Twelve former directors and officers at a failed North Georgia bank are being sued for gross negligence in their handling of loans made during the go-go days of the building boom that regulators claim resulted in millions of dollars in losses.
The Federal Deposit Insurance Corp. sued the former insiders of Commerce-based Freedom Bank last week in U.S. District Court in Atlanta, seeking at least $11.05 million in damages.
It is the sixth such civil suit filed against failed bank insiders in Georgia, which leads the nation with 77 bank failures since mid-2008. The FDIC is trying to recoup losses to its Deposit Insurance Fund.
A lawyer for the Freedom Bank defendants said the agency is overreaching.
“Our view is that this is the latest example [of] the FDIC trying to blame small-town community bankers for the financial crisis,” said Theodore Sawicki, of the Atlanta firm Alston & Bird. Sawicki said his clients "acted reasonably and in good faith.”
Among the defendants at Freedom Bank are: Vince Cater, former bank president and CEO; Bruce Grout, a former Freedom loan officer; James S. Purcell Sr., a former senior loan officer; and Ronald R. Silva Jr., a former chief operating officer and senior credit officer.
Grout, who was not a director, was specifically singled out in the lawsuit for releasing collateral properties a borrower pledged to the bank so the borrower could sell them to pay his income taxes. That borrower was a partner with Grout in a separate real estate company, and the suit said Grout had no authority to okay the release.
Freedom pursued a fast-growth, high-risk strategy centered on commercial real estate and land acquisition and development loans, the suit said.
The FDIC suit cites 21 loans made with “inadequate, incomplete or outdated” financial statements for borrowers and loan guarantors, “resulting in loans advanced to borrowers with no apparent ability to repay or otherwise service the loans.”
The bank, which operated in Banks, Barrow and Jackson counties, also was criticized for lending outside its market.
As of last month, the FDIC board has authorized lawsuits against 427 individuals nationwide, including the 12 Freedom defendants, seeking damages of more than $7.82 billion. Not all of the authorized suits have been filed.
More than 400 banks have failed nationwide since January 2008, and the pace of failures accelerated in 2009, said Kevin LaCroix, an attorney, failed bank litigation expert and executive vice president with Oakbridge Insurance Services in Beachwood, Ohio.
In deciding whether to sue, the FDIC weighs the chances of winning and how much the agency might collect from insiders or bank insurance policies, LaCroix said. The agency must sue within three years of the failure.
Most of the Freedom defendants were members of the bank’s loan committee. Also named in the suit are directors Richard Adams, Keith Ariail, Claude Philip Brown, Harold C. Davis, Thomas H. Hardy, Verlin Reece, Donald S. Shubert and Harold L. Swindell.
The Freedom suit also accuses the bank insiders of negligence and breach of fiduciary duty.
A federal judge recently ruled in another failed bank case that Georgia’s business judgment rule protects bank directors and officers against claims of ordinary negligence in the course of business. The rule essentially protects insiders from liability for business decisions made in good faith that eventually went bad.
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