Former officers and directors of First Centennial Bank were sued for negligence by the Federal Deposit Insurance Corp., which said it had to pay $163 million to depositors after the bank failed in January 2009.
The Redlands, California-based bank fueled its growth from 2003 through 2007 by issuing “risky” acquisition, development and construction loans in commercial real estate, the FDIC said in a complaint filed Jan. 14 in Los Angeles federal court. The loans, for “non-diverse projects” in a concentrated geographical area, left the bank vulnerable to a downturn, the FDIC said.
“During calendar year 2007, when the real estate market was obviously cooling nationwide, and particularly in the Inland Empire area of California, defendants, in reckless abandon of their duty to engage in safe and sound bank practices, increased” the acquisition, development and construction loans from 292 percent to 383 percent of total capital, the FDIC said.
By December 2008, the acquisition, development and construction loans were 1,264 percent of total capital, exceeding the regulatory limit of 100 percent by more than 10 times, the FDIC said.
“The FDIC’s claims are unfounded, unfair and based solely on hindsight,” lawyers Dan Marmalefsky and Mark McDonald, representing the 14 officers and directors, said in an e-mailed statement. “Just as the FDIC and numerous sophisticated market participants failed accurately to forecast the extent of the housing crash, so too were the directors and officers of 1st Centennial unable to predict the unprecedented plunge in housing prices in the Inland Empire that led to the Bank’s failure.”
The bank, with $803.3 million in assets and $676.9 million in deposits, was shut by the California Department of Financial Institutions and the FDIC was named receiver in January 2009. First California Bank would assume the deposits and take over First Centennial’s six offices, the FDIC said at the time.
Robert Jaffe, an outside spokesman for First California, said the lender declined to comment.
As of October of last year, the FDIC had authorized lawsuits against more than 50 officers and directors of failed banks as the agency aims to recoup more than $1 billion in losses stemming from the credit crisis.
The FDIC, which reviews losses for every bank failure, in July filed a lawsuit seeking $300 million in damages from four executives of IndyMac Bancorp Inc.
The case is FDIC v. James R. Appleton, 11-476, U.S. District Court, Central District of California (Los Angeles).