SONOMA — The Federal Deposit Insurance Corp. is seeking more than $12 million from three former officers and directors of the failed Sonoma Valley Bank, claiming in a lawsuit that those individuals knowingly approved millions in risky loans connected to a single borrower in the years leading to the bank’s collapse.
The suit claims that former president and one-time CEO Melvin Switzer, former chief lending officer and CEO Sean Cutting and former vice president and loan officer Brian Melland knowingly acted in violation of both the bank’s internal standards and state regulations for loan concentration in approving 11 transactions in the period between Dec. 20, 2006 and Dec. 17, 2008.
Attempts to reach the defendants were not immediately successful. Attorneys representing the FDIC declined to comment.
The loans in question, reportedly leading to over $12 million in losses, were each made to entities in which the single borrower had a direct financial stake, according to the suit. While the suit does not identify the borrower, other legal filings for his associated entities name him as North Bay developer Bijan Madjlessi. Mr. Madjlessi is not named in the FDIC suit.
The suit claims that the bank markedly grew its commercial real estate portfolio in the years between 2005 and 2008. By 2008, commercial real estate loans accounted for 451 percent of the bank’s risk-based capital.
The loans involved in the suit allegedly violated both the bank’s own internal policies and California’s statutory limit for loan concentration to a single borrower, according to the suit. That limit is defined as 25 percent of the sum of shareholders’ equity, allowance for loan losses, capital notes and debentures.
The loans also involved “stale or inadequate appraisals, excessive LTV (loan to value) ratios, lending to individuals or limited liability companies already heavily burdened by existing debt and with insufficient liquidity to repay the loans, lending to borrowers with little or no equity invested in the financed project, lending on projects outside the bank’s primary service area of the Sonoma Valley” and “inadequate analysis of borrower or guarantor global cash flows,” according to the legal filing.
Concentration grows for single borrower
The suit connects those 11 transactions to three real estate projects and a personal loan.
The first loans involved a project known as Park Lane Villas in Santa Rosa, where the bank allegedly made “extraordinary assumptions” about the completion of construction and provided “substantial sums of unrestricted cash” over the course of various loan modifications. With the first loan in 2006, the two loans and line of credit to the project totaled $6.7455 million, exceeding the bank’s in-house lending limit to one borrower and ultimately resulting in reported losses of more than $4 million, according to the lawsuit.
The second group described in the suit involved six successive loans of $1.86 million each to multiple entities connected to six apartment buildings in a Petaluma low-income apartment complex, a property that the borrower planned for conversion to condominiums and ultimate sale, according to the document.
The suit alleges that bank officers were aware that the borrower would receive economic benefit from those loans to various “Petaluma Greenbriar Investments” entities — increasing the loan concentration — and that the city had not actually approved the conversion at the time those loans were approved. Each loan resulted in “broker fees” and other payments leading to approximately $3.2 million in unrestricted cash payments.
The conversions never occurred, and the bank reportedly charged off $1 million for each of the six loans. The decline in value for property securing those loans had resulted in a loan-to-value of 103 percent as of Jan. 21, 2009, following what the FDIC alleges was an insufficient appraisal for that property.
A $1.25 million personal loan, with a stated purpose of providing cash to the borrower and paying down principal amounts connected to the Park Lane Villas project, was also ultimately charged off in its entirety. The suit alleges that providing second position trust deeds on two of the Petaluma Greenbriar buildings as collateral “was effectively worthless in light of existing first position mortgage liens on the buildings.” The suit adds, “This was essentially an unsecured loan to a borrower who lacked to funds to repay the loan, and to whom defendants had already loaned an excessive amount of the bank’s money.”
A final $2.45 million loan to Cardoso Consulting was meant to purchase an undeveloped parcel near the Park Lane Villas project, according to the filing. The bank exceeded its own loan-to-value standards for raw land loans in that case, and charged off $1.41 million of the loan.
Latest step after 2010 collapse
The suit describes how all three defendants had a direct role in approving each loan, and requests a trial to determine the precise losses it suffered as receiver of Sonoma Valley Bank. Mr. Melland filed for bankruptcy in 2011, and the FDIC wrote that it claimed to seek related damages through an applicable “Directors and Officers Liability insurance policy.”
It is the latest step following the failure of Sonoma-based Sonoma Valley Bank, which opened as a subsidiary of Napa Valley Bancorp in 1988 and became an independent bank in 1993.
Operated under Sonoma Valley Bancorp since 2000, the three-branch bank reported $337 million in assets and was publicly traded on Nasdaq before its FDIC-assisted acquisition by Westamerica Bank on Aug. 20, 2010. The FDIC in January issued an order barring Mr. Cutting and Mr. Melland from ever again working at an FDIC-insured institution, imposing a fine of $10,000 for Mr. Cutting and $2,500 for Mr. Mellan.
Attorneys representing the FDIC filed the most recent legal action in San Francisco’s ninth-district federal court on Aug. 1. No trial date has been set for the case, with a first court date currently scheduled for Nov. 21.
After acting as receiver of a failed institution, the FDIC has legal authority “maximize recoveries” by suing individuals who played a role in an institution’s failure. The authority extends to individuals both inside and outside of the bank’s employment. The FDIC estimated a $10.1 million cost to its deposit insurance fund at the time of the seizure of Sonoma Valley Bank.
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