First Independent Bank is suing one of its largest depositors, who has also sued the bank after defaulting on $13.8 million in commercial development loans.
Both lawsuits were filed March 3 in Clark County Superior Court.
Vancouver-based developer Clyde Holland alleges the bank defrauded his business by misrepresenting the bank’s financial condition in order to “trap” him into an agreement in February 2009 in which he gave numerous concessions valued at $7 million. The bank and its holding company, First Independent Investment Group, then failed to extend two loans issued to his development company in 2006 to build a high-rise apartment complex in downtown Los Angeles, the lawsuit claims.
Holland further alleges that the bank tried to ensure he wouldn’t move his deposits elsewhere by threatening to raise interest rates on the loan.
“We have tried to work with the bank for the last three months in trying to find an acceptable resolution to the (development) loan and from our perspective the bank has been completely unreasonable,” said Mick Seidl, Holland’s attorney.
First Independent, based in Vancouver, alleges Holland refused to pay his debts despite his personal wealth and instead continuously attempted to renegotiate the loans by stalling, withholding information and intimidating employees, according to the bank’s lawsuit.
The bank and its holding company are suing him to recover the full amount of the loans and the interest owed on them.
“Mr. Holland can dispute and debate the bank’s financial condition but this is a legal action to force a noncompliant borrower to pay his debts according to the terms of the agreements he entered into with the bank,” said Stacey Graham, chief strategy officer with First Independent Bank. “It’s naïve to think we filed a lawsuit because we needed his deposits.”
Court documents suggest a privileged relationship of mutual benefit for both parties that soured with the declining real estate market in 2008.
Holland, the former West Coast managing partner for Trammell Crow Residential, operates real estate development, investment and property management companies that hold, on average, $10 million in deposits with First Independent.
His relationship with First Indy began in 2001 when the bank’s top management began courting his business, which now includes Holland Holdings, Holland Partners and Holland Residential. Early on, bank president William Firstenburg invited Holland to “be his guest in the bank’s private dining room served by the bank’s private chef” along with the entire senior management team, according to Holland’s lawsuit.
In about 2006, Holland says he helped First Independent become certified with mortgage lender Freddie Mac to issue letters of credit exclusively to Holland Holdings, which had previously obtained its development loans with letters backed by Wells Fargo.
That same year Holland acquired two loans totaling $13.8 million to build a high-rise at 1111 Wilshire Blvd. in Los Angeles, backed by a letter of credit from First Independent. (Porterville, Calif.-based Bank of the Sierra partnered on the deal, which exceeded First Indy’s lending limit.)
By 2007, Holland had become First Independent’s No. 1 depositor with more than $20 million in his business accounts, according to the lawsuit filed by Holland.
All told, Holland estimates the bank has reaped about $10 million from the relationship.
But that relationship soon became strained with the national recession and the real estate market crash in 2008.
In late 2008, with the Wilshire property loan close to its due date in July, Holland sought assurances from bank managers that the bank was in sufficient financial health to allow an extension of the loan. His company held eight outstanding letters of credit with First Independent that would require yearly extensions beginning in 2009 and 2010.
Holland says bank managers reassured him directly in December 2008 that the bank “was in great shape and the bank had no issues.”
In February 2009, a letter from First Independent outlined a deal in which the bank would extend the loans in exchange for numerous concessions from Holland worth about $7 million, including a guarantee that Holland’s personal liquidity would never be less than $6.75 million on deposit.
First Independent’s lawsuit disputes that the February 2009 letter was a binding agreement.
Holland was “shocked” when Freddie Mac informed him in August 2009 that it would no longer accept letters of credit from First Independent Bank “because of declining asset quality and regulatory capital ratios.”
The bank note reached its full maturity in July and Holland was not able to extend it. Had he known First Independent Bank couldn’t extend the loan he would have moved his deposits to another bank that could have provided the letter of credit, Seidl said.
The loan is now in default.
“He doesn’t have the financial resources to pay off a $14 million loan when the property in L.A. is worth a small percentage of that at this point,” said Seidl, Holland’s attorney. “He’s hoping the market will come back and in the meantime he’s worked very hard to come up with solutions.”
First Independent also disputes that it somehow attempted to “trap” Holland, who the bank described in its lawsuit as “extraordinarily wealthy, sophisticated, experienced, successful and a self-described expert in real estate ownership.”
In the bank’s description of events, Holland guaranteed the loan personally with his assets, excluding his home and any liquid assets in excess of $5 million. Then when the loan came due, Holland refused to pay it and discussions to renegotiate the loan broke down.
“Our lending officers have been working with a lot of borrowers in the economic crisis and we’ve extended and modified loans when it was appropriate. And the majority of these borrowers are meeting their financial obligations to the bank,” Graham said. “But when a borrower fails to meet their financial obligation, we as a regulated financial institution, have to take action.”