The Federal Deposit Insurance Corp. is suing eight of TierOne Bank's former officers and directors for at least $40 million for gross negligence and breaches of fiduciary duty in lending to Las Vegas real estate projects that helped cause the bank's failure in 2010.
More than three quarters of the bank's $200 million in real estate acquisition, construction and development loans in the Las Vegas market went bad before the bank failed, according to the FDIC.
Defendants are former Chairman and CEO Gilbert G. Lundstrom; David L. Hartman, senior vice president and director of real estate lending; James A. Laphen, president, chief operating officer, and a director; Randall B. Kidd, vice president in charge of the bank's Las Vegas loan office; Delmar E. Williams, senior vice president and chief credit officer until 2008; Charles W. Hoskins, director, an accountant and member of the audit committee; Campbell R. McConnell, director, member of the audit committee and professor emeritus of economics at the University of Nebraska-Lincoln; and Ann L. Spence, director.
The FDIC, as receiver for the failed bank, accused the defendants of breaching their legal obligations in recommending or approving "eight poorly underwritten acquisition, development, and construction loans in the Las Vegas market from April 21, 2006, through September 17, 2008." The agency is represented in the lawsuit by the Omaha law firm of McGrath, North, Mullin and Kratz and by the Amarillo, Texas, law firm of Mullin, Hoard.
Gregory Scaglione, an attorney for Lundstrom and Hartman, said holding his clients personally responsible is "completely unjustified, and we will aggressively resist this unwarranted suit by the FDIC."
TierOne got in trouble with real estate loans in the hotbeds of the housing bubble, especially Florida and Nevada.
FDIC said the bank ignored its own loan policy rules as it buried itself deeper financially, then extended loan terms in a way that only delayed default and concealed the defendants' "improper lending practices."
This is the latest of several lawsuits filed by federal regulators, shareholders and the trustee of the bankrupt TierOne holding company against those responsible for the bank, including its auditors, Omaha partners of KPMG. Most of the bank's assets were acquired by Great Western Bank from the FDIC after the agency closed it June 4, 2010. It was the largest bank failure in Nebraska history.
Violating their duty to employ safe and sound banking practices, the defendants recommended and approved numerous large, high-risk loans in the vicinity of Las Vegas, Nev., "an unfamiliar and volatile market," FDIC said.
Laphen and Lundstrom created a bonus system for Kidd, put in charge of the Las Vegas office, that encouraged the origination of large, fee-producing loans without accountability for loan performance, according to the lawsuit. Laphen, Lundstrom, Hoskins, Spence and McConnell also caused the creation or maintenance of deficient underwriting and loan approval systems, the lawsuit said.
Kidd’s bonus plan enabled him to earn more than $500,000 per year in 2006 and 2007, over five times his base salary, according to the lawsuit. Because the bonus was based on the bank’s fees at closing, rather than on the performance of the loans, Kidd was "incentivized" to originate as many large loans as possible without regard to credit quality, the suit said. He also had conflicts of interest from relationships with some borrowers, according to the FDIC. Kidd was fired in 2008 and has since filed for personal bankruptcy. Kidd could not be reached for comment.
In response to the lawsuit, Scaglione, representing Lundstrom and Hartman, said the statutory standard of gross negligence means absence of even slight care in performance of duty on the bank's lending.
"My clients deny that they were negligent and deny that they should be personally liable for the balances of such loans," Scaglione said in an email. "My clients have fully cooperated with the FDIC, including providing documents and sworn testimony to the FDIC showing that they were not negligent."
TierOne’s strategic plan to enter markets outside of Nebraska, including Las Vegas, was approved by bank regulators and by TierOne shareholders, Scaglione said.
"For various reasons unforeseen at the time the loans were approved, these eight loans did not perform as expected," he said. "No one reasonably foresaw the credit crisis and real estate market collapse which prevented the borrowers from repaying the loans and rendered much of the bank’s collateral substantially worthless.
"My clients made reasonable business judgments before the loans were granted, and there is no evidence showing the 'absence of even slight care in performance of' their loan approval duties," he said.
Chicago attorney J. Kevin McCall, who represents McConnell and Hoskins, said both suffered substantial personal losses when Tier One bank was closed.
"As TierOne directors, Professor McConnell and Mr. Hoskins always acted in the best interests of Tier One bank, the bank’s depositors and Tier One shareholders," McCall said in an email. "However, the economic downturn which swept across the country and devastated real estate markets everywhere proved equally devastating to TierOne and many other banks."
Attorneys for the other defendants in related cases were sent emails or left voicemails offering the opportunity to comment on the lawsuit.
The FDIC asked for a jury trial.
Reach Richard Piersol at 402-473-7241 or at email@example.com.