FDIC sues executives of failed Lynnwood bank

SEATTLE — The feds are going after former leaders of a failed community bank in a case that’s noteworthy for the alleged hubris of the defendants.

The Federal Deposit Insurance Corp., which oversees banks on behalf of consumers and insures deposits, is seeking $41 million from two former executives of Lynnwood-based City Bank, which failed in 2010.

A 97-page professional-liability lawsuit filed in U.S. District Court here alleges the executives “breached their fiduciary duties to City Bank and were negligent and grossly negligent by, among other things, approving, in violation of the City Bank loan policy and prudent, safe, and sound lending practices, at least 26 loans” to 14 unnamed borrowers from 2005 to 2008.

The defendants are Conrad D. Hanson of the Eastside suburb of Clyde Hill, the president and chief executive officer who founded City Bank in 1973; and Christopher B. Sheehan of Lake Forest Park, a senior vice president who oversaw construction loans.

Neither returned phone messages seeking comment about the lawsuit, which was filed April 15, a day short of the three-year deadline for litigation of such cases.

The FDIC is the plaintiff and has overseen liquidation of City Bank since it was closed by the state Department of Financial Institutions in 2010. When it failed, the publicly traded company had eight branches in south Snohomish and north King counties. Its accounts were acquired by Coupeville-based Whidbey Island Bank.

FDIC lawsuits against professionals and board members are fairly unusual, although some 54 similar cases have been brought nationwide since the mortgage crisis of the late-2000s. Two similar lawsuits in this state led to settlements in 2012 surrounding the failures of Westsound Bank of Bremerton and the Bank of Clark County in Vancouver. More famously, executives of Washington Mutual settled with the FDIC in 2011.

Defunct City Bank, says the lawsuit, focused on commercial real estate and what is known as ADC lending — loans for acquisition of property, development and construction.

Even after the housing bubble burst in 2006, the lawsuit states, Hanson and Sheehan personally approved City Bank loans worth tens of millions of dollars for developments involving mostly single-family residences — routinely doing so with insufficiently documented due diligence and on behalf of borrowers who had few if any assets against which to secure the loans.

In a couple of cases, the FDIC alleges, loans were made so borrowers could make overdue payments on previous loans — again, with the borrowers having little or no collateral.

“Rather than exercising caution as they plunged the bank deeper and deeper into ADC lending,” the lawsuit states, “defendants instead relied upon informal and autocratic procedures to approve loans. Hanson and Sheehan stated to bank underwriting personnel that City Bank was the ‘bank of last resort’ and that City Bank was ‘doing deals no one else would.’ In addition, Hanson and Sheehan told bank underwriting personnel that the two of them ‘knew the dirt’ and did not need appraisals.”

The lawsuit says City Bank executives failed to heed the repeated admonitions of bank examiners, who warned that the bank’s practices had led to “ongoing safety and soundness deficiencies that needed to be corrected.”

Shortly before the state closed City Bank in 2010, the bank told The Herald that it owned 2,400 building lots.

While the bank continued to make questionable loans in defiance of regulators, Hanson and Sheehan “received an exorbitantly high level of compensation for which there was no justification,” the FDIC says in the lawsuit.

From 2006 to 2008, Hanson received $3.7 million in performance bonuses on top of a salary that ranged from $544,416 to $650,000 per year. During the same period, the FDIC alleges, Sheehan received bonuses totaling $653,000 on top of a salary that ranged from $158,108 to $182,108 per year.

In 2006, Hanson wrote members of the board: “I’m asking each of you individually to also examine if you’re comfortable with my style … because it has now worked for +/- 32 years. If you are of the opinion and uncomfortable some third party might take issue with the business of the bank, you also can resign. If the heat in the kitchen gets too hot, it might be best to get out of the kitchen.”

City Bank was one of several community banks that closed or were reorganized in Snohomish County as regulators dealt with the mortgage crisis.

Chuck Taylor: 425-339-3429; ctaylor@heraldnet.com.

Talk to us

> Give us your news tips.

> Send us a letter to the editor.

> More Herald contact information.

More in Business

Black Press Media operates Sound Publishing, the largest community news organization in Washington State with dailies and community news outlets in Alaska.
Black Press Media concludes transition of ownership

Black Press Media, which operates Sound Publishing, completed its sale Monday (March 25), following the formerly announced corporate restructuring.

Maygen Hetherington, executive director of the Historic Downtown Snohomish Association, laughs during an interview in her office on Thursday, Feb. 15, 2024, in Snohomish, Washington. (Ryan Berry / The Herald)
Maygen Hetherington: tireless advocate for the city of Snohomish

Historic Downtown Snohomish Association receives the Opportunity Lives Here award from Economic Alliance.

FILE - Washington Secretary of State Steve Hobbs poses in front of photos of the 15 people who previously held the office on Nov. 22, 2021, after he was sworn in at the Capitol in Olympia, Wash. Hobbs faces several challengers as he runs for election to the office he was appointed to last fall. (AP Photo/Ted S. Warren, File)
Secretary of State Steve Hobbs: ‘I wanted to serve my country’

Hobbs, a former Lake Stevens senator, is the recipient of the Henry M. Jackson Award from Economic Alliance Snohomish County.

Mark Duffy poses for a photo in his office at the Mountain Pacific Bank headquarters on Wednesday, Feb. 14, 2024 in Everett, Washington. (Annie Barker / The Herald)
Mark Duffy: Building a hometown bank; giving kids an opportunity

Mountain Pacific Bank’s founder is the recipient of the Fluke Award from Economic Alliance Snohomish County.

Barb Tolbert poses for a photo at Silver Scoop Ice Cream on Thursday, Feb. 29, 2024 in Arlington, Washington. (Annie Barker / The Herald)
Barb Tolbert: Former mayor piloted Arlington out of economic brink

Tolbert won the Elson S. Floyd Award, honoring a leader who has “created lasting opportunities” for the underserved.

Photo provided by 
Economic Alliance
Economic Alliance presented one of the Washington Rising Stem Awards to Katie Larios, a senior at Mountlake Terrace High School.
Mountlake Terrace High School senior wins state STEM award

Katie Larios was honored at an Economic Alliance gathering: “A champion for other young women of color in STEM.”

The Westwood Rainier is one of the seven ships in the Westwood line. The ships serve ports in the Pacific Northwest and Northeast Asia. (Photo provided by Swire Shipping)
Westwood Shipping Lines, an Everett mainstay, has new name

The four green-hulled Westwood vessels will keep their names, but the ships will display the Swire Shipping flag.

A Keyport ship docked at Lake Union in Seattle in June 2018. The ship spends most of the year in Alaska harvesting Golden King crab in the Bering Sea. During the summer it ties up for maintenance and repairs at Lake Union. (Keyport LLC)
In crabbers’ turbulent moment, Edmonds seafood processor ‘saved our season’

When a processing plant in Alaska closed, Edmonds-based business Keyport stepped up to solve a “no-win situation.”

Angela Harris, Executive Director of the Port of Edmonds, stands at the port’s marina on Wednesday, Jan. 24, 2024, in Edmonds, Washington. (Ryan Berry / The Herald)
Leadership, love for the Port of Edmonds got exec the job

Shoring up an aging seawall is the first order of business for Angela Harris, the first woman to lead the Edmonds port.

The Cascade Warbirds fly over Naval Station Everett. (Sue Misao / The Herald file)
Bothell High School senior awarded $2,500 to keep on flying

Cascade Warbirds scholarship helps students 16-21 continue flight training and earn a private pilot’s certificate.

Rachel Gardner, the owner of Musicology Co., a new music boutique record store on Thursday, Jan. 18, 2024 in Edmonds, Washington. Musicology Co. will open in February, selling used and new vinyl, CDs and other music-related merchandise. (Olivia Vanni / The Herald)
New Edmonds record shop intends to be a ‘destination for every musician’

Rachel Gardner opened Musicology Co. this month, filling a record store gap in Edmonds.

MyMyToyStore.com owner Tom Harrison at his brick and mortar storefront on Tuesday, Sept. 6, 2022 in Everett, Washington. (Olivia Vanni / The Herald)
Burst pipe permanently closes downtown Everett toy store

After a pipe flooded the store, MyMyToystore in downtown Everett closed. Owner Tom Harrison is already on to his next venture.

Support local journalism

If you value local news, make a gift now to support the trusted journalism you get in The Daily Herald. Donations processed in this system are not tax deductible.