Settlement in FDIC lawsuit over Sonoma Valley Bank collapse

Three officers of the failed Sonoma Valley Bank appear to have settled a $12 million lawsuit filed by the Federal Deposit Insurance Corp. to recoup losses caused by risky real estate loans that led to the bank’s 2010 collapse.

The suit, filed in U.S. District Court in San Francisco two years ago, named 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.

It accused them of gross negligence and breach of fiduciary duty for their roles in the institution’s failure, which shareholders said was brought on in part by $55 million in loans to late Marin County developer Bijan Madjlessi.

Madjlessi, along with Cutting, Melland and Sonoma County attorney David Lonich, were later indicted on federal fraud charges. All but Madjlessi, who died last year in a car crash, are headed toward trial sometime next year.

They face long prison sentences if convicted.

Notice of the FDIC settlement came late last month in an order signed by Judge Richard Seeborg vacating any trial dates and requiring the parties to file dismissal papers by Nov. 9.

Terms were not disclosed. A FDIC spokesman said they would be posted on the agency’s website when they are reached.

“It’s in the works but nothing has been signed,” FDIC spokesman Greg Hernandez said Wednesday.

Industry watchers said the defendants’ insurers would pay some portion of the $12 million sought by the FDIC but the former bank officers themselves could be held personally liable.

At least one of the defendants has filed for bankruptcy, according to court records.

Ralph Hutchinson, a former federal banking regulator and consultant, said the disgraced executives also could be on the hook for about $8 million in bailout funds the bank received in 2008 from the government’s Troubled Asset Relief Program. The money was supposed to shore up loans and help small businesses, but it went to Madjlessi instead, Hutchinson said.

“The Treasury Department is still very disturbed about this case,” Hutchinson said.

The FDIC settlement followed an earlier agreement in which the bank’s holding company paid shareholders $2 million to cover their losses. The FDIC initially tried to scuttle the pact, saying it was first in line to receive damages. But Sonoma County Superior Court Judge Elliot Daum intervened, ruling shareholders could get paid first.

An attorney for the shareholders, Anne Marie Murphy, said Wednesday that settlement has “gone forward and concluded.”

The bank was closed five years ago after a series of commercial real estate loans resulted in millions in losses. Critics blamed bank officers for their dealings with Madjlessi, who later defaulted on a majority of the notes.

By 2011, the bank and its loans to Madjlessi were the focus of a federal fraud investigation. The 29-count indictment charged the men with suspected conspiracy, bank and wire fraud, money laundering, obstruction of justice and other violations.

In a separate case, Madjlessi was accused of insurance fraud in connection with two separate insurance claims he made after his Reno condo-conversion project was damaged in a 2008 arson fire.

Madjlessi was killed in May 2014 in a solo car crash near the Marin coast. The crash was ruled to be an accident.

You can reach Staff Writer Paul Payne at 568-5312 or paul.payne@pressdemocrat.com. On Twitter @ppayne.