FDIC lawsuit turns to former Frontier Bank executives

  • By Dan Catchpole Herald Writer
  • Monday, May 11, 2015 9:34pm
  • Business

EVERETT — The Great Recession brought down many community banks, including six local ones burdened with bad debt from loans to real estate developers.

City Bank in Lynnwood and Frontier Bank in Everett were among the local institutions shut down by federal regulators. While they were closed and had their assets sold years ago, litigation from the aftermath lingers in federal courts.

In 2013, the Federal Deposit Insurance Corporation filed professional liability lawsuits in U.S. District Court in Seattle against leaders of both banks.

Two years later, the FDIC has reached a multimillion dollar settlement with two former City Bank executives. At the same time, the agency is getting ready to take a dozen former Frontier executives and board members to trial in early 2016.

Both lawsuits were based on allegations that the defendants ignored their own banks’ respective lending policies and basic common sense when they signed off on questionable loans to real estate developers, even as the market was flailing.

Federal lawsuits against bank leaders and board members are somewhat unusual, but the FDIC brought dozens of such cases after the mortgage crisis that touched off the economic recession starting in 2008.

The FDIC accused City Bank’s founder and chief executive officer, Conrad D. Hanson of Clyde Hill, a posh Eastside suburb, and a senior vice president who oversaw construction loans, Christopher B. Sheehan of Lake Forest Park, of breaching fiduciary duties to the bank and being “negligent and grossly negligent by, among other things, approving, in violation of the City Bank loan policy and prudent, safe, and sound lending practices, at least 26 loans” to 14 unnamed borrowers from 2005 to 2008.

In 2010, the state Department of Financial Institutions closed the bank, which had eight branches in south Snohomish and north King counties at the time. The FDIC took it over and sold the assets to Coupeville-based Whidbey Island Bank.

Bank examiners warned City Bank that its questionable loans threatened the company’s stability. Hanson and Sheehan continued to approve such loans, and they collected big bonuses for it, according to the FDIC’s lawsuit. Hanson got performance bonuses worth $3.7 million and Sheehan got bonuses worth $653,000 from 2006 to 2008, according to the FDIC.

The feds’ lawsuit sought $41 million in damages from the pair.

The two sides settled last month for much less — a total of $6,375,000 for Hanson and Sheehan. The bank’s insurer at the time could end up paying the sum, according to the settlement agreement. Neither Hanson nor Sheehan admitted any wrongdoing or fault in the agreement.

Meanwhile, attorneys for a dozen former Frontier Bank executives and board members are getting ready to take the FDIC’s lawsuit to trial in U.S. District Court on March 28, 2016. The case is assigned to U.S. District Judge Marsha Pechman in Seattle.

The trial had initially been scheduled to start in late September, but the FDIC asked to push it back, which the court agreed to do.

The FDIC seeks $46 million in damages from the 12 former Frontier Bank officers and directors. As in the other case, it alleges that the defendants breached fiduciary duties and were negligent while approving poorly vetted real-estate loans in 2007 and 2008.

The bad loans were a big part of the reason that, by 2010, Frontier didn’t have enough cash on hand, as required by federal law. That year, the state Department of Financial Institutions shut the bank down. It was reopened under FDIC control. The feds then sold accounts to Union Bank of San Francisco.

The defendants include Frontier Financial Corp. founder and longtime executive Robert J. Dickson; his son, John J. Dickson, who was at times chief executive officer and president; and several former executives, Michael J. Clementz, Randy E. Deklyen, David A. Dorsey, James W. Ries, Robert W. Robinson and Lyle E. Ryan. Former board members are also named as defendants: Lucille M. DeYoung, William H. Lucas, Darrell J. Storkson and Mark O. Zenger.

One of the attorneys representing the defendants, Gavin Masuda of Latham &Watkins in San Francisco, declined to comment on the case.

Dan Catchpole: 425-339-3454; dcatchpole@heraldnet.com; Twitter: @dcatchpole.

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