By CHUCK TAYLOR
SEATTLE — The federal government is suing former leaders of Frontier Bank, alleging they breached fiduciary duties and were negligent in issuing 11 poorly vetted real-estate loans to named and unnamed borrowers in 2007 and 2008.
In a lawsuit filed April 26 in U.S. District Court in Seattle, the Federal Deposit Insurance Corp. seeks $46 million in damages. Named in the suit: 12 former officers and directors of Frontier Bank, including Michael J. Clementz of Indianola, and Robert W. Robinson of Bainbridge Island.
Clementz was chairman of the parent company of North Sound Bank of Poulsbo, which sold to Frontier in 2000. He retired as president of Everett-based Frontier Financial and CEO of Frontier Bank at the end of 2009.
Frontier Bank and its 47 branches in Washington and Oregon were closed by the state Department of Financial Institutions, seized by the FDIC and sold to Union Bank of San Francisco on April 30, 2010. Bad loans had led the bank to become critically undercapitalized.
Earlier this month, the FDIC sued two former executives of defunct City Bank of Lynnwood, seeking $41 million. Both lawsuits were filed just in time to beat a three-year statute of limitations for professional-liability lawsuits.
The case outlined by the FDIC in the Frontier Bank lawsuit is similar to that for City Bank, except that Frontier board members, as well as executives, are named as defendants. All of the Frontier defendants, including the board members, are named as being directly involved in approving one or more of the bad loans.
The lawsuit says Frontier was the biggest commercial bank headquartered in Western Washington at the time of its failure, with $3.6 billion in assets and $3.1 billion in deposits. “Defendants’ acts and omissions,” the FDIC alleges, “caused Frontier to suffer damages in excess of $46 million.”Like City Bank, Frontier had adopted an aggressive growth plan that focused on what is known as ADC lending — loans for acquisition of property, development and construction. From 2005 to 2007, Frontier’s real-estate loans increased by more than 58 percent — by $1.2 billion, the lawsuit says.
The bank pursued this strategy despite recognition and discussion by board members and executives of an increasingly precarious housing market and limited capital for lending, the government says.
In 2007 and 2008, the FDIC alleges, the bank issued 11 multimillion-dollar loans to various borrowers who later defaulted, including a $22 million loan to a borrower whose liabilities to Frontier would then exceed $53.8 million.
According to the lawsuit, the loans were made in violation of the bank’s own lending rules and common sense, given the state of the market.
Another loan involved a complicated $5.5 million deal to support development of Streamline Tower in Las Vegas, a later-troubled 21-story luxury condominium project.
Five defendants other than Clementz and Robinson are named regarding the Streamline Tower loan. The lawsuit says that “had the defendants on this loan insisted on the required underwriting and credit analysis, it would have demonstrated, among other things, that there was no adequate source of repayment, the repayment sources identified were speculative and vulnerable to a deteriorating housing market, the borrowers’ creditworthiness did not support the loan amount, the collateral was illiquid and overvalued” and the loan “should not have been approved.”
The borrowers eventually defaulted.