June 25, 2012
Authored by: Bard Brockman
The latest drama from Beverly Hills is not a revival of Beverly Hills 90210 or a sequel to Beverly Hills Cop, but rather a 42-page complaint filed against the former directors and officers of First Bank of Beverly Hills (“FBBH” or the “Bank”). FBBH was closed and put into receivership on April 24, 2009. The FDIC’s lawsuit was filed on April 20, 2012, just days before the expiration of the three-year limitations period. For a copy of the FDIC’s complaint, click here.
According to the complaint, the director and officer defendants pursued an “unsustainable business model” focused on rapid asset growth through the extension of high-risk CRE and ADC loans. At the same time, the FDIC alleges, the defendants were weakening the Bank’s capital position by approving large quarterly dividend payments (based on “false profits” from problematic loans) to the Bank’s parent corporation, in which many of the defendants were shareholders.
A common refrain throughout the FDIC’s suit is the defendants’ alleged “willful disregard” of the Bank’s own Loan Policy. For example, the defendants approved two loans that were in violation of the Loan Policy’s prohibition against loans for construction projects with “difficult topography.” One loan was for a project that ultimately failed because it sat directly atop the San Andreas Fault. And the second loan was for a project that failed because the vast majority of the land was ultimately deemed undevelopable due to the Endangered Species Act.
The FDIC’s harshest criticisms are directed at the defendants’ approval of seven large participation loans. For all but one of those loans, FBBH took a majority of the participation (up to 90%) but relinquished the lead lender status to another participant bank. In several instances, the lead lender acted unilaterally and increased the risk of loan failure, all to FBBH’s detriment. Furthermore, the FDIC alleges that the defendants “willfully ignored” the Loan Policy’s requirement that FBBH perform its own independent due diligence and underwriting on participation loans, and instead relied on the due diligence of the originating lender.
The complaint asserts state law claims for negligence and fiduciary breach, and a claim for gross negligence under FIRREA. In total, the FDIC seeks to recover losses of at least $100.6 million attributable to just nine (9) failed loans approved by the director and officer defendants.