EFFORTS by Anglo Irish Bank to recoup €8.5m it loaned to its former chief executive David Drumm were thrown into chaos last night.
At a creditors meeting hearing in Boston, where Mr Drumm is filing for bankruptcy, the official overseeing the process described the loans as "fraudulent" and claimed Mr Drumm should not owe any money to his former employers.
Anglo loaned Mr Drumm the cash to buy shares in the bank, but the bank later changed the conditions, making the borrowings recourse instead of non-recourse loans.
Bankruptcy trustee Kathleen Dwyer said in doing so Anglo had reneged on an initial agreement and behaved in a fraudulent manner.
If the US courts agree with Ms Dwyer's assessment, it will mean Anglo will only be able to pursue him for the collateral, the shares bought with the loans.
But these shares are now worthless after the bank was nationalised.
Ms Dwyer also said she believed Mr Drumm had a valid case to sue Anglo for €2.6m for mental distress, harassment, termination of his employment and loss of bonuses.
The bombshell claims are being disputed by the bank, which yesterday sought to have Ms Dwyer removed as trustee.
Anglo, as Mr Drumm's largest creditor, sought the election of an alternate trustee, Michael Epstein of CRG Partners.
However, Mr Epstein's appointment was not ratified and will now have to be decided upon by a judge.
In the meantime, Ms Dwyer is to continue acting as trustee and a further hearing is scheduled to take place next month. Larry Murphy, counsel for Ms Dwyer, said the Anglo loans to Mr Drumm amounted to "a fraudulent transfer action".
"The trustee has come to the position that the claims by Anglo Irish Bank are not allowable," he said. He added that Anglo had "a materially adverse" interest and should not be allowed install its own trustee.
Mr Drumm arrived at yesterday's hearing at the John W McCormack Courthouse in Boston's financial district flanked by lawyers and refused to answer questions from journalists.
"I am not going to comment to the media at all today," he said.
Anglo has questioned the accuracy of the information and is to seek permission from a judge to interview Mr Drumm under oath about his finances and investments.
The former executive fled to Massachusetts after resigning from Anglo in December 2008 following the disclosure that chairman Sean FitzPatrick had been hiding up to €100m in loans from shareholders. He filed for bankruptcy last month with liabilities of €10.26m.
Yesterday's dramatic developments have now set the scene for a legal wrangle which is likely to continue well into the new year.
In court filings, Ms Dwyer said Mr Drumm does not owe Anglo Irish Bank one cent because it "induced" him to change the terms of his loans, resulting in his bankruptcy.
She said Anglo "reneged on its agreement to limit its recourse" to loans it extended to its former chief executive to buy shares in the bank.
Ms Dwyer also claimed that senior officers of Anglo were "mandated" to buy shares by Mr FitzPatrick, who required executive directors of the bank to buy the bank's stock or exercise stock options "in an effort to prop up the bank".
To facilitate this alleged prop up, Ms Dwyer said Anglo agreed to provide loans to its senior officers to "finance their mandated purchases".
Last night, sources close to the proceedings said Anglo officials were "staggered" by the claim that it had fraudulently forced Drumm to convert his loans.
Ms Dwyer accused Anglo of "wrongful conduct".
Mr Drumm obtained a loan of €7.65m in January 2008 to buy shares in Anglo and the loan was offered on a non-recourse basis.
This meant that if Mr Drumm defaulted on the loan, the bank's only security was its own shares and he could not be personally pursued for the debt.
A second, recourse loan was executed in January 2009, just weeks before the bank was taken into state ownership. This second loan was a recourse facility, allowing the bank to move personally against Mr Drumm.
Meanwhile, Mr Drumm also filed papers yesterday seeking to make two properties he co-owns exempt from bankruptcy proceedings.
In the filings he said he did not want to surrender two homes he co-owns in Ireland and the US despite owing €1.1m on both properties.
Instead, Mr Drumm has applied for court approval to allow him to reaffirm loans on both houses, meaning he would pledge to clear the debt outside of bankruptcy proceedings.
In a court filing he said he would sell his $4.6m (€3.4m) mansion in Chatham, Cape Cod to repay over $1.1m (€850,000) owed to the Cape Cod Five Cents Bank.
However, the filing did not explain how he would repay €250,000 owed to KBC Homeloans for a house he co-owns in Skerries, Co Dublin, which is valued at over €320,000.