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.
View a copy of the complaint here.
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.