Federal bank regulators sued on Thursday 15 former directors and officers of a failed Duluth bank, accusing the officials of gross negligence and other breaches of their duties.
The Federal Deposit Insurance Corp. alleges improper lending practices and other violations of banking regulations and is seeking to recover nearly $40 million in losses to Haven Trust Bank. The bank failed in December 2008 and was among the early casualties in Georgia’s banking crisis.
It is just the second liability suit filed by the FDIC against insiders of a failed Georgia bank, and only the ninth filed nationwide since the Great Recession started. Many more are expected across the United States and in Georgia.
Georgia leads the nation in bank failures with 65 since mid-2008. Haven Trust’s failure resulted in a loss of $248 million to the FDIC’s insurance fund, the backstop that protects depositors.
A lawyer for all 15 defendants, in a statement, denied any wrongdoing and vowed to fight the case in court.
“These officers and directors were experienced and highly respected bankers and businessmen who at all times acted in good faith, and with diligence and sound business judgment,” said attorney Theodore Sawicki, with Atlanta-based Alston & Bird law firm.
“The bank failed because of liquidity problems, not bad loans,” he said.
Sawicki said “the regulators did not assist, and indeed appeared to resist, the directors’ and officers’ efforts to add capital to the bank and save it from failure. Their motive for doing so remains unclear and baffling to us.”
A spokesman for the FDIC said the regulator does not comment on pending litigation.
A lawsuit related to Haven Trust’s failure was not unexpected. Last November, lawyers for the FDIC said in a court filing the regulator had “authority to file suit"to recover losses..
Legal cases typically follow FDIC investigations that last at least a year, and the regulator has three years from the date of a bank's closure to sue. Lawsuits filed by the FDIC are civil, not criminal.
The latest lawsuit details a litany of alleged regulatory violations, including improper loans to family members of two bank insiders that resulted in more than $7 million in losses.
Much of the case centers around loans made to family members of the bank's two largest shareholders: brothers R.C. and Mukesh “Mike” Patel. The two men are listed as defendants.
For instance, some $700,000 of a $4.7 million loan to UV Hotels LLC, a company controlled by the Patel’s brother-in-law, was allegedly “diverted to benefit” R.C. and/or Mike Patel, the FDIC claims.
In April 2008, the FDIC said the bank extended $748,450 to Jay Patel, son of R.C. Patel. Regulators allege the loan though was approved a day before the application was made, and Mike Patel was a part of the committee that allegedly approved the loan. Loan proceeds allegedly were put in accounts controlled by R.C. Patel and/or Mike Patel.
In another instance, four adult children of R.C. and Mike Patel also got $500,000 individual lines of credit, which the FDIC claims they did not have the means to repay. Stock from Stockbridge-based High Trust Bank pledged as collateral had already been used as collateral on another loan at another bank, and funds from the credit lines were allegedly deposited in accounts controlled by R.C. and/or Mike Patel.
A loan of nearly $3.4 million to a company allegedly controlled by R.C. Patel’s son, also allegedly went to a bank account controlled by R.C. and/or Mike Patel.
The FDIC also alleges as the bank's condition worsened it was ordered to reduce its exposure to real estate and raise investor cash. Instead of pulling back, the FDIC alleges, the bank produced more than $175 million in new or renewed loans in the final year of its existence.
The other defendants in the case include: former CEO Edward Briscoe, former Chief Financial Officer Michael F. Johnston and former Senior Credit Officer Mark Donovan.
The suit also names former directors Ken Cutshaw, Scott Dix, Brij Kapoor, Balvant R. Patel, Dhiru Patel, Kunal S. Patel, Mukund Patel, Narendra D. Patel, B. Ruth Strickland and Alan Tallis.
Many of the insiders also served on the bank’s director loan committee.
In January, regulators sued Jack Murphy, the chairman of the state Senate banking committee, and seven other former insiders at the failed Integrity Bank of Alpharetta for gross negligence, seeking damages of more than $70 million. The defendants in that case have denied the claims and the case is pending.
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