N 5/23/12 ],250,000.00 

Borrower Properties, LLC $ 2,940,000'OOE $ 750,000 Y Y Y N N 6/15112 450,000.00 

Capital LC"asmg & Fmance $ 1,441,955.07 $ 800,000 Y Y Y 4/30112 502,88L83 

C'ntml Flo" I."sing, LLe $ 1.289.147.68 $ 700,000 Y N 

~. $ 400,000.00 

"'ntml I.,,,,ing Co,!, $ 68,750.00 Vehicles/leases $ 20,000 N N N $ 10,000.00 

:~ornerstolle Capital, Inc $ 150,981.90 Vehicles/lease" $ 75,000 Y Y N Y 12 tbd 

Cornerstone Capital Corp. $ 392,940.72 Vehicles/leases $ 170.000 Y Y N Y 12 tbd 

CPG $ 20,535,948.20 Drillin RtRS $ 8,000,000 N N N N N 5/23/12 $ 6,100,000.00 

~~entI.ea;;itH!.Srvs $ 2.179,221.21 Vehicles/lcase~ $ l.OOO,OOO Y Y Y Y 6115112 tbd 

UNIN'D $ 2.068,677.62 Account Receiv $ 1,200,000 Y Y N Y 5i7!12 $ 1,034,338.8J 

UNIN'D $ 1,314,1l5.39 Lea~e e uipm~~t- S 650,000 Y Y Y N Y 517112 $ 525,646.16 

G~JN)D $ 9,707,881.69 I\lrpianc $ 5,000,000 Y Y Y N N 5!7/12 $ 4,368,546.76 

CNfN'D $ 1.541,855.46 Airplane $ 800,000 Y Y Y N N 517112 $ 616,742.18 

J l3.&B. Investments $ 77,297.24 Vehicles!leases $ 42,500 Y Y N Y 6/15!l2 $ 7,000.00 

~--

KNA $. 4,394,000,00 Hotel $ 3,300,000 Y Y Y N N 4/16112 $ 770,000.00 

$ '54,83700 Hotel $ 3,700,000 Y Y Y N N 61l4!l2 $ '.700,000.00 

[AMeO $ 7,343550.00 Vehidesilcases $ '1,000,000 Y Y N Y Y 6115112 $ 3,524,904,00 

TOTALS $ 84,462,175.78 ,40,027.500 $ 31.125.os9.74 

PAGE 50 
231 


75733.190

7/19/201212:19 PM prelim 10 

rlM4PD FY10 PRELIMINARY SINGLE AUDIT EXPENDITURE SCHEDULE 

09J24/10 

Grant FY 

18 Fll008 09 

18 Fll008 10 

18 F15013 09 

18 F15014 09 

18 F15014 10 

18 F15017 08 

18 F15018 09 

18 F15018 10 

18 F18006 09 

1B F18006 10 

18 F45029 TA 

18 F45029 TB 

1B F45029 9E 

18 F45034 TB 

18 F45034 09 

18 F45034 7C 

18 F45034 7E 

18 F45034 8A 

18 F45034 Be 1B F45034 9A 

18 F45034 9B 

18 F45034 9C 

1B F45034 90 

18 F45034 9E 

18 F45034 9F 

18 F45034 9G 

18 F45041 EE 

18 F45041 FF 

18 F45041 GG 

18 F45041 HH 

18 F45042 09 

18 F45043 BC 

18 F45043 9A 

18 F45044 09 

18 F450BO 07 

18 F45080 09 

18 F47002 05 

18 F47002 06 

18 F47002 07 

18 F47002 08 

18 F47021 6A 

18 F47034 06 

18 F47034 07 

18 F47034 08 

18 F47034 09 

18 F47035 07 

18 F47035 08 

18 F47042 09 

18 F47049 OB 

18 F47049 09 

18 F47049 10 

18 F47056 07 

18 F47057 9B 

18 F47057 9A 

18 F47057 07 

18 F47057 10 

18 F47059 07 

18 F47060 09 

18 F47060 10 

18 F47064 06 

18 F47064 07 

18 F47064 09 

18 F47066 06 

18 F47070 07 

18 F47072 09 

18 F47072 10 

18 F47082 09 

18 F47084 10 

Grant Name 

Prosecution Support 

Domestic Violence Prosecutor 

UASI - 5 0 Volunteer Program 

Base Realignment and Closure 

Base Realignment and Closure 

Summer of Services 

FY09 MLK days of services 

FY09 MLK days of services 

Nortwest Park/Oakview Weed and Seed 

Nortwest Park/Oak-view Weed and Seed 

Grantor 

Number CFDA 

VAWA-2008-1712 16.588 

VAWA-2009-1812 16.588 

2006-EM-E6-0059f05AUA: 97.008 

RA0625-09-03 

07CGHMD001 

2008-WS-QX-0149 

2009-WS-QX-0167 

12.607 

12.607 

94.007 

94.007 

94.007 

16.595 

16.595 

G-20 Summit. 9/24-25/09 EMW-2003-CA·0100!M01!97.025 

HURRICANE Gustav EMW-2003-CA-0100!M02· 97 .025 

2009 Presidentiallnaugurartion Activation Order # 2007-0C 97.025 

USAS! NCR Cache Leadership 2004-TU-T4-0010!04 1.13.97.067 

USAS! NCR Cache LeaderShip 2004-TU-T4-0010!04.1.13 97067 

UASl NCR Radio Cache Maintenance 2006-EM-E6-0059/04CUA 97.067 

UASI Trailers Cache Phase 2 2005-GE-T5-0024!4.1.1n 97.067 

UAS! NCR Radio Cache Maintenance 2005-GE-T5-0024/R2UAS 97.067 

WMd Training None shown 97.067 

UASl NCR Radio Cache Maintenance None shown 97.067 

UASI NIMS Coordinator 2005-GE-T5-0024/4BUAS~ 97.067 

UASI Mass Casualty Support Unit - Medica! Supplies 2005-GE-T5-0024/4DUAS 97.067 

UASt MCSU Supplies 2005-GE-T5-0024/4DUAS 97.067 

UASI- MeSU Medical Supplies 2004-TU-T4-0010/04.1.17.97.067 

Communication leader 2005-GE-T5-0024/5C7UA:97.067 

Incident Management Training 97.067 

USAR WMD Preparedeness GRANT 

National Urban Search and Rescue (NUSR) 

National Urban Search and Rescue (NUSR) 

National Urban Search and Rescue (NUSR) 

Assistant to Fire Fighters Grant 

FY06 IMT -Florida Hurricane Wilma 

Mission SR980 - Hurricane Ike 

National Fire Protection Association 

Safer Grant 

Safer Grant 

WashingtonfBaltimore H1DTA Project 

Washington/Baltimore HIDTA Project 

Washington/Baltimore HtDTA Project 

Washington/Baltimore HIDTA Project 

BJA Bullet Proof Vests 

JOINT TERRORIST TASKFORCE 

JOINT TERRORIST TASKFORCE 

JOINT TERRORIST TASKFORCE 

JOINT TERRORIST TASKFORCE 

FY07 PAL-PAL YEP 

FY08 PAL-PALYEP 

COPS Hiring 

METRO AllEN TASK FORCE 

EMW-2006-CA-0222 

EMW-2005-CA-0285 

EMW-2008-CA-0484 

EMW-2008-CA-0484 

97.025 

97.025 

97.025 

97.025 

97.044 

97044 

97.067 

97.067 

EMW-20006-FF-03999 97.044 

97.044 

Z988302 07 

Z903012 07 

Z914102 07 

Z926201 07 

1121-0235 16.607 

MOU between FBI and 16.595 

MC Police 16.595 

16.595 

16.595 

2007-JL~FX·0016 16.541 

2007-JL-FX-0016 16.541 

lB.710 

21.000 

Source 

!BOO 

1800 

1800 

1800 

1800 

1800 

i800 

IBOO 

1800 

1800 

1800 

1800 

1800 

1800 

1800 

j800 

METRO AllEN TASK FORCE 

NFSL-2002-1001 

NFSL·2002-1001 

NFSL-2{)02~1001 

2006-DN-BX-K203 

2004-DN-BX-K090 

21000 moo METRO AllEN TASK FORCE 

DNA CAPACITY ENHANCEMENT 

Forensic DNA Backlog Reduction Program 

DNA Backlog Reduction Program 

DNA Backlog Reduction Program 

DNA Backlog Reduction Program 

SAFE SCHOOLS-HEALTHY KIDS -FY07 

SOLVING COLD CASES with DNA 

2007-DN-BX-K100 

2006-DN-BX-K048 

2009-DN-BX-K085 

2008-LT-BX-K005 

Solving Cases with DNA 2005-DN·BX-K021 

FY06 FSS BYRNE POLYGRAPH IMPROVEMENT 2005-DJ-BX-0304 

Ed Byrne Memorial Justice Assistance Grant Program 2006-DJ-BX-0303 

FY06 FSS BJAG GOeep 2006-DJ-8X-0303 

eops RAFIS Upgrade 2005-CK-WX-0422 

PSN Anti·Gang Initiative PSNI-2006-1007 

Regional Fugitive Task. Force FATF-08-0144 

Regional Fugitlve Task. Force FATF-08-0144 

Comprehensive Anti-Grant Activity Strategy Grant 137-1241 

Wheaton CSAFE 

21.000 

16.560 i800 

16.560 

16.560 

16.560 

16.560 

84.184 

16.741 

16.560 

16.560 

16560 

16.560 

16.710 

16.744 

16.595 

16.595 

16.580 

i800 

1800 

Total Costs 

20,428.82 

58.002.05 

140,149.81 

133,226.78 

5,000.00 

62,355.51 

83,853.13 

9,672.55 

16,024.75 

(5939) 

257,85493 

55,00000 

25,888.09 

28,373.99 

49,796.19 

10.618.43 

457.84 

373,787.09 

17.509.71 

274.599.41 

470160.71 

192.52993 

282,74563 

(2,270.21) 

3,02400 

207,000.05 

537,528.84 

(4,310.61) 

42,732.96 

85,000.00 

29.45 

2,271.00 

16,645.65 

(4,280.48) 

113,945.73 

35,544.00 

200.00 

98,772.90 

3,444.46 

7,000.00 

18.824.72 

43,511.78 

1J:\1~~~R1?ongr~2s\ t12th ~anp9t~,~~~~f~ogUb~~Y1~\i~rcM~~~~~~i{r121~u8J;t, Heari~g2~-1~dB~~~rdn~07 _26~11B8M Muni Advlsor\07 -20-12 C~,935.48 Disclosure Forms\montgomerycountygrants ] 
232 


75733.191

7/19/201212.19 PM prelim 10 

F1M4PD FY10 PRELIMINARY SINGLE AUDIT EXPENDITURE SCHEDULE 

09124/10 Grantor Revenue Total Costs 

Grant FY Grant Name Number CFDA 

18 F48001 10 FY 2007 Cooperative Reimbursement Agreement CSENCRN10-043 93.563 t800 434.78732 

18 F4800t 09 FY 2008 Cooperative Reimbursement Agreement CSENCRN09-043 93.563 t800 127,925.70 

18 F48004 O. FY04 DOMESTIC VIOLENCE ASSISTANT 2001-V'JE-BX-0012 16.590 IBOO 

OVW FY06 Grants 10 encourage Arrest Policies and 

18 F4B007 07 Enforcement Protection Orders 200S-WE-AX-0096 16.590 IBOO 

18 F4B008 08 Crimina! !nvestigation & New Detective Training - LETS BJAG - 2005 - 1081 16.738 1800 

18 F48009 09 Regiona! Fugitive Gang Task Force FATF-09-0128 16.595 8,752.98 

18 F4B009 10 Regional Fugitive Gang Task Force FATF-10-0128 16.595 40,532.61 

18 F48015 10 FDIC Bank Closures-Federa! Security 16.595 16.602.55 

18 F48016 10 FY10 ATF Gang Task Force Overtime Gr3nt 16.595 2,866.08 

18 F48020 09 Grants to Encourage Arrest PoliCies 2005-WE-AX-0096 16.590 372,70102 

18 F49001 09 FFY08 STATE HOMELAND SECURITY GRANT 97.073 108,367.06 

18 F49001 08 SGSGP-LETPP 2007-GE-T7-0040 97.067 359,796.92 

18 F49001 10 FFY10 STATE HOMELAND SECUR!TY GRANT 2007-GE-T7-0040 97.067 187.89 

18 F49001 8B Mini Citizens Corp Z007 -GE-T7 -0040 97.067 4,93500 

18 F49001 BC SGSGP-LETPP Z007·GE-T7-0040 97.067 425,374.70 

18 F49004 09 UASI DATA SHARING 2005·GE-T5-0024/13DUA! 97 .067 858,209.59 

18 F49004 1A FFY09 UAS! Exercise & Training Grant 2005-GE-T5-0024/5CUAS 97.067 62,500.00 

18 F49004 7A CAT! 2005-GE-T5-0024/8DUAS 97.067 

18 F49004 9A NCR Tralning and Exercise Support 2006-GE-T6-00371ETPUA 97.008 270.00 

18 F49004 9B UASj Hampton Roads 2007 UASI HRPDC 97.067 341,245.26 

18 F49005 07 FY06 UAS! FORCE PROTECTION 2005-GE-T5-0024/MD2UA 97.067 

18 F49005 68 NCR NIMS Coordinator Position 2005-GE-T5-00Z4/5C2UA! 97.067 

18 F49005 08 NIMS Coordinator Maintenance 2006-GE-T6-0037/ETCUA 97 .OOB 

18 F49006 08 UAS! Infonnation Data Sharing 13AUAS6 97.008 1,840.376.06 

18 F49006 09 UASI NCR Law Enforcement (UNX) UASI NCR Law Enforcem€97.008 199,803.61 

18 F49006 1A UAS! Information Data Sharing UASI Information Data Sh197 008 103,211.00 

18 F49006 10 UASI-LtNX Capabilities Upgrades 97.008 75,693.03 

18 F49006 8A UASI information Data Sharing 2006-EM-E6-0059113AUA:97.008 615,Z26.36 

18 F49006 8B UASI NCR LtNX Maintenance Grant" Defiba 2006-EM"E6-0059/13AUA: 97.008 906,260.58 

18 F49008 10 Mass Care Supplies 2005-GE-T5·0024fX4UAS: 97.067 87.536.95 

18 F49009 07 UASI Grant 97.067 

18 F49010 10 EMPG Grant Program 2007 -EM-E7 ~O 1 04 97.042 288,532.00 

18 F49011 07 NCR N1MS ICS 300/400 Training EITUAS6 97.008 

18 F49012 09 Active Shooter "Immediate Action Teams" Tactics & 01 ETYUAS6 97.008 

18 F49013 09 UASI Emergency Planning 97.00B 229,670.80 

18 F49016 10 Influe Pendemic Training of Pharmacists 97.073 10,246.69 

18 F49017 10 H1N1 97.073 28,515.31 

18 F49018 09 UASI 5% Share 97.073 304,B25.98 

18 F49019 10 Regional Animal Shelter Preparedness 97.073 23,783.18 

18 F49023 10 FY09 UAS! Explosive Brea-chlng Training 97.073 4,964.88 

18 F50809 9A Depot Security. Transit Grant Subgrant # 6TG03 97.075 380,969.08 

18 F50809 09 Bus Security Cameras Subgrant # 6TG03 97.075 40,957.59 

FSOB09 10 Bus Security Cameras Subgrant # 6TG03 97.075 6,406.42 

18 F50B10 08 Travel Assistance for Income-Oualified Residents Subgrant # 08-032 20.505 5,822.67 

18 F61Z04 10 HEAD START Program 03CHz109/44 93.600 moo 1,126,BI5.84 

18 F61204 10 HEAD START Program; Transfers to MCPS 03CH2109f44 93.600 j8DO 3,374,427.10 

18 F61206 09 Community Services Block Grant DCNOCA-l0-03-013 93.569 i800 168,783,44 

18 F61206 10 Community Services Block Grant DCNOCA·1 0-03-0 13 93.569 1800 340,020.84 

18 F61507 C6 CLIG CARRYOVER· PART C SG802078-01 84.181 

18 F61507 C7 CLIG CARRYOVER - PART C 8G802078-01 84.181 

18 F61908 09 Retired and Senior Volunteer Program 06 SRAMD 003 94.002 moo 11,42512 

18 F61908 10 Retired and Senior Volunteer Program 09 SRAMD 003 94.002 i800 35,896.31 

18 F64013 09 Rockville District Court Abused Persons Support VAWA-2008-1410 16.588 i800 13,372.09 

18 F64013 10 Victim Access VAWA-2009-1411 16.588 moo 23,203.91 

18 F64040 07 CHILD CARE RESOURCE & REFERRAL NONE 93.575 

18 F64040 09 CHILD CARE RESOURCE & REFERRAL NONE 93.575 93,58593 

18 F64040 09 CHILD CARE RESOURCE & REFERRAL NONE 93.713 91,085.00 

18 F64053 05 SAMSHA SERVICE TO CH!LDREN 5 HS5 SM52929-06 93.104 moo 

18 F64132 06 Gang Prellention Initiative 2005·JV·FX·0071 16.541 1800 

18 F64140 07 Crossroads Youth Opportunity Center 2006-JL-FX-0077 16.580 1800 

18 F64142 07 Joint County Gang Prevention and Supression Initiative 2006-DD-8X-0323 16.580 1800 527,963.79 

18 F64144 07 Civic Justice Corps Grant YF15595-06-60 17.261 1800 

G:\112th Congress\112th Capita! Maril:ets Subc\11zth CM Hearings\112th CM Hearings - 2nd Sesslon\07-20-12 CM Muni Advisor\07·20*12 CM 

Disclosure Forms\montgomerycountygrants I 
233 


75733.192

7/19/201212.19 PM prelim 10 

FIM4PO FY10 PRELIMINARY SINGLE AUDIT EXPENDITURE SCHEDULE 

09/24/10 

Grant FY 

18 F64154 08 

18 F64155 10 

18 F64164 09 

18 F64167 09 

18 F64167 10 

18 F72019 10 

18 F77009 09 

18 F77011 

18 F77011 09 

18 F77011 10 

18 F77013 09 

18 F77021 10 

18 F77023 07 

18 F77023 08 

18 F77026 07 

18 F77027 10 

18 F77033 04 

18 F77034 04 

18 F77035 04 

18 F78010 09 

18 F78010 10 

18 F78020 09 

18 F78020 10 

18 F78040 06 

18 F78040 09 

18 F78040 10 

18 F78041 07 

18 F78041 08 

18 F78041 09 

18 F780S0 07 

18 F78050 08 

18 F780S1 07 

18 F78051 10 

18 F78070 08 

18 F78070 09 

18 F78090 06 

18 F78090 08 

18 F78090 09 

18 F78120 07 

18 F78130 06 

18 F78130 08 

18 F78140 09 

18 F78310 08 

18 F78310 09 

18 F78500 06 

18 F78500 09 

18 F7B500 10 

18 F78600 08 

18 F78600 09 

18 F78600 10 

18 F78800 10 

18 F78803 10 

18 F80015 09 

Grantor 

Grant Name Number CFDA Source 

Community-Based Collaborations (CSC) for Gang 

Prevetion and POSitive Youth Development Program 2007-JV-FX-0325 

Pre-Trial Domestic Violence Abuser Intervention Projec 2007-DO-BX-0715 

16.544 

16.580 

1800 

1800 

Maryland Regional Gang Initiative Expansion 

Adult Drug Court Cap Expand Initiative 

Adult Drug Court Cap Expand Initiative 

NRPA Grant 

Neighborhood Stabilization Program (NSP) 

EMERG SHELTER 

EM ERG SHELTER 

EM ERG SHELTER 

Maryland Neighborhood Conservation Initiative 

WEATHERIZATION 

WEATHERIZATION DOE SUPPLEMENT 

WEATHERIZATION DOE SUPPLEMENT 

WEATHERIZATION DOE SUPPLEMENT 

WEATHERIZATION DOE SUPPLEMENT 

FENTON STREET EDl 

LONG BRANCH COMM CTR 

wt-lEATON FACADE EDl 

WIA Dislocated Worker 

WIA Dislocated Worker 

W1A ADULT PROGRAM 

WIA ADUL T PROGRAM 

WIA YOUTH PROGRAM 

W!A YOUTH PROGRAM 

W1A YOUTH PROGRAM 

SUMMER YOUTH CONNECTION 

SUMMER YOUTH CONNECTION 

SUMMER YOUTH CONNECTION 

FY06 RAPID RESPONSE 

FY06 RAPID RESPONSE 

RAPID RESPONSE - EARLY INTERVENTION 

RAPID RESPONSE - EARLY INTERVENTION 

STATE WIDE INCENTIVE GRANT 

STATE WIDE INCENTIVE GRANT 

WIA ADMINISTRATION 

WIAAOMINISTRATION 

WIA ADMINISTRATION 

MD HEAL THCARE WORKER 

MD NEG BRAC 

MDNEGBRAC 

T.N.F 

FY'07 Maryland Wori:;ers ReEntry Program 

Offenders Employment Reetry 

DISABIL!TY NAVIGATOR GRANT 

DISABILITY NAVIGATOR GRANT 

DISABILITY NAVIGATOR GRANT 

MD BUSINESS WORKS 

MD BUSINESS WORKS 

MD BUSINESS WORKS 

FY10 Wagner-Peyser Grant 

WIA Statewide Funds 

DIesel Emission Reduction 

2008-DD-8X-0648 16.753 

1 H79T1020002-01 93.243 

1 H79T1020002-01 93.243 

B-08-UN-24-0001 

S-05-UC-24-0003 

S-08-UC-24-0003 

S-09-UC-24-0003 

MD- NCl-1 

2005·DOE FUNDS 

2006-DOE FUNDS 

2006-DOE FUNDS 

B-03-SP-MD-0331 

B-03-SP-MD-0326 

8-03-SP-MD-0323 

POOB7200010-D 

POOB8200010-D 

POOB7200010-B 

POOB820001 O~B 

POOB6200033 

POOB7200010-C 

POOB8200010-C 

POOB7200025 

POOB8200022 

POOB6200152 

POOB6200052 

POOB7200052 

POOB7200026 

POOB8200043 

POOB7200042 

POOB7200154 

POOB6200033 

POOB7200010-A 

POOB8200010-A 

POOB7200050 

POQB6200131 

POOB8200098 

8JAG-2007 -0061 

BJAG-2007-0061 

POOB62000$4 

POOB8200017 

POOB6200097 

POOB7200081 

P0088200061 

P0091400110 

POOB9200073 

92045-MEMADO 

07.000 1800 

14.251 

14.231 

14.231 

14231 

14228 

81.042 

93.568 

93.568 

93.568 

93.568 

14.246 

14246 

14.246 

17.260 

17.260 

17.258 

17.258 

17.259 

17.259 

17.259 

17.259 

17.259 

17.258/9/60 

17.260 

17.260 

17.260 

17.260 

1800 

i800 

i800 

i800 

17.258/9/60 1800 

17.258/9/60 i800 

17.25819/60 1800 

17.258/9/60 iBOO 

17.25819160 i800 

17260 

17.260 

17.260 

93.558 

16.738 

16.738 

17.266 

17.266 

17.266 

j800 

pIs see S/F012 

pis see 8/FO 12 

j800 

17 .258/9/60 [800 

17.25819/60 i800 

17.258/9/60 i800 

17.207 

17.258/59/60 

66.034 

Total Costs 

74.215.28 

113,857.03 

60,317 00 

294,450.50 

56646 

1,789,058.30 

52,96827 

129,530.12 

3.434,876.54 

31.83186 

236,771 06 

693,675.14 

52,118.94 

300,158.58 

121.908.91 

243,377.18 

21,471.23 

95,484.37 

28.003.03 

161,116.79 

28,099.99 

(30,414.19) 

349,708.48 

4,500.00 

28,973.22 

G:\112th Congress\112th Capital Markets Subc\112th CM Hearings\112lh CM Hearings - 2nd 8e5s10n\07-20-12 CM Muni Advisor\07-20-12 CM 

Disclosure Forms\montgomerycountygrants ] 
234 


75733.193

7/19/201212:19 PM preit1l110 

F!M4PD FY10 PRELIMINARY SINGLE AUDIT EXPENDITURE SCHEDULE 

09/24110 Grantor Revenue Total Costs 

Grant FY Grant Name Number CFDA 

18 FaSOO3 09 Cops In Shops - Liquor Board Project # 09-166 20.605 iBOO 5,775.79 

18 F85007 10 Cops in Shops EUDL-2009-1026 16.727 18,819.01 

18 F85008 10 10 Checking Calendar for Re1ai!ers and Takoma Park Cops If 10~166~23 20.600 9.504.93 

18 F85010 10 Tcr.vn Hall Meetings Underage Drinking Activity # 73 93243 50000 

G:\ 112th Congress\112th Capita! Markets Subc\ 112th CM Hearings\ 112th eM Hearings -- 2nd Session\07 -20-12 CM Muni Advisor\07 -20-12 CM 

Disclosure Forms\monlflomerycountygrants J 
235 


75733.194

Response to questions from the Honorable Randy Neugebauer 

by Bret D. Edwards, Director, Division of Resolutions and Receiverships, 

Federal Deposit Insurance Corporation 

Ql: How can the FDIC verify that pursuing structured transaction sales will maximize the 

return to the Deposit Insurance Fund? 

AI: The verification is comprised of several components: analysis of performance, evaluation of 

structured sale results compared to the estimated cash sale value, and monitoring for compliance. 

During the structuring process for eaeh LLC, the FDIC's financial advisor prepares an estimated 

cash flow projection for the pool of loans being conveyed to the LLC, including how the cash 

flows will flow through the deal structure for distribution to the equity holders. These 

projections become the FDIC's baseline for subsequent monitoring of transaction performance. 

In the aggregate, for the 29 LLC transactions elosed through September 2011. total projected 

equity distributions to the FDIC, as of March 31, 2012, are substantially in line with the FDIC's 

initial projections, with an approximate 0.1 percent difference. 

Another measure is the comparison of selling the loans in a structured sale versus a cash sale. 

The present value of the cash flows to the FDIC on the LLC transactions as of the respective 

closing dates is compared to the cash sale value to determine the dollar amount of the benefit to 

the FDIC from having entered into the LLC transaction. As of December 31,2011, the 

aggregate present value of actual and projected LLC cash flows to the FDIC, as of the closing 

dates for each LLC transaction, was approximately $11.7 billion (or 47.2 percent of the initial 

unpaid principal balance (UPB», compared to the cash sale values of approximately $7.4 billion 

(or 29.8 percent of the initial UPB). By this measure, the benefit to the FDIC of having entered 

into the LLC transactions instead of selling assets for cash is approximately $4.3 billion (or 17.4 

percent of initial UPB). 

The managing members are requircd by the LLC agreements to maximize return to the LLC. 

The FDIC monitors management of the portfolio and compliance with the agreements by 

reviewing monthly reports, reviewing actual performance against consolidated business plans, 

and conducting site visitations on at least an annual ba~is. In addition, the FDIC utilizes an 

accounting contractor to perform closing and interim management reports and review and 

process monthly cash flow and account statements. 

Q2: What discounts and financing does the FDIC provide to its private sector partners to 

facilitate structured transaction sales? 

A2: When the FDIC as receiver conveys assets to an LLC it receives as payment all ofthe 

equity interest in the LLC, as well as, in some cases, purchase money notes. The FDIC then sells 

a portion of the equity (typically 40 percent) to private sector partners. The LLC repays the 

purchase money notes over time from cash flow generated by the LLC, and the repayment of the 

purchase money notes is made prior to the members of the LLC receiving any equity 
236 


75733.195

distributions. The FDIC does not offer any discounts, but rather conveys the assets to the LLC 

based on the market value of the. assets. 

It is important to note that the managing member pays cash to the FDIC for its winning bid 

amount. The FDIC does not finance the managing member's equity interest. 

Q3: Can FDIC managing partners usc TARP funds to purchase their equity interest in 

LLCs? 

A3: No buyers to date had received TAR? funds. 

Q4: How many complaints has the FDIC received from borrowers whose loans have been 

transferred into structured transaction sales? 

A4: Of the more than 42,300 assets that the FDIC transferred into structured transactions, the 

FDIC has received a total of 181 inquiries from borrowers from June 2010 to the present. 

QS: How does the FDIC manage complaints received from borrowers whose loans have 

been transferred into structured transaction sales? 

AS: When the FDIC receives a borrower's inquiry, the following steps are performed: 

We determine if the inquiry is associated with a structured transaction; 

• We contact the borrower, usually via email; 

• The inquiry is assigned to an FDIC specialist, who contacts the acquirer of the loan to 

obtain and review the information that will address the borrower's specific concerns; 

• Following review and approval, a response is mailed to the inquiring party. 

Q6: How many complaints has the FDIC received from Members of Congress advocating 

on the borrowers' behalf? 

A6: From June 2010 to the present, the FDIC has received 80 inquiries from Members of 

Congress relating to borrowers whose loans were sold in structured transactions. 

Q7: How does the FDIC manage complaints received from Members of Congress 

advocating on the borrowers' behalf? 

A 7: A Congressional inquiry is handled similarly to a direct inquiry from a borrower described 

above. Inquiries are carefully tracked to assure a prompt response. The inquiry is assigned to an 

FDIC specialist, who contacts the acquirer of the loan to obtain and review the information that 

will address the borrower's specific concerns. Following confirmation that we have a signed 
237 


75733.196

Privacy Act release from the constituent, a response is then prepared for the Member of Congress 

so they can provide a response to their constituent. 

Q8: How many more structured transaction sales are in the pipeline? 

A8: There are currently several structured transaction sales in the pipeline. The first to be 

offered will be a Small Investor Program (SIP) sale from a single receivership. A multireceivership offering is in the initial planning and development stages. The portfolio has not 

been finalized, but the sale is expected to include commercial real estate, acquisition 

development and construction and single family residential loans from 70 receiverships. It is 

expected that additional loans will be included from new receiverships. The sales are projected 

to bid in the fourth quarter and close before year-end. 

Q9: Is there an end date for the structured transaction sales program? 

A9: No, there is no anticipated end date at this time, but frequcncy and volume is likely to 

diminish going forward. Nationally, through August 6, 2012 there have been 454 bank failures 

since the beginning of2008. While still high, the current pace of failures is slowing. As of 

August 6, 2012, there have been 40 financial institution failures in 2012 compared to 63 failures 

at this same point last year. Additionally, a contributing factor that affects the structured 

transaction sales program is the type of resolution and the number of loans the FDIC retains. 

QI0: On what criteria will the FDIC judge the ultimate success of the structured 

transaction sales program? 

AIO: The transaction agreement term is generally seven years for commercial real estate and 

acquisition, development and construction loan sales, and ten years for single family residential 

loan sales. As such, the success of the structured transaction sales program cannot be completely 

measured until termination of the agreements. An analysis of the overall recovery considering 

the costs of marketing and monitoring as compared to selling the loans in a eash sale will be the 

most meaningful way to judge the success of the program. The FDIC gathers substantial data 

throughout the course of these transactions so we will have the ability to evaluate costs, 

recovery, and many other factors. 

Ql1: Does the FDIC direct its private sector partners' approach to collecting outstanding 

dcbt on loans transferred into structured transactions LLCs? 

All: The transaction documents provide that the managing member service and liquidate the 

assets in the way in which a prudent servicer would do. While the FDIC does not direct the 

collection efforts of the managing member, the FDIC has a monitoring process in place to ensure 

that the managing member and its servicer comply with the terms of the Servicing Agreement 

and other transaction documents. If a servicer fails to comply with the servicing standard, the 
238 


75733.197

FDIC has the right to put the managing member in default and, among other remedies, remove 

the servicer. 

An example of servicing standards for loans secured by single-family properties is the 

requirement that the managing member implement a loan modification program consisting of 

either: (i) RAMP, (ii) the FDIC's mortgage loan modification program, or (iii) a managing 

member proprietary program that is approved by the FDIC. 

Q 12: Why does Rialto seem to have a much higher number of Congressional inquiries 

regarding its practices than other managing memhers in the structured transaction sales 

program? 

A12: Of all structured transactions sold to date, Rialto is the managing member with the highest 

number ofloans. In addition, at the time of the sale, 89 percent were non-performing 

acquisition, development, and construction (ADC) loans, with many of the remaining loans 

expected to default prior to their maturity date due to collateral characteristics and type. Over 80 

percent of the loans were more than 150 days delinquent. Many of the ADC loans have 

undeveloped land or vacant land as collateral, and it is difficult to restructure a loan with 

collateral that does not have a payment stream. The large number of ADC loans combined with 

the high percentage of delinquencies is a significant contributor to the number of congressional 

inquiries received by the FDIC. Since the structured transaction sale, the number of inquiries 

and the percent of these inquiries to total assets transferred to the LLCs is less than I percent. 
239 


75733.198

FDII 

Federal Deoosit Insurance Corooratlon 

550 17th Slreet NW, Wasllington, DC 20429 

Honorable Michael E. Capuano 

Ranking Minority Member 

Subcommittee on Oversight and Investigations 

Committee on Financial Services 

House of Representatives 

Washington, D.C. 20515 

Dear Congressman Capuano: 

Office of Legislative Affairs 

June 25, 2012 

This letter is in response to your request for information during the testimony ofBret Edwards, 

Director, Division of Resolutions and Receiverships, on May 16, 2012, at the hearing entitled 

"Oversight of the Structured Transaction Program" before the Subcommittee on Oversight and 

Investigations of the House Financial Services Committee. 

At the hearing you asked for an explanation of tile price paid by Rialto for its 40 percent equity 

interest in the two structured transactions with the Federal Deposit Insurance Corporation. 

Enclosed is a report prepared by the Federal Deposit Insurance Corporation's Division of 

Resolutions and Receiverships of the economic structure of those transactions and the price paid 

by Rialto. 

We hope that this information is helpfuL If you have further questions, please do not hesitate to 

contact me at 202-898-8730, or Ike Jones, Legislative Attorney and Advisor, at 202-898-3657. 

Enclosure 

cc; Honorable Randy Neugebauer 

Sincerely, 

Alice C. Goodman 

Acting Director 

Office of Legislative Affairs 

Chairman, Subcommittee on Oversight and Investigations 
240 


75733.199

Response to questions from the Honorable Michael E. Capuano 

by Bret Edwards, Director, Division of Resolutions and Receiverships 

Federal Deposit Insurance Corporation 

During the hearing, there were a number of questions regarding the financial aspects of the 

structured transactions entered into by the FDIC with Rialto Capital Management (Rialto) and 

per the Committee's request, below we attempt to provide a simple and clear explanation of the 

economics of structured transactions generally and that deal in particular. 

For those unfamiliar with the FDIC's structured transaction program, it may prove useful to walk 

through a simple example to explain the economics of these transactions. Assume the following 

facts: 

Example I: Unleveraged transaction 

FDIC as receiver inherits one severely delinquent loan with an unpaid principal balance 

(UPB) of$IOO. 

• FDIC's financial advisor estimates an immediate cash sale of the loan would bring $40. 

(In other words, the loan would only be worth 40 cents on the dollar if sold immediately 

for cash) 

FDIC as receiver forms an LLC and contributes the loan to an LLC in exchange for a 

100 percent ownership interest in the LLC. 

• FDIC offers to sell a 40 percent equity interest in the LLC (while FDIC retains 60 

percent). 

• The winning bidder in a highly competitive sale offers to pay $25 for the 40 percent 

equity interest and FDIC closes the sale. 

The "Implied Value" of the loan in the structured sale is based on the highest bid and is 

calculated to be $62.50. That is, if someone pays you $25 for 40 percent of something, 

then the value they are placing on the entire thing-in this case, a defaulted loan-is 

simply $25/.40, or $62.50. Note the FDIC as receiver is retaining 60 percent of the 

equity of the LLC, so by definition, its share is valued at $37.50 (or $62.50 - $25). 

Given the FDIC's financial advisor's estimate of the loan's value in an immediate cash 

sale of $40, the FDIC achieves a much better return by putting this loan in a structured 

sale. Specifically, the FDIC will receive $25 immediately and is expected to receive 

$37.50 over time as the asset is worked within the LL TC structure. This total of $62.50 

compares very favorably to the $40 it was expected to have received had it sold the loan 

immediately. Indeed, it may be argued that the FDIC is statutorily required to engage in 

these transactions because they achieve the least loss resolution offailed bank assets (in 

this case, $22.50 additional return) that the structured sale vehicle provides. 

• A comparison of what the winning bidder paid to the UPB of this severely delinquent 

loan is misleading. First, suggesting that the winning bidder paid "25 cents on the 

dollar" for this loan ignores the fact that the winning bidder is only purchasing 40 

percent of the equity in the LLC. So by that measure, it is more accurate to state it paid 

25 cents on 62.5 cents for its 40 percent share ofthe LLC. Second, the inference that 

any discount amount or percentage off the UPB constitutes a "sweetheart" deal ignores 

the fact that this loan is severely delinquent and thus by defmition, is worth substantially 
241 


75733.200

less than the UPB. Indeed, we would argue the winning bidder paid market value for its 

equity share ofthe LLC in a competitive sale and therefore there was no "sweetheart" 

deal. 

• It is important to note that the likely value of the loan is greater than $62.50. Remember 

that each dollar of recovery in the LLC is split 60 percentJ40 percent with the FDIC. 

Hence, the winning bidder does not achieve a return of its initial investment until 

collections on the loan reach the $62.50 level. The winning bidder is betting that it can 

collect more than that and thus achieve a return on its initial investment of $25. 

Example 2: Leveraged transaction 

FDIC as receiver inherits one severely delinquent loan with an UPB of$100. 

FDIC's financial advisor estimates an immediate cash sale of the loan would bring $40. 

(In other words, the loan would only be worth 40 cents on the dollar if sold immediately 

for cash) 

• FDIC as receiver forms an LLC and contributes the loan to an LLC in exchange for a 

100 percent ownership interest in the LLC. 

The FDIC as receiver then offers to sell a 40 percent interest in the equity portion of the 

LLC (while FDIC retains a 60 percent interest). 

• In order to induce greater competition for the structured sale, the FDIC offers leverage 

in the transaction. It does this by inducing the LLC to pay for 50 percent of the assets 

the FDIC as receiver contributed to the LLC by issuing a note payable to the receiver. 

This allows the winning bidder to put in half as much initial cash as it would in the 

unleveraged example. Importantly, this debt must be paid back in full from the cash 

flow generated by the LLC before any equity distributions are made to the LLC 

members. 

• The winning bidder in a highly competitive sale offers to pay $12.50 for the 40 percent 

equity interest and FDIC closes the sale. Although the bidder paid only half the cash it 

would have an unleveraged deal, the implied value of the assets remain $62.50. 

As above, a comparison of what the winning bidder paid to the UPB of this severely 

delinquent loan is misleading. First, suggesting that the winning bidder paid "12.5 cents 

on the dollar" for this loan ignores the fact that the winning bidder is only purchasing 40 

percent of the equity portion of the LLC, and that the equity portion is only 50 percent 

of the total capital of the LLC given the issuance of the purchase money note. So by 

that measure, it is more accurate to state it paid the equivalent of 12.5 cents on 31.25 

cents for its 40 percent share of the equity portion of the LLC. And as above, the 

inference that any discount amount or percentage constitutes a "sweetheart" deal 

ignores the fact that this loan is severely delinquent and thus by definition, is worth 

substantially less than the UPB. Indeed, we would argue as we did in Example #1, that 

the winning bidder paid market value for its equity share of the LLC in a competitive 

sale and therefore there was no "sweetheart" deal. 

The Specifics of the Rialto Deal 

In February 2010, the FDIC closed two Structured Transactions (LLCs) with Rialto. The two 

transactions were composed of 5,511 distressed acquisition and development (ADC) loans 

representing approximately $3.1 billion in UPB. These loans were severely distressed---over 80 
242 


75733.201

percent of the asset portfolio was greater than 150 days delinquent at the time of the sale. Hence, 

the market value of these loans was significantly lower than the UPB at the time of sale just as 

we noted in the examples above. Rialto paid the FDIC as receiver approximately $243 million in 

cash for a 40 percent equity interest in the two leveraged LLCs. The FDIC retaincd the 

remaining 60 perccnt equity interest, which had an implied value of approximately $365 million. 

Additionally, the LLCs issued approximately $627 million in purchase money notes to the FDIC 

as receivcr. The FDIC competitively bid the equity interests in the LLCs with the sale 

notification being sent to more than 960 prequalified bidders, and bid packages sent to more than 

57 potential bidders. 

Using logic similar to that outlined in the examples above, Rialto did not pay "8 cents on the 

dollar" for $3.1 billion in assets. In fact, Rialto paid approximately $243 million for a 40 percent 

interest of the equity portion of the LLCs. While Rialto manages the day-to-day administration 

of the portfolio, it does not realize a recovery on its equity interest until the LLC fully repays the 

purchase money notes. Rialto's purchase price for its equity interest is the basis for establishing 

the implicd value of the loan portfolio as a whole. 

Similar to the definition of implied value outlined above, it is the sum of Rialto's equity interest, 

the FDIC's equity interest and the UPB of the purchase money notes at issuance. The implied 

value is calculated by adding the combined equity interests to the debt issued (which includes a 

guaranty fee of approximately $18 million payable to the FDIC) and then dividing the total by 

the UPB ofthe portfolio. The implied value of the loan portfolio owned by the LLCs as 

illustrated and calculated below is approximately 40.5 percent. 

When applying the purchase price definition and calculation to the Rialto structured sale the 

following purchase price is achieved based on the structure offered for this sale which was I: 1 

debt to equity, 60 pcrcent and 40 percent equity split to the FDIC and Rialto, rcspectively: 

Unpaid Principal Balance of ADC Loan Portfolio 

Rialto Bid to Purchase 40 percent Equity Interest 

Divided by Rialto Equity percent 

Total Implied Value of Equity ($243MMJ0.40=$608.6MM) 

Purchase Money Notes before guaranty fee (I: I debt/equity) 

FDIC Corporate Guaranty Fee (3 percent) 

Total Purchase Money Note 

Total Loan Portfolio Value based on Sales Price 

Portfolio Unpaid Principal Balance Sold 

Calculated Implied Value ($1.235B divided by $3.052B) 

$3,052,645,902 

$243,458,812 

40 percent 

$608,647,030 

$608,647,030 

$18,259,411 

$626,906,441 

$1,235,553,471 

$3,052,645,902 

40.5 percent 

While the implied value is 40.5 percent, the FDIC received approximately (i) $243 million in 

cash upfront from Rialto for Rialto's equity interest in the LLCs, and (ii) $627 million in 

purchase money notes. Recoveries after the LLCs fully repay the purchase money notes are split 

60 percent for FDIC and 40 percent for Rialto. 
243 


75733.202

In order for Rialto to receive a return on its equity investment, the LLCs must recover in excess 

of$1.2 billion. The $1.2 billion consists of the LLCs repayment of the $627 million in purchase 

money notes plus $608 million in equity disbursements. The $608 million is derived by adding 

the approximately $243 million for Rialto's 40 percent equity interest and approximately $365 

million for the FDIC's 60 percent equity investment. Rather than 8 cents on the dollar, it is more 

accurate to say that Rialto paid approximately 24.3 cents on 60.8 cents for its 40 percent share of 

the two LLCs. 

In summary, Rialto paid market value for its interest in these loans in a highly competitive sale 

that is expected to achieve returns well in excess of those the FDIC would have achieved from an 

immediate cash sale of the loans. While the transaction initially realized an implied value for the 

portfolio of 40.5 percent of the UPB, the ultimate recovery will be determined over time based 

on the LLCs recovery on the loans. 
244 


75733.203

FDlct 

Federal Deoosit Insurance Corooration 

550 17th Slreet NW, Washington. DC 20429 

Honorable Maxine Waters 

House of Representatives 

Washington, D.C. 20515 

Dear Congresswoman Waters: 

Office of legislative Mairs 

June 26, 2012 

This letter is in response to your request for information during the testimony ofBret Edwards, 

Director, Division of Resolutions and Receiverships, on May 16,2012, at the hearing entitled 

"Oversight of the Structured Transaction Program" before the Subcommittee on Oversight and 

Investigations of the House Financial Services Committee, 

At the hearing you asked for information on the participation of minority- and women-owned 

businesses in the structured transaction and related programs. Enclosed is a report prepared by 

the Federal Deposit Insurance Corporation's Division of Resolutions and Receiverships that 

provides the information you requested, 

We hope that this information is helpful. If you have further questions, please do not hesitate to 

contact me at 202-898-8730, or Ike Jones, Legislative Attorney and Advisor, at 202-898-3657. 

Enclosure 

cc: Honorable Randy Neugebauer 

Sincerely, 

Alice C. Goodman 

Acting Director 

Office of Legislative Affairs 

Chairman, Subcommittee on Oversight and Investigations 

Honorable Michael E, Capuano 

Ranking Member, Subcommittee on Oversight and Investigations 
245 


75733.204

Response to questions from the Honorable Maxine Waters 

by Bret Edwards, Director, Division of Resolutions and Receiverships 

Federal Deposit Insurance Corporation 

Participation of Minority- and Women-Owned Businesses in the FDIC's Structured 

Transaction Program 

Investor Pre-Oualification: 

General Prospective Bidder Pre-Qualification 

The FDIC initiated the structured transaction sales program in May 2008 and has entered into 32 

LLC transactions to date. Structured sales transactions are marketed only to individuals and 

companies that can attest to a minimum net worth and institutional investors that meet the 

definition of bank, savings and loan association, or other institution as defined by the Securities 

Act of 1933, broker dealers under the Securities Exchange Act of 1934, and investment 

companies, business development companies or private business development companies as 

defined by the Investment Company Act of 1940 or the Investment Advisors Act of 1940, as 

applicable. In addition, prospective investors must attest, represent, and warrant to additional 

criteria including their ability to evaluate and bear the risk associated with such transactions and 

also sign the Purchaser Eligibility Certification. If an entity attests to these requirements, contact 

information for the entity is sent to the financial advisor retained by the FDIC to conduct the 

sale. 

As of May 31, 2012,713 prospective bidders have been pre-qualified to receive information on 

security sales, including structured sales transactions. One hundred twenty-two minority- and 

women-owned (MWO) firms have been pre-qualified comprising 17 percent of the pre-qualified 

investors. 

Asian 

Black or African American 

Native Hawaiian or 

Other Pacific Islander: 

Hispanic/Latino 
246 


75733.205

Woman or Entity Woman Owned Y 33 

N 0 

Subtotal ·~.}!i!!k;., ,."" Claimed Minority I 

No Designation Provided 0 

Total MWOB Firms 

Transaction Specific Qualification 

All prospective bidders wishing to bid on a specific transaction, after performing due diligence, 

must be approved by the FDIC to bid on the transaction. In order to be approved, the prospective 

bidder must demonstrate adequate capital to close the transaction and have the ability to manage 

and service the assets in the structure. In many cases, bidders form consortia or ventures 

comprised of several capital investors together with firms that have the necessary skill sets to 

manage and dispose of the assets in the transaction. The complexity of the transactions and need 

for multiple sources of capital and expertise create opportunities for firms to create ventures to 

bid on the transactions. 

Tracking MWO Participation in Structured Transactions - 2010: 

Early transactions did not ask prospective investors to provide information on their status as a 

minority- or woman-owned business (MWOB). Beginning in May 2010, the FDIC's Division of 

Resolutions and Receiverships (ORR) began reporting on the status ofMWOB participation for 

individual transactions at key decision points: bidder qualification, bid submissions, and 

successful bids. In September 2010, ORR also began to collect MWOB information from 

investors, asset managers, and servieers pre-qualifying with ORR to receive announcements 

about upcoming structured transactions. 

In response to investor feedback on the prior transactions, in late 2010 the FDIC announced that 

it would offer structured sales transactions with loan pools that were more geographically 

focused and had smaller aggregate values than prior transactions. In fulfillment of this 

announcement, the FDIC created the Small Investor Program (SIP) Pilot Sale with loans of equal 

or better quality than the loans previously included in the multi bank structured loan sales to 

increase the opportunity for participation by diverse bidders or consortia of bidders. 

Structured Sales Program Awareness: 

During 2010 and early 2011, FDIC conducted outreach workshops for minority- and womenowned businesses and investors to educate firms on how to do business with FDIC and explore 

available opportunities. FDIC held eight workshops throughout the country. The FDIC sent out 

5,300 invitations that resulted in 887 RSVPs and 615 attendees at the workshops. The programs 

were designed to accurately reflect opportunities for contracting and participation in asset sales 

at the FDIC, including the SIP Pilot Program. Prior to the SIP sale, ORR and the FDIC's Office 

of Minority and Women Inclusion (OMWI) included information about the SIP pilot program in 

the workshops to give prospective investors, asset managers, and servicers more time and 

information to form investor groups capable of bidding on the sales. 
247 


75733.206

In addition to the workshops, DRR and OMWI follow-up regularly with MWOBs on an 

individual basis and attend conferences to help MWOBs, many of whom are smaller investors, 

understand the FDIC's programs. 

Investor Match Program - September 2011: 

As a result of feedback from the workshops, the FDIC launched the Investor Match Program 

(IMP) in September 2011 to encourage all firms interestcd in bidding on FDIC asset sales 

programs, especially minority and women-owned businesses, the ability to share information on 

their companies with other like-minded firms. The IMP is based on an automated platform that 

allows companies to network with each other so firms may form ventures to bid on FDIC asset 

sales programs. The FDIC benefits from use of the program by allowing investors, asset 

managers, and servicers the ability to communicate with each other in an effort to more 

effcctively compete in structured sales transactions. As of May 31, 201 I, 176 pre-qualified 

investors have registered to use IMP and 60 of the investors (34 percent of the users) are 

MWOBs. 

Minority and Women-Owned Participation in Structured Sales Transactions 

Transactional Overview - 2010 - 2011: 

The following information reviews the participation ofMWO entities in Structured Transactions 

in 20 I 0 and 20 II. Winning bidder teams that include a MWO component regardless of size are 

identified, along with the MWO category and the role in the investment team. It is important to 

note that the following information tracks marketing efforts for all structured sale transactions 

since April 2010. In certain cases, FDIC chose to award the sale on a cash basis when both cash 

and structured sales options were offered. In other cases, pools were allowed to be consolidated 

into one LLC when the same investor was the successful bidder on multiple pools. 

2010 

Of 13 structured sale auctions from April 2010 through December 2010, minority and 

women-owned businesses participated in 38 of 146 (26 percent) applications, 21 of71 (30 

percent) bids, and 7 of 13 1 (54 percent) winning bids. 

Ofthe 7 winning bids, 4 include minority investors, 2 include minority asset managers, and I 

includes a combination of minority- and woman-owned businesses as both lead bidder and 

asset manager. 

Minority 26 15 

Women 12 6 

Total Minority & Women 38 21 

Non-MWOB 108 50 

Total 146 71 

... Only counts an apphcatIOn once even though a bldder may quahfy and bJd multIple tImes . 

• * Represents a combination minority and wornan-owned business participation. 

1 Structured Transaction Sales may have no winning bids or mUltiple winning bids. 

6 

I" 

7 

6 

13 
248 


75733.207

Winning MWO Bidders: 

T;afi~a~li'bnJ ~:~~'f~~: ,,/ ~W(lin~g;]11dd~"*;2~1~ , ,".' ".i;:':l·jl;, 

2010-CRE-J Colony Capital Black or African Investor 

American Male 

20 10-CADC-1 Mariner RE Partners American Indian or Asset Manager 

Alaskan Native 

Male 

2010-RADC-I Marincr RE Partners American Indian or Asset Manager 

Alaskan Native 

Male 

2010-CRE-2 (SE Hudson Asian Female Lead Bidder, Asset 

Pool) Manager 

2010-CRE-2 (W Colony Capital Black or African Investor 

Pool) American Male 

20 I 0-CRE-2 (N Colony Capital Black or African Investor 

Pool) American Male ------

20 I 0-CfRADC-2 Colony Capital Black or African Investor 

__ ,--Americ_an Male 

2011 

DRR completed nine competitive marketing efforts for structured transactions which had bid 

dates in 2011 (2011-SIP-2 closed in January 2012), Statistics from these auctions follow: 

• Of9 structured sale auctions during 2011, minority and women-owned businesses 

participated in 33 of 102 (32 percent) applications, 25 of66 (38 percent) bids, and 5 of 10 (50 

percent) winning bids. 

Of the 5 winning bids, 3 include minority investors, I includes a minority as both lead bidder 

and asset manager, and I includes a combination of minority- and woman-owned business as 

both !cad bidder and asset manager. 

. '~1"'" ,.,,~roup!i?!··~.l-'\~ 10, :1j:~~~;1ii;Win~iDg\"'I~S,;I~,!:·i • 

Minority 17 I3 

Women 16 12 

-+,,,tal Minori~ & Women \-- 33 25 

Non-MWOB 69 41 

Total 102 66 

* Only counts an apphcatlOo once even though a bidder may quahty and bid mUltiple times. 

H Represents a combination minority and woman-owned business participation. 

4 

I" 

5 

5 

10 
249 


75733.208

Winning MWO Bidders: 

TralijactiO't("i' ,'" ,)Wj Winl:diiii'Bi(fdf.if';;~,,\ MWQ;Catl\gQrY,""), (,Rill;;?'"",; 'e" ''''!!!''~'i'\ 

201 I-SIP-I (CRE, Acorn (Oaktree) American Indian or Investor 

CADC) Alaskan Native 

Male ",---- ,---,-, 

201 I-SIP-I (RADC) Hudson Asian Female Lead Bidder, Asset 

Manager 

2011-ADC-1 Acorn (Oaktree) American Indian or Investor 

Alaskan Native 

Male 

201l-ADC-2 Oaktree Capital American Indian or Investor 

Alaskan Native 

Male 

2011-SIP-2 Mariner American Indian or Lead Bidder, Asset 

Alaskan Native Manager 

Male 
250 


75733.209

FDICi 

Federal DeDosit Insurance COfDoralion 

550 17th Street NW, Washington, DC 20429 

Honorable Lynn A. Westmoreland 

House of Representatives 

Washington, D,C. 20515 

Dear Congressman Westmoreland: 

Office of Legislative Affairs 

June 26, 2012 

This letter is in response to your request for information during the testimony of Bret Edwards, 

Director, Division of Resolutions and Receiverships, on May 16,2012, at the hearing entitled 

"Oversight of the Structured Transaction Program" before the Subcommittee on Oversight and 

Investigations of the House Financial Services Committee. 

You asked for examples of the Federal Deposit Insurance Corporation funding loan 

commitments on acquisition, development, and constructions loans since 2008. Since 2008, the 

FDIC as receiver has funded over 1, I 00 conunitments for approximately $396 million. Enclosed 

is a detailed report prepared by the Federal Deposit Insurance Corporation's Division of 

Resolutions and Receiverships for the hearing record. 

We hope that this information is helpful. If you have further questions, please do not hesitate to 

contact me at 202-898-8730, or Ike Jones, Legislative Attorney and Advisor, at 202-898-3657. 

Enclosure 

cc: Honorable Randy Neugebauer 

Sincerely, 

~ .. Alice C. Goodman 

Acting Director 

Office of Legislative Affairs 

Chainnan, Subcommittee on Oversight and Investigations 

Honorable Michael E. Capuano 

Ranking Member, Subcommittee on Oversight and Investigations 
251 


75733.210

Response to questions from the Honorable Lynn A. Westmoreland 

by Bret Edwards, Director, Division of Resolutions and Receiverships 

Federal Deposit Insurance Corporation 

FDIC Receivership Funding and Repudiation of Unfunded Loan Commitments 

As receiver for a failed institution, the Federal Deposit Insurance Corporation has a legal 

responsibility to maximize recovery for the benefit of depositors and creditors who may have lost 

money when the institution failed. In accordance with this responsibility, the FDIC must 

carefully analyze any requests for funding construction projects as well as evaluate the risks 

associated with the proposed transaction, to determine whether the funding will provide the best 

opportunity to achieve the highest possible recovery for the failed institution's estate. The 

FDIC's Division of Resolutions and Receiverships staff review each funding request on a "caseby-case" basis. If the advancement of funds for construction purposes will result in a net 

increase in the underlying collateral value or such funds will protect, preserve, or allow for buildout so that marketing of the real estate project can immediately begin, the FDIC as receiver may 

advance such funds. Since 2008, the FDIC as receiver has funded over I, I 00 commitments for 

approximately $396 million. Attached is a summary of the loan fundings by state. 

At times, the statutory responsibilities ofthe FDIC have a necessary yet unintended consequence 

of delaying funding of construction draws for builders and developers as our receivership staff 

determine the value and viability of the construction project as well as the companies who have 

pledged to repay those loans. In some instances, following a detailed review of the project plans, 

appraisals, and current financial information from the company and/or guarantors, the receiver 

will make the decision that continued funding of a project will not minimize losses nor maximize 

recovery for the receivership estate and thus, the receivership will terminate funding on 

construction projects. 

The overarching goal of the receiver is to wind up the affairs of the failed financial institution. 

In order to achieve that goal, the receiver is given the right under 12 U.S.C. Section 1821(e) to 

repudiate undertakings entered into by the failed financial institution where it finds such 

undertakings to be burdensome and where such repudiation will promote the orderly 

administration of the failed financial institutions affairs. 

Accordingly, our receivership management personnel work to achieve a balance between making 

financial decisions that are in the best interests of the receivership estate while being cognizant 

of business decisions that may have an adverse financial impact upon construction companies, 

real estate developers, and small business enterprises-and to those they employ. Immediately 

following the failure, the FDIC contacts the loan customers of the failed bank to stress the 

importance of establishing a banking relationship with a local financial institution that will be 

able to provide on-going traditional lending and financing. We are aware that at many locations 

around the nation, the depreciating real estate environment has made it exceptionally difficult for 

many failed bank customers and business owners in the construction industry to successfully 

transition their banking relationships in an effort to obtain new lending sources. Nevertheless, 

we must base our decisions regarding continued funding ofloans from a failed bank on our 

statutory duty to minimize losses and maximize recoveries for the failed bank receiverships. 

Attachment 
252 


75733.211

FDIC Receivershi 

Failed Financial Institution Fundin 

1 st Centennial Bank $3,635,453 

1 sl Heritage Bank $301,062 

1 st Nalional Bank of Nevada 185 $54,723,452 

Alpha Bank & Trust 8 $2,189,522 

AmeriBank 3 $349,455 

AmTrust Bank Cleveland 9 $14,543,336 

ANB Financial Bentonville 51 $20,030,895 

Bank of Clark County Vancouver 6 $1,681,439 

Bank of the Commonwealth Norfolk 1 $491,253 

Bank of Wyoming Thermopclis $50,000 

Barnes Banking Company Kaysville 1 $250,000 

Broadway Bank Chicago 2 $2,080,535 

Centennial Bank Ogden 1 $45 

Citizens Community Bank Ridgewood 1 $21,070 

Colonial Bank Montgomery 78 $2,974,274 

Columbian Bank & Trust Topeka 6 $2,316,995 

Community Bank of Nevada Las Vegas $147,568 

Community Bank of West Georgia Villa Rica 3 $794,628 

Corn Belt Bank & Trust Pitlsfield 1 $53,593 

eorus Bank Chicago 10 $15,212,201 

First Bank of Beverly Hills Calabasas 41 $16,404,157 

First Bank of Idaho Ketchum 7 $461,824 

First Georgia Community Bank Jackson 2 $27,000 

First Integrity Bank Staples 1 $28,691 

FirstCity Bank Stockbridge 32 $2,443,255 

Florida Community Bank Immokalee 3 $205,427 

Franklin Bank SSB Houston 148 $27,051,080 

Freedom Bank Bradenton FL 1 $49,598 

Haven Trust Bank Duluth GA 24 $14,981,926 

Home Savings of America Litlle Falls MN 96 $21,281,615 

Independent Bankers Bank Springfield IL 6 $2,888,111 

IndyMac Federal Bank FSB Pasadena CA 2 $30,994 

Integrity Bank Alpharetla GA 2 $402,201 

Irwin Union Bank & Trust Columbus IN $6,055 

La Jolla Bank FSB La Jolla CA 2 $46,950 

MagnetBank Salt Lake City UT 3 $118,882 

Main Street Bank Northville MI 9 $876,068 

Miami Valley Bank Lakeview OH $24,095 

Netbank Alpharetla GA 2 $154,000 

New Frontier Bank Greeley CO 7 $255,039 

Ocala National Bank Ocala FL $85,093 

Republic Federal Bank Miami FL 1 $115,971 

Riverside Bank of the Gulf Coast Cape Coral FL 6 $368,043 

RockBridge Commercial Bank Atlanta GA 2 $591,194 

Sanderson State Bank Sanderson TX 1 $62,000 

Security Pacific Bank Los Angeles CA 3 $767,367 

Security Savings Bank Henderson NV 7 $9,930,143 

Silver State Bank Henderson NV 32 $10,783,105 

Silverton Bank Atlanta GA 151 $158,302,965 

Tennessee Commerce Bank Franklin TN 2 $255,697 

The Bank of Bonifay Bonifay FL 3 $43,635 

The Community Bank Loganville GA 7 $1,174,130 

Union Bank Gilbert AZ 2 $393,260 

Warren Bank Warren MI 8 $1,916,013 

Westsound Bank Bremerton WA 16 $1,767,822 

Grand Total 1011 $396,140,184 
253 


75733.212

Response to questions from the Honorable Lynn Westmoreland 

by Bret D. Edwards, Director, Division of Resolutions and Receiverships, 

Federal Deposit Insurance Corporation 

Ql: Has the FDIC established a taskforce of independent experts to evaluate and submit 

recommendations on the high number of bank failures? 

AI: Certain internal and external groups are reviewing aspects of the recent banking crisis and 

have made or will make recommendations to the FDIC regarding changes to policies, programs, 

and deposit insurance. 

As of the end of June 2012, the FDIC's Office ofInspector General (OIG) had completed 96 

Material Loss Reviews (MLR), II in-depth reviews, and 141 failed bank reviews as required by 

statute. In addition to those efforts, in May 2009, the OIG issued an internal memorandum that 

outlined the major causes, trends, and common characteristics of FDIC-supervised financial 

institution failures that had resulted in a material loss to the DIF. That memorandum, in part, 

prompted the FDIC to make a number of process changes to its supervision program in order to 

more quickly identify potential issues in banks at risk of deterioration. In December 20 I 0, the 

OIG published the results of an audit that identified (I) the actions that the FDIC had taken to 

enhance its supervision program since the May 2009 memorandum, and (2) trends and issues 

that had emerged from subsequent MLRs. The OIG's report stated that the FDIC had either 

implemented or planned actions that substantially addressed its previously reported MLR-related 

trends and issues and that would enhance the FDIC's supervision program. The report included 

additional recommendations, which the FDIC's Division of Risk Management Supervision 

agreed to implement. 

The OIG also has embarked on a comprehensive study of bank failures in accordance with Pub. 

L. No. 112-88, which requires the study of bank failures and the effects of shared-loss 

agreements; examination policies associated with troubled loans, appraisals, capital, and 

enforcement orders; and capital investment policies. The legislation also requires the 

Government Accountability Office to study the causes of bank failures since 2008, as well as 

similar topics that the OIG is addressing. 

Pursuant to the recommendations of a study of Prompt Corrective Action (PCA) by the banking 

agencies' Inspectors General, FDIC staff is exploring the feasibility of incorporating non-capital 

triggers into the PCA framework. We also are studying how various risk factors should affect 

deposit insurance premiums. The FDIC's large insured depository institution assessment system 

was revised in April 20 II to better differentiate for risk and to better take into account losses the 

FDIC may incur should a large institution fail. Similarly, staff is evaluating the small bank 

deposit insurance a~sessment system to determine if changes are needed to account for risk 

taking observed in the majority of smaller institutions that have failed in recent years. 

In a related area, the FDIC is conducting a comprehensive study of the future of community 

banking. The study will review the last 25 years and address a variety of issues related to 
254 


75733.213

community banks, including their evolution, characteristics, performance, challenges, and role in 

supporting local communities. More infonnation on these studies will be available later this 

year. 

Finally, the FDIC established the Advisory Committee on Community Banking in May 2009 to 

provide the FDIC with advice and guidance on a broad range of critical policy issues impacting 

small community banks, as well as the local communities they serve. The Advisory Committee, 

which is composed of a cross-section of community bankers from across the country, has 

discussed issues related to the financial crisis, the bank resolution process, and the impact of the 

Dodd-Frank Act on community banks. 

o