|Founder of Mortgage Unit Sues Bank for $28 Mil Over Firing
John Gallagher says wasn’t responsible for compliance problems at East West
December 3, 2004
|What looks to be a bitter and expensive legal fight over control of a mortgage company and its Internet unit has broken out in Massachusetts.John F. Gallagher, the founder and former CEO of 1-800-East-West Mortgage Company Inc. and ISoldMyHouse.com, is seeking $28 million in compensation from the bank that fired him from his job overseeing the mortgage companies.
The suit was filed in Lawrence Superior Court in Lawrence, Mass. Gallagher and his wife Susan Gilmore, who also worked for the company, say they are owed $28 million under the original contract they signed when their company was sold to Commerce Bank & Trust of Worcester, Mass., in 2000, a court docket shows.
Gallagher could not be reached to comment, but he reportedly told the Worcester Telegram & Gazette that his firing was a “desperate” move by a bank facing problems from state regulators.
“Trying to blame me for compliance problems the bank has is ridiculous,” Gallagher reportedly told the paper. “Compliance was not my responsibility.”
Commerce Bank officials did not return phone calls to comment. Instead, the bank issued a written statement saying Gallagher was fired over his performance and that the bank wanted to head in a new direction with its mortgage division.
But documents indicate that federal and state regulators have ordered Commerce to make changes at the mortgage units.
The Massachusetts Division of Banks and the Federal Deposit Insurance Corp. (FDIC) issued a ruling earlier this year that said the bank and East-West Mortgage “have engaged in unsafe or unsound practices and have committed violations of laws and/or regulations,” according to a written copy of the ruling.
The state issued a cease and desist order after it determined East-West was charging customers excessive fees and violating rules on mortgage locks and other lending provisions.
In addition to being told to change its internal practices and procedures regulators also ordered the company to make significant management changes.
“East-West, with the approval of the bank’s board of directors, shall have and retain qualified management to administer the operations of East-West,” according to a copy of the cease and desist order.
“East-West shall…begin a search for qualified management to administer the operations of East-West,” the order stipulated. “At a minimum, management shall (hire)…a chief executive with proven ability in managing a mortgage lender of comparable size and in effectively implementing lending, investment, and operating policies in accordance with sound lending practices.”
The bank did not say that Gallagher’s firing was related directly to the order, and Gallagher has maintained he is being made a scapegoat.
But the bank has told regulators it will comply with the order and make the mandated changes.
Other top executives were also forced out at the bank in recent months, including the CEO and CFO.
Gallagher was not only the founder of the mortgage company, but he also appeared in its radio ads. He reportedly has been trying to buy the company back, though no deal has been announced.
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