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Builder Aided DiFrancesco In Land Deal

Originally appeared in The New York Times on Thursday, March 1, 2001

TRENTON, Feb. 28
Five years ago, one of New Jersey's largest home builders provided $225,000 to Donald T. DiFrancesco, the State Senate president, to pay off an outstanding legal judgment, court records show. Mr. DiFrancesco, who also became acting governor of New Jersey a month ago, has never repaid the money and says he does not think it is his responsibility to do so.

The payment to Mr. DiFrancesco was part of a complicated, unsuccessful real estate venture surrounding a small vacant property in his hometown, Scotch Plains, that his relatives have been trying to develop commercially for at least 14 years.

Mr. DiFrancesco used the $225,000 to pay off a former friend who had successfully sued him, his brother Paul and his cousin Ernest DiFrancesco over a long-unpaid loan for the Scotch Plains project.

All three men were liable for the debt. But Mr. DiFrancesco says he was only the lawyer for his relatives when they borrowed the money from his friend, so the payment from the home builder was really a loan to his relatives, not to him.

The home builder, the K. Hovnanian Companies, tried to collect from Mr. DiFrancesco's relatives, but gave up after they sought bankruptcy protection.

Hovnanian says it is no longer seeking to collect the money.

Mr. DiFrancesco said there was nothing improper about accepting such a large amount from a builder that has business interests across New Jersey and frequently needs legislative or regulatory approval. He said the money never influenced his decisions on land use or other government matters.

The payment was revealed in a state foreclosure proceeding in 1997 but has not been reviewed by state authorities. A spokesman for the state attorney general's office declined to comment without having reviewed the details of the transaction. After inquiries from reporters, Mr. DiFrancesco's aides tonight hastily released numerous documents detailing the transaction.

The $225,000 payment is detailed in voluminous federal and state court records surrounding the Scotch Plains property. Legal papers and interviews with the participants depict Mr. DiFrancesco as caught in a tangle of conflicting business, political, personal and familial relationships. At best, he appears to have tried mightily to satisfy all those who made demands on him.

But in doing so, the court records show, Mr. DiFrancesco angered Scotch Plains officials, alienated friends and opened himself to questions about his ethics as a lawyer.

One of Mr. DiFrancesco's close friends sued him for legal malpractice, and after Mr. DiFrancesco failed to defend himself in court, won a judgment of more than $500,000.

And at a time when Mr. DiFrancesco was employed as Scotch Plains's township attorney -- a job he held from 1983 until 1998 -- he filed an affidavit intimating that Scotch Plains had acted in bad faith in foreclosing on property his relatives owned, but on which they had not paid the taxes for years. In other words, he sided with his relatives against his client, the township.

In an interview tonight, Acting Governor DiFrancesco said he regretted filing the affidavit, which he said he did at the urging of his relatives' lawyer and some town officials. He later withdrew the affidavit. "But I don't believe it was unethical, or in any way adverse to the township's interests," he said.

The roots of the transaction between Mr. DiFrancesco and Hovnanian date back to 1987, when his brother Paul M. DiFrancesco Jr. and their cousin Ernest DiFrancesco sought his help in raising money to develop condominiums on property in a quiet section of Scotch Plains, a stone's throw from a public golf course. The two men first needed money to assemble the site from several parcels.

At his relatives' request, according to court records, Mr. DiFrancesco asked Dr. George W. Scott, an orthodontist and occasional real estate investor, to lend $200,000 to Paul and Ernest. Mr. DiFrancesco and Dr. Scott were onetime neighbors who remained good friends: Mr. DiFrancesco was godfather to Dr. Scott's daughter, and Mr. DiFrancesco was Dr. Scott's lawyer in other real estate investments.

"Don asked me if I would do Paul a favor," Dr. Scott said in an interview. "There were these lots he wanted to pull together, and he needed the money instantly."

Unsure whether Paul and Ernest DiFrancesco had the expertise to pull off the deal, Dr. Scott said he told Donald DiFrancesco to "protect me to the hilt." Promised an unusually high interest rate of 25 percent per year, Dr. Scott agreed to lend the money; in exchange, he eventually received a lien against 2435 Plainfield Avenue, one parcel the DiFrancescos were hoping to develop.

According to court records, Dr. Scott received interest payments until late 1989, when the DiFrancescos stopped paying. After Donald DiFrancesco stopped taking Dr. Scott's calls, Dr. Scott's legal papers say, he hired another lawyer and sued Donald, Paul and Ernest DiFrancesco in 1992. Donald DiFrancesco, meanwhile, was elected president of the Senate in January 1992 after Republicans regained control of the Legislature.

In his 1992 lawsuit, Dr. Scott accused Donald DiFrancesco of legal malpractice. Among other things, he claimed that Mr. DiFrancesco had assured him that there was no conflict of interest in Mr. DiFrancesco's representing both his relatives and Dr. Scott; had misled Dr. Scott about the risks involved in lending the money and the value of his collateral; and had failed to record a mortgage given to Dr. Scott at the time he lent the $200,000.

In a recent interview, Dr. Scott dissociated himself from his own lawsuit, to a degree. He said that he did not read it, that he only sued Donald DiFrancesco because he believed that neither of the other DiFrancescos would ever repay him, and that he alleged malpractice only because he thought Mr. DiFrancesco's legal malpractice insurance would cover his claim.

"It wasn't like Don was going to profit by this," he added.

Dr. Scott said that he would vote for Mr. DiFrancesco, who is the leading Republican candidate in this year's election for governor. "I don't like to see Don painted black in front of the state," he said.

The lawsuit was quickly settled; Mr. DiFrancesco and his two relatives agreed to pay Dr. Scott what he was owed. But they did not, and the settlement amount grew with interest. In January 1995, Dr. Scott obtained a legal judgment in State Superior Court in Monmouth County against Donald DiFrancesco and his two relatives for $553,360.

Donald DiFrancesco would finally settle his and his relatives' debts to Dr. Scott by paying the orthodontist $225,000 in April 1996, according to court records. Dr. Scott agreed to accept that as full payment. The story of how he came up with the money is detailed in a separate series of lawsuits and bankruptcy cases concerning the Plainfield Avenue property.

Paul and Ernest DiFrancesco originally hoped to build single-family condominiums on the site in solidly middle-class Scotch Plains. But the project ground to a standstill in 1989 as the real estate market went into free fall, they explained in later court filings. In 1990, the two men stopped paying property taxes on 2435 Plainfield Avenue, the largest of the group of parcels that made up the project site; the town moved to collect $984 in back taxes.

By 1994, the DiFrancescos were once again marketing the property, but now as a potential shopping center. In May 1995, the Town Council, controlled by Republicans, retained a local Democratic lawyer, Lewis M. Markowitz, as special counsel to represent Scotch Plains with the project, to ensure against a conflict of interest with Donald DiFrancesco, the longtime township attorney. In June, Mr. Markowitz later said in court papers, he met with Mr. DiFrancesco and advised him to have nothing to do with the property and to have his relatives pay the outstanding real estate taxes.

That summer, a supermarket chain applied to have the site rezoned. But residents concerned about traffic packed a public meeting and persuaded town officials to reject the application.

The unpaid property tax bill kept growing. And in October 1995, the town began foreclosure proceedings.

Nonetheless, that December, Ernest and Paul DiFrancesco asked the town to change the zoning on the property for a new residential developer: the K. Hovnanian Companies, which wanted to build 56 duplex condominiums. Hovnanian said in court filings that it contracted to buy the site from Ernest DiFrancesco and his related companies in January 1996. It pursued and won rezoning from the Town Council that May.

In April 1996, meanwhile, Donald DiFrancesco used $225,000 he had borrowed from a law partner, John Coley, to pay off Dr. Scott. In a telephone interview today, Paul DiFrancesco said Donald DiFrancesco personally solicited Hovnanian executives to reimburse him.

The idea, according to the DiFrancescos, was for Hovnanian to treat its $225,000 reimbursement of Mr. DiFrancesco as a down payment on its purchase price of the property owned by Ernest and Paul DiFrancesco. Indeed, in exchange for the money from Hovnanian, Donald DiFrancesco assigned the company a mortgage he had obtained from Dr. Scott as part of the settlement.

"Donnie pays off the lien, then he goes to Hovnanian," Paul DiFrancesco recalled. "I'm at this meeting. He says, 'The property's been rezoned, you're going to close. If I had to borrow this money, would you pay us back?' Hovnanian says yes."

Acting Governor DiFrancesco denied tonight that he had any role in asking Hovnanian to reimburse him for his payment to Dr. Scott. He said he had no idea why his brother would say that he had.

In any case, neither the DiFrancescos nor Hovnanian paid the property taxes.

The town, meanwhile, proceeded with foreclosure, despite pressure from Paul and Ernest DiFrancesco to stop. A lawyer handling the foreclosure for the town, Carmen E. Mendiola, said in a sworn statement that she received calls from both Paul and Ernest DiFrancesco in the summer and fall of 1996, reminding her that they were related to Donald DiFrancesco. Ms. Mendiola said Ernest DiFrancesco called her in October 1996 and warned of "severe consequences," saying "he would take this up with his cousin."

Nonetheless, in November 1996, the town completed foreclosure and took title to 2435 Plainfield Avenue. The move rendered the Hovnanian project untenable.

In January 1997, Ernest DiFrancesco began the first of several legal attempts to undo the foreclosure by suing the township of Scotch Plains. He accused the township of proceeding with the foreclosure in secret and in bad faith, even while they led the DiFrancescos and Hovnanian to believe that the township was supportive of the development. He also accused the township of failing to notify him of the foreclosure as quickly as required by law.

In a sworn statement filed Jan. 16, 1997, Donald DiFrancesco wrote that he had reviewed his cousin Ernest's affidavit, adding, "I am concerned about the issues of good faith and fair dealing and the failure to serve the notices within seven days."

Mr. Markowitz replied that Mr. DiFrancesco, the township attorney, had thus "taken a position adverse to the client he represents."

In defending the foreclosure, Mr. Markowitz repeatedly implied that the DiFrancescos had sought special treatment. "The township has an obligation to all of its 22,000 taxpayers, not just the DiFrancescos," he wrote in a February 1997 affidavit.

Mr. Markowitz added, "Nowhere does anyone explain why Hovnanian paid in excess of $200,000 to Donald DiFrancesco but yet did not pay the outstanding taxes in the approximate amount of $85,000."

The township prevailed in Superior Court in March 1997; the Appellate Division affirmed that decision in November 1999. In February 1998, 2435 Plainfield Avenue Inc., Ernest DiFrancesco's company, sought Chapter 11 protection from its creditors in United States Bankruptcy Court. There it tried again to overturn the foreclosure. When that failed, it appealed to the United States Court of Appeals for the Third Circuit, which again rejected the attempt in a March 2000 ruling.

K. Hovnanian sought to recover its $225,000 in Bankruptcy Court, the company said in a statement, but was unable to do so: "At that point, with no other legal remedies, K. Hovnanian made a business decision to move on to other opportunities."

GRAPHIC: Photos: Acting Gov. Donald T. DiFrancesco of New Jersey at a Camden hearing yesterday. He said a payment from a home builder was not improper. (Timothy M. Shaffer for The New York Times); The site in Scotch Plains, N.J., that the acting governor's family has been trying to develop for 14 years. A home builder provided $225,000 so that the DiFrancescos could pay off an outstanding legal judgment. (Keith Meyers/The New York Times)(pg. B5)

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