January 21, 2011
Authored by: Bard Brockman
On January 14, 2010, the FDIC filed its fourth lawsuit against former directors and officers of a failed financial institution. The defendants in this action are the former directors and the former VP of Real Estate Construction for 1st Centennial Bank (Redlands, Cal.), which was put into receivership on January 23, 2009.
The FDIC’s complaint asserts state law claims for negligence, breach of fiduciary duty, and breach of the directors’ duty to supervise. It also asserts a claim under FIRREA for gross negligence. The complaint focuses on 16 specific loan losses, and it seeks damages in the minimum amount of $26.8 million flowing from those bad loans.
The crux of the FDIC’s lawsuit is that the 1st Centennial defendants “recklessly implemented an unsustainable business model pursuing rapid asset growth concentrated in high-risk loans in commercial real estate without having adequate credit administration and loan underwriting policies and practices to manage the risk.” Even after the local real estate market had softened significantly, the FDIC alleged, the defendants did not take steps to curtail the bank’s lending , carefully monitor the existing loan portfolio, or seek to minimize loan losses. By the end of 2008, the percentage of Acquisition, Development and Construction loans to total capital had increased to 1,264%, more than ten times the regulatory guidance.
Another central theme of the FDIC’s lawsuit is that the bank’s CEO, Chief Credit Officer and VP of Real Estate Construction were all unqualified to carry out their duties and responsibilities to the bank. This does not necessarily present the other director defendants with a defense, however, as the FDIC has specifically alleged the board did not adequately supervise the bank’s management.