SV Bank Shareholders' Settlement Due for Payout This Month

A group of shareholders has won some closure in the battle over failed Sonoma Valley Bank.

Federal regulators seized the community bank in 2010, after they learned about $15 million in loan defaults hadn’t been properly documented and the bank was “dangerously under-capitalized”, according to news reports. The FDIC then banned the bank's former president and a former loan officer from the banking business.

Shareholders lost a total value of about $71 million as a result of the failure. Some residents lost their homes, business properties, retirement savings and kids’ college funds.

According to my interview Friday with the shareholders’ attorney, the group, which filed a lawsuit against directors on behalf of Sonoma Valley Bank’s parent company Bancorp, can expect a total payout of $2 million this month. Attorney Anne Marie Murphy said she doesn’t know how that money will be disbursed among shareholders.

Murphy said Sonoma Superior Court Judge Elliot Daum issued a final ruling from the bench on Wednesday, upholding his original settlement approval, in spite of a request by federal regulators to intervene.

The FDIC had filed to block the settlement, arguing shareholders didn’t have legal standing to settle claims owned by the agency, which was receiver for the bank. The Federal Deposit Insurance Corporation is seeking $12.5 million in its own lawsuit in federal court. In addition to the legal standing issue, it argued in Superior Court that if shareholders are given a $2 million settlement, there won’t be enough directors’ and officers’ insurance money left to cover its costs.

The FDIC was one of several federal agencies that investigated Sonoma Valley Bank. Others have included the Federal Bureau of Investigation (FBI), Internal Revenue Service and U.S. Treasury. Criminal charges could result, according to news coverage.

On Tuesday, Daum issued a tentative ruling in favor of shareholders, stating the FDIC’s Motion to Intervene was “untimely.”

Murphy described it as “last-minute” in my interview.

Daum rejected the regulators’ argument that the settlement—which he had earlier approved--was based on erroneous legal basis or that it was unsupported by facts.

On Wednesday, a day after the tentative ruling, FDIC and shareholder attorneys argued before Daum in court and the judge upheld his tentative ruling.

FDIC spokeswoman LaJuan Williams-Young told this reporter on Friday that the agency doesn’t comment on “pending litigation.” Another spokesperson, David Barr, told Press Democrat reporter Paul Payne that the “ruling isn’t final,” according to a Wednesday article.

Barr could not be reached by Patch on Friday for comment.

Does this mean the FDIC might seek to appeal? If so, what avenues are available?

Murphy declined to respond to these questions, citing the complexity of the situation.

FDIC filed its own lawsuit in federal court in August this year, seeking to recover its costs. In September, two former Sonoma Valley Bank directors informed regulators that a judge had already approved a proposed settlement with shareholders that same month for $2 million.

Three weeks ago, the FDIC presented their unsuccessful request to intervene in the shareholders’ case.

Questions Remain

Three years after the bank’s failure, questions remain about its lending practices and what led to the failure.

For example, what happened to nearly $9 million in federal bail-out money given to Bancorp, the parent company by the US Treasury in 2009?

According to news reports, investigators learned that soon after Bancorp received the funds, Sonoma Valley Bank extended a loan of about the same amount to a business partially owned by developer Bijan Madjlessi of Marin.

Madjlessi had already defaulted on millions of dollars he’d borrowed from other banks when he approached Sonoma Valley Bank, according to news reports. Then, he reneged on his Sonoma obligations as well.

The 22-year-old community bank lent Madjlessi and his business partners an estimated total of $54 million on three Sonoma county commercial properties. Money he received for a condo complex was ostensibly for renovation. However, neighbors told reporters that virtually nothing was done to the buildings during the time Madjlessi had the money.

After Sonoma Valley Bank’s seizure, Madjlessi was arrested on four counts of insurance fraud related to a fire at his high-rise resort in Reno, according to court documents. Investigators declared the fire arson. Madjlessi is accused of taking out two insurance coverage contracts for the same amount and trying to draw the same amount from both of them after the fire.

In the wake of these disclosures, many Sonomans want to know how their tiny town’s historically trustworthy institution evolved into such a nightmare. The bank previously had a high rating, which allowed it to extend the period between routine regulator audits.

But after the seizure, the FDIC banned the bank’s former president Sean Cutting and a former loan officer, Brian Melland, from the banking business.

The FDIC stated that the men had engaged in "a pattern of misconduct" that damaged the bank, according to a Press Democrat article in January 2013. Cutting received a $10,000 fine; the FDIC imposed a $2,500 fine on Melland, according to the article.

Sonoma Valley is a notoriously tight-knit community. Approximately 10,000 people live in the 2-square-mile historic town, which is set within an unincorporated valley of roughly 30,000 more people. Residents pride themselves on shopping locally. So, they did business at Sonoma Valley Bank, to support the community.

However, many people later wondered why their bankers over-extended themselves to an out-of-town businessman who didn’t pay his bills.

How could this have happened? Why did Madjlessi come to Sonoma Valley Bank? Or who brought him in?

What benefit was derived from lending a man of possible dubious business practices so much money, when bankers knew there was a chance he might not pay it back?

Furthermore, what did Madjlessi do with the money, if he didn’t pay it back or do the renovations he said he planned?

When the FDIC auctioned one of Madjlessi’s defaulted loans from another bank, he is reported to have set up another business, with a friend, using the friend’s name to become the winning bidder on his own note. He was able to purchase the loan for pennies on the dollar, according to news reports.

Madjlessi has twice failed to appear in court when summoned by the IRS.

Were Sonoma’s bankers too naïve to see that a man who had already defaulted on millions might do the same in Sonoma? Or was it a case of greed, because of reported big bonuses that were being paid the bankers for high-risk loans?

Many of the bank’s former directors still live in this tiny community.

Meanwhile, some other residents are reluctant to raise their questions in public, as they quietly go about rebuilding their lives.

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To read my earlier blog post on the connections between Cuba, Las Vegas & Sonoma, click here http://sonomavalley.patch.com/groups/julie-pendray-blog/p/no-town-is-an-island

Julie Pendray is the former editor of SonomaValley.Patch.com , an AOL subsidiary. She lived in Sonoma Valley 2012-2103.