Alert April 23, 2013

FDIC Files Complaint Against Former Senior Officers of Failed Bank Who Allegedly Ignored Both FDIC Lending Regulatory Requirements and Repeated Regulatory Criticisms

On April 15, 2013 the FDIC filed a complaint in the U.S. District Court for the Western District of Washington against two former senior officers of the failed City Bank, a Washington State-chartered bank (the “Bank”), alleging that the officers breached their fiduciary duties to the Bank and negligently and grossly negligently violated prudent, safe and sound lending practices, FDIC lending regulations and the Bank’s lending policies.  The FDIC alleged that the Bank suffered damages of at least $41 million as a result of the actions of the officers.  The two defendant officers were the former President and the former Executive Vice President/  Construction Loan Department of the Bank.

The FDIC alleges that the Bank operated with a concentration in commercial real estate (and particularly acquisition, development and construction) loans that was far in excess of FDIC regulatory limits and far greater than the levels of such loans maintained by its peer banks.  The FDIC’s complaint emphasizes that the FDIC and the Washington Department of Financial Institutions criticized the Bank for its inadequate loan risk management practices and various other safety and soundness and regulatory weaknesses on as many as six consecutive examination reports.  The FDIC’s complaint alleges that the officers intentionally disregarded FDIC loan regulatory requirements, and the FDIC states in its complaint that

“Rather than exercising caution as they plunged the Bank deeper and deeper into [acquisition, development, and construction] lending, [the officers] instead relied upon informal and autocratic procedures to approve loans.”

The FDIC’s complaint also provides details concerning the relatively high levels of remuneration awarded to the officers as the condition of the Bank deteriorated and describes in detail the specific loans criticized by the FDIC.

FDIC as Receiver for City Bank vs. Conrad D. Hanson and Christopher B. Sheehan, U.S.D.C., W.D. Wash., No. 2:13-CV-00671.