Three officers of the failed Sonoma Valley Bank are the target of a new Federal Deposit Insurance Corporation lawsuit seeking to collect more than $12 million for losses brought about by a series of risky real estate loans that led to the bank's 2010 collapse.
The lawsuit filed in U.S. District Court in San Francisco names the bank's president and chief executive officer, Sean Cutting, former CEO and director Mel Switzer and vice president and chief loan officer Brian Melland, accusing them each of gross negligence and breach of fiduciary duty for their roles in the institution's failure.
The suit threatens to undo a $2 million settlement reached this summer in a separate Sonoma County Superior Court lawsuit initiated by shareholders against Switzer, Cutting and other bank officers. FDIC lawyers are asking Judge Elliot Daum for permission to intervene in the settlement, arguing that receivership terms dictate the money should go first to depositors, who were insured by the FDIC.
Next in line would be general trade creditors, bond holders and then shareholders, said FDIC spokesman David Barr.
"Shareholders are last in line to get any proceeds from a failed bank," Barr said. "That's the way receivership rules work."
Anne Marie Murphy, a lawyer for the shareholders, which include many Sonoma Valley residents, contends banking regulators have no legal grounds to derail the settlement. The money would come from an insurance policy that covers bank officers, she said.
"The plaintiffs plan to vigorously oppose the FDIC motion, which comes at the eleventh hour," Murphy said. "They sat on the sidelines for nearly two years."
It's uncertain whether shareholders will succeed at an upcoming Nov. 6 hearing. Before the settlement was reached, Daum dismissed two shareholders' suits, finding the group lacked legal standing.
The shareholders had blamed the bank's top officials, including directors of its holding company, Sonoma Valley Bancorp, for reckless lending. Investors saw the value of their stock fall from $31 a share in 2007 to less than a penny after the bank's seizure. The three-year slide wiped out $69 million in wealth, according to the shareholders' 2011 lawsuit.
They pointed to $55 million in loans to Marin County developer Bijan Madjlessi, who later defaulted on a majority of the notes.
Regulators shut the institution in 2010 and the U.S. Attorney's Office opened a criminal investigation into lending practices, sources said. Earlier this year, Cutting and Melland were banned by the FDIC from working in the banking industry.
So far, none of the bank officers have been charged with any crime, according to court records. Lillian Ara?zHaase, a spokeswoman for the U.S. Attorney in San Francisco, wouldn't comment on the case. Switzer, Cutting and Melland did not return calls Friday seeking comment.
At the time of the seizure, the bank's top leaders, including Cutting and Switzer, issued a public statement blaming the sharp real estate downturn for their troubled loans. They said the bank had been profitable in its most recent quarter and would have returned to financial health.
The FDIC lawsuit, filed Aug. 19, seeks to recover millions in losses the bank suffered on 10 commercial real estate loans and one commercial line of credit from December 2006 to December 2008.
In addition to naming Switzer, Cutting and Melland as defendants, it makes a general reference to seven members of the bank's board of directors, although it does not name them.